Tuesday, January 31, 2012

Big day My Barbour is back

For nearly 15 years I have been the proud owner of a Barbour coat, you know these coats thte Brits wear, they are green and covered in wax...

Now, my coat is been "away" for some months (nearly 3 month) being repaired and re-waxed.  Well today at 12:55 the postman came and delivered the waxed and repaired coat.


Industrial Producer Price Index -- down again

The IPPI decreased in December after posting a 0.3% increase in November. It was the IPPI's largest decline since the 0.9% decrease in June 2010. The downturn in the index was largely a result of lower prices for petroleum and coal products (-3.7%) and primary metal products (-2.4%). Chemical products also contributed, though to a much lesser extent, with a 0.7% decline( StatsCan).

So the massive IPPI increase of earlier this year has tempered, on a YoY basis, IPPI is up 2.8%, not great but better than the 5.5% in May.  Again, fuel costs are at the center of the reduction, but they are joined by raw material prices (as metal prices have dropped).  Overall, its a win for Carney, that had resisted raising interest rate (because of global economic concernes) to meet inflation expectations, because he believed these pressures to be transitory.  Like the the Bank of England, the BoC was right on that call.

Looking at the data in greater depth, what is remarkable is how little price movement have occurred over  the last four years.  In 2008, the IPPI index was at 107 (2002 was re-based at 100), as of December 2012 the index is at 114, which gives an annual increase of 1.6% compounded.  Which is not a lot, and excluding petroleum products (not a brilliant idea) shows that the IPPI has been stagnant for nearly 4 years. 

Monday, January 30, 2012

On thing you can say about the MSM -- They like yesterday's story

Ok, so for more than a year, the governor of the Bank of Canada, Canada's minister of finance and a number of "important folks" have been making a point in speeches that Canadians are borrowing too much and are taking on too much debt, usually to buy a condo in Toronto or Vancouver.  Well guess who's finally joined the party, but the Main Stream Media (that's what MSM means).  Anyway suddenly the papers are awash (awash I tell you) with stories about the forthcoming large scale bankruptcy of Canadian facing impossible mortgages.

First off, yes Canadian have taken on too much debt, there is frothiness in the market, as is normal for any real estate market that has had a virtually uninterrupted boom for the past 13 years., but (and its an important But) comparing what's going on in Canada with the situations that has afflicted our American cousins miss the point.  First off, Canadian have seen a constant improvement in national income -- granted the mean has not improve as much as the average (that means that rich folks are lots richer and ordinary folks are more or less the same), but still national income has risen, the Bank of Canada has taken action (more than a year ago) to reduce market frothiness by reducing the term and the amount that can be borrowed -- forcing more savings in the housing complex.  Finally, Canadian banks were not crazy, there is really no such thing as "liar loans" in Canada -- all mortgage have to demonstrate income, and the independence of valuers is well established.

Clearly, Canada is overdue for a correction (13 years is a really, really long time for a real estate boom), and Canada will get a correction, but it will not be on the scale that our American friends have seen, because mortgage in most of Canada are full recourse -- yes the  are secured on the building, but in Canada (mostly) a mortgage is a personal liability -- you cannot walk away from your house.

Moreover, with lower loan to value (and no such thing as a 30 year fixed mortgage) the risk is lower.  No one knows what kind of correction Canada will have in 2012 (or 2013) but it will not be on the scale that has been observed in the US, moreover, a large percentage of the frothiness is in condos -- multi unit projects that are suitable (for a price) for the rental market in cities such as Toronto and Vancouver (actually in Montreal too, if truth is told -- there are lots of new downtown condos being build here too).

Anyway. the MSM has just figured out that a correction is in the cards -- now they are talking end of the world kind of outcome for Canada -- as if we were as crazy as our American cousins!

Aside from that, things are quiet in the stats front in Canada...

Thursday, January 26, 2012

DIP Financing - ECB & Greece

This is almost unbelievable but it is apparently true.  The ECB (and the IMF it has to be said) have decided (BTW this is a long held position) that their exposure to Greece is worth 100 cents on the Euro!  In effect the ECB takes the view that they provided new money (not always) and that their loans to Greece cannot be redeemed for less than parity.  It gets even better, all the bonds that the ECB bought from the market should also get 100 cents on the Euro!

Now the concept of Dip (Debtor in possession) financing is clear, after a bankruptcy new money gets preferential treatment in the waterfall of repayment.  Of course, the problem here is that non one in Europe wants to contemplate a Greek bankruptcy.  

The "funny" bit is that now the ECB wants to make a profit on the bonds it bought in the market, because if they are redeemed at par, since the ECB bought them at a discount (yield of 7% vs coupon of 3%) they would make a gain on their bonds.  In fact, this is exactly what the commercial lenders wanted to expose, they offered a coupon of 4% on new instrument "if the Supranational participated".  BTW 18 months ago, the 20% Greek har cut was supposed to reduce that countries Debt/GDP to 80%, the 70% haircut today -- will generate a figure of 120%, because Greeks GDP has been contracting at a rate of nearly 10% p.a. for the past two years...

Who believes that Greece can manage debt to GDP of 120% going forward?  Realistically, the Greek government will eventually wake up (or be defeated in elections) and will reneg on this ridiculous deal.  Certainly Greece was stupid in borrowing so much (but the lenders were stupid too), now "real men" have to make a serious decisions:  Greece needs to go its own way (however painful) and tell Europe to shove it!  The current path will lead to unimaginable pain for decades, and will lead to further negotiations.  I can bet serious money that soon some German politician will suggest that "Greece could sell the Greek islands -- for cash".  

Unbelievable, simply unbelievable

Wednesday, January 25, 2012

David Rosenberg

Mr. Rosenberg and I sing from the same hymn sheet.  We both take similar views (I have never met DR) that the current recovery in Canada is driven by externalities (Good for Canada), but that the economy faces some massive challenges; specifically the China ride seems to be over -- how many more cement or steel plants will the Chinese build?  For China the next shift has to be its consumption -- right now less than 35% of its GDP (compared to 69% and 55% for the U.S. and Canada respectively).

DR also takes the view that more debt for over-indebted countries is not the solution.  Canada is in relatively better shape (still not good), but the U.S., the U.K and parts of Europe are in terrible shape and it will take years for this debt burden to be reduced (or forgiven).  

Obviously the housing sector in America, the UK and part of Europe still have some way to go.  America will permanently reduce its single family units, so construction will be in multi-units will rise, but the UK still has some reduction in prices, and some parts of Europe (Spain I am looking at you) have not even started the hard bit - taking the hit on inflated house price (kept off the market).  DR and I were both very impressed by McKinsey's analysis of the debt burden adjustment -- using statistics going back to the late 19th century to find a comparable situation.  Their view was (and remains) that 10 years is the minimum period of adjustment -- so 2017/18 is the date!

The short term ups and down of the market are amusing but really mean little to wealth creation (ignoring AAPL of course) since 1,300 has been the "number" for the S&P 500 for several years now.  However, David has some choice thought for investors:

1.    Market volatility is part and parcel of every post-bubble deleveraging cycle
2.    Deflation trumps inflation 
3.    Balance sheet quality becomes so much more important 
4.    Always be on the lookout for assets priced for recession
5.    In this post-bubble environment, policy rates will remain near the floor for years
6.    Keeping policy rates low means that real rates will remain negative
7.    Global deleveraging cycles almost invariably bring on heightened geo-political tensions
8.    Populist policies win the roost in these types of cycles

As far as I can see, the action of the ECB, the Feds, (the Wall Street Kleptocracy), and the the EU are certain to cause irreparable damage to the European Union.  Already the level of suffering in Greece is beyond imaginable -- and Ms. Merkel wants more of the same , and this to give the Greeks cash so that they can pay their loans to the German, French and Italian banks pension funds and insurance companies.  Figure that one out -- where's the upside for Greece.
Finally, and in the "I shit you not" category -- guess what is the statutory discount rate that Canadian Pension funds use when analysing their future liabilities -- if I told you 7.25% would you be surprised?  Think about this, Canadian pension funds are somewhat underwater based on a discount rate that is out of this world high (making future liabilities seem smaller today).  BTW you can buy a Canadian government 30 year bond for 2.67% (yesterday anyway).  How will these pension funds make the difference of nearly 4.5% in yield shortfall?  

Canadian CPI tampering

Well, the BoC finally got its wishes and the CPI has finally taken a breather.  Granted most of the move was driven by lower fuel costs (its not over yet folks).  CPI was 2.3%, down 0.6% from last month while core CPI was down to 1.9% -- both figures are closer to the BoC target of 2%.  Yet worries remain, because although prices have tampered, the real "saviour" here is fuel cost.  As of November 30th they were up 13% for the year, but only 7.2% for the year ending December 31st -- a massive deceleration in fuel costs has helped, both measures for December.

Bottom line, 30 year BoC TBonds are still trading around 2.5% for 30 year money.  Granted there's a lot of foreign appetite for CAD sovereign bonds -- after all Canada has one of the few central banks not printing like mad.  The Americans are pricing the Feds printing an extra $777 billion (real cash) over the next few months.

Granted there is zero sign of inflation in the US economy... still that kind of printing has to translate into something serious (inflation wise) eventually. 

Anyway, good-ish news for Canada!

Tuesday, January 17, 2012

Bank of Canada, Banks and Baltic

Eagerly awaited by pundits across Canada are this morning's Bank of Canada director rate.  Absolutely no one is expecting (and 30 seconds ago the BoC made the announcement) a rate hike, but they are all awaiting with baited breath the "wording" hoping to extract some guidance on when (and if ) rates are going to rise.  First off, Mark Carney has made it clear that a rate hike will be governed by the global economic outlook -- he has exactly (more or less) the same data that anyone else has (with the predictable laggs).

The first line of the statement starts with: "The outlook for the global economy has deteriorated and uncertainty has increased..." so the BoC will have to wait until things improve.  Needless to say that the futures are still flat as far the the eye can see (Q1/13) so no guidance there.  Canada's economy seems to have grown by 2.4% in 2011 -- there the BoC has an edge, most commentators were working on the basis of weak Q4 -- in fact Year on Year to November 2011 was 1.5%... outlook for 2012 is 2.0% and 2.8% in 2013 -- of course this last number is total BS no one has any idea what will happen in 2013 (we're still trying to figure out 2011, and that's already happened).  However, the overall trend for Canada is for weak to moderate growth.  The second to last paragraph talks about Canada's economy operating at full capacity (by the end of 2013), but again the BoC has a relatively poor record of estimating economic capacity utilisation.  This could be a sign that by the end of 2013 for the BoC to tighten interest rates, but that's 24 months away...

In other news, Citibank data revealed that over the past 24 months, nearly 50% of its pre tax income is from write-back of reserves.  Provisions that are released because they were deemed as excessive.   It may explain why banks are trading at a discount to book value -- in fact since the financial sector is 1/3 of the S&P 500, and we know that Citi was not the only bank "writing back provision"it speaks volume to the quality of corporate earnings in America...

Finally, the Baltic Dry index is back in the news, it has reached its lowest level since 2009.  Until recently, the BDI was a useless index because so much new capacity was added in 2010 and 2011.  But this massive ship building program is now over, and indications are that trade volume (for bulk carriers as opposed to containers) has collapsed, it stands at 1013 which was just about the low point during the 2008 crisis, another 30 point drop and we will have to go back to the early '90s to see such low rental costs for bulk carriers.  

Monday, January 16, 2012

I told you so: I get no pleasure in this, but...

Greece is near the inevitable edge, no surprise there, the reality is that its American hedge funds that will be blamed, because they bought the debt that the French and other European banks were selling.  The tragedy is that the writing was on the wall months ago, at no time in history has a solvency problem been solved with more debt.  

So now we are days away from an Greek default, and instead of having a process that is orderly, it will be a free for all, that will create even more pain.  Its nice to see that Mrs. merkel got exactly what she was hoping for (maybe not what she wanted but what she played for).

As of 6 am this morning it is the Portugese debt market that is blowing up, because if Europe was incapable of solving a tiny problem such as Greece, you can bet that they cannot solve Portugal (which is a small problem).  Next up is Spain, where the current official unemployment rate is around 24%.  The question now is really, will these countries leave/be pushed or will Germany, Netherlands France and italy make a run for the door first.

This is not the beginning of the end, it is the end of the end!

Things continue to be boring in Canada!

I gota be more diligent about this!

2012 is not starting well, I've been less than diligent in writing my blog.  There are a few reasons for this; I am surprisingly busy for an unemployed dude.  Secondly, the economic news (Canadian anyway) is less than interesting.  Europe is still in trouble (obviously), the Euro is slowly falling (which should help but we must not forget that most of Europe's trade is internal), so the impact of a falling in Euro is higher energy prices -- that cannot be good.  China is still in line for a "landing" hard or otherwise.  Since Chinese statistics are generally unreliable... we will never know.

America's corporations continue to defy gravity.  Yes, lots of bad news is already priced in the market, but the question is; how will Q4 earnings hold up.  A great deal of ink has been used to state that US corporate earnings had benefited greatly from a strong Euro -- its now trading at 1.26, substantially lower.  American consumers still seem to be doing their bit (despite no increase in income).  Canada a second derivative country highly dependent on US growth continues to benefit from the American party!  Rumors, and limited statistics seem to indicate that certain segments of the Canadian economy are in fact seeing slow down:

Quebec has seen a dramatic rise in its unemployment rate -- its unclear (the numbers don't provide this kind of breakdown) if there is a massive "return to the labor force move" or if its actually Quebecers losing their jobs. 

In Ontario, anecdotal evidence seem to imply that a good deal of real estate demand is generated by speculators -- financial investors looking to acquire property under development and sell then to end users before construction is completed.

The Canadian oil boom out West (the non-tar sand business) is not doing too well, because most Canadian don't realize that the vast majority of "oil" sold by Canadian companies is actually natural gas!  And gas is cheap.

Anyway, these are Canada's chalenges in 2012, we will have to see how it plays out

Thursday, January 12, 2012

Fun stuff and Canadian Real Estate predictions

I'm just back from several weeks in sunny Mexico, enjoying the sun and the margaritas... anyway the stark reality that is winter really hit the spot this morning, with very uncomfortable conditions, with snow on the way -- maybe even some rain (we are so lucky here!).

A friend of mine woke up last saturday at his cottage,a bout 1km from mine to see on his snow covered dock two wolves.  I have never seen wolves near our cottage, or even wolf tracks (which are rather distinctive), although we have seen increased dear population and foxes so its natural that their predators would follow.

On a more amusing note, and in the "Shit you not" category, was the announcement by Royal LePage, one of Canada's largest real estate brokerage group that:  "Housing prices will continue to rise in 2012". Very much like NAR in the US these groups will never (even if earth is destroyed by aliens) acknowledge that prices could stop rising or even fall.

Canada has seen its longest ever housing boom, with nearly 13 years elapsing since a correction (I discount the 2008 episode since it was a few months long and driven by global liquidity issues).  No house price will continue their upward trend forever!  It is absolutely natural for Canadian house prices to rose by 6% or 7% per annum indefinitely --- morons I tell you complete morons.  

Wednesday, January 11, 2012

2012 and all that

The new year is now 12 days old, and 2012 feels a lot like 2011.  Few of the core issues have been addressed in any meaningful way.  Here in Canada the debate is about the possible price deflation in housing, for although Canada is one of the few OECD countries that has seen reasonable growth since 2007, there is a feeling that the party is overdue to end.

First and foremost is the now 13 year old housing boom; as a participant in this sector until recently, my feeling are that on average 7% annual price growth is not sustainable.  Although national income has risen continually over that period (bar for a brief period in 2008) it remains that Canadian house prices are driven by ultra low (and in the long term unsustainable) low interest rates.  The question is not so much on the likelihood of a correction, but rather a question of timing and size! 

Other issue of interest last week was IPPI

Prices for industrial goods increase slightly

Remove fuel from the equation (not that this is entirely justifiable) and a picture emerges of an economy that has prices under control for its production process.  On the employment side of the equation, the data last week was very weak; whereas an rise in the number of employed Canadians was expected, what we got instead was a reduction (unlike in America which saw surprisingly resilient employment numbers). 

Canada is, and will remain, a second derivative economy; its health is less driven by endogenous factors and more driven by exogenous forces to which the economy has to adapt.

For once I will refrain from making any predictions on the economy -- I was wrong on GDP growth, I was wrong on the bond market and I was wrong on the equity market (too optimistic, to pessimistic and to pessimistic).

I'm back, and I still don't know