The trouble with being right is that it’s a hard act to follow. What worries us now? Not the U.S. economy, which we think is on the mend. Not the Euro Debt Crisis, which we think is all but over. Not the U.S. stock market, which we think is in good shape.
The Canadian economy and the Canadian housing market worry us. We have covered these subjects amply in editions gone by. The other thing we point out is that interest rates could rise without an increase in inflation or economic activity. The current level of interest rates is artificially low. As we’ve shown in past editions of our Market Observer and Corporate Bond Letter, “normal” interest rates would be 2% higher for T-Bills and 3% higher for long term bonds. This would cause substantial carnage in the bond markets.
It seems to us that Canada, China and Australia are now paying for their sin of using excessive credit support to escape the recession in 2008-2009. This let them fiddle while the U.S. economy burned. Now the tables are turned and the U.S. looks to be exiting its post Credit Crisis slump while China and commodity producers Canada and Australia are all slowing dramatically. If you live by the commodity sword you die by the commodity sword.