Tuesday, April 30, 2013

The state of democracy in the OECD

Most of us learned that democratic governments have three separate but equal branches; the legislative, the executive and the judiciary.  Right now we are seeing a major shift in the importance and relevance of each branch.  First off, the legislative branch is getting its ass kicked (we are excluding the US for now from the discussion).  Here in Canada the role of the legislative has never been weaker, in part because of the central role undertaken by the "party" the reality on the ground is that backbenchers (those who's party is the government but are not part of the executive) no longer have any say, and even don't have the right to ask questions or propose new legislation (which was often done in the past).  

Prorogation -- a strange device that fundamentally changed the relationship between the executive branch and the legislative branch, has further weakened our Canadian democratic process.   In effect, the executive branch was able to shut down the legislative branch for several months when uncomfortable questions were asked by parliament.  The then governor general, either badly advised or lied to, agreed to this massive change in the interaction between the two sections of the government.  This expedient was wonderful for Steven Haper's then minority government -- but as the American conservatives are discovering with dismay, once the rule has been changed others will use the same gaps (Obama has retained all the power that Bush was given by his GOP Dominated congress).  

In the US, partys (and its affiliated entities) have muscled the independent thinkers out simply by getting them kicked off the primary ballot.  In many elected seats, because of gerrymandering  there is  no competition -- so a small number of individuals now control the selection process for an a much larger population -- the impact of this has been dramatic; there is now open warfare in Congress (and to a certain extent the Senate) and virtually no decision can be taken.  The opposition's job is no longer to modify and amend the governing party's agenda and legislation, but to oppose ALL legislation, to block the government.  Obviously the Republicans have been especially good at this, but the Democrats are not far behind.

Looking at Europe the situation is even more serious.  The clear rise of the technocrats that wields supranational power is in evidence.  The Euro has removed the decision process from the elected government to some faceless bureaucrate in Brussels or Berlin.  Granted those who want to avoid reality at all cost (I'm thinking of you PIIGS) are easy to blackmail... and have often been willing to sell the soul for "just one more day".  Something tells me that the European scene is about to become more "interesting"  as unemployment now grips the center countries (France and Italy) a nationalistic backlash has to be expected, especially since many German elected official have a way of saying the wrong thing.  BUT and this is important, those who see a Euro surviving the current crisis have to see a federated Europe -- something akin to what took place in Canada and to a certain extent in the US (the states still have many powers).  That means additional diminished roles for "local" governments.  Don't know if the unemployed French or Italian factory workers will have the patience for such grand scheme, when others will offer them more immediate (and more nationalistic) solutions.  Those (like me) who see the death of the Euro as inevitable are less sanguine about a federated Europe -- manly because these nation states retain, to this day, virtually all their independence...  

Looking at history, it is clear that no political system can survive for ever, the reality of humanity is a dynamic change.  Those who clamor for the status Quo, are probably really regretting the initial move down from the tree!  The decline of the democratic process may be a necessary evil if you consider the challenges faced by OECD countries and their citizen:


  1. Pension funds have nowhere the means of supporting their future obligations.  
  2. Economies are near standstill despite hugely accommodating monetary policies.  
  3. Government coffers and ability to add taxation have reached their natural limit, 
  4. people are living longer than they were 40 years ago, but still want the same benefits that were agreed 40 years ago.


The reality is that democracy is poorly suited governing tool where the pain of adjustment is deep and protracted; there are always charlatans out there promising more milk and honey today .  France proved it with the election of Francois Holland a socialites who ran on the platform that "everything will be fine, we just have to tax the rich!" Holland is now in charge of the most unpopular government in France's fifth republic's history -- and this only after 18 months in power.  Certain countries have found a happy middle ground between pure autocracy and democracy; Singapore has all the trappings of a democracy, but in reality is a dictatorship with the ability for the population to express its displeasure with the government every 4 years.  It has been a model of probity, but its unclear if the model can be replicated in a "real country" since Singapore is the size of the island of Montreal.

Still one has to wonder about democracy...

Monday, April 22, 2013

Inflation is just not playing its part


This is bad, not "really bad like the Dutch housing crisis" but bad insofar as the Bank of Canada has been trying for a while now to get inflation back on track into the 2.0% and 3% range that has been the BoC's policy for the past few years.

As Mark Carney prepares to leave for Greener pasture (Bank of England) he must be disappointed.  Canada's economy is slowing, as demand for primary goods falters, inflation is well below the BoC's traget level, and Canada remains attached to the hipe to the US economy.   If the latest figures from Caterpillar (NYSE:CAT) are to be believed the global economy's expansion is faltering.  Demand for Steel, Aluminum, Copper (and hence demand for things that move the raw material that make-up those products) is faltering.  CAT is particularly gloomy with global GDP growth at 2.5% and Chinese growth at 8% -- funny enough most economists have GDP growth in China at 7% for 2013/14...

Anyway back to Canada

Pension Manager balk at Barrick Gold's CEO compensation

Some of Canada's largest pension funds have protested at Barrick Gold's CEO pay package that include a rather massive bonus for the year, that despite the company's lack luster performance (we are not talking gold prices here -- but performance of a mining company).  This is noteworthy because until recently few institutional managers would question management's compensation plans.... it would seem that these large investors have had enough, that the Co-Chairman's golden handshake of $11 million was unacceptable.

See here

Them are the news that are fit to print.  Things here are not great, but then Europe is a mess and so we look good in comparison   



Thursday, April 18, 2013

Trudeau as a credible prime Minister

Justin Trudeau son of Pierre Elliot Trudeau -- a famous and outspoken past prime minister was "anointed" as the leader of the Federal Liberal Party.  I say anointed because although there was an election he won with nearly 80% of the ballots cast -- in the first round.  Today we are at least two years away from a Federal election, and the election of Trudeau as the leader of the Federal Liberal Party is the "buzz" across the nation (to be fair its mostly the MSM talking to itself out of sheer boredom) .  His father was famous for bringing Canada's constitution back from Great Britain, and for introducing a Bill of Rights (to the ever damnation of the Quebec separatists).  So a 30 year old guy follows in the footstep of his father, many have been there before

Could Trudeau be a good prime minister?  Who knows, guys with spectacular resumé kind of sucked and some with ordinary achievement records were great.  Reading biographies of political leaders it is clear that nothing prepares you for that job... nothing at all!

One thing for sure he's got what it takes to win, he ran in a difficult riding (constituency) where the Liberals had not won for a long time (20 years).  So this is a man than can convince, he's a half decent orator, and seem to be able to surround himself with smart (even smarter than him) people.  That's the mark of a great leader -- so there's hope there.

On other news;


The world is falling apart, its official now (mind you it was kind of official a few months ago too)!  Apparently the IMF just figured out that Spain's debt level is unsustainable the fact that the IMF recommended (even forced) Spain to take drastic budget cutting actions is now announcing that these policies have impacted the economy is... well typical of the IMF really.  

The IMF here doesn't cover itself in glory by stating the obvious.  And in related news is there any relation here to the prodigious  fall of Gold prices?  One thing for sure something's up.  My first economics professor told us that supply and demand is what creates a price point, and when there is excess supply then the price falls!  Gold has gone from $1,900 an ounce to $1,400 an ounce, a rather large correction.    



The market signals are strange, aside from the set-up for a "head and shoulder" market (the possible precursor to a major correction), the US economy (the air and blood of Canada's growth) is giving mixed signals.  Then the growth is inventory, but average income is rising (median income probably not).  Apple (no position) seems to be in free fall too from near $700 a share to $396 today -- we broke the $400 level!!!.  Not sure why it keeps dropping with a p/e of 9.13 its not that expensive?  Markets do  strange things  sometimes (Henry Blodget today announced that he was buying Apple -- he though the price fall was ridiculous).  I watch the whole thing from afar with some level of bemusement.

On a Canadian front things are going So-So.  First off foreigners love of Canada seems to be ebbing:



Canadian equity positons are being sold off -- bonds are still being bought but equity are being sold mainly because the Canadian equity market is dominated by ressource company (35% at least) and material (from Gold to Copper) are going down.




Wednesday, April 3, 2013

Inflation is back -- maybe, hopefully, it could still happen

So earlier this week StatsCan published the IPPI; basically the price of industrial production and the RMPI that shows the rise in cost of raw materials.  Good news if you are from the Bank of Canada -- that has been desperate to get inflation back on track of the 2% to 3% zone.  IPPI and RMPI are both up after having been flat for months.



Both charts show one thing -- which is not especially good, all the price increase in industrial production comes from raw material costs -- none of it from general price inflation -- in an economy that is 60% services -- that's a reflection of a weak economy.  There is no pricing power.

Canada's policy makers have run out (like the rest of the world) of macro-economic tools to affect the economy.  Interest rates are low, velocity of money is not rising (which is different than falling) and the fiscal tool shed is empty -- mainly because the government will not consider an expansionary (and deficit growing budget) so that they can achieve their targeted zero deficit by 2014/15.

Canada's problem is far less serious than the rest of the world -- still low growth and zero-bound interest rates cause all kinds of long term problems, most Canadian have not noticed by pension funds obligations are discounted at a rate of 7.25% -- its the law here.  IN reality the discount rate is far lower -- in the 2% to 4% range (depending on duration you are considering).  That means that pension funds are underestimating future (discounted) liabilities -- never mind their current dilemma that  the risk free rate of investment is around 2% (and not 5%).  Statistics will show that immigration is growing in Canada; you see it everywhere -- but that GDP growth (and labor) are nearly flat. 

All this to say that the Bank of Canada got some OK news earlier this week -- inflation in the raw material sector is good for Canada's exports, but the economy is still in a funk, the real bet is that the U.S. can be there for us!




You go away for a few days!!!

So North Korea has decided that there's isn't enough tention in the world, that we need to push that button a little harder.  You know that things are bad when the US president will not talk about it!  The fact that B2 bombers are in Korea tells you something.  What is missing from all this is a sense of what is going on in the hermit kingdom?  Is the new president playing is grandfather's game and if so why moving so fast to the full confrontation mode.

In other news the French government is modifying its new income tax laws so that the courts can approve, but bottom line is that income in excess of Euro 1 million will be effectively confiscated by the state -- taxed at 75%.  Of course the law of unintended consequence applies here -- French footballers who earn considerably more than Euro 1 million are threatening to leave the country.

In other news (really all that stuff was an excuse to talk Canadian stuff) it looks like TansCanada pipeline is confident of getting approval to change the use (and direction) of its east west pipelines.  The impact is that Quebec and the Eastern provinces would get Alberta crude instead of buying expensive European crude (about $20 per barrel cheaper!).  Separatist must really really hate this outcome, one minister what even quoted as saying the Quebecers prefer more expensive Europe oil (to be told to shut the &$%-up a few hours later)

Here in Quebec the bullshit continues; the latest is to nominated Gilles Duceppe (ex-leader of the Block Quebecois -- a Federal separatist party that died at the previous election of irrelevance).  Anyway GD got the job of heading a commission to see if the labor training business should be Federal or Provincial -- the kicker here is that everyone involved is a "strong separatist"; the commission has been set up to see how the labour training process should be run, by people that have already indicated that the province alone should be responsable of such training (although they are not wrong), but that the Federal government should pay for it -- no questions asked!

Oh the hypocrisy of governments -- but really what's pissing everybody off is that these 5 individuals are going to get paid for 24 months to produce conclusions they have already drawn.  Moreover, the objective of the exercise (avowed in fact) is to get the Quebec population in a pro-independence mood.  Governments are slow at adapting to change, but information is quick and the old games of hiding your true intention from the public -- especially one that can be reminded of your position via videoclips is becoming virtually impossible.  Within hours of being nominated these individuals that had claimed (in press conference no less) of their open-mindedness as to the whole problem were shown to preach the exact opposite just a few weeks earlier.

The king of the videoclip remains Jon Stuart of the Daily Show, Quebecers that don't understand (or care about the rest of North America) have generally been unaware of this phenomena -- it has for the past few months been hitting Montreal's shores with hilarious consequences, such as a journalist being challenged on his facts to have same journalist play the very damaging clip on his iPhone to the politician... hilarious I tell you

Wednesday, March 27, 2013

What does Canadian manufacturing say?

Canadian manufacturing has been in a funk for the past 4 months (well at least till January 2013).  The numbers are just not that great.

Sales are off both in 2002 dollars and actual dollars


Canadian manufacturing has been depressed; and its across the board although transport equipment sales were off their game (we are talking aerospace here -- Bombardier).  Canada is a small economy and aircraft sales are lumpy, sale in the aerospace sector were off 20% between December and January -- normal variation, still overall sales are way off.

Inventories are rising too

On a geographical basis Ontario and Quebec were the worse hit; Quebec obviously is the Aerospace sector (although they have an important presence in Ontario) but the Ontario has seen steep decline in vehicle sales.  Rumors of "channel stuffing" abound in the car sector (see here).  From vast Audi depot  to the same story for American made vehicle; then again, wages are stagnant in the US, and Median wages are falling -- average wages are stable because wage of the top 5% are rising rapidley -- I will not even discuss the top 1% that has seen a year on year increase for the past decade of more than 10% per annum in wage growth (we exclude here revenue growth).

Canada is an open economy; as such it acts as a litmus test for the health of the global economy -- there is very few lies in the statistical output of Canada (unlike China where stats are managed).  This could be a sign.  US corporations have been showing depressed earnings in the last quarter of 2012.  Rumours about Q1/13 are not good (thanks to twitter).  

Bottom line, Canada's economy is not growing strongly, the Canadian minister of finance (in his recent annual budget) indicated that expected GDP growth in 2013 is 1.8% -- it could be even lower.  In reality, Canada is dependent on US GDP growth (as our largest market).  Only time will tell but the signs are not positive...


Monday, March 25, 2013

Random thoughts on Cyprus and Quebec

So a deal was done on Cyprus; depositors with less than Euro 100,000 will see no drop in the value of their deposits; those with deposits in excess of Euro 100,000 watch out!  Strict capital control will be impose (by Cyprus) that will mean that despite keeping the Euro, Cyprus is now isolated from the rest of the Union.  Capital control essentially means the end of the Euro experiment in Cyprus, don't know how the rest of the game will work, but certainly no one will participate in Cypriot bond issues -- especially if the money is frozen in the country.

What happens next, what about Spain, Greece? I just don't know, maybe Cyprus was a special case --turns out that according to the Dutch minister of finance, bank bailout is over in Europe! but it all depends on the next few months, if Cyprus will ends up in a depression then they will not be the it will nevertheless be the blueprint for southern Europe, if they recover quickly I just don't know.  One thing for sure, the Euro experiment in Cyprus is over.

More interesting is what is going on here in sunny Quebec --  the massive influx of French people into the province, virtually every shop in Montreal's CBD has French assistants.  You walk into a shop that was considered an "anglo stronghold"  and now you hear "proper French" all the time.  I know that there is massive immigration, two friends have recently moved from France to Montreal, hearsay is even worse.  In one case, the CEO (owner) of a small french company just packed up his business and is moving wholesale to Montreal -- his children have already been enrolled in Montreal private french school for the 2013/14 school year that begins in September.  He's had enough of the meddling from both the Brussels's and Paris governments.  This is not a large company but could easily (ish) be relocated here.  He's taking with him his engineers and senior management and has left his workers there; the way he tells it (I take it would a grain of salt) is that the union that controlled his workers had become bolder in the past few months with additional demands that increased his labor costs by 30-40% (probably a lot less but still).

He is currently working with his clients to stockpile products so that he can shut down at the end of the summer.  He believes that he will be up and running by January 2014.  The sad part is that his workers now are working very hard because of the contracts they have to fullfil, they don't know that by the end of September they will be told that the company is shutting down for good.

The way he tells it, by 15 september his machine shop will be boxed and ready for shipment to Canada, that one month later it will be installed and that final adjustment will take until the end of December.  After that he's ready to go.  His sales force is already at work getting orders for January 2014.

Quebec's gain and France's loss!

N.B.  it has been pointed out to me that even when a company goes bust or is closed in France its not the end of it all.  There are still liabilities and the concept of bankruptcy in France is complex (it really didn't exist until a few years ago).  So that the liabilities of our "French CEO" could still be large.

Wednesday, March 20, 2013

Cyprus -- Black Swan event?

Was Cyprus the black swan event that everyone was waiting for late in 2012?  I don't know, but it has all the hallmark of a geopolitical disaster.  First, it puts in play the whole idea that deposits for less than $100k are guaranteed.  Even if this agreement between Cyprus' new government and the IMF/EU fails, the gate has been opened to employ this solution elsewhere.   Europe's technocrats have decided that your money is really theirs to play with, and dispose as they see fit. Watch out Greece -- your government will not play ball, we will get our cash out of your savings accounts...

"the Russians are coming!  the Russians are coming!" would be the best statement I could make on the events of the past 72 hours.  It is more than likely that Europe has just sold Cyprus to the Russians (giving them the ability to build a massive base on the island) next door to the middle east for $20 billion.  Not only is Europe now sucking on the teat of Russian Gas to an unprecedented level, they've just given away Cyprus -- giving Russia a say in the Mediterranean.  Because that's cheap for Russia -- $20 billion to get a foothold in the region is much better than what Bush/Cheney achieved in Iraq/Afganistan -- which is $1.5 trillion for absolutely nothing!

If I were Putin I would get this thing lock up quickly before the Americans figure out the geopolitical impact this will create.  America which is in full bellybutton mode may wake up in a few weeks with a done deal.

One thing for sure, despite the reassurance from every serious commentator, the door has been opened to seize depositors cash (BTW ahead of equity holders and bond holders) to make up the numbers.  

A worrying precedent! 


Saturday, March 9, 2013

China -- the export machine continues

From the Telegraph yesterday morning:

China's trade figures released this morning are shocking. They tell us that China is still flooding the world with excess goods, and is once again a net drain on global demand.
As you may have seen, Chinese exports surged 22pc in February. Imports fell 15pc.
This is exactly what pessimists feared. For all the talk of a great shift by China away from export-led growth to internal demand, the reality is that the Politburo is still propping up the same old system, still shovelling subsidies to loss-making firms and state behemoths to keeps factories open.
Investment is still 49pc of GDP. Consumption is still 36pc. China is still a massively deformed economy, and the global effects of its imbalances are getting bigger every year as the economy grows at far higher rates than the West.
For all those who insist that China is now moving towards a consumption society I say BullShit!  The immediate reality of China's government is that they don't want any social dislocation.  They know (not stupid these guys) that there is a cost to what they are doing.  It remains that the artifice of borrowings against raw material (its complicated) has more or less stopped, leading to a dramatic drop in imports (down 15%), while the "engine of growth" that is export continues on its merry way.

More from the Telegraph:

We have now reached a stalemate all too like the 1930s. The West is trying to counter the effects by currency devaluation, ie QE. This exports inflation to those countries such as China holding down their exchange rates with pegs or dirty floats. It is a way of hitting back.
Everybody knows that this is unsustainable, but no one wants to be the first to move!  First mover will get crushed.  As an example the west could start a trade war, that would lead to inflation.  If you look at certain European countries (Spain, Greece and Italy) you have tremendous unemployment, and among the young it is even worse!  Imposing trade barrier would bring inflation at home, would also create jobs as manufacturing would return, in some fashion, home.  The cost of all this would be tremendous, but the road we are on is unsustainable, the more we wait the worse the correction will be (thing US housing market).

BTW there is no easy solution here.  The reality of world trade is that inertia controls a great deal of what will happen over the next few years.  Those with economic power will retain control (and the current system) as long as possible.   




Friday, March 8, 2013

Employment in Canada

Well both the US and Canada published their new job numbers for January, while the number in the US at 236k was respectable Canada's number at 51k was a blow out.  Amazingly, this is as if the US had created 500k jobs in January -- so it gives a sense of proportion.

Canadian unemployment trend



The big winners were Ontario +30k and British Columbia +20k.  The big looser was my province, Quebec, that saw virtually no growth.  No point in "pointing fingers" the current government's policies (especially on language) is doing a great job at pissing off people that would/could create jobs here.  Its not that they are "socialists" is that they come across has having only electoral priorities.  It may not work out for them.

However, for Canada overall the news is excellent   One of my new favorite blogs Sober Look has an excellent piece about Canada -- interesting though process, some of the analysis is incorrect, but still generally valide.   His overall point is that America is awash with oil (true for the time being) that Canada's cost base has risen (as the CAD has risen) and that housing is now much more expensive than in the US (not true for most of the country).  Still the new governor of the Bank of Canada will have his work cut out.  Right now the Canadian Government is looking at a rosy scenario; employment is up, more Canadians are looking for work.

Good news

Although this will not help the CAD which remains weak against the USD.

Wednesday, March 6, 2013

60 minutes, China's Property Bubble & Reality

Although I didn't record it, last Sunday night 60 minutes had a bit on the Chinese property bubble that makes your head spin.  I first became aware of the "real estate bubble" in China 5 years ago, but again market phenomena can outlast almost any prediction.  A convergence of events make this bubble a necessity and a tragedy.

A necessity because although the median Chinese is poor, there is a growing middle class, and in a country of 1.2 billion the law of large numbers applies.  First, most of the properties have been bought.  Developer need the capital from investors to ensure that they can afford to build their projects (a fundamental aspect of the Chinese financial system).  These apartments are kept empty, because in China a "used" apartment is not worth as much as a new apartment.  

Second, Chinese investors have limited scope for deploying capital (as was explained in the report) no foreign investments allowed, limited or no return on bank investments, and a "ponzi" quality to a good chunk of the domestic bond market.  

Thirdly, over the past 20 years real estate investment has been a real winner, generating massive profits for the investors that played the game.  If its worked for the past 20 years why not now!

The situation 5 years ago was that China has more than 60 million empty apartments (built but with no electricity meter).  that's equivalent to nearly half of America's entire housing stock.  More troubling these empty apartments were in the $60 -- $100 K zone.  Not really the thing for the average Chinese worker that ears maybe $5 K per annum.  So not only is there an overhang in terms of available properties, but there is a tremendous missmatch in terms of the type of dwelling available.

There has been lots of pressure to stop this mad development, but at the same time there's been lots of pressure for it to continue.  First, there are the states and local government which depend almost entirely on land sale to generate revenues.  Then the reality of China's economic policy is to encourage investment... whatever that may be.  So they don't like the consequence, but that's the law -- that of unintended consequence.

The question is the same in the US, Spain and China.  Can the housing built be absorbed.  The news looks OK in the States (although it's not over yet), Spain is in deep trouble and China, well that's just a different scale!

Friday, March 1, 2013

Dinner conversation and Ignorance

Last night when to a birthday party, sitting across the table from me was this youngish Chinese women.  Smart and well spoken, she speaks English, French, Mandarin and Cantonese!  slightly better than most Quebecers!

Anyway, this women was making the point, loudly in fact, that China's policy was the right one, to promote exports and restrict imports, the only problem in here mind was that China was accumulating too many dollars.

As an economist, and a dinner guest, how to do you reply to this idiotic statement.  Well, turns out it rather easy (hint:  after our conversation she gave e dirty looks and stopped talking to me -- which was actually a blessing).  Anyway, I told here that the accumulation of dollars (or US government debt -- the same thing) was a direct consequence of this policy of supporting exports surplus -- that by definition if your exports are greater than your imports you will accumulate dollars (that's what probably pissed here off the most).  She had not made the link between the two.

She came back with the statement that today China was importing more than it was exporter -- which is almost true.  China's overall export surplus has shrunk dramatically (even with the US), but that is less a result of a change in China -- Chinese can no longer compete on some manufacturing because of high transport costs -- but also because the Chinese are trying (on an individual basis) not to hold currency.  They buy raw material, for a number of reason (Store of wealth) but also as a borrowing device (its complicated), which makes Chinese look like bigger importers.  As an example the current stock of Copper in China is equal to several years of consumption: it is a store of wealth.

Anyway, she then asked me why then were export so important, and I then explained that it was a wonderful development tool for an emerging economy, and gave Japan as the perfect example (Korea would work too), but (and this is important), neither of these countries persisted with this strategy in such an aggressive way as China has, where consumption now is less then 30% of the economy, Vs investment which is 70% (the peak for Japan was around 45% to 50%).

The impact of all this, well she found me to be a jerk and a know-it-all!

Finally, and as an aside, Europe is nearly autarkic in terms of trade; virtually all trade is intra-european.  Today's Germany PMI was up (while France was down -- car sales are off more than 20% YoY), now Germany is feeling confident, but where are all its exports going -- to the rest of Europe that is! One morning Germany will wake up with problems -- if Europe's economy continues to crater


Thursday, February 28, 2013

Inflation, inflation here is inflation!

Ok so the headline is a total lie, there is no inflation as far as the eye can see.  On Monday StatsCan published the data on Canadian inflation -- the trend is deceleration since early 2011.



Bottom line with or without Gasoline (the light blue line) there is no real inflation in Canada.  The greatest price increases over the past year (all below 1.5%) are for food and alcohol.  That's below the Bank of Canada's inflation target range.  It also means that real interest rates are positive, making economic policy slightly more restrictive.

2013's dilemma for Canada has to be China's slowing economy.   It was always ridiculous to think that China could continue to grow at 9-11% rate when Europe and North America (its primary markets) are facing stagnation.  Many commentators imply that China can change its economic make up -- moving from an export orientated economy to one of consumption, the reality is that Chinese economic policy continues to favor investments:  None of the tools (higher interest rates) are in place to ensure that the average Chinese can become part of the great consumer society.

Prices for energy, raw materials, and grains is also down -- there's a reason (aside from overpaying) for RioTinto to make additional $10 billion dollar provisions on their Alcan purchase; the price of aluminum is down, as is "king" copper (although not dramatically).

So there we are, Canada's economy (wide open to the world) is facing an economic slow down; the sequestration is certain to slow things down south of the border, Europe's government are compressing expenses -- with the obvious impact on GDP growth.  Inflation is inexistant, and falling, and although the BoC's interest rate policies remain accommodative it is less so than it was even a few months ago.  Its interesting to see the Bank of Japan (really the Japanese government) having installed a high inflation target for the country (with the obvious consequence of a falling Yen...), competitive devaluations seems to be the new game.  Watch the Brits they too will look at that tool to ease economic pressures.

2013 will be very interesting.



Tuesday, February 26, 2013

Sequestration, Italy and Canada

Last night I watched Man of the Year,  a Robin William movie about a comedian who is elected President of the United States of America... now imagine that this happened in real life, it did, but in Italy not in America.  I'm sure that the Beppe Grillo is a nice guy, but he's Italy's answer to Robin William (of course he's not president but you get the analogy -- what we have in Italy is gridlock).  

The first thing is that the voters reaction to Monti and his chums should not have been surprising -- its always been the failure of democracy, that you can avoid the hard choices if you lie!  The reality is that Italie (and a good chunk of Europe) are in deep trouble, that since 2011 the ECB has been buying off the market with a backstop debt buying program that has reduced the urgency to take action at the supernational level (where debt write-offs take place) and keep the focus on cutting wages and salaries at home (creating wage deflation) -- so that pension funds, banks and the establishment can continue, for one more day, to make believe that everything is OK.

Things are not OK and will not be until real actions are taken.  As of right now Italy (Europe's second largest debt market -- Oops!) has 120% debt/GDP ratio, that's high and Italy is very important country within Europe -- around 11% of Europe's GDP.  The cuts proposed by Monti & friends will ensure that the country recovers, in a decade (maybe) and this assumes that other play ball -- considering that the UK (which has its own currency) is in deep trouble, this is unlikely.  Canada did very well in the mid 90s when the Federal Government cut expenses because the global economy in general, and America in particular were "on fire" with GDP growth in excess of 5% -- the world could carry Canada.  This is not true today where GDP growth is much much lower (maybe even negative in Europe).

The hard choices that will be made over the next few months (with gridlock in Italy -- funds from the ECB will dry-up) will result in much sharper pain, but it may be much shorter too, and better distributed.  There is no reason why only wage earners are suffering in this game, especially since capital is largely at fault here -- the road preferred by Morgan Stanley this morning is one that had no pain for bankers and investors.  The odds of this being the actual outcome have shrunk tremendously overnight.

Sequestration, sounds bad and it is bad, it was a formula that was devised to create the most pain possible to ensure that both sides would sit down at the negotation table and find a better outcome.  It speaks volume for the failure that is the US political system that such negotiations seems to be impossible.  I am sure that both sides are to blame here, but being me I suspect that a greater share of the blame must rest with the GOP.  It is a peculiarity of the American political system that elected officals in Washington owe almost nothing to the party under which they are elected.  They raise their own money, decide to run on their own, often without any support from the central party, and face the risk of re-election every two years -- in primary were only the party faithful participate!  

Things are so bad that the Senat and Congress are in recess for the next few days (actually 10 days).  

What about Canada in all that, well we watch on the sideline.  We are an export nation (mostly to the US) that have little control over the actions of our neighbour and wonder at time if they are insane.  Then again here in Quebec, the language police has shown its true importance (BTW no joke here, there are language inspectors...) demanding that on/off switch in restaurant kitchen be covered with their French equivalent.  Turns out once one restaurant spoke out, several other joined the protest.  We look like a bunch of cretins, CNN and BBC thought it particularly funny, as did TF1 (France).  

Aside from that the CAD continues to fall, predictions are that the CAD could go to 0.95 to the USD.  Again an indication of how serious things are in the primary metals, and energy sectors in terms of slow down.  What gave Canada legs for the past 6 years could be a real problem going forward.  On the other hand manufacturers must be happy... 

So yesterday we had a market correction, this morning the futures were up -- there's always an overshoot, but the reality is that the financial markets this morning woke up with a black swan event on their doorstep.  The market doesn't know what to do or thing following the Italian elections.  What kind of coalition will be formed?  The market hates uncertainty, and is now forcing a re-evaluation of different risks.








Friday, February 22, 2013

Spain & Bankia

Euro 12.5 billion provision!

Now that's serious money , and its the kind of money that appears when banks become honest broker and sell their distressed assets for what they are worth today.  You see the Euro 12.5 billion hit (aka the largest bank provision, like for ever) is the result of Bankia selling its bad assets to a "bad bank" for what they are really worth.  In fact, this is usually done in a non-distressed context -- the buyer (really a government entity) looks at a reasonable treatment for the assets -- this is not a shark sale, but a friendly one where the buyer is not looking at making a killing just get its money (and costs) back.

On Wednesday I wrote about Spain & Greece, I didn't know that Martin Wolf from the FT had done a long piece on how things are getting really bad in Greece (we are talking social breakdown here).  I had no idea, although some inkling, that Greek hospital no longer have medicine for their patients; its like hospitals in sub-sahara Africa "we provide the doctor and the bed -- you, the patient and his family, provide everything else.

I read this morning that Spain government operating deficit is now around 10% of GDP -- worse than America (which has been cutting by the way).  Its not that government are spending more money -- well they are because more people are unemployed, but its because the economy is shrinking.

Now elections are taking place in Italy this weekend -- where according to many things are just peachy, so good in fact that rumours are that Silivio Berlusconi is apparently doing well (no polling since February 9th, as per Italian law) against  the liberals (Monti's gang), but there are several nationalist parties (especially in the rich North) that are looking at non-EU solution as a way for Italy to get back "on top". It should be interesting. the cards are mixed up because so many new parties have emerged and the level of corruption (and greed) has been unmasked -- it will be interesting to see how the voters behave.

It is hard to believe that all this european mess will end well (even France in in Merkel's bullseye), maybe Europe will get lucky, maybe they will flirt with disaster.  Then again things this side of the pond are not going too well, our American neighbours are flirting with sequestration (again) the idea that since both sides cannot agree on cuts, an automatic mechanism will enact the most painful cuts possible.  Who knew Americans could be so... well American.

Funny report in Time magazine that shows how well American private health care is working.  The same hospital charges private clients $230 for an X-ray that it produces for the American Government (Medicare) for $20... yes that's a 10 fold increase.  Drugs that it pays $3,000 a shot (cancer stuff) it bills for $13,000 and this is the kicker, the hospital's CEO take home pay last year $1.8 million... not a bad gig.  When you hear the GOP talk about medicine this is the bit they like, you take a desperate user (the sick person) who is unable to negotiate is forced to pay usurious fees to the provider.  18% of America's GDP is spent on healthcare   and based on virtually any serious metric America's health outcome is one of the worse in the OECD!

Needless to say that no serious discussion on this will emerge, ever

P.S.  The Bankia sale has serious consequences, because most deals where done on a syndicated basis, several banks will have to "re-evaluate" certain assets in view of this third party transaction.  My guess is that Thursday Credit Agricole's "surprise" write offs, may have been related to the Bankia asset sales!  Watch the other big players...




Wednesday, February 20, 2013

Canadian Real Estate market: Will it crash?

Ok, so the Teranet-National Bank House Price index is out this AM, and as we say in physiques, its deceleration all around.  Yep, fancy that the BoC aggressive stance on new mortgage has finally paid off -- maybe.

Ok so the two really crazy real estate markets in Canada are Vancouver and Toronto (many other places in Canada are in the "crazy" zone but not nearly as bad).  Vancouver has been in free fall!  Well that's what you get when you read the press, in fact over the past 12 months house prices have declined by 2.5% -- that's after a 100% increase over the past decade -- so yes a bit of a correction.  According to the press, Toronto is also in free fall  and in a correction; so far total drop is 0.37% (really not that big a correction).  Now it is true that sales are dramatically lower, hence the bathed-breath headlines because in both markets sales are off by nearly 1/3 which is not inconsequent when you are an real estate agent! It was also the first marker that the US housing boom was coming to an end, sales just dried up!

 I will not discuss the Vancouver issue any further  -- it has been covered elsewhere and has its own peculiarities.  Looking at Toronto the situation is different; until recently Toronto saw an annual population inflow of more than 100,000 individuals -- that has now changed, with a 30-40% drop in the last 12 months (reasons are unclear).  At the same time the number of condo under construction is in excess of 50,000 -- of which 25,000 will be delivered in 2013 -- now that sounds like a lot, but if you think that there are approximately 1,700,000 households in the GTA region (2011 census) then the 25,000 represents less than 1% of the housing stock -- so not really the end of the world, still population is growing by only slightly more than 1%, and a a rule of thumb households grow 1/3 the speed of population, so that there is a problem there.

Stories are that in the core of Toronto, where all these luxury condos are being built the majority are being purchased by speculators -- not people who will acquire the property, but will acquire the right to acquire the property in the hope of selling the condo prior to delivery (and completion payment).  Urban folklore is always amusing, the reality is that so far it has not been a problem!

The math tells you that the number of condo under construction is high and may be slightly ahead of demand, but overall not such a big deal.  The math confirms that although the market is overheating (especially in terms of house price/income) its not fundamentally flawed.  Demand and supply is more or less tracking.  That would mean that the correction is a direct consequence of the BoC's new mortgage rules -- three years ago I used the analogy of a super tanker; it takes a while for a  ship/market to shift in a new direction, but that the rules are finally slowing the Canadian real estate market.

Can the real estate market in Canada crash? -- of course, in the end real estate prices are a confidence game.  How much are you (and your bank) ready to pay for a parcel of land -- to a certain extent that's the problem in Vancouver, many of the more outlandish house purchases were done on an all  cash basis -- no financing.  its a bit like buying a Picasso -- its worth as much as the next guy is ready to pay!  There is no doubt that the Canadian real estate market is "fully priced" as some would say, especially when using the standard metrics of rent/price and gross income/price.  The Canadian economy is a resource based economy (well around 35% of Canada's GDP anyway), China could crash and the demand for oil, steel, electricity, gas, aluminum, copper, zinc and gold could drop, the same for wheat, corn soya etc.   But Canada has had less exposure to insane borrowing/lending practice, there is no real fundamental shift in the owner/occupier as a percentage of the overall population in Canada.  Canadian are fully liable for their debts (unlike many in the US).

My guess is that we will see a 12 to 18 months softening of the Canadian real estate market, and maybe house price increases will better track inflation (which is what happened this year in several Canadian cities) rather than capital growth (which is not the historical norm anyway).

That's my prediction (please note that I rent and do not own a house) I've got no skin in the game!

Tuesday, February 19, 2013

Was I wrong about Greece, Spain and Portugal?

Two years ago now I stated that Greece and Spain were in a world of pain and about to default...boy was I wrong.  The problem with "short" views (this company is going bust next week) is that the market can fool you and things can last a lot longer than you can hold the position.

First question:  Was my position wrong?  Well since neither Greece or Spain have gone under clearly my position was wrong.  However, and this is a biggy, I was wrong in timing but maybe not in overall consequence.

For Greece the pain of restructuring is evident everywhere, yes bond rates have become tighter -- that's more a reflection of Europe's decision to do "everything in its power to keep Greece within the EU".  My problem was underestimating the willingness of politicians to spend other people's money to support their ideals -- because at the end that's the fundamental issue here.  The politicians in place (and the bureaucrats)  are willing to spend the future of Germany to support their ideal of a unified Europe, and a single currency.

Greece's  reality is that there are only three exit strategies: because the easiest (inflation) is simply not available to the country (e.g. devaluation).  The first, and most likely is default -- in other words once debt rises beyond 200% of GDP (they are now around 171%) then all bets are off, as the European central bank will then virtually all of Greece debt.  This would be followed (or preceeded by an exit if the Euro Zone) by default by Greece -- a massive wealth transfer from Germany to Greece (please note that the transfer already took place -- we are talking of bookkeeping here).  The second option is deflating the economy -- the pain is uneven and it is a very long -- this would seem to be the current (and favoured) solution as it keeps all restructuring costs  in Greece (at least until the revolution!).  The third option is European wide inflation -- extremely unlikely as virtually no country seems to be able to get inflation going (look at Canada -- core inflation has dropped to 1.2% per annum -- the BoC is looking for 2.5%).

Now, the reason for making the Greeks pay is simple -- its their fault; yes the bankers were stupid to lend them money, but it is the Greeks who lived (and not all by the way) beyond their means.  This solution calls for the entire burden of restructuring to be borne by Greek wage earners, and not savers since the savers have their money in Euros.  I'm not going to bet on this solution to work out -- because if you are Greek and smart, you will leave the country -- further increasing the burden on those who remain.  I give this solution a 50/50 chance of success -- the last European country that saw that kind of "squeeze" on the middle class was Germany -- that didn't end well for Europe.  I'm not saying that Greece will be taken over by the Nazi (but several radical Greek parties have been doing well of late).

Why this strategy may fail is that the Greek economy continues to contract, and its not so much the debt that is rising, but the GDP that is falling!  Estimates are that the debt/GDP figure will stabilize at 177% of GDP in 2013 and 2014 but these are projections:  who knows how realistic these are... after all the Greek government is prosecuting its chef statistician for being too truthfully!

In Spain its a different tune, but same rhythm!  The problem is that overall sovereign debt is very large,  and the economy is in free fall (not only is the central government cutting, but so are states and the local government), since the government accounted for more than 50% of the economy, the pain has been great.

Overall I still think the European monetary union is doom to fail, but it probably will not be Greece, Spain or Portugal that will be the trigger, it will be something as stupid as Cyprus that is in real trouble but is so small that it will be forgotten!  they will provide the blueprint to recovery.  Throughout economic history governments have defaulted against their loans -- either directly or via massive inflation -- it is ridiculous to think that things would be different now



Wednesday, February 13, 2013

The curse of misused antibiotics

There have been some serious outbreaks of antibiotic resistant deseases across the world (and even here in Canada), for years doctors and health officials have been clamouring for people to fully use their antibiotic and for doctors to reduce the number of prescriptions... Well one of the early 20th century most debilitating (and contagious) deseases -- Tuberculosis is on the march again.

It appeared in South Africa where a new strain of TB has emerged that is untreatable even with the most modern forms of antibiotics.  See here

The Daily Mail‘s health site reports. They say doctors are warning “the world is on the brink of an outbreak of a deadly and ‘virtually untreatable’ strain of drug resistant tuberculosis unless immediate action is taken.” Fears of a repeat of the 1980s outbreak in New York City that killed 90% of the people who contracted the TB strain are being cited by those urging action in poorer countries where the disease is spiralling out of control.
Dr Uvistra Naidoo, who treats TB sufferers in a South African clinic, has horrific first-hand experience of the new disease after contracting a strain himself. He underwent three years of agonizing treatment after contracting the new multi drug-resistant disease - only surviving after undergoing a cocktail of powerful drugs which caused life-threatening side effects.

That's serious.  Now to be faire the article also discuses the fact that the vast majority of those who have contracted this new form of TB are HIV positive, with weaker immune system, still it remains a very serious problem.  Here in Canada several hospitals have been closed to visitors so that certain deseases could be contained and treated within a closed community (isolation is the first method of reducing the death toll).

Tuesday, February 12, 2013

Reversing Pipeline to Eastern Canada

Ok, so oil prices are complicated, first because although oil is fungible (its not really) it behaves a little like natural gas -- which has a more "local" pricing behaviour.  In North America, virtually all oil goes via Cushing in Oklahoma -- for those not in the "know" Oklahoma is one of those squarish states, and  it also has the largest concentration of oil storage facility; if all roads lead to Rome, then all oil pipeline lead to Cushing.

The problem is that there is (again) a shortage of storage capacity, it happens from time to time, mostly during the autumn as stocking rises to meet the winter demand.  This year the storage shortfall is very early, which has lead to a wide differential in price between Brent Crude and Cushing WTI crude -- it was always around $10 to $15 a barrel, but has been increasing as WTI crude prices are dropping.  The difference arises for several reasons; first, Brent is lighter and sweeter -- easier to refine, but also secondly, demand for petrol is dropping in North America (and has for several years), the result of higher prices is that as a whole people drive less (there are also more unemployed people so that too has an impact).

Now, the Canadian angle.  First Canada is a big ass supplier of crude to Cushing  there have been lots of pressure to build new pipeline to the South (Cushing actually -- XL) and to the West (so far that has been a total bust), but and this is the good bit, there are tons of willing buyers that are closer than Chinese or Japanese to buy cheap WTI, they are called Canadians.  Most of Quebec's and part of Ontario's oil (two of Canada's largest provinces) are supplied from Europe with expensive (yet cheap to  distille) Brent crude.

This is the best part the only thing that they need to get the Canadian oil is to reverse the flow of oil in the Trans Canada pipeline... there are environmental concerns apparently slowing the process,  and the funny bit here is that the flow used to be in West to East (it was reverse many many years ago).

My favorit bit of Stupid Politics is that the current Quebec environmental minister is against the switching of the pipeline direction -- we don't have the sharpest tools in governments, still to protest that Canadian oil will generate more pollution that European (or middle Easter) oil is a bit rich.

Wednesday, February 6, 2013

Financing the political process

Up here in Quebec there's been all kind of disclosure at a specially created commission (Commission Charboneau) on the goings on in the province as to how infrastructure projects were used to funnel money to political parties.

Hearing the outcry in the rest of the country you would thing that Quebec is the only place (like really!) where these kind of games takes place -- you can bet serious money that this is not the case.  The problem here is that the small number of contractors available (Quebec is a small place), made it easy to create a merry-go-round of briberies that were channelled to certain political parties.

So far the dirt has been at the municipal level -- projects are numerous and generally small, elected officials have few ressources, they are not that smart and the job is essentially about garbage collection and cleaning the streets -- not very exiting.   The process is likely to move to the "provincial" level soon, although the game there is more complicated, not because there are many more bidders, but because of the open competition process -- look at the mess that is the Montreal subway system...(1).  Still it "seems" that it it possible to game the system there too -- if what has been reveled is true it appears that even PPP projets saw briberies being paid.

In a fit of madness the government of Quebec decided to reduce contribution to $100 per person per year -- the maximum before hand was $3,000 -- the amusing thing here is that many people believe that a $3,000 contribution is enough to sway a government in giving multi million dollar contract -- now i'm exaggerating  there was lots of bundeling (but then both parties were beneficiary), people would rent their name, make the personal donation and then claim this as a business expense (oh the hypocrisy of it all), 

Now the law of unintended consequence comes into action; first old style fund raising is over, no more cocktails to thank party donnors, instead the internet will be used to get $10 dollar donation over button issues -- don't like the new arena in Quebec city, give $10 to your favorite politician.  The age of internet payment allows a greater separation between the voter and their representative, since your financial contribution to a politician is now insignificant .. in the same stroke website will be built (they exist in other countries) to see how your politician supported your views in the past.

This will fundamentally change the political process in the province (maybe for the better), but my guess is that you will have the equivalent of the Daily Kos or Drudge Report to create the "crisis" situation to stimulate fund raising.

That means more attack adds, mostly via the internet -- very very cheap process rather than television which is being abandoned as a source of information anyway.  Our politicians have not clued onto the internet (just check out the web site of any Canadian political parties -- it looks like a web site from 1999) full of bad video (what's wrong with Youtube guys) its not that programers are not good, its a question of budget allocation -- political parties are mostly run by old white guys (sorry Mme Marois) -- who "understand computers" but not the internet.  My prediction is that this $100 limit will create a monster!  because outrage will become the only voice of the land -- after all its the only way to separate you from your hard earned (and heavily taxed) dollars.

This aint over


(1) Several years ago, the Quebec minister of transport decided that it was legal for the province to select Bombardier to replace the aging rolling stock and systems that run Montreal subway system -- the same trains have been working hard since 1969.  Big surprise this turns out to be completely illegal, slowing the process down by years (the bids were for 2002, and the trains should have been running by 2010 -- today in 2013 they haven't even give the contract yet).

Saturday, February 2, 2013

-19c is a little too cold for cross country skiing

This morning I decided to go skiing and really didn't enjoy the ride, it was too cold and my lungs screamed murder.  Anyway back home now!

Friday, February 1, 2013

One week is a long time!

Is this normal ship noise or are we sinking?

I wake up this morning and realize that things are going south (in a modest way).  In Europe, the Spanish banks admitted further substantial losses on their real estate portfolios (write down is up to 40%) -- with the central bank stating that the banks will need more tier one capital (that's the expensive stuff), a Dutch bank was taken over by the government -- shareholders will be wiped out, depositors guaranteed to Euro 100k.

In 'merica unemployment numbers are not good, and consumer sentiments are negative (while the market sentiment is positive -- go figure).  The SEC is getting tough on banks, turns out a small American bank didn't follow Fannie Mae's guidelines, and that criminal prosecution will be certain to be filed, this is the best bit, the bank with $250 MM in assets (no typo here) arranged some asset back loans -- investors are not exactly complaining, the portfolio has a default rate of 0.5% (the usual default rate is near 5%).  Its like the joke about the IRS, we go after the poor and the weak because they cannot fight back!  It seems that the SEC is following the same principle; go after the minuscule banks because they don't have armies of lawyers and friends in the administration -- what a croc!

In China things are slowing (again) despite the massive pump priming.  Few saw the massive $460 billion rollover of local government loans as anything nefarious  but the reason for rolling these things over is that the local governments just don't have any spare cash to repay these loans -- no one knows how much of the 6% interest due was rollover too.  It is well know that local government finance in China are troubled -- their only source of revenues is land sales -- and with the slow down in real estate there is no revenues (and real expenses).

Up here in Canada economic things are quiet GDP growth is still there (November was up 0.3%) giving an annualized rate of 3.6% (simple -- and wrong extrapolation).  but price (of services) are down in Canada (which is good and bad), bad because at 60% of the economy services are important and the government has a 2% inflation target, and good because things are cheaper....




RIM & RIMM

Ok so RIM finally is ready to release the new version of the Blackberry -- incidentally they have changed their name to Blackberry, no more of this Research in Motion crap.  I fell in love with BB in 1999 when they first introduced two way pagers -- they were the rage in NY's financial district.  Then I got my first BB in 2003 -- it was a pure email machine but you could see how quickly it became ubiquitous, for a simple reason, it worked well.

I got my first "Blueberry" a few years later, an excellent machine with a phone included.  It was again a tool as good as the Iphone (or Samsung) machine is in providing something you didn't even know you needed!

Then the next 7 years were hell for BB, in fact, aside from new machines (when you are a heavy user they don't last very long), very little improved.  The internet access program was lacklustre  adding new programs was difficult, and for investors it was the "Nortel story all over again".

BTW for those who don't remember the "new" BB was first introduced 18 months ago at CES (Consumer electronic show) goes to show how far BB was from being ready -- still on Feb 5th if you live in Canada you can get a BB Version X.

The stock price has been a downward spiral, and the companies performance over the past few months has been terrible.  So with the upcoming release of the new BB the stock price rose over the past 5 months more than doubled.  Fine as fas as it goes stock price (that was once $148.00) was at $6 in early september and rose to $14.  Then the new BB is release and the surprise surprise the stock price falls.  Every analyst on the plante expresses wonder at the collapse;

Yet on of the first saying I every remember from broker friends is:  Buy the rumor sell the news -- this was true 40 years ago (before my time), and is still true today.  Either these analyst don't know anything, or they do and are playing the listening public for fools!  Nether is very complementary but are possible but the latter is more likely...

Will Blackberry survive, I don't know.  One thing I do know is that the shine is off Apple (stock price and technology) I still hate Android phones -- don't care what you say the UI is unusable rubbish.

Monday, January 28, 2013

All is well in the world!

At least that's what I heard at a recent (thursday) investor conference -- I was shocked to hear that Europe was in year 6 of a 10 year de-leveraging cycle, there is no evidence of any deleveraging in Europe.  Of course house prices have crashed in certain countries, but this is not deleveraging insofar as the debt has not be repaid, it is a net loss for the economies (Spain, Greece), as these home stand empty today.

I was surprised how sanguine there were about the US (but not Canada), how things in the US were looking up, house price finally "rising" (they have in fact risen by nearly 9% since September).  However, interest rates are still very very low (lower than inflation), median income (not average) is not rising, speaking volume about the lack of purchasing power by the middle class.  

The view of Europe was that things are getting better -- they are particularly turned on by the UK -- which is strange considering the difficulties of the the Cameron government.  I suspect that there is general exhaustion about the bad news coming out of Europe.  The European central bank has decreed that it will do whatever it needs to maintain Greece's position within the union, but one has to wonder how long this will last?  Also as a "fly in the ointment"  problem is Cyprus, which is closely tied to Greece, and which has seen all three of its domestic bank forced into restructuring -- since so much of their assets were tied to Greece -- needing a rescue, Cyprus could fall out of the EU by sheer neglect giving an exit road map to other troubled economies.  

It seems that the investment community has taken the election of Obama into its stride, and are now looking at the US as an engine of growth -- for what its worth this morning's durable (December 2012 timeframe) goods number were twice as high as expected (4.6% Vs target of 2.1%), now I've not looked at the data granularity in any meaningful way, aside from Investments -- companies adding assets to their production capacity that was up marginally, but follows very strong performance in October and November its hard to draw meaningful conclusion.

Overall, their view as to the energy and ressource sectors are negative (e.g. Canada), and would see fall in prices.  China's economic growth would be lower -- at 8% but driven by consumption (not sure how that's going to happen since the incentive in China are still towards investments).  First step would be to make borrowing more expensive, paying investors meaningful interest on their deposit balances.  The other issue (to unlock value) are Chinese IPOs that are blocked because the companies cannot demonstrate profitability -- in a country were the books are unusually well cooked!  Tells you something about the strength and weaknesses of the Chinese economy.

Overall, the conference was interesting because I disagree fundamentally with their views of the world. The kicker is that these fund managers have outperformed the market almost every year (and by nearly 2% point over the life of their fund -- 25 years).  So although I disagree with their views of the world, they are probably better at reading the investment world than I am -- food for thought!

Finally, in a poll of the 150 participant (via electronic gismo) the overall risk was a black swan event!

Wednesday, January 23, 2013

I'm back

After 9 months of quiet I've decided to post again.  My focus remains Canadian, but of course now I can be less cautious about my identity, since I no longer work in a big-ish bank... the reason for posting was to provide my non-canadian clients some insight into "all things Canadian"  leaving banking, thank god that's over, means that my natural audience had disappeared -- I still have some thoughts that I want to share.

Right now I've got a few bees in my bonnet:

(1) Why are CEO & senior management of large companies receiving compensation out of proportion with their value added [short answer is that they can!].

(2)  Why are companies borrowing so that they can pay large dividends [this is illegal in the UK where I received most of my training]

(3)  Why are union so inefficient in protecting "real rights"  [I'm thinking of you Air Canada]

I will address these issues in upcoming blogs, I need to make sure that I have more than just anecdotal evidence...

I will resist talking about "American stuff" mainly because every time you make a comment about the good old US of A, the comments section gets out of control -- and I don't really care about the US (aside from a purely neighbourly voyeuristic way). Obviously I would prefer that Canada be less  dependent on the US, NAFTA has increased the overall trade between the two economies, and has increased the risk of interference.  On the bright side the US should continue to treat Canada like Saudi Arabia, we can do more or less what we want as long as we continue to ship the "black gold" they need.  The whole "American energy independence" discourse sounds fake to me, especially when looking at data that shows that shale sector durability to be a lot less than meets the eye.

I remain fascinated by the North American energy sector, especially the shale oil and gas sector that seems to be perpetrating a fraud, the number of drilling continues to increase but the quantity of oil being produced is levelling off, which means that older shall gas/oil wells are not producing nearly as well as had been anticipated by the market.  Some energy commentators have even suggested that shale drilling is really unable to meet its capital costs... the implication is that there is not enough oil to justify the expenses of drilling.





This is a small thing -- and this graph relates specifically to the Bakken region see here the original blog post.  I'm no engineer, but one thing I know is that once you start injecting water or other substances in oil wells production is about to fall of the cliff face; and that's the starting argument for shale gas/oil... anyway (NB  I know that the poster of the original statement is making the argument that the average is not falling off, the problem is the growth of exploration which is logarithmic -- you cannot drawn average from log progression -- that's a mistake)

I'm back