Friday, April 29, 2016

American Elections & the Republican conundrum

I remember about a year ago, the chairman of the GOP saying that they had a deep field of candidate for the 2016 presidential election; and then Donald Trump thru his hat in the ring...We are now in April 2016, and within the next few weeks (maybe days) the presumtive nominees for the Democrats and the Republican will be finalizes.  Ms Clinton with all her faults, real, perceived or simply made up, will almost certainly head up the Democrats.  For the GOP its still a choice between Trump and Cruz, but in reality neither are acceptable to the vast majority of the electorate -- so it really doesn't matter.

What is truly interesting is the impact on November's voters; some will vote only the down ticket, but in reality voters almost never vote the bottom of the ticket.  So my best guess is that a lot of Republicans will stay home in November, will hand the Democrats a victory on par with what Reagan got in the 1980's a 30/40 state victory -- this will be a historic defeat for the GOP; if its Trump (which is looking increasingly likely) the GOP will be able to say that it was not them, it was the nominee's fault -- giving them the ability to further deny reality of their failed policy, if its Cruz, I suspect they will still say its the candidate, but they will not be able to say that he was not at the very very right end of the spectrum.

This will at the very least hand the Senate back to the Democrats -- and may do the same for the house...although the house is, with all its gerrymandering, is harder to judge.

Maybe the GOP will change its ways.  The rise of Trump is entirely due to the GOP's historical habit of bait and switch; talk about values and middle america as the core of the economy, but then pass legislation that allows the 1% to off-shore their wage bill to lower cost jurisdiction and cut the 1% taxes even further.  In short the GOP has largely taken its voters for granted (BTW the Democrats have done the same with the african american vote too...), still Trump has clearly addressed these "core Americans' concerns"  (e.g. middle age blue collar white guys).  The press loves Trump, he gets about 85% of all press coverage.  His rallies are energies (and apparently violent).  

The GOP's conundrum is as follows:  After the 2012 defeat the GOP undertook a full review of its platform and what Americans were saying -- especially Republican Americans; and instead of following the script (Jeb Bush by the way) the GOP went full loco, full right wing crazy -- build a wall etc etc etc.  Granted the GOPs problem are even deeper; their willingness to gerrymander certain congressional seats means that there is an increasingly large number of representants that will not move an inch from their dogmatic position -- because they don't need to! They are elected by a minuscule subset of the electorate (in primaries) and then always win!  The GOP has no control on the selection process -- since all these campaigns are self funded (BTW that's what gave rise to Mr. Trump)

That's the GOP conundrum, the two front runners for the nominations are both deeply flawed candidates that the GOP establishment will easily dismiss as irrelevant; making the GOP unelectable for the foreseeable future.  Now I am not a republican (for starts I am not an American), still any political system who has a broken party is pray to massive problems.  The UK faced similar situation during the Thatcher years -- the labour party was unelectable, and so the system of check and balances fell apart.

Wednesday, April 27, 2016

Greece: Episode 9 -- I've not lost my bet yet!

The head of the European Union has rejected Greece’s request for an emergency meeting aimed at ending an impasse over the country’s bailout.
Greece agreed to a third rescue package worth €86bn (£60bn; $94bn) last year and faces a looming debt payment. However, it has been unable to unlock the next loan instalment after clashing with its creditors over more reforms.
The International Monetary Fund and other European partners are demanding that Greece implement further austerity measures. They are looking to generate nearly €4bn in additional savings or contingency money in case Greece misses future budget targets.
But the left-wing government led by Alexis Tsipras has said it will not agree to any “additional actions” to what it had already signed up to last summer.
A special ministerial meeting was supposed to be held on Thursday, but Dutch Finance Minister Jeroen Dijsselbloem, who is in charge of the Greece negotiations, called it off.
Source: BBC

For all those who though that the Greece thing was over and done with, let me disabuse you.  What the ECB/EU/Germany have done is "shovel the shit forward".  Despite the fact that Greece as agreed to massive cuts in government expenditure the reality is that revenues are also way bellow expectation:  Would you build a plant in Greece.

Little has really changed in Greece, it remains difficult to start a business, unions are all powerful and red tap is still rather extensive.

However, the one thing that has not happened is debt forgiveness; granted countries are not companies and so bankruptcy is not really an option.  Still, the one thing that could possibly give Greece a chance is not being considered.  And now, with almost Euro 4 billion due in July, we are back at the game table, where Europe refuses to meet with the Greeks until some further cuts are put in place.

i can still win my bet -- that Greece will be out of the Euro...

Thursday, April 21, 2016

The logic of Uber & Lyft

Article today says that business travellers are increasingly user Uber instead of rental cars...what a surprise.  What makes Uber so much better than a taxi is that you know who your driver is -- joking aside many times the guy driving the taxi was not the guy on the picture, had no idea where he was going (aside from the major streets). But why car rentals?  In a sense people rent cars because often they cannot trust the local taxi service -- if it rains or its shift change or some other reasons.  This is not nearly so much a problem with Uber/Lyft because you know the state of the market; you can visualize the number of Uber/Lyft in your area.  Cannot do that with taxis.  Information has made Uber superior to taxis but also to car rental.  

So you go to a meeting from your hotel having booked your Uber on your way out -- go to the meeting and as you sit comfortably in the lobby of your meeting wait for your Uber to show up...that's so much better than finding a parking space and paying an attendant.  On top of everything else, in Europe at least, getting a rental car is a slow and cumbersome process.  There's no pre-registration and there's always 5-6 signature and imprint of the credit card, despite them having it on your reservation.

If you think taxis are going to take a hit, rental cars will be far worse.

What Uber & Lyft are bringing to the "temporary transport industry" is 21st century technology. While the taxi "sorry my credit card machine is broken" industry and the car "just one more signature here" rental industry are dealing with ancient technology, the new entrants have rethought the process; you can see on a map where you Uber is located!   

This is not an isolated phenomena, in fact, Financial industry is finding out the same thing.  I wrote about this before here.  Several businesses are challenging how things are done:  Have you tried transferring money internationally recently? if you use a Fintech the cost/process and simplicity will astound you.  Fintech are able to transfer internationally within 24 hours (some places its even less), compare that to traditional banks that can take days/weeks.  How about receivable tracking -- and financing; used to cost nearly 10% of the top and would often be full recourse when dealing with discount houses.

Wednesday, April 20, 2016

Oil prices at $44 -- Dennis Gartman must be dead!

In January, Dennis Gartman, a market prognosticator (and a bit of a right wing nut) said to Bloomberg that "we would not see oil prices at $44 in his lifetime" -- so Dennis my boy you must be dead (he's not dead...).  You see if you are going to be a good pundit (aka Trump is done, or Trump is gona win), you have to be categoric and aggressive with your opinions.

Denis of late has been a bit of YoYo and somewhat exhausting one at that!  On Monday he's "Short the dollar then go long gold" on Tuesday he's sell gold by dollars.  You may see a trend there.  

Anyway, I have always been a good economist: I have no idea where gold or oil prices are going.  I contemplate that there's a lot of oil siting around, but there too you have to be careful; yes oil reserve levels are high but its not like there's 20 years of oil sitting around doing nothing, no we are talking a few weeks that's it; as an example "there is 100 million barrels of oil sitting in tankers right now, twice the level of last year and a historical high"  How many days of global consumption are we talking about? A month, a week?  Its actually a day (according to Wikipedia the world consumes 96 million barrels of oil per day).  A trick question...

The oil market is however very inelastic -- which means that a small change in the demand supply equilibrium will have a huge impact on prices.  So a small shift in demand -- and oil price go from $100 to $28 in the space of 18 months.

Now oil price are up dramatically off its lows -- 57% so that's going to boost inflation expectations too (and we are seeing that too, with inflation numbers that are).  The Saudis announced that they were going on a market share ware with Iran -- not entirely clear what they are getting there.  Nevertheless, oil prices are going crazy, down 4% in the morning, up 3% by the end of the day -- a 7% movement over the day.

So oil price were are they going?  In short I don't know, there's a lot of market speculation -- false rumors move the intra-day market by large numbers, but the overall trend, if it continues is up a bit but it remains that the real issue is what happens in China and America in the second half of 2016.  Stories about China are not good -- but who knows.  As for America some signals are negative others are positive.  It could go either way, we are looking right now at the longest market rally (almost 9 years) without a real correction.

So take your money and take you chances, as for Dennis, well although he's made some spectacular wrong calls (I think he's for Ted, I believe Christ is on his way, Cruz), the fact that he speaks well, sounds authoritative makes him a very attractive pundit.

Monday, April 18, 2016

Two weights two measures: Labour Vs. Capital

Over the past 20 years, as a results of the NAFTA agreement (North America's free trade agreement) and the entry of China into the World Trade Organisation there has been a  completely changed the economies of Canada and the US.  Blue collar America got killed; Canada and the US have lost a massive number of "high paying" manufacturing jobs to China and Mexico.

Its all well and good, and frankly for Canada's economy it has been excellent. 

Yet I have not heard a word about compensating those who have lost their job and their trade. Because in our economic system people are disposable (maybe not on the scale of China and India, but you all get my point).  If you lose your job because you were a welder at Ford and it was cheaper for Ford to get its car welded in Mexico -- well good luck buddy; here are a few months of salary (usually not that much) and unemployment benefits for a few more months.  That's it!  A life is worth 6/8 months of near starvation cash.

However, if you own a taxi license, because it has a cash value -- mainly because you may have bought it 20 years ago for $5,000 well then you are owned compensation!

Now I am not saying that taxi drivers should not be compensated if they lose business because Uber of Lyft of some other provider gets in the way, but it is remarkable that the same economists (yeah you know who you are) have no problem heaping people into the garbage heap -- hey your trade is no longer relevant get training and become a computer programer, but these same economists want the taxi drivers to be compensated (or at least the medallion owners).  

Now I know what happened, Capital (as opposed to labour) has become, in the eye of most economists, more valuable -- because its not squishy.   Until you have fired someone (whatever reason) its hard to understand the human suffering.  So its been largely ignored.  How much should you compensate the welder with 20 years experience -- how much is his knowledge worth now that its no longer necessary.  A medallion has a market value (they are often sold).  Still Capital gets compensate and labor doesn't, and most economist seem fine with that.

I get really pissed with my colleagues who have no problem with NAFTA -- but suddenly become bleeding hearts when it comes to capital -- they also get mightily pissed off when you point out their hypocrisy.  

Tuesday, April 12, 2016

Tesla Model 3

325,000  400,000pre order where $1,000 deposit we necessary.

Honestly, Tesla challenge when it introduced the Model S was indifference.  That's not the problem here.  Tesla could be a game changer in the industry, like the iPhone was for the cellular business -- remember Nokia, anyone?

Tesla has a lot of competition (which is good) because it means there's demand for the product.  The technology has been smoothed out with the S and the X models.  Now the challenge is building 500,000 cars a year.

The car, with its 350 km range is more than sufficient for 90% of driver's requirements.  In reality the average commute is 100 km per day (50 each way) so a 350km range should do the trick.  Granted that's in ideal conditions still battery technology is moving very fast not only is it cheaper to produce, they are more performant.

The answer from the car industry:  We're not worried, this is just a guy... that exactly what the CEO of Nokia said in 2007

Italy's Euro 360 billion NPL -- a Euro 5 billion Band-aid

So the Italian finally made their plan known to address the country's commercial banks' mounting Non Performing Loan problem.  So far the total bad loans is around Euro 360 billion -- one bank is responsible for nearly Euro 80 billion.  The proposed capital is Euro 5 billion, so just a big more than 1%, giving the bad bank a total leverage of 100:1.  That's really going to work.  Not only that but the loans that have already gone under have total losses of more than Euro 5 billion.

To say that the market was underwhelmed would be an exaggeration; to be honest the market expected this kind of lame answer.  First, because the ECB has made it hard for the Italian government to save its banks, and secondly, because the Italian government is broke and third so are the banks that need every penny of capital they can lay their hands on.

Over the past 12 months, the Italian market has lost nearly 1/3 of its value (so not as good as the US markets...).  Italian banks remain in the dump, which makes it almost impossible for them to raise fresh capital.

In fact, Italian banks were stopped out today -- limit down.

The question is therefore:  Now what?

This is a very important question, because rumors are that Italy is just the sharp end of the stick, and that other banks are facing similar conditions.  DB -- not to single out, but still, has some terrible number of late, and the reorg is not going too well -- stories are that the rainmakers are having a terrible time, and the recent cancel M&A activity also means that 2016 is going to be a very very bad year.  Please note that all the deal death was caused by the IRS change rules that made it difficult for American firm to re-domicile in the target's "home country"  -- read Ireland.

These multi billion dollar deals were going to be major money makers, now three massive deals (we are talking nearly USD 500 billion in M&A deals died over the past 10 days.

So other banks are feeling sickly, in this age of communication -- contagion cannot be far off.  The issue with Lehman (which was a small institution) was the knock on effect.  As Donald Rumsfeld once said; there are things we know, there are things we know we don't know and then there are things we don't know we don't know -- the last is the real problem.  For banks the world over the problem is the same; they have no idea from where the next punch will come!

At least Italy knows the scope of its problem (even if they have no idea how to solve it)

Tuesday, April 5, 2016

Inflation -- core or imported

Canada is an unusual country, it has since the signing of the Free Trade Agreement changed in ways that make it an oddity within the OECD.  nearly 1/3 of Canada's economy is accounted from the production and export of natural ressources (grain, metals and energy).  

It has made Canada rich when China was in first a development and then credit fed construction boom without precedent.  Look at the New South China Mall or Ordo one of the most well know ghost cities.  Economic growth has now collapsed in China (data doesn't give a scale of the drop in GDP growth) -- Canada being a second derivative country has been suffering a collapse in commodity prices, which include oil.

The Canadian dollar that peaked at 1.06 to the US dollar fell all the way to 0.68 to the US dollar; it has since recovered to 0.76.  But Canada is a cold place and in winter all vegetables are imported from the US -- this year there were apparently cauliflowers being sold for C$12 each.  Now that's real inflation. 

The way the consumer price index is calculated seasonality impact is removed -- after all the $12 may have been high, but in January its bound to be more expensive (on the other hand I have a hard time understanding why anyone would buy cauliflowers in January -- or at anytime for that matter...   Still Inflation that was having a hard time hitting the 2% target has been doing well as of late.

                            Canadian CPI

So the Bank of Canada should be happy, since Canada has had a 2.0/2.5 target for nearly a decade. The fly in the ointment is that a lot of the inflation recently has been driven by fuel prices

                        Fuel Price Chart
            Canadian Dollars price change

The drop in fuel prices (nearly 13% of the past 12 months) is lowering the CPI, but fuel is no Giffen good, and consumption really doesn't change much -- very little price elasticity over the short term -- over the long term the issues change.  So Canadians have been more affected by price changes from other sources (such as vegetables) than the CPI shows.

For the BoC the issue is what do to with interest rates!  Really its the only real policy tool.  Like the Feds south of the border, the BoC has been trying to raise interest rates for some years now, with little success.  Every 25/50 bps changes in the prime rate has been beaten down by sudden economic slow down.  There is no doubt that the Canadian establishment didn't want to raise interest when the economy was booming because the CAD dollar was already so strong, they didn't want to encourage more hot money.  Still it was probably a policy mistake; possibly adding some form of short term (not market friendly) barriers to buying GoC securities to dampen the F/X game would have helped and have allowed the BoC to raise interest rates, but the idea of introducing market distortions was contrary to the spirit of free trade embraced by Canada.

Now Canada is without effective policy tools -- taxation is fully spoken for, the Government of Canada has been spending like crazy -- a C$ 22 billion deficit was recently announced, and interest rates are stuck in low gear at 0.5%...

Canada's central bank, like all OECD central banks is out of classical economic tools (not to sure that they worked that great in the past), and has few options.  The BoC has been neutered.  


Monday, April 4, 2016

Rates, Yield and Returns

So this morning out of boredom I looked at the markets; 5 years ago the 30 year T-bond generated a yield of 4.5%, today its 2.6%, the S&P 500 on the other hand went from 1,332 to 2,064 -- so clearly being long the market over the past 5 years was a good idea!  Frankly, owning 30 year bonds too was a good idea.  If memory serves the GOP stated that Obama's second term would be terrible for investors -- so they go that really wrong since the market is up by nearly 55%...

But that's not the real issue, the issue going forward is that as interest get closer and closer to zero the upside diminishes; because the option of zero interest rates is to keep cash at hand.  Banks if they pay no interest provide limited services.  In terms of earning quality, its been poor for some time -- the magic of accounting trickery still ensures that companies generate greater profits -- from non core activities.

The banks will survive -- they've made sure by payoff the politicians -- it may not work because the risk that the banks have taken is even greater than it was, the risk of contagion is unquantifiable -- Europe is a mess and NOTHING has been fixed, Greece's Debt/GDP continues to rise -- Gernamy told Greece a few days ago to "take a hike" on new money, unemployment in most of Europe is also rising, and ethnic tensions are rising -- the massive increase in refugees is starting to put pressure on the system -- so far the problems have been anecdotal, but they could create a political force against the integration of refugees.  

In Quebec, a mayor (he should be praised) when asked by the new immigrant muslim community that the pool become single sex -- told the press and the community that new arrivals had to adopt the rules and customs of the country that was welcoming them, not the other way around.  They should strive to learn French and come part of the community, and not try to impose their customs on the Canadian citizens.

The Panama Papers

Talk about major breaking news!

Probably the most interesting part of the whole "shit storm" is the role of Nevada (yes yes the state -- next door to Las Vegas), which has become one of the primo cash hiding place in the world.  The Americans, playing their usual sanctimonious bullshit games, failed to ratify the bank disclosure rules they imposed on everybody (starting with the Swiss) and so that, today, one of the most attractive haven for hot money is the US.  Really that's so amusing  

The slow trickle of named names that will now come out and where all their trades are exposed; how they hide the money they stole; starting with "Putin" and going on down the list.  It reminds me of Mit Romeny's generous contribution to his church, nearly 15% of all his income went to the Mormon Church -- except he didn't really.  What Romney did, and this is perfectly legal, is set aside 15% of his gross revenues (before taxes) and put them in a trust -- that had as beneficiary his church, expect a little loophole allows him to reverse his gift.  Moreover, Romney payed himself a salary to manage his money that he may, or may not, give to his church.

Now the stuff coming out of Panama is financial porn; so far nearly 70 current or former heads of state's hidden wealth has been exposed and will have to be explained -- Putin was always smarter and used a friend as his go between -- he can always have his friend, arrested, tried, hung and the assets returned to the state!  

Good stuff; (a) the mighty and powerful have been shown to be cheaters (big surprise) (b) the Americans have been shown be be hypocrites (another surprise) and (c) its the gift that keeps on giving -- some of the people who were caught turn out to be the very "enforcers" of wealth disclosure (e.g. France's ex minister of IRS)...