Photo: fred h via Flickr
The best articulator of the bear case, David Rosenberg of Gluskin-Sheff, summarizes all of the risks facing the market in one paragraph:Market sentiment is as overly optimistic now as it was pessimistic at the July- August lows. Eurozone fiscal deflationary shock. Anti-inflation policy restraint in emerging Asia. Widespread cutbacks at the state and local government level. Debt ceiling issue triggers major rounds of market volatility. Tax breaks that are temporary tend to have marginal economic impact with few multiplier impacts, hence GDP revisions will likely be to the downside post-Q1. Another downleg in home prices undercuts confidence and spending (with around two years’ supply of total vacant inventory backlog).
'China is overheating and more policy tightening will likely be needed. When government officials begin discussing price controls, you know the situation is serious. The bottom line is that conventional Street research is probably way off in the consensus view that the inflation pickup is confined to food. Wages are rising rapidly beyond productivity gains and a huge credit bubble could well burst sometime within the next 1-2 years. There is dramatic excess capacity -- highlighted by the 40%-plus ratio of fixed investment to GDP. So, there is a strong chance that China undergoes a significant, though likely brief, economic adjustment by 2012, which could interrupt, at some point, our secular bullish call on commodities. Just something to consider.'
'We remain concerned that Canada experienced some sort of housing bubble in 2009 and into 2010. We are worried about looming default risks but have been pleasantly surprised by the fact that the real estate market has eased, rather than busted. Be that as it may, a more pernicious turndown in real estate values cannot be ruled out, especially if the Bank of Canada follows the market and resumes in its rate-hiking program early next year. As it stands, the Teranet-National Bank House Price Index (HPI) deflated 1.1% in September -- the first decline since the depths of despair in April 2009. Some cause for pause.'
'Canadian household leverage -- debt ratios are as high as they were in the U.S.A. at the peak in relation to income (the debt/asset ratio for now looks better here). This is a longer-term concern, especially if interest rates were to be raised further in the future. I see this is a very big intermediate-term concern for the consumer spending outlook.'
'Lack of productivity growth in Canada. This is a key source of debate -- but we contend that the U.S. data are overstated and the Canadian data are understated. How can we be a productivity laggard when we have practically the same underlying inflation rate as the U.S.A. with a comparable unemployment rate that is nearly three-percentage points lower.'
'The Canadian dollar. In our view, it is still overvalued by a nickel even with the recent firming in the commodity complex, though strong international capital inflows are providing a very firm floor under the loonie. That said, the Canadian dollar is impeding growth in the local manufacturing sector and clearly dampening domestic export competitiveness -- Canada's record current account deficit attests to that view.'
'The dramatic retrenchment at the state/local government sector south of the border and the negative feedback effects on domestic demand. This is the one critical source of downside risk for the U.S. economy in 2011, which could easily result in 1.5-2.0 percentage points of withdrawal from GDP growth. Outside of the consumer, this is the second largest spender in the U.S. economy. Have a look at The Mortgage Parallel on page 78 of The Economist.'
'The two Koreas as an example but the situation will also test China-U.S. foreign relations as Beijing tells America to butt out. In recent months, China has been making strides to deepen its economic and strategic relationship with North Korea despite American objections.'
'It does not seem to me that economists have fully taken into account the drag from the fiscal side of things in the U.S. and in the Euro region. Global GDP consensus has been at 4.2% for several months. Interestingly, the BoC took down their 4% view to 3.5% last month -- so they could be ahead of the pack.'
Business Insider Emails & Alerts
Site highlights each day to your inbox.