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Why Paul Krugman, David Rosenberg fear a looming depression

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Shelter in the storm It's a very safe haven kind of day as global markets plunge and bonds rally in the wake of renewed economic jitters. The yield on 10-year U.S. Treasuries have dipped below 3 per cent, and the yield on 2-year paper to below 0.6 per cent.

"The drop in U.S. yields, with the 2-year having fallen to an all time low of 0.59 per cent and the 10-year now trading at a 13-month low of 2.96 per cent, hints that the coming months are going to be difficult ones," said Scotia Capital currency strategist Camilla Sutton.

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Ms. Sutton added in a research note that the bond market is signalling important themes likely to lead to heightened volatility and a higher U.S. dollar:

  • A string of disappointing economic indicators suggest the U.S. may be weaker than many believed.
  • A shift in tone among global policy makers, from "supporting growth at all costs to fiscal responsibility," is pressuring estimates for world economic growth. This was a theme of the G20 summit in Toronto on the weekend.
  • Some observers, such as the Bank for International Settlements, believe central banks should hike interest rates "before the macro economic environment fully justifies it."
  • Europe's overhang, now highlighted by the pending expiry of a massive bank lending program, is an ongoing threat.

David Rosenberg, chief economist of Gluskin Sheff + Associates, has a more worrying take, following on comments yesterday by Nobel laureate Paul Krugman. In effect, Mr. Krugman fears global policy makers are making the same mistake as their Depression-era predecessors by pulling back too early on stimulus measures, a move blamed for prolonging the ugliness of the 1930s. "We are now, I fear, in the early stages of a third depression," Mr. Krugman wrote in a New York Times article.

Mr. Rosenberg followed up on this in a research note today: "The bond market is telling a very important story here and it is one of a deflationary depression. We may not agree with Paul Krugman's cure of solving a credit collapse by trying to create even more credit, but his diagnosis is spot on.

"... The stock market bulls who got the 2009 call right were the same ones that got investors whacked hard in 2008 and they again have overstayed their call. Instead of heeding what the bond market is telling them, they are calling it a 'bubble.' In realty, the bond market is sending out an important signal; decelerating nominal GDP growth ahead. This does not dovetail with notions of a V-shaped increase in corporate earnings to new record highs in the coming year and we would be looking for earnings guidance to be rather spotty during the looming reporting season."

Related: G20's plan for deficit cutting draws fire from Paul Krugman

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China, economic fears sink markets Global markets are falling sharply today, partly on renewed fears that economic growth in China, one of the few engines driving the global rebound, is slowing. Like Europe, whose debt crisis has wreaked havoc in financial markets, China has been a concern given its rising importance among investors. Europe is still playing into fears today, as are wider economic concerns, such as a disappointing measure of consumer confidence in the United States. In Japan, a new reading showed industrial dipped 0.1 per cent in May and shipments took their biggest drop in more than a year. Oil prices and the Canadian dollar also fell.

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The turmoil in the markets began with a reading by the Conference Board, whose leading economic index for China rose just 0.3 per cent in April, a revision from the 1.7 per cent it had earlier reported. It was then fed by other concerns.

"Concern over reduced raw materials demand from China and, on a wider scale, the effect global austerity plans will have on economic growth, are prompting portfolio reshuffles as the outlook for the next few months remains a little uncertain," said IG Index chief market strategist David Jones.

Related: David Rosenberg on why the loonie's not just about oil anymore

Japan shows signs of stalling Japan's recovery is showing signs of slowing, based on several pieces of data today. Industrial output dipped in May, the first drop in three months, while shipments overseas fell 1.7 per cent, led by autos. Household spending, a hefty part of Japan's economy, fell 0.7 per cent. "While exports remain in good shape, growth has been moderating since February, as governments around the world start to gradually pull back stimulus and start to focus on managing their finances," said Scotia Capital economists Gorica Djeric and Derek Holt.

Unrest in Europe mounts Europe's austerity measures continue to spark social unrest, as strikes in Greece and Spain cause more disruptions today. In Greece, a hotbed of unrest over government cutbacks, strikes disuprted public transport and other operations, and sparked clashes between protesters and police. In Madrid, workers disrupted public transit in a protest over pay cuts. Read the story

Related: Time to face reality over Greek debt, Roubini says

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In pictures: Protesters, police clash in Greece

Consumer confidence falls Canadians and Americans are in less of a jaunty mood, though in Canada it depends on where they live. The Conference Board of Canada said today its consumer confidence index fell 5.7 points this month, wiping out gains in May and leaving the benchmark 13 points below where it started the year. Most of the pessimism was related to employment, and was concentrated in British Columbia and Ontario. Consumers in the Atlantic provinces and Quebec were notably happier.

"This is the first setback since February and although we are accustomed to seeing some pretty wild mood swings show up in this survey, this is a particularly negative result given what some of the details showed," said BMO Nesbitt Burns senior economist Jennifer Lee. "... As Fed Chairman Bernanke said in early June, the recovery will continue but 'it won't feel terrific.' In fact, it feels downright lousy right now." Read the story

U.S. home prices rise The U.S. government's homebuyer tax credit helped boost home prices in the United States in April for the first in several months. Having fallen for six months in a row, the S&P/Case-Shiller home price index for 20 cities rose 0.8 per cent in April, with 18 centres showing increases from a month earlier.

"Demand for homes has softened since then, and that is likely to weigh on prices, particularly in May and June," said Toronto-Dominion Bank economist Martin Schwerdtfeger. "... Weaker sales and still-high foreclosures will likely drive month's supply higher in the near term, and this will put lid on home prices. Pulling the lens back, however, the fact that every metropolitan area surveyed showed larger price gains or lower decline rates with respect to the previous months speaks well of the stabilization in the housing market at a national level."

Blast causes extensive damage at Greenhills Teck Resources Ltd. says an explosion caused extensive damage to the dryer building at its Greenhills coal mine near Elkford, B.C., yesterday and it will be several days before it can estimate the full damage, and production interruption. Teck, which owns 80 per cent of Greenhills, said four workers treated for minor smoke inhalation. Read the story

Analysts keen on CP Rail Canaccord Genuity today began covering Canadian Pacific Railway Ltd. stock with a "buy" rating and strong comments on the company. With a target price on the stock of $72, analysts David Tyerman and Chris Bowes cited strong potential for gains in earnings per share based on the railways efforts to boost its profits and the outlook for the economic recovery. "We also believe there is good potential for upside surprises during the economic recovery phase from strong volume and operating leverage gains," they said.

BP, ConocoPhillips look to join pipeline project A competing consortium is in early talks to join TransCanada Corp. and Exxon Mobil Corp. in a massive natural gas pipeline project, The Houston Chronicle reports. TransCanada won a license to build what would be a 2,700-kilometre pipeline from Alaska to Alberta. Now, according to the newspaper report that quotes an unidentified source, BP PLC and ConocoPhillips are considering throwing in their lot with the TransCanada group. Read the story

What do you do with a drunken trader? Britain's financial regulator has fined a former oil trader £72,000 for a night of drunken oil trading with the authorization of his company. That's not to suggest that his former employer, PVM Oil Futures Ltd., the world's biggest independent oil broker, would have given him clearance. The Financial Services Authority also banned Steven Perkins from working in the industry for at least five years. Mr. Perkins, the FSA said, had been drinking at a company golf getaway, and kept on drinking on the night of June 29, 2009, and into the morning hours, trading millions of barrels of crude at the same time. His trades, made from a laptop at home, boosted the price of Brent crude futures to the highest of the year, and cost his company a loss of $10-million (U.S.). Read the story



A man for all recessions Prince Charles cut his costs by more than half last year, partly because Canada footed the bill for his main overseas trip. The annual accounts released today showed the costs of his official receptions and entertainment fell to £2.5-million in the fiscal year ended March 31 from £5.3-million a year earlier. His earnings rose to 4.3 per cent to £17.2-million, though his officials didn't say why.

"We are always keeping an eye on the economic climate," Michael Peat, the principal private secretary for the Prince of Wales, told reporters. "We do live in the real world - for the most part anyhow."

Mr. Peat noted that a big part of the reduction in expenses was due to the fact the prince didn't have to pay for a trip to Canada.

"Most of that money is spent on overseas travel that the prince and the Duchess of Cornwall undertake at the request of the government, so it depends where the government wants them to go," he said. "Last year the main long-haul trip they did was to Canada, which was paid for by the Canadians, so it didn't fall as a cost to British public funds."

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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