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Showing posts from January, 2011

Canada: Kind of boring

Economic news in the great frozen north has been rather boring of late, inflation up a bit, GDP up a bit, tax revenues higher than expected, aside from the strength of the Canadian dollar, life has been rather quiet up here. The reality is that a country as small as Canada (population wise) there is just so much news to report.  Of course the issue here is the structural deficit, which at 1.4% is lower than most of the rest of the OECD, but still persistent.    

Canada's 2011/15 challenge is to transform this structural deficit into a surplus, as it was during the 2000/2007 period.  The current government, looking at electoral favors, is probably inclined to let the current corporate tax rate drop by a few percentage point, but will be reluctant to raise the value added tax, the most efficient way of achieving this goal (don't trust me trust one of Canada's foremost economist here).
Taxing consumption is generally a good idea, there are problems, as the tax rate rises there …

Amusing story of the week

Meet Dr. Zoe D Katze  Ph.D., C.Ht., DAPA.  Some guy got really pissed on how easy it is to get professional qualifications, so he made some efforts to get his pet a PhD.


9.8% budget deficit -- have they no shame?

The U.S. Congressional Budget Office projected yesterday in its Budget and Economic Outlook a federal deficit of $1.48 trillion for 2011, or 9.8% of U.S. GDP — a sizeable increase from their previous forecast of 7% back in August. To put this in historical context, we’re back around the ratios last seen in 1945.
Below is a 2009 breakdown of the US Government's expenditures -- in total the 2009 budget was $3.5 trillion (yeah lots of money).  With the war in Iraq and Afghanistan, the US government's military budget is $1,4 trillion or 40% of the Federal Government's total expenditure...

Looking further down the road, the CBO expects the deficit-to-GDP ratio to decline over the course of the next several years to 7% in 2012 and down to 4.3% in 2013, reducing gradually to average around 3.1% from 2014 to 2021 (all this is based on relatively economic growth forecasts).
Starting the think that the Tea Party maybe onto something.  How long can this last, I have no idea, but lets ju…

What will the Bank of Canada do with 2.4% inflation?

Yesterday, Statics Canada reveled the inflation for Canada in the last month of the year.  The news was not so good, the CPI rose by 2.4% (annualized), the rise in prices was due in no small part to higher gasoline prices (+13% YoY), even core CPI was 1.6%, down from 2.1% last month.

Question is does the BoC need to do anything about this?  CPI inflation has moving higher, and (as can be seen above) away from the BoC's 2% mid range target, but within the scope of the BoC's recent reports.  In short not much, moreover its not clear that much can be done, since the price rise of raw material is exogenous to Canada.  Even if we have a recession in Canada, energy prices will not fall.  Moreover, Canadian PPI (producer price index) have been rising faster than the CPI -- for a year now, which indicates that Canadian companies are unable to pass-on some of the price increase they face, leading to margin compression.
Canada's currency remains above parity, despite oil price falling…

Oil Prices & Oil demand – Changed dynamics

It used to be that an American recession would lead to a fall in natural resource prices, but America’s dominance is no more, thanks in part to the Asian tigers in general and China in particular, which have registered GDP growth of 7-9% per annum.
In 1980, America consumed 17 million barrels of oil per day, today, 30 years later America consumes 19 million barrels per day,(in 2005 it hit 21 million, but since then higher oil prices and a rather deep recession have reduce American demand).America’s great competitor in the 21st century will be China -- the battle for resource has already started, as China looks to resource rich Australia (and Canada), but also forging alliances in Africa and South America; China’s goal is to find the necessary resources to support China’s continued expansion program.
China’s challenge is important; already in 2010 China has “limited” the amount of raw rare-earth minerals available for exports.Three years ago China started a massive nuclear power station …

The power of the internet (Redux)

Monday morning my showerhead misbehaved!No it was not talking back or anything, just water started streaming out from the side of the showerhead.I have some “Mr. Fix it” skills but after about 20 minutes of taking the thing apart (and putting it back together) it was clear that a major failure had occurred.Only solution was to get a new showerhead.
Of course we bought a rather pricy model made by Grohe (I know I had never heard of them either till our plumber advised that this was the thing for us…).So this afternoon, I finally called the plumber (very nice by the way), the receptionist I spoke to immediately told me that she could order the part, but it would be 40% surcharge fee – for their trouble, and I might as well contact their distributor and get the part myself.
Contacted the distributor, not a very pleasant guy, in fact he told me that I had to come in person (despite using a credit card), and because they don’t deal with this company very much it would take a month and there …

5% of MSCI World Index

Its official, Canada has joined the grown-up table.  Canada now accounts for 5% of the MSCI world Index, a function of the strength of Canada's stock market, and currency makes Canada now a major player for investors globally.

OK, enough with the hype, what does it really mean?  It means that major investors (think SW Funds) will be  looking at Canada as a distinct asset (and not just as in its Rest of the World allocation).  The truth is that the Canadian stock market has outperformed the US market by nearly 500 bps, annually for the past 8 of the 9 years.

Stick that in your pipe and smoke it boys!


Yesterday I was having lunch with a pension fund buddy and a new abbreviation sprung up: UCITS.He couldn’t tell me what the abbreviation stood for, but this morning I received an article from UCITS Hedge (a hedge fund publication).First I was able to get the spelling right and to get the wikipedia definition:I stands for:Undertakings for Collective Investments in Transferable Securities is hailed as the “new” break through structure for hedge fund participation.It is seen as a superior product to straight “off shore” structures.
First its not new – it has been around since 1988. Wikipedia had an excellent (although short) review of what UCITS are all about – by the way LuxAlpha was an UCITS (more on that later).In plain English UCITS are intra European border free investment vehicles.Over the past year a perception has emerged that UCITS will provide better transparency and better regulation oversight for hedge fund investors.One article mentioned a Scandinavian pension fund saying tha…

Baltic Dry Index 66% drop from 2009 peak

In November 2009 tthe Baltic Dry Index was printing around 4,220.  today it stands at 1,411.  There is no doubt that the massive increase in bulk carrier over 2011 has had a massive impact, and the coal mine flooding in Australia is also having an impact on the demand for shipping capacity.  Nevertheless a 66% drop in the index also speaks volume as to something else occurring.

For those who may remember in May 2008 the Baltic Dry Index peaked at 11,709.

What that something else may be is another story.

This is unreal

The U.S. government currently spends $160 for every dollar it receives. 
Yep its official:  America is a banana republic with the deficit now exceeding anything ever seen both absolutely and relatively (Deficit prior peak was 120%).  The U.S. federal government borrows nearly 40% of its budget…
The ration of Insider Selling to Insider buying just hit infinity:
Last week there was absolutely no insider buying – not a single share was acquired by a company insider last week (Jan 9 to Jan 14).  Looking back at records this never happened before.  Insider selling has been much greater than insider buying for the past 12 months, but this is a new low (or a new high depending on your point of view -- in fact infinity marks an absolute record...).
GOP announces they will not raise the Federal government’s debt ceiling:
GOP operative continue to insist that the budget be cut as they will not allow America’s debt level to exceed $14.3 trillion.  This is due to pressures from the Tea party.  Only pr…

Capital inflow continues

In November 2010 foreign investors continued their Canadian acquisition binge.This was one of the first month (in 2010) where all three segment (Stock, bonds & money market) saw positive inflow.Then again, Canada is the flavor of the month.Inflation is (more or less) under control [CPI at 2.0% and core CPI at 1.4%], the currency is strong, the government seems to have a plan, and employment is rising.

In fact, in US dollar terms, the Canadian stock market has outperform the U.S. markets in 8 of the past 9 years (the exception was 2007).This out performance exceeds 500 bps each year – which is enormous.Canadians realized this, and have been reducing their foreign equity holdings (a recurrent theme), and shifting towards government bonds.On another note, as of this morning the gap between the yield on the US and Canadian Treasure bonds in the 10 and 30 years stands at -5bps and -88bps, levels never seen – a clear indication that not all AAA rated government bonds are viewed alike by …

Canada’s declining merchandise trade deficit

In October 2010, Canada recorded a merchandise trade deficit of $1.5 billion, by November this has shrunk to $81 million.Imports declined by 3.2% (most of this volume, ¼ of the decline was price), with the single largest contribution being energy which dipped 15.1% (Strange – more on that later).Import volumes fell 2.4% and prices down 0.8%, decreased for a fourth consecutive month.Energy products and machinery and equipment were the main factors behind the decrease in the value of imports. On the other side of the equation, exports rose by 0.8%

The big picture items: Canada’s trade surplus with the U.S. nearly doubled from $1.7 to $3 billion – mainly because of a drop off in Canadian vehicle imports from the U.S. (11.5% decline).Vehicle exports have been trending down since may 2010, falling a further 10% in Novermber.Canada’s trade deficit with the rest of the world shrank marginally to $3.1 billionEnergy imports dropped by 15% and export of crude rose by 12.5% (Nat Gas down 17%).The …

Canada as an emerging economy

On Monday, Merrill Lynch investor conference made interesting comment about Canada:It behaves more like an emerging than a developed economy.Although it was not talking of corruption or weak administrative institutions or laws, rather it was talking about Canada as a “capital destination” with the same problems (and opportunities) that emerging economies face.  In ML's universe Canada faces stronger inflation pressures than does America, but nowhere the same level as the emerging economies.
Like all analogies, comparing Canada to an emerging economy can be carried to far, but ML did make a few valid points, insomuch that the tools available to the central banks are muted because of the foreign investors huge appetite for Canadian 30 year sovereign debt (pricing at an historically unprecedented 88 bps discount to similar T-bonds issued by the U.S. government).I mentioned in earlier posts that the BoC had four main tools at its disposal (see here), but that the only tool currently av…

Interesting stats: U.S. house prices have now decline by a greater percentage than during the great depression

This morning Zillow Inc. published numbers that shows that over the past 53 months average house prices in the U.S. have dropped by 26%, thereby beating the 1929-1933 contraction of 25.9% -- of course the numbers for the 1929-33 are based on very fragmented data, but with U6 unemployment around 16%, and house price down by more than 1/4 from their peak, this creates all kinds of pressures on America.

Of course, the pain has been more muted with America providing unemployment and social security benefits that make the pain of unemployment slightly more bearable.  Another interesting statistic:  income inequality in the U.S. is today about the same as it was during the great depression.

The challenge for America is that extraordinary economic growth lays in its past and not its future.  Some are worried about the US dollar going forward.  As a Canadian I am more worried about our primary export market  falling off the cliff.  But that's me!

Canadian business conditions Q1/2011

The Bank of Canada’s first 2011 quarterly survey of expected business condition was published on Monday.Canadian businesses maintain their positive outlook for the next 12 months. There are two main currents:

First, Canadian exporters are seeing modest growth and increased competition, partly due to the higher Canadian dollar (trading above parity) and also moderate demand (Canada’s largest trading partner is the U.S. which accounts for ¾ of all Canadian exports.Second natural resource producers are seeing the strong price increase in most commodity prices as positive aspects, and these remain extremely optimistic (interesting challenge for the Bank of Canada).
The survey shows that most companies feel little additional capacity pressures (unchanged from the past two surveys Q3 & Q4 2010). All firms expect better pricing power for their production – but also higher input prices.However, there is a realization that competition will seriously limit the ability of company to fully pass…

Borrowing conditions continue to improve

The senior loan officer survey for the 4th quarter of 2010 was published Monday.  Focusing on on changes to business-lending practices in the fourth quarter of 2010.  The survey results point to an overall easing in business lending conditions, both in terms of pricing and non-price aspects of business lending eased.

Moreover, the improvement is spread across all borrower categories: Corporate borrowers eased for the sixth consecutive quarter.Commercial borrowers, the survey points to a material net easing in both price and non-price conditions for the second consecutive quarter.Small businesses, overall lending conditions eased during the fourth quarter, after remaining unchanged during the third quarter.In all cases increased competition among lenders appears to be the primary reason for better pricing and conditions. Finally, demand has also been increasing, largely driven by corporate borrowers (M&A activity).  Bottom line Canadian firms are borrowing to fuel expectation of gro…

Why the Baltic Dry Index is dropping like stone

I mentioned this last year that the Baltic Dry Index was no longer a reliable index for trade of raw material.  This morning Zero Hedge indicated that 200 additional bulk carriers will enter into service in 2011, or an increase of 18% of the fleet, another number, put end to end these vessels would stretch for 70 KM.
The upside of this of course are bulk carrier users who will have access to the cheapest shipping rates in decades...

New construction permits down 11.2%: Is this important?

November saw an 11.2% contraction in building permits, the second monthly decline in a row.BC and Ontario with the source of the contraction, but the news while less dire elsewhere was still negative in every province and segments (institutional, commercial, multi unit and single unit homes).Not entirely surprising following 2009/10 Canadian construction boom, eventually supply had to slack to match demand, which in both (a coincidence, maybe not) British Columbia and Ontario has fallen off due to rather excessive growth in prices over the past two years.
Construction which was a net contributor in both 2009 and 2010 will probably not provide any “growth” to the GDP; however, it is important to note that construction (all types) account for less than 5% of Canada’s GDP, so any contraction will have only a very limited impact on the overall GDP growth for 2011.
The question remains what is driving the Canadian real estate market?Every night Canadians are exposed to the disaster that is t…


Never saw that coming, Canada created 22,000 jobs in December, and the vast majority are permanent (81%) in the manufacturing segment! These are not “Christmas related jobs, they are real employment. In a sense, this increase is not entirely surprising, Canadian companies have been investing massively in machines and tool in 2010, once these are installed employees have to be hired to operate these machines. It was believed that this uptick in employment would only occur in the first quarter of 2011 or even the second quarter, instead it has begun earlier than anticipated. It could be that because there is tremendous slack capacity in the US and Europe (where these machine tools were acquired) that installation was quicker than anticipated. At any rate the employment picture for Canada in December was excellent

Highlights from StatsCan:

Employment up for the second consecutive month in December, with an increase of 22,000. Full-time employment was up 38,000 in December, the fourth…


Some economic data out for Canada today, but nothing really worth mentioning, the IPPI (Producer prices) are up 2.1% for the year as a whole, down from 2.4% in October, but the bulk of the increase has been in energy prices – who hasn’t noticed the prices at the pump recently? And metals. The rest has been relatively quiet, and somewhat lower than the CPI…

More interesting is the differential in Canada/USA bond rates – the Canadian 10 year Treasury bill is currently 125 bps lower than its American counterpart, despite short rates being 100 bps higher in Canada than in the US. There are two principal reasons:

Canada benefits from a healthy energy and metal export market – not the largest exporter but doing well (grain prices are also a historical high, and Canada is one of the largest grain exporters in the world).

Second, and probably more important, Canada is the only OECD country that has a plan to reduce government deficits, is not using competitive devaluations (CAD trades a …