Wednesday, August 31, 2011

On political matters

Watching politics from the sideline, I am always amazed by the lack of fortitude of certain of our elected leaders.  That a member of parliament would suggest that certain ideas and concept should be reviewed by the population directly always makes a mockery of what politicians are suppose to do. 

The latest culprit here is called Bernard Drainville, an ex-journalist (who should know better).  It is evident that his objective was maybe not to make referendum part of the every day life of those who live in Quebec, but it is the one that has reverberated the most in the news (and blogosphere).  First of, it seems that Mr. Drainville is trying to position himself in the event of a new race to the leadership for the Parti Quebecois. Secondly, this was one of ten different suggestions he had to make the political class more popular.

The popular perception of Quebec’s political class is often created in Quebec City – where a particularly toxic form of talk radio exist (BTW it makes FOX look like a bunch of amateurs), and every single politician is assumed to be a crook and a liar – no proofs are required, every.  Quebec radio is particular for an ability to make stuff up, a few months ago, the process of building a hospital was blamed on the Public, Private Partnership structure – it was never mentioned that the  contract had not yet been awarded because no-one could agree on the site of the project…  so how could a contactor be slow then?

The breakdown of the “souverainiste” movement cannot be underestimated.  The defeated of the Bloc Quebecois in Ottawa earlier this summer was a stunning reversal to the movement.  Moreover, an ex-pequist, Francois Legault, has been threatening to create of a new party – with no “independiste” strategy – and he has been poling around 35% (where as the PQ is polling around 12%), and he’s not even running.  There is a lassitude on the subject of independence.  Those who speak for the movement are all old, and the whole thing comes across as the issue of an older generation.  Quebec’s youth are no longer interested in the debate.  If you are a francophone in Quebec it is entirely possible (with no effort on your part) to live 100% in French.   

The problem with referendums is that they allow politicians to walk away from the hard choices.  California with its numerous direct “proposition” has allowed its political class to rake up a huge deficit, leaving to its citizen the obligation to make the hard decisions.  Unfortunately, the public never agree to “Cod oil” solutions; Every time a political decision is put to a referendum the easiest solution is selected.

He also suggested that the leader of the government be directly elected, and then be free to select his minister from anywhere – replicating the American presidential system (because that’s been such a success).  The one thing that Mr. Drainville has shown is that he’s got big brass balls – not the smartest kid on the block, but big shinny brass balls nevertheless!


Canadian House Prices: +1.7% in June

The Teranet National Bank House Price index came out this morning.  As the headline shows, the Canadian market continues its unstoppable price rise.  Year of year the price increase at 4.5% (up only 0.1%).  June's "winner" was Toronto which is up 2% for the month.  One notable aspect is that Calgary's house price are still 10.9% below their 2007 peak -- a combination of high oil price and an absolute shortage of housing (professionals were clogging hotel rooms as temporary housing -- while their condo were being built).  Overall, the Canadian housing situation remains worrying for the Bank of Canada.  Clearly this kind of price acceleration is unsustainable, is leading to excess consumption and indebtedness.

BTW Montreal and Vancouver lead the race for YoY price increase with 5.9% and 7% respectively.

Note:  There is some thought that these June number were inflated by the March deadline for revised terms for max mortgage terms.  Sometime closing on a house takes longer than anticipated.  Then again there is no proof that this is the case, this is the third month where this argument has been used


National Post: Canada's economy shrank in Q2/2011

OTTAWA – The Canadian economy shrank in the second quarter, the first quarterly fall since the 2008-09 recession, largely due to temporary factors such as Japan’s earthquake and tsunami, Statistics Canada said on Wednesday. Real gross domestic product fell at an annualized rate of 0.4% from the first quarter, worse than the median forecast of a 0.1% increase in a Reuters survey of economists. The first quarter grew by 3.6%. However, most economists expected a rebound in the third quarter from the temporary disruptions in the second. If this is the case, Canada would escape the technical definition of recession — two quarters of negative growth. The decline was marked by a 2.1% fall in export volume. This, in turn, was influenced by a supply disruption in the auto industry caused by the earthquake and tsunami, as well as wildfires and maintenance shutdowns that helped cut oil and gas extraction by 3.6%. Business investment, housing investment and consumer spending were all up in the quarter. For the month of June, Statscan said real GDP rose by 0.2% in June after a 0.3% fall in May, with the auto and gas industries posting rebounds.
© Thomson Reuters 2011

Don't need to say much more -- hate reprint, but anything else would just be a rewrite -- which is lamer.  Bottom line is that Canada's Q1/11 +1% performance was followed by zero or close to zero growth in Q2.  The question is what will happen in the second half of 2011, there the bets are off, housing in Canada is slowing, partly has a result of more stringent mortgage rules (30 year mortgage, sensitivity to higher mortgage rates).  Finally, is the health of our No 1 export market:  America.  


Tuesday, August 30, 2011

THe Canadian dollar

I realize that I’ve not written anything about the loonie in a while (as the CAD is affectionately known here in the great white north – because of the image of the loon on side of the dollar coin).  The reason is that the CAD “weakness” was obvious caused by oil prices falling of the cliff (correlation is around .85 – there are issues with the correlation when the CAD nears parity – one way or the other that break down the relationship).  Guess what has been happening to both oil prices and the CAD over the past few trading sessions:  You got it they’re both gone up.  The CAD was trading around parity for about a month as the perception of the U.S. economy was the recession was at the door step.
The only thing that has changed (aside from higher oil prices – although not NatGas prices) is the Jackson Hole last week, where the Fed Chairman’s “non” statement was perceived by everyone as a sign that things were going their way (what ever way that was – those who saw positive sign of QE3 and those who saw no sign of QE3 both started buying stocks – and gold by the way).

Note that as far as I am concerned the difficulties faced by the American economy (Canada’s No 1 export market) have not subsided.  In fact, virtually all indicators are saying the same thing – the U.S. is in for a rough second half (not that the first was so much fun).  Virtually all metrics are down – and some are down by historically wide margins (today it was consumer confidence – biggest monthly drop – ever). 

This should mean that the CAD recent strength will reverse soon, which every Canadian economist is expecting, because if American (and Europe is in even worse shape by the way) then demand for oil will drop – yes emerging economies account for 50% of all oil demand (up from 20% a decade ago), but it remains that if Europe and America face a recession – and I really don’t see much hope for strong growth – as all G7 governments tighten at the same time, then demand for oil will fall.  Canada a maker of raw material (including oil obviously) – is a second degree casualty of the America’s slowdown (BTW my best case scenario for both America and Europe is tepid growth of 1% to 1.5% going forward as the deleveraging continues its inexorable path – only slowed down by the 2010 QE2 stimuli).

So back to Canada, right now oil prices WTI are back up around $87bbl ($89/bbl as I write), down from the nose bleed $110 it May 2011 (BTW CAD was trading at 1.05/95 then) today its around 1.02/98, back from parity 1.001/.999 just 10 days ago.  My guess is that with a Q4/2011 “expected” cut in the BoC’s director interest rates we can expect the CAD to trade at or below parity by the end of 2011 (I could be wrong in timing but not direction).

As a side note, Canada’s oft mentioned “cousin” on this blog, Australia is starting to see some rather unpleasant effect of the Chinese “slow down” with house prices coming under pressure (after nearly two decades of mind numbing price rises – Australia’s house price index is around 550, about 200 for the US and 155 for Canada – assuming a start date of 1987 for all three markets).


Monday, August 29, 2011

Extraordinary women

Reading this morning about Germany's CDU minister stating that Germany like Finland wanted collateral for its Greek loans, I researched this minister:  Ursuala von Der Leyen, she is of a generation of women (52), who always scare me!  Not because she's only three years older than me and attended the LSE, but rather her accomplishments   Dropped out of LSE, in the early 1980s to do he medical degree -- eventually earning a PhD in medicine, in the middle of all that she had 7 children (count them), and got her MSc in public health.  What I want to know is what did she do with here "empty Tuesday evenings".

Another superwomen!


Friday, August 26, 2011

Sino Forest Update

This morning from OSC (Ontario's SEC equivalent)

The commission said in a release Friday that it has reason to believe the company and certain of its officers and directors have “misrepresented some of its revenue and/or exaggerated some of its timber holdings” and that some of the officers and directors – including chief executive officer Allen Chan – appear to be engaging in acts “they know or reasonably ought to know perpetuate a fraud.”

Don't know what it will do the the shares of Sino Forest, but it cannot be good!

Once again weirdness in the market, Sino-Forest shares are suspended in Toronto, but still trading on the Pink sheet down in the U.S. -- down to $1.65 a share, close yesterday in Toronto was $4.81

Is Jack Layton Canada's Diana?

Last Monday Jack Layton died, he was then the leader of NDP, a renewed and vigorous party that seems to have achieved an amazing political feat -- he destroyed the "Indendentist" movement in Federal politics (in my opinion that movement was long dead, it just didn't know it was - a bit like "Weekend at Bernies"), and dethroning the Liberal party of its 100 year reign as either government or official opposition.  

Mr Layton always came across as a sensible man, dedicated and courageous, but a simple man.  I suspect that he would be appalled by the show.  I mean no disrespect to the man, but he has left this mortal coil, he has moved on.  This mass hysteria is frankly strange.  A state funeral is a bit  much, but the timing of his death -- every politician starting with Steven Harper understood faith's fickleness can be harsh, and giving the man and his family this recognition may be a justified gesture, but still... now I understand that his corps will be paraded to Montreal.  Should Mr Layton be in heaven, he must be cringing at the whole spectacle.


Thursday, August 25, 2011

Why I’m against big government

As an economist I grew up in the shadow of Keynes -- literally every morning walking from my hall of residence to the London School of Economics I would walk in front of J.M. Keynes London home (the homes of famous residents are remembered with a blue circulate plate on the façade), where I was trying to become an economist.  Yes, LSE had a large number of professors (and students) where were very much in view of the western system was raping the world, and were into a balanced growth model, but LSE was one of the premier Austrian schools (Robins & Hayek both taught there), and a surprisingly large number of its professors were (mid 1980s) in monetarist think tanks.  BTW the reason LSE got a left wing image was simply that the BBC headquarters were literally down the street (about 50 yards) – so reporting from the front line of the “revolution” was easier at LSE than Oxbridge (50 km away) [So I got that chip of my shoulder].

Experience teaches that massive shifts in the social contract take effort, a crisis, a will and outsized personalities!  When these changes become necessary you hope the politicians in charge will make the right call, but more often than not you are disappointed.  You assume that the disappointment arise from the immediacy of decision making or simply because of expediency, but at time it become evident that politicians have deep character flaws that were hidden by the glamour of the media embrace (or laziness as the case may be). 

Over the past three days I have been reading Thinking the unthinkable a deeply depressing document written by Tim Morgan, Tullet Prebon’s chief strategist.  His analysis of what is happening to Britain is dispiriting and leads me to a simple conclusion.  The only way governments can help an economy is if they remain an insignificant part of the game.  Because in the end, governments are pro-cyclical.  In a nutshell, Prebon’s analysis is that the excess of the past are not the only bad news facing the UK, because the future of the UK is now also in serious jeopardy, the British government decided that its 10% deficit (reminds you of anyone) had to be addressed by a combination of increase in revenues and cuts in services.  Part of the UK’s problem is that the government is now a very important player in the economy and those cuts will now affect GDP growth, and the British government is now counting on the private sector for growth (and a rise in tax revenues!!!) the news is bad because nearly 60% of the historical source of GDP growth are now “out of the game” (real estate, finance and construction and Government), suddenly all the economic growth has to be generated by the 40% of the economy.  So if you assume a 3% GDP growth rate this 40% of the economy has to be growing at 5.5% just to achieve this overall goal of 3% -- in Prebon’s opinion this is unrealistic, and therefore despite an initial success in correcting the current imbalance, the UK economy will soon slip back into a low growth model, where the deficit begins to grow again.

This makes me sound like one of the loons of the Republican Party!  That is not my intention, but what is clearly emerging is that the government which could be countercyclical at the time of Keynes now is a pro-cyclical element of the economy.  Several G7 governments tried to stimulate their economy in the face of the deep 2008 recession (one notable success was China), but in reality few have the will or the resources to carry real stimulus – in America the amount the Federal government spent to stimulated the economy was more than matched by the reduction in expenses by state and local governments

It gets worse, the strategy of “shovel ready project” are hardly suitable to a post industrial G7 world to generate economic growth, this is not the 1930s.  I am now firmly of the belief that governments, by the nature of the G7 world, are unable to stimulate demand in a post industrial society; they simply don’t have the tools. Actually, one of North America’s great successes in mitigating the recession was the province of Quebec; the province embarked on a massive (and really overdue) program of infrastructure upgrades.  The success of this program in mitigating the recession must be set against its time frame:  this project was first developed in 2005/6, 36 months before the 2008 crisis.  It was fortuitous for Quebec that it had a pre-approved (where the design and engineering was already in the works) program in place.  But as investors know, luck cannot play a part in everyday affaires – otherwise you would pay for your 45 feet yacht with your future lottery winnings!

Pimco’s Bill Gross continually reminds America that beyond the $1.5 trillion operating deficit, America has $66 trillion in unfunded commitment that cannot possibly be honored.  America’s problems are as intractable as those of Britain, moreover since Americans have such dismal financial literacy, the same people who support a balanced budget amendment would never consider a reduction in their “earned” benefits and yet the reality is that is exactly what needs to happen.  Aside from raising taxes (a necessity if the problem is to be resolved) G7/G20 countries need to realize the limit of their government’s abilities to fix their world.  

Aside from income redistribution – the issue becomes one of understanding what needs to be done and what is realistic.  What are the services that only government can provide, and everything else should be turned over to the private sector.

Defense, regulations and support of the weakest members of society should remain in the hands of government, the first two because there really is no other option.  The third because how we treat our weakest members defines who we are as a nation.  Healthcare is trickier, clearly the U.S. model is deeply flawed, but as a Canadian the absolute single payer system also has problems that are intractable.  Moreover, all health care systems in the G7 world share a common affliction, costs are rising more quickly than GDP – in the medium term it is unsustainable.

The rest can be shipped off to the private sector (or some form of non-governmental system).  Education doesn’t not need to be in the hands of governments, equally the  private sector (in the U.S,) how shown what a mess they can make – the for profit education system there has proven one thing, while medical costs are rising quickly the cost of education is rising even faster.

This could lead to a 50% reduction in the size of governments across the G7.  Because I am not here talking about only central government, but also local governments.  This doesn’t solve the problem of recession (in my opinion cycles are part of our economic growth model) but it removes an important pro-cyclical element to the process.

That’s my two cents!

[Ed Note:  The province of Quebec spent $10 billion dollars over five years -- this is equivalent to the US spending $1 trillion dollars, some would say that the $900 billion of US stimulus is relatively close to what Quebec did, but most of the money was not actually spent on stimulus, something like $200 billion was allocated to "shovel ready projects]


Wednesday, August 24, 2011

Another misguided effort: Blogger dismiss Canadian health care system

I just don’t know why they keep on doing this, but one of those respected blogger: Mark Perry here decided to go after the Canadian healthcare system by saying that it took some guy six years to find a family doctor.  First off, he didn’t look very hard because there are many “family doctor like” options in Canada.  

Once again the idea was to show how superior the American model was to Canada’s because some guy could not find a family doctor.  Now as a Canadian the last thing I want to discuss is the relative of the two systems, we got ours and we don’t care about yours.  

What was fascinating were the comments to the blog.  All kind of justification why “Merica” is so great, how medical tourists are coming in drove (not true) you want medical tourists go to Mexico… I suspect that this behavior comes from “America is #1” view of the world.  I cannot blame them for this reaction.  It must be infuriating when virtually all metrics show that America’s health care system is inferior to Canada (also France, Germany, United Kingdom, Spain, Italy) or that its education system is terrible ranked 39th in the world.  

BTW in neither of these sectors is money the problem.  America spends more than anyone in the world on healthcare and almost more than anyone on education.  Money is not the issue; something else is at work, an inability by government to take on vested interest – pharma, doctors, teachers union! to name but the most obvious players.  So at the end we are back at Government’s failure to legislate for the good of the country.  Personally I blame the lobby system that has for years controlled America’s legislative process.  The reason is money, each politician in Congress is responsible for raising all his own campaign financing, and running in America is expensive. Politicians are directly influenced by their biggest donors – what other reason is there for Wall Street to get away with “murder” after the absolute failure of the banking system in America?

Now I don’t want to imply that Canada’s health system is the best in the world, in fact I suspect that Germany’s and France both have better outcome than does Canada (with a mix of private and public money), but America’s inability to even discuss what needs to be done with its runaway health care cost is puzzeling..  

Devastation from yesterday's Virginia earthquake

Just too funny
(Source:  The Big Picture Blog)

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Tuesday, August 23, 2011

Canadian real estate -- When will the other shoe drop

Until now Canada and Australia have been the great outliers in the real estate world.  Both saw large increase int he value of their real estate mainly because both economies were more protected by the nature of the make-up of their GDP, both are huge exporters of natural resources.

Now it seems that Australia's real estate tide is turning, although these are early signals, and the nature of the Australian real estate market may make it more prone to short sharp shocks.  it remains that in Sydney were wages are similar to those of Canadians (better weather but more flies) property prices have become stratospheric.  In Mosman (the posh neighborhood across the bay from Sydney opear house) house prices are usually in the $3/4 million for anything detached.  Also in Australia all properties are sold at auction, so on the day all those interested in buying show up and the house is sold (must be hard on the sellers in a falling market).  An article in the WSJ seems to say that in many markets the tide is turning.

This could be a blip, but it remains that house prices in Australia are very expensive  using almost any start point Australia is in the stratosphere (1988, 1993 or 2000) all show that Australian prices are up 525%, 340% and 250%, where as the data for Canada is 170%, 155% and 155%.  Its worth nothing that only in the last decade has house prices increased more than the U.S. using 1988 and 1993 Canadian house price has risen by less than in the U.S.

If Australia, which is completely attuned to the Chinese market (more so than Canada which is driven by the US demand), then things are beginning to deteriorate for the raw material exporters.

8th signal: Canada Q2 growth near zero

Number for retail sales (Consumption) are out this morning, nominally up 0.7%, but removing vehicle the growth rate drops to -0.1% (there's a good reason for removing vehicles sales -- they tend to be cyclical).   Specifically here vehicle volume sales were up 1.6% -- so heavy discount was to blame for accelerated sales at the beginning of the summer.

Retail sales increase in June
(Source: StatsCan)

On the other hand a positive aspect is gasoline sales that were down 1.3%, not in volume but in price, the first time (in several quarters) where energy price "positively" affected inflation (CPI dropped from 3.3% to 2.7% in a quarter).

Aside from that not much to say about sales, except that it is a further proof (if any was needed) that Canadian are putting the breaks on spending.  Its not entirely clear what is driving this trend among consumers (probably American news of a possible new recession -- apparently now a 40% probability), since Canadian still (rightly) live by the motto "America sneezes, Canada catches cold...".

There is increased pressure from the financial markets for a loosening of monetary policy, not only in the futures market but also when looking at the CAD, which has under performed virtually all commodity currencies

Monday, August 22, 2011

Sad news: Jack Layton leader of NDP died early this morning

Early this morning, the second biggest winner of the recent federal election -- Jack Layton died from cancer.  It is more than likely that already during the election that "something was wrong" but the desire to win (and he did win big after all)  delayed the process of seeking medical advice.  

Those who say politicians are in it for themselves will never reconcile the act of "giving your life" with the idea that politicians are all corrupt or are looking to enrich themselves, probably do not understand the dedication of certain people to the democratic process.  In a sense Mr. Layton ended is political career on an incredible high.  Hopefully his successor (whoever it is) can follow his class act.

Little Canadian news

Instead I've been reading one of my favorite Australian bloggers, who wrote a persuasive article on why's HP's decision to divest itself of its PC hardware business is the right decision. Read it here.  Bottom line hardware is dead and gone, everything is software.

Also a fascinating "review" of the state of the G7 economies (not entirely good news),  Read it here.  Bottom line  Germany choose your poison!  Stay in the Euro, and Italy, Spain, Portugal and Ireland are out, and your banks go bust, or take your saner brothers (Finland Benelux) and leave the Euro, have a stronger currency and face a recession.  Last option is Germany takes over fiscal policy in Europe (not going to happen).

Finally a graph & review of G7 economy since the beginning of the crisis.  The outlier is Canada -- but not for good reason (in my opinion) of course Canada had saner policies -- after all Canada's banks are too big to fail, and have for years so they are run conservatively, but Canada's raw material (from timber to oil) have tied its economy to emerging market (and some assets inflation thanks to QE1, QE2 and soon QE3).  

Friday, August 19, 2011

Inflation decelerating to 2.7%

In July inflation dropped to 2.7%, still higher but better than 3.3% in May, and 3.1% in June.  However, July 2011 marks the first full year of implementation of the new HST tax (harmonization in several provinces), so in fact the overall inflation picture is slightly muddied.  It would be fair to say that inflation pressure has not altered that much.

 The 12-month change in the CPI and the CPI excluding food and energy
(Source:  StatsCan)
Culprits are the usual suspect:  Food and fuel!Food prices rose 4.3% in the 12 months to July, matching the increase in June.  Excluding food and energy, the Consumer Price Index (CPI) increased 1.2% in the 12 months to July, after advancing 1.4% in June.

Not the end of the world, but not great.  As usual removing energy and food from the CPI is a poor measure of inflation pressures felt by Canadians.

Thursday, August 18, 2011

Stagnation at best – Probability of recession is rising fast

I didn’t want this to be a rambling post, but it is because there are many interconnected issues here.  I also insist on being amusing!

The problem with additional data that sometime it confirms you worse fears.  More data points this morning confirm that Canada is now operating at stall speed.  Today’s data is unemployment benefits and wholesale trade.  Last May both had been going in the right direction (fewer people were receiving unemployment benefits and wholesale trade was rising 2% -- annualized rate), both these metrics are just about flat in June which augurs poorly for June’s GDP numbers; overall Q2/2011 could be slightly negative!

 Little change in the number of Employment Insurance beneficiaries in June

Wholesale sales increase in June
(Source: StatsCan)

So far I’ve counted 7 data points that all say the same thing.  Canada is decelerating fast.  While Q1 was on fire, that’s no longer the case.  Inflation has been tamed (more or less), interest rates are still ridiculously low and will probably drop further.  Since this new recession is not “made in Canada” there is little that the policy makers can do.  In fact, interest rates really have nowhere to go!  The only stimulus available is if the federal government decided to slow down the pace of its budget cuts (hence not create more job losses), but we are not sure that this is such a good idea, first because since the recession is not Canadian in origin there’s really nothing to fix here!

Canada’s prime minister is definitively on the right track.  His recent trade mission in South America was well timed and these markets are somewhat uncorrelated with the U.S. and Europe (Canada’s principal export markets).  The same goes for Asia and the Middle East, for while we are expecting slow down in these regions too, its nothing compared to what looks to be on the cards in the U.S. and Europe (especially in Europe). 

The Bank of Canada has few policy tools at hand (fewer than the Feds or the ECB in fact).  First because growth in Canada is largely the result of trade (1/3 of Canada’s GDP is trade related). Canada’s banks are well capitalized and the “newish” mortgage lending rules make that sector more or less bullet proof.  Canadian companies have recently completed a large number of refinancing that means that they too are more or less immune to market insanity.  Canada’s banks also depend less than their counterparts around the world for interbanking funding, and at any rate the Bank of Canada can easily inject liquidity in the system as it did successfully in 2008 (within 9 months it had been withdrawn)  

Canada strength and its weakness are the same, Canada is a small open economy that is largely inconsequential, and has the good luck of being rich in natural resources, it has a well educated population and a strong legal system.  Although its tax burden is higher than some, at some level the single payer health care system dramatically reduces enterprise risks.  Wage inflation is low although a higher percentage (than the U.S.) of the labor force is unionized. 

Since a slow down (or even a recession) cannot be avoided the best solution is to embrace it, and make sure all the elements are in place for a quick recovery.  Stable government policies and stable tax policy is helpful.  Despite the riots in Vancouver a few months ago, there is little social tension here.   


I've enabled comments -- again

I had turned these off about a year ago, too much BS (and lots of spam too).  Say what you will, be respectful and please add to the conversation -- BTW feel free to disagree... I like that best

Wednesday, August 17, 2011

American politics: like watching a crash on the motorway

Canadian politics are boring, especially since the election cycle is usually very short (30-60 days max), the rest of the time the party in power governs and ignores the opposition (more or less).  American politics are exiting, but exiting in the way of a car crash.  You slow down to see the carnage, but eventually if you are "lucky" to see real pain and suffering you become disgusted with your voyeurism   

That's what the political process is like now.  The vitriolic has become such that it is painful, moreover, the process has become insanely long.  Imagine Barack Obama has begun campaigning -- more than a year before the elections are set to occur on Nov 2012!   

At heart I am a conservative.  I have major issues with the size of America deficit, but I also have issues with the way the government is funding its operations.  First,  the idea that funding two wars on the charge card is a terrible idea.  Second, the status quo in health care is just not a reasonable alternative (16% of GDP and growing at 7% p.a.).  I agree that governments don't create wealth (jobs) but they can create a opportune environment.  America's tax code is a disaster. On one end you have mega corporations paying no taxes (GE in particular has paid virtually no taxes for years), yet SME's pay 35-39% tax rate.

Blame America's media or even its education system, but the truth is that Americans are in general economically illiterate.  Is $20 billion a lot?  (a) that the budget for NASA in 2010 -- many Americans would say that's too much money for a boondoggle (space), but (b) it is also a little bit less than the American military spends on air conditioning in Iraq and Afghanistan.  Suddenly $20 billion doesn't sound like much.  The federal government 2011 budget will borrow 40% of its outlay or $1.4 trillion, that means that cutting NASA's budget by 100% would reduce the deficit by slightly more than 1%, just 99% to go. 

On that basis the demagoguery of virtually every republican candidate for president is astonishing, aside  from Ron Paul every other candidate seem to have little understanding of economics.  They assume (Ryan Plan) that America can reduce its unemployment rate to 2.8%, that inflation will stay below 1% and that GDP growth will be more than 5%.  Reality check, at no time in the past 60 years has U.S. unemployment been below 3%, GDP growth of 5% has only rarely been achieved (briefly after a recession), and with very low unemployment inflation would jump.  Moreover, interest rates would be a lot higher than 1%.  That's a huge lie, and yet it is preached as gospel!

Watching Rick Perry's grand entrance Sunday with his 10th amendment comments, concealed gun, cowboy boot wearing shtick is depressing.  Maybe America gets the politician it deserve, after all the Tea party has an important message that 10% government deficit cannot continue, while at the same time saying that military, healthcare and social security cannot be touched, demonstrate a deep misunderstanding as to where the money is spent (in fact these three items plus interest expenses account for 77% of government expenditures).

It gets even better apparently now the Republicans want to elimination of America's small gas tax -- which by the way is 100% used to maintain America's roadway system.  As a conservative, a user taxes is the most efficient may of taxing a public good.  Those who use America's roadway should pay for those roadway, the more you drive the more you use the more you contribute to their maintenance cost.  These guys take the view that all taxes are bad -- I guess they prefer toll roads.

Depressing I tell you,   

Foreigners reducing CAD bond holdings

It seems that June (aside from very bad economic data points) also saw foreigners reducing their Canadian bond holdings.  This is being spun as debt "retirement"  It seems that in June more than CAD 6 billion in Canadian bonds were retired --and that foreign investors took this opportunity to invest elsewhere.  First there is no doubt that sovereign rates in Canada are getting insanely low (5 years at less than 2%) so its natural for investors to view Canada (which is closely associated with the U.S.) to view this as a subpar investment.

Foreign portfolio investment in Canadian securities
(Source; StatsCan)

Anyway take what ever view you want is that foreign investors' view of the CAD bond market is that there are better ways of investing money -- also June marked the high point for the CAD so that it may have been seen as a good exit strategy -- come back when the CAD is again in ascendancy!

As for Canadian investing abroad has been mostly in blue-chip shares -- and not fixed income.  The vision may be that the yield on bonds is now lower than the average dividend yield. so may as well take that free ride, since it is perceived as "unsustainable".  This view is based on the past 30 years of data.  Going back to the 1920s it can be shown that there are many episodes where bond yield were lower than dividend rates.

S&P downgrades Google following its acquisition of Motorola

First off rating agencies have lots o"splaining" to do with their rating activities.  No so many years ago, several rated all the Icelandic banks AAA -- based on the idea that they were TBTF and therefore had an implicit government guarantee.  Never mind that with a population of 230,000 Iceland's banks were dwarfing the local economy.

Then there was the rating of CDO/CLO and other bastardized complex financial structures, taking a bunch of BB rated debt instruments and magically creating AAA rated paper.

The downgrading of America was a "political" decision, in view of the intractable nature of the discussions in Washington, and the dogmatism shown by the republicans.  S&P's rating decision (America is still AA+ rated -- which is not so bad) is a true reflection of a government's spending decision and its inability to find realistic solutions to the problem.

The latest downgrade of Google that decided to acquire Motorola Mobile on Monday is sheer insanity.  First, Google has been looking at the handset business for some time -- its Android operating system is now the most popular smart phone OS, for every sale of Iphone there is two sales of Android powered phones.  The reality is that Google is more than a search company, its a data company.  Personally, I suspect that within 10 years the "telephone" aspect of most smart phone will be nearly eliminated (think skype) with data accounting for 90% of traffic and revenues.  The fact that Google is sitting on nearly $30 billion in cash (and short term instruments) tells you all you need to know on this acquisition:

  1. Google is looking at growing its data business, and handset complete the loop to the customer
  2. Google is using less than 30% of its cash at hand (should they go for an all cash offer)
  3. Culture clash is certain to occur, but then Google probably wants to keep hardware and software divisions in separate silos.
  4. Google's management has been looking for a "big project" for years.
  5. Real shame here is that Google could have bought Research in Motion for the same amount of cash (although competition issue would have been more serious)

Sure there are issues with keeping the OS development away from Google/Motorola phones will be difficult, but one of the many negative aspects of Android phones is that each manufacturer "damages the brand" with its overlay and tweaks that hamper the OS's strength.  Having a pure Google OS user will "force" other android phone makers to keep the OS as clean as possible.

BTW some disgree with my view -- a particularly well written comment here that basically takes the view that Google should have purchase Nortel's patents and not Motorola...

I really don't get the downgrading here!


The world seem to think that Canada is in a recession

This morning reading a number of blogs and newspapers every mention of Canada was that we are either near a recession or in a recession.  I guess it just doesn't feel like a recession yet.  Granted the market is pricing a reduction on short term interest rate before the end of the year (around 25 bps), but that is all.  Canadian bank stocks are down a bit from their high, but are still within 10% of their historic highs -- maybe that's a signal.  

Not that I am in the secrets of the gods, but rumors in the market is that all Canadian banks are doing remarkably well with predicted strong Q2 performances ... again, I have no special knowledge here but it is interesting that National Income numbers, retails sales, construction (Industrial commercial and personal) are all strong (and rising) demand for construction permits is up in all three of the last quarter...

Maybe the missing link is that since about 1/3 of Canada's GDP is trade related it doesn't matter how well Canada is actually doing -- its the performance of its trading partners that matter.  Still, commodity prices are back int he $90 range ($88/bbl this AM for the WTI and Brent is around $110) says that demand is still rising.

Call me a skeptic, but I just don't see any sign Canadian recession  


Tuesday, August 16, 2011

Politics & the separatists

It is well established that I live in the province of Quebec (the French speaking bit of North America), and for more than 60 years there has been a movement for Quebec to secede from the rest of Canada, its best incarnation (and most long lasting) has been the Parti Quebecois ("PQ").  The cause has hit a number of roadblocks over the years, but the past 6 months have been nothing short of disastrous for their cause.

First, its important to note that between 20 and 30% of all Quebec resident are "pro-independence".  Amusingly enough the most "pro-Independence" sentiments are in places that have virtually no contact with the rest of America, not that they live in no-men's land rather they live in the heart of Quebec, speak French (only) and get 100% of their entertainment in French.  They have a separate and different culture where Shakespeare and Monthy Python do not exist -- yes even in the internet age it is easy to ignore the rest of North America!  Their only contact with the "anglo" is in product labeling!

Part of the PQ's problem is that their early successes have dampened the population's enthusiasm for the cause, had the PQ -- in the first flush of its success not passed a language law (prohibit parents from sending children to English school or making French the language of the workplace, and forcing signage in French) then most Quebecois would be more riled about about the presence of the "invaders" -- yes it was 400 years ago, but its still stings (and for cause that French Canadians were until the mid-70s largely treated as an underclass -- "speak white" meant speak English).

The fortune of the movement really took a hit early this spring.  First in the federal elections where the Bloc Quebecois -- the "federal" version of the PQ lost 36 seats (out of 40).  The reasons are multiple, but first was the lack luster performance of the party, and the exhaustion with the whole topic -- Quebecois just don't want to talk about this anymore, and saw (maybe) a more vibrant message out of the far left NDP . Second was a provincial private members' bill introduced by a Quebec City based member of parliament (a PQ member) to fund 100% the building of a new professional hockey arena, so that Quebec city could attract a professional hockey team (Quebecois are hockey mad!).  The party in power (the Liberals) was forced to let its own members of parliament to vote as they wished on the topic -- otherwise the PQ would have won every election in Quebec City for the next 100 years -- which was partly a calculation by the PQ's leadership that could not support the project on economic ground, but did on political ones.

However, the strategy blew up in PQ leadership's face, and in the space of 10 days the PQ lost 4 members of parliament for political reasons (the bill in question was a mere catalyst).  Rumors are now that the four are considering starting a rival party; more radical that the soft option of independence that the PQ has been offering the electorate.  It really could not get any worse for the PQ, having already lost the far left separatist to "Quebec Solidaire" but a further splintering of the movement would relegate the PQ to eternal opposition.

Interesting times in the Quebec political scene -- its a nice sport when the topic of conversation changes after 50 years!


Recession in Canada?

A fortnight ago GDP Q2 numbers emerged and were troubling, while the first quarter GDP was up 4%, second quarter is looking flat overall (April was up a bit and May was down).  Now more data is emerging (its not only the German's that are seeing slowdown after all) which shows that manufacturing for June 2011 was down 1.5% (which is rather a lot -- BTW should't "a lot" be one word...) looking at the trend below it is worrying.
Manufacturing sales decline for third month
(Source: StatsCan)

No wonder the market is pricing a solid 25bps fall in CAD interest rates.

At the same time sale of durable goods was down 1.9% -- granted much of that drop is due to the oil sector (Don't ask its complicated... but its true) because not only did volume collapse in June (so did prices).  On the bright side inventories are flat -- so it would appear that Canadian companies have been good at tracking the drop in sales without the build up in inventory (although with interest rates as low as they are its hardly expensive in terms of working capital -- nevertheless).  However, inventories are flat in dollar terms, they are rising in terms of sales...
Inventory levels flat in June
 The inventory-to-sales ratio increases
(Source: StatsCan-- both graph)

Surprisingly enough manufacturing backlog is rising again, my guess is that this measure is a poor indicator as some sectors have great buildup and others do not.  Dispersion in order backlog is probably large (Don't have access to that data), but it seems that Aerospace is the big winner here.

Overall this is presenting a troubling picture of the Canadian economy.  Aerospace in Canada is less affected than most by the strength of the CAD, but it appears that other manufacturing companies are finding the going difficult.  This has to be a warning shot across the bow of the Bank of Canada (with regards to interest rate policy).  The primary reason the BoC didn't raise interest in the spring appears to be currency related.  The spring's strong CAD showing acted as a break on Canada's economy -- which is apparent today (3 months later).  Now Carney and friends have to decide what is the proper stance they should take.  The CAD remains above parity against the USD; inflation pressures seem to be abating -- Core CPI is down to 1.3% and CPI is "down" to 3.1% (from 3.3% earlier this year).  

My guess (and I've often been wrong) the BoC will stay put on interest rate on September 6th, for although Canada's economy is slowing, recession doesn't appear to be on the cards (yet).  An open economy is always at the mercy of its clients -- America and Europe are definitively slowing (Germany GDP growth has stalled), China may be slowing (we will never know since the economic data is massaged to match policy).

At the same time, Canada's federal government has expressed a desire to implement serious budget cuts so that the budget deficit disappear prior to 2015 (a worthy goal in my opinion), that too will color the BoC's interest rate decisions.


Monday, August 15, 2011

Rumors, truth and other fictions

Somehow a Mail on Sunday article about SocGen's difficulty in funding its operations is being blamed on a typical Franco-British failure to communicate:  A fictional account published in Le Monde (12 part series) of a financial crisis impact on the 2012 French election cycle.  The story used the liquidity collapse of  SocGen and Unicredit two large banks well known in France, to mark its story line 

First, despite the attractiveness in blaming the Mail on Sunday for misunderstanding a "fake" story on the impact of the demise of two European institutions as being the real thing forgets two important facts:  First, Italy is going through a spot of difficulty which is true.  After Greece, Italy has the highest level of state debt (120% of GDP) of any European country, and a government who has been otherwise busy (Bunga Bunga Parties).  That's its banks (large holder of sovereign Italian banks) would be in difficulty is not that hard to imagine.  Moreover, Italy's economy is certainly not the most robust -- it has been operating near stall speed for more than two years now.

Second, Societe General is extremely leveraged bank.  The figure for SocGen is around 50x.  Put this in context, American banks have a leverage of 15-18x, Canadian banks are the same around 13-17x.  A loss of 2% would sink S.S. SocGen.  The second reality for SocGen is that like all French bank it has a substantial exposure to Italy and to Greece.  Finally for SocGen, which has paid in capital of about Euro 18 billion, there is a great deal of pressure for the bank to raise around Euro 85 billion in new capital (BTW none of the news here is "new" it is well know in the industry).

Third, and most importantly, for the past two weeks the Euribor market has been nearly frozen, as Europe's largest banks hesitate lending to each other, because of fears as to their ability to survive any serious crisis.

Why did Le Monde pick on these two banks, my guess is that the writer(s) of the story asked some friends in finance which were Europe's two largest banks with a greater than average risk of failing and these two name were natural "winners"  in this context.

This morning, Bank of America joined the chorus of those thinking that gold will soon trade at $2,000 an once!  We forget that as recently as 2006 Gold was trading around $300-$500 range.  The Canadian and American governments saw their recent 5y bond auction leading to some of the lowest yield ever seen:  Canada at 1.41% and the U.S. at 1.5%, just 3 years ago the same duration bonds were 200 bps higher. Obviously, this reduces the cost of government borrowing, but the impact on pension funds is devastating!

No economic news in Canada today -- only thing is that the interest rates futures curve is now only pricing a 25bps fall in short term rates (down from 50bps last Wednesday -- during the height of the "Crisis")


Friday, August 12, 2011

1.12% and the week will be a wash

This afternoon, Friday the 12th of August, the S&P500 is just 1.14% short of its Friday Augsut 5th closing of 1199.  In a nutshell, if you had been on holiday all week on a desert Island, and return to the office on Monday, nothing of this week would have transpired to you.  In fact, oil and Nat gas prices are also back to where they were a week ago!

Despite all that, the market is nervous, volatility is sky high.  Maybe its the plunge protection team at work again.

Have a great weekend


What Canadians worry about?

Early today I was reading David Frum’s blog/news site, and wondered a number of things.  Despite having left Canada more than 20 years ago, he remains interested and connected to the country of his birth.  Not only is his sister a Senator (in Ottawa) but he remains well connected in Canada’s intelligentsia.

Apparently, David was invited at the last get together that Jim Flaherty hosted near Ottawa a few days ago, and where political and economic topic about Canada were discussed.  Chatham house rule applied (where you cay discuss the ideas raised but not who took what position) to the entire get together.

So what worries Canada’s leading lights?  In no particular order these are the main themes:

  • Canadian health care costs are rising at more than 6% per annum
  • Canadians incurred too much debt
  • Is the Federal government correct in keeping its target for a balance budget to 2014

When discussing America there is a certain amount of despair; the dogmatism in America seems out of control.  When a political leader in Washington can say: “Our only objective is to make sure that Obama is a one term president” governing become impossible, since the opposition takes a scorched earth strategy – its blocks everything, from nominee to policy to law, and works hard at introducing fatuous bills that will never make it into law.  I don’t know if the Republican’s strategy will harm their 2012 prospects (BTW I am not saying that the Republicans are the only problem), but this kind of behavior will encourage the democrats to take similar action.  The debt ceiling debate was awful because it was apparent that the GOP were relishing the idea of taking the economy hostage, fur pure and ephemeral political gain.  

Canadians view this behavior as destructive to the country and the democratic process.  American politicians have become skillful at using strident statements to get elected but have forgotten why they were really elected – to run the country.  Good at winning election but very bad at governing.


A commentary about the London riots

I lived in the UK, first as a student and later as a banker.  London is an amazing city, but the spectacle of the city  (and as a microcosm for the country as a whole) was to behold in the early 1980s.  It is hard to express how London was "failing apart" during that time (yes Thatcher was prime minister, but had not yet embarked on her fight against the coal miners' union).  You could see the rot as it were.

Over the last few nights violence has exploded in the city, first it appears caused by the death of a young black man, 20 yards from his home in troubling circumstances.  Penny Red, and Englishwomen blogger wrote the following:

Riots are about power, and they are about catharsis. They are not about poor parenting, or youth services being cut, or any of the other snap explanations that media pundits have been trotting out: structural inequalities, as a friend of mine remarked today, are not solved by a few pool tables. People riot because it makes them feel powerful, even if only for a night. People riot because they have spent their whole lives being told that they are good for nothing, and they realise that together they can do anything – literally, anything at all. People to whom respect has never been shown riot because they feel they have little reason to show respect themselves, and it spreads like fire on a warm summer night. And now people have lost their homes, and the country is tearing itself apart.

I wish I could say it as well.  What amazes me is that  while the U.K. is bad in the size and remoteness of its underclass (poor, uneducated no training and no job prospect) is how a similar class in the U.S. has not yet expressed is rage and powerlessness!  On day a young black man will be probably killed in Chicago or L.A. and  the powder-keg of resentment will explode... watch out America!


Thursday, August 11, 2011

Canadian Data: Trade balance is dropping

This morning StatsCan released its June 2011 trade data, and while import track a growing economy (with a strengthening currency), exports tell a different story.  Canada's trade deficit that had grown to $1 billion in May is now $1.6 billion, and in view of the price for natural resources (including energy) over the past two months, I would suggest that Canada has "worse to come" in terms of trade balance.

Exports and imports
(Source: Stats Can)

The usual culprits are to blame;  Energy and automotive (but considering their importance in export trade) this result is hardly surprising.  Exports dropped by 2.2% to $ 36.5 billion.  Import volume rose by 1.9% but there was a nearly identical drop in import prices (its easy to forget that the CAD become very strong in early June -- and that this trend -- peaking at 1.05/0.95 in early July) will reverse throughout the summer.  

One issue because Canada is very dependent on energy import/exports summer months can create false sense of euphoria or doom, summer refinery shutdowns has a huge impact on trade balance (a bit like the aerospace sector that has lumpy sales).  One thing for sure is that trade is showing stabilization in Canada's export picture -- stagnation trends seem to be emerging (maybe that just my imagination...) 


Brief note: Canadian Futures say 50 bps cut in interest rates!

Title says it all.  Six months ago the market priced a small rise in interest rates (25bps) in early 2012.  A month ago this had shifted to no increase in interest rate for the next year, Monday the futures market was saying a 25bps drop in interest rates.  This morning:  50bps drop in rate is on the card by the end of 2011!

Granted this is the "today" market perception, yet the reality is that worldwide economic conditions appear to be heading south. China has 6.5% inflation rate (the authority there said that 5.1% was way too high a few months ago... so 6.5% is probably not too good either).  For some reason, the same guys who think that the U.S. government cannot find its Ass with two hands, thinks that the Chinese can engineer a soft landing, while I am certain that the Chinese can engineer a statistical soft landing (after all they control the whole show) the reality may be otherwise.

Europe has discovered that the "Can that has been kicked down the road" is now too heavy to kick further, rumors of "broken foot" in the form of a European bank failure -- or downgrading of France -- is spooking the entire market.  Continental equity markets are off by more than 25% since their 52 week high (Italy is down 35%).

Canada an export orientated nation (2/3 to US, 10% to China and the rest goes to Europe) that sells raw material is facing "challenges" that may require lower interest rates -- especially as inflation pressures seems to be coming off rather quickly.

Technical note on ETFs

I’ve often said that I am a terrible stock picker.  I don’t believe in stock picking, for every good pick there is the equivalent terrible selection.  What makes a good stock trader is not his ability to pick winners, but to have the guts to “cut-out” the losers quickly, and I am crap at that part of the equation!

Anyway, my favorite stock investment instruments are ETF – Exchange Traded Funds that allow me to take position in virtually any global strategy (did very well for a while investing in Taiwanese stocks as a proxy for China).  Funny enough the first ever ETFs were invented in Canada – really, but the real big ones are the QQQQ, spiders etc that provide access to some of the biggest stock plays in the world (in the case of the above two:  Nasdaq top 100 stocks and the S&P500).  The reason I like ETFs is that since I am a terrible stock picker (alpha) the way I make money in the stock market is following the trend of the market in general (beta).  The other attractive feature of ETF is that they are easy to buy have very lower management fees (most) and brokerage fees are minimal as they can easily be bought using a discount brokerage account.

Anyway, being somewhat involved in the financial market I kind of know how ETFs are made, especially I know how they are made in Canada – most of the ETFs are made by the book runner buying and selling the underlying stocks – that way the ETF tracks the index (more or less).  However, to reduce the tracking errors (because different stocks have different volatility coefficients -- it gets complicated here) derivatives are used here.  That way if you buy the ETF for the S&P/TSX 60 your tracking error may be as small as 25/35 bps (1/3 of 1%).  However, in Canada there are liquidity issues (Canada is a small market) about 10-12% of any specific ETF assets will be derivatives (instead of the underlying stock).  In the U.S. where liquidity is much higher (and we are talking orders of magnitude here!) maybe 5% of each ETF is made up of derivatives – and for the really big ones (QQQQ & SPY) it is probably lower (less then 1%).

In Europe the proportion of derivatives is much higher.  Primarily for fiscal efficiency it is efficient to use derivatives instead of the underlying equities; as much as 50% of the average ETF is made up of derivatives.  The issue with derivatives is counterparty credit risk.  Not only is there a risk vis-à-vis the sponsor but also towards his own derivative counterparty.  Moreover, whereas the sponsor of the ETF in North America is usually an independent firm (free to replace the book runner) in Europe the Sponsor and the book runner are one in the same.

I’m not saying that investors should avoid European ETFs, but I wonder how many investors realize that whey the buy the ETF for the CAC40 they are in fact taking a great deal of European bank risk, with virtually no recourse to the assets of these firms (they become an unsecured creditor).  Anyway it gives everyone something to ponder on this Thursday morning.

Wednesday, August 10, 2011

Where should the American government cut first?

I will give you hint or three

Expenditure in this segment of government has risen by 81% between 2001 and 2010
It is equal to 43% of world wide expenses in the segment
America spends six times more than anyone else in the world
It consumes 4.8% of America’s GDP
No other segment of the US government comes close to the military in increased expenditure

Military Expenses

Two fascinating post I am reading today

Fist, is Bank of America death watch by Yves Smith on Salon.  A must read for those who are still curious of  the impact of Level 3 assets on bank's balance sheet.  In a nut shell, today Bank of America (NYSE:BAC) has tangible net worth (difference between total assets and total liability) of $222 billion.  One of the many Level 3 assets held by BAC are second liens mortgages for a total book value of $125 billion.

The average American mortgage created between 2002 and 2008 was for 90% of the then market value of the house.  First, and often conforming mortgages are limited to 80% of the value of homes (so that they can be securitized), the balance is a second mortgage.  in view of the AVERAGE drop in home value between 2007 and 2011 of 30%, what's the bet on the value of these second mortgages?  In fact, the value is near zero (and in some case its negative -- don't ask).  My guess is therefore that there's not much value in this $125 billion "asset".  That's why BAC's share price reflects 30% book value -- Read it its fascinating.

Second the continued "amusement" of watching the death spiral of Chinese foreign listed companies continues.  As the CEO of Muddy Waters Security said a few weeks ago, the issue of disclosure for Chinese companies is the level of "lying".   One of the recent "shorts" story involves Trina Solar (FRA:TR3), in this case it appears that the short got the right strategy, but for the wrong reason.  Bronte Capital a Australian based hedge fund that has made bucket loads of cash shorting China's worse offender of the "lie and obscure" (China media Express and China Agritech) thought he had another play in TR3.  Turns out that this company's sin is to have undertaken huge forward positions to buy polysilicon in the order of $14 billion -- or 7 years of sales.  Moreover, these forward position (actually means obligation to take delivery) are backed by bank L/C. Anyway read the entire analysis.  It shows the power of analysis available to those who really want to understand an investment.

Not much Canadian news today, yield curve is really pricing a 25 bps reduction in Canada's director interest rates (overnight) within the next 3 months -- next meeting of the governors of the Bank of Canada is September 6th.  Mark Carney and his friends are seeing the carnage that is America and Europe, and the impact on Canada could be dramatic.  Already the CAD as dropped 4% over the past 3 weeks, Canada's economy is very exposed to global shocks, and there are a few of those around now....

Tuesday, August 9, 2011

Bogus Data of the day!

Ok, so at 8:30 this morning Q2 productivity for non-farm labor was released and it printed at -0.3%, seriously better than the anticipated -0.9% target, except for one little hiccup, the number for Q1 was revised slightly, you seen a few weeks ago BLS released Q1 productivity to be +1.8%, a decent number that shows an economy still growing well, you see the revision was rather large from +1.8% to -0.6%, a 150% movement, but that's ok right?  Well it means that the first half productivity is not up at least 0.9% (with the fall off in Q2) rather its down a staggering 0.9%, literally 1.8% below Q1 target.  It means that the economy is slowing fast in Q1 -- even faster than the GDP Q1 forecast revision of +1.8% to -0.3% implied.

Now many in the market "hang on" these daily/weekly states to determine the "direction" of the market (not only financial but also the underlying economy).  Well it turns out that all that stuff is complete and utter B.S. because there is a rather important between growth and contraction.  It makes one wonder as to the logic of releasing early (and often very wrong) numbers.  Moreover, a revision of 2.4% over a quarter says something very serious about the quality of the data.

Monday, August 8, 2011

Banking sector getting slammed today!

Canadian banks are getting slammed today.  The smallest (and the most "Canadian") National Bank (TSE:NA) saw its stock go from $79.65 a few weeks ago to $69.66  today a drop of 13%.  Granted that is nothing like what the US banks are suffering right now.  Bank of America (NYSE:BAC) is down 17% today -- Citibank (NYSE:C) is down 15%.  BAC is down 44% since its "high" of $15.25 in January 2011.  America's most well regarded bank JPMorgan Chase (NYSE:JPM) is only down 29%.

The rest of Canada's finest are:

RBC  down 3.13%, CIBC down 3.00%, TD down 3.32% and BNS down 2.57%.  Not a good day to own stocks in Canada or anywhere else for that matter.  Question for the market close with the S&P 500 breach the 75 pts drop in one day...


Waking up to an interesting day!

The world has suddenly decided that “Risk Off” is the proper strategy, gold it $1,700 this morning – it was below $1,600 just a few weeks ago.  Euribor has decided to freeze up (the implication here is that European banks are declining lending to each other… think of Bear Sterns and Lehman Brothers period).

Obviously the problems that affected G7 countries 4 years ago are still largely present today, and investors have noticed that the attempt to sweep all these realities under the rug has failed.   The highlights:

  • Greece is still a mess, and despite all the ECB/IMF efforts its debt to GDP is greater today than it was 18 months ago.
  • Spain will have elections in October
  • Italy has finally woken up to the fact that after Greece it has Europe’s second highest level of debt to GDP
  • Swiss Franks has risen by nearly 50% in the past 18 months
  • Belgium has been without a government for more than 418 days (a world record)
  • America’s continued internal brinkmanship in resolving its excessive government deficit has reached its ridiculous conclusion with an 11th hour agreement to raise the debt limit (a fake issue), and confirming that there is no political will to find a solution to the debt problems.
  • Finally, this morning it is rumors of bank insolvency (SocGen and Unicredit are at the center of the storm).
Up here in the great frozen north we observe our largest export market (America) poised on the edge of the abyss of another recession.  As ISM numbers show a continued deceleration in economic growth.  QE3 cannot be too far now (although since 5y and 10y bond yields have already dropped dramatically… I don’t see that the feds have much value added here).  Canada is bracing for further capital inflows, averaging 7% of GDP for the past 2 years, it is beginning to worry policy makers.  Fast money was the bane of Asia in 1997/99 when the world decided that they could better the use the money elsewhere.  Policy makers will have to think of ways to channel these funds away from fast money instruments towards more productive uses, that would "lock-in" investors for many years -- and reduce the risk to Canada's economy of a mass Exodus when things settle down  again in a few months.

On fact for Canada that may slow down the cash inflow is the current weakness of the CAD, peaking at 1.06/.94 a few weeks ago, it is down nearly 5% to 1.01/.99 this morning.  Many, including me, have shown that the CAD is effectively a “petro currency” and with the WTI at 83bbl this morning, down from near $100 in early June has the predictable effect of reducing the value of the CAD.  Where do we go from here.  It has been widely stated that the Middle East premium was around $20/bbl – this has now been erased as the discussion moves on to economic slow down in Europe and America – these two markets account for 50% of world oil demand.  Could we see oil at $60 – sure maybe although as old oil hands will tell you predicting oil prices is a mugs game.

Anyway, the S&P 500 (in the futures market) is near its next support level of 1160 at 1172.  Interesting day ahead!