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Market Update 
20 September 2015
 

Thursday of this week at 2:00pm was the moment investors around the world have been in deep anticipation for. The Federal Reserve Bank of America announced not to increase interest rates and leave rates as is at 0%. So why did no investor around the world jump. Well, over the last week rational thinking and not anxiety have taken hold. As we discussed a no move in interest rates by the Federal Reserve signals uncertainty not euphoric investing. Chair of the Federal Reserve Janet Yellen raised concerns about China and emerging economies. Both China and emerging economies over all could have a knock on effect in North America. In the month ahead a clearer picture will develop.

Uncertainty in how markets around the globe are interpreting Fed actions left investors in a holding pattern till late October as the Federal Reserve indicated it will look to increase rates then.

However let’s look at this with a realistic eye. Inaction by the Fed, which leaves interest rates at zero, is really an extension of quantitative easing and cheap money. Current, inflation numbers point that infact deflation and not inflation are the concern in America. I believe the real concern for the American Federal Reserve is low to no inflation numbers in the months to come. The table below points to a pattern of low and negative inflation.
 

Year

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Ave

2015

-0.1

0.0

-0.1

-0.2

0.0

0.1

0.2

0.2

 

 

 

 

 

2014

1.6

1.1

1.5

2.0

2.1

2.1

2.0

1.7

1.7

1.7

1.3

0.8

1.6

2013

1.6

2.0

1.5

1.1

1.4

1.8

2.0

1.5

1.2

1.0

1.2

1.5

1.5

2012

2.9

2.9

2.7

2.3

1.7

1.7

1.4

1.7

2.0

2.2

1.8

1.7

2.1

2011

1.6

2.1

2.7

3.2

3.6

3.6

3.6

3.8

3.9

3.5

3.4

3.0

3.2

2010

2.6

2.1

2.3

2.2

2.0

1.1

1.2

1.1

1.1

1.2

1.1

1.5

1.6

2009

0

0.2

-0.4

-0.7

-1.3

-1.4

-2.1

-1.5

-1.3

-0.2

1.8

2.7

-0.4

2008

4.3

4

4

3.9

4.2

5.0

5.6

5.4

4.9

3.7

1.1

0.1

3.8

2007

2.1

2.4

2.8

2.6

2.7

2.7

2.4

2

2.8

3.5

4.3

4.1

2.8

2006

4

3.6

3.4

3.5

4.2

4.3

4.1

3.8

2.1

1.3

2

2.5

3.2

2005

3

3

3.1

3.5

2.8

2.5

3.2

3.6

4.7

4.3

3.5

3.4

3.4

2004

1.9

1.7

1.7

2.3

3.1

3.3

3

2.7

2.5

3.2

3.5

3.3

2.7

2003

2.6

3

3

2.2

2.1

2.1

2.1

2.2

2.3

2

1.8

1.9

2.3

2002

1.1

1.1

1.5

1.6

1.2

1.1

1.5

1.8

1.5

2

2.2

2.4

1.6

2001

3.7

3.5

2.9

3.3

3.6

3.2

2.7

2.7

2.6

2.1

1.9

1.6

2.8

 

The much anticipated inflationary pressures of 2014 which lead the American Federal Reserve to state marking announcement that interest rate hikes are necessary for 2015 are not materialising.

Why?

The drivers are multiple fold. China and the emerging economies can not be the sole cause. Yes, both China and emerging economies did create a super cycle in commodity prices around the globe which has lasted for nearly 30 years. World demand for resources has dramatically dropped since the decline of China and emerging economies. Oil has always and will continue to play a direct role on inflation. The price of oil drives the cost of all we consume, manufacture and need to sustain our lives. Now more than in the past this state rings truer. Energy consumption is needed for all components of our daily modern lives. The need to supply reliable uninterruptible electrical grids with a vast supply of energy has been the relentless objective of the American government over the last two decades. Today, America can stand proud as it has not only attained energy independence from foreign oil, it can also find and  produce so much as low cost prices for energy around the world have crumbled. Historically untameable energy prices have pushed inflation out of control of central banks. At this point in time, central banks don’t have to deal with the oil factor in inflation. Actually, quite the opposite.

In this week’s update, we will mention Britain not the EU. The Bank of England has reversed it’s stance on raising interest rates and now is looking to cut interest rates by  50 bps to zero. Once at zero, if an economic turn around is not seen, the Bank of England will be forced to post negative interest rates.

China like India is in a state of both decline and transition. How effective government leadership will be in transitioning economic reform is yet to be seen. China's ambitions are to have state-owned corporations move into advanced manufacturing. Darlings in this sector (not by an order) are Korea, Taiwan, Canada and a recovering Japan. Advanced manufacturing is where China would like to dominate. Being the maker of all things cheap is not a sustainable economic pursuit.  As the saying goes "live by price die by price”. China’s ability to make things cheaper than everyone is being eroded not just by demand from within for better wages and standard of living but also by competing countries such as Vietnam, Malaysia, Indonesia and so on. There will always be a nation emerging out of economic chaos with such low standards of living that citizens of that country will gladly do the work. India is at a similar crossroad; however it has its eye on advanced technologies space.   

Here at home, the Bank of Canada left interest rates as is. Given the slowdown in western Canada, more needs to be done. Ontario however is quite a different story. Manufacturing is expanding along with a boom in infrastructure development. You would be hard pressed to believe the rest of Canada is in an economic recession. The unfortunate outcome of inaction on the Bank of Canada’s part is that our Loonie has been treading higher. The unwillingness to close the interest rate spread between the Bank of Canada and that of the American Federal Reserve  allowed our Loonie to become a good stop to park short term capital creating an unnecessary headwind for Canadian exports. The importance of manufacturing to Canadian survival is real. Our politicians and the Bank of Canada should keep that top of mind. Neglecting to nurture a strong manufacturing sector will only hurt. In spite the lack of attention to advanced manufacturing and industry overall, corporations have managed to innovate and grow in Ontario. Emerging economies are clamouring to get into this highly lucrative space while our leadership does everything to scare and hamper corporate growth.

What drives an economy is jobs but not just any type of job. High paying jobs which require specialty skill sets are the ticket to a stable economy and provides the tax base to afford the government services needed to carry on a well rounded health society such as Canada is.

There is nothing like facts to put everything into perspective. Based on recent rational, once our Loonie falls back in line, manufacturing in Ontario will boom again. Back in 2000, 18 % of GDP came from manufacturing in Canada which put us on par with Germany and other industrial nations. Wow, way to the Canadian industry. In 2013, the number dropped to 10% of GDP, putting us in line with Britain. Factory employment has fallen by 500,000 jobs to 1.7 million employed which in the decade to 2012 has seen 20,000 factories shut down. Niagara peninsula is one of my favourite places to visit.  Unfortunately it is also one of the most obvious places of industrial decay.   

The upcoming Federal vote will be critical to the economic health of Ontario and how well Canada as a whole performs. We should not repeat the errors of the EU and ECB. Too much austerity to preserve budgets choked the entire economic enterprise of Europe, including Germany, to be followed by unrestrained amounts of stimulus spending to revive a near dead economic engine. 

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