Cuts to US Government Spending

Here is a chart showing how US government spending has been cut in the last few years. Cuts to government spending reduce jobs. In an economy with 14 million people unemployed, job creation should be the priority.

Ontario's Debt

Ontario's debt and slow economic growth are two issues that voters might be thinking about in this election year.

From Livio Di Matteo's site, here is a link to a good article on Ontario's 244.7 billion dollars of debt.One can make the argument that debt is not that big of a concern when it is held by domestic residents.

 

 

According to the Ontario government,

"Ontario accounts for approximately
38 per cent of Canada's GDP. In 2010, Ontario's GDP was approximately
C$614 billion. With 13.2 million or approximately 39 per cent of the Canadian population, Ontario is Canada’s most populous province. Ontario is centrally located for both the Canadian and United States markets."

Here is a link to a fact sheet on Ontario's economy.  Financial services and professional services  make up 44% of Ontario's GDP. Manufacturing makes up a smaller percentage of Ontario's GDP.

 

Reducing debt is however, going to be a problem since Ontario's GDP is forecast to grow at around 2.5% per year over the next three years and the unemployment rate is forecast to average 7.7% over the next three years. Reducing debt requires cutting government spending and increasing taxes: neither of which is popular during an election year or when the economy is growing slowly.

On the expenditure side, health and education are expected to account for 57% of government spending in 2011-2012. There is not much room for cutting expenditures.

In 2009-2010, tax revenue made up 67.8% of Ontario's government revenue. Here is the forecast for 2011-2012.

 

On the tax side, personal income taxes and sales tax account for 62% of  tax collection. Here is a link showing where the tax revenue comes  from.

Personal income taxes accounted for 36% of Ontario's tax collection while corporate taxes accounted for 9% of tax collection.

My preference would be to focus on increasing economic growth and worry about the debt later.

Two Slow Growing Economies

Second quarter GDP data was recently released for Canada and the United States. Second quarter growth in both countries was slow. The modest surprise, especially given all of the talk about the weak U.S. economy was the slightly negative second quarter GDP growth rate for Canada. For Canada, second quarter GDP fell by 0.1% (or 0.4% on an annual basis) compared to the first quarter. This is not a very big number, but it is a negative number. This means that the Canadian economy is half way towards a recession. On the other hand, these numbers do get revised in the coming months and there is a chance that the revised second quarter GDP number will be positive. Consumption, business investment and government spending continued growing slowly between Q1 and Q2. The negative Q2 growth rate comes from imports out pacing exports. One thing is for certain. The recovery (if there ever was one) from the most recent recession has stalled.

In the charts below, Canadian growth rates are quarter over quarter, while US growth rates are annualized quarter over quarter.

A New Leading Economic Indicator from Suez Cargo?

After the Baltic Dry Index lost some of its usefulness as a leading economic indicator, there has been much interest in finding a suitable cargo based alternative. As The Economist reports, perhaps the Suez indicator will provide useful.

"Making a simple forecast based on the past few months' data suggests that world GDP will fall from 3.8% in the first quarter to 3.3% in the second quarter."

Siegel on Cheap Stocks

Here is an interesting video of Jeremy Siegel explaining why he thinks stocks are cheap and why he doesn't like Robert Shiller's CAPE.

Comparing Emerging Economies with Developed Economies

Here is a short video from The Economist comparing emerging markets with developed economies.

Sector Rotation for August 31, 2011

At the end of each month, I rank a selection of  Canadian ETFs according to their price strength. The ranking is based on a simple average of three month returns, six month returns and twelve month returns.

Canadian size portfolios

iShares S&P/TSX 60 Index (XIU.TO)

iShares S&P/TSX Completion Index (XMD.TO)

iShares S&P/TSX SmallCap Index (XCS.TO)

Canadian industry sectors

iShares S&P/TSX Capped REIT Index (XRE.TO)

iShares S&P/TSX Capped Energy Index (XEG.TO)

iShares S&P/TSX Global Gold Index (XGD.TO)

iShares S&P/TSX Capped Financials Index (XFN.TO)

iShares S&P/TSX Capped Info Tech Index (XIT.TO)

iShares S&P/TSX Capped Materials Index (XMA.TO)

International portfolios

iShares S&P 500 Index C$-Hedged (XSP.TO)

iShares MSCI EAFE Index C$-Hedged (XIN.TO)

iShares MSCI Emerging Markets Idx (XEM.TO)

Claymore BRIC (CBQ.TO)

Commodities

iSHARES GOLD TRUST (IGT.TO)

Ticker	XCS	XEM	IGT	XEG	XFN	XGD	XIT
Rank	7	12	1	13	9	2	11
Above ma(10)?	No	No	Yes	No	No	Yes	No
Ticker	XMA	XRE	XIU	XMD	XSP	XIN	CBQ
Rank	4	3	8	5	6	14	10
Above ma(10)?	Yes	Yes	No	No	No	No	No