10/09/2016

The Elephant in the room - by Jeff Fitchett

As I ponder the possible topics to discuss in this week’s missive I can’t help but marvel at all that is going on in our world today and in the lives of those whom I interact with.  

There is certainly a lot of instability and change going around.  I learned a long time ago to take a step back, contemplate what I am seeing & experiencing and make appropriate decisions based on my assessment of what it is transpiring around me.  

With that said, there are things that we can control and there are things that are out of our control.  All that we have to work with is in the present moment.  Our actions today lead us to future outcomes. 

The present financial, political and economic landscape is precarious to say the least.  It is obvious to anyone who has been reading my weekly updates or speaking with me directly that I am of the opinion that our collective future is going to be tumultuous.  

I often feel like I’m observing an elephant in the room  while others are only noticing a small rubber duck lying next to the elephant.  I do not think that the economic and financial situation in the US should be disregarded.  We all understand that borrowing from the future cannot mathematically continue unabated in perpetuity. Debts are either paid back or defaulted upon.  

A cursory glance at the US debt clock corresponds with the elephant in the room.  The US government owes over $19 trillion, has a $733 billion annual trade deficit and a $616 billion budget deficit (or $5.7 trillion budget deficit using generally accepted accounting principles and factoring in unfunded liabilities).  This equates to each US taxpayer owing approximately $864,000 for their share of the unfunded liabilities (GAAP).  
Financial pundits are constantly talking about the likelihood of US interest rates going up (duck in the room).  From my perspective, I struggle to see how an increase in interest rates won’t lead to a serious economic contraction that will reverberate globally (I think we are heading for a major global contraction even if rates drop).  



























Just think about it for a moment.  Historically, increasing interest rates within a country normally cause their currency to appreciate in value.  A strong currency negatively impacts businesses that export their products abroad because the products they produce become more expensive to foreign buyers.  As exports decrease companies begin to cut back and layoff their workforce or in some cases the businesses relocate to lower wage jurisdictions.  


Some people will argue that a strong dollar allows for consumers to purchase imported goods at lower prices.  Over short periods of time this premise holds true, but over time a society will gradually decline and then fall apart.  I think Detroit is a prime example of what I’m trying to convey. 

At one point, Detroit represented the economic strength of the United States of America.  The American dream could be realized by people who worked hard and produced goods that the world wanted.  Check out this 45 photo montages showing Detroit then and now.  It’s heart breaking to see such a prosperous city fall to ruins.  

It is important to keep an eye on the big picture and not get too caught up with the barrage of media stimulus  that we are inundated with.  Donald Trump and Hillary Clinton are non issues in the grand scheme of things.  Neither of them will be able to embark on a course that strays too far from the status quo.  The elephant in the room is too large to move over the course of one person’s presidency.  In the meantime, the big picture is made up of each moment that passes us by.  Our actions today will shape the future we will inherit.  I liken our current way of life like a snowball growing larger as it rolls down a snowy mountain.  Economic carnage will likely ensue given the growing mass of problems. 

I have singled out the US because they are the largest elephant in the room when compared to China, Japan, Europe and so on.  Almost every country is dealing with at least some of the issues that the US is reeling from.  Over time I suspect that more people will realize the precarious position we find ourselves in and we will reach an inflection point. Confidence is a major force that keeps our way of life humming along.  When confidence drops systems fail.  

In Canada, I think the decline in house prices will be a major blow to the confidence of Canadians.  I continuously hear people talk about the strength of the Canadian housing market and how robust it will be well into the future.  Low interest rates and foreign investors have helped fuel the boom in our housing market.  Canadians have a staggering amount of personal debt. It is only a matter of time before we face a repricing of the value of our homes as demand begins to wane.   

Courtesy of MLS

The world is awash with problems.  It would be wise to not be complacent.  Many countries are experiencing severe hardship and more will feel the same in the coming months and years. 

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