Impeachment, global debt and other things to worry about

In a volatile, unpredictable world, forecasting is crucial, but it’s not enough. Scenario planning will play a more important role, said Willis Sparks, global macro director at Eurasia Group, speaking at CFA Society Calgary’s 42nd annual forecast dinner on Thursday.

“Everything that is going to happen over the next few years demands that we think outside the box,” he told the crowd.

“As analysts and business decision makers, we have to devote time, money and people to preparing for events we are pretty sure are not going to happen—because some of them are going to happen. And if we make intelligent choices, that’s going to be our competitive advantage.”

Sparks said he thinks 2019 will be an ugly year in American politics. He expects U.S. President Donald Trump will be impeached but not removed from office.

And while he expects the U.S.-China tariff war to be resolved this year, that doesn’t mean tensions are over.

“Do not be fooled. The U.S.-China relationship is broken and it’s not going to be mended any time soon,” Sparks said.

“This is not about tariffs. This is about the future balance of power in the world. This is a rivalry between an established power and a rising power, and is going to be fought in 100 different ways besides tariffs. Technology is going to be the main battleground.”

Sparks was joined on stage by three panellists. Larry Berman, chief investment officer and partner at ETF Capital Management, was most concerned about global debt.

Since 2007, the amount of global debt relative to GDP has “basically doubled,” he said.

“We are in the biggest credit bubble of all time. When you look at personal, government and corporate debt, there is a massive amount of leverage in the world economy. All of the growth in the world has been fuelled by leverage,” he said.

Because of this, Berman foresees a “massive credit problem. There are some ticking time bombs. Leverage always kills.”

He doesn’t think interest rates will rise much more and sees a recession coming, possibly in 2020.

Jackie Forrest, senior director at ARC Energy Research Institute, spoke about Western Canada’s oil and gas sector, which she said is facing a very difficult year.

“It’s challenging not only because of $50 oil and very low gas prices, but also because of the pipeline situation,” said Forrest, who’s expecting to see less investment in the industry compared to last year as a result of uncertainty around market access. “We do need more pipelines and more market access.”

Forrest, who praised the Alberta government’s recent move to curtail oil production, said companies must recognize that not all of the difficulties the industry is experiencing are due to a lack of pipelines.

“The price of oil is structurally lower than it’s been in the past,” said Forrest, who expects the price of WTI this year to remain close to where it’s been for the past four years, “probably in the low $50s.”

She emphasizes that in this lower price environment, the industry must innovate to stay competitive.

“Pipeline or not, you’ve still got to be able to run your business at low prices. It’s about making our industry even more low cost than it is today. We can innovate to be a stronger leader that is going to do very well into the 2020s.”

There are market access issues for natural gas as well, she added. “Natural gas is not in a good situation in Western Canada. We’re producing too much gas and seen prices that are ridiculously low: 40% of the price that Americans are getting.”

Forrest believes that LNG offers a huge economic opportunity for Canada, which can deliver gas to Asia more cheaply than the U.S. She thinks that LNG could be an economic opportunity for Canada on the same scale, if not larger, than the oilsands were in the past decade.

According to panellist Todd Hirsch, chief economist at ATB Financial, it should give all Albertans a little comfort that the Bank of Canada understands the pain that Alberta’s oil and gas sector is going through.

“They’re looking at slower growth in Canada because of the woes in the energy sector,” said Hirsch.

He’s predicting one, maybe two interest rate increases  in 2019, likely not until after the summer.