Stability in a World of Volatility

Steve Saretsky -

Inflation concerns continue to percolate. US CPI inflation ripped to 7.9% in February, the highest reading in over 40 years. So now we basically have inflation at 8% and interest rates at zero. Of course this has major implications not only from a financial perspective but a societal perspective. It’s also a fundamental driver behind massive house price gains, or rather, the ongoing currency debasement. Savers have unfortunately been annihilated over the past couple of years, and it is becoming difficult to see how things get any better.

Based on recent projects it is likely we will see inflation north of 10% in the coming months. The last time inflation was at 10% US debt to GDP was 30%, today it sits at 130%. In other words, it’s going to be incredibly difficult for central bankers to fight inflation without triggering something. While we are mostly talking US figures here, the same applies to Canada and then some. Our debt figures are even worse and even more concentrated in the private sector which has limited ability to absorb higher rates, ie they can’t issue new debt to pay for old debt like the public sector can.

This doesn’t mean the Bank of Canada won’t raise rates, they will try, and they will likely keep pushing forward until something breaks. That breaking point will arrive sooner than most anticipate.

Now that rates are going up and pandemic restrictions are being lifted all across the nation, the housing trade is beginning to fade- at least in Vancouver & Toronto. However, in our commodity rich provinces the party is just getting started. Calgary home sales were up 80% year-over-year in February and capital is aggressively flowing in from across the country. Yes, it’s boom town in cow town.

Things are also looking rather positive for the province of Saskatchewan as commodity prices rip across the globe. The province is the world’s largest exporter of peas, lentils, durum wheat, mustard seed, canola, flaxseed and oats. Saskatchewan is recognized worldwide for the quality of its crops, and the province is also the second largest cattle-producing province in Canada. It’s no wonder that RBC is predicting Alberta and Saskatchewan to lead the country in Real GDP growth this year.

The two provinces are enjoying attractive house prices and are in prime position to prosper in a world that is entering a rather dark place with what will likely be persistently elevated oil prices and unfortunate food shortages as the war in Ukraine rages on. Russia is the world’s largest exporter of wheat, and Ukraine is the fifth largest. Together, they provide 19% of the world’s barley supply, and about 14% of total wheat supply. They are also lead suppliers of rapeseed and account for 52% of the world’s sunflower oil export market. Russia is also the lead producer for global fertilizer supply.

In other words, in a time of heightened volatility and commodity shortages, these two provinces should offer some stability.

Three Things I’m Watching:

1.Commodity boom suggests Alberta & Saskatchewan will lead the country in economic growth this year. (Source: RBC)

2. Agriculture prices have already doubled. (Source: Richard Dias)

3. In Canada, Extractive Industries, Agriculture & Chemicals make up roughly ~50% of Total Exports. (Source: Richard Dias)

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The Saretsky Report. December 2022