The last week on the global stock markets has been a case study in how prone to irrational mood swings the financial markets can be. The film The Big Short based on Michael Lewis’s book of the same name provides deep insight into the crazy and crazed world of the financial markets in the run up to the great real estate driven crash in the derivatives market and the broader market collapse that followed in 2007-2008. The market has swung close to a 1000 points on the Dow over a few days then swung back again by some 500 points on Thursday and Friday then swung back again down over 200 points today.
This bipolar reaction is supposedly driven by the slowdown in China and the collapse in world oil prices. Nymex and Brent crude prices have fallen to close to and just under the 30$ a barrel marker. Way down from their level las t year and substantially down from their levels last month. Undoubtedly the drop in prices is worrisome to some traders and banks and financial houses but the story isn’t all bad since cheaper energy supplies will give a boost to consumer potential spending on other products and services. China is an important market but what percentage of overall company profits and thereby the North American GDP is China anyway ? China accounts for about 128 billion US$ of total annual exports. Canada is a more important customer. Roughly 1/18th of the U.S. GDP is exported to China. So lets assume that exports to China falls by 10 % Indeed this may be an exaggerated projection since China is still growing by 7% a year. The ten percent decline in exports means that in the absence of any other developments the US GDP is impacted by a negative 50 basis points or 1/2 a percent. This is hardly a catastrophe. The Chinese slower rate of growth is driven by business cycle phenomena and will recover in time particularly if the Chinese stimulate their economy.So the North American stock market reaction is overplayed. How should Canada respond to the threat posed by very low oil prices and a speculator options driven low Canadian dollar?
It is a good thing that because of how the Liberal party campaigned on a moderate stimulus and the return of sensible counter cyclical fiscal policy it will not be difficult to maintain public support for accelerating and even expanding the program because of the challenges our economy now faces. It is of course true that we are a resourceful country with a highly skilled and well educated labour force, a strong tradition of technological and scientific innovation and entrepreneurship but also an extraordinary reservoir of natural resources that have played a huge role in the history of our country since the first days of the staple base in furs, fish and timber during the 17th 18th and nineteenth century. Yet at the same time we need where possible to diversify our export base and indeed our export dependency to ensure that we are less vulnerable to global price shifts.So as a general principle we need to expand the infrastructure program in terms of the total aggregate demand that it generates perhaps by tripling the amounts involved and subject to the constraints of good planning and practical implementation front end loading some of it to have the maximum sustained impact.
Part of the country’s infrastructure also includes pipelines that carefully and in an environmentally sound way should permit our resources to be distributed and refined to serve the entire country thereby lessening our dependence on imported oil and to bring our resources efficiently and ecologically to market. Lac Megantic showed us that rail transport is more dangerous.
(Note: I myself invest in the markets and have a small retirement account)