Sunday, December 25, 2011

Merry Christmas to all

It is Christmas day, and of for the past few days I have not written very much. Frankly, the Canadian scene has been quiet -- aside from inflation data that showed that inflation is not under control in Canada, in reality inflation is steady at 2.5%, while transport costs (read fuel prices) are rising much faster.

GDP growth for October was flat (after many months of strong growth).  The reality that is GDP growth seems to indicate that Canada strong Q3 growth will be match by adequate Q4 growth, but nothing to write home about. It makes the numbers for the whole year closer to a level of 2.0% than the 2.5% that had generally been hoped for.

It is hard to say what will happen in 2012, since the BoC's hands are tied by global economic conditions.  The tea leaves for Canada are impossible to read, the events emerging in China, Europe and America will determine what happens to the Canadian economy.

Europe's story for 2012 seems to be largely written, and the news is not very good.  On the other hand China and America could surprise (despite the deleverging trend)


Saturday, December 17, 2011

500 posts and counting

Just notice the counter on my post hit the 502 number --- cool

It didn't work for MF global, it may work for European banks

Some will have followed the Congressional hearing on John Corzin, the ex-head of MF Global, a middle size American investment bank, and broker that seems to have lost or misplaced around USD 1.2 billion of segregated client money. The picture that is emerging is that MF was using clients' money to improve its return by borrowing -- and pledging these funds to acquire government owned security .  Never mind tthe conflict that emerges from borrowing clients money without compensation, the reality is that MF was basically borrowing this cash so that MF could "gamble" in the sovereign bond market .  Usually because the risk of losses in sovereign bonds is very limited the lender (MF Global) can re-lend this moeney several times -- creating leverage.  It seems (and not all the information is in yet) that MF re-lent these funds many many times over -- but when the European bond market moved (by two or three percentage point) the collateral (Provided by MF's clients) was essentially wiped out.

Now, it is hard to see how this kind of strategy could be considered winning, it has proven dangerous when bond markets become vollatile, so imagine my suprise when the ECB annouced that this was their new strategy to save Europe and its banks.  The ECB will provide massive amoount of liquitity so that the banks can then turn around and buy the Spanish and Italian bonds that no one wanted last week.

Granted, this will reduce yields -- so investors who were buying Italian bonds at 7.25% stand to make a killing.  However, this by no means resolve the European problems;  first European banks (except maybe the Germans) have more than enough European sovereign debt on their book, secondly this will reduce the pressure on European government to reform, and third if this strategy led to the demise of MF global, why does it think that this is a good idea for European banks?

The attractive feature of this "solution" is that it removes the risk that Europe will implode during the Christmas holiday, but the growth of bank holdings in sovereign debt will soon worry holders of bank bonds -- as the size of these holdings continues to grow.  Over the next few days expect to see the price of European bank bonds to slide dramatically as this new operations gets underway.  Already the Greek government has been putting incredible pressure on the Greek banks to buy more sovereign debt.  

As a commentator recently said, the actions of the ECB and the EU are certain to promote the sale of mattresses -- as an excellent place to store your wealth.  The Greek public is withdrawing an average of Euro 5 billion per week from the banks -- believing that they are better served by keeping liquid cash hat hand.  

I don't know if this is going to work (taking the cash out), but there is no doubt that Europe is unraveling at increasing speed, every action or comment from the EU or ECB is a new way of avoiding the painful reality that some (large) write-offs will have to occur as the borrowers just don't have the capacity to repay the amounts they borrowed.

Get ready for a strong open on Monday, bank stocks will be on fire.
P.S.  For those interested something strange occurred on Thursday at the Feds.  It appears that (see here) a bank borrowed USD 80 billion...rumors are that it was a European bank (could it be one of the Germans or a French?)

Friday, December 16, 2011

Chris Htichen is dead

One of my hero's, a man ow wit died last night.  All those who followed the last year of his life new that he was "fighting the fight of his life", although to hear Hitchen, it was not so much a fight than it was a contemplation since he had little energy from the chemotherapy.

As a life long atheist he bugged America's known nothing right, and delighted many with his erudition, I've got several of his book on my Kindle reader for the holidays.

A fascinating man

Amazon and prostitution -- two unbelievable stories

First, the really crazy story; It was reported this morning that the German government is forcing its citizen into prostitution.  Hard to believe but according to the report a German women has been threatened with losing her unemployment benefits unless she accept a job in a brothel: "providing sexual favours".   You see prostitution is legal in germany -- it can only occur in certain area, like the Reeperbahn in Hamburg (as an example).  Now, the American puritanical right has been warning for years that légalisation of prostituions would lead to women being forced by their government into prostituions.  Turns out they may be right (I still think this is crazy).

However, there are a few things that don't add up in this story.  Say for example that you are a guy and are offered a very dangerous job, would the government have the right to terminate your unemployment benefits if you refused that job??? 

Still strange!

IN other news, yesterday afternoon -- it was around 3 pm I ordered a book on Amazon.ca, and I needed ASAP (like before Sunday), well this morning at 10:30 AM UPS delivered the book to my door.  I am serious, not only did I not "have" to go to a book store (I did but the book was not in stock) but I had the book delivered (with certain charges of course) to my door.  The kicker -- and its a big one, the total price of the book, including delivery (by UPS) was less than the price of the book, had i bought it in the book store (had it been available).  

Thursday, December 15, 2011

France Vs. England -- An uneasy relationship

On new years eve 2000 I was celebrating the "new" millenium with my family in southern France -- we would watch the new year celebrations on the hour every hour as each time zone celebrate the new year (BTW I am fully aware that the new millenium only starts at the end of 2000 -- so don't point it out).  French television was effusive when the French capital did its "show" with the Tour Eiffel being the spectacular center piece of the new year celebration (it was such a hit that the lights that were installed for that event are still there today).  An hour later it was London's turn; the Brits really pulled out all the stops and the fireworks were spectacular.  The French commentator was so pissed-off that he started bad mouthing the British economy and social framework (at 1:30 am!).

Well we had a repeat last night.  It appears that the head of Banque de France (Christian Noyer) was being interviewed in a regional newspaper, where the issue of France's AAA rating was discussed (and the risk of downgrading).  His point was that the rating agencies are imbeciles, and the proof is that the UK has not been downgraded, in fact it should be downgraded (here) .

Ok, first off, politically what Christian Noyer said is never (ever) done.  The head of a central bank doesn't speak badly of his economy, but also doesn't go out of its way to attack that of a neighbour; and this attack was unprovoked.  There is no doubt that following last weeks fall out between France/Germany and the UK relationships are more than frayed.  More importantly, the Banque de France's desire to change the conversation away from its own very serious problems is a damning indictment of the scale of the problems faced by Europe. 

Finally, for all its faults, the UK has one serious advantage that weighs a great deal (with the rating agencies).  All of the UK's sovereign debt is issued in sterling -- the UK is in control of its currency.  The same cannot be said for France.  Moreover, the UK is well aware that the problem it faces are extremely serious; and the government is trying to address its massive deficit.  France not so much!

Wednesday, December 14, 2011

Is Commerzbank the first one to go?

According to the FT (December 14) the German government is working on a plan to rescue Germany's second largest commercial bank.  Commerzbank could be the first European institution (after Dexia) to fail.

I wish this was a joke (here), but the reality of Europe's over leveraged banks, and the fact that the $30 trillion Eurobond market has been closed for months, means that all these attempts to keep the boat afloat are now facing increasingly strong storm currents...

As Zero Hedge said this afternoon:

 "the German government has begun preparations for a possible state bail-out of Commerzbank." The plan would be activated if CBK is unable to figure out a way to fill a €5.3 billion shortfall in the next 30 days, which in reality will likely turn out to be far greater when all of the bank's dirty laundry is exposed for all too see. And with German banks by far the most sensitive to any perceived "tipping points", since it is the German state whose job it is to bail out the world's biggest economic block, it becomes obvious why letting doubts appear about the stability of German megabanks would likely not be a "good thing."


This is getting a little too real.  Talking to brokers this morning the overall view is that of a slow moving train reck.  Although it seems to have gathered speed in the last few days... everyone thought that the market was good till January (at least) and maybe even February.  It is widely know that European banks are sucking cash out of all their non-core operations (which means anywhere that is not Europe) for weeks, which partly explained the strength of the Euro (until a few days ago), but I guess that the off-shore coffers are now empty.

2012 Projections -- a dilemma

My head says be true to your beliefs and analysis, my heart says the world will muddle through!

Each path has a very different outcome for Canada, and only in a few times in history have the pressures of change been more powerful.  In one corner we have China, the engine of growth for Canada with its insatiable demand for raw materials -- the core of Canada's strength.  In the other corner we have China the  65 million empty apartment massively over-invested economy battling inflation and a weakening economy.   Data out of China is famously unreliable, certain data points used to be useful (energy consumption) but over the past decade China's government has made this data less reliable.  Economists have used coal consumption (the primary source of China's energy) as a barometer, but even these datapoints have become contaminated.  Its a little like the USSR of old, not only was the Kremlin lying to the world, it was lying to itself; the pressure to make the numbers look good are as powerful in China, as advancement is dictated by an ability to achieve the stated goal -- today the goal is lower inflation -- guess what happens to the relevant data then!

China is only one of Canada's problem.  America should pull-out of its weak economy (although ECRI believes that a recession is baked in the cake), the American political system is paralyses by a dysfunctional congress and a weak President.  The ability of the US system to address external shock is probably at its lowest in since the early 1900s (ok so I may be exaggerating -- but there is no will to act).  Europe is a massive mess that will certainly end badly for all those involved.  The inability of Germany and France (the rest are not guiltless, but they are powerless) to even frame the full extent of the problem means that by early January trouble will be serious (again).

Despite all this my heart says that the world will muddle through.  In reality (and this is why I discount this scenario) muddling through is Canada's best chance of moderate to strong economic growth.  I would expect a wave of nationalistic fervour across Europe in 2012:  "Buy (insert country here) goods" with the national flag and maybe even a "green" tinge of "its better to buy locally".  However, nationalistic fervour doesn't affect the import of raw materials -- and that is something Canada is very good at producing.  Assuming that the world muddles through then Canada should expect continues strong economic growth -- in part because of very accommodative financing costs but also because Canada's national income continues to rise (in the US it has fallen back to its 1997 level).  The muddle through scenario would see Canada's interest rates remaining low (maybe slightly higher than now), the CAD remains near or at parity with the USD, and that inflation remains under controle (that's the though one).  My guess is that Canada could expect a 2.5% to 3% GDP growth in 2012.  

All bets are off in Europe implodes, first off Canadian interest rates would rise, why because CAD bond holders have done very well in 2011 -- both in currency and in the dramatic drop in yield.  When the "solids" hit the fan you sell what you can not what you should.  Canadians rely a great deal on foreign lenders (one of Mark Carney's many headaches).  Should foreign bond holders start to liquidate it would put pressure on yields (upward) and the currency (downward) that would squeeze liquidity out of Canada and  could cause a recession (as credit may become more difficult -- and expensive).  Household would feel the pain, because so many Canadian mortgages are on a floating basis. On that basis, the CAD could fall to its "fair value" of 92/94 to the USD, interest rate would hover around 2/3% and a recession would ensue. On the bright side inflation pressures would disappear!

Normally, during a US election year the risk of such outcome is low -- in general economic policy becomes more accommodative, and the US northern neighbour would benefit from this, but the above mentioned gridlocked washington means that the bullets available are few and far between.  Although QE3 is an option history shows that its ability to stimulate the economy is negligible.  Therefore the "normal" expansion during a US election year should be discounted in 2012.  

What's an investor to do?  David Rosenberg said it best buy strong North American company's debt instruments or stocks (which pay a dividends), Sovereign bonds should be shunned -- returns are ludicrous and the risks of global contagion (for good or bad reasons) is too high.  It may be that corporate bonds are less risky than sovereign bonds for 2012....   

There you have it -- Canadian growth or recession, but it has nothing to do with Canada and everything to do with what occurs in the rest of the world

  

Tuesday, December 13, 2011

Turns out I was wrong! (Review of 2011 predictions)

IN late 2010 I made the following predictions:


  1. 2011 growth would be around 3%
  2. 10y T-Bond would price around 2.95/3.30 (because of inflation)
  3. 30y T-Bond would price below 4% but remain above 3.3%
  4. Inflation would be higher than BoC wants but Carney & friends have few options
  5. Oil would remain around $100/bbl
  6. CAD/USD would trade in the 97/101 range.
How did I do?

Turns out not so well on the important stuff, the 10y and the 30y fell dramatically during the year, in fact as an investor the 30y has been a spectacular investment if you consider that yields have dropped from nearly 4% in January 2011 to 2.57%, nearly 1% below my lowest target price.  The same is true for the 10y that fell from 3% in January to 1.75% this morning.

Growth:  the numbers are not all in, but while the first half was a disaster the second half of the year saw an explosion in GDP growth that could take Canada GDP growth rate within spitting distance of my 3% target.  Better yet, growth has been countrywide and relatively equal.  Most will not know, but Canada's car manufacturing capacity is working at capacity -- there is little slack in the economy, and Canadian companies have invested massively over the past 2 years -- allowing for large productivity gains (would be my guess).

Inflation:  That was the easiest to figure out, as long as the global economy didn't implode oil price would be higher than in 2010 (and a massive contributor to inflation this year).  There is no doubt that the BoC has wanted to tighten all year, but there is simply no scope with every other country experiencing serious dislocation (economic & political).  Canadians may not agree with the current government's objectives but one thing for sure is that Canada doesn't suffer from political gridlock!  Anyway inflation is above the BoC's confort zone.

CAD;  The only exchange rate that matters for Canadian is with the USD -- where the bulk of our exports end-up (moreover, the great bulk of Canada's exports are priced in USD), that was the easiest call I could make.  The CAD is clearly overvalued (it should trade in the 92/94 zone).  Earlier in October it seemed that the CAD was heading back into that zone, but it lasted for a few days.  Canada has an effective political system (at all leves), its financial institutions are in excellent shape (at least they have not been tested by a falling property market...yet) and foreigners see Canada (rightly) as a safe haven.

So overall, disappointing, I was of the opinion that because of inflationary pressures and solide economic growth the BoC would raise interest rates (January futures market had a 1% increase in base rate "baked in the cake"), but the BoC's incredibly negative view of the global financial system  forced Carney's hand -- no rate hikes.

My view of the Canadian economy (for investors) was neutral/negative, while I "predicted" stable yield on the sovereign bond market, a weak currency meant that Canada was not a destination of choice -- in fact, the opposite turned out to be the truth!  A foreign investors in Canadian fixed income instruments saw little or no currency fluctuation (at least against the USD) and massive yield drop -- the impact on bond prices has been massive.  You win some you loose some!


Monday, December 12, 2011

Europe -- a short post

Being out of the loop for a few days allowed me to take some distance from Friday morning euphoria regarding Europe's most recent summit.  Looking at the cold reality of what has been agreed, a fiscal pact seems to have been struck by Europe's 17 (maybe 24 soon).  This falls well short of what is needed to repair the problems, but is a first and significant step in the right direction.

Most amazingly, reading the data available shows there are numerous ways for a country to derogate from the targets and stil escape from financial penalties.  Amusingly enough these penalties are not spelled out anywhere -- but the derogations are!  

Fundamentally, the initial problem persists; the only proposed solution is a deeply "protestant" one "those who overspent have to cut expenditure" -- there is no element of debt forgiveness.  An unrealistic (but locally for Merkel, politically expedient solution) position that assumes that the lenders don't share the  blame (funny enough US banks are saying the same thing about US mortgages).  Circumstantial evidence points to a German public which strongly believes that its leaders (politicians and bankers) strike the right pose.

The problems for Greece, Portugal, Spain and Ireland remain unaddressed -- how will they finance their maturing debt obligations and who will provide the additional credits?  Debt forgiveness seems to have been removed from the table by Sarkosy, who, at the beginning of an election cycle, cannot politically afford the nationalisation of several French banks (the result of debt forgiveness in the PIIGS).  The questions for Sarkosy and Merkel is are they too late?  The story of Europe's crisis is one of missed opportunities.  This recent fiscal pact would have worked wonders two years ago -- as a first step, but you don't bring a jug of water to a house fire, you do that when the flame reaches the drapes, not when the roof is ablaze.    

Canadian concerns

As one famous ultra-right wing economic commentator once said: "Canada makes things that if you drop them on your feet, hurt".  Canada makes steel (or at least Iron ore), we make copper we make gold and plenty of soft commodities.  Not only do we "make" these things we export the great majority -- which enables many Canadians to flee Canada's harsh winters.

Canada's banking system is made to measure to serve these industries, we know that demand is a boom/bust scenario -- unending change from feast to famine driven not by Canada's doing but others exuberance or at times soberness.  Canada's financial institutions are deemed some of the safest in the world because they know that today's feast can quickly change into famine. The past quarter of century (and the last decade specifically) have belonged to the emerging nations and as far as Canadian exports, China in particular.  The Chinese story has been one of massive investments -- accounting for nearly 60% of GDP -- the previous "master of the universe" with this level of capital investment was Japan -- which peaked at 40%.  For Canada this has been a boon of economic wealth -- whereas even a decade ago, Canada was dependent on the U.S. construction industry for sale of timber (and periodic trade "wars"),  Canadian exporters shifted their focus on China, just  as it  engaged in a massive construction boom.  

However, like all good things infinit investment is not a panacea for sustainable growth.  China's assumption is that its export engine was "the" solution (a similar ambition was espoused by Japan in the 60s and 70s), is being sorely tested by slowing OECD growth. The cold reality of aging OECD population -- with the corollary impact on GDP growth, the excess indebtedness in virtually every one of these countries (there are a few exceptions -- they don't include Canada but are "nordic countries") had to come to a head;  the events in Greece, Spain and Portugal are testaments to this realisation.  

Bottom line, China cannot rely on European consumers to stimulate GDP growth via exports, and what is said about Europe also applies to America. 

For Canada, finding the early signs of this turnaround are key to understand where our economy will be in 12 months time.  The first source of data is "King Copper", historically it has been the indicator of choice -- copper is used in everything, and production expansion is slow -- so easily quantifiable and as such (at the margin) provides a good indicator of potential growth.  However, copper has been surprisingly resilient, and has also played the fool to speculative fevers across the globe in particular in China where "Hog Farmers" infamously bought copper as a hedge (and also it turns out as a financing tool -- don't ask!).  Copper became a speculative tool by investors because of its role as economic predictor -- but its very success has marred its reputation as a predictor of growth.

The newest -- and it is still early days, predictor of growth is apparently steel -- in particular Chinese steel production -- which outstrips the capacity of the rest of the world several times.  Stories out of China are that there is now a massive amount of idle capacity (early maintenance shut down as they are euphemistically called).  Also demand for construction equipment is slumping.  Again, this is hearsay, and has been used mostly by those seeking to prove that China's economy is slowing.  Nevertheless, these are important indicators for central Canada -- where a good chunk of these heavy things are made!  

Next post: 2012 prediction -- later today


Thursday, December 8, 2011

A busy week!

I finally got my walking papers from my employer -- after waiting and hoping for more than six months, my (now former) employer finally came to its sense and made me an offer I could not refuse, I happily walked the plank, and I am now officially unemployed -- Yeah bitches!

Not entirely sure they were expecting my reaction, they are nice people, but I they keep on saying no to my deals!  What`s a guy to do?

My silence over the past two days was due first to the above mentioned:  "Your services are no longer required" episode, but also due to the fact that I had "minor" surgery yesterday morning -- the most painful part was when they removed the surgical tap that held the surgical cloth up (to keep the area clean).  No worries dear reader I was not emasculated -- no the "operation" was near my eyes -- I now look like a punch drunk boxer.

I`ve been out of it for 24 hours -- but the news this morning is far from glorious.  Don`t kid yourself, the ECB is cutting rates because Europe`s economy is in free fall (and by Europe I mean Germany).  The president of the ECB is doing his best to reduce confidence.  

Europe is like an alcoholic, the first step is to admit you have a problem; the leaders of France and Germany still have not done this.  They are still operating in the bubble that "everything will be fine" if the PIIGS cut their deficit.  Its a bit like watching a slow speed "black ice" accident




Sorry uploaded the wrong file

Tuesday, December 6, 2011

Canadian Interest rates unchanged


Uncertainty around the global economic outlook has increased in the weeks since the Bank released its October Monetary Policy Report (MPR). Conditions in global financial markets have deteriorated as the sovereign debt crisis in Europe has deepened. Additional measures will be required to contain the European crisis. The recession in Europe is now expected to be more pronounced than the Bank had anticipated in October, as a result of increased deleveraging and tighter financial conditions, as well as necessary fiscal austerity and structural reforms.(Bank of Canada)

Other topics; Canadian GDP growth for Q3 and Q4 are expected to be higher than the BoC had expected in October, also although inflcation is also at the upper range of the BoC's target (both Core and non-core) CPI are expected to fall before the end of the year.

Canadian futures market still takes the view that Canadian rates could go down Q2/12 by 25 bps -- depending on how serious things get in Europe and America (lest we forget China's own slowdown).  Things are getting interesting.

The CAD remains int he 98/1.02 range -- one (me) would expect the CAD to fall as economic stress builds up (watch Europe on the 9th of December) and America is getting close to its borrowing cap (again), so things there could further deteriorate.  

Soft Commodity production (final tally) for 2011

It was well known that 2011 was an excellent year for Canola and Wheat production in Canada each seeing an increase of 10.7% and 9.1% respectively -- partly because of increased of acreage 9% and 5% respectively, but also because of increased yields.

Soybean and corn has been a different story (Quebec and Ontario) that saw a slight drop in production despite "substantial increase in acreage"  the drop of 2.7% is not significant but the cost of production (fuel) means that the impact on Quebec and Ontario farmers has been significant.

Strong production of  Canola and Wheat (especially Durum) has been a boom to Western Canada farmers -- that were able to take full advantage of the summer's high grain prices (since then much lower).

Building Permits -- up after three bad months

Just when Canadians seem to have given up on the construction industry (I exaggerate for effect) numbers for the October 2011 shows a 11.9% increase in building permits, most of it in the non-residential sector (up 32% -- "Chinese like" growth really).

Total value of permits

A break down by segment

Residential and non-residential sectors
The bulk of the growth was in Ontario, where the economy seems to be on firm footing.  Last week's disastrous employment numbers (down 32,000) was 175% attributable to Quebec which saw a 57,000 reduction in employment.  Indication again, that Ontario's economy seems to be on an even keel.  Moreover, since the bulk of the permitting relates to non-residential projects an indication that this building "boom" is driven by industrial demand.

Good news indeed!

Too strange: real estate in China

Several years ago (2003) the inner-mongolian city of Ordos decided to build a new city for one million people.  Until recently Ordos was a building site, despite the fact that most of the city that has been built was a ghost city -- amazingly enough despite this city having a capacity of nearly a million, no more than 50,000 people living there.

Surprisingly, real estate prices in Ordos are only now beginning to fall, to the despair of the owners (20 to 30%).  For nearly 10 years the city of Ordos has been empty, these property generated no income for the owners and despite this, property prices remained high.  

There are some Chinese peculiarities, first off, Chinese home buyer will pay a premium for a brand new home (for some reason they think its like a new car), so speculators buy real estate and keep them empty -- waiting for prices to rise, and not relying on rental income.  Hence, China probably has more than 65 million empty homes -- to give an order of proportion, in America there are approximately 120 million households... 

Nevertheless, there was never any reason to build Ordos, it is far from everything, in an area of China that has low population density (relatively speaking).  Now building of new apartments has come to a halt, as buyers are getting scarce,  Check the video here

Moreover, the city has been built on debt (including a spectacular museum) that will never be repaid.  Like all bubble, the Chinese real estate sector is built on trust and hope.  Once investors figure out that there is simply no demand for the apartments they own, they will begin to liquidate.  Investors are still (today) working on the idea that the market will quickly recover.  There are stories of investors protesting at the office of real estate developers because of price cuts, while at the same time calling their friends to come and buy an apartment at the new low price.

That's why so many investors are concerned about China's banking sector.  It is easy to forget that the 2002 banking bust (where the government created good/bad bank structures) has still not been resolved -- really!  This will be interesting




Monday, December 5, 2011

According to FoxNews the Muppets are Commies

http://www.huffingtonpost.com/2011/12/05/fox-news-the-muppets-are-communist_n_1129173.html?ref=canada&ir=Canada

Sure the Muppets are against global warming and pollution.  That's old news, I just don't get the commie reference... really I don't think Russia is against dirty energy are they?  

Models say: Go bonds!

This morning talking to three money managers -- they work exclusively with very wealthy individuals.  They get paid a flat commission and have no reasons to churn their clients' books.  All three this morning told me that they ran their models over the weekend, all three came to the same conclusion, move clients money from 100% equity to 100% bond.

The metrics they use a relatively common, nothing mysterious, all three note that the year has been flat (all Americans) so that clients are not worse off. Their trading strategy means that their clients are actually up a little, these are not buy and hold managers, the actively manage their clients' money.  Anyway, all three had the same perspective; the economic risk is very high, all those who plead that the banks (in America) are fine are not only talking their books (which is fine) but also hoping that the derivatives books will not blow up (because of a counterparty failure) -- BTW there were rumors of a big European bank having an almost "Lehman moment" last week.  However, the political risk is off the chart.

Also, and more importantly, following the MF Global "moment" (don't underestimate the importance of this), they've all reviewed their custodian accounts and have specifically prohibited their custodians from "borrowing" clients' security or cash for investing in "no risk" instruments.  The implications here are serious, these guys are "white shoe firms" they are highly regarded, if they are doing it other are following their move, collectively this may be seriously impacting market liquidity (this may explain the Fed's actions last week...).  They don't control that much money (together these three account for less than $500 million), but they pack a punch on the credibility scale.

Bottom line they don't care for the rally, it's artificial, they are looking for sovereign bonds of medium duration (3/4 years) in the U.S. and Canada (Ausis too but liquidity is limited).  They've cut all their all their short positions (liquidity squeeze and unlimited downside), and their derivative positions (excluding currency hedging) bottom line they've buttoned down the hatched and are ready for the storm.

These guys will be rewarded for not loosing their client's cash, not forging a 2or 3% additional yield.  There's an old saying in money management, the first rule to making money for your clients is not to loose any money!

Friday, December 2, 2011

Two in a row

That's not so good, after the excellent September numbers 54,000 jobs were lost in October.  November, where everyone was expecting a rebound (Prediction +20k) turns out to be negative too (actual -19k).  That's two bad months in a row

Employment

On the bright side, full time employment rose by 35,000 and part time fell by 54,000 so its not all doom and gloom, but looking at historical data (above) for the past 3 years seems to indicate that this could be the start of something more serious.

Thursday, December 1, 2011

Is it too late for the Euro?



I’m in the bear camp on that one, unfortunately the decentralized nature of the EU means that because there are so many decision makers that have conflicting objectives it is difficult to address serious problems (remember Kosovo?).  The likelihood of the Euro surviving beyond 2012 is probably less then 50% -- because the EU needs to take real decisions instead of kicking the can down the road.
  • The first thing which has to happen, call it a “12 step program” for Europe is to admit the problem.  European countries have been making promises they cannot keep. All of Europe’s governments have been playing extend and pretend, and while the German are better than almost anyone in Europe they are not exactly paragons of virtue. 
  • Second, European leaders have to admit that it is a solvency issue and that some default will occur (some debt will be forgiven – and it will be a large number (BTW liquidity is simply a symptom). 
  • Third, Europe’s government cradle to grave program is unsustainable – this is not a Conservative Vs. Liberal view of the world, and while universal health care is great, and retiring at 55 is also brilliant it is unsustainable.  The reality is that when the programs were created European (and Americans) lived through to 67/8 and not 75/6 (you don’t believe me check actuarial death tables).
  • Forth, Germany is not guiltless in this affair; Germany tilted the field early on when it devalued its currency prior to entry into the Euro (Germans were complaining the government denied everything – while poorer countries did the opposite – making their exports uncompetitive compared to Germany).
  • Fifth, several countries’ tax collecting system has to be reformed, Greece is obvious, but it’s also true for France – where rich people “negotiate” their tax bills (it goes back centuries- see “le dinner de con”).


After that comes the hard part, Europe needs to re-define the role of government in society.  It is easy to fall in the Right Vs. Left view of the role of government, but fundamentally government has a very important role, from security to providing infrastructure, it produces better results than the private sector in these roles.  Too often governments have been captured by special interest groups in providing support or services that really would operate better in the private sector.  Let’s be honest the role of government is to protect its citizens:  protect them from foes, social unrest, unforeseeable disability and plain injustice.  I’m also a proponent for citizens to know and understand the cost of the services they receive.  Obviously many of these “costs” can be subjective, but surprisingly enough in many instance citizen can find out how expensive government services are to deliver.

Education has to be universal, that students pay $500 per term of $2,000 per term is irrelevant since the true cost is probably $5,000 per term.  But people need to know what the true cost of things are, and this has been hidden (there is no reason for this).  Here in Quebec we have $7/day day care, now this may be a good decision from a society’s stand point, but why the lie, why not tell people that the true cost is really $60 or $90 a day.  However, a society is made of people, and unless you are Saudi Arabia sitting on billions of gallon of oil, people are a country’s single biggest wealth creator.

Basic health care has to be free to the users, and preventative care has to be encouraged (maybe via taxation incentive).  Basic health care has to be free because it an essential good and preventative healthcare has to be encouraged because it is by far the best way to reduce the cost of healthcare...

The last item is Defence, the obvious ones are border protection, civil protection.  It is also to protect citizens from fraud (Securities regulation), health risk (environmental protection and food and goods protection).  How do you ensure that there is no “regulatory capture” by industry (or special interests) of the regulator?  The rest, the government has no business in actively participating, one caveat is that, and with all the research accomplished so far it should be easy to prove.  Any service that is more efficiently provided by government should be provided by government (no-fault government provided car insurance in Quebec is dramatically cheaper – and unsubsidised).  It is noteworthy that all these goals are very difficult to achieve, as an example what is good education?  How do you measure good education, how do you reward good teachers?  The “capitalist” view is you give them more money, but that cannot be the solution.    

Back to Europe, the reality that is Europe is complex (it is no simpler to modify the behaviour of the Chinese who absolutely must curb investment as a proportion of GDP), the forces are powerful.  Public workers in the UK are on strike because they may face cuts in their pension – they see no reason for them “alone” to pay the bill.  The situation is similar in Europe, and yet the cash is just not there (and it’s getting worse with the ultra low interest rate now in place around the world).

  1. Europe needs a real central bank that can intervene
  2. Europe needs to cut government expenditure
  3. Taxes will have to be collected on an equal principal for all citizens
  4. Tax avoidance (legal or otherwise) has to be removed
  5. European government have to remove corporate tax incentives


What is true for Europe is true for North America too. Too many companies (agriculture, energy) are subsidies by the state for dubious reasons – mostly government capture.  One of the brightest aspects of the 21st century is the advent of social media, because they stand a good chance to remove corporate money from the political equation.  The only way politicians will act for the people is if they understand that they survival (in politics) is dependent on the people, and not the corporation that support them in elections (in Canada this problem has been resolves years ago, when political donation by corporation became nearly impossible)

Cow Joke

Thank Ryk


SOCIALISM
You have 2 cows.
You give one to your neighbour.
COMMUNISM
You have 2 cows.
The State takes both and gives you some milk.
FASCISM
You have 2 cows.
The State takes both and sells you some milk.
NAZISM
You have 2 cows.
The State takes both and shoots you.
BUREAUCRATISM
You have 2 cows.
The State takes both, shoots one, milks the other, and then throws the milk away...
TRADITIONAL CAPITALISM
You have two cows.
You sell one and buy a bull.
Your herd multiplies, and the economy grows.
You sell them and retire on the income.
SURREALISM
You have two giraffes.
The government requires you to take harmonica lessons.
AN AMERICAN CORPORATION
You have two cows.
You sell one, and force the other to produce the milk of four cows.
Later, you hire a consultant to analyze why the cow has dropped dead.
ENRON VENTURE CAPITALISM
You have two cows.
You sell three of them to your publicly listed company, using letters of credit
opened by your brother-in-law at the bank, then execute a debt/equity swap with
an associated general offer so that you get all four cows back, with a tax
exemption for five cows.
The milk rights of the six cows are transferred via an intermediary to a Cayman
Island Company secretly owned by the majority shareholder who sells the rights to
all seven cows back to your listed company.
The annual report says the company owns eight cows, with an option on one more.
You sell one cow to buy a new president of the United States, leaving you with
nine cows.
No balance sheet provided with the release.
The public then buys your bull.
A FRENCH CORPORATION
You have two cows.
You go on strike, organize a riot, and block the roads, because you want three
cows.
A JAPANESE CORPORATION
You have two cows.
You redesign them so they are one-tenth the size of an ordinary cow and produce
twenty times the milk.
You then create a clever cow cartoon image called 'Cowkimon' and market it
worldwide.
A GERMAN CORPORATION
You have two cows.
You re-engineer them so they live for 100 years, eat once a month, and milk
themselves.
AN ITALIAN CORPORATION
You have two cows, but you don't know where they are.
You decide to have lunch.
A RUSSIAN CORPORATION
You have two cows.
You count them and learn you have five cows.
You count them again and learn you have 42 cows.
You count them again and learn you have 2 cows.
You stop counting cows and open another bottle of vodka.
A SWISS CORPORATION
You have 5000 cows. None of them belong to you.
You charge the owners for storing them.
A CHINESE CORPORATION
You have two cows.
You have 300 people milking them.
You claim that you have full employment, and high bovine productivity.
You arrest the newsman who reported the real situation.
AN INDIAN CORPORATION
You have two cows.
You worship them.
A BRITISH CORPORATION
You have two cows.
Both are mad.
AN IRAQI CORPORATION
Everyone thinks you have lots of cows.
You tell them that you have none.
No-one believes you, so they bomb the **** out of you and invade your country.
You still have no cows, but at least now you are part of Democracy....
AN AUSTRALIAN CORPORATION
You have two cows.
Business seems pretty good.
You close the office and go to the pub for a few beers to celebrate.
A NEW ZEALAND CORPORATION
You have two cows.
The one on the left looks very attractive.
A GREEK CORPORATION
You have two cows.
You borrow against the cows from the Germans
You kill the cows and make souvlaki
You can’t pay the interest so the Germans lend you more money
You can’t pay the interest so the Germans lend you more money
You can’t pay the interest so the Germans lend you more money
You can’t pay the interest so the Germans lend you more money .....

Another reason not to use the "office mobile" for personal stuff

Turns out that virtually all mobile phone come with Carrier IQ, which allows the carrier (and maybe the company that owns the phone (hint hint) to track every keystroke!  Obviously the owner of the phone wants to know what it has been used to do, but it turns out now that it is far more pervasive, it records all keystrokes, it records your location (even when you switch this function off on the phone).

For the past 6 months my office smart phone stays home at night, every night, its actually switched off as of 8 pm and during the weekend (probably still recording location anyway), and I now have a personal mobile phone.

Its not that I am paranoid, its just none of their damn business.

funny Christmas card





Personal Debt for Canadians

Fascinating article in the National Post this morning:

Here are the highlights:

Canadian household debt as a share of personal disposable income stood at a record 150.8% at the end of June this year (Source:  Moodys')
 But according a report last week in the Economist, Canada is one of nine countries where housing prices are overvalued by at least 25% and one of just four where prices are on par with those in the United States prior to the real estate collapse . (Source:  national Post & The Economist)

And two images:

 

And this:



Yesterday's Action

I've been out of the market for a few weeks, but yesterday's activity (S&P500 up 4%) still amazes me.  None of the news was that good, the Chinese reduce fractional reserves because their economy is slow (because Europe's economy is in terrible shape) and then a "concerted effort" by all the central banks that matter (and Canada) to make swap line arrangements to facilitate liquidity between the central banks.

First, this is not a new program (they've lowered the cost from 1% to 0.5%), but this is central bank to central bank lending -- they don't really care and frankly its not 50 bps that are going to make a difference.  The liquidity crisis is mostly between Europe's banks.  It is primarily driven by a dead Eurobond market (that banks use to fund their day to day operations), the banks have been repatriating cash (to meet their home markets needs as fast as they can -- hence the strong Euro), they've agreed to raise tier one capital to 9% (two methods reduce assets or raise new capital), so far only ONE bank has raised some capital Unicredit of Italy (they are planning on raising Euro 7.5 billion).  Second, the Bond market's decision not to lend to European banks is not driven by liquidity fears it is driven by solvency fears!  The Economist calculated that with their current asset base (and assuming limited write downs of Greek debt), that Europe's banking system needs more than Euro 200 billion in new capital.

Nothing has changed, banks in Europe are still screwed, PIIGS have too much debt (BTW neither France or Germany are in particularly "great" position).  The euphoria of the past few days is probably an overshoot, although lots of people (and they are smart guys) are saying that the advent of QE3 in the US (80% probability now) will probably support stocks till the year end.  This morning's "numbers" were depressing with initial claim rising over the 400k threshold again (and upward revision on previous week's numbers...again), and continuing claim (despite the 99ers falling off the unemployment rolls) rising again.

In Canada, no news today!  

Japan and Lying

Years ago I worked for a Japanese financial institution (they no longer exist), these were my formative year and it gave me a taste of easy it is for financial institutions to hid information from regulators (that's the important bit).  Since this firm was "highly" regulated by the bank of Japan every year a number (4-6) Japanese auditors would arrive at the bank -- and then instead of working they got drunk with the staff -- every night till 3/4 AM. But more interesting is that the staff of my bank (the Japanese guys) would prior to the arrival of these auditors remove records from the filing system [highly coordinated, they had a list].  Now these auditors were clearly going through the motion (SEC anyone, anyone at all) since they could have sequestered themselves from the bank staff (like it is done here in Canada).

Since I was a "good friend" of some of the Japanese staff (I was probably the only Gaijin who actually liked Japanese food and culture) they told me how the system worked.  First, the head of the bank was told by his Japanese boss how many infraction they were to have (the fix was in), and that certain files must not be reviewed (hence the list), the boss of the bank in London would then instruct his staff (via the Managing Directors -- until they got to the newest "Japanese" guy in the bank), who would be faced with the problem that  he knew that certain files were "no-go" in that they were delinquent or loans had not been approved correctly or amounts were too large, faced with this dilemma he took the files out of the system and took them home.

The objective here is to illustrate how easy it was in the mid-80s to hid your junk from the regulators, imagine how much easier it is in the electronic age (where structures are 10x more complicated)!  Remember the  Section 105 swap that Lehman and Bear Stern employed to hide the size of their assets (and leverage)?

This morning it emerged that Fukushima Nuclear plant (here) came much much closer to full meltdown then was every acknowledged -- apparently Tepco finally admitted that there was only a few meters of cement that stopped the nuclear fuel from exiting the facility (nuclear fuel had melted through the containment vessel and most of the concrete floor below that..."China Syndrome" or in plain English for those who never saw Fonda's movie -- full nuclear meltdown)

Going back to my Japanese bank what eventually did them in was a whistle blower who went to the Bank of England (he was made redundant and didn't like his termination package...), I was long gone by then (I lasted all of 24 months there) but apparently the Bank of England sent 50 inspectors (with police escort) told the staff to immediately leave the premise, and checked everything themselves -- I understand that within day every single Japanese employee was on a plane back to Tokyo and a new bunch was sent to London.  They also paid massive fines (part of which was paid to the whistle blower).

Still, the Japanese have a culture of the "magical" that always impressed me; senior management says I want ABC result, and the leave it to their staff to execute, since bosses are never questioned (ever) eventually corners are cut to meet senior management's objectives.  Nissan is a perfect example of that, objective #1 become #1 car manufacturer in the world -- "Yes, Sir, right away sir" with the disastrous consequence on the quality of their product.

Anyway, end of rant