2016 in Preview

2016 is fast approaching and it appears that the year will be a repeat of 2015 where the world economy bounces along.  Global GDP will be lower but remain positive.  Last December we predicted the stock markets would trade in a 5% band which it has.  For 2016, we are extending the band to 7-8%, up or down from todays levels.  The increase will be due to an aging population coupled with the never-ending zero interest rates which are destroying savings.

Both the Baltic Dry Index (BDI) and the CRB Index are telling us the world economy will be weak.  The BDI tracks shipping rates which are currently setting new all-time lows, meaning world trade is slow and will be for most of 2016.  Likewise, the CRB Index, a basket of commodities, is trading at its lowest level in the 39-years of its history.  It too is forecasting a slow economy. 

Canada will continue to feel the effects of lower oil and natural gas prices, but that is to be expected.  Due to an abundance of natural gas we see the price falling to $1.50, a level experienced in the late sixties.  We feel the price of oil is nearing the bottom because global demand continues to grow.  More importantly, the Middle East needs more oil revenue.  At today’s price, it will take less than two years for Saudi Arabia to go bankrupt so it is in their best interest to have higher prices.  Oil will hit the $50-$55 range, but not overnight. 

Prices should not be the main concern in Canada’s oil market.  Getting the oil to the market place is the issue.  Canada must build more pipelines, not rail cars.  The pipeline is safer than rail, creates thousands of jobs and will open the European market to our oil faster and safer.  Today, there are 31 pipelines travelling between Canada and the U.S.  All of them are nearly full 24 hours a day, 7 days a week.  Shell Canada and Cenovus Energy have curtailed building their tar sands plant partly due to a lack of pipelines.  This alone has cost well over a thousand direct jobs.  The Trans Mountain Pipeline and the West to East Pipeline would prevent Alberta from heading into a typical contraction brought on by an NDP government.  But, the Alberta government does not care.

Interest rates are a tough call.  On one hand we have the Carbon tax; a brilliant marketing scheme for all governments to raise taxes.  The Carbon part is an easy sell because it makes consumers feel like they are spanking big business and protecting the environment at the same time.  This feel good moment will all come to end once the consumer realizes that all tax hikes on business are passed onto the consumer through higher prices.  This may cause deflationary forces and could be what keeps interest rates from increasing.  This is obviously what all governments want because it keeps their borrowing costs low.  You just know the politicians are all high fiving each other behind closed doors.  On the other hand we also have a weakening Loonie which increases the cost of everything.  This could be what the market needs to drive interest rates up.  One thing remains though; as long as there are low interest rates the economy will not be robust.  

It will still take a few quarters to decide where our heart throb PM is leading us.  Right now it does not look promising.  In Ottawa, the politicians prefer to talk instead of take action.  The potential for Canada remains amongst the best in the world because demand for resources will continue to grow.  Only the politicians can delay the future.  Today, they appear hopeless and do not know what direction to take.  In other words, be careful in your spending and investing.  2016 is not going to be a very profitable year.