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