Thursday, March 31, 2011

Canadian Producer Prices Index:

Forgetting the monthly data (it’s still accelerating!) the more interesting analysis is the 12 month picture.  Don’t forget that both the Canadian CPI and Core CPI are low, around 1.9% and 0.9%, and trending down.  Looking other side of the transaction we are seeing fast rising producer input prices (creating a profit squeeze for manufacturing and other industries).

The annual IPPI rose 3.4% in February after advancing 3.0% in December and 2.9% in January (in a nutshell its accelerating). The IPPI rise was driven by higher fuel costs (+16.0%), and metals (+15.6%).  Even fruits, vegetables, feeds and other food products all saw rises that substantially outstrip CPI and Core CPI (+5.0%).

Unlike the U.S. which saw a 12% increase in food price over the past 12 months, Canada’s food prices were tempered by the 7.0% YoY appreciation of the CAD against the USD. Currency appreciation reduces IPPI increase by more than 0.5%.  Finally, the Raw Material Producer Index rose by 19.2% YoY, the highest growth since April 2007, when it rose 21.8%.

These statistics may partly explain why Canadian manufacturers are investing so heavily in plant and equipment, we are talking massive double digit growth (a trend that continues from 2010), the implication for productivity are important, we should see Canada’s productivity position Vs. the U.S. improve, as American plant and equipment investments has been in the basement for several years (excess capacity) and the slow “re-hiring” will reduce productivity (initially).

You want scary, I got scary!

‘Ethereal Blue Flash’

Nuclear experts call such reactions "localized criticality." They consist of a burst of heat, radiation and sometimes an "ethereal blue flash," according to the U.S. Energy Department’s Los Alamos National Laboratory website. Twenty-one workers worldwide have been killed by criticality accidents since 1945, the site said.

         (Source:  Bloomberg)

This is where it gets scary, no one fully understand these nuclear events.  This is the very edge of nuclear science.  At the same time TEPCO is saying – don’t worry we’ve got this baby under control, really, why would we lie about such a thing.

Wednesday, March 30, 2011

Interesting data points

Canadian retail sales remained sluggish in January – following on the previous 4 months, consumers are being careful with their wallets.  It could be that Canadians are finally “hearing” the message that excessive indebtedness is becoming a real problem in Canada.  Also, while the rest of Canada experience strong economic growth in Q4/10 (+3.3% GDP growth), Quebec lagged with 1.2% GDP growth, and January 2011 saw a 0.2% contraction while the rest of Canada saw growth (1.2%). Moreover, the trade deficit shrank in real terms. Businesses drew down inventories in order to meet domestic and foreign demand, which explained the modest GDP growth relative to demand growth.

Canadian businesses are seriously retooling, a trend that I had though run its course in Q3/2010 seems to be back investment in machinery and equipment jumped 19.6% annualized for a third consecutive quarter of double-digit growth.

Finally, for those who are interested, Canadian federal elections on May 2.  Rumors are that the Conservatives are ahead in the polls (now), but 4 weeks is a long time in politics, and things could change.

Monday, March 28, 2011

OSFI is worried!

While the world’s central banks and banking regulators from Japan, via Frankfurt and Washington are screaming from the rooftop that all is well in “Bankland”, the one country that has seen no banking run, failure or rescue (aside from some rather substantial liquidity facilities when the international money market froze during the peak of the crisis).  Canada’s banking regulator is taking a very different tack, fear that the next banking crisis is around the corner – and not years way.  Canada central bank’s quarterly analysis of the international financial system takes the same view.

"I think we have seen this movie before, but the amazing thing is we continue to expect a different ending," said Ted Price, assistant superintendent of the Office of the Superintendent of Financial Institutions (OSFI), according to the prepared text of a speech in Calgary, Alberta.

The world's banks are now entering a "dangerous" phase from a regulator's point of view, where profits are strong and they are increasingly willing to invest in risky assets that offer high returns […].  What comes next is usually a reluctance to stop risky behavior even though returns are diminishing, setting the stage for the next crisis. "I believe we have passed the easy part of the cycle, and it is time for regulators to get tough," he said.

Mr. Price's blunt warning came as the global banking group, the Institute of International Finance, is pushing back against efforts by G20 policy makers to impose stricter capital and liquidity standards on banks in hopes of preventing bank failures and bailouts like those seen in the last crisis.

(Source:  Thomson Reuters, 2011)

Japanese work mentality

Many million years ago I worked for a Japanese bank.  An aggressive institution with a very high number of Japanese expats.  This firm, the result of a merger about a decade earlier had three HR departments, one for each of the old employees from the pre-merge firms and one for all the employees hired after the merger (it tells you something about efficiencies in Japanese financial institutions).

These were the Go-Go years of the late 1980’s when deregulation came to the City.  I had started in the City for a money centre US banks a few weeks prior to the crash of 1987.  The day I joined this bank had more than 600 employees in London.  Two years later it had less than 50!

I had joined this Japanese bank on the counsel of a friend who said that they were the only ones with “gobs of cash” which was true by the way.  I lasted about two years there before being head hunted away.  Although regulations were lax then, by the Japanese standards it was still restrictive.

Famously, every year before the auditors came to town, the Japanese staff would be in a frenzy of file creation.  Moreover, days before the auditors arrived, inconvenient files would disappear from the office and the officers of the company would take them home.  The internal auditors were not so much a problem, these guys would arrive and be out drinking at lunch and dinner every night.  The first day or so they did some work, but by Wednesday they were so exhausted (I was told that they often closed the clubs – this was London so clubs would close around 5 am…).   Eventually, the bank fired one too many “local” employees who had created a meticulous file on the branch’s transgressions and forwarded this file to the BoE – one day the Bank of England showed up (en masse) with more than 30 examiners.  I had already left the firm by then, but I understand that the entire senior management was sent packing, and the bank paid a hefty fine to the BoE.

What this has to do with the current events in Japan is that for the Japanese form is as important as content, sometimes even more so!  A few years ago, at another Japanese nuclear power station, workers were caught transferring nuclear material in buckets – almost creating a fussion event, this was an unwritten procedure, implemented to speed up operations and reduce costs.  What we are seeing at TEPCO seems to be a desire for things to be better by wishing them better.  It is evident that TEPCO was not prepared for a major incident, all the drones flying or entering the facilities are owned by the Americans, this from a country that invented the industrial robot… because most Japanese organizations are top down operations, and there is no questioning of one bosses decisions, it creates an atmosphere were senior management’s wishes are realized by lying or embellishing.  

Now, two weeks on, TEPCO is finally asking for help, it may be too late for even a Chernobyl solution because senior management at TEPCO could not accept this level of failure.

Friday, March 25, 2011


That’s Canada as of December 31, 2010.  Almost exactly 1/10 of America’s population!  The two largest provinces Ontario and Quebec account for 39% and 23% of Canada’s total population.  In 2010, about ¼ of million people emigrated to Canada – not huge but it adds up.

Speaking of growing population an interesting observation was made by a fellow blogist talking about house statistic.  Unlike the rest of the OECD, Canada (and Australia) saw virtually no dip in the value of their housing stocks – partly due to different lending rules in Canada (far more conservative with full lender recourse), but also a result of the strength of Canada’s resource based economy that has powered on.  So this blogist wrote about a commonly used statistic for determining whether housing is over or under priced:  price divided by the median income; generally speaking excessively high prices (aka bubble) are reached when the ration exceeds 400%.  Below are the figures for the period ending December 31, 2010:

Vancouver and Victoria are in a special hell, and many of my friends who live there complain about the cost of housing, partially because these two cities are seen as “haven” or bolt holes for rich Chinese (mainland or Taiwan and Honk Kong).  But across the nation, there is a clear reality that although income has been rising, housing prices have been rising even faster.  Moreover, whereas Canadians used to be spendthrift, statistics are showing that the level of debt (home, credit cards and personal loans) now puts Americans to shame… not good statistics.

A lengthy period of low interest rates has prompted Canadians to rack up debt faster than their disposable income is growing. For the first time in 12 years, Canadian households now have a higher debt-to-income ratio than those in the United States. It hit a record 14 per cent in the third quarter, new Statistics Canada data show.

(Source:  Nicolas Van Praet, National Post, December 2010)

Wednesday, March 23, 2011

Round up of News:

Retail Sales

January’s Canadian retail sales failed to impress faling 0.3% when market economist were expecting 1% growth.  Weather could be the issue, but this is the great white north for God sake, snowstorm just slow us down a little.  Car sales were the biggest culprit, but the rest of the market was hardly inspiring.  One aspect could be rising fuel and food prices (the two aspect of cost inflation that consumer see the more directly), its is after all the fourth month of disappointing sales data.  Personally, I cannot think of a reason, except that Canadians are overexposed to the U.S. news market, and there the news is simply not good at all.

Federal Deficit & Friends

Canada’s conservative government’s budget is a dead duck, as all three opposition parties have said they will vote against it, and this will result in a non-confidence vote that will trigger elections (in about 5 weeks).  However, there are a few aspects of Canada’s budget (even if its not passed whoever wins will probably adopt very similar policies.  Last year the federal government budget deficit was around 3% of GDP (provinces have very big budgets too), but next year it is anticipated to drop to 1.5% of GDP on very conservative growth projections.  Based on the same projections Canada’s Federal government would return to balance budget by 2015/16 – a year ahead of its 2009 plan.  This compares very well to the US Federal government that is running an 8% budget deficit.  

David Rossenberg said it best:

The Federal debt-to-GDP ratio is expected to drift below 30% over the course of the next five years from the current level of around 34%, the best since 2008 before the recession hit, solidifying Canada’s status as one of having AAA balance sheets. The economic assumptions, which are the foundations for the projections, remain reasonable as the Canadian government uses private-sector projections as a starting point. They assume 2.9% real GDP growth for this year and 2.8% growth for next year. On top of this, they built some padding into nominal GDP forecasts assuming that nominal GDP will come in $1.5 billion less than projected by the private sector over each of the next five years, increasing the odds that Ottawa will meet its budget projections. There was not a lot of new spending announced. Program expenses-to-GDP are expected to move lower over the five-year time horizon

Bank of Canada policy options

Bottom line with a strong (and getting stronger CAD), there bank of Canada’s decision to raise rate has probably been further delayed; inflation (CPI at 2.2% and Core CPI at 0.9%) is well contained, retail sales are shrinking (and that in an atmosphere where GDP growth forecast of 2.8% for 2011 looks well short of what will be achieved), and high fuel and food costs will dramatically reduce the BoC’s appetite for raising interest rates.  The BoC’s quarterly market review is due in a few weeks, and I would suspect that from the BoC’s perspective there are lots of external risks that warrant taking a wait and see stance (unlike the ECB and the BoE – which are facing very real inflation pressures). Finally, the BoC will not raise rates until after the elections and a new cabinet has been formed.

Canadian Federal Elections in five weeks?

Last night the Conservative federal government presented its annual budget, it was not really an austerity program.  The 2010/11 federal government deficit is pegged at $40 billion, while the 2011/12 is $29 billion. There was one massive change, the minister of finance announce that many tax loopholes would be closed generating additional revenues of $3/4 billion per annum.  It was widely anticipated that the Conservatives would try to buy-off the NDP (Canada's "far left" party -- which puts them at the right of the U.S. Democratic party) but it turns out that there was not enough  "give aways".

The other segment where the government has been generous was in the accelerated depreciation for capital assets -- which is a good idea insofar as the CAD is so strong (and going stronger according to virtually everyone) that capital expenditure on plan and equipment is essential -- in fact the National Bank of Canada wrote a sensational piece on the productivity of Canada's manufacturing sector -- well worth a read.

Bottom line we were going to have election within the next 12 months (there has to be election after every 4 parliamentary session -- 'tis the law of the land), the Conservative government has been running "How good we are" adds for the past three months, since no one wants election in the summer, or risk the autumn (this is Canada -- snow storms are always around the corner!) late April or early May 2011 were seen that the optimal time to have elections, by all involved.

In fact, the only party that could cause problem with this picture is the Block Quebecois -- they have not shined much over the past few months (oblivion is more like it) and they may enjoy screwing with everyone's time table (they are the only party that has no pretension to power!).

N.B.  Election would normally take place 5 weeks after the vote of no confidence.  This has yet to be scheduled and there are some procedures which relate to the budget debate (if such debate does occur)

Monday, March 21, 2011

Canadian Economic Data this week: Nothing!

having somewhat of a Magritte morning, this week there is absolutely no Canadian economic data (the U.S. is another story...).  Canada is watching the situation in Japan and the Middle East, WTI is now around $103 (yet the S&P500 futures are pointing towards a huge open, go figure), and the Brent crude index is around $115.  What is truely amazing is that while Americans like to quote the WTI (priced on Cushing data), the market reality for consumers is the Brent Crude -- at $115.  This is a wide gap (caused in part by the surplus of oil in Cushing -- its a physical delivery issue).

On the bright side if you are invested in refineries you are doing very well, two years ago, cracking margins were negative, today they are around $24 a barrel -- great business.

Friday, March 18, 2011


This morning StatsCan released the February CPI and Core CPI, the first rising by 2.2% and the latter rising by 0.9%.  In both case these represent small reduction over the previous month (0.1% and0.5% respectively).  The biggest price increase has been fuel which rose 15% (year on year), after having risen 12% (again YoY) in January, followed by food...

For most Canadians their most obvious view of inflation is when they fill at the pump!  I remember, not so long ago filling up our car (when it was really empty) was around $40, now its near $75!  This is closely followed by food purchase, so the average Canadian's experience of inflation is somewhat different than what the headline suggests, but it remains that on a global basis, Core CPI is now below the BoC's target zone, more food for thought for Carney & Friends.

Inflation pressures are worse in the transport sector (obviously), with only cloth of footwear seeing a reduction in price (since nearly 95% of goods in this segment are imported the reduction in price is obvious). Geographically, the results are unchanged from previous months with Newfoundland and Ontario showing the higher month-on-month inflation while Alberta and PEI are at the other end of the scale.

Policy wise its not clear that this has much policy impact for the bank of Canada.  This morning’s aggressive action by the G7 central banks to support the Yen is more indicative of the type of action we will see over the next few months since Japan will have to spend billions in reconstruction efforts (never mind the whole nuclear situation).

Article is here

Wednesday, March 16, 2011

Canada’s manufacturing sales increased 4.5% in January

I don’t know if this proves anything about Canadian productivity, but it remains that Canadian manufacturing is firing on all cylinders!  In constant dollar, the sales number were a bit higher at 5.5% growth, an indication that there is some margin compression here, which is not surprising if one considers that the CAD has gone from parity to 1.03 in the space of a few weeks.

(Source:  StatsCan)

Moreover, the advance was broad base, with 17 of 21 industry showing increase in sales (but the big winners were cars, car parts, and aerospace).  Part of the January increase is weather related (December was brutal in the U.S.) the automotive segment saw a 26% increase in January (accounts for 10% of all Canadian manufacturing sales), but the aerospace growth of 25% had nothing to do with weather (3% of Canada’s manufacturing sales) and this increase was the single largest for the past 18 months.

In terms of geographic concentration the big winners were Ontario (+5.8%) and Quebec (+7.4%).  But since these are the most exposed provinces to the biggest “winners” segments this outcome is not surprising.

These buoyant sales level have increased demand expectation, and inventories have also risen to meet future demand, but is also a reflection that increase in sales will automatically translate into higher inventories (although the automobile sector saw a 25% drop in inventories – also the result of poor December 2010 weather conditions – which lead to inventory draw downs).

This data point should give the BoC additional ammunition to raise interest rates in June.  The big imponderable is the situation in Japan, and PPI inflation south of the border (rising 1.6% when the market was expecting 0.6%...)

Tuesday, March 15, 2011


Focusing on Canada with the drama that is unfolding in Japan is near impossible.  Figuring out the economic impact (never mind the untold human carnage) is near impossible.  What we know, is that Japan's economy will be on its knees for some time, that Nuclear power is in the dog house -- and that Japan will need to use different sources of power to create electricity.

The first natural source of energy for Japan is LNG, already a very big importer of LNG from Malaysia and Indonesia demand is bound to increase, Canada is a major producer of natural gas -- lots of our "classic" oil business is in fact natural gas.

Lumber industry will do remarkably well, once reconstruction starts a new in the summer.  Canada is already gearing up with exports to China, Japan shouldn't be too much of stretch.

The unknown are when the world's second largest economy grinds to a halt, what happens.  this is not an "Indonesia" 2004 it is something else entirely.  One thing for sure the BoC will keep interest rate at their current level for some time...

On Canadian news:

(1) Statistics Canada reported that capacity utilization is at 76.4%, down from 84.3% in Q4 2006, of course the problem with this data is that the denominator (available capacity) is estimated by StatsCan on an annual basis.  It doesn't make much allowance for "capacity destruction" .

(2)  Employment report shows that nearly 80,000 jobs were added in the past 3 months in manufacturing -- its says something about the strength of the Canadian dollar being of somewhat secondary importance.

(3) CAD is moving back towards parity with the USD, only 50c  away from parity.   Oil prices here are the main driver, off by 3% overnight to $97/bbl.

Again these figures only discuss what happened in the past, the tragedy in Japan makes the situation difficult to judge.

Wednesday, March 9, 2011

The Euro

Somewhat off topic from my usual Canadian fair, today I’m having a brief look at the survivability of the Euro.

On the Pro side:
·        Euro has cut transaction costs
·        Helped European integration

On the Con side:
·        Imperfect union has made it easy for irresponsible behavior
·        Increased systemic risk

There are many other aspects to the Euro, but for Germany and France (the main sponsors) the reality is that the Euro has created an easy to access market for their exports.  In fact, the vast majority of trade occurs within Europe, with China and Canada being two notable exceptions.  The argument for the Euro is strong, and in fact the weakness are really not that serious – Canada has a very similar make-up, with each province able to borrow in its own rights, although taxes are paid at both level of government (Federal and Provincial) for most Canadian this is only one tax document (notable exception is Quebec).  Each province borrows in the international capital market and is responsible for its own credit rating.  Quebec is a good example where the risk of downgrading forced the then government to undertake massive service cuts – something in the order of 10%.

Therefore, closer fiscal integration would help, but is not considered essential to the survival of the Euro.

So the reality of Greece and Ireland (Portugal, Spain and Italy too) is not so different than Canada!  What is different is that there was a perception (which turned out to be partially true) that the European central bank would stand behind the credit of each state, and therefore Greece and Portugal were able to borrow far in excess of what Quebec was able to do in the mid 90s.  Once again the rating agencies failed in their work!  Do we need more proof that these guys are a menace?

There is ample evidence that many were guilty for allowing the PIIGS to continue on their wayward ways, there was an implicit guarantee from the ECB

Proof, if any was needed, that the European banking elite has found an attractive solution to the problem of holding in excess of €200 billion in Greek sovereign debt; they “sold” it to the European Central bank at par, because the deal in place is that all Greek debt issued before 2013 will be fully guaranteed – there will be no write-offs (no once seems interested in the idea that no one in their right mind will acquire 2013 Greek debt).  So over the past 18 months European banks have reduced their Greek bond holding from €200 billion to something less than €140 billion (ECB has indicated that it has taken on nearly €60 billion in Greek debt, most of that would be roll over of secondary market acquisitions from the European banks).  Once again, the losses have been taken from the private sector and have been socialized – Europe four largest banks (BNP, SocGen, Commerzbank, and Deutsch Bank) total market capitalization is €114 billion.  Assuming a 30% hair cut on the Greek debt (the “agreed” amount from various punters – from the Economist to the FT) the total reduction in Europe’s four largest banks would have been 50%.  

Because European banks are for more leveraged than their North American counterparts, and that a substantial portion of their classified as “low risk assets” are sovereign exposure to the PIIGS.  They are too big to fail and will/have received support from the authorities.

The survivability of the Euro remains in doubt not because further integration is necessary for the survival of that currency.  Rather, will the various PIIGS to take the necessary steps in resolving the issues at hand e.g.  Excessive outstanding debt.  It is important to note that until two years ago Spain and Ireland were not seen as basket cases because their sovereign debt levels were low, but there was recognition (even then) that their lightly regulated banking market (all Irish banks, and the Cajas in Spain) could cause some serious problem to their respective governments.

Part of the dilemma today is that the sharing of the pain appears unequal (not ready to say whether it is unequal).  Greece’s growing black-market economy (not that it was small before) is certain to grow even more, while the level of unemployment and underemployment is certain to cause social strife.  Already the new Irish government has talked down the risk of write-offs, if they can get better terms out of the ECB.  However, the pain of restructuring has only just begun the next few months will be telling.  The recent explosion in food and fuel prices may accelerate the popular outcry.  

The real issue now, is that little of the fundamental problems of Greece and the other PIGS have been addressed.  Greece’s total debt is now at 120% of GDP, up from 104% a year ago.  That doesn’t look like a solution to me!

The PIIGS are in the same situation as the U.S. Federal government’s deficit.  Everyone knows there’s a massive problem there, but no one has any idea (or courage) to address the problem.  Whether its cutting U.S. Federal entitlement programs (the third rail of politics in the U.S) or addressing the unsustainable level of debt by the PIIGS (especially if interest rates start to rise in Europe – as the ZIRP interest rate policy is now starting to seriously damage OECD economies).

Some places are just different

Reading an article in the Economist this week, where among other things they talk about the building boom in China, and the fact that aside from Canada and Australia, OECD countries are trying to stimulate housing demand.

Halfway through the article the economist talks about a 15 story hotel that was completed in 6 days – yeah I know god created the world in six day, and the took Sunday off, still building an entire hotel in 6 days is remarkable.

Here’s the video from Youtube.

Monday, March 7, 2011

The Dollar

The Canadian dollar continued strength is the last element of a complex situation; first Canada is in the enviable position of having a healthy financial system, a somewhat healthy housing market (there could be a correction of 10% to 15%), and a central bank that has the confidence of the market.  Finally, and this is the surprising element, a healthy manufacturing sector, with growth in exports of 17% in the 4th quarter of 2010 – flying in the face of the generally agreed position that Canada’s manufacturing could not sustain parity with the U.S. dollar – when in fact, via heavy capex program, Canadian manufacturing is doing rather well (productivity has to be rising..right?).  

Canadian manufacturers know the currency appreciation game well.  In June 2002, the Canadian dollar stood at 0.62 to the US dollar, an all time low, since then the Canadian dollar has appreciated by 66% -- so Canadian manufacturers are well versed in dealing with an appreciating currency.  My bet was that Mark Carney, the Governor of the Bank of Canada would raise interest rate on March 1st, his first chance to do so, but I was in a minority of one!  The market believes that any rise in Canadian interest will only occur after the Feds start raising interest rates (Canada has never has a 1% interest rate differential with the US).  Bets are now being taken for a May 1st raise, but there are many factors in the way, oil prices for one, although Canada is an important exporter it’s a heavily energy dependent (something to do with our bitter winters I guess), which is already impacting the economy.

Nevertheless, Canada’s economy is doing remarkably well, inflation is well within the bank of Canada’s preferred range, near 2% and GDP growth for 2010 seems to have ended around 3% (0.2% lower than my initial 2010 prediction).  The odds for a stronger Canadian dollar are somewhat limited , tied as it is to the U.S. dollar (our largest export market), but and this is important Canadian exports are increasingly moving away from the US, last week the US government began its lumber fight again, wanting to impose countervailing duties on our lumber exports.  In the past, this would have made the headlines of all Canadian newspapers, today it was hardly mentioned because the U.S. is a shrinking market for Canadian lumber; instead it is put on ships and sent to China!  I suspect that this was not the reaction the Americans were expecting, Canadian lumber will not go to the US, it will go to China instead, kind of robs the American punch (this fight has been going on for 30 years).

I anticipate that unless interest rate rise soon the CAD will be blocked at the 1.03/05 range, and may even decline thereafter – on a purchasing parity basis the CAD is now 5% to 10% “overvalued”, granted PP is not the only measure, but it is important measure of when currency should trade on a long term basis.

Thursday, March 3, 2011

Moose on the loose!

Too cool for words

Wednesday, March 2, 2011

When the Koch Brothers talk well of Canada

Imagine my surprised when I read the WSJ editorial written by Charles Koch – one of America’s most infamous ultra right wingers praising Canada for reducing government’s involvement in the economy.  Now, as a Texas based and wide supporter of all things right wing (Cato, AEI etc) Koch doesn’t actually say why Canada was able to reduce the presence of Government in the economy – because according to the “Right-speak” it is support for Planned Parenthood, and NPR that is at the root cause of all evil, and government expenditure.  

Not what is truly amusing is that Canada’s government limited role in the economy can be directly traced to Canada’s single payer system for the health care sector.  A policy that is an anathema to America’s right wing lobby.  Canada’s expenditure on defense (1.3% of GDP) is another important factor as it is so much smaller than what America spends (4.3%). Leaving social security aside (similar in both countries), we have a situation in Canada where all levels of government spends substantially less on medical care and military costs than does America (on the debt front Canada and USA are very close).  These two factors alone would seem to explain the difference.

Canada is no magical kingdom; it has its share of screw-ups.  Canadians have too much debt, too little savings.  We were saved from the real estate implosion south of the border because of deeply conservative banking rules, and full recourse mortgage lending.  Canada’s central bank removed all monetary stimulus 18 months ago now, with the growth of M1, M2 and M3 in line with economic expansion.  Government debt is still substantial, and the provinces (in charge of providing most direct services to Canadians), suffer heavy debt burden, and a continual battle to keep control over operating costs (they are loosing the fight against medical costs, which are growing more quickly than GDP growth).  Finally, Canada’s central bank is probably the only one in the world preaching a strong currency.

In Quebec, the continual “war” between those who want to leave the confederation and those who wish to stay poisons the debate on all other issues – whether it relates to securities law, education of health care.  In Ontario, the problems are no less severe, with aging power infrastructures a substantial bill is looming for Ontario residents.  

To get back to Koch & Friends, it is remarkable that in this day in age, it is possible for a seemingly serious publication to allow for such ridiculous statements to be made.  Few if any winning aspects of Canada’s society are applicable to the American experience.  Americans would never allow for a 50% reduction in their military budget, the same way America could never live with Canada’s socialized medicine. 

Tuesday, March 1, 2011

Damn! I hate being wrong

Was I talking my book when I predicted that Canadian interest rates would rise by 0.25%?  I guess I was because the Governor of the Bank of Canada and his buddies decided that the external risks are too great to Canada’s economy and that interest rates should remain at the current 1% rate.

In fact, the current interest rates are very accommodative, for an economy that just saw spectacular trade numbers (Canada is back at having a trade surplus), moreover, with oil prices remaining around the $100 mark, the trade surplus is bound to remain.  Inflation pressure are certain to be relatively muted in Canada, the strength of the CAD (now at 1.03 to the USD) will insure that imports will act as a deflator.  GDP growth for 2010 is now estimated to have topped the 3.2% (well ahead of the BoC’s 2.8% target), exceeding the U.S. numbers that have just been revised downwards.

I want to get back to interest rates, because their current level is so very low (by historical standards).  The interest rate which the Canadian economy anticipates is usually around 3% to 4%, with longer dated interest rates around 6-7% range.  Clearly, borrowers are happy with the current state of affaire since borrowing rates are so low it pays for consumers (and businesses) to borrow – proof in the pudding is that Canadians have the highest level of personal debt (yes we are now worse than the Americans).

As David Rosenberg said this morning, Canada achieved an impressive level of growth without the Bank of Canada blowing-up its balance sheet, and while the Canadian government maintains a “healthy” budget deficit (around 5% of GDP, and a structural deficit of 1.5%).  Strictly speaking if the Canadian government’s spring budget included a boost in tax revenues and same smallish reduction in expenditure, Canada could be the only OECD country with no structural deficit… we shall see [election fever is in the air].

It remains that there are consequences to extremely low interest rates, first is the impact on pension funds.  Since, most are assuming an IRR of 7% p.a. when the long term Canadian bond rates are around 3.5%, we have a problem with pension solvency.  In fact, the BoC may have decided that the strength of the Canadian dollar is a sufficient dampener to Canada’s inflation exposure.