Wednesday, April 25, 2012

Canada's fantasy economic outlook is at odds with reality

I still haven't had an opportunity to return to my budget analysis, it's been a busy few weeks with the Alberta election and the ever-changing economic news and I just really haven't had time to get to it. However, the most important part was Part 3 which covered what I determined to be Canada's overly rosy outlook on the global economy.

It's just one month later and already global economic data is blowing holes in Canada's so-called risk analysis. It was a risk whitewash, meant to confirm the government's rosy budget outlook and support forecasts of a balanced budget. Canada through convenient economic omissions has maintained the 'stable economy' lie.

The outlook that the "global economy is improving" is being maintained by Canada even now as predictably Europe re-enters a recession along with the UK. The measures in Canada's budget can not mitigate a second global recession and indeed it appears this is where we are heading. I have maintained on my blogs that this is where we are headed, I have stood by these forecasts even as supposed "experts" convince you all to spend-spend-spend because the economy is "beginning to improve". I wasn't guessing and no I'm not a doom and gloomer. I base my forecasts on a very simple principle of cause & effect. I have seen no "cause" events which would result in the "effect" of an actually improving economy. Economic data and growth forecasts are meaningless while central bank easing reigns and the only thing that really matters in the end is nothing fundamental has changed in our economy since the 2008 collapse. Instead all we have done is attempted to "Stimulate" growth on the fraudulent and flawed fundamentals we were so sure before 2008 wouldn't collapse.

Months before the 2008 collapse "experts" were telling you everything is fine, and we will see a repeat of this event - perhaps sooner than you might think. Einstein said that insanity is the act of repeating the same thing over and over expecting different results; by this definition our economic "experts" and leaders are literally insane. Our economic fundamentals have not changed (in fact Canada has been actively fighting economic "change"), and therefore the end result will be the same, only this time Canada doesn't have a "get out of recession free" card to play.

The interest rate fear monger

Mark Carney has been in the news a lot lately preaching about the "inevitable" interest rate hike. I've already written a post on why I think he's bluffing and as long as those fundamentals remain true we will not see an interest rate hike. The fundamentals may even be worse than I originally thought as it appears that mere talk of a rate hike results in stronger Canadian dollar. That's the "free market" for you: central banks making announcements and the people thinking they mean something important.
Talk can net big results, and the amount of talk Carney has been doing I believe is to drive fear. He can not in reality raise interest rates as I've pointed out, however the 'fear' of rising interest rates is what I'm betting he is banking on. I now strongly believe that the interest rate hype is meant to illicit a response from consumers in hopes that they get their debt under control themselves as the central bank can not make any meaningful changes to it physically. Canada is stuck between a rock and a hard-place. High energy prices are driving up the cost of living which is being supported by consumer spending that's fueled by cheap lending which is leveraged on an overvalued housing market. This problem then compounds when you consider that a large portion of Canada's anticipated GDP is based on this consumer spending. To add insult to injury the effects of peak oil on oilsands production that I've been telling you would happen are now happening.
Yes, the oilsands are still booming. Multi-billion-dollar projects are still being built, production is growing and skilled workers are in high demand.
But increasingly what’s happening in the oilsands amounts to an activity boom, not a profit boom, as Andrew Leach, a University of Alberta energy economist, describes it.
This is the end result of Alberta's exponentially rising oil targets since the price of oil after a certain point can no longer rise exponentially. This 'peak' price appears to be $100 dollars now that all of the spare credit people had saved was blown on the high prices of 2008. Growth may push the price past $100 but it can't stay there for long as the price of energy simply causes a decrease in demand and in growth, returning us to the $100 mark. Peak oil theorists refer to this volatile period as "the bumpy plateau". Canada can expect to see diminshing returns on oilsands energy as the large bull run in prices is over. The cost of production for oilsands is based on $100 / barrel now, the costs have finally caught up with the output as oil has leveled off. The demand of course will always exist, the production will continue (albeit sporatically) but Alberta's (and Canada's) net-benefit is now declining.

Conclusion

The coming economic trends have already been set. Bull expectations for Europe are not justified while their people go hungry and jobless. True production, real risk and cost, and the people that make an economy work have been completely neglected in favour of accounting tricks. The only reason the global economy is still alive is because it's still on life support.

Canada is now left with little options as any attempt to address the problems this late in the game will simply result in large and significant negative effects. Depending on what they choose to do (or not do) we will either see trade with the U.S. choked off due to the "strong" Canadian dollar, or we will see the cost of living in Canada rise exponentially as revenue declines in comparison to escalating cost compounded with dollar devaluation due to easing.

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for eQube gaming systems.

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.

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