Friday, October 16, 2009

Financial Turmoil May Be Over... But It's Not Likely

Today the Conference Board of Canada came out with the prediction that the recession is behind us. Baloney.

Sure, it may be over. But it's not likely. The problem is, we're getting our economic news from people who want us to believe it's over - from economists and analysts at financial institutions that have a commercial stake in keeping us active in the capital markets, and from government and organizations who believe (with reason) that if they tell us it's over we'll start spending and make it be over.

All this is well and good, except that most of us have our retirement savings tied up in things that will lose big time if the rosy predictions are incorrect.

And it is very likely that the rosy predictions are incorrect. Recent US job numbers and car sales all point to trouble ahead. A second dip (which could result in a much worse depression next year) would be caused by a downward spiral of higher savings rate, higher unemployment rate, more business failures and lower spending. Additional pressure will come from workers whose EI has run out, consumers whose credit history is damaged, home owners who are continuing to default on mortgages, and possible coming problems with credit card debt and another wave of sub-prime mortgage balloons.

Rosy predictions by the Conference Board of Canada and the US Federal Reserve Board and so on are designed to increase optimism and hence increase consumer/business spending. But they have another effect. Just look at the Comments section on the Globe article referenced above: half the commenters are calling for an end to government stimulus spending. That idea is madness, but it seems to be catching hold in Canada and the US.

Smart money says we should be very conservative in our investing: especially if your investments have recovered, move the funds into something more crash-proof; and speak up to support the government stimulus package.



Anonymous said...

The Conference Board of Canada could be wrong, but they don't have anything to gain by slanting the news one way or the other. Besides, there's far more economic data indicating we are on the road to recovery than data that would say otherwise; that means things could still go the other way, but the direction so far is clear.

Yappa said...

Hi Anon at 2:02 -

I think the Conference Board falls into the jolly-us-along camp, trying to get the economy moving again by making us think it's doing better.

It could still go either way, but the direction is by no means clear. Even if the recession is over, the recovery could be years away. During this time our economies are very vulnerable - a flu pandemic, for example, could have huge effects this winter.

But I think there's a pretty good chance that worse will happen and we'll have a market/economic slide before Christmas. The bailouts have kept companies afloat but there's a lot of question about the real health of North American corporations.

Anonymous said...

It's analogous to micro and macro physics. In the short term chaos theory applies; in the longish term some predictions are possible.