Yesterday I was at a conference for the Mortgage Brokers of British Columbia where I was a speaker. At the same conference speaking right before me was Benjamin Tal from CIBC World Markets and here are some bullet points along with my comments.
1) This is the longest recession ever
In the US this recession in now 22 months old, bet you didn’t know that, and although the end is near we are not there yet.
2) We (society) we are cast into this recession totally unprepared
We are essentially wiping out 15 years of bad behavior in two years. We had approached catastrophic debt to income ratios, and virtually no savings. For many people this fact and having to have gone through this recession will forever change how they act and conduct themselves financially again. This lesson will likely set us up to have higher savings rates and become less dependent on credit in the future. Both great legacies of this painful recession
3) US Stimulus Package will provide unbelievable lift
The total cost of the pledged stimulus package will reach $1.8 trillion. Part of why this massive amount has not kick started the economy yet is because it has not all been paid out, and that which has is being parked. In other words banks are hoarding the money. The money multiplier which measures the velocity of money and how it flows is at record low levels. But it will open, think of opening a dam as this is what it will be like massive money coming into the economy for people to use.
4) Business Inventories are falling
This was an interesting discussion where Ben showed that yet another indicator that they look at to forecast the recovery time is the level of business inventories against sales. The good news here is that business inventories are falling fast. The reason why this is a good indicator is the good old supply and demand story if inventories fall to the level of current sales there will be balance and therefore more buying etc. However this will cause prices to increases as well
5) US House prices are now UNDERshooting household income in the US.
From previous posts I talked about this was a significant leading indicator to the household bubble bursting when house prices significantly OVERshot household income. That trend has been completely erased and is still falling. Clearly pointing that the bottom of the US housing market collapse is near.
6) We are in Emergency Times, which is causing these emergency interest rates
It is an absolute certainly that interest rates will rise, and likely sharply, as the recovery takes hold. Mainly because inflation will become a concern when we recover. The irony is that all that Ben Bernanke is doing to fight this nasty recession he knows is bad but it is required and the alternative in unthinkable.
Inflation is a dead lock cinch. This will cause interest rates to rise GUARANTEED. People not refinancing their mortgages or purchasing now will be very sorry when the window closes.
7) What will drive inflation?
To put some more substance behind my previous comments about inflation being a certainty are the reasons WHY their will be a recession
a) The money multiplier indicator is at a record low. This essentially means that all the money that has been and will be injected into the economy is not flowing…yet. Once it starts flowing the economy will overheat slightly. Overheated economies result in inflation, the degree to how much they overheat determines how the medicine to stop it is administered, and therefore how quickly interest rates go up.
b) Food prices. During the worst global recession in history food prices continued to rise. Demand is still far exceeding supply. especially for meat and grains, (another good thing for Alberta and Saskatchewan). So, if during these terrible times food prices are rising what do you think will happen as the globe recovers? Of course demand will increase, but where and how could supply increase? As a side note this is why any companies involved in food production, or distribution will be good stock buys in the recovery.
c) Oil prices. Once again although the media has tried to really ramp up the fact that oil prices are at $50 during the worst recession in history, the fact remains that they are still $20 over the long term historical average. In fact not that many years ago $50 oil was considered to be very expensive. Funny how perspectives can change. So, once again if during the worst recession in history oil prices were $20 OVER the long term average where do you think they will be in the recovery when demand SURGES back, particularly from China. It is incredibly likely that oil prices could settle in the $80 range in the recovery with an .80 cent candian dollar puts the revenues and profits to the oil patch in the very high range once again. Higher oil prices though as we have learned is in lock step with higher inflation.
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