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2013 outlook: flat is the new up in a troubled world

As a new year begins, the outlook for off-farm investments is clouded by troubles around the world. Canada is a sweet spot and the Prairies sweeter still, for Alberta, as always, is good to its business. It is becoming ever more the headquarters of corporate Canada.

Saskatchewan is booming with its key products — grains, fertilizer, and energy. Manitoba has its balanced economy and continues to do well in spite of rising tax loads. It is the rest of the world that is in trouble.

The U.S.

The United States faces the fiscal cliff. The phrase, coined by Fed Chairman Ben Bernanke, alludes to what will happen if tax cuts created in the era of President George W. Bush have not been extended beyond December 31, 2012 and if spending cuts due to go into effect on January 1, 2013 were not cancelled.

Economists and political forecasters have taken it as a foregone conclusion, as a Nov. 23 Scotiabank economics report puts it, that a “payroll tax cut will be eliminated to the sharp detriment of Q1 disposable income.” The implication: Americans still employed will have less income to spend.

The Congress, so far, has shown no ability to get over its fundamental party divide. Higher taxes may take 1.5 to two per cent out of gross domestic product. If spending cuts go into effect, U.S. gross domestic product (GDP) may drop as much as two per cent. The total, a potential four per cent drop in U.S. GDP, would be a disaster for the American economy and would echo in Canada.


Europe’s time of troubles is not at end. Greece remains the sorest spot with its ratio of debt to GDP headed toward a shocking level of 190 per cent. Ireland is working out its problems; Portugal may be able to survive without default. The prospects for Spain, which is in deep recession with youth unemployment in several parts of Catalonia, Barcelona’s province, approaching 50 per cent of the available work force, are dismal.

With a forecast drop of 1.2 per cent of GDP in 2013, Spain has arranged a bank bailout worth US$130 billion in which the European Stability Mechanism, the latest Euro-rescue fund, will aid the European Central Bank to save the country from financial collapse.

Italy is in deep recession. Its GDP will shrink what is predicted to be 2.4 per cent this year, but Italy has massive gold reserves. The problem is that if Italy misses a payment on its sovereign bonds, it will be in default. There is not enough money in all of the European central banking system to bail out Italy. The Italian economy, about 25 per cent larger than Canada’s, could bring down the house of Euro. Those worries alone will keep money out of Italian bonds, force up interest rates all along the Italian yield curve and infect other marginal European debt markets. They are all — save for Germany, the Netherlands and the Scandinavian countries — having a bad case of the chills.


China matters a great deal to Canada, for it is where we sell our copper, lumber and pulp, uranium, fertilizer, grains, oilseeds and iron. Barclays Bank China watchers advise that the recently concluded 18th Party Congress marks the beginning of a new decade of leadership goals. The Barclays analysts said, “We think leaders will be more tolerant towards the ‘new normal’ rates of economic growth in China.” Translation: the days of massive stimulus programs to drive growth are probably over.

There will be reduced growth in China after massive infrastructure projects, including scores of new airports and dozens of nuclear power plants are completed. GDP growth will subside to six per cent from eight per cent, and the effect will be felt on Bay Street as Canadian resource companies find their own rates of growth of sales declining. That will put downward pressure on the ratio of stock prices to corporate earnings. Don’t expect a hot year for Canadian stocks.

Spending and politics

Most of the problems in the United States, Europe and China are the work of politicians and monetary authorities who, over many years, allowed government and private spending to get out of hand. Righting the ship of state in each country will take political courage and wisdom. The problem is that a combination of bad economics and bad leadership continue to hamper recovery.

European governments are rightly frightened of mob politics. In Greece the national government cannot impose further austerity without destroying more of the social fabric. Mob violence has broken out in several Spanish cities and the provincial government of Catalonia is threatening to secede from Spain, arguing that it can do better for its economy than the national government in Madrid. A generation of young workers is facing what they see as lifetime unemployment. A political tidal wave threatens the fourth largest economy in Europe.

The prospects for world economic recovery rest with politicians in Europe, the United States, perhaps in China, and in Canada. The best minds in Europe are trying to find money to fix the cancer of debt. The problem is that cutting social programs and growth to save money to repay debt is pushing the Mediterranean nations — mainly Italy, Spain and the lost cause, Greece — into lower growth and reduced ability to generate taxes to pay debt.

In the United States, still the mover of the world’s economy, there are excellent economists and dedicated political leaders in many levels of the federal government. But far from the Federal Reserve’s board room in Washington, Georgia’s state legislators have recently debated whether President Obama is using a Cold War-era mind control technique called “Delphi” to turn the country into a Communist dictatorship run by the United Nations (UN).

I am not kidding. On October 11, the Georgia state legislature met in a closed-door session led by the Republican caucus leader to consider whether the conspiracy would extend the dictatorships of Stalin and Mao Tse Tung into the peach groves of Georgia. The plot: put the U.S. under the control of a gaggle of UN socialists and turn Savannah and Atlanta into leafy gulags. State legislatures in Tennessee and Kansas also debated the concept, called Agenda 21, with Kansas condemning the idea as a plot to make its citizens turn off their air conditioners, ride bicycles and live in high rises. This idiocy diverts government from the real task at hand, namely, fixing the financial mess that began to go wrong five years ago in the debt and banking crisis.

Canada’s fate and the direction of investment markets in 2013 depend on actions take in the U.S., Europe and China. Our American neighbours are friends and allies, but political foolishness, such as the Delphi nonsense, the apparent willingness of Republicans to create a serious recession that they can blame on Democrats, the lack of a solution to European debt problems and slowing growth in China will make for a year of tough stock markets. Canadian and American government bonds pay very little, though there are investment grade corporate credits around with interest rates of 3.5 to 4.5 per cent. They tend to be expensive. Priced over their redemption values, they will generate capital losses if held to maturity, reducing returns to perhaps 2.5 to 3.0 per cent after the price adjustment. Bonds are getting to the end of their run. It is now time to rest and watch the world squirm either toward a weak recovery or a deeper recession.

In a world in which off-farm investments are dicey, at best, cash looks good. One per cent or a little more in a bank or credit union, maybe two per cent in a GIC, barely keeps up with inflation, but, as Walter Schroeder, head of the Dominion Bond Rating Service, now called DBRS, has said, “flat is the new up.” 2013 promises to be a time when modest goals offer the safest and sanest ways to invest. †

About the author


Andrew Allentuck’s book, “Cherished Fortune: Build Your Portfolio Like Your Own Business,” written with co-author Benoit Poliquin, was recently published by Dundurn Press.



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