Wednesday, May 28, 2008

The soaring stock market

This applies more to Canada than the US, but our stock market has been at record levels the past few weeks. The TSX is currently trading at around 14,500 points, and it has a lot of us wondering just how strong the Canadian economy is. My brother is a banker, and he wrote a post on it a while back.

South of the border, despite the much anticipated recession, the latest GDP forecasts remain positive (however slightly). However, this is a distinction without meaning. The definition of recession is rather arbitrary; officially, it's two consecutive quarters with negative GDP growth. But even one quarter of negative growth is recessionary in character. And for those with stagnant wage growth and job losses, they surely feel as though they are in a recession already, despite what the official numbers say.

It's possible the US has dodged a bullet for the time being, but the underlying problems remain. Too much debt, an anemic domestic manufacturing sector, an over-reliance on the automobile and fossil fuels, and a seriously fucked up financial sector.

What explains the rapid growth of the TSX then? Simple. A rise in oil prices hurts the US, because they are a net importer of oil. We are a net exporter. It's like free money. Most of it is going to Alberta, but it keeps our entire economy afloat, as well as our stock market. The TSX has more oil and gas companies than any other major exchange in the world. But Ontario's manufacturing sector has been hurting, and in normal times, that would spell trouble. These are not normal times.

The question is how far out of balance can things go? Oil or not, our export economy is dependent on US demand. If all the underlying problems in the US economy come to a head (and they will one way or another, whether it's this year or next year, or five years from now), we'll get hit too, no matter how much oil we produce, or how high our stock market soars.

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