The end of oil. A worthless currency. Could the apocalyptic economic news get any worse?
The Toronto Star last week quoted one investment advisor calling for a 55 cent dollar. He’s not alone. Oil will soon be in the teens, goes another prediction. It’s already under $10 a barrel for bitumen — the gooey, tar-like stuff that was to move through TransCanada Corp.’s Keystone pipeline.
The pessimism has a global reach. A front page headline last week in the usually sober Wall Street Journal: “Stocks take a beating as alarm grows.” A business page article in the London Guardian: “Sell everything, ahead of a stock market crash, say economists at the Royal Bank of Scotland.”
There’s an old saying that at the point of maximum pessimism the worst is over. The effects may linger and public perception lags the reality, but things won’t fall much more.
Is this that time? We won’t know except in hindsight, but there are signs that the pros are starting to position themselves for the next upward economic cycle. David Wolf, a Princeton-trained economist who between 2009 and 2013 served as adviser to the Governor of the Bank of Canada, doesn’t see a global recession. He thinks oil and the dollar have fallen so quickly, the odds are for a rebound, not a steeper drop.
“The farther and faster oil and the dollar goes down, the faster they will come back into balance,” Wolf said in an interview.
Before his Bank of Canada days, Wolf was head of Canadian economics and chief strategist at investment house Merrill Lynch. He is currently a portfolio manager at Fidelity Investments, where he advises their fund managers on the weightings of stocks versus bonds. He’s telling them to increase their holdings of Canadian shares.
Here’s an edited version of our conversation:
Q: If oil makes up less than 15 per cent of the economy, why is the price collapse hurting us so much?
A: The income of all Canadians has dropped because the oil, gas and the commodities we sell aren’t worth as much. So we are poorer.
Companies pump less oil, profits fall and people lose their jobs. That affects Tim Horton’s in Fort McMurray and banks in Calgary and the real estate agent trying to sell a house in Alberta. Manufacturers in Ontario and Quebec who, with a strong dollar, switched to things that oil and gas producers need, now sell less.
Folks on the East Coast who went out west for work and brought the money home don’t have those jobs.
That’s why the spillover effect is much broader than the industry. What appears to be a small part of the economy can have a big effect.
Q: Where are oil and the dollar going?
A: I’m no longer a forecaster and it’s frankly a mug’s game trying to pick levels.
Sentiment is getting more extreme and when sentiment gets to an extreme, that’s the best time to buy.
Q: What about share prices?
A: Last year, we got on the side of the boat that said it was going to get worse. Now, everyone has joined us and we’re shifting back to the other side.
A year ago, we were at the maximum underweight on Canadian assets and the dollar. Now we’re only a third or a half of that. We’re accumulating them now.
Q: Why are stocks selling off so much?
A: People get afraid and that exacerbates things and they can overshoot badly. That’s where we see opportunities.
We don’t see a global recession. The U.S. is doing fine. Europe is doing better. Not great, but not terrible. U.S. stock price to earnings ratios are higher, but not at a global peak.
Q: So what happens next?
A: I’m not in the business of making forecasts, but of looking at probabilities. But the fact that both (the dollar and oil) have fallen so quickly means it could be sharp, but short.
So what now?
Wolf’s last point doesn’t mean that there are no lurches ahead. Even at the bottom prices bounce with a relief rally one day, followed by losses the next.
News normally seen as positive is ignored while bad news is magnified beyond its real impact. That seems to be where we are now. At some point, that changes, but until then expect a bumpy ride.