By Max Fawcett From Alberta Venture

If there’s one thing that you can count on in 2014, it’s more volatility

At least, that’s the word from Craig Alexander, the TD Bank Group’s chief economist. That doesn’t necessarily mean a bad year on the markets, he says – just a rockier one. “I don’t know where the stock market is going – if I did, I’d be on my 200 foot yacht in the Cayman Islands. But I do know where corporate profits are going. And on average, corporate profit growth should be in the five to six per cent range. If you add on dividends to that, you’re talking seven or eight per cent. So a high single-digit return on U.S. equities – even with the run we’ve had – over the medium term is quite plausible. The only issue is that you could get a lot of volatility around that return.”

Investors might think that we’ve already been dealing with enough volatility as it is, but Alexander says the data simply doesn’t support that view. “Most investors, if you asked them, would say that volatility has been high.

But in actual fact, if you look at measured volatility, it’s been incredibly low. And there’s a disconnect there – and the disconnect is that people think of all the things that could go wrong, they think about the risks out there, they think about the uncertainty, but because a lot of people weren’t even in the market and trading, it meant that the volatility in terms of day-to-day movements was really low.”

Where does he expect the added volatility to come from in 2014? Tapering, of course. “When the Fed is doing all this quantitative easing and pumping all this money into the system, in a sense it creates a one-way bet for investors. The Fed is pushing to get the market up. Well, what happens when the Fed stops that program and all of a sudden it’s not a one-way bet anymore? That doesn’t mean the market should go down. But it does mean that the market could move around a lot more.”

We had some extra material left over from our conversation with TD chief economist Craig Alexander, and while we couldn’t fit it into the magazine we thought it merited a mention – and a read – all the same. Here he is, in his own words.

On the strength of the U.S. economy:

“It’s taken a long time, but on the ground the U.S. economy is getting stronger. The housing market’s recovering, manufacturing has become much more competitive, the energy sector is booming on the back of a shale oil and gas revolution, employment is gradually rising, albeit at a disappointing pace – there are a lot of indicators that the U.S. economy is getting stronger. Now, if you look at the growth rate the U.S. economy had in 2013 you actually won’t see that story, because the pace of growth was only 1.7 per cent. However, the reason why it was only 1.7 per cent was because of the U.S. government. America managed to avoid the fiscal cliff that threatened to drive it into recession at the start of last year, but higher taxes and government spending cuts still knocked down U.S. economic growth by 1.3 per cent. If the U.S. government had not exerted that fiscal drag, the U.S. economy would have grown at three per cent, not 1.7.”

On the impact that tapering could have on emerging markets:

“In 2013, when the Fed talked about tapering, it spooked financial markets, bond yields in the U.S. jumped, interest rates globally increased, and when that happened some emerging market economies ran into real problems. It is going to be a challenge for some of the emerging market economies.”

On where the loonie will trade in 2014:

“The combination of smaller positive interest rate spreads in Canada’s favour plus a stronger U.S. dollar will, I think, pull down the Canadian dollar. We’ve already seen a pullback in it, and our view is that the Canadian dollar is going to come down to 90 cents next year. For Canadians who are buying things on the Internet priced in U.S. dollars or snowbirds that are headed down to the U.S. for the winter, a weaker Canadian dollar is unwanted. But exporters are one-third of the economy, and a weaker Canadian dollar boosts their competitiveness. So on a net basis, while there are winners and loser, a weaker Canadian dollar is actually good for economic growth.”

On whether the so-called commodity “super cycle” is dead:

“I was never a big proponent of the super cycle story. When the economic recovery began in 2010, emerging markets came roaring back to life. This created enormous demand for commodities and really boosted prices, but unfortunately the pace of growth we were seeing was inflationary in the emerging markets – it wasn’t sustainable. I thought it was inevitable that the pace of growth would slow and that commodity prices would not continue to rise the way a lot of people had been saying.

I think the medium to long-term outlook is that commodities are going to remain well-supported, because the emerging market economies are going to be a rising share of the global economy.  Their growth rates may be disappointing relative to history, but they’re still going to be providing support to demand for commodities. But the demand is not going to be as strong as people thought.”

On the end of growth, as prophesied by Larry Summers:

“Larry Summers, the former treasury secretary, gave a speech about stagnation in which he argued that growth would never pick up. But I don’t buy it. If I believed that then the U.S. economy, which has been struggling to grow at an average of 2.2 per cent, when the fiscal drag hit it should have dragged it down below one per cent growth. Instead, it came in at 1.7 per cent. The legacy of the financial crisis is abating.”

On the political machinations in Washington, and whether they’ll have a positive or negative effect on the economy.

“I’m really optimistic that things are going to go more smoothly in January and February politically than maybe people had thought. The last time around, the resistance by the Republican Party to raise the debt ceiling played out very badly in public opinion polls. It really hurt the Republicans in terms of popular sentiment, and I don’t think they’re going to want to go through the same experience that they just had before they then go out to the electorate. I don’t think they’ll pass a budget, but I do think they’ll get a continuing resolution that funds the government so there’s no government shutdown, and I think they’ll raise the debt ceiling.”

PHOTO: Craig Alexander

For more on this story go to:

http://albertaventure.com/2014/02/investment-craig-alexander/