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Few mainstream Wall Street prognosticators are willing to publicly stick their necks out and contend that the global economy is mired in a depression.

But Carl Weinberg, chief economist at High Frequency Economics, a Valhalla, N.Y.-based forecasting firm, is convinced that's what much of the industrialized world is experiencing.

"Our choice of the D-word, depression, is not by accident. The phenomenon we're looking at is a money- and credit-induced contraction of the economy … It's more akin to the Great Depression than to any cyclical event we have experienced in our lifetimes," he told clients Wednesday on a conference call.

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In the aftermath of the strong rebound of the stock market from its lows in March, 2009, much of the dire chatter in the investment community has subsided. The global economy has resumed growing, commodity prices have rallied, and the view that the worst is past is the prevailing wisdom.

To be sure, gold bugs and stock market perma-bears like technical guru Bob Prechter have continued to maintain that the worst is coming. But HFE, more of a blue-chip forecasting outfit, is an outlier among conventional firms with its exceedingly gloomy take.

Mr. Weinberg, who held the call to outline views for the G7 major industrialized economies, predicted Europe, Japan, and Britain are about to experience an "accelerating downdraft" in business conditions following the modest rebound of the past year. "I fear that that's the direction that we're headed in," he says.

'Delusional'

He thinks those who believe the widely held Canadian view of almost universal optimism about buoyant future business conditions, are being delusional.

While he admits Canada stands a chance of doing better than other countries, it's unlikely. The dollar is nearing parity against its U.S. counterpart, and while the U.S. economy isn't as weak as those in Europe and Japan, it is going to be a problem for the export sector.

"Can Canada grow without a vigorous U.S. economic expansion? We've never seen that happen before," he says. "We think Canada's outlook is a lot grimmer than it appears to be on the basis of official forecasts. We think Canada will underperform the Bank of Canada's forecast, it will underperform Bay Street's forecast."

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The reason he's so pessimistic? Flagging money supply, and the contraction in bank lending in major countries, along with the deep austerity programs in much of Europe. Based on the continued selling of Greek bonds and their rising yields, he believes the debt crisis there isn't over yet either.

Weak monetary conditions are a sign that consumers and businesses aren't spending and borrowing, the normal prerequisites for healthy growth, in Mr. Weinberg's view.

Central banks have tried just about everything to get money supply and bank lending back on track again, but have largely failed. "They've been unable to increase money supply," he says. "Nothing good can come from that."

A collapse in money and lending through a credit contraction also happened in the 1930s.

Mr. Weinberg's investment take is that poor growth prospects mean bonds will do well and that stocks in Europe and Japan have "blown past their natural level," although he thinks Canada and Australia will be more buoyant. He thinks there's "great potential" in Government of Canada bonds, for instance, but industrial commodity prices, currently on a tear, should weaken.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More

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