The subprime mortgage crisis in the United States, the consequent liquidity crunch in credit markets in the US and in Europe, the corporate exposure to unsellable (more or less) asset-backed commercial paper (ABCP) the big point of debate around here (here being the newsroom of Canadian Businessmagazine, over which I am the humble editor) is how far downhill all this, er, stuff is going to run.
In other words, Does any of this matter in the quote-unquote real world? And if it does, will it spark (I realize this might not be the most appropriate verb here) a recession?
Well, if you believe the spending habits of the American consumer are responsible for the good times in the global economy over the past few years, then its not a big leap to see a US recession in early 2008. The subprime crisis is both a cause and an effect of higher borrowing costs; worried about making payments, and about their jobs, consumers might just turn off the spending tap. Hello, slowdown.
For some, the evidence is already out there. American consumer sentiment is at 9/11 levels, and today’s US jobs statswere pretty dismal the first employment decline since 2003. Thats got some Wall Street observerscalling for the US Federal Reserve to start cutting rates big-time in mid-September. Well see. Othersaint so sure a recession is imminent in the States, even with the crummy job numbers and even though a Fed rate cut looks a done deal this month.
Where does this leave our chilly climes? Short answer: Who the heck knows?
Todays Canadian job numbersreflect a pretty healthy economy, with unemployment holding steady at six percent. The Bank of Canadadoesnt seem that concerned about the credit crunch, though its keeping its overnight-rate powder dry just in case slowdown pressures start exceeding its inflationary worries. (I know, I know whatever that means.)
But again, who the heck knows? This country is still so dependent on the fortunes of the US, as is the rest of the world, that a lot will depend on the severityand the duration of any recession south of the border.
Personally, Im more with the skepticsthan the doomsdayers, not just for Canada but the States, too. Im not saying recession concerns are unwarranted, just that I have a bias towards thinking theyre overblown at the moment. (Hows that for fudging?) In which case, there might be buying ops out there (as RBC has no doubt concluded in its $1.6-billion Alabama bank foray).
Still, if you’re an investor, you might want to weigh the oddsof a US recession, of it spreading to Canada and perhaps globally, and then act accordingly.
Trouble is, if/when a US downturn comes along, it will be the first consumer-led recession in decades. The classic cyclical plays might not be appropriate this time around. The big question and the one that some of CBs writers will try to answer in our next issue is what would be the smart plays for investors now, given the different possibilities?
My suspicion is the answers will be non-obvious. Because this time around, the recession that comes down the pipes might not be like any weve seen before.