Monday, October 20, 2008

Life, LIBORty and the Pursuit of Happiness

Apparently all you need is a bear market to effect changes in the way people learn about economics. It amazes me how many clients now watch BNN (Business News Network). Six months ago, I would not have expected a client to know what a LIBOR was and why it was important to the economy. I queried a client about this on Friday and he responded correctly (kudos to Chris). For those who are unaware, LIBOR (London Inter Bank Offered Rate) is a percentage rate that banks charge to each other (please see the humour in banks having to borrow money from other banks) to borrow funds for the short term. The fact that the rate has dropped dramatically over the past two weeks is an important sign of a lessening credit crunch, and means more money will be available for John and Jane Q Public to buy cars and houses and such.

While I don't expect people to suddenly go on a spending spree, the rate to borrow money (assuming you can or should) is going lower. The Bank of Canada dropped their rates again today by a quarter point and indicated more rate decreases to follow.

How will this affect Canadians? The Bank of Canada expects growth to be sluggish through the first quarter of next year, then to pick up over the rest of 2009 and to accelerate to above-potential growth in 2010. The recent drop of the Canadian dollar will also provide an important offset to the effects of weaker global demand and lower commodity prices. Overall, the Bank projects average annual growth in real GDP of 0.6 per cent in both 2008 and 2009, and 3.4 per cent in 2010.

The next question seems to be where do we go from here. While there are positive signs emerging, and though Canada is expected to lead the G7 nations in GDP for 2009, the weakening US economy saw another recommendation for a "stimulus". Federal Reserve Chairman Ben Bernanke testified Monday that Congress should consider passing a new stimulus package to try to jump start the economy. Bernanke, speaking before the House Budget Committee, came just short of an outright endorsement of a package to pump tax dollars into the economy. But he clearly said the economy needs additional help from Congress. The when and how of any such package coming to fruition is debatable, but perhaps after the November election and before the new Congress takes office in January.

So where do we go from here. While the signs are there for a rise (dramatic) in the markets, we are rapidly approaching year end. This can often signal a time for certain investors to sell some of their holdings (non-registered) to trigger capital losses. Markets in November/December can be very uncertain, but an interesting chart appeared in Rob Carrick's column in the Globe and Mail on September 8, 2008. I guess that based on the data, that RRSP season that traditionally kicks off on January 2nd should really start in December.

S&P/TSX composite from 1985 to 2007

Average % return each month (% of time returns are positive)

January 1.8% (65)
February 0.8% (52)
March 1.1% (65)
April 0.4% (57)
May 1.7% (70)
June 0% (48)
July 1.0% (65)
August -.5% (48)
September -1.4% (35)
October 0.5% (65)
November 0.8% (61)
December 2.6% (96)

Please take a moment to answer the "poll" on whether your RRSP contribution habits will change due to current market conditions.

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