Recession on the horizon? – May 22, 2018

Recession on the horizon? – May 22, 2018

David Rosenberg, Chief Economist for Gluskin+Sheff, penned an article in Saturday’s Globe and Mail in which he forecasted a Recession occurring over the next 12 months. Rosenberg blamed the upcoming recession on “Trumpenomics.” In his view, cutting taxes for corporations and also providing tax breaks to the wealthiest people in the country (ie, “regressive” tax policies), will squeeze the finances of the world’s largest economy to its breaking point. He correctly points out that it is reckless to dramatically cut tax revenues, increase spending (yes, the US government is adding to their spending this year) and impose tariff duties for major imports (for example, hardwood lumber which has doubled in price, and effectively imposing a tax on new home buyers of about US$1300 per home).

You can run deficits for years and years so long as someone is around to buy your debt (ie, loan you the money to cover the deficit). No one knows if the U.S.’s major creditors will be able and willing to come up with the additional money needed to pay for the increased deficits. Worst comes to worst, U.S. institutions will have to buy the debt the Treasury is issuing…if that happens, one would imagine that these institutions will require a lot more interest than what the Chinese are willing to accept (remember, the Chinese have a strong need to re-invest their dollars into the U.S. debt market, no matter the interest rate).

There is an additional risk to the current U.S. economy which I believe is taking shape now. I believe that inflation is percolating through the economies, in both the U.S. and Canada. In particular, I get a sense that labour markets are tightening in the U.S. (immigration policy has removed able-bodied and willing people from the labour pool). In addition, commodity price increases have moved through the income statements of many businesses during Q1 and we will start seeing price increases passed on to consumers in future quarters. As Rosenberg argues, if we start to see some inflation we might finally see long-term interest rates ramp up, depressing purchases for homes, cars and other longer-term assets.

The DVI portfolio remains 20-30% in cash.