So didn’t I tell you this would be a boffo week to take your dog to Cuba? Any doubt of that should have been erased on Wednesday when all hell broke loose, as more or less predicted.
Oil futures collapsed almost 7%, taking crude down to $26.50 – the lowest price since 2003, when most Millennials here were still harvesting zits. There hasn’t been this big an oversupply in 80 years, which should tell you why Canadian companies like Husky are again slashing their capex (capital expenditure) budgets. Our oil’s expensive to produce and considered ‘dirty’ by the tree-huggers who increasingly run America, our biggest customer for the stuff.
But mostly, there’s too much crude in the world. So much for peak oil.
Stocks markets fall along with energy, with the biggest rout on Wall Street in five months. The Dow, S&P and tech-heavy Nasdaq all cratered – until something interesting happened. After shedding more than 500 points, the Dow rebounded, while the Nasdaq was able to erase a 3.7% freefall.
The tinfoil crowd around here will claim the mostly-mythical Plunge Protection Team was behind the dramatic rescue (the Dow regained more than half is lost turf). But it’s a lot simpler than that. We hit bottom – at least during the session. The decline was too far, and too fast. All of a sudden, stuff started looking cheap. Or simply more affordable.
A few months ago the S&P index was at a level equal to 18 times the earnings of its member companies. Not crazy expensive compared to some previous periods, but well above the long-term average of 14.9 times. In fact, the market was trading at a 17% premium to the norm. So what happened today? You guessed it – the index retreated back to its historic average, which made everything look a lot less scary.
Timing the market is a losing game for just about everybody, especially in a world where high-frequency trading means the retail investor is at a structural disadvantage. (One more reason not to own individual stocks.) But logic tells us that with the US economy still growing, throwing off record job numbers, entering into a Presidential election year, with consumers using cheap gas savings to buy record numbers of SUVs and pickups, that this is no 2008. Not even close.
As for Canada, however, the bottom is probably still down there somewhere. Oil could in fact drop to $20 – a prediction made months ago by the high-salary dudes at Goldman Sachs. That is well below the cost of extraction for most oil sands producers, which will mean the cancellation of more new projects and the layoff of lots more people. In fact, on Monday BuildForce Canada estimated 31,000 jobs will be lost in construction alone in Alberta.
Now, against this tapestry of Canuckistan misery, our central bank did the right thing Wednesday by not dropping its key rate. After all, the last two cuts did little other than to pulverize the dollar, give us $8 cauliflower and make the moisters wild for condos. Household debt has swelled considerably since Governor Poloz diddled with rates, and our currency is worth about a third less. The loonie is among the worst-performing currencies in the world, and if Goldman is right it will continue to fall without any extra help from Ottawa.
The caution here? Do not underestimate the negative momentum of our economy. Sure, oil will rebound, which should be no issue if you have a 80-year investment horizon.
Finally, just so you understand financial guys also bleed when they’re cut, let me share with you part of an internal memo send to the surviving employees of Bay Street’s GMP Capital earlier this week. In it CEO Harris Fricker detailed why the company was ending operations in the UK and Australia and punting people here and in the US, reducing its headcount by 27%.
This is a paragraph for the ages:
“Adversity brings with it clarity. And clarity provides the most viable perspective from which to address adversity. The very clear message to you today is that you are an important part of the future of this firm. That said, each of you have to ask yourselves if you still have the will to compete in this industry and, just as importantly, on this platform. Have the courage to answer honestly. There are easier paths to pursue and much easier places at which to pursue them. If this is not what you truly want and where you want to be, you simply will not survive the new normal in our industry or at our firm.”
As goes Alberta, so leans the nation. Embrace that.