I was driving my car to work this morning (an hour ride each direction, there’s time to think a lot!) and I was thinking about the recent economic events and how they were reported in the media. I got this idea because as a banker, you are constantly confronted against what has been reported in the news and how your clients perceive that news.
When you look at how the media reports economic news, there are 2 big issues:
#1 Most individuals have a very limited background in finance/economics but since we all deal with money, think that they know what they are talking about. Therefore, they will take any economic news to the first degree and won’t do further research to understand fully why there is a recession or why there is a bull market.
#2 The Media industry (especially newspapers) is in the midst of a business model crisis. Therefore, the new “good” journalist is the one who reports the “biggest news”. So let me ask you a question:
What is more interesting between the following news items:
#1 The housing market in Canada will generally slow down based on our economic review and some inflated markets such as Vancouver, Calgary or Toronto might be facing a more important correction in housing prices.
#2 There will be a housing bubble burst in Canada! Interest rates will rise to 7%, people will lose their jobs and then their homes. Florida is nothing compared to what is coming our way!
I’d say that most editors will take option 2 as their headline ;-). I have my opinion on the topic (housing bubble in Canada?) but let’s take a look at some major economic news from past years:
2007: Oil price will rise to $200/barrel; We don’t have much oil left.
Back in 2007, we were surfing on a huge oil price rise and more and more “specialists” with tons of diplomas were writing theses on how little oil was left on earth. Gasoline was ridiculously high, people were investing in oil income trusts like they were GICs offering 10% interest and Alberta was so prolific that they cut their taxes and their inflation went through the roof.
Result in 2010:
- The barrel of light sweet crude is struggling to get to $80
- Nobody talks about the lack of oil anymore or about all that was spilled into the Gulf of Mexico
- We don’t even care to report US oil reserves in the news (at one point, it was reported weekly!)
2008: Economic crunch; this is the end of the capitalism and all banks will follow it to the grave
In 2008, the market plummeted like it was the end of the world. Economists on Oprah were declaring that our economic system will never survive and that our banks will collapse. Even in Canada, it was the end of our Canadian banks. They saw their stock price fall by 50% in a span of a few months.
Result in 2010:
- We are getting out of a big global recession but capitalism is not dead.
- Most banks survived and Canadian Banks showed interesting profits, even throughout the crisis.
- The stock went back up almost to their peak prices in 2008.
2009-2010: Economy is back in Canada; Interest rate to jump through the roof!
After seeing Australia increase their interest rate in late 2009, some economists increased significantly their Canadian interest rate forecasts. We were talking about the Bank of Canada increasing their rate faster than expected. I even heard about variable interest rates going up to 7% within the next five years (I wonder if the same guy called the lowest interest rates for 2008 back in 2003 ).
Result in 2010:
- The Bank of Canada didn’t budge until June 2010 (which was announced 18 months prior)
- Variable interest rate hikes by 0.50% so far and no important increase is forecast for the rest of the year.
- Inflation is under control and there is no need to hike the interest rate anyways.
So back to 2010: Canadian housing bubble to burst or housing market going to slow down to a normal level?
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