Sound bites: Limits to growth

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Back in the 1970s, a think tank called the Club of Rome commissioned a publication Limits to Growth which argued the world would soon press up against a wall of finite natural resources. As a consequence, the world needed to prepare for a lower growth environment. Some forty years later the world may have indeed run up against limits to growth, but not due to natural resource depletion. Instead, accumulated global debt may be the culprit.

Global debt has soared by US$70 trillion dollars since 2007 to US$208 trillion according to Mary Meeker at the Silicon Valley venture capital firm Kleiner Perkins Caufield & Byers. This debt may now be what is holding back global growth as businesses, consumers, and governments around the world become reluctant to take on more debt to spend or invest.

A 0.25% rise in rates means a lot more today in terms of payments than back in 2000.


For the Federal Reserve which is desperately trying to raise interest rates, it also means an 0.25% interest rate hike packs a lot more punch in terms of global interest rate expense than it once did. That, along with borrowers having reached their limits of debt tolerance, may help explain why the Fed backed down from its rate hike mantra yesterday.

As we wrote to INK clients Monday, short of a rapid improvement in US economic indicators, we just do not believe the conditions are in place for even one more rate hike by the Fed, never mind the two or more it had signalled it would like to do. Early this month, the Fed's own Labor Market Conditions Index plunged to a 6-year low. It has now been in negative territory ever since the Fed raised rates in December. For all the talk of an improving US economy, warning signs are appearing that just the opposite may be the case. Had the Fed not dithered on raising rates over the past few years, in our view they could be talking about a rate cut by now, as opposed to a rate rise.

For the most part, insiders continue to sell, wary of the Fed's up-until-yesterday optimistic growth message. Based on the large divergence between our global economy sensitive INK Toronto Indicator (110% June 14) and our US Indicator (42% June 14), we see US growth lagging the rest of the world or, at best, tagging along. That narrative is in stark contrast from what we often hear from economic bulls south of the border. It also suggests that it may be difficult for the S&P 500 to break out to new highs while other markets around the world struggle on the back of growth and other concerns. Those global investor concerns may relate to the United States as much as Brexit, China, or anywhere else.

If US stocks do manage to make new highs over the next few weeks, they are likely to be powered there by the fuel of low interest rates as opposed to firming fundamentals. Meanwhile, with no immediate rate hikes in sight, both bonds and gold should continue to shine. Resource-oriented Canadian stocks should also do relatively well as the US dollar stays range bound. Year-to-date, that has been the story with the INK Canadian Insider Index up 7.1% versus 1.3% for the S&P 500.



The debt limits to growth are hitting everyone it seems, and neither the United States nor the Federal Reserve are immune.

Listen to Ted Dixon on Roundhouse Radio FM 98.3 every Thursday for his weekly financial markets commentary at 7:30 am Pacific Time. If you missed the live broadcast, catch the replay here


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