SI's Consensus Watch Blog

Since our search for Consensus began almost a year ago, some common Consensus themes have emerged. Here’s a sampling:

Canadian Consumer On Spending Spree

Rightly so, the Canadian economy has been on a crazy roll the past few years, buoyed by rising commodity prices. The flip side is that the Canadian dollar has surged to record highs. Many in the Soothsayer Consensus have cried that this rapid rise is going to have major impacts on the economy, which is justified. A higher currency makes our exports more expensive and will crimp our exports and ultimately consumer spending. What is surprising has been how resilient the Canadian economy has been…until now. Recent data is now showing that inventories are rising, retail sales are flat lining, and final sales, which is indicator of demand is falling. We’re still waiting for the confessionals from the banks on the loans. The seeds for a slowdown are now planted. The stock market is now catching up to this reality. Coupled with year-end tax selling, the next few months are bound to be rocky for equities. The Consensus is lining up behind this momentum. As the pessimism is bound to create some interesting value opportunities. Earlier this year, these concepts were not in the Consensus’s radar screen.

Real Estate Crunch is for the Local News

The Consensus was holding their hands together firmly on this. Over and over we were this past year told that the cracks in the real estate and credit markets were local issues and were unlikely to spill into the general overall economic psyche. Well now we are getting on a daily basis that we’re in the early days of a major meltdown. The latest coming from the OECD in it’s Market Trends Report; “It may well be that the most recent correction is only a precursor of a more protracted downturn. Write-downs that were initially projected at $25-50 billion are now revised up to $300 billion and counting, mainly because in 2008, approximately $100 billion in sub prime loans are scheduled to come due. According to the OECD, mortgage delinquencies in the US are soaring past levels seen in previous recessions. Bottom line is that there have been a lot of people who either couldn’t afford a home in first place or bought more home than they can afford. The reality check has hit the US, Australia and very shortly it will hit Canada. Up north, the Jump The Shark moments appear to be at hand with the recent 1 Bloor Street project causing people to line up a week before they went on sale (to preferred real estate agents by the way). Another project on the Toronto waterfront, gave prospective buyers pagers and once paged they had x minutes to put an offer. People did. Go to any cocktail party these days and the predominant topic de jour is flipping houses or condos. It’s so reminiscent of the dot bomb days.

Deficits, Schmecifits

The Consensus has also been consistent in pronouncing that the surging gluttony of credit borrowing by the US government and citizenry is OK and that unlike other nations which have paid heavily in terms of a weakening currency and standard of living (e.g. New Zealand, Brazil, Argentina, and Canada), America is immune from such economic adjustments. Basic fundamental economics don’t apply when it comes to the US economy. Essentially the US has been getting away with it by asking foreigner to pay them hush money for their guns and also primarily by it’s past press clippings. Again sadly, the Consensus has tipped us off knowing that it’s too good to last. Global investor’s are slowly pulling money out of US assets (well actually they’re more redirecting new money to other parts of the world).  The latest Treasury International Capital shows that foreigners are purchasing less US assets and that the rate of foreign investment is not sufficient to finance their current account deficit. The gorilla of foreign reserves, China, has been a net seller in the first two quarters this year. The painful adjustment has begun. As much as the stock market wants Gentle Ben to cleanse the market’s sins, the reality is rates have to go up to attract the capital the US needs to maintain its current standard of living. The other option is ratchet it’s spending on social services. Either option is not pretty and will lead to economic hits around the world. If we were still on the gold standard, the US could pull the 1970’s trick and jump off of it and in subtle way default on its obligations, but alas they cannot play that card. Unfortunately other countries have cards to play.

If you were to follow what the Consensus was espousing to, we’d wouldn’t be going out on a limb too much by saying your portfolio hasn’t been having a good year, record stock indexes included. So where does that leave us right now? We have been in the midst of a global asset adjustment. We’re in the early days. The Consensus has woken up and seen the light and is starting to come to grips with all this. Pessimism is much more prevalent. The consumer is feeling the heat, although you wouldn’t know it by the mad dash to the $500 plasma TV’s on Black Friday. The financials are in the process of declaring their sins. Benny and the Fed are seeing all this but they are pretty much powerless to do anything as they have lost control over their monetary policy and that makes sense when you owe money to others. We haven’t reached the darkest hour, but we’re closer to that then we are to a surging economy. As the Consensus continues to build up its lament, a time is arriving to take SMALL positions in solid assets that are getting thrown out with the bath water (financials, consumer durables, health-care, REITS, gold jump to mind). Trying to time the bottom is futile, so you have to be ready to take a hair-cut in the short-term. Remember, a Sage Investor invests for the long term. As you sit in line waiting to cross the US border to pick up some cheap, foreign made American goods, don’t forget to set aside a few pesos to pick up some solid, well-run American companies as well.