There is much talk these days about whether we are headed for deflation, or inflation.  In fact, just the other day a friend approached me and said “are you for inflation or deflation” which I thought was an odd question coming from this friend, specifically because our relationship doesn’t generally involve these type of questions.  So I think my main point is that this topic is making it to main street and sadly either way you look at it the result is not positive.

Ok so let’s address it.  First, my answer is that I think as I have repeatedly said, we are headed for inflation, and in fact it could be hyper-inflation which would likely be as bad as deflation, except of course if you are a real estate speculator.

Why, do you ask?  Well the main reason is, and I have been steadfast in this assertion, through the recession the governments across the world, but specifically in the USA, have been printing money at a breakneck pace.  With all that excess money in the economy the only plausible result will be inflation.  When?  As soon as that money starts to flow into the economy.  Yes, the tail end of a recession will always make people and more importantly institutions (banks) hoard their money. But hold on and fasten your seat belts when that money starts flowing.

Would you like to have the inside track on when inflation will trend up?  Book mark this page and return periodically to track  the M1 money multiplier graph.  The money multiplier measures how much money is circulating in the economy, and as you can see it has fallen steadily since the 80’s but fell off a cliff at the beginning of our severe recession.  Note: the Grey bars are all the past recessions.

Economists like Benjamin Tal have repeatedly reminded us of this law of economics, when money supply rises, which it has significantly, then inflation will follow.  Look for the M1 money multiplier to rise in the next 12-18 months will bring inflation.

Now, for all you people who have an insatiable appetite for real estate speculation, please don’t use this post to justify more real estate speculation.  To be clear, there is much to much risk in today’s inflated market to be involved in speculation.

Finally, and this from Peter Schiff, if you don’t know who he is you should.  Peter is one of the only experts who called the real estate disaster in the U.S.  He is currently saying that gold will hit $5,000 an ounce, due to what he believes to not only be inflation, but hyperinflation.  Why?  Because in is mind he thinks Bernanke, the federal reserve chairman, is keeping interest rates artificially low, to continue to save the housing and stock markets, at the expense of long term pain for the entire economy in hyper-inflation.

Where do we go from here?

1) Watch the M1 graph.

2) Buy any big ticket items you want (i.e. a house) now, as inflation will drive up both the prices, and the interest rates, which brings a net effect of substantially reducing affordability.

3) If you are tight on your budget, lock in your existing mortgage Tuesday.  Rates WILL rise, and likely will continue to do so, for some time.

Much talk this week likely spurred on by Mark Carney and his proclamation that the recession is over.  Many clients and business partners have asked me whether this can be true or if he has another agenda.  Certainly the contrarians out there like Garth Turner and his blog dogs have taken particular exception to Mr. Carney’s words.

Today I read an economic summary from Avery Shenfeld which I thought was interesting and topical to this ongoing debate as to whether we are in a recovery.

He essentially believes that whether we are in a recovery or not depends on who you are.  For instance if you are a stock market investor then the recovery is when you are starting to get your money back, and that happened essentially in March.  With typical corrections obviously still to come the investor will still see gains continue for some time.  This makes sense from another perspective as historically stock markets are a leading indicator of both entering and exiting a recession.

However, if you are an economist, and this is where Mr. Carney is, then you will not call a recovery until positive GDP growth starts to happen, and not just for one quarter but that there is a trend.  In the US it is largely accepted that we will cross that line this summer.  Before the contrarians out there jump on this saying it is impossible to see growth absent of any real increase in demand, you must factor in that the first half of this year so massive cuts to production, which resulted in significant depleted inventories.  Even with marginal demand increase there will be marginal positive growth.  Canada will see growth then as US company ramp up stocking the shelves and warehouses then Canadian exporters will see their order basket fill up.

Finally, according to Shenfeld the average Joe Canadian will not declare we are in a recovery until they start getting their jobs back. Shenfeld then goes on to predict that this is a longer road then we would like.  Even if GDP growth bounces back as we predicted above.  He contends that US and Canadian consumers are still licking their wounds from earlier wealth losses and will take some time to unlock their wallets.  As well businesses are horading cash instead of buying equipment etc.

Although I agree with Shenfeld technically, I disagree that consumers, as a whole, will take longer to get out and feel confident again.  Employment participation, especially in Alberta where it tops the nation, is still very high and even if unemployment sadly tops 9% nationally there is still a significant number of people employed.  Secondly, as Avery’s colleague Benjamin Tal pointed out in his recent road show across the country in this nasty recession we saw an interesting but significant difference from any previous recession and that is the number of business bankruptcies were barely a blip and the significant number of women in the workforce.

His theory was that in past recessions unemployment was more damaging as employers “went out of business” in this recession most just were “laid off”.  Therefore the hypotheses suggests that it will be easier for businesses to callback their employees then it would be to start the business all over again.

The theory behind more women in the workforce this time around was that in many situations when one spouse lost their job the other was still working, which although difficult made it manageable for many people to weather the storm, and thus will make it quicker for them to rebound.

There is a silver lining in Shenfelds theory if you want to believe it.  If the recovery takes longer to grab hold of the average Joe, then count on more government stimulus to prod them, and for certain a delay in interest rate hikes from the bank of Canada.  Mr. Carney can NOT hike rates until the average Canadian is out spending again.  This bodes well for the real estate market, and particularly in Alberta.  Why?  because of the blessing in Western Canada of natural resources which will be the number one demand item in the global recovery.

Comments?

Bob Truman posted a good guest post on his blog.  It is a month old but I think still has some great info. Be sure to read his comments as well for further insight.

Also read the next post as it gives the other side from Garth Turner. Remember always read the comments that is where the good information to support the ongoing conversation is.

Bank of Canada governor Mark Carney was on CBC TV today and was again letting us know what some of the signs we are headed for recovery.  I have recently blogged about this here, here, here and here but since my quest is to always show the other side of the story that the media shy’s away from here we go:

1) Fiscal policy around the globe has been easing, because there are clear signs that the measures have been taking hold, not the least of which is when global central banks start easing their monetary and fiscal policies they are signaling they are responding to the market improving.

2) He mentions there has been a sharp increase in business and consumer confidence, he also referred to a stabilized real estate market, yes folks it’s true the real estate market has stabilized, better get off the fence.

3) He mentioned sharply dropping business inventories a lot, which I reported from Benjamin Tal’s presentation last week.  This is not often talked about but is incredibly important for a recovery, once businesses shed their over inflated inventories left over from the lack of sales brought on by the recession, they will have to start producing more which equals increased productivity and jobs etc, which spells r-e-c-o-v-e-r-y.

In fact in the US although their economy dropped by 6% in the first quarter, which is of course bad, but it is largely due to the massive dropping of inventories to the tune of $103 Billion.  It is really akin to the US economy ripping off the band-aid and thank God they are doing it.  The faster we shed these inventories the faster we get to recovery.  I would rather see a real, real bad quarter, in fact Benjamin Tal correctly called the first quarter of 2009 the darkest hour of this recession and probably the darkest hour since 1945.  But it’s over.  This was painful but necessary to get us to the recovery point sooner.

4) The most pessimistic analysts and economists are forecasting recovery in lockstep with the Governor.  In fact one of the most outspoken negative economists was Warren Jestin from Scotiabank who said on Friday “the worst is over for the Canadian economy and that a sluggish recovery is underway”.  You know when the pessimists are saying something is positive, you better believe it.

One side note I thought was interesting, was when the Governor did a reversal from his last interest rate cut announcement, not even a month ago, when he said then that he absolutely would hold the bank rate at it’s current level until June 2010.  Today he said “the rate promise is an ‘absolutely conditional promise’ based on inflation remaining tepid.

Thanks Mark, we know your primary job is controlling inflation and you will increase rates to do so.  What is telling foreshadowing is that the bank is concerned inflation may come back sooner then many people expect.  It will.

Recently I read a blog where the writer said that in 12 months we will be concerned about deflation, not inflation, due to excess inventories as a result of reduced demand, excess labour supply, etc.  He is not paying attention.  He is speaking about recessionary symptons.  As almost every expert says 12 months from now we will not be in a recession, and for many reasons you can read here we will be battling inflation hard.

This story is pretty interesting.  It makes one ask the question if the seasonally adjusted average price for ALL the US is only down 9.6% since it’s peak in April 07 then where is this meltdown?To me it seems as usual the regional areas that are experiencing 30+% drops are “hogging” the news.The same thing in Canada, it is the hotter areas that had the biggest boom that are seeing the biggest drop, insert Calgary and Vancouver here,  but in reality across the country the news is not all bleak in the housing market.  It is just nobody seems to care what is happening in those areas.

 Great Story in the Globe and lots of talk about how this merger will bring about some more positive vibe for the economy, particularly in Alberta.Actually lots of positive things lately:

1. Conference Board of Canada reported a big spike in consumer confidence
2. Obama to put up $1 trillion to free up bank balance sheets
3. Stock Market surges yesterday.  Dow up 497 points, TSX up 424 points
4. Oil up again and seems to have promise that it is at bottom
5. Real estate markets are showing positive signs
6. US Housing starts up 5% this month. Huge one month gain

Before all the pessimists get on me, I am by no means saying “everything is over” but I am saying a lot of indicators seems to be pointing that we are approaching the bottom of the curve and a recovery is looking like it may be sooner then we feared a few months ago.

This story serves to let people know that if you feel you are getting overwhelmed with your bills and more specifically your mortgage payment CMHC and the big five banks want you to know that you can approach them and work things out.The key is that you must go to them BEFORE you get over your head.The funny thing is, Genworth, Canada’s other insurer, has had this program since their inception.  CMHC is now doing it due to the realities of the market.  Competition is good for our industry but CMHC is not playing fair these days.Genworth is in effect being blocked out by unfair competition from CMHCs parent, our federal government.  They will not grant Genworth the same government guarantees that they give CMHC which of course means that in this environment banks will prefer to insure with CMHC.More on this later…

There is certainly many people on both sides of this debate, but I think this article makes it clearer for me.“No, more credit will not make the problem go away. But yes, the government should do its best to restore bank lending to prevent an even worse economic outcome”.“U.S. Treasury Secretary Timothy Geithner was only the latest to proclaim what has now become an official mantra. Without credit, which he and others call the “lifeblood” of the economy, you can kiss recovery hopes goodbye.”“Federal Reserve Chairman Ben Bernanke, justifying the massive help the central bank has offered to financial institutions, made his own case: “This disparate treatment, unappealing as it is, appears unavoidable. Our economic system is critically dependent on the free flow of credit.”

Here is an article from the Calgary Herald that I dare say is trying to continue the news that the Real Estate market in Calgary is still in the doldrums.  In fact if you really look at this in the right way this is continued good news.  If builders are taking a pause to catch their breath and let the market catch up then see it for what it is, a good thing.Another way to look at it is it is another contribution to the much needed battle of reducing inventory in the market, which by the way is working…

In a story today from Reuters David Dodge is saying that the current Bank of Canada governor, the Canadian Government, and anyone else suggesting we will come out of this recession by end of the year are “dreaming in technicolor”My comments to this are:1) Does he still have access to the same information as he did when he was governor, so is he basing this opinion on facts, or on his opinion?2) Does it really matter?  Should we really be focussing on when we are getting out or should we be focussing on how we should live now and more importantly in the future?  We are all in this together, get out and buy things, especially bigger ticket items as they are a great buy now.3) When he says there will be a fundamental change to mature industries in Canada such as auto manufacturing.  I have talked about this before, (and this is controversial) but in a lot of ways Canada should not be in some manufacturing businesses, including Auto’s.  If we can not be competitive globally in this business and it appears we can’t then we should not be in the business.4) Is there really going to be a fundamental change to the oil sands? Where will the world get the oil from?Let’s all keep our chins up and get out there and keep our economy alive