A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the World Wide Web.
I grow concerned about the Canadian economy. The Saudis have pushed the West Texas Intermediate crude oil benchmark well below $80, in only the latest sign of the end of the commodity supercycle. So far, we've only seen the first order effects – falling stock prices.
The second order effects will be visible as the fallout from sharply lower commodity prices becomes clear. The biggest of these effects will likely be corporate investment. As Business in Canada notes, the mining and energy sectors have been responsible for almost half of all capital expenditure in the country. This investment is not about to grow with lower resource prices.
The simple formula for calculating GDP is Y = Consumption + Investment + Government spending + (Exports minus Imports). Slower Investment feeds directly into slower GDP growth.
"Why Canadians should be worried about the drop-off in oil prices" – Business in Canada
See also: "Saudi hikes oil prices to Asia, Europe, but U.S. cuts spook market" – Reuters
A terrific column from Allianz SE's Mohamed El-Erian discusses the importance of market volatility on portfolio construction and global risk tolerances. He presents three explanations for the recent choppiness in markets, ranked in ascending order of investor scary-ness:
"There are three possible explanations, with differing economic and market implications. First, the volatility is the result of one-off disturbances elsewhere, the impact of which is both temporary and reversible. Second, it signals an upcoming policy transition in which some central banks no longer seek to repress volatility to the same extent, while others do. Third, it reflects central banks' growing collective inability to achieve that effect. "
"How to read the Dow Jones ups and downs" – Financial Times (subscription may be required)
I've been fascinated by the work of European economist Mariana Mazzucato who presents a compelling argument that government spending, not private entrepreneurs, is the primary source of economic innovation.
Ms. Mazzucato points to Apple's iPhone to show the importance of government spending. Almost every novel technology in the smartphone – GPS, touchscreens and lithium ion batteries are only three examples – were first developed by the U.S. military.
This is a counter-intuitive "man-bites dog" thesis but it has undeniably convincing support, as the graphic below indicates:
"The state is behind Apple"- Mazzucato, Twitter
Economist Noah Smith frames the search for alternative energy sources as a fight against barbarism. It's an interesting if theoretical post, describing a tension that he believes is playing out in Russia right now:
"If we don't find a better source of energy than oil and gas, Putin's militarized gas station represents the future of our planet. We won't run out of fossil fuels for at least a century, but high-tech extraction costs will rise and rise, giving windfalls to whoever sits on the land with the lowest extraction costs, whether it's the rulers of Russia, Saudi Arabia or Iran. We won't go all the way back to the zero-sum world, where land is the most important source of wealth, but we will slide back in that direction."
"Bad Energy. Good Energy. Choose Your Side." - Smith, Bloomberg
Tweet of the day: "@auarelija U.S. residential construction dynamics getting just worse... pic.twitter.com/d0JYJixZ7a"
Diversion: "Scientists pick the top ten catchiest pop songs of all time" – Quartz
Follow Scott Barlow on Twitter @SBarlow_ROB
Scott Barlow