The consensus view

The widespread, conventional view about the course of short-term comfort is that all is well – but that is wide of the mark.

Consequently, for the most part , the absence of any news meant that investors could have paid no attention to news stories, as there were few changes.

First of all, almost everyone agrees on the current strength of the U.S. dollar and the concomitant fall of the Canadian counterpart, as well as the currencies of almost all nations.

Therefore, it must be acknowledged that the economy south of the border is performing better than that of any other nation and also the U.S. Federal Reserve is offering the highest interest rates of any major country. That explains its dominance.

However, the fiscal position of the United States sooner or later will change attitudes; in its foreign trading account the United States is running annual deficits of several hundred billions of dollars. Also, the U.S. has only had a budget surplus twice in 50 years.

As well, the United States government appears dysfunctional, incapable of control spending or raising taxes or even implementing gun control.

Soon the world’s love affair with that nation will end and its currency will reflect that. Then the Canadian dollar and other currencies will rebound.

The long-term U.S. bond market remains buoyant as the Federal Reserve Board is reluctant to raise interest rates in view of the fragile state of the economy.

Among other problems are the difficulties in the Middle East. It is clear that investors have decided that the risks are overblown. Besides, there is a slowdown in China, the engine of the world’s economy. Too, it is clear that growth is hard to achieve, but the equity market is selling at historically high valuations.

Furthermore, the usual simulative measures to bolster the economy will not be forthcoming as the public is opposed to increasing the budget deficit. Also, corporate profits for the most part have been disappointing, as evident in such stalwarts as Apple and IBM.

It should be noted as well that house prices generally have reached levels so that they are not affordable in many cities so that prop to the economy is ending.

Still, the conventional wisdom is later on this year economic growth will resume, that foreign troubles will be resolved, and that we are headed for better times. Our politicians on both sides of the border and investors could be in for a nasty surprise.

Hence everyone should be very careful now.



Bruce Whitestone