Skip to main content


Showing posts from September, 2010

Impact of a trade war on Canada’s economy

My conclusion:trade war will have very little if any impact on Canada’s trade position.First, the Bank of Canada is one of the few central banks that has no real issue with the direction of its currency.In fact, the BoC has made a point of not taking the direction of the currency in its analysis of the strength of the economy.With this in mind, the idea that Canada is manipulating its currency is considered moot.
Canada is part of one of the world’s greatest trilateral trade alliance, the NAFTA (North American Free Trade Association), which includes Canada, U.S. and Mexico, but already America has made some inroad in this alliance when in 2008, its infrastructure program made “Buy America” a precondition to any federally funded projects.Although the impact on trade was limited, it was not inconsequential, and in reality Canada and the U.S. are the two largest trading partners (with each other) in the world.
What is interesting is the nature of Canada’s merchandise export/imports:

Canada’s first Reading of negative GDP figure

It seems that the Bank of Canada’s bet is not working out as planned (maybe), GDP growth that was expected to be more sluggish in the second half of 2010 is turning out to be downright terrible.It is difficult to blame the BoC, but it remains that Canada’s economy appears to be decelerating rather dramatically, from a 5.8% GDP reading for the first quarter of 2010, to a negative reading of 0.1% for July.

The biggest negative contributors were manufacturing, retail and wholesale trade, construction and forestry.Confirming that Canadians, although clearly out of recession, are still spending as if they were in a recession.The sectors which did the best were mining and to some extent the financial sector.It must be pointed out that the success of our resource economy has little or nothing to do with the health of Canada’s economy; these numbers are entirely driven by foreign factors.

Manufacturing decreased 0.7% in July, with 11 of the 21 major groups retreating. Manufacturers of non-durab…

Canada – Out of the Woods, yet?

Today the Teranet National Bank Index came out, indicating that, across Canada, house prices were still rising, but the increase was decelerating (prices are rising more slowly).

Canadians have never seen such low borrowing costs, the Bank of Canada has been raising benchmark short term rates from 0.25% to 1.0%, but at the same time, inflation expectations have abated so the yield curve has “flattened” (which means long term interest rates are falling while short term interest rates are either rising or remaining flat.Bellow is a diagram of borrowing costs in Canada, which illustrates this point rather well.

About 10 days ago, Tim Lane one of the BoC’s deputy governors made a presentation.The highlights are:
Inflation is around the 2% target range, which is right were the BoC wants it.Borrowing conditions for small companies are still tightening, GDP growth forecast for 2011 onward is for a rate of 2% instead of 3%, we got in the past decade (a function of aging pop…


Fascinating interview with Aaron Regent the CEO of Barrick Gold on CNBC (TSE:ABX).He is one of the more interesting guys “running” Canada, honest about his company and his industry.First and foremost, is the scope/size of the business, total market cap for all gold stocks, and gold ETF is around $600-700 billion.Which is lots of cash, but if you consider this is one extraction business not that much.So the arrival of new capital, even in reasonable amounts, can have a rather dramatic impact on the industry.
That gold trades near $1,300/oz gives firms like Barrick a tremendous amount offree cash flow, and one of the more interesting comments from Regent was the fact that finding new reserves is difficult and bringing a new mine to a “exploitation level” can easily take a decade or more.This is the interesting bit, Barrick’s legacy mines are high cost producers, the newer ones operate at lower costs, therefore balancing the equation.However, Regent indicated that is reserve attrition is …

Canada’s trade picture

In 2005, the U.S. accounted for 70% of Canadian total exports; in 2009 this had dropped to 63% -- in terms of volume, forgetting the impact of Canada’s stronger currency.Trade with Europe and emerging markets, still small (each less than 1/6th the size of the US/Canada trade flow) is growing quickly.China that was nowhere in 2000 as an exporter to Canada is now the third largest (after the U.S, and EU).As a percentage of GDP trade is ¼ smaller than it was in 2000 at 30% instead of 40% of GDP, but a great portion of that drop is the result of the appreciation of the Canadian dollar – a monetary impact, not so much one in terms of economic significance.Canada is the world’s ninth largest exporter and the tenth largest importer, and 20% of all Canadian jobs are related to trade.
Some overall characteristics of the Canadian export sector:
(1)Canada export sector remains deeply reliant on the U.S. as an export market, despite the increased barriers the Americans have added after 9/11 on the …

Canadian Economic Data Today:

Two pieces of data of importance:First, the cash keeps on flowing into the country, another $5.5 billion in July flowed in from non-resident, and Canadian liquidated $3.3 billion on foreign holdings during the same period.Second, is Wholesale Trade’s headline numbers were down, dragged down by car sales (-0.6%).

The first is not a huge surprise; the average monthly inflow was around $9.7 billion (over the past 6 months) that includes April and May that saw $23 bn and $13 bn inflows respectively.The trend seems to be “down”, probably because the “risk-on” trade is now attractive.However, the Canadian market is maybe not see as a “risk-on” market for non-resident investors, since equity outflow were large again at $0.6 billion.
Wholesale trade is a huge deal for Canada, because the auto sell shortfall is an indication that the North American economy (we mean America here) is slowing, in fact not only were wholesale sales off, inventory have been rising, and indication that the U.S. econom…

Canadian Manufacturing & Productivity – a mixed bag

First the good news:  Canada’s industrial capacity utilization rose in the second quarter of 2010, still well below its peak, but any increase is good news (although a 0.2% increase is not exactly something to write home about).  The low of 68.1% was reached about a year ago, and the high of 83.1% was reached in Q1/2007.  The BoC anticipates that the capacity utilization for Canada’s manufacturing will continue to rise, but with the weak American economy its recovery will be slow.  Another bright signal was the increase in Canadian productivity, whereas the market was expecting a 0.5% decline the “reality” was of a 0.5% increase in productivity (there are real issues in measuring productivity – especially for services). 
Now the bad news:  Canadian manufacturing sales “unexpectedly” declined by nearly 1% in July according to StatsCan.  The market had expected a 0.2% rise and was therefore off by 1.1%.  The biggest “fail” were unsurprisingly vehicles sales and furniture (two sector grea…

Gold Stocks:

I don’t usually write about stocks – I’m an ETF man myself (Go China…), but this morning it was pointed out to me that the main gold stocks (Barrick, Goldcorp and Newmont) were behaving strangely over the past few days --- down while the markets were up.
It seems that gold prices (the metal) continue their unending reach for the star program, with gold flirting around the $1270/oz level – which by the way is near an all time high (in dollar term – in Euro to but not in Yen, go figure).Anyway, the stock prices have been moving rather a lot (go on Google finance to check for yourself).Its important to note that yesterday was a “bit of a rally” on the market – its seems that Mr. Market decided that despite all the bad news, life really, was not that bad after all.But gold got clobbered – no special news, no new views as to the problems with fiat currency.(BTW I have no explanation as to why Gold stocks were off by nearly 6%, while the market was up by 6% since the beginning of September -…

The Dead Zone

In terms of economic news up in the Great White North (better know as Canada) things are quiet, the Chinese are buying more commodities – I guess to build more empty malls and empty homes, but also to sell stuff to those rare animals:  “Americanus Consumtor”, Canada’s balance of payment was again negative (in August), oil are back trading around $77 bbl (off their $72 floor) – which tells you something about the change in global market dynamics.  America and Europe are clearly still broken, but Asia is growing by 8-10% per annum – oil demand is growing by 25% per annum.
Materials as a store of Wealth
An interesting commentary from Michael Pettis (here) on what’s going on in China – he teaches out there and is rather smart fellow.  First and foremost China has a big “inflation” problem it will have to deal with, official price rises are tracking (in August), a 4.8% rise in the cost of living – workers are demanding higher wages revving the whole inflation machine.  One way of reducing in…

Today the Bank of Canada revised its interest rate policy to 1.0%

The Bank of Canada (“BoC”) raised its benchmark rate by another 25 bps this morning to 1.00%. .Interestingly, since the BoC’s first rate hike (June 2010), the Canadian Swap curve has actually flattened. The 3-month CDOR rose by more than 40 bps while the 5-year swap rate declined by more than 80 bps.The Bank of Canada press release highlights:
In the United States, the recovery in private demand is being held back by high unemployment and recent indicators suggest a more muted recovery in the near term.Economic activity in Canada was slightly softer in the second quarter than the Bank had expected.The Bank now expects the economic recovery in Canada to be slightly more gradual than it had projected in its July Monetary Policy Report (MPR), largely reflecting a weaker profile for U.S. activity.Inflation in Canada has been broadly in line with the Bank's expectations and its dynamics are essentially unchanged.Any further red…

Doom and Gloom

The Obama administration has been a real disappointment. Unlike most politicians Obama kept on seeking Republican support for his bills despite them never, ever supporting his agenda. In fact, this had led the American government to pass some of the most long winded and poorly drafted laws in the land – 2,000 page health care law is just insane (a normal bill in Canada will run 75 - 100 pages).
November is coming up, and the right has fomented its troops into a frenzy of lies and half truths about Obama. The economy is a complete disaster and far worse than even the most pessimistic analyst ever anticipated – you can bitch about Goldman’s behavior in arranging sub-prime securitization, but the reality is that all securitization structures failed. They picked the worse, but it would not have mattered.
Obama has failed to pass any social legislation, or even try to pass social legislation. Had Obama forced the hand of congress on iImmigration reform, he would have lost, but the failure co…