Reasons for skepticism

Happy Days Are Here ­Again.

Are they? That song was so popular in the 1930s during the Great Depression that it almost was a theme song. Then (and now) it was betokening more hope than reality.

Rather absurdly these days, the stock markets rise again and again following assurances that come forth that interest rates will continue to stay low “for an extended period of time,” as if the constant repetition entitles equity markets to rise repeatedly.

What is being ignored by the financial markets was the reason policy rates will remain near zero. There apparently is the recognition that the economic “recovery” is not self-sustaining. That is verified by the action last winter when interest rates were set at the minimum level, but equity markets fell sharply. Hence, this factor, low interest rates, should not be so encouraging.

What is going on is a weak economic backdrop, with deflation pressures continuing and credit markets contracting.

Housing has been a weak element in triggering the current recession. Mortgage applications in the United Stat­es for new home purchases now are about 13 per cent below last year, which, in turn, were down 30 per cent from the year before that.

In addition, commodity markets look toppy, despite the longer term favourable outlook. Clearly, a correction in the prices of most commodities is underway, reflecting weak demand for such items as copper, a strategic component of capital investment projects.

Corporate balance sheets have improved markedly over the past year, but this is the opposite of individuals’ personal situation, where overhanging debt will continue to limit consumer spending.

The automobile industry is chalking up huge sales gains compared to the previous year, when sales collapsed to depression numbers. Hence, the spectacular improvement does not represent anything significant as the average rate of car purchases remains nearly 30 per cent below the usual pattern.

The expansion of industry output primarily was caused by inventory restocking. Inventories were depleted last year as buyers were reluctant to accumulate anything pending clarification of future prospects. Rising industry production triggered gains in productivity, which always occurs under those circumstances.

Moreover, the stimulus measures put in place by governments last year will run out in the second half of this year, making a double-dip recession a possibility. Happy days seem to be still a distant probability.


Bruce Whitestone