Keeping real about recovery expecations

While I was speaking at some conferences over the last week, I took the opportunity to take some informal surveys from the audience. “How many people here are feeling optimistic about the prospects for the US economy over the next 12 months?” Result: about three hands were raised out of 400. “How many people are feeling optimistic about the Canadian economy over the next 12 months?” Answer: most hands in the room up.
Interesting….my own belief is that export-dependent-on-the-US Canada may be in for a wake up jolt again as we did in January 2003 and the summer of 2008. And although we could experience our typical time-lag of a few months should the US economy stumble afresh in the next few quarters, Canada is more tied to the “Uship”—US-hip than most chose to understand.
An excellent article in the NY Times this weekend, underlines some important themes that I have been speaking about for the past several months: interest rates move in long secular cycles of 25-30 years, and this latest falling rate cycle that lasted from 1980 to 2009 is now at an end. We know it must be at an end, because with the overnight lending rates at 0.5%, rates now have no where to go but up:

“The impact of higher rates is likely to be felt first in the housing market, which has only recently begun to rebound from a deep slump. The rate for a 30-year fixed rate mortgage has risen half a point since December, hitting 5.31 last week, the highest level since last summer.
Along with the sell-off in bonds, the Federal Reserve has halted its emergency $1.25 trillion program to buy mortgage debt, placing even more upward pressure on rates.
“Mortgage rates are unlikely to go lower than they are now, and if they go higher, we’re likely to see a reversal of the gains in the housing market,” said Christopher J. Mayer, a professor of finance and economics at Columbia Business School. “It’s a really big risk.”
Each increase of 1 percentage point in rates adds as much as 19 percent to the total cost of a home, according to Mr. Mayer…”

Read the whole article here: NY Times: Interest rates have no where to go but up.
My expectation is that we will see the next wave of weakness in the economy over the next few quarters. So I do not think that governments will want to raise rates quickly. (Recall that Canada started hiking too early in 2002 only to backtrack and slash again when the recovery stalled in 2003) But the fact is that governments cannot slash rates lower from here should a fresh wave of weakness hit. Those bullets have already been spent in their “rescue” efforts over the past year.
Meanwhile…back in the real world… the small business survey this morning shows “no optimism at all” about the economy. It turns out that main street businesses need actual customers coming through the door before expecations will improve… really, who would have thunk? It turns out you need real consumption gains to stimulate growth:

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