Money Show, Derek Burleton

Derek Burleton is Vice-President and Deputy Chief Economist for TD Bank Group. The title of his talk was Economic and Financial Outlook.

He says that Europe is in trouble and this is not going to go away anytime soon. We will continue to have stock market volatility. The last recession was a Balance Sheet recession and these types of recessions always have along recovery time. In this sort of recession, economies can stall in times of recovery. This is probably what is happening in the US. Volatility damages people’s confidence. Companies are worried and they are lowering their debt levels.

Europe remains the largest risk and it is really a wild card as no one knows what will happen. The prominent question is when Greece will default. The main risk is political. Europe is without a federal government and it needs one. But, how will get there? European banks a vulnerable. There is very little growth in Europe.

Things are slightly better in the US, but it is politically divided on its fiscal challenge. It needs massive fiscal restraint for a long time to come. The US economy is very fragile and it is weaker than was originally thought. There is pend up demand, but the problem is to get it to materialize. They have a liquidity trap. Banks currently will not lend money. They also will not solve their Real Estate crisis and they would have to write-off a lot of mortgages.

Basically, the US has structural problems. 2013 is not going to get better. The velocity of money is low and it will stay low. Interest rates are going to be low for a long time. There is similarity with Japan, but the US has better demographics.

Our Canadian economy is tied to the US economy. We will not be able to export our way to a recovery this time. Our commodity orientations will help us. Resources producers are making investments. China is not as strong as it used to be and there is some vulnerability there, but it should be ok.

We also have long term vulnerability because our consumer debt loads. We also have heavy government debt, especially in Ontario. He does not expect any adjustment to Canadian Real Estate until 2013. He feels that Canada will outperform the US, but not by much. If the US has a technical recession, we will too. (A technical recession is two quarters of negative growth.)

There is an inflation risk in the developed nations. The recovery in advance nations is very fragile. The solving of European problems will not be pretty. Going forward, cash will returns will be low. Bond yields will also remain low. Equity markets will be supported by rising earnings. Commodities will be supported by emerging markets. The Canadian dollar will remain strong and the US dollar will remain weak. Volatility will continue and we should focus on the long term. Equity long term markets will give us a return of around 7.5%.

What has happened is that private debt has become public debt and we now have to deal with this. Greece will have to default and this will be a problem for Europe’s banks. No one knows how this will play out.

We have major fiscal problems with Toronto and Ontario. Ontario will have to drastically change how they deliver services. We should have a slow recovery over the next 3 to 5 years.

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