During the Dirty Thirties unemployment exceeded 20%. Yet, interest rates were between two and three per cent. Today, unemployment throughout North America is between five and six per cent but we have zero interest rates. At least back then you would be rewarded on your savings. Today, after-tax and inflation, one earns not a cent and in most cases lose money. Without savers being rewarded there cannot be any sustained long term economic growth. Those with savings tend to spend more freely when their money is generating a return. Businesses understand this and are making smaller investments as a result. Savers are also being squeezed by higher energy, housing and food costs. People are being forced to borrow or cut spending just to survive. This is not good for the world economy.
Too many Canadians are house rich and cash poor. This is about to change because house prices are set to fall, if they are not already. Mathematically, it is impossible for house prices to hold up. Fewer people have the necessary savings for a proper down payment and the pool of buyers is drying up as ownership rates continue to break records. Wage growth is almost non-existent. The California Department of Finance states personal income in the state is the same as what it was in 1995. Considering California is one of the most prosperous states, how are other states doing?
A Vancouver real estate agent on the radio stated that prices in downtown were off 3% while prices in the suburbs when down 7% over the past couple of months. Hong Kong and Singapore have in place a foreign buyer’s tax like Vancouver has implemented. Prices in Hong Kong and Singapore have dropped 7% and 11% in the past year, respectively.
There are surpluses of foods, iron ore, copper, all types of energy, soya beans, and many more commodities yet prices are holding up. Three weeks ago every New York city gasoline storage tank was full. Two tankers full of gasoline were sitting out in the ocean as they had no where to unload. New Jersey was selling gas at the pump at the lowest in a couple of decades.
Here in Canada, Ottawa and Alberta are doing everything they can to close down the energy sector. A recent paper by Ottawa stated that Canada does not need any more pipelines until after 2025. This just provides proof that politicians are out to lunch because every oil executive in Alberta says we need pipelines built today. All existing pipelines are running at above 95% capacity. Guess who will win this battle? Ottawa's answer is to add useless carbon taxes. Australia provides ample evidence that it costs jobs and generates very little revenue for governments. Not one of our trading partners is implementing carbon taxes. As a result, Ottawa is making us uncompetitive.
All this says deflation is coming. The biggest threat is in housing. Oil prices are heading back into the low thirties. Unemployment will be going up this fall due to zero interest rates destroying savers and we are over producing most goods. The stock markets are trading near record highs based on price-to-earnings. Enjoy the rest of the summer and continue to favour cash.