Monday, October 31, 2011

IPPI +5.3%

Industrial Production Price Index was up again -- the above 5.3% is on a YoY basis... on the bright side the strength of the CAD +3% "moderated" the IPPI.  Bottom line, over the past year Oil and Coal price rose 30%, Metals and Chemicals both rose by 8% and vegetables and feed were up nearly7%.  Try telling Canadian manufacturers that inflation is not a problem!

On the bright side, IPPI is basically back to its 2008 level (2002 was 100), 2008 was 115, and we are back at that level.  The truth is that input cost inflation is high, and it is surprising how little of this inflation has ended up in the CPI (or core CPI) at 3.2% and 2.2% respectively. However, it makes some sense as Canadian companies have been investing heavily, high Capex translates into more efficient production (usually) so that some of these costs have been absorbed there.

Overall, inflation pressures are rising in Canada, the trend in the IPPI will translate into higher CPI (eventually).  The BoC has so far remain on the sideline -- my guess is that the stalled economy (August & September) will translate into less wage inflation -- although the Canadian labor market, while not very thigh, is certainly showing some signs of "warming up".  These divergent tendencies make sense in country such as Canada that is a price taker for most input costs (also a price taker for most outputs).  It makes fiscal policy far more important for the Canadian governments (Federal and Provincial) as to how to deal with these external factors.  

We know that the Federal government wants to return to budgetary equilibrium -- still some way to go to meet the 2007 surplus level, the provinces have a number of divergent objectives -- some just won elections (Ontario), or are lead by a new leader (Alberta) others are contemplating a "pre-electoral" zone (Quebec) that will generate different regional directions.

Canadian GDP rise 0.3% in August

This is a case of good headline, but dig a little and the news is not so great, mainly because Energy accounts for 100% of the GDP growth in August.  It was also a dominant component in July (not so much in June).  The reality is that manufacturing is down, but building is up a little.

However, the overall news is that Canada's economy is essentially operating at stall speed in July and August.  Not a huge surprise as employment and income have both lagged (again the headline was great, but the underlying data was So So).

On the interest rate front, there is no pressure for Canadian interest to go anywhere (either up or down) the futures curve is virtually flat.  There is little reason to lower rates, since the problem is external demand, and there is little reason to raise rates -- again because inflation is external -- mostly energy prices and commodities.  The BoC stands aside.

The big news is that the Federal government has decided to remain on path to reduce expenditure -- as they had promised in the May elections.  The ideal situation is one where the government reduces its deficit the zero; still its objective for 2014/15 fiscal year.

Friday, October 28, 2011

Guilty Pleasure: Quebec Politics

Until recently Quebec politics had fallen into a predictable funk, where politicians could recycle 20 year old speeches with impunity since the debate had become kabuki theater (set in stone).  There is a new sheriff in town and Quebec politics is now exiting!  First, was long in coming wake up of the "non-separatist" segment of the population.  For us, Quebec's problems have nothing to do with the independence discussion, but everything to do with the societal choices that we must make today.

It started a decade ago with the "lucides" ex-politicians stating frankly the critical challenges that face Quebec, which will define us as a society; these challenges have nothing to do with our place in or out of Canada.  The process moved along with an ex-PQ MNA forming a "movement" to recast the discussion away from separation, and the final element was the destruction of the Bloc Quebecois in Ottawa.  

Since then, both main Quebec parties: Liberals and Partie Quebecois have been having difficulties.  Focusing on the PQ the unpopularity of  its leader has dominated the press for some time, she has been battling party apparatchik who dislike here and want to replace her with a more radical leader (very much like the U.S. Republican -- when the message fails double down on the radical).

That's the set-up to my comment (I can be long winded):

This morning on the french radio network of CBC  two supporters of Pauline Marois attempted to demonstrate that their cause was valid, and that their leader was had the unconditional support of the caucus.  If these guys are the best Marois could field, she's in much deeper trouble that even the press indicates.  I surprised as to the Journalist's docility, either out of conviction (my guess he is a PQ supporter) or maybe he perceived that these guys were more than able to destroy their own message, because these were two bozos!

(1) That Marois knows what she is doing: This cannot be proved, but she had proven strangely ineffective over the past two years.  She has been involved in politics for 30 years, and has been head of the party for nearly 2 years.  How much longer does she need -- and the polls are brutal toward her party and her leadership -- the PQ could be wiped off the map in the next general elections!

(2) The concept of independence is not "history" because the Scots will have a referendum on "separation" from the United Kingdom within the next 60 months, after all "the Scots have fewer grievances and don't have their own language"  -- this is so bad its like the morons never even saw the movie Brave heart, or have never heard of Gaelic -- stunning lack of knowledge.  Moreover, the Scots were very keen to separate until about two years ago (they wanted to join the Euro Zone -- my guess is that they are probably less keen today).

(3) The party supports Marois: Not so much since there has been a number of "discussions"  and some very high profile resignations.  The fact that these two morons were being interviewed disproves this very comment.

(4) My favorite, these cretins stated that since no one was authorized to speak for these caucuses (but for these two Dbags) the comments heard by the press were at the very least exaggerated, but more likely false.  Mme Marois has the broad support of here party.  That's why they have these meetings every other week...

The ship is sinking, they gave terrible examples and were terrible spokesmen -- my "gut impression" is that no one else wanted to be there, Mme. Marois was scraping the bottom of the barrel with these two incompetents.  They were so bad, that I listened to the entire interview in disbelief, I can only assume that the journalist was not listening to what they were saying because in the space of 5 minutes they did more damage to the brand than I thought possible.

Good times

Thursday, October 27, 2011

Canadian labor market looks tight

Ok so I usually stay far away from quoting Canadian banks (sometime I "steel" their diagrams), but one of my competitor has had interesting things to say about Canadian productivity and the labor market, fundamentally original research on complex topic.  As an example their take on Canadian productivity is that it doesn't compare to the US because of very important difference.  Don't agree with all their arguments, but they have a valid point on certain aspects.

The bank of Canada has taken a position that the Canadian labor market is still relatively "slack", but this bank takes a very different view, especially because part time work is such a small percentage of the workforce (yeah you read that right).  They take the view that in fact the labor market is tight (for full time employment).

Their chart is below:

(Source: Da Bank, BLS, StatsCan)

The implication is that the BoC has less room to operate than is implied by the futures market (no rate hike for before 2013).  Canada is still a few percentage points away from the "overheating" zone but is getting closer.  Moreover, the Canadian labor market poorly reflect regional disparities.  Carney and friends must be "praying" for a European/Chinese/American economic slow down.  Otherwise, the BoC will have to take action.

It would seem that the 4am "resolution" in Europe has taken the risk of severe recession in the region to "after Christmas.  Everyone is going to pat themselves on the back after this latest effort.  Next year European governments will figure out that when government expenditure falls in an economy where it accounts for nearly half of GDP, then GDp doesn't rise, it falls.  The banks' liquidity problems are still present (hence the strength of the Euro -- as they repatriate cash).  America is depressed but sales of "stuff" is rising -- depletion of savings! While China -- no one knows.


(Source:  Jim Bianco)

And the question was:  How big of a hole is the Euro in?

Discounting Property prices is illegal in Shanghai

I can hardly believe this is true, but this article states that it is now illegal in Shanghai to reduce condo prices by more than 20%.  Apparently China Overseas Land cut some of its prices by 30%, this was found the be illegal by the Communist Party of Shanghai (they still control the place).

Makes you think.  I guess that they will only allow prices to fall once China Overseas is bust...

Got to love communism, its the opposite of what happened in the U.S.  In China companies have to support the prices of goods they sold to citizen.  In America, the government supports the right of corporations to screw the citizen.  Man, I think I've misunderstood this capitalism/communism thing!

RIP -- A stupid CDS instrument

So around 10pm EST Europe's leaders came up with a plan.  They announced a 50% "hair cut" on Greek debt (in fact this applies to public bonds and bank loans only -- sovereign exposure is excluded.  Total write-down is about Euro 150 billion (or about 1/3 of Greece's total debt burden)).  It's a start!

On another front, the International Swap and Derivative Association (ISDA) agreed that the 50% hair cut was not a credit event, because the write-down was voluntary.  The impact is that all these financial institutions that bought (or sold) credit default swap on their sovereign exposure found out last night that these instruments are worthless (if a 50% write-off is not a credit event, what is?).  These were always stupid financial instruments, it assumed that governments would not react to instruments that allowed the financial world to bet against the government's (worse) behavior.  Last night sovereign credit default swaps died, they will not be missed.

Another stupid Wall Street invention bites the dust!   

Wednesday, October 26, 2011

Canadian House Prices -- Gravity further delayed!

Initial impression is that this is too good to be true, but the National Bank - Teranet House Price Index is as precise as can be, measuring the change in price on "house-pairs" which takes in consideration renovations and other expenses.  As such (and looking back on the previous three months) it is as exact a measure of the change in house price across the nation.

The index shows a further 0.9% increase in the prices of Canadian homes, the 9th straight month of increase.  The regional level is somewhat different (here) but the trend is persistent.  Canadian houses are now "expensive" when compared to average (or median income), Canadian are clearly taking the view that low financing costs are here to stay.  They may be right, but again external factors could change all this.

There is no doubt that the Canadian banking sector is healthy because of the healthy housing sector. Funny enough the data seems to be indicating that there seller/buyer levels are more or less balanced (no market tightness).  Rumors are that Toronto is getting very "frothy" in the condo market with a very large percentage of buyers being "investors".

 It is hard to see what tools are available to deal with this continuing price trend.   

Tuesday, October 25, 2011

Yes a solvency crisis for the sovereign but also a liquidity crisis for the banks

Euro 30,000 billion (Americans would say 30 trillion) that's the amount of wholesale financing currently on Europe's bank balance sheet.  European banks rely far more on wholesale market for their funding -- a consequence of their very high leverage.  The problem is that for the past 5 months the wholesale funding market is essentially closed.  

Some will have heard of the LIBOR rate that has exploded, and that the Federal Reserve has expanded the dollar lending operations for European banks.  The problem is far more severe, because the closure of the wholesale market means that banks have to refinance Euro 800 billion in maturing obligation every single month.  Obviously, this is impossible, so European banks are cutting lending (with the obvious economic consequences), they have also been losing deposits to European sovereign institutions -- Siemens transferred several billions to the ECB.

The implications is this liquidity crunch very serious:  Businesses will be refused expansion loans, or see lines of credit cancelled outright (the banks need to reduce their borrowings).  Obviously, the crisis in confidence started with the "fake" stress test of last summer (Dexia the now bankrupt bank came on top as the best capitalized).  The solution is for Europe to follow the American example of 2008 -- for European sovereign institutions to buy new issued Preferred Securities (expensive).  The problem of course is that it will reduce bank profitability (a given with lower leverage -- watch out stock prices) but will allow the banks to operate and not face a liquidity crisis (this is a flow as opposed to a stock issue).  The problem is the size of the necessary exercise:  Euro 2,0000 billion, or 5x what Europe is trying to agree too on the EFSF program.  What are the odds that this will have a happy ending?

Greek write down, ECB & Disagreement

Over the past few days the ECB has been spoiling for a fight, arguing vehemently that a write down of 60% was unacceptable.  I could not understand their position, at first I thought that ECB was protected, but it turns out they bought ordinary bonds on the market -- so they have to face the same write down as commercial investors.  Moreover, it didn't make sense, that the ECB would be against such a necessary move -- Greece cannot support its current level of debt, its a fact.

Turns out the reason for the ECB's position is due to its own viability:  Turns out that the ECNB has just a bit more than Euro 5.1 billion in capital. it obtain an increase about 12 months ago (to Euro10 billion), but the money is coming in three tranches... over the 2010, 2011 and 2012 fiscal year.  It is also back loaded, so the bulk of the increase is only available in 2012.  

Guess what, the write down of Greek bond of 60% would deplete its capital dramatically... the loss for the ECB  in a 60% write down (we are assuming that they bought most of that paper at a discount to face value of about 70%), but that cut all the way down to 40% of face value would totally absorb the ECB's equity cushion.

Funny bit of course is that many European corporation have been "stashing" their cash with the ECB -- a sign of weakness of the European financial system -- imagine it is now the ECB that is in trouble.  BTW blame leverage, the ECB has a 30:1 leverage (less than DB, Comerzbank, BNP or SocGen -- to name Europe's most leveraged banks).

Oil Prices, Recession & CAD

Many oil market analysts have argued that a backwardated market is a bullish signal because it suggests tightness at the front end of the market. The other side of the debate (which is where we land) is that a backwardated market is one in which market players believe prices tomorrow will be weaker than they are today. The last time we were in a backwardated market was in late September/early October 2008 when prompt oil prices were trading between $90 and $100 per barrel. Three months later we touched a low of $32.40.

 Ok so the bread and butter of the CAD is oil prices -- specifically oil prices priced in the WTI (don't know why there is high correlation with that index -- and not Brent or West Coast...).  Barckwardation is an anomalous condition in physical commodities it can be caused by two distinct reason:  funny enough at either extreme of the economic cycle.  First high spot price are based on a view that supply is tight, in a rising demand environment (Economic growth) will lead to rising supplies (eventually) hence forward prices are lower.  The other argument is that future prices are lower because there is an expectation of demand collapse -- caused by recession.

ECRI's model assumes that America is on the verge of a recession (the last time they predicted a recession was in 2007) and they have an excellent track record.  The other reality is that with the Greeks, Portuguese, Irish, British, Spaniards and now Italians all cutting government spending, a recession is a given in Europe.  Governments account for a much larger percentage of GDP in Europe (in France, government expenditure accounts for 42% of GDP).  Italy and Spain are the only two economies that matter here with 12% and 8% of Europe total GDP -- a cut in their growth rate will be felt accross Europe.

News out of China are not good, everyone in the business is "praying" for a soft landing there, but it is hard to imagine how the Chinese government could orchestrate such an outcome, especially since inflation remains a stubbornly high!  A hard landing in China, a recession in Europe and America would spell doom for oil prices -- maybe not into the $40/bbl range but it could easily drop by 30% or 40%.  

Needless to say that a multiple recessions across the planet would have a negative impact on the CAD, on our exports would suffer (obviously).  


I live in the old port of Montreal (yeah where the tourist go, and walk around as if they were in Disneyland...) and since my office is downtown I used the Bixi bikes to get to a from work (about 1.7km each way).  This method of getting to work ends today as the weather is becoming increasingly cold.

Since May I have made 217 trips and covered more than 300km -- total savings a measly 21 liters of fuel (had I driven).  The real challenge is to use back roads, the problem is that some streets are rather dangerous, not in the morning (I usually arrive at the office before rush hour) but in the evening, when people are tired and aggressive!.

Anyway, total cost for the Bixi was $72 -- not a bad investment and a fun way to go to work.

Monday, October 24, 2011

CAD near parity... again

Well I guess the loonie Yo-Yo continues its game, with the risk-on strategy, and oil prices near $90/bbl it is a sign that things are getting pulled up, as is the CAD (granted all currencies are doing good against the USD), just take a look at the Euro that has been hovering near 1.4 and the Yen that just hit an all time hi of 76 against the greenback.

The CAD is within 40 bps over being at parity again, as a rule of thumb, parity is a big barrier (up or down) for the CAD, so it may muck around this level for a few days, it may well fall back, it could also power through, although that is unlikely because the CAD as been on a tear of late.  In September we were flirting with .94 now we are at .9962.

BTW this should help to reduce inflation pressures (although higher oil prices is a problem).

The weekend in review -- Canadian style

Autumn in Canada usually brings good excuses to stay at home and watch old movies.  The trees bear of leafs and the usual gray skies allow procrastination. Although this year the weather has been unusually balmy -- we are expecting a high of 15c today.

Canadian economic news is slow, not much going on.  The one item of interest it seems that Mark Carney is a shoe-in as the new head of the FSB (the guys who decided on the banking capital).   The Canadian banking system (which was laughed at during the early part of the past decade), proved that Too Big to Fail can work -- if well regulated.  Canada has six banks that account for 95% of all deposits, effectively control the banking system.  Yet all theses banks are profitable (less so this day -- still) and risk averse.  There is no concept of Level 3 assets, and Canadian banks have no equivalent to the FASB157 (where banks can dictate the value of their assets).  So that was the big news, confirmation, that Carney was now in line to take over the shaping of the world's largest bank's risk capital.

Aside from that the world is in "Melt-up" mode.   Some good stats out of China (why does anyone trust Chinese statistics is beyond me) have helped and the absence of news out of Europe -- it will take until Wednesday for the EU's leader to decide what they're going to do with Greece, Spain, Portugal, Ireland, and Italy... As the FT alluded to this weekend -- the problem now is that the EU seems close to finally addressing the problem, investors will soon realize what this really means.  Confidential documents are showing that Greek 2010 and 2011 GDP growth was/will be -5.5% and -3.5% respectively.  There is hope for some minimal growth between now and 2030 (yeah not a typo..) but if you are Greek, you get out now -- there is no future in that country.  The Irish, used to periodically leaving their homeland over the centuries, will restart their emigration...not a surprising outcome, the best and brightest will get out of town.

The economic news flow peaks on Wednesday with the release of the National Bank Teranet House Price Index -- another increase in Canadian house prices seems to be baked in the cake (at any rate if you look at the other Canadian house price indexes!).  Aside from that not much of interest, the one remarkable aspect of the weekend is how little was discussed about the situation in Europe and what will emerge there, the FT had a commentary that the leveraging of the EFTF was a very bad idea, but that's about it.

As I said last week, plan for the market to melt up a bit more, rumors of QE3 are emerging, but it could be just that since QE1 and QE2 proved to be short live success (if we can call them that).  One thing for sure the US government is monetizing the debt right now with the rise in money supply.

Good week ahead

Friday, October 21, 2011

US money supply up 30%

Very scary headline, the US money supply growth is out of control.  Although the US economy is not in recession its not exactly on fire.  The 30% growth in 4 months  can only have (eventually) one outlet:  Inflation.  It may take a while because the US economy is a service economy and there is tremendous labor slack, but it will happen.

The most amazing thing, of course, is that the FED is taking the money out of the hands of savers into the hands of the borrowers.  Maybe the Tea Party is right to be pissed after all, they are getting screwed -- hard!

See this bit in ZeroHedge here

Canadian Inflation: Not good at 3.2%

So the data is in, and headline CPI inflation is not good at all, in fact even the Core CPI is higher -- below the 2% threshold but at 1.9% (1.5% last month) this is at the upper limit (I would say a little beyond) what the Bank of Canada wants (in fact the BoC has a 1% -- 3% target CPI band).  

Headline inflation has been (two months running) above the target set by the BoC some years ago, bottom line energy prices are much higher than they were a year ago (14%), but so is everything else.  Canada's reality is that, very much like the U.S., it is a service economy, a labor is much tighter in Canada -- strike threats are in the air all the time (in the case of Air Canada literally) because the labor market -- while not drum tight -- is still getting tighter.  Just an FYI gasoline prices in September 2011 were 22% higher than a year earlier.  No graph today, they are meaningless -- prices are rising and the BoC's hands are tied.  Only actor that has some room to maneuver is fiscal policy... no news on that front. 

The impact is now being felt (surprise, surprise) in the interest rate futures market, that had for serveral weeks now been implying the risk of cuts in the BoC directors rates, that has now ebbed to a point where the futures are essentially flat -- there is no pressure (there never was much) for interest rates to fall, nor is there for interest rate to rise -- exogenous events (Europe, America and China) guide Canada's monetary policy right now.

Speaking of which, the Europeans seem to be doing their best efforts tor educe expectation of the weekend summit.  Frankly, since their failure spans nearly two years now, it is hardly surprising.  Merkel needs to decide if she is ready to leave the political scene -- because that would be the impact in agreeing to the "enlarged" EFTF program (whatever form it eventually takes).  Worse for Merkel and Sarkosy is whatever political chip they pay to get this deal done, the reality is that all the projects being "announced" fail in their intent.  This crisis (with Greece being its current center point) is not a liquidity crisis (all the EFTF programs talk about liquidity) it is a solvency crisis.  Greece could deflate its way to competitive pricing, but the pain (and time frame) are unacceptable to the population (they will get replace the current government with one that promise the end of pain!  I'm not making an analogy here in the type of regime that will result in Greece, but that is exactly how Hitler came to power -- he promissed "to end the pain of reparation").

Thursday, October 20, 2011

What I'm reading

  • The FT has a "profile" of what's going on with Rick Perry here
  • The "new Pepsi" in economics Nominal GDP as a policy tool worth the read here  Don't know if he's crazy about this theory -- it may work, but there are real issues here too!
  • Proof that Ron Paul is running for his next gig:  FoxNews here
  • Bronte Capital continue to rip the reverse take-over crowd here
  • My first job, was in 15 September 1987, went for 4 weeks of training, my first "in office" day was on October 19th 1987.  Terrible storm overnight (London) with most Tube lines running "short" service.  Arrived in the office to see the Dow Jones down 20% -- asked my boss "is this normal?"  here

North American median Income...growth

I've been thinking about this for a while, I've often written that there are fundamental difference between Canada and the U.S. and these are widening (despite what the Conservative government thinks) rather than narrowing.  

  • First, is the nature of the Canadian economy:  small and open energy and resource export driven economy.  Canada is no Qatar or Kuwait, where energy is 99% of its exports, it is far more balanced that  that, energy exports are important but not dominant, but it remains that Canada's strength lays in "heavy things that hurt when you drop them".  
  • Socially Canada is more homogeneous, and the Caucasian majority doesn't feel is important to note that in the U.S. the Caucasian majority is only a few years away from no longer being the majority [BTW I'm not inferring any preference here, but note that the U.S. Tea party was mostly "Angry Whites" -- realizing that their "position" in America's economic system was eroding (the FoxNews "take-back" talk was "code" for "whitey man the barricades!"].  
  • Canada is not a military "super-power" (in fact we are hardly a military power -- we have been relying on america for our defense -- truth hurts, but its true nevertheless).  
  • The healthcare issue is supported by a wide consensus (of course some people will always complain) but the reality of our Southern neighbors with regards to health care is not enticing.  U.S. healthcare system is a cautionary tail:  Maybe our system is not "good enough" or "perfect" but one thing for sure the U.S. system is a disaster! and not something anyone should emulate.

The past 10 years have been very good to Canada and to Canadians in general, for while Canada does have income disparity, it is no where near the scope of what is found in America.  which brings me to the meat of my topic:  Median Income.

Median income is generally hated by politicians because it represents the absolute middle income -- literally half the population earns more and the other half earns less.  Unlike average which can be pulled by the rich getting a lot richer!   The American reality is that median income has been static (read falling) for more than a decade.  

(source: Medicare Tax Base)

Importantly, from this figure Americans must also subtract health care expenses -- which have been rising at nearly 7% p.a. for over a decade.  The earning power of the median American has dropped dramatically.

Looking at Canada:

(Source:  StatsCan)

Shows a very different picture.  It is important to note that the '90s were not kind -- Canadian income suffered under Paul Martin's 1995 massive debt correction (our version of Greece), so there is some catching up here.  Also the numbers are not strictly comparable, first because we are looking at family and not individual income, and also because of the health care component -- BTW these figures are after tax in both cases!

The housing bubble in the U.S. was driven by "median" American's attempt at maintaining the fiction of income growth (according to some, median income has been stagnant for nearly two decades -- but inflation and other adjustment can make data say anything) that simply didn't exist.  As such it is remarkable that Greenspan never did a 2+2 analysis of the data -- which was apparent, house prices were rising while income was stagnant, the only factor that "improved" where interest rates -- by definition there is a lower limit to interest rates (zero if you doubt to thought process).  In a sense, Republican politicians are correct that the house crisis "began in Washington".  The bubble would have lasted much longer (less intense) had Wall Street not gone crazy in 2004 and refrained from lending money to people who had no means to make even the first mortgage payment!

However, the median income data shows one thing very clearly, is that the Canadian situation (based on our resource rich economy) is very different to that of the Americans  doesn't mean we are out of the woods (by any stretch of the imagination), but it does show that those who borrow have seen an absolute increase in the income (average income will grow more quickly), it doesn't mean that Canada's housing market is now near or at bubble level -- Toronto and Vancouver in particular are very frothy. 

Wednesday, October 19, 2011

Toronto Real Estate

According to the Globe and Mail, 60% of new condo buyers in Toronto are investors.  The game is the same everywhere, you invest in a condo project, with progress payments (initially very low) on a $500k condo the initial payment may be $50k, the idea, for the investors is to hold on to the property until its close to completion, and then "flip it" to a owner-occupier, usually generating a very nice yield on the $50k investment (maybe a doubling over 24 months), not bad in a rising market.

The problem is obvious, with so many condo projects being built  there is a finite number of "real owner-occupiers.  The result, those early buyer start by dumping their project, with the usual consequences on the market at large.

Why OWS has already won

Simple, they've changed the conversation in Washington!  Whereas a month ago the conversation was about cutting spending, and how Americans were paying too much taxes, the conversation is how much of a raw deal "99%" of Americans have had over the past 30 years...

Call it a first victory in a long battle, but, as an example, it is amazing how last night's GOP debate was different from its previous incarnations, granted they are still in cuckoo land for most of what they are talking about, but already some of the conversation has changed, consider how far crazy they were in their last debate,  it shows that even the GOP is waking up to a new reality -- why would Rush Limbaugh be so pissed off otherwise!

Tuesday, October 18, 2011

Loan officers say: Canada is doing Ok

Interesting times in Canada!  Late last week the Bank of Canada issued its Senior Loan Officers Survey, a quarterly affaire that tracks where the lending market is going.  Of course in Canada with 6 large lending institutions the information is unusually helpful – it is a real source of help in understanding what lenders “believe” the market to be doing.  First off, the demand for loans remains strong, and condition continue to be favourable, competition is the problem, there’s too much of it keeping standards loose (the same for pricing), although the improvement has “diminished... not too sure what to make of that “negative” statement.  The BoC seems to be of the opinion that lending standards remain reasonable and seem to have nicely rebounded from the lows of 2009.    

The Canadian bond market is saying a similar story with a strong probability that 2010 record $78 billion in new issuance will be “beat”.  As of last week the Canadian market has seem issues totalling C$61 billion vs. $55 billion in 2010.  The IPO market while not “on-fire” is far from being a disaster, despite the market being down nearly 12% since January 1, 2011. 

The question is “What about 2012”, there the news is far from clear.  There is no doubt that Canadian corporations have been cleaning up their balance sheet (over the past 18 months) issuing longer term debt to increase their duration (and reduce cash flow exposure).  Also, it has to be pointed out that for the past year financing costs for corporations have been very attractive.  There is a “feeling in the air” right now.  That every thing could come down crashing.  The American economy is weak, Europe is playing with fire and the non-OECD countries because of their inflation problem cannot be counted on to take up the slack.

All these represent a substantial problem for Canada – as a small export nation when the bulk of our clients are in trouble, we too are in trouble.  Not only is an issue as to sales, price is also an issue.  Although non-OECD countries now account for about 50% of oil consumption (and about 55% of all energy consumed) it remains that this is only one aspect of the overall export situation:  what about Zinc, gold etc.

I wish I had a solid conclusion – bottom line the Canadian debt market is doing fine this year.  Market fears are interesting, but investors are still aggressively buying Canadian corporate bonds... BTW the buyers are mostly Canadian, as the issuers are generally not well know outside the country.  Foreign investors focus on sovereign instruments. 

Iphone -- I broke down

Huge day!  I finally broke down and bought an iphone.  The reason; well its cool technology, it works well and frankly I don't have a home number anymore -- so I was relying on the office provided cell phone (a bad idea).

So now I have the new iphone 4s. BTW I didn't order the thing, i just walked into a store and bought it!  Strange, I heard stories of people waiting for months for their new phone.  Finally, the SIRI function is "way cool"

Dinner Saturday Evening

Ok so Saturday I went to a dinner party in the Laurentians (North of Montreal), the weather was simply terrible, BTW now used to GPS, not having one at hand is a complete nightmare, using Maps in the car is dangerous (especially when driving alone, at night in the rain).

Anyway, I arrive at the dinner and meet a bunch of new people, very pleasant, lots of wine being drunk, having a ball no doubt about it.  One of the guest, is a big cheese in one of Montreal's premier money mangers (didn't know that at the time), anyway I speaking to our host and explaining that the market is largely rigged against the small, that the market is in a secular bear market (because of demographics and deleveraging) and that the model portfolio today should include lots of fixed income and stocks that pay high dividend and that are counter cyclical (or at the very least not related to consumer discretionary businesses).

Not making a big fuss about all this, but I do point out that most of the trading floor participants (my colleagues) are very heavy into fixed income (and relatively light in equity -- our big long is stock grants for bonus payments).  This guy jumps in, and echos every thing I've said to my friend; the problem with these things is that they become echo chambers very quickly -- especially when contrarians meet (so I try to steer the conversation towards other topics -- largely successfully).  However, much later in the evening this guy corners me and asks me what is my investment strategy:  I tell him that about a year ago; David Rosenberg of Gluskein Sheff wrote a very interesting note on investment strategy in a bear market -- and that I have been following his advise:

  • Invest in what you know and understand
  • Buy "good" yielding average duration fixed income security from Canadian corporation
  • Stay away from consumer discretionary stocks
  • All stocks should be with high dividend (demographic reasons -- retiree want income so these stocks will be more popular)
  • Balance should be 60/20/20 Fixed income/Stocks/Cash.

That's what Rosenberg suggested.  I told my new friend that there's nothing really magical about this strategy.  What was amazing was that when I said this everyone became quiet, I don't think I revealed any great secret, in fact, this is relatively pedestrian as a strategy. 

Then I was asked what I though was a worse case scenario:  So the Europeans cannot get their act together and following another liquidity crisis, European banks start liquidating assets, causing a panic, forcing the ECB to step in declare a bank holiday and take over the banks...(I said a worse case), the deeply integrated financial system grinds to a halt.  As the American banks are faced with their own liquidity crisis (as European banks shut down), this transfer itself to Canada -- because as a major trading nation (with America in particular), the Canadian banks face the same liquidity crunch.  BTW, at the same time the European are shedding "non-core" assets in a bid to improve their capitalization (as the equity markets are now shut), pushing asset prices lower.  Massive deflation -- there is a real risk of liquidity freeze up here -- you know you go to your ATM and nothing happens (I said worse case).  

After the deafening silence, I was asked what I though the probability of this happening (I think less than 5%).  I keep on hoping that European leaders will see the light.  However, the FT had a fascinating article about Europe.  The FT's thesis is that European bureaucrats are essentially the product of small open economy mentality (like Canada) but Europe is a large and closed economy -- much more closed than America.  Their prescriptions are for small independent open economies, which do not work in a large and closed economy...grime hope indeed!

Mark Carney -- Tells it as it is!

Last night an Globe and Mail article made its way to my desk, it was all about a suddenly very chatty Mark Carney.  As the article implies central bankers are normally not very chatty -- manly because every one of their utterance can move markets.

Of late, Mr. Carney has been seen "storming out" of a meeting with the CEO of JPM and four days ago Mr. Carney said some hard things in Europe to Europeans.  He gave a detailed interview in the Figaro (terrible search engine, cannot find the article), spoke to journalists.  At any rate read the Globe and Mail article (here) is very interesting, gives additional links.

Should Mr. Carney become the head of the FSB (he would retain his role as governor of the Bank of Canada) he will be a strong voice to make the world financial system stronger.

Monday, October 17, 2011

Occupy Wall Street -- A banker's perspective

The whole financial mess (the continuing saga with PrimeX) that began in earnest in 2008 has finally created demonstrations in America!  One has to wonder why it took so long.  American banks were "rescued" by the U.S. government, and the next day, effectively, accused the government of having too much debt.  Moreover, U.S. banks that were in 2008, deemed Too Big To Fail, are bigger than ever, because the "Treasury" backstop  ensures that they cannot go bankrupt.  

Over the weekend, OWS said:  what would happen if we took all our money out of Bank of America?   The bank's answered "F-you we don't care".  What other business in the world can afford to alienate one million customer with impunity?  Their basic "beef" is with Socialism for the banks and capitalism for everyone else! Banks (and bankers) got bailed out and the rest of America got screwed.   They see no relief from their government;   it is well know that both houses of Congress have been bought and paid for by corporation. BTW and as far as I am concerned the day a corporation is executed in Texas is the day that I will believe that a corporation is a person!    OWS has taken the next obvious step:  if it worked in Egypt maybe it will work in America.

Of course up here in Canada the banks didn't need rescuing (2008) -- they needed liquidity (not the same thing) that the Bank of Canada provided, and was promptly repaid once the money market stopped freaking out.  Most people don't understand the difference between liquidity and solvency problems (e.g. one is a flow the other a stock problem).  Greece is not a liquidity problem, it is a solvency problem 


Canada's TIC report: On track, more or less!

The magic figure this month is $7.8 billion, that the capital inflow (mostly into T-bills).  Last month, the bulk of capital inflow was money market so this is a shift in the type of assets being purchased.  Interestingly, stocks investment inflow remain at "depressed" levels (still growing but getting very small).

One reason, is that foreign investors have already reached their equity capital allocation target for Canada (ok its possible -- and make more sense than other options), and are seeking safety in Canada's T-bill market.  As usual, the bulk of this fixed income is in the form of federal instrument (as opposed to provincials). This supports the thesis that foreign investors are "parking" their cash in Canada (rather than investing in Canada), looking for safety rather than income.  

Again the preference for ultra liquid T-bills (instead of T-bonds) speaks volume as to foreign investors' risk appetite.  One more headache for  the Bank of Canada.

Finally, the CAD is back to near parity (driven by last week's "risk-On" mentality).  Of course the real test for all this stuff is the October 23rd meeting in the EU on what to do with the crisis!  My bet: kick the can down the road... the "victory" in getting Hungary on board was, lets not forget, about the June EFSF.  It doesn't come close in resolving the problems now -- where its $3 or $4 trillion (thousand billion) that is needed.

I have always said that Canada is a second derivative country (we supply stuff to make stuff) and the events in China should not be discounted, housing sales have fallen by half (Chinese policy) in an effort by the central government to tackle inflation (running at 6% -- food inflation is around 13%, when the official inflation target is 4%).  This will reduce the demand for steel, concrete, wood and energy.  Several sector in which Canada is a dominant trading partner.  

It could get intersting

Friday, October 14, 2011

Canadian manufacturing up for a second month

The big contributor to growth was:  Sale of transport equipment (+7%) in July it was up 3.5%.  Food and Energy both played important role in the growth of manufacturing (oil in particular is seeing higher volume after the June/July shut downs).

Manufacturing sales rise in August for a second consecutive month
(Source: StatsCan)

Grand total sale growth was 1.4% -- highest level since early 2008. On a provincial level the big "winner" was Quebec with manfuacturing sales up 3.5% -- this may have something to do with the Aerospace sector (very variable shift in sale from month to month).

The inventory-to-sales ratio declines

Looking at manufacturing inventory, there has been a slight rise, but the inventory to sale has decline to lower levels.  This should reflect itself in new hiring and growth of production going forward -- assuming that the order backlog data is correct (it is actually rising slightly -- a lot if aerospace in included...).  Good data for Canada (at the manufacturing level at least),

Iphone 4S

OK so this morning I was listening to the news, apparently in Montreal's sole Apple store there was a 200 people line up to snag the new Iphone 4s.  Lets be clear here, the phone that Apple sells in its store is unlocked and so full priced (about $700 each) and look exactly like the "old" Iphone. You got to give it to Jobs/Apple to create this kind of frenzy for a product and which you can get at any phone store (for $100 + 3 year contract) where you have to explain that your phone is better than the old one...

On a separate note yesterday the internet was very sluggish.  Turns out it was not a local phenomena, apparently, and I have a hard time believing this was true, it was due to the release of iSO5 (also by apple), its new operating system -- again most if not all the changes are "under the hood"...massive number of Apple users were downloading the software (takes about 60 minutes)

Strange world we live in, Kudos to Apple.

Thursday, October 13, 2011

Thursday Already

To quote on of the good guys:  "We follow the bouncing ball of Risk on, Risk off.."  The past 10 days saw no real reason for a 100 pts bounce in the S&P500 (or a 1,000 point on the Dow Jones), so today we get a 1% correction on "no news" (OK so Chinese trade data came out...nothing really that big except trade deficit with China rose again (all time high)).

On the other hand looking at the hard data is scaring the crap out of me!  One of my favorite bloggers, Bruce Krasting (a fellow bear) has a couple of graph that are worth a look, but bottom line the PrimeX disaster of last week is now explained by the death of new issuance in the sub-prime market.  Issuance has gone from $60 billion a quarter to ZERO in Q3/11 (look at the chart below), that's how much sub investment grade bonds have been issued in the past four weeks.

This is a liquidity crisis in the making, if you look at the SME market you notice that the primary reason for a terrible business environment is not regulation, but the lack of demand.  There is no demand, as consumer (America) are tightening their belts.  The job market is lousy and national income is dropping or flat.  BTW I only found out yesterday how much health insurance cost the average family -- $14,500 per annum.  America, where the average take on pay (for a family is around $50k per annum) must pay federal, state and local taxes plus FICA, house and feed themselves and then pay $14k per annum for health insurance.  No wonder that 15% of American forgo insurance.  

I mentioned in an earlier blog that in America consumption was around 75% of GDP (55% in the rest of the OECD) and around 35% in China.  The two outliers will eventually have to move back to the mean -- which they now seem to be doing (at least for America), in China a slow down in construction will reduce GDP growth (not the way you want consumption to be a greater percentage of GDP...).  A new age of austerity may be rising in America.  Most of the 2009/2011 personal debt increase has been for education purpose -- if a 20 year old cannot get a job might as well get a degree (don't laugh that's exactly what I did in 1984 when Canada had a very bad recession).  It is a lot more fun to go to class than to wait in the unemployment line...

The CAD continue its "march upward" despite oil prices dropping a few bucks -- BTW the main indicator of oil prices is now Brent Crude and not WTI (for prices at the pump it has a better correlation factor).  Thing $105/bbl and not $84/bbl.

Some scary graphs:

SME owners view of the Economy (they're not talking politics but growth)


From Bruce Kastring

From Financial Armagedon Blog:

Doctor's visit down 8% -- Americans are not healthier, they are too poor to go!


Oil Prices & Oil Demand

The IEA provided some interesting data last week (its mostly boring stuff with some interesting "nuggets").  First, the IEA doesn't see a marked reduction on global energy demand -- so oil prices so stay "stable" assume that America doesn't declare war on Iran (that little spat could end badly -- very easily).   Now what every one knows now the non-OECD countries (e.g. the non-rich world) accounts for 50% of all oil demand but overall energy demand by non-OECD countries already (in BTU terms) already exceeds that of the OECD countries (55% for those interested), and demand in those countries unchanged growing by 5% per annum, while OECD countries oil consumption for OECD countries is largely unchanged for the past 25 years.

As far as the IEA is concerned its see's no significant reduction in energy demand for 2012/2013 period (despite the risk or recession in Europe and America), as any contraction in demand by OECD countries will be more than made up by increase in demand by non-OECD countries.  Over the past 15 years demand from non-OECD has been rising at 5% p.a. whereas OECD demand has been declining over the past 5 years.  

For Canada, and the CAD, clearly the strength of oil demand will support pricing of around $105/bbl (which by the way is the average "import" price in 2011 for the U.S. -- it says something about the irrelevance of the WTI price (currently around $85/bbl).  Canada is not a petro-economy, but its currency is!

Although we expect short term weakness in the CAD (it could easily hit the 92/1.08 range) most forecaster take the view (and why should I disagree) that parity with the USD is a given.

Wednesday, October 12, 2011

Manna from Heaven – Foreign Direct Investment?

FDI has been, since I trained as an economist, the best form of investment that a country could hope to obtain.  Money invested for the long term that will result in job growth and revenues increases – even it turns out when the FDI is in the form of buying already existing companies it appears.

There is no doubt that Canada has a problem because the greatest bulk of foreign investments into Canada is either TSX60 companies or sovereign t-bills or bonds – highly liquid investments that can exit at the first sign of trouble (or better opportunity elsewhere).  Over the past 30 months (in fact shortly after the financial crisis) investors have looked at Canada favourably, its banks seem solid, and well capitalized, the housing market seems to be doing ok (in fact better than ok, it’s on fire!) which has resulted in more than $100 billion a year in investments (about 8% of GDP). We know that the Bank of Canada is concerned with all this "hot money", and how to minimize the risk it represents to the country (the economy and the currency).

Right now for Canada media the manna is Chinese since they are” sitting on billions of dollars” that is looking for a home to invest.  Hearsay is that in Africa in particular Chinese have been aggressive investors – although compared to America, which annually invests in excess of $300 billion abroad, the Chinese efforts have been small ($70 billion in 2010 – ranked #4 in the world).  The Canadian reality is that for Chinese looking for steady markets Canada has certain advantage, but is maybe not a very important consideration.  The reality of China’s massive investments into Africa (Senegal in particular) would seem to indicate that political (and economic) turmoil is not a critical consideration.

It remains, and hence the beginning of the commentary, that China has looked at many assets in Western Canada – in the oil and gas field in particular (Daylight Energy is the latest TSE:DAY).  However, as a method of “locking-in” resources for China the Canadian market is a poor substitute for poor and easily “influenced” countries in Africa – there is currently only two (full) pipeline (Vancouver & Prince Rupert) going from the oil rich Alberta to the BC coast. 

In fact, of Canada $560 billion in direct foreign investment, China accounts for only 2.7% -- a tiny participation that can easily grow from its current low base.  However, Canada doesn’t offer “resource security” since it would be almost impossible for China to export its production (as in a colony situation) back to China.  The analogy, as far as Canada is concerned is false – as such Canada will remain dependent on its historic “primary” source of FDI – United States of America.  

Today -- an ultra short term prediction

So what's up this morning?  Well the whole banking sector is doing OK today -- Societe Generale's share price are up 5% today, the US futures are also up...the USD is in free fall after last night's Senate vote to punish China for an undervalued currency, and Obama's job bill failed in the Senate -- so every analyst will now revise growth estimates for Q4 and Q1/2012.  I would say that the GOP/Republicans strategy is really paying off!  Make sure that the economy is in free fall before November 2012 -- then they can fix it (again huge amount of sarcasm here).

The S&P500 is fooling around 1,200 it may have another 50 pts to go (target range 1250) but after  that down has to be the trend.  The CAD is tracing back toward parity and will maintain this trend as long as oil price continue to rise.  This morning WTI is around $86/bbl and the CAD is just shy of 1.5c of parity (10 days ago it was 5c lower).  

Since last nights votes were 100% politics and 0% policy observers of Congress are now assuming that the US legislative branch is shut down until February 2013 (hard to believe).  For the next 15 months nothing of any use will emerge from Congress, so for Canada the rule has to be any dealing with the US will have to avoid the legislative branch -- interesting times ahead.

As a Canadian watching the Republican nomination process is somewhat depressing, it would seem that Perry is out of the race its between Romney and Cain (Pizza guy, and ex-chairman of the Kansas City Feds) both have pledged no new taxes -- ever, and Cain has promised a balance budget within 12 months of being in office -- considering that the U.S. government currently borrows 40% of all expenses -- should Cain win the nomination (unlikely but not impossible) then America will face the mother of all recession -- cannot be good for Canada.

No real economic news out of Canada this week (we got construction yesterday [up] at odds with new permits  last week [down]).  

Last week Dexia this week Erst Bank

Some readers will remember that last summer (June 2011) Europe performed a stress test on its financial institutions.  Some will even remember that Dexia came rated very high scores (very safe) on certain scales Dexia was Europe's best capitalized bank -- the results so far this week is that the whole mess of a bank is being sold, and taken over by the French and Belgian governments.

Last night Austria's largest bank reported losses of Euro 1.6 billion.  Aside from getting screwed by the Hungarian government -- Erst had been writing Hungarian mortgages in Euro in a Forint denominated country.  The reason was that Euro interest rates were low, while the Forint interest rates were high... of course this could only end well (sarcasm).  When the Forint was devalued against the Euro (because the economy is in trouble) those who had taken a Euro loan were screwed, so the government came to the borrower's rescue, and made the F/X contracts "illegal".  Erst should have known that this was a very stupid trade (Erst was not the only players, but was the largest), entering into sophisticated transactions with unsophisticated counterparts.  So we know that Erst is stupid, but it turns out they are also liars, because in the June stress test Erst audited indicated that it had no CDS exposure -- Ernst was not a "participant in the credit derivative swap market".  Imagine everyone's surprise when yesterday Erst revealed a loss of Euro 460 million on its Euro 2.8 billion CDS portfolio -- that didn't exist!

Some will ask how was this done?  Simple, Ernst "hide" the CDS business in its "assets held to maturity" which are marked to model (or to whatever you want) -- moreover the regulators never saw these books (or didn't look).  Further proof (if any where needed) that the European stress test of last summer (again June 2011 -- 4 months ago) was only a exercise in public relations.

Tuesday, October 11, 2011

Comparing costs of health Care

From today's Globe and Mail:

Montanans will spend almost $8-billion (U.S.) for health care this year, while Saskatchewanians will spend $4.5-billion. That is a whopping difference. But spending is just part of the story.
In Montana, more than 280,000 people under the age of 65 had no health insurance last year, according to Families USA. Another 55,000 insured residents still faced “catastrophic” out-of-pocket health expenses – meaning more than $14,000. Private health insurance does not come cheap: The average premium for a family was $13,770 a year, double what it was five years earlier, according to the Kaiser Foundation.

 The state of Montana is the same size (population) with the same ethnic mix and industry as Saskatchewan.  A population of 1 million in both places, the G&M found that the total health care expenditure for Montana was nearly twice that of Saskatchewan, but more importantly, a quarter of the population is not covered (by choice or because the cost of insurance is prohibitive -- also some people with "pre-existing conditions" cannot obtain health care coverage).

As a microcosm of the problems faced by many Americans, Montana is a good example of what is wrong.  Of course, for some people in Montana the cost of health care (or access) is not a problem, but it remains that for a quarter of Montana's population health care is a huge problem (BTW those young people who maintain they don't need "no stinking healthcare" use expensive emergency room treatment when something happens!).  

Montana is now looking at adopting the Saskatchewan model (don't know if its possible) as a way of controlling health care costs (oft forgotten is that the states cover the bulk of health care costs -- hence the states' dislike for "Obamacare" -- they foot the bill of the expanded program).  Americans often thing that the Canadian health care system is monolithic, when in fact Canada has 11 health care system (each province is different), the Federal government used to have a great deal of say on the medical system used in each province, but this has whittled away as the old 50/50 funding model has been replaced with a 85/15 model today --  money speaks here!  Saskatchewan's system is very different to that of Quebec and Ontario, so the departure is not as radical as it may first appear.  It will be interesting to see the rank of those with vested interests (HMOs and big Pharma) -- doctors increasingly work in large practices and may actually prefer the Canadian health care system!

Anyway, an interesting analysis from the Globe and Mail, and a massive problem for the GOP/Republicans!  If an American state decides to implement a "Canadian" health care system it will cause massive problems for the Washington talking machine.

Note:  Last night I learned that there are more MRI machines in Montana than in all of Canada.  It begs the question, does Canada have too few MRI or does Montana have too many?  This morning, I checked with a doctor friend, asked him how long it I would have to wait to get an knee MRI -- he told me: two weeks for elective, and if I tore something he could get me in before the weekend!!! So my guess is that Montana has too many MRI... maybe this explains why there healthcare costs are so much higher?

A quicky on Tuesday morning

Found this chart on the interweb last night -- in a nutshell it talks about Median Household Income Index.  If the index had been set at 100 at the turn of the new millennium, today it would be 89, down 11 over the last 10 1/2 years.
(Source: here)
Take into consideration that during this period there has been some  (not much) inflation during this period.  the whole "Occupy Wall Street" demonstration makes a certain amount of sense.  although the exact same data is not available for Canada, during the 2005 to 2010 period, Canadian Median Household Income grew 13%.  this is reflected in the health of Canada's economy.

Moreover, although this is an after tax number it is not a after health care cost in America -- where health care costs have risen dramatically (on average 7.5% p.a. between 2000 and 2010).

Friday, October 7, 2011

Confusing Indicators of growth

Reading a number of report on forecast growth in the US economy, first is Bruce Krasting who has a good following and the other Artemis Capital Management.  Looking at their analysis produces two very divergent forecast:

Krasting is taking the view that the recent data (employment in particular) would lead to believe that 3% growth is on the cards for the U.S. economy.  Krasting has not fully bought the story (he's a bear like me) but data is data and as an ex-FX trader is agnostic on sentiments, he looks at hard numbers.

Artemis looks at different market factors, asset correlation, market volatility (especially the overall surface) and finally hard data on money supply -- which have been spiking of late.  He reads a risk of recession.

Part of the problem is that indicators are all over the place, as in all recessions.  Usually when looking at part recession we only remember the elements that "caused" the recession, forgetting data that did not fit that story -  because we know how the story ends.  Looking forward there are certain truth to the U.S. economy (they are true elsewhere but easily observable in the U.S. and more relevant to the Canadian economy).

  1. America is in the middle of a massive deleveraging (willing or otherwise) process. First, because a massive debt binge has to eventually come to an end, but also because of demographic forces.
  2. American housing problems are still at the core of the problem, and the asset pricing problem seems to be spreading from the sub-prime to the prime market (exhibit:  PrimeX pricing that is imploding -- an index for prime mortgages that is in free fall)
  3. Consumption as a percentage of GDP is too high, and has to fall back to "historical" average.  In China, consumption is less than 35% of GDP, in Canada and OECD consumption is around 55% of GDP, in the U.S. consumption is 75% of GDP.  China and America are the outliers, and will revert to the mean -- eventually.
  4. America's financial system is almost as dangerous as it was in 2008, in certain asset classes (derivatives) America's top 4 players have gross exposure of $350 trillion (more than 6 times the world GDP).  The European banking network is vastly over-leveraged -- contagion risk to the U.S. is extreme, and there is absolutely no way that a TARP 2.0 will be passed this time around (neither the Republican or the Democrats would vote to support another Wall Street bailout -- especially after Wall Street has been saying that they have no risk of collapse).
  5. Demographic forces are playing havoc will the economic systems of OECD countries (including Canada), 10,000 American retire every single day... this will shift consumption patterns for years to come.  Not only are they retiring but their nest eggs have been decimated by the 2000 and 2007 financial crisis.  Now that they are being prudent and investing in fixed income, yields have collapsed.
  6. The American underemployment problem will persists for at least a decade.  As long as America's economy doesn't re-balance its system.
  7. U.S. money supply data seems to be indicating a recession
  8. The absolute immediate risks facing the American economy is the collapse of the European banking system.  Several governments are now realizing that they will probably have to "nationalize' a number of their domestic banks (Dexia is the first of many).
  9. A soft landing in China is possible, but unlikely.  Few government have the ability to engineer a controlled economic slow down.  Moreover, there are disturbing new trends emerging in the Chinese financial system -- such and bank deposit, that seem to disappear... the money is taken out but no outlets are being found.
  10. It is increasingly evident that both Greece and Ireland will have to be let go from the Euro -- they just don't have the resources to repay their outstanding debt (never mind meeting their social contract obligations).  The question is will they leave or will it be Germany that leaves the Euro?
  These are the risk facing America now -- A weak economy could survive one or two of the above "risks", but anything more could lead to a renewed and deep recession.  It is important to note that most of the risks facing America now are externalities.  Things over which the U.S. policy makers have no control (BTW the whole derivatives business is out of control -- there is absolutely no will by the Democrats to do anything, and the Republican are being obstructionist -- as a matter of principle).

Finally, I have no conclusion to offer here.  Many because America (and by default Canada) could get lucky here.  but its unlikely!

CAD short term direction

The CAD is back trading in the 95/95 zone, but then oil prices that were all the way down to $75 last week are now around $83 (WTI), so it makes sense.  My guess is that the Canadian employment numbers will make the loonie more attractive to foreign investors (again).

It may play around this range for a few weeks -- the direction of the CAD is 100% driven by exogenous economic events.  Europe seems to be coming apart (Dexia) and that could be bad for everyone around.  What happens of the Dexia crisis spills over into France (BNP, SocGen).

Election night in Ontario

The Liberals won a minority government -- short one seat to have a majority.

This campaign was amazing for one fact, Ontario has fixed date election calendar, removing the advantage to the sitting government to set an optimal date for the election, and the Conservatives started the campaign with a 20% lead.

The blew-it, plain and simple.  First major disaster was the leader of the conservative who said: "wouldn't it be great if all three levels of governments were conservative!"  Toronto voters unanimously said: NO!  That was a stupid move if I've ever seen one, first off, because Torontonian that had voted in the conservatives (Tom Ford)  on the promise to "Cut waste" discovered that there was not that much waste after all, so he starting cutting the meat:  Library etc...Toronto was not amused, the same way Canadians are not amused by the Federal Government's Omnibus Crime Bill that no one in the justice system wants (judges, police, lawyers etc), the changing of Canada's Army to the Royal Canadian Armed forces, and the latest "Flag" private member's bill (which is total BS since sitting government backbenches cannot go to the can, without the express approval of the Whip).

So Ontario decided that three levels of "conservative" governments is a very bad idea, and returned the liberals to power (minority government) for a third mandate.  The impact on federal politics could be interesting, because it is well know that the Federal conservative have more or less given up on Quebec, and Toronto's heavy rejection of the conservative message will create problem for the Federal conservatives, because they need Toronto to remain in power.

This, a bit like a reality show, changes the equation for the Federal Tories (amusingly). How they behave will be fascinating to watch.  Probably somewhat less hubris.  If you take that with the election as the leader of the conservative party of Alberta of a women who is clearly at the "left edge" of the conservative party, this is a massive headache for Harper and his advisers.  The Alberta Conservative party is the foundation of the Reform Party which took over the Progressive conservative party about 15 years ago (merger).  Its roots are socially conservative -- in the resources rich Alberta financial conservatism is an oxymoron (a bit like Republicans in Alaska -- there's always some resource company available to pay for everything).  Now Ontario's has moved to the left (or remained on the left) and Toronto definitively moved to the left with a shut-out of the Conservative by the NDP and the Liberals.  Of course its not all bad, the Ontario Conservative won 20 more seat than they had -- but this is a third mandate for an unpopular government -- Ontario Conservatives should have won this (small majority), their strategy was all wrong.

Harper must be thinking that for an October that has started so well, the last few days have been depressing.  He is getting lots of resistance for some of his cherished projects (Omnibus Bill and "royal" stuff) and being outright laughed at with the "Flag Law" and its insane punishment (up to 2 years in prison...).

Interesting times

Canada post +60k in new jobs

Go figure!  Just a few weeks ago all was doom and gloom in Canada.  The consensus was that for September 16,000 jobs were created -- well they were wrong by a factor 3.  In September Canada created more than 60,000 jobs (its as if the U.S. had created 600,000 jobs).  

The immediate impact is that the rate of unemployment fell by 0.2% from 7.3. to 7.1% (BTW strict comparison with U.S. unemployment would reduce the unemployment rate by 1%).

The bulk of new jobs were in private sector -- in fact public sector job levels are back to their September 2010 level... (up 14k).  The growth in labor was greatest in Ontario and Alberta, with British Columbia seeing the greatest percentage surge.

These figures are certain to give some strength to the CAD, and reduce the pressure on Mark Carney the Governor of the BoC to cut interest rate.  Canada's economy is humming along, right now.  The one sector that is slowing is construction, but this could be a seasonal thing more than anything else.  

For Canadian, the employment situation is positive (growth in full time work, reduction in part time work -- e.g. transformation of part time to full time work).  All in all a great way to start to Thanks Giving weekend (in Canada).

Thursday, October 6, 2011

I never agree with Anne Coulter...but

I am not the first to note that the vast difference between the Wall Street protesters and the tea partiers: To name three:  The tea partiers have hobs, showers and a point.
Of course Ms. Coulter refers to the Tea party 2.0 -- the very first version was a bunch of guys in tri-horn hats screaming that they had enough, (of what exactly it depended on who you spoke to).  The real fear here is that what the GOP did to the Tea Party 1.0, that Democrats will do the Wall Street Protesters 1.0 -- transform them in a nation wide vocal anti-Wall Street movement.
I remember the Democrats making fun of the Tea Party 1.0 -- they were not finding it so funny when the 2010 elections came around.  Now imagine the same thing, but reverse the outrage!

Building Permits -- a sagging story

Construction in Canada is slowing -- but then there is a seasonal aspect to this in Canada.  However, the most important factor here is the dramatic drop in Commercial construction -- down nearly 21%.  This statistic is both true in the private as it is in the public segment of the industry.

Total value of permits
(Source: StatsCan)

The impact of a drop in construction (of such magnitude) is certain to impact GDP -- however that impact will be small, as construction is only about 3.5% of Canada GDP -- a 20% drop will translate into a much smaller change in the overall GDP.

It is hard to figures out what this all means, permit are

I was not a fan of Apple& Other tidbits

I was not a fan of Apple computers, I never understood the fetish that it caused among its users.  First, you have to understand that I was of the first generation of PC.  For me a computer was not a thing of beauty, it was a tool I used every single day, many hours a day.  The very last thing I wanted to do was to have a computer at home. 

I purchased my first home computer while living in Asia -- in late 1999, and only because I was starting a consulting business, and needed a computer! Then in 2002 I bought my first Ipod, and I immediately understood what made Apple better -- it was the user interface.  Four years ago, fed up of my every two year purchase of "Gray Boxes" that seem to fail with great regularity I bought a Mac mini -- again the interface blew me away.  Two years ago I bought an Ipad, and "magical" was the first word they came from my mouth -- this was the computer device I always dreamed of (I of the star trek generation)!  

Mr. Jobs, who died yesterday, was an innovator who as one Tweet comment said:  Made something beautiful from something that was ugly.  Mr. Jobs embodies everything that is great about America:  A smart man can rise to the top -- make his mark is few can do anywhere else in the world.  Granted Mr. Jobs is an exception, but where else in the world can such a story occur.

For all of its faults (and they are many as America's numerous critics are found of pointing out) America remains a beacon where the impossible can occur.  The question remains today, where tuition fees even in public university are skyrocketing, if this dream is still possible, but for a 56 year old adopted man in a  blue collar family the dream was possible -- and he made the world a better place.