THE BLOG

A Rain Storm of Good and Bad News for Global Markets

06/24/2013 05:28 EDT | Updated 08/24/2013 05:12 EDT

CALGARY -- This city of hustle and bustle was a ghost town Friday with empty streets due to the force of nature as Calgary's rivers roiled and flooded as they surged from the mountains.

By 8 a.m., office, hotel and condo towers were dark and residents were advised to evacuate. Stores, offices, transit and schools were closed and cabs were few and far between.

Calgary's crisis paralleled the disaster this week in global markets. Lightning struck signalling the financial storm when Federal Reserve Chairman Ben Bernanke announced that qualitative easing, or printing mounds of money, may be slowed later this year.

That was bad news for cheap money fans, but for those who desire long-term sustainable growth, it was welcome news indeed, and will likely be gradual. Market hedge guru David Tepper said on CNBC Friday interest rates would remain where they are until U.S. unemployment rates sink to six per cent. So in that context, it's not a catastrophe, but a needed correction. Of course, that doesn't make it any easier because markets took everyone prisoner: Bonds, stocks, foreign exchange rates and currency values.

The weaning was inevitable because global economies cannot continue to function like this. So the good news is that the Fed is confident that the recovery is strong enough that tapering can be imposed to avert bond or other bubbles.

Will Fed's "exit strategy" ever make an entrance?

There has been a cascading effect and other regional problems have arisen:

  • The U.S. dollar went higher, affecting the value of other currencies and a lowering in value of commodities.
  • The higher U.S. dollar and slowdown in China is also affecting the Canadian and Australian dollars.
  • China, still a galloping six per cent GDP growth, is hobbled by worries about a debt bubble caused by China's dramatic stimulus program since 2008.
  • Emerging markets tumbled due to lower growth prospects in Europe, China and elsewhere but also due to special circumstances in some countries. There have been riots in Turkey and in Brazil by protesters pushing back from austerity measures, either financial in Brazil's case or religious in Turkey's. They are also the result of youth unemployment which afflicts the global economy.
  • Commodities, and therefore the Toronto and Australian Exchanges, were punished this week over prospects prices will continue to soften and shale oil and gas will drive down fossil fuel prices. Commodities have been dependent on roaring output from China and others, now slowing as the cost of money will eventually rise as promised by Bernanke.
  • The squabbling by OPEC is also a dampener when it comes to oil prices as its members -- which include countries on both sides of the Syrian civil/religious war -- cheat on quotas designed to prop up prices.
  • Finally, the G8 agreement to globalize tax collection, and stop arbitraging tax rates by the world's gigantic multinationals, could prove to be a dampener on global trading patterns. This is far from final and the agreement is only the beginning of a long overdue correction, but some market experts may be building in higher tax rates for these giants in years to come in their models. This too, has contributed to lower stock prices.

But Americans have nothing but good news. Stock players may be over-reacting but the Fed is confident and they should be, too. The shale revolution and re-industrialization of the American economy is real and will provide an engine of growth for jobs, trade and the neighbours such as Canada and Mexico.

Meanwhile, here in Calgary, the only good news will be when the rivers recede and Washington permits the Keystone XL pipeline to be built. Just in case, however, thousands of train loads are carrying bitumen to U.S. refineries and the White House knows that cheap, plentiful energy self sufficiency has to include the oil sands and is a guarantee of its economic pre-eminence for decades.

Flooding in Alberta