Misplace enthusiasm

This columnist generally has maintained a bearish outlook on the economy over the past several years.

However, financial markets, particularly in the United States, have decided to overlook the negative factors that continue to predominate but for the most part are ignored.

The media, like governments everywhere, remain optimistic and choose to remain upbeat, even in the face of bad news.

For instance, the latest report on the number of jobs created was greeted with a soaring stock market, a weak bond market and a continuation of the downtrend in gold prices.

The reported figure of 195,000 new jobs that were created serves as an illustration of misplaced enthusiasm. Nowhere did the press explain that literally all were part-time jobs. This was the third month in a row when all the positions filled were part-time ones, such as seasonal sales clerks, bank and stores greeters, fast-food workers, and the like. Are any of these new employees likely to make big purchases?

The press reports that housing starts continue to show improvement. To a surprising extent, many were built by speculators who hope to find buyers. While prices have rebounded significantly, many of these new houses are vacant and the inventory of foreclosed houses remains high.

In Vancouver and Toronto prices have reached levels that place many out of the market, although by most measures houses still are in the affordable range. The overbuilding of condominiums in Toronto and Vancouver has reached absurd levels. Now with mortgage rates rising and further increases in interest rates likely, is the long-term outlook favourable for this sector?

The very strong U.S. dollar (why?) and a weak economy in the developing world constitute negative hurdles for exports, compounded by a pronounced slowdown in the Chinese market.

One of the factors that will be supportive of an economic push forward would be the end of the household de-leveraging cycle, but that appears to be at least two years away.

We have the weakest growth in private capital stock in 60 years. Business spending as a per cent of GDP is at recession levels. Productivity growth is heading lower because of the lack of capital formation, a bad omen for future economic expansion.

Corporate earnings are disappointing observers, with more than two-thirds falling below estimates. The Economist has written, “The cyclically-adjusted price earnings ratio on the American stock market in 23.6, well above the statistical average.”

The potential withdrawal of monetary ease by the U.S. Federal Reserve Board forces equity investors to focus on the fundamentals that are not that supportive.



Bruce Whitestone