Juggling Dynamite - The Case For A 4000 Point TSX Drop

I see the case for a drop in the mkts simply because we're are at the peak of a commodities market. And we in Canada are inextricably tied to that market. Oil at or below 50$ in three to five years, grains and metals backIng off thirty percent or more. Seems inevitable to me.

The only way to mitigate it is to become more competitve in non-resource industries - and that is done by deregulating labour and cutting the cost of capital by cutting capital gains taxes.

Gord, there's nothing inevitable about it. China, India, Brazil, Korea still have growth well above 5%, and concensus is that they've about bottomed out, particularly China. That one alone means the grains market still has room to grow and commodities shouldn't fall much more, particularly now that they're getting their inflation under control. All of this means to me that corporate earnings should still remain respectable. And corporate earnings ultimately drives the stock market.

Trying to predict the stock market from simply past trends in the stock market is like reading an ouija board.

Your second paragraph, I agree with entirely. It's not new; it's been said for at least 30 years, and it still hasn't happened. And it won't as long as goofs like McGuinty are still at the helm of Canada's principal industrial province. The electricity supply policy alone is insane.

"Gord, there's nothing inevitable about it. China, India, Brazil, Korea still have growth well above 5%, and consensus is that they've about bottomed out, particularly China."

There is a consensus in climatology too you know. I have lost confidence in the confidence men behind any consensus these days.

Cgh: just a few days ago there was column cited on this blog that talked about the Chinese kleptocracy. I would recommend you read it - chinas continued growth is by no means certain

And regardless of demand changes we are on the cusp of a boom in commodity production - from NG to OIL to AG to minerals. The cure for high prices is high prices and with prices where they are now the decline in prices likely will be precipitous.

Gord, I did read it. It's not much different than the state corruption in Korea in the 1970s and early 1980s. It didn't stop growth then.

A precipitous decline in prices, one that lasts more than a quarter, is only reasonable if growth flatlines worldwide. I don't see that happening in Asia, particularly not with grain. Leveling off and some decline, yes. A precipitous collapse, no.

Truenorthist, there's a consensus about Newton's Law of Gravity and Einstein's Theory of Relativity as well. Are you suggesting that consensus is wrong? We reject climatology because there's a large body of evidence suggesting it's wrong. So if you want to argue against a consensus, fine, no problem. But you have to bring somme reasons to the table. I haven't seen any evidence about a precipitous decline in commodity prices. Oil at $50 just isn't going to happen.

cgh you make a good point. Unrest or no, monetary collapse or no, Chinese people are going to eat and they are going to be buying grain. Everybody in Holland didn't -die- when the Tulip Craze crashed, just the crazy ones who sank everything into the trade. China will be similar, barring something truly catastrophic like a new Great Leap Forward.

Still, another crash of the stock market like 2007/2008 is not unexpected, given that the same forces are at work. Trades may have been unwound in the last four years, but the philosophy of those trades continues on unchallenged.

Phantom, I agree with you that a stock market slump, even a severe one, is not at all impossible. However I also suspect, though I do not know, that there's somewhat less leverage in the system than in 2008, and that may limit its decline. Certainly with the amount of cash on their balance sheets, corporations have the ability to discharge unprecedented amounts of debt if interest rates should rise sharply.

And as we know, what really kills an economy is a financial crisis. I don't see any sign of that happening in Canada, or for that matter in the BRICK nations. I would find it utterly incredible if any Canadian chartered bank was holding, say, Greek debt today. Or the debt of anyone who was holding excessive amounts of such.

At least in the past, financial crises didn't crush everyone. In the 16th century some of the largest banks in the world were in Genoa. After being flattened by the Spanish bond crisis in the early 1600s, that dominance passed permanently to London and Amsterdam.

So I'm rather phlegmatic about it all. Canada has been keeping its financial nose clean throughout, and Canadian banks have risen enormously in world ranking compared to pre-2008. If there's another one, it could well enhance Canadian banks relative strength and standing again.

And you're absolutely right about the Tulip crash. Individual investors who were overexposed got creamed, but the Netherlands remained a dominant banking and commercial power.

cgh @ 1:53;
Lots of interesting comments.

My take on longer term prospects is based on demand and liquidity. No matter how well certain countries have managed their financial affairs (Canada,) if major markets such as Euroland and the USA go into prolonged recessions/depressions due to debt related crisis, the rest of the world will be hooped. Factor EU and USA purchases out of the BRIC and Canadian economies and see what you have left.

Inevitably an international financial crisis will severely reduce liquidity. It happened in 2008 and collapse was avoided only because of the USA Fed stepping in. In the next crisis if both the EU and USA governments have lost their credibility then all international trade parameters will be/could be, lost. Funny things happen when credibility is put in question. Moody's is talking about a USA downgrade this morning.

I cannot take a lot of comfort from entities in BRIC which for all intents do not operate by rule of law let alone fundamental capitalism. As we move forward we discovery each day that the supposed bulwarks of international commerce have been 'cooking' the books for years.

Sorry but I am not confident in where we are headed.