Falling energy and other commodity prices over the last year have significantly reduced the cost of living... although if you see the prices at Safeway and Coop you may wonder. Home ownership has become a bit cheaper and thanks to falling interest rates also more affordable. Also, you can buy stocks and other assets at much lower prices. Finally, a lot of people have stopped spending in order to pay off their debt. All this has created a deflationary environment. When prices fall, people may react as they did during the depression and wait with spending for even lower prices. That then is supposed to create a `deflationary cycle`.
Guys like Harry Dent predict deflation because of demographics; the baby boomers will spend less and sell (when there no buyers) their assets to get funds to pay for their retirement. This is deflationary. Mr. Dent thinks we`ll be going into a depression starting 2010.
Of course, the large government stimulus packages open up inflationary valves as pointed out by many. Also, when we recover, energy demand and prices are expected to rise, fuelling inflation even more. This is offset by the `deleveraging of the financial industry`. Lowering of leverage will stop amplifying bank and insurance profits and create hardship for consumers, just like lowering leverage in your real estate investments lowers your profits.
My most likely scenario expects short term deflation and longer term modest inflation. Low interest rates in the near to medium term followed by slowly rising moderate interest rates 2 to 5 years out. Of course, I likely will be wrong. Energy prices will be schizophrenic in that oil prices likely will improve to the 50 to 60 dollar range over the coming 12 months while gas will remain in the dumpster.
I do not foresee a return of a booming energy industry (at the current time, who knows about what I see tomorrow). With the new shale gas supply and possible gas hydrate production further into the future I see no long term gas shortage but a lingering equilibrium between gas exploration and production costs versus gas demand in North America. With the confusion around Alberta`s botched gas royalties, I see Alberta falling behind N.E. BC, Saskatchewan and Texas.
My best scenario is that we will achieve a `Goldie Locks` economy over the long term in Alberta. Not too Hot and Not too cold. The worst case scenario is a Depression ala Harry Dent. Yet as pointed out in previous e-mails, Mr. Dents forecasting data is, in my mind, suspect. A more believable demographics scenario was presented by Jeremy Siegel where the retiring Baby Boomer assets are sold of to wealthy investors in the BRIC countries and other developing countries with high saving rates.
So with all this contradictory data, you try figuring out what is going on. I think, hardly anybody can fathom the end result. Nor will anybody, other than lucky guessers, call the bottom of the stock and real estate markets correctly. Market timers and economists have notoriously poor forecasting records. So have the consensus forecasts, like the one we`re trying to establish here on this forum.
So, I suggest, you use the ideas suggested in these posts not to create a `consensus` forecast. Instead use them as a collection of scenarios ranging from `bad to good` and then based on your risk tolerance, prepare for the bad (or if you are very conservative for the midrange to bad scenarios) and hope for the good.
BTW here are some interesting tidbits of good news.
[*]Citibank made an unaudited operating profit of close to $8.3 billion for the first 2 months of the year.Yields on corporate and short term debt peaked last October and has come down since - i.e. credit is loosening up[*]H&R REIT secured financing for Calgary`s `The Bow` project - i.e. Credit markets are improving[*]Libor has fallen.[*]China`s stock market is recovering while its economy has stabilized. The Chinese government expects now annual GDP growth of 8% rather than 6% forecasted a couple of month earlier. `The best forecaster is one who forecasts often.`Canadian Banks had good profits and modest debt write-downs in the last quarter. Much better than expected.Several oil companies (CNRL, Talisman) had good results in the last quarter due to production hedging. Also, companies like Talisman and Vermillion were selling non-core properties or overseas properties (Venerex in Libya, 50% owned by Vermillion) for excellent prices. Also, CNRL`s Horizon produced its first synthetic oil at the end of February. After filling up its 1-million barrel on-site storage tanks they will be ready for commercial production. Operating costs are estimated at CAD 35 per barrel. With an oil price of U.S. $45 or nearly CAD 55, they will generate positive cash flow.When Warren Buffett`s portfolios are performing poorly, like during the Tech Bubble and now, people are ready to pounce on him and state that Warren is `passé`. Yet, Warren`s economic demise to date has always been called prematurely and a few years later he looks like the investment genius he is. Not that he is perfect; he is not - and he certainly is not a market timer - but then he never claimed he was. Many `value investors` of the Graham school, including Warren Buffett had portfolios that were in bad shape during the 1973-74 downturn. Guess what... he did ok. And so will we when we hang in there and create positive cash flow.
I know, I posted here a lot of loose ideas. Yep, the signs of a chaotic mind that doesn`t know where we truly are going. And that while claiming in one of my previous posts "that all has been said..." - but that was about my investment strategy: Cash, cash and cash...
Hope this helps.
