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Putting the debt issues of all this stimulation into perspective, the U.S. Congressional Budget Office (CBO) once again warned that the future is “worrisome.” In fact, looking beyond 2025, the agency repeated the scary point that “high and rising debt, relative to the size of the economy” could bring “the risk of another fiscal crisis.” Federal debt held by the public currently stands at 74.1% of nominal gross domestic product, “more than twice what it was at the end of 2007,” the CBO notes, “and higher than in any year since 1950.” Despite all of the monetary effort to revive growth, this surge in debt has only served to spawn global deflation, as debt-financed productive capacity now exceeds the demand that debt-leveraged, maxed-out consumers can muster. This is the crux of the problem in China. Money was spent to build capacity in manufacturing and infrastructure when there is no demand for those products. The auto industry is a classic example of this. There is global capacity to produce 70 million autos a year while the annual demand is around 50 million vehicles; no wonder prices have been stagnant!
Things are not much better in Canada either. A slowing Canadian economy, collapsing oil prices and weak global demand have all conspired to dent the confidence and outlook for Canada’s small businesses. The latest Business Barometer survey from the Canadian Federation of Independent Business showed that businesses in only three out of ten provinces registered improvements in confidence for the month of January. Only 55% of owners are planning to make any capital expenditures in the next 12 months–a post-recession low, the CFIB notes in its report.
Enough of all of these sombre prognostications; is there any ‘real’ good news out there? Corporate America seems to be the source of real strength. While central banks and policy makers have been increasing debt at record rates, corporations have been more prudent with their money. Cash balances at the S&P500 non-financial companies have risen to record levels of over $2.5 trillion. While Apple is now the largest company in the world with a market capitalization of over $700 billion, Apple’s $178 billion in cash would make it the 14th largest market cap in the S&P500. If Apple distributed the $178B in cash to the 320M Americans, it would work out to $556 per person. This compares pretty well to the much-talked about oil ‘tax cut’ due to the 50% fall in oil prices over the past six month. That works out to around $750 per family.
Canadian banks reported first quarter earnings this week and the news has not been nearly as bad as feared once again. Short positions (negative bets) on Canadian banks, primarily by U.S. investors, had risen to record levels on the view that the collapse in oil prices, a slowing economy and an inflated housing market would lead to weak earnings growth at the banks. The recent surprise cut in interest rates by the Bank of Canada only seemed to stoke those fears further. But with 5 of the big 6 banks having reported this week, the numbers were ahead of expectations for all but one, the Bank of Montreal. Royal and CIBC had the biggest positive surprises as wealth management and trading contributed more than expected. While the full impact of the fall in oil prices may not have reached the banking sector yet, the steady earnings and high dividend yields of the Canadian banks are going to push money back into the sector, forcing short sellers to cover their bets.
The other sector that every investor seems to want to find the bottom in is the energy group. Is it time to look at beaten up stocks in the energy sector? Before looking at the stocks we have to look at oil itself and see what the supply-demand picture looks like. The chart below shows weekly U.S. oil production over the past 25 years. Production suffered a 50% decline over the 20-year period from 1990 to 2010 as high decline rates and under-investment in the sector forced U.S. refiners to buy more of their crude oil needs from foreign producers. Then the shale-oil revolution came. Extracting a form of heavy oil from shallow depth porous shale by injecting steam into the rocks gave U.S. oil production new life. Production has basically doubled over the past five years, lessening the U.S. dependence on foreign oil and, more recently, putting significant downward pressure on prices as foreign producers such as the OPEC cartel also continued to produce near capacity levels.
