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....


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.