The good news from money manager Michael Quigley is that we aren't in another Great Depression because we learned lessons about things such as having deposit insurance, and we'll avoid a painfully slow economic recovery like Japan's in the 1990s due to cultural differences.
On the other hand, Quigley, a senior vice-president with Natcan Investment Management, a portfolio management firm in Canada, told a gathering of National Bank and Altamira clients that worsening housing woes in the United States and a makeover of its financial industry mean a global economic recovery won't come quickly.
"Twenty-five per cent of Americans today have negative equity in their homes; my mortgage exceeds the value of my home," he says. "From the peak in late 2006, the national prices in real estate in the United States were down about 30 per cent. In San Diego, it was minus 54 per cent.
"We're now back to long-term averages, but unemployment is way up and financing is less available, so, at Natcan, we're of the view that the housing story isn't over yet in the U.S."
It also isn't finished yet in Eastern Europe, where half the mortgages were taken out in Swiss francs to get better interest rates.
Another major economic hurdle is the U.S. financial industry.
"When they're finished, their banking system is going to look an awful lot like ours," Quigley says. "Today, five banks in the U.S. control over 70 per cent of deposits."
The industry is sick but gets intravenous feeding from the U.S. dollar, which Quigley doesn't think will collapse, like many people do.
"The deficit in the U.S. and debt are at levels warranted by an emerging market. If the U.S. wasn't the U.S. and owner of the world reserve currency, people would have stopped lending to them a long time ago. But you can afford an awful lot when you're printing the world reserve currency."
That's also why the U.S. can bail out its auto industry, which Quigley thinks will "lose a player at least" as that business is restructured.
The Bank of Canada lowered its overnight lending rate to 0.25 per cent, where it is expected to stay for a year, yet Quigley says that after another 18 to 24 months "we're about to go back to the '70s in inflation."
In the interim, there will be a continuation of stock-market volatility "for several months."
Already, the S&P 500 index in the U.S., which rose or fell more than five per cent in a day only 31 times from 1950 through 2000, did so a whopping 34 times in 2008.
On average, a recession lasts eight months, but Quigley says that "when you have a recession that's accompanied by a banking crisis, it's twice as long and twice as deep."
He says this global recession won't last as long as Japan's did starting in the 1990s, because "in Japan the collective comes ahead of the individual, and the willingness to put up with economic difficulties is enormous. In the U.S., the individual comes over the collective, and the patience to put up with difficult times is much less."
For example, many administrators of pension plans that traditionally invest 40 per cent in bonds and 60 per cent in equities are now saying "that's too painful," and they're going to stay at the 50-50 mix they adopted back when the markets tanked.
Quigley refers to this as "the paradox of prudence," namely paying a high price to play defence.
He points out that 109 years of financial data show that "over the long, long, long run, after inflation, nothing beats equities" as the way to invest.
In 1900, in the U.S., a dollar invested in equities is now worth $582 net of inflation, in bonds is worth $9.90 and in T-bills, $2.80. In Canada, a dollar invested went to $503 in equities net of inflation, $9.70 in bonds and $5.90 in T-bills.
But in the great tradition of economists who are told not to give both a number and a date, Quigley suggests: "If you have money to put in the market, do it in stages, and don't ask us for timing."
Generally, he is more bullish on investing in Canada than the U.S., in the U.S. rather than the rest of the world and in large-cap stocks over small-cap stocks. On the bond front, he says there is a move toward provincial rather than federal or most corporate bonds.
He is very bearish on Japan, but, on the contrary, says "what's happening in China is really, really important, especially for Canada," which is a provider of commodities. The price of copper went up 19 per cent in March, as China doubled its demand for refined copper.
Quigley says a couple of things that could upset the apple cart and derail a recovery are social unrest in emerging Europe and "a return to the panic mode related to banking in the U.S."
Our fingers are crossed.
(By Ray Turchansky, For Canwest News Service;)