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 inflation is to increase interest rates, but that has severe for China’s economy – the dominant Chinese companies today operate as break even operations.  Not really my purview here, but most borrowing today in China are from SOE (State owned enterprises) who generate no profits – increase in interest rates could be problematic.  However, my topic here is Canada, what if, as Prof. Pettis posits:  the Chinese tiered of fiat money are buying raw material as a store of value; the implication is that the “real” trade balance is much worse than the numbers suggest – because the Chinese are buying goods as a store of value.  His contention is that trade tensions are certain to rise – as a trading nation this has serious implications for Canada, then again we export raw material, its not like people have much of a choice.

Clearly, Canada benefits from higher raw material prices.  Some (based on sheer desire) are talking about gold at $3,000 an ounce – maybe but my guess is that at $3,000 an ounce the amount of counterfeit gold is bound to rise – Two months ago, the UAE’s central bank indicated that they no longer test “African sourced gold” as they expect 100% counterfeit, and that’s for gold at $1,200/oz.  About a month ago the CAD was trading around 1.07 (to the dollar), it’s now around 1.03 – especially after the BoC’s 0.25% increase in the short term interest rates.  However, it must be pointed out that the long end of the Canadian interest rates curve has flattened over the past few months.  A reflection of one factor:  inflation expectations have ratcheted down dramatically.  Short term movement in the CAD are to be expected going forward, it will gyrate between parity and 1.07 for the next few months. 

The global recession was very tame in Canada, employment numbers for August were positive, which is good, but private sector jobs growth was lackluster:  In the first half of 2010, Canada was creating 50,000 jobs a month, whereas in July and August the average is around 15,000 – the economy seems to be decelerating, which supports my thesis of 2.5% GDP growth in 2011 (not great but OK).

Green Rant:

America politicians are in Canada this week to visit the Atabasca oil sands region, to decide if they will allow the building of a second oil pipeline to the US.  The green movement is against America buying any “oil sands” generated oil because of the excessive pollution it creates – bottom line oil is fungible, if the American chooses not to buy Canadian oil, others will, this will weaken our political and economic alliance.  Under the terms of the NAFTA agreement, Canada has agreed to sell a specific percentage of its oil production to Americans, this clause would have to be revised (Canada produces very little natural oil – synthetic oil and gas is our core business – what natural oil we produce is heavy and requires a great deal of processing).  My educated guess is that if the Americans turn the project down (its an election year – the temptation will be great to do some grand standing) then Canada will probably begin building a new pipeline to the West coast…

An interesting note, China recently imposed export quotas on rare minerals, the Chinese’s position is that the extraction process is too polluting and therefore production will be reserved for Chinese companies (it is true that China has a terrible pollution problem).  This news is amusing because most of these metals used to be mined in America until the mid 80s when environmental pressures closed all American mines.  The funny thing is that to avoid the highly restrictive American pollution rules producers moved their production to a location which places little emphasis on pollution control (if any value at all – 75% of Chinese drink contaminated water) – therefore the green movement created more pollution (granted in China instead of America) – the law of unintended consequences.  More serious is the security implication that such quotas create.  Last year, Argentina imposed quota on the export of beef and cereal, this summer Russia imposed (for goodish reasons) a cap on exports of cereals after the terrible firestorms they suffered.  These are early warnings of a global economy that is coming to grips with shortage (real or perceived) and taking action.   It could be stated that the era of trade expansion is coming to an end – protectionism may be rearing its ugly little head, and as Prof Pettis said last week, everyone is counting on America’s trade deficit to continue (even to grow) to support their economic correction process.

That may not work for the Americans