Fun Facts

• The European bank stress test assumed a 1% economic contraction, the American bank stress test assumed a 4% contraction.  If the European stress test had used 2% contraction instead of 1%, the amount of additional equity required by European banks jumps from €4.5 billion to €24 billion.

• European banks need to refinance senior unsecured debt to the tune of €3.3 trillion, about three times as much as US banks, which stand at USD1.3 trillion.

• Greek trucker are entering their 4^th day of strike, oil foodstuffs are becoming scarce.  Government has implemented War measures to no effect (yet).

• China’s second largest steel producers increased capacity by 26% in 2010 to 45 million tons, number one producer’s capacity stands at 47 million tons.  The entire US steel production capacity is 16 million tons.

• America has 140 million homes 19 million house for sale, about 8 million empty homes.  China has 65 million empty homes (on purpose) being held as a hedge against inflation.

• America has 80 million baby boomers that are beginning to retire at a rate of 10,000 per day, Generation X includes 65 million who are much poorer then their parents.  The implications for house price are important, as it will require lower home prices going forward.  Housing, as an investment strategy is no longer a sound idea.

What do these things mean for Canada, its economic development and growth?  One certain fact is that problems in Southern Europe have not been solved; they’ve just been on holidays for a few weeks.  Greece is now entering a difficult stage where the early “victims” of the austerity measures will set the tone for what happens next (think Thatcher’s showdown with the miners in the early 80s).  A banking shock could easily occur in Europe – a failure of Greece would certainly impact the European banks’ balance sheet.  Moreover, any sign of weakness will have a huge impact on the banks ability to refinance their long term debts.  The implication for banks is that they will either have to borrow from the ECB, or reduce loans outstanding.  I would suggest that both avenues will be explored.  Banks will increase their lending standards, which will lead to a recession, which will cause further bank losses.

On this side of the pond, the economy is clearly having a hard time.  Despite quantitative easing, massive government surplus and very low interest rates, the economy is sickly, especially after the Q1/Q2 inventory boost is now over, virtually every economic indicator (except for corporate profits) is indicting a slowing economy.  The impact on China is certain to force the government there to undertake a second round of stimulus.