Monday, January 31, 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 is increased incentive for certain services to flip to the "black market", it is also regressive, since poorer people consume a greater percentage of their revenues than rich people.  Nevertheless, for an economy such as Canada, where the savings rate is marginal at best, incentive to save should be promoted.

In fact, studies show conclusively that VAT are one of the most effective and fair tax since all are treated equally are that distortions are minimal.  For the Conservative raising VAT after having reduced int two years ago would seem to be a walk back on their electoral promises, moreover, in the late '90s the Conservative were elected on a platform of removing the value added taxes that the Liberal administration had implemented...

That's Canada's challenge.  Ont he bight side we are not in America, where Congress will eventually have to figure out how to reduce the federal government's 40% deficit, especially since increasing taxes is off the table, but that's another story.

Thursday, January 27, 2011

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.

How a cat named Zoe earned several advanced degrees and became a psychotherapist


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 just say that Congress becomes serious about cutting.  Medicare /  Social Security / Defense / interest is equal to 77% of the budget.  Even if every other penny is cut, there would still be a huge deficit, because among the other expenses are "mandatory expenses, which is actually mostly Military expenses for the two wars that America wages currently.  

Whatever the Tea Party apologist say, the reality is that medicare, Defense will have to suffer very deep cuts.  You cannot cut social security since it has its own tax base... 

Wednesday, January 26, 2011

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 back to the $85/barrel range -- a strong currency acts as a growth dampening mechanism.  Maybe the BoC's best bet are the Canadian federal government's fiscal tools.  Banks are already cautious, in fact bank lending conditions only recently started easing (following the 2008/09 crisis), banks are under leveraged (excess capital), and short term interest rates are in the one year 75bps and two years 140 bps than in the U.S.  Moreover, the recent reduction in the term of Canadian mortgage (from 35 to 30 years) and the reduction in LTV on which banks can lend will have a dampening effect on Canadian consumption.

Since the BoC expected this small spike and have already seen many tightening measures implemented, it will  just have to wait for these moves to take effect.  One thing for sure, Canadian economic growth remains driven by demand and not quantitative easing, so the economy is fundamentally sound.

Turns out, there's nothing to see here!

Tuesday, January 25, 2011

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 building program:  a 10 fold increase in electricity production to 80GWe by 2020 and plans for up to 400 GWe by 2050.  So back to our oil story, while Americans were consuming 17 million barrels per day in 1980, the Chinese were consuming 2 million barrels per day.  This is where the story gets interesting; last year China consumed 8 million barrels per day, since 1995 demand growth has been around 7% p.a.

The story doesn’t end there, BP predicts that China’s oil consumption will continue to rise exponentially, as Chinese become richer they will require more energy.  BP estimates that Chinese oil demand will rise to 13 million barrels by 2015 and 19 million barrels by 2020 (equivalent to what America consumes today). 

China’s growth is slated to exceed 7% p.a. as far as they eye can see -- despite the high increase in hydro electric dams, nuclear power stations demand for oil in China is expected to grow exponentially.  Limited supply growth, near demand supply equilibrium, and demand inelasticity (at least in the short term) has to result in higher oil prices. 

Historically oil price shocks have caused recessions (obviously since it implies massive wealth redistribution).  However, if a weak recovery for America results in oil demand rising by slightly more than 2% (in 2010), than an exponential demand by China is not going to lead to a price contraction, rather it will result in American Stagflation, cause by resource price increases.

The oil production reality shows limited scope for production increases despite high oil prices over the past 18 months production has not increased dramatically.  I would suggest that long term oil prices have only one possible direction, barring some kind of major economic disaster in some part of the world, which is up. The world should expect oil prices of around $95/barrel (average over the year) within the next 2 to 4 years. 

The implication for Canada is both good and bad; first if America faces a new recession, Canada’s core export market will suffer, but a core component of Canada’s exports are energy and material which can easily find new export markets.  The good is that the nature of Canada’s economy should protect it from most of the oil price increase.  Canadian economists are increasingly talking of the Canadian dollar trading around 1.1 to the US Dollar.

We shall see

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 would be a surcharge.  Total cost $512.65 for the showerhead alone. 

I told him that I would see him tomorrow, but then went on the internet, and I found the exact same showerhead for $145.23, with shipping charges and taxes the total will be $199.72 and it will be delivered next Monday.

So if I had bought the part from my plumber it would have cost almost $700 dollars (worse case scenario – and my plumber suggested that I contact the distributor anyway), instead I purchased a replacement for $199.72, a 70% discount.  There are two morals to this story:  (1) An honest plumber saved me a lot of money, and (2) in the age of the internet, distributors are redundant.

I just love the internet

Friday, January 21, 2011

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!

Thursday, January 20, 2011


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 that asset managers are now less concerned with returns than with eventually getting their money returned!

UCITS vehicle have the economy of scale to do the proper monitoring of a hedge fund’s position (especially mark to market activity) and strategy drift.  It sounds like a good idea when you are investing in a hedge fund; there are two main problems with this idea. First, liquidity when you buy and when you sell are two different things – ask anyone playing on the pink sheets, Second if you are assuming supervision, you are assuming that those running the vehicle understand (or care) about the underlying positions taken by the hedge fund manager, third is the ability of the sponsor to add another level of fees. Fourth , most hedge funds have redemption restrictions (e.g. no more than 10% of the fund can be redeemed every year) and many hedge fund have side pocket of highly illiquid investments, which may take years to be liquidated.  So the monitoring assumption is a difficult one to prove (or execute for that matter). Finally, earlier I mentioned LuxAlpha which was an UCITS, in fact it was one of Madoffs Europe master feeder vehicle….

Part of this is a rant, in fact an institutional investor cannot delegate its risk management activity to a third party, secondly, the inefficiency in having such interposed third party means that the investors have no direct line of conversation with the hedge fund – that cannot be good for investors.  BTW my pension fund buddy had the same view, that this was mostly another gimmick to extract value (by the financial community) for the institutional investor base. The attractiveness of such structure to an institutional investor is that it give the risk manager the ability of off loading his risk supervision role (and obligations). Finally it provide the institutional investors asset allocation team with the “lemming defense”: “this UCITS manages X billions so they most know what they are doing!

There’s an old saying when you don’t know who the sucker is at the table, its probably you!

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.

Tuesday, January 18, 2011

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 problem is that Medicare, Social Security and Defense are all off the table (according to John Boehner), which leaves nothing of consequence since these programs account for 77% of all Federal expenditure (with interest expenses).  Only problem is that the GOP is now in charge of the budget process – seriously the house of representative drafts budgets – and the GOP is in charge there.  If they are serious about this (they’re not by the way) they would have to cut expenses by nearly 45% to meet the target of no increase in the deficit…. This should be interesting

First shock of 2011, the Tunisian government falls

Rumsfled was famous for his “known unknown and unknown unknowns” well the world just got bitch slapped with an unknown unknown – the fall of the Tunisian government (Egypt and Oman are looking shaky) because of food riots.  If you are a fan of Chinese history you will know that virtually all violent changes in Chinese governments were caused by food riots.

Canada tightens mortgage rules

The Bank of Canada has been adamant for several months that Canadians borrowing are unsustainable.  The bank finally got new rules (from the Minister of Finance) that will reduce the mortgage term from 35 to 30 years, the maximum loan to value ration from 90% to 85% and removes CMHC guarantees from mortgage lines of credit..

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 investors.

Today (Tuesday January 18) the Bank of Canada will meet to decide what to do about short term interest rates; bottom line rates will remain unchanged.  The very strong demand for Canadian long dated bond adds complication to Canada’s monetary policy, since a flat yield curve creates limits to some of the BoC’s policy tools (but at least the BoC doesn’t have the U.S.’s zero bound problem). 

Today, Canada’s sovereign bond rates are as follows:

1 Year
2 years
5 years
10 years
30 years

If this were America, the difference between short term interest rate and the long end of the curve 2.68% is remarkably small (the US curve is much steeper at 4.43%), an indication that inflation fears are mitigated (Canada’s equivalent to TIPS is pricing 1.24% tracking down from nearly 2% in 2008). 

Bottom line:

Foreigners continue investing in Canada, their perception that the economy is sutainable, where nearly half of its GDP is related to natural resources (metal, minerals, foodstuff and energy) that its governments appear to have "a plan" and that its financial system appears to be functioning.

A note:  Last week the Minnesota Federal Reserve announced that pressures on America's financial system were easing... Just before Christmas the Bank of Canada released its semi annual review of Canada's financial system, they found that stresses to the system were at higher levels, equal to what was faced in 2008...

Only one of these two can be right, my money is on the BoC

Thursday, January 13, 2011

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 billion
  • Energy imports dropped by 15% and export of crude rose by 12.5% (Nat Gas down 17%).  The drop in import may have to do with a shift in the composition of the energy complex.
  • Price of exported industrial goods and materials increased by 3.9%, which was a leading factor in the overall export picture.
  • Canadian companies retooling programs seems to be at an end with a 3.3% decline in volume of imports of tools and machinery by Canadian companies.  The biggest decline was for wind turbines which fell by 26

The image of Canada’s trade balance is not entirely expected; November marked one of the largest increase in industrial employment.  The shift in demand for vehicle (in light of $90+ oil prices) away from light trucks to automobile has a big impact on the vehicle balance of trade (light trucks are mostly manufactured in the U.S. while Canada focuses on cars).  It is difficult to make any generalization as to Canada’s trade balance based on a single month of data.  However, it is evident that a balance between goods imports and exports has been re-established (for how long?).  Canada’s core strength are raw material (grain, energy and materials) and the price (and demand) for these goods have exploded over the past 24 months.

Wednesday, January 12, 2011

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 available was moral suasion; since late November, the BoC governor and deputy governors have been “shouting from the roof top” about the risks to the Canadian economy.  In fact, Canada appears to be moving to a position of a flat yield curve (e.g. where the short term and long term pay the same yield – usually long term debt have higher interest rates), and there is nothing that the BoC can do!  Interest rate policy will be ineffective as long as foreign cash continues to stream into the economy (in 2010 it represented nearly 10% of GDP – an unprecedented amount).

ML, like many other economic commentators, also made the comment that the BoC miscalculated the supply destruction which occurred during the recession.  While this is true, especially in the auto sector which is today operating around 75% of capacity I think that ML missed the boat and is underestimating the impact of capital investments.  In 2010 Canadian companies undertook massive capital investments (more than 9% of GDP -- far beyond what it had done over many years), that would have two main consequence:  First increase demand for labor [December labor numbers would seem to prove this], and Second increase labor productivity – higher capital expenditure leads to more efficient use of labor, which translates into higher wages and higher productivity. As a side note it would be amusing of the largest upgap in Canadian productivity occurred when government policy was neutral on productivity increase…which would confirm one of my own pet theory that there are no policies mix that can induce capital investments which target productivity improvements.

Although inflation pressures in Canada are higher than in the U.S. it is important to note that in 2010 Canadian corporation already recognized that they were hitting thresholds in production capacity and have taken remedial measures.  Of course, the strong Canadian dollar helps in muting some inflation pressures, but it remains that current inflation levels are well within the BoC’s acceptable band.

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!

Tuesday, January 11, 2011

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 on to buyers their additional costs – the implication here is for tighter margins. Canadian companies take the view that inflation expectations are well anchored within the Bank’s inflation-control range.

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 growth in 2011/2012. 

Monday, January 10, 2011

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 the U.S. real estate market, the recent push in the value of all real estate in Canada (up 14% since the low of 2007 and up 6% year to date) make many Canadians wonder what is pushing Canadian housing prices.  First and foremost is personal income (Note that Canadians are not in cumbered by health care insurance premiums as their southern neighbors) which has been rising ahead of inflation (although below the increase in house prices).  Moreover, the Canadian government has directed Canada’s banks to remove the ability of Canadians to borrow for periods in excess of 25 years, and Canadian home buyers must past revenue test which assume much higher interest rates before they can borrow.

These tests were enacted in October 2010 – coincidence I think not!  Overall, the data is not important since construction is such a small percentage of the overall economy.  It is reassuring to see the market responding to changes in market rules (mortgage duration and interest rate tests).

Friday, January 7, 2011


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 increase in the past five months.
  • Increases in the number of private sector employees in December were partly offset by declines in self-employment.
  • The unemployment rate held steady at 7.6%. Compared with December 2009, employment increased by 2.2% (+369,000), following a decline of 1.1% the previous year.
  • Employment increased in manufacturing; transportation and warehousing; as well as in natural resources. At the same time, there were declines in construction; health care and social assistance; wholesale and retail trade; business building and other support services; as well as agriculture
  • Among the provinces, Quebec, Ontario and Newfoundland and Labrador saw employment gains in December, while British Columbia posted declines. Employment was little changed in the other provinces. Strong gains in manufacturing and transportation and warehousing
  • Following a decline of 29,000 the previous month, manufacturing employment increased by 66,000 in December. The bulk of the gains were in Ontario and Quebec and were spread across a number of industries. This follows little overall change in the manufacturing sector in the previous 18 months.
  • Transportation and warehousing also saw a notable gain in December (+45,000). With this gain, employment in this industry was up 10.8% (+85,000) compared with December 2009.
  • Employment in natural resources increased by 7,700 in December, bringing growth in the industry to 10.8% (+33,000) over the past 12 months.
  • My soft spot: employment in Quebec increased by 25,000 in December, Quebec employment was up 102,000 (+2.6%) from a year earlier. Quebec’s economy is 1/100th that of the U.S., so Quebec created the equivalent to 10 million jobs in the U.S. over the past year

Wednesday, January 5, 2011


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 parity with the USD).

Finally, corporate taxes are low in Canada and falling – by 2012 corporate taxes will be 15%!

Finally, Happy New Year to all