All signs point to economy in deep trouble

In view of widespread confusion, we need a new reality check. Too few understand our economic situation, and sketchy newspaper reports are not very enlightening.

It has become apparent that the stock markets and the economic trends are acting in a “see no evil” manner. Evidently, they are responding to hope, while the economy should be providing a dose of reality.

The equity markets persist in dreaming that a significant contraction can be averted, based on continuing assistance from the government. That seems strange because government spending is no longer expanding at its historical rate.

It should be noted that the programs last year implemented in the United States led to only one good quarter of growth. Why would any more be effective?

Financial markets are presenting important clues about the future. When the stock market rallies, it is taking place on low volume, sort of a low-conviction improvement, all too typical of a pending, lower trend.

The equity market is noteworthy for its lack of leadership. The stock in an up trend, discount stores, health-care companies, gold miners, and utilities, all have defensive characteristics. If investors believe in a major recovery, share of constructions, steels companies, and leading transportation corporations would be the leaders. But that is not what going on now.

Then, when the market declines, even in an important down day, there is no capitulation-like action; investors still do not want to sell, so there is no near-panic behaviour that is typical of the end bear market.

Then, the bond market remains very buoyant. If indeed the economy were going to recover, investors would be shifting out of bonds into equities. They would infer that a stronger economy would increase the demands for capital, and thus interest rates would be rising and bonds declining. Yet interest rates remain at recession-like lows.

What about the economy? Gross domestic product  growth in Canada has come to a halt – with no gain in the latest quarter, and only a minute uptick in the United States

Personal consumption expenditures have been funded by a dip into savings. Consumer confidence continues to slide, not the usual background for stronger retail sales. Although the automobile sector in Canada has experienced a sharp rebound recently, that followed several months of decline. Future sales will be impacted because consumers remain wary as housing continues to be weak and the wealth effect is discouraging. Weak employment numbers are another weak factor.

Hence, all the data show an economy that is on the verge of a great deal of trouble. Hope always springs eternal, but nowadays it seems misplaced.




Bruce Whitestone