Thursday, October 28, 2010

Craig Alexander, Toronto Money Show 2010

Craig Alexander is an economist at the TD Bank. The full title of his talk is “The Risk-Filled Recovery: An Economic and Financial Outlook for 2011”. When I go to the Money Show and also to the previous Financial Forum, I always like to listen to an economist.

Alexander first talked about the global economy. He said we have had a rough ride from 2009 with a global economic recession. He said that this is the first time the whole world economy has contract. Since the 2nd quarter, the developing countries and since the 3rd quarter, other countries have been recovering. Currently the emerging markets are booming. However, he thinks that these markets might be growing too fast and there is a risk of them overheating and a risk of inflation.

He feels there is also an inflation problem with China’s housing market. There is also general inflation happening in India, especially with food. These countries are making an effort to slow growth. This has been viewing negatively, but he feels it should not be. These efforts should be view as sensible. 20 years ago, the portion of developed markets to emerging markets was 70% to 30%. Now the ratios are 50% to 50%. So, we probably need a new name for emerging markets. The emerging markets are showing strength, but the developed world markets are weak.

Europe has a debt crisis. He asked why are people worry about Greece as it is a very small economy? His answer is, is that people are viewing Greece as a canary in a cool mine. The market is worried that the European problems can come back to haunt us. He feels that European countries are going to have to raise taxes, cut entitlements, reduce spending and pay down debt. Europe will need tough political will to get their economies healthy.

He feels that Canadian was able to put its house in order because Canadians wanted the government to do so. The public actually demanded it. However, he feels that this is not what will happen in Europe. So some European governments will not be able to do the tough things and this is a risk. Nevertheless, he feels that fiscal austerity will come to Europe and that it will slow growth to 1 ½ % in the near future. He also said that Europe does have some good companies who do business world wide.

Alexander goes on to say that, the US has had the worse recession since WWII. Currently, a lot of people are saying that the recession was over in 2009. However, there is talk of a double dip and there are lots of worries. The US recovery is atypical of past US recoveries. The problem is the recovery is very weak. In the past, a recession was followed by a strong recovery. And this is not happening this time. This is because this recession was not caused by inflation. This recession was caused by a financial crisis.

From history, we know what happens in a financial crisis in an industrial economy. First comes a bad recession, which last typically 7 quarters (the US had one of 6 quarters). There is a decline in GDP averaging 4.8% (US had one of 4.1%). The GDP recovery is usually at 2.8% (US had recovery at 2.8%). It takes a number of quarters for recovery (US took 5 quarters). Over the next 2 quarters, he sees GDP growth of 1 ½% to 2%.

Next, he talked about the possibility of a double dip recession. He does not think that his will happen. He says that the chance of a double dip is 1 in 3 and therefore not the most likely outcome. He also notes that what happened in Japan was not part of a global recession. He sees the problem with the US is that it is impatient. However, you can rush things. The US government is also showing impatience. This is a worry. He does not think that the QE2 (quantitative easing) will do much.

He mentioned that the TD bank has more branches in the US than they do in Canada. He says he sees lots of houses for sale in US and lots of house in foreclosure. There is lots of unemployment (about 9 ½%) and also underemployment (about 16 to 17%). He feels that it will take the US consumer 2 more years to recover. This is why people are worried about a double dip recession. In connection with the debt in US, he feels that it will not be dealt with until the next president. This will keep the US growth rate at 2% for quite sometime into the future. In the US, interest rate will go up, but not until 2012.

For Canada, he says that there was nothing wrong with the Canadian economy before the recession. We have been hit by this recession, but it could have been worse. Usually in recessions, we have longer ones than that occurs in the US. But, this is not what occurred this time. We have done well and we have had a v-shaped recovery. He says that Canadian job creation is not in the places were jobs were lost. We lost jobs in manufacturing and had growth in jobs in the service industry.

He says the economic forecast for Canada is also 2% growth. He acknowledged that this was not fair, as we do not have the problems the US has. However, we have a small open economy and our dollar will be strong. Our housing market has been cooling and it is headed for a soft landing. We have had rising unemployment with a rising market and this is an odd combination, especially since our market was not based on speculation. Our corporate profits are good and our corporate balance sheets are good.

He says that a 2% growth rate is ok, but not great. It also has investment implications. The first thing is that any cash investment will have a negative return after inflation. Return on Canadian government bonds will be 3 ¼% to 3 ½% and this will be a 1% to 1 ½% over inflation. Provincial or municipal bonds will do better. The best bonds will be corporate bonds. For equities, we will get paid in earnings and dividends. Earnings return will be 5 to 6% and dividends will be 2%, for a 7 to 8% return. (I think this is an interesting way of looking equity returns.) Alexander says that he thinks the market will be slightly less volatile than it has been, but it will still be volatile.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

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