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The state of democracy in the OECD

Most of us learned that democratic governments have three separate but equal branches; the legislative, the executive and the judiciary.  Right now we are seeing a major shift in the importance and relevance of each branch.  First off, the legislative branch is getting its ass kicked (we are excluding the US for now from the discussion).  Here in Canada the role of the legislative has never been weaker, in part because of the central role undertaken by the "party" the reality on the ground is that backbenchers (those who's party is the government but are not part of the executive) no longer have any say, and even don't have the right to ask questions or propose new legislation (which was often done in the past).  
Prorogation -- a strange device that fundamentally changed the relationship between the executive branch and the legislative branch, has further weakened our Canadian democratic process.   In effect, the executive branch was able to shut down the legislati…

Inflation is just not playing its part

This is bad, not "really bad like the Dutch housing crisis" but bad insofar as the Bank of Canada has been trying for a while now to get inflation back on track into the 2.0% and 3% range that has been the BoC's policy for the past few years.
As Mark Carney prepares to leave for Greener pasture (Bank of England) he must be disappointed.  Canada's economy is slowing, as demand for primary goods falters, inflation is well below the BoC's traget level, and Canada remains attached to the hipe to the US economy.   If the latest figures from Caterpillar (NYSE:CAT) are to be believed the global economy's expansion is faltering.  Demand for Steel, Aluminum, Copper (and hence demand for things that move the raw material that make-up those products) is faltering.  CAT is particularly gloomy with global GDP growth at 2.5% and Chinese growth at 8% -- funny enough most economists have GDP growth in China at 7% for 2013/14...
Anyway back to Canada
Pension Manager balk at B…

Trudeau as a credible prime Minister

Justin Trudeau son of Pierre Elliot Trudeau -- a famous and outspoken past prime minister was "anointed" as the leader of the Federal Liberal Party.  I say anointed because although there was an election he won with nearly 80% of the ballots cast -- in the first round.  Today we are at least two years away from a Federal election, and the election of Trudeau as the leader of the Federal Liberal Party is the "buzz" across the nation (to be fair its mostly the MSM talking to itself out of sheer boredom) .  His father was famous for bringing Canada's constitution back from Great Britain, and for introducing a Bill of Rights (to the ever damnation of the Quebec separatists).  So a 30 year old guy follows in the footstep of his father, many have been there before
Could Trudeau be a good prime minister?  Who knows, guys with spectacular resumé kind of sucked and some with ordinary achievement records were great.  Reading biographies of political leaders it is clear …

Inflation is back -- maybe, hopefully, it could still happen

So earlier this week StatsCan published the IPPI; basically the price of industrial production and the RMPI that shows the rise in cost of raw materials.  Good news if you are from the Bank of Canada -- that has been desperate to get inflation back on track of the 2% to 3% zone.  IPPI and RMPI are both up after having been flat for months.



Both charts show one thing -- which is not especially good, all the price increase in industrial production comes from raw material costs -- none of it from general price inflation -- in an economy that is 60% services -- that's a reflection of a weak economy.  There is no pricing power.
Canada's policy makers have run out (like the rest of the world) of macro-economic tools to affect the economy.  Interest rates are low, velocity of money is not rising (which is different than falling) and the fiscal tool shed is empty -- mainly because the government will not consider an expansionary (and deficit growing budget) so that they can achieve th…

You go away for a few days!!!

So North Korea has decided that there's isn't enough tention in the world, that we need to push that button a little harder.  You know that things are bad when the US president will not talk about it!  The fact that B2 bombers are in Korea tells you something.  What is missing from all this is a sense of what is going on in the hermit kingdom?  Is the new president playing is grandfather's game and if so why moving so fast to the full confrontation mode.
In other news the French government is modifying its new income tax laws so that the courts can approve, but bottom line is that income in excess of Euro 1 million will be effectively confiscated by the state -- taxed at 75%.  Of course the law of unintended consequence applies here -- French footballers who earn considerably more than Euro 1 million are threatening to leave the country.
In other news (really all that stuff was an excuse to talk Canadian stuff) it looks like TansCanada pipeline is confident of getting app…

What does Canadian manufacturing say?

Canadian manufacturing has been in a funk for the past 4 months (well at least till January 2013).  The numbers are just not that great.

Sales are off both in 2002 dollars and actual dollars


Canadian manufacturing has been depressed; and its across the board although transport equipment sales were off their game (we are talking aerospace here -- Bombardier).  Canada is a small economy and aircraft sales are lumpy, sale in the aerospace sector were off 20% between December and January -- normal variation, still overall sales are way off.
Inventories are rising too
On a geographical basis Ontario and Quebec were the worse hit; Quebec obviously is the Aerospace sector (although they have an important presence in Ontario) but the Ontario has seen steep decline in vehicle sales.  Rumors of "channel stuffing" abound in the car sector (see here).  From vast Audi depot  to the same story for American made vehicle; then again, wages are stagnant in the US, and Median wages are fallin…

Random thoughts on Cyprus and Quebec

So a deal was done on Cyprus; depositors with less than Euro 100,000 will see no drop in the value of their deposits; those with deposits in excess of Euro 100,000 watch out!  Strict capital control will be impose (by Cyprus) that will mean that despite keeping the Euro, Cyprus is now isolated from the rest of the Union.  Capital control essentially means the end of the Euro experiment in Cyprus, don't know how the rest of the game will work, but certainly no one will participate in Cypriot bond issues -- especially if the money is frozen in the country.

What happens next, what about Spain, Greece? I just don't know, maybe Cyprus was a special case --turns out that according to the Dutch minister of finance, bank bailout is over in Europe! but it all depends on the next few months, if Cyprus will ends up in a depression then they will not be the it will nevertheless be the blueprint for southern Europe, if they recover quickly I just don't know.  One thing for sure, the E…

Cyprus -- Black Swan event?

Was Cyprus the black swan event that everyone was waiting for late in 2012?  I don't know, but it has all the hallmark of a geopolitical disaster.  First, it puts in play the whole idea that deposits for less than $100k are guaranteed.  Even if this agreement between Cyprus' new government and the IMF/EU fails, the gate has been opened to employ this solution elsewhere.   Europe's technocrats have decided that your money is really theirs to play with, and dispose as they see fit. Watch out Greece -- your government will not play ball, we will get our cash out of your savings accounts...
"the Russians are coming!  the Russians are coming!" would be the best statement I could make on the events of the past 72 hours.  It is more than likely that Europe has just sold Cyprus to the Russians (giving them the ability to build a massive base on the island) next door to the middle east for $20 billion.  Not only is Europe now sucking on the teat of Russian Gas to an unpr…

China -- the export machine continues

From the Telegraph yesterday morning:
China's trade figures released this morning are shocking. They tell us that China is still flooding the world with excess goods, and is once again a net drain on global demand. As you may have seen, Chinese exports surged 22pc in February. Imports fell 15pc. This is exactly what pessimists feared. For all the talk of a great shift by China away from export-led growth to internal demand, the reality is that the Politburo is still propping up the same old system, still shovelling subsidies to loss-making firms and state behemoths to keeps factories open. Investment is still 49pc of GDP. Consumption is still 36pc. China is still a massively deformed economy, and the global effects of its imbalances are getting bigger every year as the economy grows at far higher rates than the West. For all those who insist that China is now moving towards a consumption society I say BullShit!  The immediate reality of China's government is that they don't wa…

Employment in Canada

Well both the US and Canada published their new job numbers for January, while the number in the US at 236k was respectable Canada's number at 51k was a blow out.  Amazingly, this is as if the US had created 500k jobs in January -- so it gives a sense of proportion.

Canadian unemployment trend



The big winners were Ontario +30k and British Columbia +20k.  The big looser was my province, Quebec, that saw virtually no growth.  No point in "pointing fingers" the current government's policies (especially on language) is doing a great job at pissing off people that would/could create jobs here.  Its not that they are "socialists" is that they come across has having only electoral priorities.  It may not work out for them.

However, for Canada overall the news is excellent   One of my new favorite blogs Sober Look has an excellent piece about Canada -- interesting though process, some of the analysis is incorrect, but still generally valide.   His overall point is …

60 minutes, China's Property Bubble & Reality

Although I didn't record it, last Sunday night 60 minutes had a bit on the Chinese property bubble that makes your head spin.  I first became aware of the "real estate bubble" in China 5 years ago, but again market phenomena can outlast almost any prediction.  A convergence of events make this bubble a necessity and a tragedy.
A necessity because although the median Chinese is poor, there is a growing middle class, and in a country of 1.2 billion the law of large numbers applies.  First, most of the properties have been bought.  Developer need the capital from investors to ensure that they can afford to build their projects (a fundamental aspect of the Chinese financial system).  These apartments are kept empty, because in China a "used" apartment is not worth as much as a new apartment.  
Second, Chinese investors have limited scope for deploying capital (as was explained in the report) no foreign investments allowed, limited or no return on bank investments,…

Dinner conversation and Ignorance

Last night when to a birthday party, sitting across the table from me was this youngish Chinese women.  Smart and well spoken, she speaks English, French, Mandarin and Cantonese!  slightly better than most Quebecers!

Anyway, this women was making the point, loudly in fact, that China's policy was the right one, to promote exports and restrict imports, the only problem in here mind was that China was accumulating too many dollars.

As an economist, and a dinner guest, how to do you reply to this idiotic statement.  Well, turns out it rather easy (hint:  after our conversation she gave e dirty looks and stopped talking to me -- which was actually a blessing).  Anyway, I told here that the accumulation of dollars (or US government debt -- the same thing) was a direct consequence of this policy of supporting exports surplus -- that by definition if your exports are greater than your imports you will accumulate dollars (that's what probably pissed here off the most).  She had not m…

Inflation, inflation here is inflation!

Ok so the headline is a total lie, there is no inflation as far as the eye can see.  On Monday StatsCan published the data on Canadian inflation -- the trend is deceleration since early 2011.


Bottom line with or without Gasoline (the light blue line) there is no real inflation in Canada.  The greatest price increases over the past year (all below 1.5%) are for food and alcohol.  That's below the Bank of Canada's inflation target range.  It also means that real interest rates are positive, making economic policy slightly more restrictive.
2013's dilemma for Canada has to be China's slowing economy.   It was always ridiculous to think that China could continue to grow at 9-11% rate when Europe and North America (its primary markets) are facing stagnation.  Many commentators imply that China can change its economic make up -- moving from an export orientated economy to one of consumption, the reality is that Chinese economic policy continues to favor investments:  None o…

Sequestration, Italy and Canada

Last night I watched Man of the Year,  a Robin William movie about a comedian who is elected President of the United States of America... now imagine that this happened in real life, it did, but in Italy not in America.  I'm sure that the Beppe Grillo is a nice guy, but he's Italy's answer to Robin William (of course he's not president but you get the analogy -- what we have in Italy is gridlock).  
The first thing is that the voters reaction to Monti and his chums should not have been surprising -- its always been the failure of democracy, that you can avoid the hard choices if you lie!  The reality is that Italie (and a good chunk of Europe) are in deep trouble, that since 2011 the ECB has been buying off the market with a backstop debt buying program that has reduced the urgency to take action at the supernational level (where debt write-offs take place) and keep the focus on cutting wages and salaries at home (creating wage deflation) -- so that pension funds, ban…

Spain & Bankia

Euro 12.5 billion provision!

Now that's serious money , and its the kind of money that appears when banks become honest broker and sell their distressed assets for what they are worth today.  You see the Euro 12.5 billion hit (aka the largest bank provision, like for ever) is the result of Bankia selling its bad assets to a "bad bank" for what they are really worth.  In fact, this is usually done in a non-distressed context -- the buyer (really a government entity) looks at a reasonable treatment for the assets -- this is not a shark sale, but a friendly one where the buyer is not looking at making a killing just get its money (and costs) back.

On Wednesday I wrote about Spain & Greece, I didn't know that Martin Wolf from the FT had done a long piece on how things are getting really bad in Greece (we are talking social breakdown here).  I had no idea, although some inkling, that Greek hospital no longer have medicine for their patients; its like hospitals in sub…

Canadian Real Estate market: Will it crash?

Ok, so the Teranet-National Bank House Price index is out this AM, and as we say in physiques, its deceleration all around.  Yep, fancy that the BoC aggressive stance on new mortgage has finally paid off -- maybe.

Ok so the two really crazy real estate markets in Canada are Vancouver and Toronto (many other places in Canada are in the "crazy" zone but not nearly as bad).  Vancouver has been in free fall!  Well that's what you get when you read the press, in fact over the past 12 months house prices have declined by 2.5% -- that's after a 100% increase over the past decade -- so yes a bit of a correction.  According to the press, Toronto is also in free fall  and in a correction; so far total drop is 0.37% (really not that big a correction).  Now it is true that sales are dramatically lower, hence the bathed-breath headlines because in both markets sales are off by nearly 1/3 which is not inconsequent when you are an real estate agent! It was also the first marker tha…

Was I wrong about Greece, Spain and Portugal?

Two years ago now I stated that Greece and Spain were in a world of pain and about to default...boy was I wrong.  The problem with "short" views (this company is going bust next week) is that the market can fool you and things can last a lot longer than you can hold the position.

First question:  Was my position wrong?  Well since neither Greece or Spain have gone under clearly my position was wrong.  However, and this is a biggy, I was wrong in timing but maybe not in overall consequence.

For Greece the pain of restructuring is evident everywhere, yes bond rates have become tighter -- that's more a reflection of Europe's decision to do "everything in its power to keep Greece within the EU".  My problem was underestimating the willingness of politicians to spend other people's money to support their ideals -- because at the end that's the fundamental issue here.  The politicians in place (and the bureaucrats)  are willing to spend the future of Germ…

The curse of misused antibiotics

There have been some serious outbreaks of antibiotic resistant deseases across the world (and even here in Canada), for years doctors and health officials have been clamouring for people to fully use their antibiotic and for doctors to reduce the number of prescriptions... Well one of the early 20th century most debilitating (and contagious) deseases -- Tuberculosis is on the march again.

It appeared in South Africa where a new strain of TB has emerged that is untreatable even with the most modern forms of antibiotics.  See here

The Daily Mail‘s health site reports. They say doctors are warning “the world is on the brink of an outbreak of a deadly and ‘virtually untreatable’ strain of drug resistant tuberculosis unless immediate action is taken.” Fears of a repeat of the 1980s outbreak in New York City that killed 90% of the people who contracted the TB strain are being cited by those urging action in poorer countries where the disease is spiralling out of control.Dr Uvistra Naidoo, w…

Reversing Pipeline to Eastern Canada

Ok, so oil prices are complicated, first because although oil is fungible (its not really) it behaves a little like natural gas -- which has a more "local" pricing behaviour.  In North America, virtually all oil goes via Cushing in Oklahoma -- for those not in the "know" Oklahoma is one of those squarish states, and  it also has the largest concentration of oil storage facility; if all roads lead to Rome, then all oil pipeline lead to Cushing.

The problem is that there is (again) a shortage of storage capacity, it happens from time to time, mostly during the autumn as stocking rises to meet the winter demand.  This year the storage shortfall is very early, which has lead to a wide differential in price between Brent Crude and Cushing WTI crude -- it was always around $10 to $15 a barrel, but has been increasing as WTI crude prices are dropping.  The difference arises for several reasons; first, Brent is lighter and sweeter -- easier to refine, but also secondly, de…

Financing the political process

Up here in Quebec there's been all kind of disclosure at a specially created commission (Commission Charboneau) on the goings on in the province as to how infrastructure projects were used to funnel money to political parties.

Hearing the outcry in the rest of the country you would thing that Quebec is the only place (like really!) where these kind of games takes place -- you can bet serious money that this is not the case.  The problem here is that the small number of contractors available (Quebec is a small place), made it easy to create a merry-go-round of briberies that were channelled to certain political parties.

So far the dirt has been at the municipal level -- projects are numerous and generally small, elected officials have few ressources, they are not that smart and the job is essentially about garbage collection and cleaning the streets -- not very exiting.   The process is likely to move to the "provincial" level soon, although the game there is more compli…

One week is a long time!

Is this normal ship noise or are we sinking?

I wake up this morning and realize that things are going south (in a modest way).  In Europe, the Spanish banks admitted further substantial losses on their real estate portfolios (write down is up to 40%) -- with the central bank stating that the banks will need more tier one capital (that's the expensive stuff), a Dutch bank was taken over by the government -- shareholders will be wiped out, depositors guaranteed to Euro 100k.

In 'merica unemployment numbers are not good, and consumer sentiments are negative (while the market sentiment is positive -- go figure).  The SEC is getting tough on banks, turns out a small American bank didn't follow Fannie Mae's guidelines, and that criminal prosecution will be certain to be filed, this is the best bit, the bank with $250 MM in assets (no typo here) arranged some asset back loans -- investors are not exactly complaining, the portfolio has a default rate of 0.5% (the usual defaul…

RIM & RIMM

Ok so RIM finally is ready to release the new version of the Blackberry -- incidentally they have changed their name to Blackberry, no more of this Research in Motion crap.  I fell in love with BB in 1999 when they first introduced two way pagers -- they were the rage in NY's financial district.  Then I got my first BB in 2003 -- it was a pure email machine but you could see how quickly it became ubiquitous, for a simple reason, it worked well.

I got my first "Blueberry" a few years later, an excellent machine with a phone included.  It was again a tool as good as the Iphone (or Samsung) machine is in providing something you didn't even know you needed!

Then the next 7 years were hell for BB, in fact, aside from new machines (when you are a heavy user they don't last very long), very little improved.  The internet access program was lacklustre  adding new programs was difficult, and for investors it was the "Nortel story all over again".

BTW for those …

All is well in the world!

At least that's what I heard at a recent (thursday) investor conference -- I was shocked to hear that Europe was in year 6 of a 10 year de-leveraging cycle, there is no evidence of any deleveraging in Europe.  Of course house prices have crashed in certain countries, but this is not deleveraging insofar as the debt has not be repaid, it is a net loss for the economies (Spain, Greece), as these home stand empty today.
I was surprised how sanguine there were about the US (but not Canada), how things in the US were looking up, house price finally "rising" (they have in fact risen by nearly 9% since September).  However, interest rates are still very very low (lower than inflation), median income (not average) is not rising, speaking volume about the lack of purchasing power by the middle class.  
The view of Europe was that things are getting better -- they are particularly turned on by the UK -- which is strange considering the difficulties of the the Cameron government. …

I'm back

After 9 months of quiet I've decided to post again.  My focus remains Canadian, but of course now I can be less cautious about my identity, since I no longer work in a big-ish bank... the reason for posting was to provide my non-canadian clients some insight into "all things Canadian"  leaving banking, thank god that's over, means that my natural audience had disappeared -- I still have some thoughts that I want to share.

Right now I've got a few bees in my bonnet:

(1) Why are CEO & senior management of large companies receiving compensation out of proportion with their value added [short answer is that they can!].

(2)  Why are companies borrowing so that they can pay large dividends [this is illegal in the UK where I received most of my training]

(3)  Why are union so inefficient in protecting "real rights"  [I'm thinking of you Air Canada]

I will address these issues in upcoming blogs, I need to make sure that I have more than just anecdotal e…