Well, doesn’t everything in the equity markets look peppy this week!
The indexes are pricking at 18 month highs, U.S. unemployment is falling and the Bank of Canada has been musing about pushing up interest rates sooner rather than later. Some Canadian banks have helped the optimismfest by already increasing their fixed rates.
And, as I look at a five year chart of the Dow Jones Industrial Average, I can allow myself to believe that the worst is all far behind us – just a fading memory – and we’re at the beginning of a long, long recovery that will allow everyone to recover their RRSP losses and see their pension plans become solvent again. Look at the chart:
Do you see a bottom head and shoulders pattern there, in that year long trough? If that’s truly what that is there, then there’s a good chance of clear economic sailing ahead. And that’s what crop prices need. I’ve got to admit it’s been a little depressing for the past few days following up on recent USDA reports and hearing nothing but glumness and grimness from analysts. Prices now are weak, and U.S. farmers intend to plant a crop that – with good conditions – will be either big or huge. That won’t help through the massive stockpiles of wheat, barley, oats that are out there holding prices down.
So our two big hopes for the coming season in terms of fundamentals are: 1) bad weather somewhere else, and perfect weather on the prairies; 2) continuing economic recovery and growing worldwide demand for grains and oilseeds.
Weather’s anyone’s guess.
Growing demand is a factor that you can see if you watch business news on TV, listen to it on exclusive Bloomberg podcasts that my kind editors allow me to subscribe to, or read in places like the Globe and Mail’s Report on Business.
The news is happy this week, especially for non-exporting Canadians. “U.S. Economy Begins To Wake,” says the main headline on the front page of the ROB. The strength of the Canadian economy is highlighted in the story beside it: “With Loonie Near Parity, Companies Scramble to Hedge Their Bets.”
Let’s take a look at the Loonie:
And quietly a lot of the non-crop commodities have come surging back. I talked about pork a couple of days ago, but have you looked at copper, which is a bellwether for industrial and residential growth? Here it is:
So these fundamental factors – strong U.S. economic recovery, stock market recovery, commodity market rally, big demand for resources pulling up the Canuck Buck – suggest we can be fairly confident the recovery is here to stay and that there will be growing demand to sop up all our excess crops from this year and the coming growing season.
But, as always for the past four years, I find myself thinking bearish thoughts. And any look beyond the top headlines shows the disturbing factors under the surface. If you flip past the first few pages of the ROB and get to the bottom half of the investing page, renowned investment analyst David Rosenberg (remarkably based in Canada rather than New York!) has a column highlighting the downsides of today: “Deflationary Undertow Threatens U.S. Recovery.”
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And what I treasure most about the Bloomberg podcast service I subscribe to (Tom Keene on Demand) is that every day I get a dozen often-in-depth interviews with the world’s leading economic thinkers, investment strategists and market gurus and I get to hear a broad range of views. This is important, because if you just look for “consensus” or average views, like those reported in mainstream places like local daily newspapers or on CBC business reports, you will never find the full range of opinions, because the ends of every debate are cut off in order to provide something easily digestible in five minutes.
So let me tell you from my trawling of the sea of analysis that as much as most reports, stats and analysis right now saythe recovery’s here and is going to continue, there are a substantial number of voices that disagree, and some like Rosenberg are from sources no one should easily disregard. We shouldn’t assume that prices of crops are hitting the bottom and that increasing demand will take us inevitably higher. That increase of demand and prices may happen – and perhaps the odds are that this is the most likely future we’re facing. But it’s not something you should glibly assume. We’re still in an unsettled world situation.
The ROB story on the near-parity of the Greenback and Loonie quotes a foreign exchange broker on the situation today: “Many businesses are asking if it’s a good idea to hedge their future transactions when the U.S. and Canadian dollar aree nearly at par and we of course say: ‘Yes, all the way.'”
Of course, that business makes money from FX hedging, but that’s still good advice not just for FX but also for any commodity operating in the world market. It’s spring, we want to be optimistic and there is good reason to be optimistic, but that’s no excuse to stop considering the downside.
