Friday, September 30, 2011

Europeans are taking action on MBS disaster

From Reuters this morning:

JPMorgan Chase & Co and Bank of America Corp were hit with new lawsuits by investors seeking to recover losses on $4.5 billion of soured mortgage debt, expanding the litigation targeting the two largest U.S. banks.

Sealink Funding Ltd said between 2005 and 2007 it bought nearly $2.4 billion of residential mortgage-backed securities (RMBS) from JPMorgan and $1.6 billion from Bank of America in reliance on offering materials that were misleading about the quality of the underwriting and underlying loans. 
According to court papers, Sealink is an Irish entity that oversees RMBS purchased by special purchase vehicles once sponsored by SachsenLB.
Another plaintiff, Landesbank Baden-Wurttemberg, raised similar claims in a separate lawsuit against JPMorgan over $500 million of RMBS that it said it bought.

The plaintiffs seek compensatory and punitive damages.

Newsflash:  Everyone was thinking of American hedge funds taking the baseball bats to BAC and JPM, guess what, the European have finally figured out the game -- just so we are clear this is just the "tip of the Iceberg" once they get satisfaction in these cases, it is billions (With a B) that they will be claiming.

BAC will have few choices but to sell the rest of its assets and "call it a day".  It will take some months but the nails are hovering over the coffin!

Futures Market -- says nothing anymore

Used to be that if you looked at the S&P 500 futures market you had a good idea of the market's psychology. No more, yesterday market was "all green" and opened up 1%, by 15:00 it was down 1% but closed up .81%.

this kind of volatility is due to very small trading volumes, and market participants looking for direction by pushing the price around.  For investors it is a dangerous time, because the moves can be sudden.  Old trader joke, the market takes the stairs going up, and the elevator going down... 

The market is driven by forward earning estimates (determined by 25 year old recently MBA graduates), who are told by the companies they cover: "What to expect".  Bottom line the actual performance and these indicators bear little correlation.  in 2008 analyst were predicting earnings of $75 per share -- the actual number was zero (we also got the S&P500 at a close low of 666 -- how fitting).

American Companies have had a free ride with the past 3 years, via the weak US dollar.  That's about to change with the trouble in Europe (don't believe the punters who say everything will be fine -- they are picking up dimes in front of a steamroller).  Once the free ride of low costs dies (plus the high cost inflation in China) things are going to look more difficult -- you can assume that lots of the currency movements will be counted as "extraordinary items" -- Corporate America's new accounting game; costs you don't like are treated as extraordinary item that are counted after profits: HP is famous for its "non-GAAP accounting rules"  The new CEO will probably do "lots of restating". BTW really enjoyed the fact that the departing CEO of HP -- after 18 months at the helm of the company got a $7 million severance pay.  He was so good that the board could not wait to kick is ass out of the company... Maybe Meg can improve things?  

Love American "capitalism"  it rocks!  Don't matter how bad you are in the executive suite -- you get at the very least an 7 figure payout.

July GDP growth of 0.3% or 3.6% annualized

July would seem to see Canada's economy recovering from its dismal second quarter.  On an annualized basis, there is still hope that the 2.1% target by the BoC can be reached, although the rest of the year will have to generate the same kind of growth that was produced in July.

manufacturing grew by 1.4% which is excellent since it reverse the previous three months of poor performance.  Every sector bar retail and construction advanced, and with continued rising national income savings are also going up (despite the poor -- or maybe because of the poor yields).  Oil and Gas continues to be a drag on the overall GDP numbers, but this is entirely due to price decline (as opposed to decline in volume due to the fires earlier this summer).

Overall, the number was positive for Canada.  However, externalities remain the #1 problem for the country.  America seems to be, at least not in a recession, at the very least operating at stall speed.  The news out of the UK (Second largest market) is hardly inspiring, and stories this morning out of China are downright scary -- talks are of a hard landing are emerging -- as the forces of reality take over an overheated and unsustainable growth in infrastructures expenditures.

Thursday, September 29, 2011

IPPI was just too boring to talk about!

So, Industrial production price input (IPPI) was up a bit in August +0.5% (Huge yawn really), guess what all the increase in prices is due to cost of motor vehicle (big whoop!), whereas raw material costs were flat (and will be falling for September -- you can bet on that).

Some of the 2011 census data is starting to emerge, the big stuff:  Canada's population is 34,403,800 up 1% over the past year, aging is a bit of a problem since fertility rate is below 2.1% (population replacement rate). Average age is 39.9 years (up 0.2 years) and 16% of Canada's population is below the age of 15.

Bonus:  Last week, a report came out that the Americans were thinking of building a "wall" between Canada and the U.S.  initially I thought it was a joke (a bit like the Onion), turns out no so much (Globe and Mail today).  Apparently, the Americans have decided that it would be a very good way of keeping terrorists and illegal immigrants out -- turns out Canada agrees, plus the Americans are going to cover the entire cost.  turns out most of the illegal immigration is from the U.S. to Canada (not the other way around).

Personally, with the crazies running the show in the U.S. right now, I think this is probably a good idea (I wish them luck with the Rockies (but not really my problem or Canada's dime).  Next shoe to drop is the XL pipeline, should America decide they don't want our oil -- better for Canada in the long run, selling to the rest of the world is probably a better idea anyway!

Wednesday, September 28, 2011

Teranet- National Bank House Price Index +1.3%

Canada's housing market continues to defy gravity.  A cursory look at the rest of the planet of those countries that have seen a strong housing market after the 2007 crisis -- China and Australia, are both now facing rapidly slowing market. Yet, for the 4th month running Canadian house prices are up, this time by 1.3% (July) , in June  it was 1.7%.  Canadian house prices are now 12% above the 2008 peak

(Source: national Bank of Canada & Teranet National Bank House Price Index)

What is driving these prices, well mortgage rates have restarted their downward trend of the past 30 years.  We forget that in October 1981 Canadian mortgage rate peaked at 22%, falling almost without interruption (87, and 95 stick out as rises 10% to 14% and 6% to 10%).  Today mortgage rates in Canada are around 5% for the 5 year term (Canada doesn't have the U.S. system of 30 year fixed mortgage), and less than 3% for the 1 year mortgage term.  That's driving the ability of Canadians (who still benefit from rising income) to buy more expensive homes.

The Teranet-National bank index also noted that the market was more or less in balance across Canada with the exception of Toronto where non-resident investors are a major driving force (more so than Vancouver).  Yet lost in all this is the Canadian consumer confidence index -- which is at its lowest (outside a recession period), although much of Canadians view of the economy is colored by what is occurring south of the border, still it remains that the numbers are not bullish for the economy.

The Teranet National Bank Housing Index is the equivalent of the American S&P Case-Shiller Home price index comparing sale price of the same property over time, and takes into consideration improvements...  

For those who thought I was too pessimistic

 From the Head of Unicredit (BIT:UCG) Security business
"the euro is “practically dead” and Europe faces a financial earthquake from a Greek default"... “The euro is beyond rescue”... “The only remaining question is how many days the hopeless rearguard action of European governments and the European Central Bank can keep up Greece’s spirits.”...."A Greek default will trigger an immediate “magnitude 10” earthquake across Europe."..."Holders of Greek government bonds will have to write off their entire investment, the southern European nation will stop paying salaries and pensions and automated teller machines in the country will empty “within minutes.”

That's no kook talking, Monday's  Alessio Rastani is now joined by a serious hitter.  Already the futures market in America (that were up 100 bps at 4 this morning) are now up only 55 bps.  Cannot wait for the Spanish finance minister to say that Attila Szalay-Berzeviczy is full of shit, and that everything is OK, this guy used to be the head of the Hungarian Stock Exchange and now runs a huge division in Europe's largest bank (also the one closest to the precipice -- it is massively under capitalized).

And from Bloomberg there is more:

The impact of a Greek default may “rapidly” spread across the continent, possibly prompting a run on the “weaker” banks of “weaker” countries, he said.
“The panic escalating this way may sweep across Europe in a self-fulfilling fashion, leading to the breakup of the euro area,” Szalay-Berzeviczy added.
Szalay-Berzeviczy has just arrived in Hungary from a trip abroad and can’t be reached until later today, a UniCredit official, who asked not to be identified because she isn’t authorized to speak to the press, said when Bloomberg called Szalay-Berzeviczy’s Budapest office to seek further comment.

Try that for size folks, Rastani said it best, use defensive portfolio management, bonds, utilities and high dividend non-cyclical stocks provide the best portfolio protection (See David Rosenberg's many comments on the issue).  Reduce leverage keep some cash at hand (when the system freezes it can lead to banking panicks where the switch is pulled).


Tuesday, September 27, 2011

The trading rumors are insane

Over the weekend and the last two days, rumors of a fix for the Euro Area's crisis have emerged, this one using the European Investment Bank (EIB) as the vehicle of choice.  In a nutshell, the ECB would capitalize the EIB with Euro 200 billion, then the EIB would borrow another Euro 1.8 trillion (9:1 leverage) that would the proceed to buy (maybe at face value) all the sovereign bonds sold to European banks (maybe insurance companies too) and issuing instead an EIB bond -- that would have the full faith and credit of France and Germany.

First off, this was reported in one news organisation (CNBC)  -- and the details are only now being worked out, first being how will this impact the credit worthiness of Germany and France?  BTW, this is exactly what the original U.S. bail out was suppose to be, except that because we were talking about mortgage back securities (of various level) it was thought too complicated to get a "reasonable market price".  Maybe with only four credits (Ireland, Greece, Spain and Portugal) it would be much simpler... What is not simple is the impact on the credit of Germany and France of guaranteeing Euro 1.8 trillion in new borrowing.  Somehow, this doesn't solve the problem since the Euro 200 billion in equity is almost not enough to insure that further losses will not occur.  It is generally accepted now that of the Euro 400 billion in Greek debt, the necessary write-off is around 50%, so that country alone would account for 100% of the equity injected into the EIB structure.

Despite all that B.S. the markets have seen a 500 point rally -- based not on fact, but on a possible "solution" to the European crisis -- that would allow everyone to further delay the inevitable; Finally, this solution doesn't address Greece's current Euro 8 billion shortfall in funding needed by October -- it only deals with what has been issued, not what needs to be issued.

Strange times 

Cash Crunch in China Picks Up Momentum; Chinese Economy "Teetering On the Edge"

Yesterday’s Mish Shedlock title for his blog!  Basically, the Chinese government has been putting the screws to the economy in order to slow down the, out of control, housing market before something bad becomes terrible.  There is something like 65 million empty apartments in China – constructed but with no electricity provided – basically unoccupied.

In China, as in most of Asia, people like new things; this is also true for housing – go figure!  Still it is what it is, so if you buy an apartment as an investment you want to keep it “pristine” and therefore unoccupied form, so that you get full value when you sell it.  Think of an apartment as a car, a soon as it leaves the show room it looses value.

So the Chinese government has been aware for some time that excessive investment in real estate has taken place, for two years now the Chinese government has been trying to slow the housing market, and its latest tactic is to starve the market of credit – raising capital requirements and making life hard for the informal financial market.  The impact is clear to see, as cash is flow back to china and the differential between off shore Yuan and onshore one has narrowed dramatically.   

About 75% of China’s economy is investments; infrastructure (roads & Bridge) manufacturing (steel, concrete etc) and housing (discussed above).  Now the steel industry and the concrete industry are geared to local asset expansion, bridge and roads require concrete and steel as do housing, which also requires wood, bricks and copper and other material.

NOTE: here comes the Canadian connection.

Canada like Australia is very dependent on trade for its GDP, as an example about 1/3 of Canada’s GDP relates to exports – and a great percentage of this is raw material (Oil, Iron Ore, Zinc) and commodities (Wheat, soya etc).  America our immediate neighbour, and largest trading partner, has a much lower dependence on trade (around 10% of GDP), so whenever an America politician says that trade will save the U.S., the only answer is: In what universe?  Back to Canada, China is not only Canada’s third largest trading partner (after America and the U.K.) it is concentrated in the “things that are heavy” segment.  Yes Canada has exported some mass transit products and aircraft but overall the Canada to China trade is one of raw materials. 

Canada is a second derivative country, we are not the market we are not the maker of the product, we are the provider of the inputs for the countries that make things – it may seem a lowly position, but it has served Canada well, and in fact Canada cannot compete with the Chinese (or Vietnamese) for labour costs.

But is also means that when things go bad in America (and they seem to be really bad), the U.K. (really same boat as America, maybe a little further along – but a long way to go) we have to rely on the growing demand for raw material by China to feed our economy.  Now the signs are that China is getting close to the precipice:  its two core consumers (Europe and America) are in trouble – Japan its third largest market (really an intermediary to sell to America and Europe) is facing the same pressures.  Moreover, the Chinese government is becoming concerned about its debt burden, for while the country’s borrowings are reasonable, because China is a command economy it also effectively guarantee the debt burden of local governments, and state owned enterprises.  Bottom line whereas China’s sovereign debt is low, aggregating the debts of SOE and local governments brings the number much, much higher!  The Chinese authorities in 2008 injected about $700 billion into their economy – to avoid a recession, an amount equal to what America invested, but a smaller economy and most of the funds were used for building things (the bulk of funds were transferred to state and local government to keep things going… far less stimulus).  Chinese are unlikely to have the same appetite, moreover, with the high inflation (due in large part to an undervalued Yuan – to support unprofitable exports) the Chinese authorities’ hands are tied.

That spells trouble for Canada…

Impact will be two fold, we can expect a weakness in the price of raw material (already king copper has taken a hit), other like Zinc (stainless steel) and oil are sure to follow.  The impact on the CAD is certain to be important, especially since the weak dollar policy seems to have been reversed.  My guess is that the CAD could fall to the 92/93 range depending on the depth of the Chinese slow down.  This could be a difficult ride for Canada – it may be that the BoC’s 1.9% GDP growth forecast in 2012 is optimistic, personally I think that the 2.2% growth forecast in 2011 is very optimistic, considering that the first half generated growth of only 0.7% (Q1 +1% Q2 -0.2%).

Tell me this is not a massive problem

The Census Bureau started tracking New Home sales in 1963, and the record low was 412,000 in 1982 - until that record was broken in 2009 - and then again in 2010 - and it looks another new record in 2011. (Source: Calculated risk)

Imagine in 1963 America's population was 186 million (a little more than half of today's), and the record low in new homes was 412k, and yet 2011 is shaping up to be a 303k -- 25% lower than in 1962 (peak of Cuban Missile crisis). The only bright aspect, it really cannot fall much more! For the sake of comparison -- population wise (this was also when the baby boom started) America with a population of 311 million needs to build 685k house just to be in the same percentage new home as in 1962 (for the sake of comparison from 2002 to 2006 more than 1 million new homes were sold).     BTW in 2009 375k, 2010 323 and now 2011 is looking like 303 -- not a good trend at all, and a further indication that the housing problem is still very much with America.  

Obviously all this data is backwards looking, but sometime it is important to consider not only the rate of change (or trend) but also the absolute number.

Monday, September 26, 2011

Nial Feguson is my hero

Ferguson is a very well regarded economist (Cambridge) and has a rare ability to cut to the core of the issue.  Below is a presentation he made at the TED talks.  Watch it!  My issue here is how things are changing for the west in general and for the U.S. in particular.  The six killer apps of the West are:

  • Competition
  • Scientific Revolution
  • Property Rights
  • Modern medicine
  • Consumer Society
  • Work Ethics

The question is: Are all six of these elements necessary for the continued success?  China economic model is looking relatively good, and the concept of property rights there are rather nebulous.  Of course one of the dilemmas with China is that type of growth that has been achieved.  In a sense, growth has been via investment in production capacity – about 70% of China’s GDP is capacity in infrastructure and production.  Chinese model is not dependent on its  citizen to generate demand for its production, rather it looks at the rest of the world as its market.

Looking at the U.S. it is interesting to note that several of the above “Killer Apps” are weakening.  Unlike China, America’s level of consumption is high – around 75% of the GDP.  Whereas the Chinese model is unsustainable the U.S. system faces the same challenges.

Competition:  Still fierce in the U.S. the concept of constructive destruction is alive and well, the rise and fall of IMB, Bell and Microsoft are proof that the U.S. system takes a very aggressive view as to the survivability of its companies.  I would suggest that this extend to most of its financial sector too.

Scientific Revolution:  Is under threat from several segment of society, stem cell research is just the most obvious segment where America is falling back, yet smart foreigners still flock to America, because it is the world single largest homogenous market.  The question becomes more difficult when basic scientific research is concern.  The withdrawal from space is one of the most glaring shifts in America – there’s money for guns at unprecedented level but there’s no more money or scientific inquiry.  It is easy to blame politicians, but they are a reflection of the population at large.

Property Rights: The end of the U.S. housing boom has been difficult for America in more than one way. First off, it is now evident that the housing boom of 2002-2008 was built entirely on debt, yes more borrowing, but more importantly, people borrowed more, but faced, on average falling income.  The middle class of 2011 finds itself with income slightly lower than in 1990 – 20 years ago!  Yet borrowing levels continue to rise.  This has led to unprecedented number of homeowners defaulting on their financial obligations.

Add to all this shoddy paperwork on mortgages that were put in place during the boom years – and property rights in America are deeply affected.  In the U.S. a very strict paper trail to perfect mortgages has evolved over the century (yep we’re talking a long time).  In the case of hypothec the loan note has to be physically attached to the mortgage charge, and hit has not been the case for many mortgages.  This means that the bank which repossess a house may have no rights to do so – you can see where this is going.

Modern medicine is the next topic, and while America has probably the ultimate cutting edge in medicine, and increasingly large percentage of the population doesn’t have access.  The stigma of “pre-existing conditions” never mind the willingness to pay huge premium.  In fact, over the past 10 years, 100% of the nominal increase in national income has been absorbed by ever rising medical expenses.  Modern medicine exist, but too many in the middle class it is no longer available.

The consumer society is alive and “well” in the U.S. although there is doubt that the current level of 75% of GDP in consumption is sustainable (its not) and that consumption will have to drop sooner rather than later.  In fact, the boom in housing between 2002 and 2008 fuelled the largest increase in the consumption society, but since the home ATM is closed (probably for a long long time) the ability of American to continue their consumption binge in the face of falling income is hard to reconcile.

America’s work ethic is one of the strongest, but it is under a great deal of tension with the rising unemployment.  Not only was the 2000-2008 period of economic growth largely accomplished without the participation of labor, the worse is that the 2009/10 recession saw a dramatic increase in unemployment.  The strictest form U2 is at 9.1%, but the more widely accepted measure of U6 (which counts people who are underemployed e.g. would like full time work but cannot find it) at 16% is dramatic, as is the rise of the long term unemployed.  This could fundamentally shift American’s work ethics.  Already a Chinese works a 1,000 hours more a year than does a European (difference is not as wide in America).

So there you have it, what has been the strength of the western world 


I've received a few comments on my blog, not realizing that I had to approve these.  So they related to somewhat older posts,.  Surprisingly only one "Viagra" comment.. I will be more diligent going forward.

Friday, September 23, 2011

Scandal in the construction industry

A well know secret in Quebec is that the construction industry cartel extract economic rent from the province in its construction projects.  Fact 1:  Roads in Quebec cost about 30% more to build than in Ontario (similar weather).  Fact 2:  For more than 30 years the Quebec department of transport has failed to inspect work sites -- only doing paper inspections. Fact 3:  Everyone in the province hates Public/private partnerships. Now the police force union wants an independent commission to investigate these "crimes".  

Think about it, the police doesn't want to do its job, they don't want to investigate arrest and obtain convictions, they want whitewash -- its the only explanation I can phantom, as to their behavior.  It is possible that the police union sees the level of corruption so institutionalized that they see no way of obtaining any conviction.  

The reality of PPP is that they do contain costs and keep the contractor "honest" because he's got to bear the costs of maintenance for the next 20 years.  This morning on Radio Canada the announced said "I think there was even some excess cost on the 25" which was a PPP, which BTW was ready ahead of time and on budget.  Further proof of the dislike for the method of building.

Imagine that you tell a contractor that he's got to build (or replace) a structure and will remain responsible for maintenance cost for the next 20 years -- odds are he will make sure that it is correctly built.  Take the opposite example, renovate a house and never show up on the construction site -- what do you think will happen?

Just a rant, nothing more to say, no economic news -- that CAD is stable, USD is strong against all currencies.  Operation Twist has worked, 30y TBond is at 2.76% (7 standard deviation down -- only more extreme move was in 1987...).  Earnings report are coming in, analysts projections for full year earnings are also declining -- reality is a bitch.

Add-on:  Last night (Sunday 25/9) the man in charge of the construction industry inquiry was on one on Quebec's most watched program.  Aside from the real life issue of personal security for the man, another issue was the apparent lack of proof of "criminal behavior" which could lead arrests and conviction.  Much analysis was based on data analysis (proves that something was up but not who did the crime...).  The idea of a public inquiry would be to be bring light to the process and allow for new procedures to "stop the rot", a somewhat valid argument  

Thursday, September 22, 2011

CAD down 3%

What a night, first I'm not sure what the Street was expecting from the Feds!  In fact, the Feds delivered exactly what most economist had assumed to be the plan:  Twist; whereby the sell short term T-bills and buy long dated one (last tested in the Kennedy Administration) as a means of changing the shape of the yield curve.

For Canada, the implication was severe overnights, yields have tightened, the stock market is off nearly 4% (taking Canada back to August 2010), the CAD is down nearly 3% (down to 0.97/1.03) but then oil prices are down 5% for the day.

Good old fashion panic is in the air, the French banks are in melt down, European banks are increasingly unable to fund themselves, BAC and WFC have both been downgraded.  Screaming, crying the world is ending... not really!  Over the past year we've had a bear market rally, and now the bears are back!

Watch earning forecast for S&P500 companies; in January the figure was $105, then in April it was $95, its now slipping to the high 80s, it could be around $70-75 by November -- that says S&P500 at 900/1000 and not 1,450 (what the analysts were predicting in January)

What’s with ‘Merica?

I want to speak specifically about the Wall Street protests that have been going on for a few days.  There’s been a virtual media blackout on the subject as if it were not taking place.  I guess the only place you hear about it is in the foreign press (BBC, TV5 and Al-Jazzira), not the WSJ or NYT not CBS, NBC or Fox. Complete media blackout, and now the latest rumors that some web site are blocking emails about the protest (you know do what you will , and then apologize later if you get caught).  Apparently some protesters were arrested for wearing masks, because in NYC there are laws against wearing masks…

I wonder how the American media would react if the demonstration were in Egypt or Syria? 

Friends who live in Chicago tell me about curfews for 18 or less youth.  Chicago is the one I know about, but I understand that these curfews have been expanding all over the U.S. in recent years to combat youth bands steeling and beating passersby [I read that a few thousand cities now have curfews in place]. 

Only thing missing to the mix is a bunch of guns (I don’t know on which side) and you’ve got an explosive situation.  Yesterday’s Feds statement is a recognition that the monetary authorities have run out of ammunition (or ideas) the government is paralyzed, the Democrats don’t know what to do, the Republicans are looking to do as much damage to the economy – believing that Obama and the Democrats will be held responsible – image a party that says “uncertainty damages the economy” and the tries its worse with a debate about raising the debt ceiling and stating that they may stop honouring America’s obligations (like that’s not a calculated move to destroy confidence) . 

Wednesday, September 21, 2011

Inflation up (whoops!)

This morning reading the StatsCan web based news I was directed by error to the July inflation data, when in fact this morning StatsCan published its August data (I have removed the post since).

The August news was bad, real bad!  First fuel costs as a component of the CPI is actually down -- fuel prices in August were lower than in July, and yet inflation came in at 3.1% Year on year... Futures market is still pricing a reduction in rates (although with less conviction than it did last week), that's up nearly 0.4% (when the market was expecting at worse a +0.1% increase in inflation).  Question is what can be done? Joke is that inflation is always a monetary phenomenon (of course-- since the goods themselves have not changed!), Canada has been expanding credit (so maybe the BoC will talk to the banks to tighten credit rules -- one would have thought that the new mortgage rules would start to bit, but it seems that's not the case).  The principal tool available to the BoC after that are asking banks to increase reserves (but since banks are already keeping reserves in excess of the BoC's requirements).  BoC cannot touch short term interest rate.  Next the government can raise taxes (or at the very least compress expenses) -- but government don't like that too much (even the conservatives).

So lets see, the economic news for Canada:

  1. Canadian's per capital borrowing is nearly equal to the Americans', but whereas Americans are deliveraging Canadians are pilling debt at a rapid pace -- this is bad news (not terrible, but bad)
  2. The IMF (following the BoC last week) downgraded Canada's growth for 2011 from 2.8% to 2.1% ( still think this is optimistic -- 1% growth in Q1, zero in Q2...), so more bad news (although I cannot believe that this was not already priced in).
  3. Manufacturing is up (so that's good news, but then exports are in trouble so ordinary news)
  4. Inflation is going the wrong way (again) and is slightly about the 1% to 3% band that the BoC targets.
  5. Cash continues to flood Canada (another $11 billion in July) but its mostly being invested in S/T instrument -- so really hot money that's got to get up the BoC's nose!  (rumors are around that the amount of cash around is starting to really worry the BoC).  Can negative interest be far away here too for foreign cash depositors.  Second year when cash inflow in excess of 8% of GDP
No wonder the CAD is playing around parity.  

Tuesday, September 20, 2011

Canadian Income/Personal Debt Index is higher in Canada than the U.S – Really

Are we comparing apple and oranges here?  First off, we are comparing Personal disposable income.  While my American cousins’ harp about the fact that health care in Canada is not free, it is free as a portion of personal disposable income in Canada.  Whereas in America the average American spends nearly 20% of his disposable income on medical costs (I wish I was exaggerating – the math don’t lie!).

So the table that is often show that Canada has now passed its over indebted cousins would seem to compare to things that are not comparable.  So taking healthcare allocated revenues out of Americans disposable income reduces that index by 12%.  Which means that Canadian are not yet the worse of the lot… although we are working hard at changing this, as the direction of debt growth is for ever up while Americans are aggressively (willingly or otherwise) deleveraging.

The above graph shows the trend, and while Canada is “really” not as bad as the U.S. TODAY, the direction of both market is somewhat (huge sarcasm here) evident.  Canadians continue to borrow at unprecedented rate while the Americans are not (in fact the problems in America are becoming very severe with the destruction of credit facilities everywhere – shadow banking is in free fall). 

Bonus:  A friend recently relocated to Phoenix (big job and big salary) found a very nice house (actually a spectacular house for a very reasonable amount of cash) sought mortgages (non-conforming) from three lenders (well recognized financial institutions), the higher was for 71% LTV – not a problem for my friend, but the terms were far from interesting.  Eventually he picked a 50% mortgage – yes he invested 50% in cash.  No wonder the U.S. housing market cannot find its footing, if the minimum cash amount now required is 1/3rd of the purchase price (probably a good idea).  This to illustrate the dilemma facing the Federal Reserve tomorrow – at the very least “operation twist” is on, but they may have to do more.  Investors have lost all confidence in the system, and have chosen to protect capital instead if seeking return. 

Bonus 2: Yesterday, China “announced” that they were supporting Europe… yet at the same time Chinese banks are cutting European bank lines (BTW I totally agree with the Chinese banks position – this has been a constant refrain in North American financial institutions – the game is up in Europe, why stick around to pick up the pieces).  One thing that bankers have learned is you may be protected by your ISDA agreement if your counterparty fails, but it's September 2011 and my employer is still dealing with the Lehman legacy, we are still waiting for some of our collateral… 

2014 -- When 26% of Canada's population goes wireless

When I moved to Canada in 2002 I had a cell phone, a land line, a fax line.  Now, I have only one phone, a mobile phone.  I have high speed internet (and skype for long distance phone calls).  The whole thing changed when I finally looked at my bell Canada bill (Internet/phone/satellite TV), my total monthly bill was nearly $300.  That's $3,600 a year -- and I didn't feel I was getting much value for money.

Videotron a Montreal based upstart offered me a similar service (cable provider) and my total bill dropped to $105 per month (still got a phone line, TV and internet).  Few months ago I looked at how I was using TV/Internet and phone, bottom line I never used the phone line (only received irritating telemarketers calls), and I just didn't watch as much TV.  My total bill last month was $39.75.  In a decade my "communication" bill went from $3,600 p.a. to $477 p.a. (I've got a cell phone but its outside of that billing -- and it costs less than $50 a month) .  So my digital entertainment cost fell by 87% in a decade.

No wonder Canadians are switching off their home phone, they get the Bell Canada bill ($72 for basic services) and wonder if they cannot do better with Cell phones.  Guess what they can, and they are.  It is estimated that by the end of 2014, 26% of all Canadians will only rely on cell phones!

IMF Cut Canada's growth rate

Big news (not really) the IMF has cut Canada's 2011 growth rate to 2.1% and 1.9% in 2012 (down 0.7% for each year approximately).  Basic problem is not Canada but the fact that about 1/3 of Canada's GDP is dependent on exports, and our primary export markets are having a tough time (America, UK and Europe).  Now oil remains in the $85/bbl range (and has been around that level for some months now), but King Copper is telling a very different story, with copper price hitting 2011 lows.  

Copper is a good indicator of economic growth, and everywhere seems to be slowing down.  Canada is not a great exporter of copper (its like 9th largest exporters in the world), but Canada exports many things that when dropped tend to hurt your foot, and these are used in making things (Canada is a second derivative country).  

This is hardly a surprising prognostication considering that the Bank of Canada lowered its forecast for GDP growth earlier this year and the figure for them is 2.2% (whereas their 2012 forecast is 2.1%).  The IMF basically got in line with the BoC's own forecast (we will not quibble with a difference of 0.1%).

So there you have it, Canada is slowing (prospect for interest hike are dime to none) futures market is still pricing a Q1/12 25 bps cut in rates (no increase on the horizon for 2012).  Copper says world economy is ready for another pause (maybe not recession but slow growth), the result of debt contraction.  The only shoe left to fall in Canada is a fall in house prices...

Fascinating Dinner last night

Last night, I was invited by a friend to a fascinating presentation about the Canadian political scene.  The speakers, who will remain nameless, are two of Canada best know political commentators and have both been active in Federal and provincial elections (elected, holding office and nominated as ministers).  Both are well know in Canada’s two solitudes for their knowledge of their respective market (Ontario and Quebec).  The tone was collegial (Cannot say the same for several guests present…) before the presentation I had the opportunity to talk to many of those present and I was amazed (mostly high net worth individuals) bottom line they take the American view:  “All politicians are corrupt, crooks, liars and don’t understand anything”.  The strongest reactions I got from two individuals in particular who had never held a “real job” they managed their family’s money.

Now there’s nothing wrong with managing your money, they’ve gone to good schools, but it’s also true that as “the shareholder” and “manager” they’ve never had to make suboptimal decision because they have all the same interest.  First, was their view that the Quebec scandal on the construction industry needs to be “reviewed in public”, there is here some desire to see who were the crooks, but the reality is that the public “shaming” events are generally useless, first because the guilty never go to jail, they get immunity.  Moreover, whatever is said in the witness stand becomes “The Truth” just because the speaker has nothing to lose (no one considers that these people may have some accounts to settle).   When I tried to mollify their view with the nature of Quebec’s construction industry – it’s a cartel with few players – and that’s not about to change (since the Quebec government is prohibited from hiring “out of state” contractors (BTW that’s not exceptional to Quebec it is true everywhere), but because Quebec is small it gives rise to collusion between the players… I got nowhere, they were convinced that something could be done – funny enough they thought “the incompetent” politicians would find the answers, go figure.

There were essentially four topics:  Toronto politics, Ontario Politics, Quebec Politics and Federal politics.  The first was that Rob Ford (the current mayor of Toronto won his elections because of his four word slogan: “We will cut waste”), Torontonians are discovering that (as is Rob Ford) that there’s not that much waste to cut so as one speaker said “he’s cutting the left arm of the city” he’s not cutting fat he’s cutting basic services – that’s not the platform on which he ran.  This win by the conservatives in Toronto has now harmed the Ontario Conservatives who started the election (October 6th) process with a lead of nearly 20% on the Liberal (government).  Ontarians now understand that when the government talks about cutting fat, they mean cutting services (that Ontarians actually like their services).  Ontarians have made that leap and don’t like the cuts that the conservatives are proposing.  So today two weeks before the elections the conservative and liberals are neck and neck…

In Quebec, the situation is even more interesting a Leger Marketing poll that came out this morning (20/09) showed that Francois Legault “movement” gets 38% of the vote, the Liberals get 28%, the PQ gets 17% and the ADQ gets 8%.   This is an unmitigated disaster for the separatist movement in Quebec, the blow of losing the Block Quebecois in Ottawa, and this could spell the end of the Quebec separatist movement (great) and change the conversation.  As one of the speakers mentioned Quebec’s Love affaire with the NDP is a “one night stand” Quebecers don’t know who or what the NPD is and what it stands for.  At the Federal level this is a tremendous opportunity for the government (or the Liberals) if they can seize the day.

There is a large body of opinion that the Conservative have no interest in Quebec – first because they won a majority without the province, secondly because 30 new seats will be created in Parliament to adapt for changing population trends – none of them will be created in Quebec, the Conservative will focus their energies on these seats.  Finally, and most damming is that so few “counsellors” to the prime minister are from Quebec, in fact the vast majority are from Ontario (contempt for Quebec) and the West (even more contempt for Quebec).  They don’t know the place; they don’t like the place (often they don’t even speak the language of the place).  This is a terrible wasted opportunity for the Conservatives.  The Liberals may be able to capitalize on this (it is almost certain that the NDP will not)  there are more than 55,000 members of the NDP across Canada and only 1,700 in Quebec – Thomas Mulcaire cannot win the leadership race, so even if ¾ of all NDP members in parliament are from Quebec someone else will win the nomination).  In fact the real issue is how long will it take for the Liberals and the NDP to merge.

So this was a fascinating conversation.  It was scheduled to end at 8:30, if finally ended just short of 10, as the two speakers had to catch flights to Toronto. 

Monday, September 19, 2011

Foreigners Buying Canada Again

The short break where foreigners decided that Canada was not worth the effort was, it appears a one month phenomenon.  They’re back and the figure is $11.3 billion for July, mostly in sovereign short term instruments.  My guess is that foreign investors still see a strong likelihood that Canadian interest will rise (they will not) based on Canada’s overall economics health (forgetting Canada’s Q2/2011 negative GDP numbers).  Over the past 12 months, foreigners have purchase nearly $120 billion in Canadian assets, a similar level to what was seen in 2010 – and about 8% of Canada GDP.
Foreign portfolio investment in Canadian securities
(Source: StatsCan)

At the same time, Canadians are reducing their foreign bond holdings – not entirely surprising considering that when Canadian invest “abroad” we mean U.S.A. and the 10 year T-Bond are now down to 2% -- taking in consideration the movement in the CAD and the weak yield, there’s not much incentive for Canadians to hold foreign bonds, moreover Canadian are very concerned about foreign financial institutions – sub debt for American banks pays nearly 400 bps than the equivalent instrument for a Canadian bank…

Canadian portfolio investment in foreign securities
(Source: StatsCan)

Again 8% of GDP is a substantial amount of money, what must be worrying to the BoC is that most of these funds are in self liquidating short term instruments.  Not entirely certain what to make of this.  It could be a fear of capital control (or some other action by the Canadian authorities) to slow down the flow of hot money.  

Friday, September 16, 2011

Never believe anything until it is officially denied

Proof that the Euro is doomed:  Angela Merkel said that the Euro would not fail.  (Quote in the title from:Yes Minister)

Thursday, September 15, 2011


No writing over the past two days due to travel, NYC if you want to know.  First, this is my first trip to New York City in about two years.  I left Montreal with no U.S. dollars, paid for hotels, lunch, cabs virtually everything with a credit card… the cashless society is here.  The other thing I notice is how “third world” U.S. infrastructure.  Comparing the security systems in place in Canada and the U.S. was day and night.  Whereas the system was fully computerized in Canada, their American counterparts had pen and black light – so basically relying on an aware and attentive controls – where as their Canadian counterparts could concentrate not on the paperwork, but on the passenger demeanour (if you look at the Israeli security system you will see that the focus is not paperwork but rather personal interaction).  Granted that our American cousins are far more interested in the security theatre – when going through the security process in the U.S. there was zero eye contact – procedure was everything, removing belts and shoes… sade!

I also noted that virtually every public washroom has pressure taps, where you press down on the knob and water flows for a specific amount of time... no more electronic water taps (like we have in Montreal), its like they are getting ready for the next power outage...third world I tell you!

The news stays bad both side of the Atlantic, no job growth in the U.S. and with state and local government under pressure to balance budgets (13% of GDP) its going to get worse before it gets better.  The Greek tragedy continues, Merkel’s government continues to go right to left up and down, completely dysfunctional.  Surprisingly, CDS spreads are staying put, but then again when the yield is over 70% on short term paper there’s just no point in selling anymore (keeping the instrument is almost like a risk free option on the upside!).

The most notable aspect of the capital markets now is their high correlation; let me explain generally markets are to some extent correlated (stock prices tend, over time, to rise) but lets say for the sake of argument that stock markets correlation is around 75% -- the last few weeks the correlation has been around 90% and over the past few days its been 97% -- which makes no sense, unless you take all the players (and with high frequency traders involved) and lower volume you have an end of trend risk (think just before the failures of Lehman and Bear Stern – we had the same tendencies).  We only need very simple catalysts to switch the sentiment from bull to bear.  Such change could be the re-rating of American’s corporate earnings (right now around $95 whereas many believe it should be around $75) will impact the S&P500 from the 1,150s to 900s.

Back to my American theme, the place was hopping like Tokyo was in the mid ‘80s.  The wealth of the place is not an indication of America’s wealth, no empty stores, sales on Fifth Avenue seem brisk, the economy of NY is on fire.  This says nothing about the country as a whole, but one thing absent were cranes, on both flights coming and going I had a good view of NY City and there was virtually no construction (excluding the World Trade Centre).  NYC reminded me of Montreal in the mid 90s, in the core things were good, shops were full, but there was no evidence of growth – no building projects anywhere (or if there were, it was muted in the skyline).  You have a sense of End of Empire when travelling to NYC, the place is amazing, but you get the feeling that decay is just below the surface and that there is no real growth.

Granted I was very busy, and it was very hot.  Still the overwhelming impression was welcome to the third world.

Monday, September 12, 2011

Funny but sad comment

The end game is afoot for Greece, the first member of the EU looking at default and maybe/probably exit from the Euro.  The austerity package has been a disaster for Greeks at large.  The promised revenues (and asset sales) have not occurred and the budget deficit is not actually shrinking (as a proportion of GDP) but rising as the country's economy collapse from absolute reduction in government expenses -- that's what happens when the government accounts for 50% of GDP (I know, I know the gov't produces nothing -- but indulge me here).  

Germans who've been trough the German unification process (and cost) are not too keen on doing this again, especially since they view the Greeks as layabouts (not making a value judgement here -- just reading the mood). 

So the great European experiment has come to a cross road and some hard choices have to be made soon (they could fudge it and delay until 2013 -- but the political landscape may have changed by then -- imagine nationalist parties taking over government in several North European countries).  In a nutshell Europe has two choices: 

(a) Save the Euro and give up national fiscal independence
(b) Kill the Euro and retain national fiscal independence.

Of course this being Europe, there's always "door #3" where the worse possible outcome emerges; the Euro dies as does fiscal independence.

Again no real Canadian news, the CAD is now within .002% of parity with the USD and did dip briefly early AM, no real Canadian news today (actually nothing interesting till Wednesday)


Friday, September 9, 2011

Rumors about Greece

Well the solids are hitting the fan it seems, rumors are that Greece will give up the ghost this weekend and will declare default.  Honestly, they are way behind their targets (not that they really had any chance of meeting those targets), CDS are 400 bps wider this morning.  That screams default.

Collateral damage:  SocGen is trading 8% lower this morning -- it is rumored to be heavily exposed (and under capitalized) to Greek debt...

Obviously the big question is why this weekend:  The answer is why not!  It sounds flippant (that's my point) there is absolutely no catalyst this weekend that was not already present last weekend or two months ago.  This is Europe worse kept secret -- Greek austerity is not working, it never worked because the building blocks are just not present.  

Funny research report earlier this week by UBS that stated that Greece cannot leave the Euro, because, wait for it, there are no mechanism for leaving the Euro... I mean how stupid do you have to be (as an analyst) to suggest that the reason something will not happen because there's no rules for this to happen, morons I tell you real morons [not I will not link that research too stupid and lame to give this guy publicity].


Unemployment up 0.1%

Not entirely surprising, unemployment rose in August, it rose for two reasons:  First, all those employed by the Federal government to execute the 2011 census have now left!  Beginning in March and ending 31st July, the decennial census is now completed.  Second, the July private sector employment +95k was bound to lead to a slow down in August --- too much too soon too fast!  

(source: StatsCan)

Putting these numbers in perspective, nearly 1/4 million jobs were created during the pat 12 months, which is not that bad, in fact nearly 300,000 full time jobs were created -- and 77,000 part time jobs were eliminated -- full time work is always better than part time work.  The bulk of employment growth was in Ontario and Alberta.

Construction is one area that saw a rather sharp decrease in employment, but then no one is surprised about this as permits for construction peaked a year ago.  Overall, the August job creation performance was not bad, although negative.  The overwhelming fact that the employment at government levels is shrinking is a driven by policy (and the Census) where all levels of governments (Federal and Provincial) are looking at tools to reduce Canada's structural deficit (which is still around 2.5%).

Again a month doesn't a trend make, but there is no doubt that a slow down in employment was anticipated, Canada's economy Q2 performance was poor (slightly negative) and we know that capital good imports have declined over the past three months (it had been historically high previously -- which bods well for productivity).


Thursday, September 8, 2011

How healthy are Canadian banks

By yesterday's standard VERY.  Toronto Dominion Bank  (TSE:TD) raised $5 billion in covered bond yesterday, 40% 2 year 60% 5 year, oversubscribed largest ever bond offering for a Canadian bank, and the yield was not bad 0.875% and 1.62% for the 2 year and 5 year respectively (below projection) [Note: bonds were issued below par so that actual yield is a bit higher, still]

How many banks could raise that kind of money at these yields, current Bank of Canada 2 year yield are 0.91% and the 5 year is at 1.46%. So TD (AAA rated by the way) raised money at zero premium to the Bank of Canada in the two year and about 25 bps in the five year.


Also for all those who think that Canadian banks are in trouble, the same pricing for a US bank would be at least 100 bps higher (if they could get it).


Trade numbers for July

Interesting results this morning, since both Canada and the U.S. revealed their July merchandise trade.  Interseting because both numbers were positive, Both Canada and the U.S. saw a marked improvement of their trade balance.

Exports and imports
(Source: StatsCan)

For Canada its June trade balance of -$1.2 billion was reduced to -$0.7 billion for July, the result of exports rising by 2.2% (while imports only rose by 0.5%).  Looking into the numbers Canada’s trade performance is even better since volume rose by 4.1% - a 1.9% price decline reduced the upside numbers.  As for imports it was the opposite trend with price rises (0.9%), and volume was down 0.4%.  The Japan effect is now gone (trade is back to its pre March level), trade direction reverse towards the U.S. again.  Funny enough energy exports keep on falling (they were not part of the increase here) partly due to the forest fires here (thing of those as the equivalent of Hurricane in the Golf of Mexico) that halted production (also prices were slightly lower in July) that trend too has reversed.

Trade balance
(Source: StatsCan)

U.S. numbers were also very interesting

Exports increased and imports decreased. Exports are well above the pre-recession peak and up 15% compared to July 2010; imports are up about 13% compared to July 2010. The decline in the trade deficit was due to an increase in exports.   Now America has benefited from a weak currency (although this has come to an end (15% down in the past 12 months), so the future direction of its deficit (especially as exporters will be challenged) is hard to predict, especially if Europe is in real trouble now, it is hard to see how this trend can persist.  However, the likes of GS preach this trade performance to suggest that GDP growth in Q3/11 will be stronger in the U.S. (around 1.6%).

U.S. Trade Exports Imports
(Source: Calculated Risk)

Intersting time for both economies.  Big difference is that trade accounts for about 1/3 of Canada's GDP while the figure for the U.S. is around 10%.  


Must read

This commentary about the global economy is fascinating, written by a well respected hedge fund manager, who year in year out generates good returns for his clients (He's a global macro player).  His name is Josh Brown he writes on the Big Picture Blog here.

Also this morning HSBC downgraded the US GDP growth for 2011 from 2.8% to 1.3%.


Liberals are morons

The "Defense against Marriage Act" or the "Patriot Act" are exactly the opposite of what they preach to be, that's the conservative way -- give it a name that sounds good, so that people will listen to you, and the do what you want (for those of Canadian persuasion the first is against Gay marriage and the second is to ensure that civil liberty are further eroded)!

Liberals are cretins:  This morning on the radio some group called "AgainstPPP" (which means Public Private partnership) made lots of noise because a hospice run as a PPP was using hiring methods that would be illegal in the public sector -- except this institution is not in the public sector (which makes their whole argument moot by the way).  Anyway, this group's statement was that this hospice should be run by the government and that these people were crooks!  Finally, and this is the funny part (hence the stupidity of this group) there are no complaints about patientcare, no its to do with the idea that the private sector can run things in the healthcare sector.

Problem is when you start with a group called AgainstPPP the listeners already knows that you have a "hidden" motive, so the strength of your argument is reduced.  It would have been much better for this group to take a name such as:  Group for the protection of soft kittens, or Group for the protection of the vulnerable older granny with soft eyes and a willingness to give you candies.  That's the conservative way!

Liberals just don't get it!  they're morons!  1984 thought us that the medium is the message.


Wednesday, September 7, 2011

Stop the Presses!

Mark Carney announced this morning that the Bank of Canada was keeping interest rates at 1%!  Ok, not really a big surprise since 100% of all economist polled thought that rates were going to stay at 1%, in fact every Canadian thought the rates were going to stay at 1%.

So not really a surprise at all.  Among all the data for the first half (so far 1% Q1 and -02% Q2 GDP growth) has not been spectacular.  That the BoC maintained its 2.9% growth for 2011 is "surprising" for that to occur the second half of 2011 will have to be a "gangbusters" (really simple math -- first half generated about 0.45% of a total of 2.9% -- so we aer looking at 5% growth rate in the second half).

The odds of very strong growth is limited, new mortgage rules make it difficult now for Canadian to withdraw equity from their home for consumption (although Canadian consumption as a percentage of GDP is around 55%, far away from the U.S. 70%), moreover Canadian (probably due to our proximity to the "disaster" that is America) are gloomy which doesn't say anything positive about growth in spending (BTW income is growing but substantially below the rate of inflation).

Ok enough from "Captain Gloomy" there is no other news on the Canadian front.  Oil is playing its usual game ($87/bbl this AM) and the CAD is playing around 1.02/98 seesaw around these levels.  big question is what is the impact of the Swiss National Bank trading band for the Swiss Franc on "safe haven countries" that have decent economic performance, reasonably sound financial system?  I don't know, I really don't

Tuesday, September 6, 2011

Driving home from the cottage

Weekend was somewhat miserable because of the weather.  Around 11 am I contemplated returning to Montreal early, just to catch a movie.  Well this morning a colleague told me that she left here cottage  (in Mont Laurier) at noon, and got home at 5.  A two  1/2 hour journey took 5 hours!

Eventually, I decided to leave at 7 pm, and got home at 8:20, I was on cruse control the entire way, the best way of avoiding speeding tickets.  Turns out that was the right decision -- the road was empty of traffic (it was also dry).  Just goes to show, procrastination sometimes pays off!


Estates General!

It’s a strange use of word, but it represents something real here in Quebec.  First off, the words come from 1789, when the French king decided to bring all French together (Nobility, clergy, business and the rest) to figure out how to pay for the wars.  French king liked his wars!  Anyway, the result was the 1789 French revolution, because neither the nobility or the clergy paid any taxes – they were exempt, so business and the rest decide that enough was enough and the guillotine solved many problems.

Back to Quebec, the “revolutionary” thematic is somewhat understood here, although it’s evident that those calling for this “conversation” don’t know or remember what happened to those who called for the process in 1789 (they got their head chopped off).  The problem, as I’ve often expressed it, is that the “revolution” that was called by the early leaders dates back to the 1950s and 1960s – a long time ago, the early leaders (you can still see Rene Lévesque’s’ speech in 1976 when winning the election in black and white with cigarette dangling…), are more or less gone and their successors are worn out.  Young Quebecers cannot relate with that story, they have no connection to the hardship faced by French Canadians, as late as the 1970s. For them, French is everywhere and all the time, in school, on TV and at the movies.  They have other issues getting a job, a car or a girlfriend. 

The problem was that while winning an election in 1976 and making major changes (forcing French school on all, French in the workplace and French signage on buildings) has made English a non-event.  Master in our own home when there is virtually no sign of “others” is difficult to explain.  Quebecers, via the new media have also begun to understand that the Anglos are not monolithic – when a separatist movement emerged in Alberta, Quebecers were very surprised, that Alberta didn’t think like Toronto (they were even more surprised when the encountered the Western Canadian animosity vis-à-vis Toronto). 

So back to the Estates General where all these separatists will get together and decide how they will push their ideals forward.  The press loves this stuff, its sells paper – unfortunately, after 60 years in and out of power, two referendums where even the mildest form of separation was rejected; there are not many new ideas under the sun.  Not to get too crude, but this whole thing will look like a “circle jerk” very quickly.  In a sense, the best news for the separatists is the news now – before the process begins for real, because they get airtime.

So what are the option:
  1. Another referendum
  2. Don’t ask, just unilaterally declare independence
  3. Put the whole thing on the back burner for 10,20 or 30 years
  4. Give up the dream focus on winning power

There are probably other options available but these are the big ones.  First point no government will seek a referendum unless they have a fair chance of winning.  Apparently, the mildest and most open question gets no more than 40% approval, while pure separation gets 20% of the vote.  BTW most don’t know what it means to separate – this is mostly a philosophical issue.  The chance that Quebec could unilaterally declare independence is somewhat more complicated, because without a strong majority for independence there really is no reason for the rest of Canada to agree.  Although the idea of putting the whole issue on the back burner has been suggested on a number of occasions, it has not worked with the movement activists – they keep on believing that Quebecers will soon see the error of their way, and will jump on the chance to separate.  Giving up separation is just not possible, mainly because the “coalition” that is the Parti Quebecois” has both social extremes – conservative all the way to Marxists (if you don’t believe me, the guy in change of organising the Estates General is a well know Marxist.. he defines himself as such), and everything in the middle. 

The result here is that the only option for the PQ is the Status Quo, anything else spells doom of the party, which is simply unacceptable to those who run it.  Activists spend an incredible amount of time on their ideas and philosophy and will not give up the fight, and yet it is already lost.  Maybe there will be a backlash, but with these troubled economic times (South of the border) it is hard to see much lust for the separatist agenda.  The death of the Bloc Quebecois in Ottawa (BTW noneof Canada’s three oppositions have  a leader) and the languishing rating of the PQ in the province of Quebec (around 12% of voter’s interest) speaks volume for the movement’s dilemma.


Here we go!

First off, after a glorious summer, Labour Day weekend was mostly miserable, so it was three wasted days, which means lots of reading.  Certain themes resonated for Canada:

  • Swiss national bank pegs the Swiss Franc – they’ve had enough of the wild ride.  Not sure how it will work, because commentaries from the ECB seem to indicate that this was all news to them.  This means that many countries that are perceived to be sound (Canada, Switzerland, Sweden, Norway and Australia) may resort to the same process.  We know that the Bank of Canada is very concerned about all they “hot” money flowing into Canada (about 7% of GDP).  How do such economies protect their industry and citizen from global market fears?
  • Europe decided that a good old fashion panic was on the cards for Monday – while America celebrated “something” – but certainly not labour. Spider futures were wild on Monday, but Tuesday morning things cooled down.  BTW as of 6 am Tuesday AM (EST) the yield on 1 year Greek debt was 81% -- the two year paper is around 57%.  Greek default is priced in, haircut is around 80% (that’s the new 21%).  Ackermann of DB gave a terrific speech on Monday – he said that if Europe’s bank had to take provisions for their Sovereign bonds they would be nearly insolvent…lovely!
  • Confusion in the media:  Zero Hedge reported that protesters were in front of the Italian stock exchange on “labour day” as a significant protest… except Labour Day in Europe is May 1st, not September 1st (or 5th for the matter), our American cousins once again confuse ‘merica, for the rest of the world.
  • New research on Canadians’ attitude vis-à-vis Americans; five years ago Canadians envied Americans, today we feel sorry for them, truth be told we never wanted to be them.  How many of my Canadian friends living and working in the US were asked when they were getting their US passport – their answer that they would never give up their Canadian citizenship was met with surprise and disbelief (Americans have been brainwashed into believing that everyone in the world wants to be them!).  Today any conversation about America ends with a head nod – we wish them well, we like them, but we really don’t want to be them.
So that's the highlight of the weekend read.  I'm also looking at the whole story behind the "Etat Généraux" for the soveregnist movement in Quebec -- It's like a headless chicken, dead but keeps on running around.  


Friday, September 2, 2011

As if we needed a new proof that the North American economy is slowing

In a country that has more than 100 million employed (and I mean America here), that each month 100,000 jobs are created or that none are created is almost immaterial.  Think about it, its a statistical aberration, its a 4th decimal rounding error!  What it is important is the trend indicator, the reality of America is that this non-recession since the summer of 2009 has been one of the weakest in terms of job creation.  The only thing that has been growing are profits (and executive pay).  Overall with the other ISM numbers that have been coming out of the woodwork for the past few weeks, there is no doubt that North American's economy is in a rough spot.  Personally I don't see how QE3 will help, the impact of QE2 has been muted (and expensive). But that's my opinion and its worth... not much.  However, it seems to me that repeating actions that have produced no results is in the hope this time it will be different is a form of madness (see cartoon below).

As usual my focus is Canada.  Our Q2 GDP performance was slightly negative.  Going forward, I would suggest that in the short term we are going to see weakness in the oil demand (Europe is also going trough a rough spot right now -- although that's been more of a Greek tragedy!). For Canada we should expect continued poor results in exports and merchant trade, the CAD should also weaken, after it is a petro currency.  My guess is that by Christmas we should be looking at the CAD at sub-parity with the USD as the positive funds flow of the past 36 months begin to reverse.  The fact that Canadian interest rates are about to fall, that the currency will weaken and that liquidity in the Canadian markets is an issue (both corp bonds and equity).  I suspect that the Bank of Canada's concern over these excessive flow from foreign investors is about to reverse itself... I could also be excessively pessimistic.

Like Australia, Canada is a second derivative country -- we are not the source of demand for good, or even for manufacturing goods (on a global scale), but we provide the building blocks for economics prosperity.  The world is in a very slow growth phase!  Brazil just cut interest rate (no economist saw that one coming) China's investment strategy is starting to show massive problems (high speed train anyone, excess steel, or concrete, empty cities...).  With luck the G7 world is looking at very low growth 1-1.5% at worse stagnation.

Aside from all that have an excellent labor day weekend.  The weather up here in Canada has been simply divine all summer, one of those summers that will go down in the books as a high vintage.  Maybe its global warming, maybe its just good luck. 


Europeans and reality

It would appear that overnight reality has reared its ugly little head in Greece.  Austerity has never worked when the debt load is as heavy as it is now in Greece, it didn't work in Latin America and its not working in Greece -- big surprise.  I guess that someone somewhere (probably in high school today) will get his/her PhD on the fallacy of the European plan for Greece, Portugal and Ireland.   

Guess what the world now knows that a budget deficit that was to top out at Euro 23 billion for the YEAR is now a Euro 21 billion, six months into the fiscal year.  The sheer incompetence exhibited by all the players -- and the ultimate desire not to face reality will probably kill the Euro.  One thing for sure its future as the common currency of all of Euro is closer to the end than the beginning.  The question is how will the bubble pop.  Will Germany, Benelux, Finland quit or will, or will some of the PIIGS have to leave the alliance (it seems that Ireland is doing better).

In any event, if you choose, full speed ahead damn the torpedoes I've got a sweet sweet 2 year Greek government bond, yield of 47% (yep that's a 47% coupon per annum).