Economic analysis


The Sunshine Gang vs. The Legion of Doom. PLUS: The geography of job cuts

EconowatchThere are two dominant schools of thought emerging in the economy today. They agree on nothing and they’re making quite a racket.

The first group we shall call the Sunshine Gang. After watching stock markets rise 20 per cent in the past month, they’re feeling good. Every piece of economic data that is slightly less awful than it was last month only bolsters their enthusiasm and their oft-repeated mantra that “the worst is behind us.” U.S. Federal Reserve chairman Ben Bernanke bought his membership in the Gang Tuesday morning, telling an audience of college students that he sees “tentative signs” that economic activity is “levelling out.”

On the other side, we have the Legion of Doom—for now, they enjoy the upper hand because in 2007, while the Sunshine Gang was saying that a three bedroom, two bath in suburban Phoenix really could appreciate at 15 per cent a year forever, the Legion was saying it couldn’t . . . and the Legion was right.

But that doesn’t mean that the Legion is going to be right forever, and as they predict ever-lower asset prices, and ever-deeper misery, their warnings begin to sound a touch hysterical.

Last week in Toronto, Ian Gordon repeated his famous prediction that the Dow Jones Industrial Average will fall to 1,000 (from around 8,000 today) before this crisis is over. Such calls are so extreme, and so confidently delivered, that they are inherently fascinating. You know, beyond any doubt, that this person is either a genuine oracle or a complete crank. Either way, there’s a certain frisson that comes from listening to them speak. And we’re hooked on that frisson.

Avery Shenfeld represents the vast middle ground that is too often drowned out by the shouting from either side. Shenfeld’s first report as chief economist at CIBC was entitled “So it’s not 1929 after all,” but he isn’t a card-carrying member of the Sunshine Gang. Shenfeld thinks the market has gotten ahead of itself and is vulnerable to another tumble on any disappointment in corporate earnings.

That said, by the end of 2010 he expects the market to be about 12 per cent higher than it is today—stimulus money will slow the tide of job losses, housing will stabilize and modest growth will return. In other words, this is neither the beginning of a bonanza nor the end of the world. There’s not much frisson in words like that, but there’s probably a lot of wisdom.

GRAPH OF THE WEEK: The geography of job cuts

Life is not fair and neither is the economy. Since October, 356,600 Canadians have lost their jobs, but the turmoil isn’t evenly spread across the country. As the graph shows, Ontario has suffered the lion’s share of job cuts. In percentage terms, B.C. is hardest hit with a three per cent drop in employment (followed by Ontario and Alberta). Only Saskatchewan has held steady so far.

The geography of job cuts


Flight of the loon

It’s been a rough year for the Canadian dollar, but things are looking up. The loonie hit a 10-week high above US82 cents this week, up 7.6 per cent since February. And while most analysts say the rise is due to weakness in the U.S. dollar, UBS strategist George Vasic thinks investors may finally be realizing that the Canadian economy isn’t just about rocks and trees. With a strong banking sector and our enviable fiscal position, our dollar is finally beginning to reflect “Canada the good,” Vasic says. It’s about time, too.

The dragon’s alive

China’s economy appears to be pulling out of its nosedive. Imports of iron, coal and oil rose last month, as did sales of homes and cars.


U.S. manufacturers have struggled all year with a glut of unsold goods sitting in warehouses, but that problem may be easing. Several companies, including Alcoa and Goodyear Tire, are reporting sharp cuts in inventories recently.

If you build it . . .

Construction of new homes in Canada soared by 13.7 per cent in March, halting a six-month slide. But don’t get too excited: the number is still 36 per cent below last year, and most say it was due more to good weather than rising demand.


The axe keeps falling

Canadian employers slashed another 61,300 jobs in March, driving the unemployment rate to a seven-year high of eight per cent. In all, 387,000 full-time jobs have disappeared since October—the sharpest drop since the recession of 1982.

Retail Sales

Retail sales in the U.S. took an unexpected fall last month, sliding 1.1 per cent. Anemic demand for cars, appliances and clothing led the declines. The optimists note that the past three months as a whole were better than the last three months of 2008. But with job losses mounting, consumers are paying down debt and building up savings accounts, not filling out their summer wardrobes.

The money hole

The U.S. government’s budget deficit is growing even faster than expected. Uncle Sam is already US$1 trillion in the red, and we’re only halfway through the fiscal year. In fact, the deficit was US$192 billion for the month of March alone. Canada’s budget shortfall is now projected to come in at a comparatively modest (but still record) $39.2 billion this year.

Running on fumes

Oil prices retreated below US$52 a barrel this week as the International Energy Agency projected that global demand will fall by 2.4 million barrels a day this year. That means cheaper fill-ups for commuters, but more pain for oil exporters like Canada.



  • One of the oldest truisms in investing is that grocery stores and drug makers are recession-proof. After all, people have to eat, and people have to take their medication, right? Well, it turns out meds are a luxury for some cash-strapped Americans. According to one medical tracking form, Americans failed to fill 6.8 per cent of their doctors’ prescriptions in the final three months of 2008—an increase of more than a fifth from a year earlier.
  • A recession, it seems, is no time for ballet. The National Ballet of Canada indefinitely postponed its five-city tour of Western Canada “in order to avoid undue financial risk.” Despite attracting good audiences in Ontario this year, the company is facing a deficit and decided it couldn’t take on the expense of a western tour.
  • The economy is so dire in the United States, it has driven desperate Americans to drink domestic beer. U.S. beer imports dropped 19 per cent in the first two months of this year. The hardest-hit brands were Mexico’s Corona, and Heineken, the bestselling Dutch brew. Sales figures suggest domestic brands like Coors Light are benefiting from the import slump. God help them.
  • These are tough times to be a car dealer, but in Britain there is no job tougher than being a used car salesman. New figures from the U.K. show that several dealers, including Vauxhall (owned by General Motors) and Mazda, are selling new cars for less than the same pre-owned model. Dealers say vicious competition for sales has driven prices down to unsustainable levels.


First, Wells Fargo & Co. projected it would turn a US$-billion profit this year. Then, Goldman Sachs announced better-than-expected earnings and plans to repay the government’s emergency loans. Now, all eyes are focused on the quarterly earnings reports that will come over the next couple of weeks. Can companies produce more positive surprises, like Wells Fargo did? If not, will the market plunge again?

Abby Joseph Cohen“The very dramatic declines in corporate earnings forecasts seem to have ended.” —Abby Joseph Cohen, senior investment strategist at Goldman Sachs

“What we see is a lot of hope in the market that this quarter will finally show some legitimate bottom-line results above and beyond what we saw last quarter. It’s more a function of hope rather than any evidence that that is going to happen.”—Jason O’Donnell, senior bank analyst at Boenning & Scattergood Inc.

Marc Faber“You have essentially a government that gives financials free money at the expense of the taxpayer. With this free money, they may actually have decent earnings in the near future.” —Marc Faber, publisher of the Gloom, Boom and Doom report

“The worst of the post-Lehman panic appears to have passed.” —Brad Hintz, a securities industry analyst at Bernstein Research

“The [bank] CEOs have taken a stand and expectations have been raised . . . They could get slammed if they don’t perform.” —Frank Barkocy, director of research at Mendon Capital Advisors

“First-quarter 2009 earnings season may have more head fakes and rebounds than the NCAA basketball finals . . . We anticipate that first-quarter 2009 will be a head fake, with negative fundamentals returning in second-quarter 2009.”—analysts at Keefe, Bruyette & Woods


Thursday: StatsCan will release Canadian manufacturing shipments for the month of February. Judging by the number of manufacturing jobs lost in the past few months, you can expect that shipments were lousy. The U.S. will report housing starts for March.

Friday: The Canadian consumer price index is expected to show that inflation remains the least of our problems for the time being.

Tuesday: The Bank of Canada will make its monetary policy announcement. With rates at 0.5 per cent, there’s not much left to cut.

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