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Showing posts from 2010

Inflation Pressures remain strong in Canada

Not entirely surprisingly, inflation pressures in Canada continue to be at the upper limit of the BoC’s comfort zone. Proof, as if any was needed, that capacity utilisation probably higher than the Bank of Canada has estimated. Obviously, if you consider that the BoC’s estimate for capacity utilisation is based on derived data. Several economists beleive that the BoC has a tendency to underestimate capacity utilisation, and hence inflation pressures.

On a seasonally adjusted monthly basis, consumer prices rose 0.2% in November, after increasing 0.7% in October. The transportation index advanced 1.8%, while the household operations, furnishings and equipment index rose 0.3%. However, the shelter index decreased 0.2% while the food index fell 0.3%.

Worrying is that aside from clothing and footwear, all segments of the pricing complex rose in November.

Mark Carney scared the crap out of me

Two days ago, the BoC governor spoke at the Economic Club of Canada (see here).  Several comments he made make me very nervous about the state of the world, or at the very least very nervous about the BoC’s world views.  Below are a few highlighted segments: […] by the recent extensions of unconventional monetary policies in the United States, Japan and Europe. With currency tensions rising, some fear a repeat of the competitive devaluations […] countries left the gold standard in order to ease monetary policy, and the system became more flexible.  Today the process is working in reverse. Ultimately, excessive [foreign currency] reserve accumulation will prove futile. Structural changes in the global economy will yield important adjustments in real exchange rates. If nominal exchange rates do not change, the adjustment will come through inflation in emerging economies and disinflation in major advanced economies. Historically low policy rates, even if appropriate to achieve the inflation…

Starbucks Bucks– a travel card?

Funny blog entry on Worthwhile Canadian Initiative, a Canadian economics blog about using your Starbucks bucks (Sbucks) card to get rid of your spare change at airports.  You know the drill you are traveling to country XYZ and you have a couple of Euro or pound coins in your pocket, and the notional value of coins in Europe can be rather high. 
I’ve always dismissed Sbucks as a promotional gimmick, but it turns out that your Sbucks are good all over the world; Starbucks takes care of calculating the exchange rate.  So if you are at Heathrow airport with a few pound coins and a few bills you can load-up your Sbucks card to use back home.  Brilliant!
I guess I will start drinking Starbucks coffee – maybe McDonald will eventually have the same idea?  Interestingly, the use of Sbucks increases the money supply (I don’t know maybe we should call it M9).  It reminds me of a story: many years ago a colleague tried to pay a Bangkok stripper with Canadian Tire dollars – didn’t work! So maybe Ca…

Interesting data point: Falling energy consumption

Riddle me this; which country saw back to back reduction in total energy consumption in 2008 and in 2009?Of course the answer in Canada (BTW in 2008 GDP shrank by .089% and by 1.08% in 2009).In 2009, Canada’s total energy consumption dropped 1.9% (2.1% in 2008).Energy consumption was 7,650 petajoule (Petajoule = Joule x 1015).Canada is the world 8th largest energy consumer (just ahead of the U.S.), but behind several Middle Eastern countries and surprisingly Luxembourg (Don’t know why Luxemburg, it has relatively mild climate, but its 65% higher than Belgium).
Interesting facts:
Oil sands now account for 70% of all oil production in CanadaCanada represents 20% of all oil imported into the U.S (largest)67% of all oil produced in Canada is exported to the U.S.Quebec, Ontario and Alberta account for 72% of all energy demand in CanadaNatural Gas production declined by 4% and exports by 7%Coal consumption dropped by 20% and 10% respectively in 2009 and 2008, whi…

I love this diagram -- Health care as a Percentage of GDP

Bottom line the figures for ALL countries is a problem because the implication is that healthcare takes a greater and greater proportion of the GDP, eventually, it will be 100%.

Something happened in the US in 1984 (aside from the election of Ronald Reagan), cost as a percentage of GDP exploded.

Early signal that Canada’s Q4 GDP will be disappointing?

October vehicle sales were down 0.3%, not a huge amount but it still amounts to a continuation of a trend that began emerging in September.  Canada’s economy has stalled – in fact aside for Quebec, vehicle sales were off in every province with Alberta the winner at -8%.
One question not addressed here, is the change in VAT tax in certain provinces, which may have accelerated vehicle purchase in the summer of 2010 to take advantage of the lower tax level. 

Although the figures are not seasonally adjusted, in 2007, 2008 and 2009, vehicle sales actually rose in the closing months of the year (it makes sense as dealers try to unload “previous years’ model”).  Anyway, September was flat and October was down slightly (against trend).

History doesn’t repeat itself, but it often rhymes (Twain)

Looking over the slow developing disaster that is America (now you know my bias), I decided that the best way to get a sense of what the implosion of an Empire looks like was to study another empire that, through no outside forces, when the way of the dodos. Initially, I though that I could look at the decline of some 18th or 19th century European empires, but I realized that these did not so much decline as they were superseded.  In other words they present a poor example of an implosion.
The solution, it turns out was something I’ve already been reading about, a few months ago While watching a Daily Show interview with Robert O’Connell, an American historian who wrote the Ghost of Cannae – about the darkest hours of the Roman republic (in fact the point at which the republic lost its “democratic” footing).  So yesterday I downloaded Gibbons: The History o Decline and Fall of the Roman Empire, paradoxically published in 1776.  It is a massive work, which according to friends is a diff…

Canada’s net worth rises

In the third quarter, Canada’s Net Worth rose by 2.7% -- this is almost entirely due to the strength of the Canadian stock market – which is up 9.5% for the year (small percentage due to the increase in the value of the housing stock).  Kind of a boring week for economic data, thank God our southern neighbors are providing such entertainment (e.g. healthcare reform unconstitutional, renewal of Bush tax cuts). 

Following the BoC financial strength review (last Thursday) the Bank of Canada’s Governor further pressed the issue of Canadians excessive private borrowing, especially in an environment of ultra low interest rates -- rates may change and there is a strong likelihood that they will rise above the prevailing inflation rate.  Personal indebtedness is the only endogenous risk factors identified by the BoC -- the only area where policy may have an impact.  Canada is, in fact, the only OECD country encouraging its citizen to borrow less and save more.  The question is will be the Bank…

Predictions & Projections

Last year, I predicted that Canada’s 2010 GDP growth would be around 3.2% (although the final tally is not in yet, the number appears to be around 3.0%), so I was too optimistic.My forecast was tempered by the reversal in housing; 2009 saw an over-stimulated housing market, and that sector retrenched in 2010 (creating a drag on GDP).Of course, I never saw the weakness of the U.S. recovery as a critical factor.
The BoC 2011 GDP forecast is for growth of 2.5% because the Bank sees a many potential headwinds.Thankfully for Canada, Pres Obama decided to kick the can down the road, by agreeing with the GOP on extending all American tax cuts creates a massive boost to “income” that “should” translate into additional spending.In view of this pure Keynesian stimulus package (and I thought the GOP were solid Austrian economists… the joke is on me!).In my opinion the BoC’s 2011 forecast appears to be too pessimistic.  I take the view that GDP growth will be closer to 3% (and maybe even slightly …

Canada Vs. USA 30 year bond rate differential

For a first hand look at the impact of Keynesian fiscal and monetary policy:

20 year look-back at the differential interest rates on 30 year T-Bills in Canada and the U.S.  In 1994, the Canadian government facing a budget deficit of nearly 10% of GDP took drastic action, and cut governmental spending dramatically, which resulted in federal government surplus between 1999 and 2007, which is reflected in the confidence shown by Canadian bond holders.  
As of 2002, Canada has seen its 30 T-Bill trading inside the American government's rate, and the trend appears to be accelerating.  Canada's Bank of Canada is convince that fighting inflation is difficult and requires persistent effort on the part of the government of the day and the central bank (Compared that to Bernake's 60 minute comment of last Sunday).
Over the past 3 weeks, the trend has gotten even more pronounced, one suspect that the market was buying the rumor of QE2 and "selling the news" ever since (especia…

Canada’s trade deficit shrinks

There is less here than meets the eye, unfortunately!  Canada's merchandise exports rose 3.1% to $33.8 billion in October, on the strength of industrial goods and materials, as exports of precious metals and copper ores reached record highs.  Exports of agricultural and fishing products as well as automotive products grew in October. In contrast, declines were recorded in exports of machinery and equipment and energy products.  Oil exports continue to grow, but natural gas shrank.

The end result is that exports rose by 3% while import only grew by 1.2% (volume was up 1.7% but prices declined by 0.5% -- which speaks volume about the “inflation risk” in the U.S.).  So Canada’s October trade deficit narrowed to $1.7billion from $2.3 billion in September.  One sector which saw tremendous growth is the automobile parts business, which saw a 3.5% increase in October, but this is after an 11% decline in September… these numbers have to be taken into perspective.  Moreover, this segment of…

Financial System Review – December 2010

Twice a year the Bank of Canada undertakes a review of the major risks facing Canada’s financial system, being the arbiter between a small open economy and the rest of the world, the Bank looks at where the “trouble” could emerge.The December commentary (here) makes for somewhat disturbing reading.
The BoC has three main concerns:First, Europe’s debt market disintegration, second the growing “imbalances” across the world. Finally, the Bank is concerned with the level of personal debt in Canada.Their fear is that any one of these three elements could cause a demand shock in Canada, that these risks are more important today then they were six months ago, and that this could have consequences for the stability of Canada’s financial system.
The instability which the BoC refers to is driven first by America’s decision to follow Keynesian “pump priming” fiscal and monetary policies, which at best are only delaying the inevitable, and a worse make the situation even more precarious and difficu…

New home prices up again!

The resilience of the Canadian housing market is at times astonishing.  According to Statscan, new house prices "edged up again in October".  Year on year data shows that new house prices rose by 2.4%, which is in line with general inflation, and marks the 3 month in a row where prices rose.
Canada's housing sector remains very healthy, and the new home segment is just a further indication of its health. Mortgage securitiziation (that plagued the US housing system) was not prevalent among Canada's largest banks, only the secondary players in Canada's housing market availed themselves of this option (since they didn't have access to retail deposits).
Moreover, Canada mortgage registration system is very different than in the U.S., so none of the American problem could occur -- there is a central registry (in each province) of all liabilities against a property, and there is no concept of limited recourse borrowing in Canada's mortgage market.
As I often disc…

Very Strange

Several months ago, I added the Google Analytic functionality to my blog. The idea was to see who read my stupid thoughts.I began this blog principally as a way of formulating my ideas outside of work environment.Although my clients like to know what I think about Canada’s economy, they usually have their own economist on staff that will tell them their own view of the world.
I started this endeavor because so little is written about Canada and its economy (aside when there is a big buyout as was the case a few weeks ago).Until recently, I averaged between 5-15 readers per day.I don’t publicize this website, and I keep it intentionally anonymous.Not because I speak of my work, in fact I never even cite my own firm’s research (not that it’s not good, it’s just that I only take publicly available information – some research I access is proprietary, to avoid problems I maintain a complete embargo). Over the past few days/weeks (actually it stared November 15) the web traffic to my website…

PISA 2009 Ranking

Today, the OECD published the PISA 2009 ranking of 15 year olds (Report here).  This takes the scores of students across the nation and compares them to other countries.  The reason we are making a fuss about this in Canada is that our ranking are high.  Of course some of the data is less useful than other pieces.  As an example Shanghai dominates all three tested areas (Reading, math and Science), with a population of nearly 20 million, it is a fair comparison with Canada in terms of population, but not an accurate representation of China (which is probably correct) since Shanghai easily compares with any first world (maybe exceeds) capital city.

Before looking at Canada a few comments about the US (its ranking remains unchanged -- in reading the one tested for the past 10 years) over the observed 10 year period.  
America, in absolute term, has the most expensive schooling system, the US spends more per student then any other country observed (except for Luxembourg, go figure).  Ameri…


By David Rossenberg (Gluskin Sheff)
An extract of David's Letter of December 7th 2010.   There was little doubt that the Bank of Canada was going to stay on the sidelines at today’s policy meeting and provided a strong hint that the rate-hiking cycle was a three-strikes-and-you’re-out affair, just as the V-shaped recovery in the Canadian economy was a three-quarter bounce-back. Economic growth is slowing below forecast at the current time and underlying inflation is hardly an issue either. Moreover, the “output gap”, which measures the degree of excess capacity in the broad economy, remains high at 2.9%, though nowhere near the deflationary 3.6% levels prevailing in mid-2009.As it turns out, and despite my earlier doubts, the Bank turned out to be 100% correct in hiking rates early as to defuse what was possibly becoming a housing bubble in Canada. So far, it looks like it has let the air out of the balloon gently without having to burst it.There’s never a reason to become complace…

What happens to Canada if the US gets into real economic trouble?

Last night president Obama made a deal with the GOP to make the Bush tax cuts permanent.  Sure the extension is for two years, but the employment situation in American will not improve (estimates are for unemployment rates to drop by 0.3% and 0.6% they are at 9.8% now) and the likelihood that Obama will win a second mandate (there could even be a challenger for his job) appear much lower.  Democrats feel betrayed (he ran on a platform of no extensions), and independents now realize that the GOP has the real power so may as well give them the whole thing after all!
Republicans are very bad at cutting spending, Social Security, Medicare and Defense are off the table for the GOP (in view of their supporter’s demographics and philosophy), problem is that with interest expenses these four items account for 77% of the U.S. government total budget.  Moreover, healthcare costs are rising at more than 4 times the rate of inflation.  Renewing the "Bush" tax cuts (rechristen "the t…

Soft Commodities: Wheat

Winter has finally arrived across Canada, and the Agricultural department finalized the harvest number for the 2010 season.First, production is down 4.6& (global) against 2009, most affected was wheat which saw a 15% drop in production.The canola harvest was also well below the 2009 level (-20%).Obviously, the markets were already well aware of the “projected” production for 2010, add to this the very poor season in Russia (intense heat and fires) and the high wheat prices are easy to explain.
At 9 am the bank of Canada’s rates decision will be announced, rates at 99% certain to remain at their current 1.0% level.

Canadian Interest rates

This is an easy one, tomorrow (Tuesday) the Bank of Canada will announce that interest rate remain unchanged, and will remain at 1%.  The BIG question tomorrow is for how long they will stay there?  It is generally assumed that the rates will stay where they are until March  2011, but after that there is a wide range of opinions -- all they way from a possible cut in interest rates -- because Canada's economy is slowing, to the idea that rates could be as high as  2.25% by the end of 2011.
Personally, I have no opinion, frankly there are too many external  factors at play here (decision over which Canada's main actors have no input -- are price takers).  First, commodity prices (Copper, Oil and Gas etc) are high and rising, that has an immediate impact on the Canadian economy -- since so may of our exports are raw material (or at the very least lightly processed).
Our giant next door is another issue, there is a growing possibility that the congress will not agree to the extensi…

Canadian unemployment dropped to 7.6%

Apparently in November America created only 39,000 jobs (market was hoping for 150/200k), whereas in Canada 15,000 were created (Canada’s economy is roughly 1/10 that of the U.S.). Canadian unemployment rate drop to 7.6%, mainly because of a drop in the labor force, mainly because of youth participation dropping (a seasonal factor).Over the past 12 months, nearly 318,000 jobs were created (+1.9%).
(Source: StatsCan)
Underlying numbers were less stellar as all the growth in jobs was from part time work, full time employment actually declined:Not entirely surprising the bulk of the cuts came from the manufacturing sector – even when the economy recovers it is more than likely that manufacturing is permanently displacing workers (as attested by the dramatic (+30%) surge in plant and equipment investments over the past 2 quarters).Services (Insurance and finance were also targeted)
In terms of regional differences, the biggest winner was Ontario, with Quebec and Manitoba loosing employment.T…

Why I'm talking Smack

Basically, as the year winds down there's little economic data which is of interest. I don't talk about companies performance, although the three Canadian banks which have reported results did OK.  Finally, and out of boredom, I found that the two most popular blogs I wrote over the past year (total 143) are:  U.S. Level 3 Assets and the Chinese "64 million" apartments.

Go figure, I focus 99% of my energy on the Canadian market and what get the most airplay are two non-Canadian topics.   What shame!  Which reminds me that I'm about to start doing research on Level 3 assets again.

Amazon Rules!

Who goes to the stores anymore?  Tuesday after I called my sister to wish here a Happy Birthday, and at the same time she asked, can you order a specific DVD for me?  She doesn't live in Canada, hence the request.  So Tuesday afternoon I order this DVD, and it arrived a few minutes ago, total time 36 hours.

My question is why would anyone go shopping when your fingers can do the job?

Let me know: frozeninthenorth at gmail doc com

Surprise! 93% of market economist believe that BoC will keep interest rates unchanged next week

Not making this up, Canada's respectable Financial Post wrote an article that indicated that 93% of market economist "believed" that interest rates were going to remain at 1% next week when the board of the Bank of Canada meets. 
Part of the problem is that the article is about Canada's "economist" when the journalist really doesn't address the fundamental problem for Canada next week:  Weak 3rd quarter GDP numbers, with negative GDP growth in September, and very high producer price inflation.
What could have been interesting is th discuss the dilemma faced by the BoC; price stability is core to its mission (BoC is not independent from the Canadian government's policy -- as the latter can overrule the decision of the bank), and there are serious worries there.   Service inflation is substantially above the core target, and has been for some time, the core CPI is on the 2% threshold,  but CPI (including food & energy) is above that 2% target. It is…

Non-Economic rant: Tom Flanagan and his Fatwa against Julian Assange

Tom Flanaganis was a senior advisor to Stephen Harper Canada's Prime Minister.  On Monday, he joined Aytollah Khomeini (against Salman Rushdie for his book) in proclaiming a "Fatwa" against Julian Assange (the Wikileak guy), and that he should be killed.
is words were:   I think Assange should be assassinated, actually," Flanagan said with a laugh, and when asked to expand upon his answer, added that he "wouldn't be unhappy" if Assange "disappeared."When the CBC's Solomon commented that his position was "pretty harsh stuff," Flanagan, who is known for his off-the-cuff sense of humour and often brings props to panel interviews, replied: "I'm feeling very manly today, Evan."   (Source: here) 

Now Flanagan is part of Harper's inner circle, originally from the University of Calgary (don't laugh it’s actually a good school).  This guy has been professor of political science since 1968, so the man knows "what …

Amazing Analysis of the European political / economic landscape

Prof Pettis


Some "Money Shots"

"For ten years I have used mainly an economic argument to explain why I believed the euro would have great difficulty surviving more than a decade or two.  It seemed to me that the lack or fiscal centrality and full labor mobility (and even some frictional limits on capital mobility) would create distortions among countries that could not be resolved except by unacceptably high levels of debt and unemployment or by abandoning the euro.  My skepticism was strengthened by the historical argument – no fiscally fragmented currency union had ever survived a real global liquidity contraction." The point I was trying to make in the passage is an obvious historical one – that the resolution of Europe’s crisis will inevitably involve a difficult political debate over apportioning the cost of the resolution.  In one of my favorite history books (The Financial History of Western Europe), Charles Kindleberger argued that the political structur…

Wikileak: Is it possible to embarrass US banks

From Barry Ritholz the Big Picture blog:  Here is the sad reality: Can you really embarrass any [... U.S.] banks? They were incompetently run, with criminally inept risk management. They blew themselves up, and exist today only due to the largesse of the taxpayer. They gratefully took all they could grab and more.What else can you release to embarrass them?Unless they have 5GB of video showing their CEOs engaging in bestiality, its hard to imagine Wikileaks embarrassing the big banks.Harsh but probably true, even the Vampiresquid GS got away with "murder"

Canada’s Balance of Payment – Deeply negative

Sorry missed this data yesterday!
The strength of the Canadian dollar continues to affect the Canadian economy.Canada’s trade balance continues its downward trajectory into the negative…In the third quarter of 2010, our current account deficit widened to C$4.6bn, for a total of C$17.5 bn for the year.
The strength of the Canadian dollar is sucking-up foreign demand; at the same time demand for Canadian goods (non-energy) is ebbing.This has been financed by the dramatic increase in foreign capital inflows (see here) that have been the hallmark of Canada’s economy for the past two years.

On the bright side, Canada’s Gross fixed capital formation advanced 9.4% driven by non-residential investments (+19.8%) with machinery & equipment surging 28.7%.In a nut shell Canadian company are investing heavily to increase labor productivity.
(Source Data:  StatsCan)

Steven Harper's Hair -- very funny joke

Amid the furor and embarrassment of the state and military secrets revealed in the latest Wikileaks data dump, there is perhaps some reason for pride among Canadians in keeping at least one important state secret. Buried in the thousands of pages are a few telling lines that point to Ottawa’s steadfast defense of Prime Minister Stephen Harper’s Unmovable Hair. It appears that Canada’s spy agency, CSIS, was inundated with calls from world leaders and military chiefs in the wake of this summer’s rainy G20 meetings in and around Toronto. It did not go unnoticed that while wind and rain assailed many a presidential coiffure, come photo time Harper’s hair was as unruffled and well-ordered as a Ken doll’s. 
Hoping to coat the undersides of Humvees and helicopters in war zones with this seemingly indestructible unguent that protects yet provides volume and shine, foreign powers had their entreaties rebuffed again and again, “lest the secret fall into the wrong hands.” Having grown weary of th…

Producer inflation is a worry for the Canadian economy:Stagflation signal?

While the Canadian CPI Index has recently felt a bump, there reality for producer price is one of very heavy inflation.  In October, the Industrial Product Price Index (IPPI) and the Raw Materials Price Index (RMPI) were up 0.5% and 1.7% respectively from September. Both indexes advanced mainly because of petroleum and metal products.  Importantly, excluding petroleum and coal prices, the IPPI would have remained unchanged in October.
(Source: Statscan)
The story for the Raw Materials Price Index (RMPI) is one of strong year on year inflation.  They increased by 1.7% in October, primarily because of higher prices for mineral fuels (+2.0%), non-ferrous metals (+2.8%) and vegetable products (+5.1%). Crude oil prices were up 2.5% in October, after falling 3.7% in September. Excluding mineral fuels, the RMPI would have increased 1.4% in October, continuing its upward trend that began in July 2010.
Compared with the same month a year earlier, the RMPI rose 5.0%, following a 5…

Canada’s 3rd quarter GDP numbers make for grim reading

As expected third quarter GDP growth in Canada was poor, annualized growth of 1.2% (against 5.8% in the first quarter), is nothing to write home about.Moreover, in September itself GDP declined by 0.1%, which is far worse than expected and sets a difficult stage for the 4th quarter.

Our initial estimate in December 2009 was for GDP growth of 3.2% for the year, based on solid natural resource prices (check), strong-ish Canadian dollar (check) and oil price in the $72-$75 range (check) what we underestimated was the impact of trade, exports were a massive drag in the 3rd quarter GDP numbers to the tune of 0.4% -- somehow we had anticipated that the U.S. economy would be doing better than it is.The one single item of strength in the GDP figure is personal consumption which rose 0.9% (again in the quarter).Housing was also a drag on the GDP number, not entirely surprising, since it was during all of 2009 and early 2010 such a massive contributor to Canada’s GDP growth.

The BoC target was 3%…