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The crisis 10 years on: Look back in anger and ahead in anguish as Trump threatens to ruin Canada

Briefing highlights

  • The crisis: Look back in anger
  • Trade wars: Look ahead with anguish
  • Markets at a glance
  • Learning about pot production
  • What to expect in debt-wealth report
  • What to watch for from Apple
  • What else to expect this week
SEPTEMBER, 2008

The Lehman Bros. collapse sparks a crisis that brings together policy makers the world over to rescue the financial system and head off a global depression. President George W. Bush, at a meeting of world finance officials, October, 2008:. "All of us recognize this is a serious global crisis that requires a serious global response for the good of our people."

SEPTEMBER, 2018

The world is fractured, dogged by trade wars and U.S. threats to punish auto imports with crippling tariffs. President Donald Trump, at a North Dakota rally, Friday: "In some countries, including Canada, a tax on cars would be the ruination of the country. That’s how big it is."

This week marks an ugly anniversary, with the collapse of Lehman Bros. and the financial crisis not-so-distant a memory for a world now at war.

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These are trade wars sparked by President Donald Trump, who came to power promising to fix an America broken by trade imbalances, among other things.

Which is not to say he's wrong about America's swollen trade deficits with certain countries, though he's wrong about Canada. But, certainly, his approach, his facts and his hyperbole are being questioned.

LOOK BACK IN ANGER

Some people caused the 2008 meltdown, and others suffered the severe fallout, from those who lost their homes to those who lost their jobs. To those young adults who couldn't find work, their career paths stalled.

The financial crisis raised questions about central bank policies, commercial bank practices and credit agency ratings.

"The economic and financial costs of the crisis have been dire," Nikolaos Panigirtzoglou and his colleagues at JPMorgan Chase said in a report.

"It took almost six years for global equities to recapture the losses incurred during the crisis and nine years for advanced economies to close the output gap that had opened up by the Great Recession of 2008."

Indeed, stocks have climbed to impressive heights, something for which Mr. Trump takes credit, though they face turmoil over trade fears.

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Globally, an "elevated" 190 million people are jobless, with unemployment projected to ease slightly to 5.5 per cent this year, according to the International Labour Organization. This would follow three years of higher rates.

Among the world's youth, more than 64 million are without jobs, with 145 million young people living impoverished lives.

Canada suffered less than other countries during the crisis, particularly because of the strength of its banks, and its labour market rebounded nicely, though it was hit again by the oil shock.

Now, almost 1.2 million Canadians are without work, with unemployment at 6 per cent.

Our young people, aged 15 to 24, have an unemployment rate of 10.9 per cent, with 301,000 of them jobless.

And, of course, many of our children had to put their lives on hold when the crisis hit, some living in our basements and choosing to stay in school rather than face a harsh environment.

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AHEAD IN ANGUISH

From the economy to stocks and currencies, just about everything is a big question mark because of the Trump administration's protectionist agenda. And it's important to keep in mind that we're not talking about Americans or, indeed, even the entire administration, though Mr. Trump's approval rating is decent enough.

Angst is rippling through global economies, and observers believe it's not going to end.

The impact of U.S. tariffs to date has not been huge, but those potentially in the pipeline, including against Canada and China, are another matter.

“The tariffs in place so far are only the tip of the iceberg relative to those under review or threatened,” said Toronto-Dominion Bank chief economist Beata Caranci and senior economist Leslie Preston.

“If enacted, these would put a more serious damper on the U.S. and global economy,” they added in a recent look at the trade spats.

“Given the size of the potential impacts, it is in the U.S.’s interest to negotiate with its trading partners and avoid a worst-case scenario.”

For Canada, the threat level is raised as the United States and Mexico reached a trade deal that the Trump administration wants Ottawa to join, to replace NAFTA. The United States and Canada are divided in areas such as Ottawa's demand to keep a dispute-settlement provision.

Canada would be whacked should NAFTA die. Threatening, too, are Mr. Trump's repeated warnings that he'll hit auto imports with 25-per-cent tariffs if Ottawa doesn't come on board, measures that would hit Ontario hard, though "ruination" is a bit much.

President Donald Trump speaks during a fundraiser at the Carmel Country Club in Charlotte, N.C., Aug. 31, 2018

BRENDAN SMIALOWSKI/AFP/Getty Images

Some observers believe he's bluffing because of the damage such tariffs would do to his own economy.

But Mr. Trump has been relentless in his quest to fix what he sees as the wrongs of NAFTA.

On Friday, for example, as The Globe and Mail's Adrian Morrow and Eric Atkins report, Mr. Trump went all out at a rally in North Dakota.

"In some countries, including Canada, a tax on cars would be the ruination of the country. That’s how big it is,” he said. “NAFTA has been the worst trade deal ever.”

As Avery Shenfeld sees it, there are two certainties even if Canada agrees to become the Three Amigos again.

"It won’t mean 'free trade,' and it won’t be the end to Canada’s challenges on the export front," the chief economist at CIBC World Markets warned.

"Remember that Canada and the U.S. have been in a building trade war over the past two years, when NAFTA was still very much in place."

Analysts suggest the Canadian dollar would sink toward 70 US cents should it all fall apart, but push higher to about 80 US cents if a deal is struck. Which leaves problems.

"The Bank of Canada will still have to be careful about hiking at a pace that takes the loonie to firmer levels, given its desire to rotate growth towards exports from consumption and housing," Mr. Shenfeld said.

"And Canadian businesses will still be questioning whether this side of the border is the safest place from which to target the American market, given this President's obsession with trade balances, and a somewhat tighter regulatory policy environment in Canada."

Many observers believe that, as deadlines come and go, a three-way deal will still be reached.

But "the muddle through and other messy disruptive scenarios are still more likely in the near-term than the swift and successful tripartite agreement which is being attempted," warned Daniel Hui, global foreign exchange strategist at JPMorgan Chase, and his colleague Patrick Locke.

They also believe that the threat of a "blanket tariff" on autos has eased given that some progress on NAFTA is evident and that the United States and Europe "agreed to a sort of détente" in July.

But Mr. Hui and Mr. Locke also said in their report that trade issues aren't going to fade.

"Regardless of the true motivation, whether to make the threats more credible, for political posturing to the base, or for their own ends, the reality is that the current strategy is not stopping short of implementing real material trade barriers, and that apparent willingness to compromise is generally low and lacks urgency," they said.

"This suggests more protraction in trade conflict, rather than any quick resolutions."

Cases in point include the tariffs on steel and aluminum, and the punishment of goods from China.

Note, too, the "seemingly lowered hurdle" for tariffs in geopolitics.

"Earlier tariffs were carefully employed under the justification of national and/or economic security; of late, there appears to be a straying away from the original legal justifications," said Mr. Hui and Mr. Locke.

"In particular, Trump’s doubling of tariffs on Turkey suggests an outright weaponization employed to inflict pain as a political consequence," they added.

"This has segued into the explicit threat of auto tariffs in attempt to force Canada’s acquiescence in NAFTA. This may signal an increased willingness to deploy tariffs as a short-term tool in trade negotiations, as well as part of the geopolitical arsenal in the future."

Which is why many economic forecasts of late come with a something of a caveat, and are based on assumptions that trade disputes are settled.

There are various scenarios for the loonie, which has bounced around on NAFTA-related developments.

In August, noted George Davis, technical strategist at RBC Dominion Securities, the currency traded between just shy of 76 US cents and 77.5 US cents, picking up on "trade optimism" as the United States and Mexico reached their deal, then sinking on the strength of the U.S. dollar and "renewed realism in NAFTA prospects."

Some believe, too, that stock markets are in for a hit.

“With a ceasefire in the U.S.-China trade war unlikely anytime soon, we think the fears of protectionism will keep equities under pressure,” Capital Economics said in its latest forecast.

“What’s more, even though the U.S. stock market has generally shrugged off these concerns, we suspect that it will fall between now and the end of next year, too, given the deteriorating outlook for the U.S. economy.”

As for Canadian stocks, S&P/TSX Composite Index perked up this year, until recently, and has now trailed the gains of the S&P 500 for a couple of months.

As Bank of Montreal senior economist Robert Kavcic noted, gold stocks have been hurt, the oil price rally has eased and, for the purposes of this discussion, "NAFTA talks deteriorating haven't helped."

In fact, "the biggest negative point contributor to the TSX since June, outside of the gold sector, has been Magna," he added, referring to the Canadian auto parts giant.

Brian Belski, chief investment strategist at BMO Nesbitt Burns, said investors are "befuddled" by issues that shouldn't be befuddling them.

"We continue to believe the pessimism is misplaced and investors should expect another year of positive stock market performance, despite all the concerns about domestic growth, NAFTA, oil prices, and weak gold prices," he said.

Thus, his base case for the TSX this year is 17,600, his bull scenario is 19,000, and his bear case is 14,500.

What happens now is anyone's guess. While observers still expect a deal, they also note that Congress could stand in Mr. Trump's way should he try to carry through with just a U.S.-Mexico deal, excluding Canada.

He doesn't need Congress for auto tariffs, though.

"One extreme scenario is that Trump loses patience with the negotiations and levies tariffs on Canadian autos/auto parts," said RBC's Mr. Davis.

"At present the market is not priced for this - and when considering how many times one part can cross the border, it is clear the economic impact would be enormous."

Economists project both U.S. and Canadian economic growth will slow, regardless.

And America’s expansion is already a long one.

“All told, an escalation in the trade spat with China and waning global demand may yet test the durability of the current expansion,” said TD economist Ksenia Bushemenva. “However, for now the U.S. economy continues to boom.”

In Canada, CIBC’s latest projection, for example, pegs growth at 1.8 per cent next year and just 1.3 per cent by 2020.

“Even if Canada can somehow stem further market share losses south of the border, or gain ground in other regions, our trading partners are themselves on the precipice of a slowdown in growth … reducing the scope for any material uptick in exports,” said CIBC senior economist Royce Mendes.

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Markets at a glance

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Smoking in the boys' room

Remember learning all about smoking pot in school? Now you can learn all about producing it.

Niagara College has kicked off what it calls its "one-of-a-kind Commercial Cannabis Production (Graduate Certificate) program," with 24 students at its Niagara-on-the-lake campus.

"Students in the program will receive hands-on training in the biology and cultural practices of cannabis production, including plant nutrition, environment, lighting, climate control, pest control, and cultivar selection," the college said.

"The program will also equip students to navigate the complex regulatory framework that governs the industry in Canada. Graduates will go on to pursue careers working with licensed producers (LPs) of cannabis as growers, operation managers, and in positions related to quality control and assurance, post-harvest and propagation operation."

(I'll just note here that the Niagara College Canada logo on the news release includes the phrase "Applied Dreams.")

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What to watch for this week

Expect to learn this week that Canadians are juggling a heavier debt burden.

Then compare that to the growing number of ultra wealthy, and the ultra wealth they hold.

Statistics Canada's measure of household credit market debt as a proportion of disposable income eased in the first quarter to a still elevated 168 per cent, which means we owed $1.68 for each dollar we had to spend. In total, we owed more than $2.1-trillion.

Bank of Montreal expects Statistics Canada to report Friday that the debt ratio "moved modestly higher" in the second quarter as the housing market gained ground, meaning more mortgage borrowing, while growth in incomes "slowed sharply" from a year earlier.

Consider, too, that the ratio traditionally rises in the second three months of the year, and has done so in every such quarter since at least 1990, noted Benjamin Reitzes, BMO's Canadian rates and macro strategist.

"And this quarter will be no different, with the only question being the extent of the increase," Mr. Reitzes said.

"So, don’t be surprised to see the ratio perk up after Q1’s record drop, but look for the rise to be very modest compared to the average Q2 increase of 1.4 percentage points."

Expect in the same report to see that what we're worth looks a little better.

"Net worth as a share of disposable income saw its largest decline in nearly seven years in Q1, thanks to a drop in home prices, but Q2 should be better with equities up, the [Canadian dollar] weaker and home prices stabilizing," Mr. Reitzes said.

"Over all, Canadian balance sheets are in decent shape, but don’t be shocked if debt ratios deteriorated a bit in Q2."

Given that income inequality is a big issue, compare the Statistics Canada report to the latest study from research firm Wealth-X, which measures the number of ultra high net worth people, or those with at least US$30-million.

Canada ranked in the top tier, in fifth spot, behind the U.S., Japan, China and Germany, and ahead of France, Hong Kong, Britain, Switzerland and Italy.

The number of ultra wealthy Canadians rose almost 14 per cent in 2017 to 10,840 people, their net worth swelling almost 15 per cent to US$1.15-trillion, Wealth-X said.

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What else to watch for this week:

TUESDAY

Canada Mortgage and Housing Corp. reports on residential construction starts, which economists believe rose in August to an annual rate of 210,000 or more.

WEDNESDAY

A big day for Apple Inc., this.

The all-things-i tech giant holds a product unveiling that analysts expect will include new iPhones and more.

"There's been much speculation about in the last few weeks about the next range of product upgrades from the U.S.'s most innovative company as management seek to maintain expectations about Apple’s ability to sustain its place as a cash machine," said CMC Markets chief analyst Michael Hewson.

"In terms of dominance of the mobile phone market, it is slowly losing market share globally to Samsung and Huawei," he added.

"This shouldn’t be too much of a surprise given that the next areas for growth are likely to be in places like India, and consumers are likely to be much more price sensitive."

Morgan Stanley analyst Katy Huberty expects three fresh iPhone models, an Apple Watch Series 4 and upgrades to its range of Mac computers.

"Whether or not Apple finally unveils the AirPower wireless charging mat [this] week is unknown at this point, however they provided a sneak peak of it at last year's September event, so the timing could make sense," Ms. Huberty said.

"While the launch of the Watch, iPad, Mac and potentially AirPower are a net positive, we expect the focus of the event to be the new iPhone model launches."

Also on tap are the release of the Federal Reserve's Beige Book of regional conditions and quarterly results from Roots Corp.

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THURSDAY

Both the European Central Bank and the Bank of England are expected to hold their key rates steady, with the ECB reminding investors the "tapering" of its asset-buying stimulus program is on schedule.

"This week’s meeting is likely to see the ECB outline that it remains on course to begin the tapering process at the end of the month, despite current evidence that inflation still remains subdued," said CMC's Mr. Hewson.

"The ECB will also update its latest economic projections, against a backdrop of rising concerns about the imposition of tariff barriers on some areas of the European economy."

As for governor Mark Carney's Bank of England, it recently raised its benchmark to 0.75 per cent.

Bank of England governor Mark Carney

Reuters

"We do not look for another hike by Carney et al until the spring of 2019, after Brexit Day has passed," said BMO senior economist Jennifer Lee.

"Until then, the bank will be parked on the sidelines as Brexit talks heat up ahead of the October EU Summit," she added.

"The data have been mixed but the economy looks to have softened in the second half of 2018, partly on Brexit uncertainty."

Watch, too, for the report on U.S. consumer prices, which economists expect to show a monthly rise of 0.2 to 0.4 per cent in August and an annual inflation rate of 2.7 to 2.9 per cent.

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FRIDAY

Along with the Statistics Canada report, markets will be watching for the latest trade numbers from the euro zone and the August measure of U.S. retail sales, which observers forecast will show a rise of 0.4 or 0.5 per cent.

"A 0.4-per-cent gain in retail sales in August is still consistent with a healthy consumer who is reaping the benefits of tax cuts and higher wages," said Katherine Judge of CIBC World Markets.

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