This morning we have news that wholesale prices in the US deflated .4% in April–the 5th decrease in the past 6 months and–a decline of 1.3% over the past 12 months; far short of the Fed’s stated inflation targets. Bonds are rallying on the non-inflation news. So far the US dollar is weaker and US stocks are ripping out of the gate on the premise that deflation means no rate hikes any time soon and perhaps maybe even, another round of QE ahead from the Fed’s impotent basket of tricks.
Canadian stocks are not so sanguine. If there is no growth and no inflation then there is also little reason to bid commodities. There is also less hope for Canadian wage growth or even further home price inflation to keep the Canadian household credit bubble expanding. There is also no reason for companies to expand, or borrow to invest in productivity gains.
All that seemed so right about Canada into the 2008 cycle peak, has turned against the Great White North. Once praised as a commodity superstar with stable banks, Canada is now increasingly noted globally as an embarrassment of household improvidence, sorely under-diversified and dependent on the antiquated economy of fossil fuels.
In all that has happened over the past 7 years, in all the trillions that have been wasted to re-inflate asset bubbles worldwide, the Canadian stock market still remains below its June 2008 cyclical peak. What’s more, with deflation spreading and demand slowing, TSX valuations remain bloated and face steep mean reversion from here. A debt boom and global adoration were nice while they lasted, but the payback will be more dramatic still.