Wednesday, May 31, 2017

Brexit -- the cost

The EU has been rather adamant that the UK will pay a very steep price for exiting the European Union.  In fact, requiring that the UK pay for everything.  The figure could be anywhere between Euro 60 billion and Euro 200 billion.  In effect, the EU has asked all its institutions to create a list of demands -- like a divorce, the demands can (will) be outrageous, because if you don't ask, you certainly will not get.

How the whole thing plays out is a different story.  There is no doubt that the EU wants its cake and to eat it too!  The UK has the same problem, of course its not about "cash" rather is about access to markets and ability of British National to travel freely within Europe.  The Ft this morning indicated that the UK will need to negotiate more than 700 treaties with various countries over various issues (so lots of work there).

How all this plays out is dependent on many factors:

(1) British Elections:

This morning the worse possible news for Theresa May, she may lose her parliamentary majority -- a richly deserve outcome at a particularly poorly run campaign, when Ms May though she had a 20 point lead in the opinion polls.  Her party's platform was mean (a la Trump) and she seem the relish the idea that she could do anything.  She had her platform demolished by various journalists -- in particular by Jeremy Paxton -- who demonstrated that Ms May had a poor understanding of what she was offering her country...

(2) Italy:

Now, all this could go away if Italy become the spoiler in this whole game.  It seems that the 2018 elections may actually occur in 2017, as the risk of a non-confidence vote escalate.  The reality is that within Italy's parties the vast majority are against remaining in Europe (and the Euro) because the country is facing dire problems with its banking system.  This could really upset the European apple cart.  Time will tell

(3) Greece

The key to Greece are the German Election in the autumn, the problem for Greece is that it has payment obligations in July -- on which it may default (it simply cannot repay the loans).  As the risk of default rises, there is a feeling among European that the Greek problem could play a major roll in the future of Europe, not because its important but because it too may exit the EU, and as such provide a blueprint for the UK -- after all the rules cannot be harsher for one player than for the other!  

(4) Trump

There is no doubt that Trump's European tour was a catalyst for European unity in the face of a a poorly informed bully.  His "planned announcement" to quit the Paris Accord, his non-support for Article 5 of the North Atlantic, and his clear pleasure at paling around with dictators -- Philipies, Saudi Arabia Russia -- he's event hinted that 

Monday, May 29, 2017

California single payer solution will cost 400% of state budget?

now that's clearly BS since just north of California there is a state (British Columbia). That has universal health care, and the cost is, per capita, just a little less than half a f what it cost in California!

That's the truth!  Ho do we get an explosion in cost, you don't simply a hit piece by a dishonest hack. Who is pushing a line. The fun thing is that not only are wages lower in Canada, but so are ancillary corporate costs, since "the state". Assumes the cost of health care.

Just though it t was funny, that someone would write such BS and that no one would say anything

Wednesday, May 24, 2017

The Euro is on fire!

Over the past 3 months the Euro has exploded (8%) against the US dollar, moving from 1.04 to 1.12 in the space of only 90 days, this is a massive movement in the European currency and is difficult to understand or explain.

First, is the Euro improving or is the dollar falling off a cliff?  These may seem to be the same thing but they are not; looking at other Euro pairs (Yen, CAD, Peso) and you get different result;

The Mexican Peso -- third most traded currency (I know who knew) is looking at a price move of nearly 7% over the past 6 months, but of course the Peso was seriously devalued in 2016 -- a reflection of all things Trump -- since then the Peso has returned to its long term trend (slow 3-4% annual devaluation to reflect the higher inflation rate).

The Yen:  After the November election the Yen took a fall from 104 to 118 against the USD, this is slowly reversing itself towards 110/11 (seems to be an appreciation trend

The CAD:  has remained largely unchanged around 1.3 its got ups and down but the reality is that the CAD (that was trading above the USD in 2007 is now trading at a 30% discount to the USD -- talk about cost devaluation for Canadian manufacturing & services...

Sterling:  No trend the price has been more about the UK's economy and the BREXIT process, the pound has gone from 1.5 to 1.3 in the past 9 months

Back to the Euro:  There European experience while in the same "time zone" as the Yen and the Peso has been far more explosive; it could be that Europeans are feeling that the US economy is done and gone -- "sell and may and go away" trend -- it could be a number of factors, but there appears to be a strengthening of the European cohesion after the Brexit vote, there seems to be greater reassurance that despite the UK and Greece that Europe is going to survive.

There is no doubt that the election of Macron (centrist) in France and the serious defeat of LePen -- far worse than anyone anticipated help to cement the democratic sense that the European experiment will survive (it may or may not).  The market has spoken, there is no doubt that the direction is confidence in Europe.



Tuesday, May 23, 2017

Anti vaxxer and Chem trail -- what?

I've been reading a number of articles of late on the anti vaccination movement in the US  The strangest aspect is that most anti-vaccine people are well educated and rich.  Where did these ideas come from, how come it remains at the forefront of discussion (mostly in the US)?  The same for Chem Trails -- that's the idea that jet "mix" in their exhausts chemical to do something -- bottom line whatever they are doing its very very dangerous...

How can reasonably smart people believe this utter bullshit?  I mean think about it, it makes no more sense than Pizzagate -- that's the story that Clinton and friends were running a child abduction (I think) center in the basement of a DC pizzeria (called Comet) so certain that this as fact that one crazy guy even went to investigate (with his long gun) -- and didn't believe the owner when he told him that the pizzeria had no basement.  apparently shots were fired.

All these stories have one thing in common, Facebook -- I had no idea but it appears that these groups are created and then self-select news that demonstrate their viewpoint.  In fact, there are also Facebook pages for UFO abductions (did you know that nearly 20% of Americans believe in UFOs), and BTW its says something about America's obsessions with their asses, that anal probes are a prominent fixture of these abduction sites -- why in the world would aliens be so obsessed with our asses?

The absence of real analysis, of using half truth or 100% invented stories -- making links between things that do not exist -- its all very strange.  Take chem trails, there are applications available that show you exactly what is flying overhead -- in fact, if you live in the US, you just type what plane is overflying me and presto you know what airline what aircraft and its origin and destination. Those obsesses with Chem Trail or anti Vaxx movements never talk of the logistics, never check their sources use circumstantial evidence as proof.

A very good friend faced a serious and deadly cancer with a very low survival rate, mortality was in the 80% range.  He used classical aggressive medicine, but also considered alternative medicine, some of his friends now say that he survived because of alternative medicine!  Its been 10 years and he fine, because people will believe in miracles rather than statistics; 80% mortality also means that 20% survive and of these 20% a small portion have complete remission...doesn't mean that cancer treatment is bullshit, it just means that for that cancer there's only a 20% chance of surviving, but 20% is not zero.  Also its entirely possible that the alternative medicine (and change of lifestyle) help a lot!

But none of these serious questions are answered, there is a "out there" kind of reality. For chem trail it doesn't matter so much since there is really nothing anyone can do (except where foil hats...ha ha). However, the anti vaccination movement is something else, because until recently this minority were protected by the herd -- a few kids no vaccine were protected by the other children that were vaccinated.  However, in parts of California certain schools are seeing up to nearly 40% of children not being vaccinated -- and there are real consequence there (life and death).

So we now have the ability to shut off parts of the information stream (self selection) so that we confirm our bias.  If you are convince that Clinton was running a pedofile center in DC, then she is evil, and you have proof from articles that fiends sent you in your Facebook feed.  If you believe that aircraft are using certain products to alter human kind, or that Trump is a Russian spy, there's a feed for you.

As an example, the worse you can say about Trump is that he is a cretin, that he doesn't care about facts outside his own reality (and how the world views him), the idea that Trump could be a Manchurian candidate is ludicrous.  The reason he will not be impeached...he was (and remains) looking for commercial advantage for him and his family, getting special treatment in China for his Hotel (apparently) and other benefits.

Newspaper used to be curated, now people don't need newspaper and TV shows will say anything that supports their position -- FOX is the worse of the lot, but by no means the only one.  The availability of information (or Bullshit dressed as information) is wide ranging and easily available to those looking to confirm their position.  Even I succumb to the maladie; how often have I looked at the news via Daily Kos or TMP or NYT, I have a hard time looking at FOX news, Drudge Report or Zero Hedge are difficult to read -- my own bias delegitimize these sources of information

What will kill our society:  Free "information"



Greece the continuing saga

This morning, the talks between Greece, the EU and the IMF broke down again.  There is no panic in the air, because everyone knows that it will be resolved...eventually.

I say this with far less conviction than in the past.  Until last year, when the last debt renegotiations took place there was a sense of doom, now not so much.  It may have to do with the departure of the United Kingdom from the EU, that Greece's exit is no longer such an issue, it could be that everyone believes that a deal will happen, at the 11th hour as usual.

The true cynic believe that the whole thing will be wrapped up once Merkel has won her elections in late September -- Greece has a debt payment due in July,  which it cannot repay, its economy has sunk back into recession, but there is simply no sense of market panic.

So to recap; for the past 4 years Greece has been going from nowhere to bad, recession, mild recovery and it can expect more of the same for the next 20 years.  The youth of the country will/is leaving the place -- anywhere has to be better than Greece.  Those who remain are forced to endure difficult economic condition, Greeks must be damming the day the joined the EU -- looking at Turkey with envy now (despite its "dictatorship").

Politicians have looked at the easy way out for the past 20 years, bankers have aided and abetted -- and guess who will pay the note, ordinary Greeks and ordinary Germans -- because once all is said and done, Greece cannot repay the outstanding debt -- the banks and investors that "invested" into Greece's disaster were all bailed out by the ECB or the IMF, which have replaced virtually 100% of the outstanding sovereign debt.

Undercapitalized European banks got bailed out (on the quiet) and now all of Europe is paying for Greece's folly.





Wednesday, May 17, 2017

Death by a thousand cuts

I had an epiphany this morning, reading, again about Trump's many travails -- own goals and simple stupidity.  The troubled White House is leaking like a sieve and that means that everything that Trump does will become part of the national conversation.

I mean we know he records CSPAN on his 60 inch TiVo powered television so that he can watch the blow by blow of Congress with comments -- who in the world needs to know that, except it shows one thing, the President is not really minding the store, he's acting like a Monday morning quarterback.  He should be making decisions not judging the decisions of others.  If it is true, that the Israeli information on bomb in laptops was a "Do not share", and he did anyway, then it shows his carelessness.  Or the fact that the White House was "tricked" in allowing a photographer from TASS into the Oval office (while the US press was excluded) must have amused Putin to no end.  However, it shows a White House that is unable to verify the important but minute details -- they are dealing with a massive house fire, you don't worry too much about the tool shed burning (not elegant but hopefully you get the point -- those in charge don't have the time/bandwidth to deal with the small issues).  These are the thousand cuts, because overworked good people lose their jobs fur such screw ups...because there is no excuse!

The leaking White House is leading to an ever increasing number of "newsworthy" disclosure -- news in the sense of News of the World or The Enquirer, you know tabloids that like to talk about stars -- useless and often demeaning information.  The overall aspect is the acceleration of this "news", its neither interesting or important -- its kardashianesque.  However, it does serve a narrative and this is serious, because Trumps own inability to let things go (he's still talking about the inauguration crowd), you have an effectively paralyzed White House.  All the staff's efforts (including cabinet secretaries) are being sucked into the Trump vortex of Bullshit.  Trump's legislative agenda (ok ok stop laughing) is stopped dead on its track.  Dealing with fires and not issues.

Its also how you get this idiotic photo-op of the GOP Congress and Trump on the White House lawn celebrating their "victory" in passing the Health Care Act -- when the Senate still have not even started considering the proposal -- its like celebrating the construction of half a bridge...who does that?  The White House should have been the grown ups (ok ok I know Trump) and said to the President -- lets wait until the legislation is on your desk before we trow a kegger!

The unhappiness at the White House will grow over the next few weeks/days -- until Trump replaces his entire team with another gang.  However, look at all the self inflicted pain:

  • The Russia investigation will go nowhere (trust republican Congress on that one), but it will stay in the headlines.  
  • The top secret disclosures of Israeli intelligence (not a crime -- but stupid as hell)
  • The Flynn affaire (Trump's insane desire to save Flynn means that the FBI is going to go after him and his buddies) 
  • My favorite BS aspect is that Trump has selected a GOP fundraiser and non-scientist to become the USDA Head Scientist will cover Trump in ridicule; I mean its in the job title!  
  • Election witch hunt has begun already with a new commission that will investigate illegal voting (as if this was a problem), of course this commission will not investigate voter suppression...but will again show Trump's white house going after ghosts
  • The Comey firing -- and the "evidence"that Trump was working hard at exonerating Flynn 

These are the thousand cuts, its not so much that he will be impeached (he won't) its rather than no one will want to be seen with him.  His power of persuasion will drop to zero (his popularity is already shaky).  A disaster for the GOP who will have to confront their voters with their total failure to get anything done, when they control the House and Congress.

You don't need to impeach Trump, just continue the relentless circus that is his White House.  In fact, the Democrats don't have anything to do, just watch and enjoy the show, and make sure that all the investigation continue on a slow burner.


Death by a thousand cuts


Fun times


Tuesday, May 16, 2017

Secrets

So the President decided to share top secret information with the Russians, so far nothing illegal has been done, stupid maybe, but not illegal, literally the President decides what is and what is not secret. That's the positive side -- there is no crime here!

Now the negative;

(1) If the Post's story is correct (note: Trump confirmed that it was) this secret information was given to the American intelligence community -- with a do not share request.  That country will now reduce the amount of information it shares with the American government.  At the very least the NSA/CIA and other acronyms will be much more careful it what they share with the President.  That's bad, because less information is bad -- especially when people are out to get you.

(2) Trump asked three of his future ex-employees to go out on and say that Trump did not share any secret information -- and that the Post got the story wrong...12 hours later Trump tweets that "it's true, I shared confidential information -- and its not a crime".  This is the second time in two weeks that Trump makes his surrogates look like complete idiots.  That's not good because these people were betrayed by their boss -- for no good reason.

(3) Another manufactured "own goal" by Trump -- how many does this guy need.  First, Trump is like rich kid who broke a window -- accuses everyone else, and when confronted with the evidence that it was him says:  It doesn't matter its my window.  Why lie? Trump could fire Comley for any reason (or no reasons) but choose to say it was about Clinton...He reveals secret information to the Russians then denies, denies and denies, and they quickly confirms and says:  Its not a crime, I am the President!

(4)  The GOP is in a bit of trouble, it cannot drop the president.  In fact, history has shown that parties will support their president to the bitter end.  Its true for Clinton, Reagan and Nixon -- in all three cases the party of the President went down with the president.  The mid terms are going to be brutal for the GOP -- even in gerrymandering land its going to be ugly -- by 2018 GOP's America will have discovered that their health care costs have tripled, if available at all.   The truth of the GOP's health care reform is that its a huge tax giveaway to America's richest...  You cannot shave $800 billion without people's healthcare being affected, simple math.

(5) Manufactured crisis by the President are exhausting, and what will he do when a real crisis occurs -- what will be his Katrina?  How will he react -- my guess is a weekend at a golf resort, but I am a cynic!

Finally, the most important is that nothing will change the GOP's position towards Trump.  If history is any yardstick in none of the cases: Nixon, Clinton, Reagan, did the party in power walk away from its President.  There will be no investigation of Russia links, there will be no investigation of corruption, there will be no invest of anything that Trump did aside from an investigation in those who leek information from the White House.

For Trump the real problem is who will want to work for him.  He casually throws his surrogates to the wolfs for no good reason or any valuable real estate.  He values loyalty above competence (remember Bush) but for Trump its a one way street -- and a short street at that.  My guess, is that on his return from his foreign trip Trump will undertake a major shift in the White House staff, to replace his communication team, and several of his advisors (lookout Pribus and Steve!).  He's not getting what he wants -- so he will find it elsewhere!

Monday, May 15, 2017

You go away from the weekend...and this happens!

So oil is back flirting with $50/bbl...again.  Apparently there was a deal done over the weekend to restrict supply...again, and so the market dutifully went up... again.  The stock market that had been a northingburger (yeah low vol but not much overall activity) is up nearly 1%, on a news lite day.

Straying a bit into politics, I note that Trump has been staying away from Twitter this weekend, I thing, but maybe he's been too busy remember all the names of the countries and people he will be meeting in his upcoming, golf free, foreign trip.  Historically, Canada has been the first port of call of any new president, this year, not so much, and Canadians (starting with the Trudeau) seem perfectly happy that Trump is going elsewhere -- reduce the police budget for 2017!  The absence of enthusiasm for Trump's possible visit to Canada, mirrors that UK's recent "rescheduling" of Trump's long announced visit to the UK, there too the government decided that his visit was not very popular, and moreover the British have an election to run.

Returning to the main topic, its easy to understand the frustration of institutional investors who also don't understand the market and its direction.  The market is happy to give Amazon a 180x valuation but has a hard time with GM at 5x -- Sure GM is going through a difficult period, but to think that one is worth nearly 30x as much is hard to understand.  The largely unprofitable techworld has nose bleed valuation; Snapchat is a perfect example, after the CEO and his friends took a massive bonus the company's reported US$ 2.2 billion in losses -- almost $2 billion of those losses were share allocation of Snapchat's management.    Despite this huge loss, the share price more or less shrugged off this massive 1,333% reduction in "profits", the share price went from $23 to $18 and is back around $21, and will prob ably be around $23 by the end of the week.

Another funny impact from the election of Trump, gun manufacturers are in trouble: the NRA should always support Democrats, because its when Democrats are in power that the gun manufacturers do the best.  Right now, its time to be short American Outdoors brand (owners of Smith and Wesson) and not long, gun sales are way off from the Obama years.

So its Monday and oil prices are up as are stock prices, the VIX is up, but really had only one possible direction, and overall the world is still unchanged, Macron picked a Prime Minister and will select his cabinet shortly, Merkel did well in the recent regional elections, and LePen is gone quiet fo the next four years -- it will be interesting to see if her party does well in the parliamentary election in June...



Tuesday, May 9, 2017

Volatility it's like 1993 all over again

The VIX (volatility index) has not seen such low levels in nearly a quarter of a century...24 years to be exact.  Looking at the market something strange is afoot; the price rise of the SPX has been concentrated in a few big stocks (Google, Apple, Facebook, Amazon etc) whereas the rest has been languishing in "nowhereland".

What is going on; gold is in the forever band of US$ 1,200/oz, king copper dropped down (granted no one knows why), and oil is back screwing around the mid $40/bbl and so the economic hard data (PMI etc etc) are fading and also doing very little to encourage the market.  In fact, until a few days ago, the SPX and consumer sentiments were the two outliers, until late last week when consumer sentiment started tanking -- joining the ranks of hard data and other stuff.

The question is what's going on; could it be central bank liquidity that has no where to go, and has selected these hyper stocks as a good store of value (better than Treasuries?) what is making the market so relax and all the indicator that the global economy (aka USA USA USA) are not being the engine of growth everyone hopes it will be/become?

Maybe investors are taking the view that after the success of congress to repeal Obamacare (not so fast there nelly!) and the implied tax reduction, that a massive cut in corporate taxes, and repatriation of off shore cash will lead these mega stocks to declare massive dividend to their investors.  On that scale the billions accumulated offshore would come home!

The rest of the SPX (underlying stocks) are not doing too good -- in fact, nearly 20% are below the annual high, and a good percentage are below their 200 day average (trust me an important technical threshold).  It would be intersting to strip the US companies that hold large off-shore cash balance from the SPX, and see what happens to the index then?  My expectation is that the ex-mega SPX would be in the doldrums too!

The low volatility flies in the face of the hard data: the Chinese are very concerned with debt expansion -- and have begun forcing back to bring back off balance sheet item back on board -- with massive liquidity compression.   The Chinese have been concerned for some time that their economic expansion has been done, on the back of ever increasing debt loads, a situation they know is unsustainable -- that should lead to slower Chinese growth (massive impact on primary resources pricing -- including copper, oil steel, etc etc).

The game in Korea is getting more than a little intersting, Japan seems to be sinking back into deflation, again, after its latest attempt at inflating the economy via debt has failed...again -- in the face of aging and decreasing population (by 2040 Japan's population will be equal to that it had in 1965 -- but average age will be over 45 -- in 1964 9% of the population was over 65, by 2040 it will be near 40%).  In Europe, despite Macron's recent success, the problem remain: Ridiculously high youth unemployment, and general unemployment above 15% for most of Europe (there are exception in Germany and the UK).  Politicians and the population want to retain their historical gains, but have no idea how to move the ball forward.

In America, a 8 year expansion is running out of breath, from the retail to the automobile sector the trend seems to be exhaustion -- those borrowing have terrible FICO scores, which means that losses will be experienced. The idea that 5% or even 6% growth is possible if taxes are lowered is ridiculous in the face of America's skewed income -- its not the millionaires of Greenwich that fill the malls! Employment is dong ok-"ish", but the real measure of unemployment U6 is telling a very ugly story, with unemployment and underemployment nearer 10% than 4.4%, and wages stagnant.

No the answer has to be that institutional investors are taking a punt on Trump's tax cuts that will generate, before the end of the year, massive cash repatriation from the Mega companies (Facebook, Apple, Amazon etc) and that's the only play in town.  All other aside pale in comparison and hence the very low market volatility -- either holding or selling their non-megas, hence their lower prices either below their year high or even worse their 200 day moving average.

The low volatility has to be driven by these factors, institutional slowly liquidating their non-mega position, and with the low liquidity, price trends are downward, while the demand for the mega never stops rising.

Note:  No position in Apple, Amazon, Facebook, Google -- also to be added to the mega are GE, Microsoft -- also no position there






Monday, May 8, 2017

The five biggest promises: Macron's presidency


  • Committed to Europe
  • Reduce Payroll taxes
  • Liberate the economy
  • Better Education
  • Securing Europe's borders 

Committed European: I am not certain these are Macron's biggest promises but they do represent substantial "challenges". On the bright side, the first one is the easiest because Macron doesn't have to do anything.  LePen's cue was that her party was anti-Europe, mainly to stop the flow of immigrants -- (et tu Theresa May?).  But again this one means that France, its institutions, remain committed to the ideal of Europe.

Reduce Payroll Taxes:  The issue of taxation is a serious one in France, but also Germany where marginal tax rates are high, much higher than anywhere in North America -- but not only are taxes high, the government deficit is also very high.  While reducing payroll taxes will make employing additional workers, I suggest that changing work rules (such as 35 hour work week) and other shift (very very difficult) are necessary.  Maybe Macron will have more luck, but the French system is in need of major overhaul!  This is very difficult to accomplish when there is a perception that you've been lied to about the benefits of globalization for your entire life!  So reducing payroll taxes is simple -- my guess is an executive decree, but reforming the entire is a different story.  However, its important to note that the relation between level of taxation and economic growth is tenuous at best (yeah a know -- its sounds counter intuitive, but the causal relation between taxation level and economic drive is simply not there -- despite what American Republicans preach)

Liberate the Economy:  That's the big one.  On one side there is a lot to be said for the 35 hours work week, especially if that comes with additional working flexibility -- but in fact this was not the case!  However, the problem is not French, its European, and has been for a long time.  A few weeks ago a study showed that Mexican worked an average of 2,200 per annum (6 days a week) and that France, at 1,400 was the second lowest, the lowest?  Germany at 1,300, and yet Germany doesn't have a 35 hour work week -- how is this?   Germans work less than French, and yet are more productive -- there can only one answer -- productivity, more capital is being used per worker, and those workers are better able to adapt to changes...this makes "Liberating" France's economy a massive challenge.

Education Reform:  I've not followed that issue at all in France, and I have zero idea how good/bad French education is in reality, I seem to remember that France's PISA scores are acceptable -- above the OECD average -- lower than Germany but still close overall.  However, the issue here is attacking one of France's most powerful lobby/union.

However, the elephant in the room here is legislative success.  A year ago, Macron's party didn't exist.  There are rumors that he's the re-invention of the socialist party (maybe , but lots of his proposed changes are more center right), but it remains that without allies in the chamber of deputy Macron's agenda will stall.

Legislative success:  Macron's first challenge is that he has, effectively, no political party!  He is a one man show, and in fact LePen only has one deputy, and I don't think she has a single Senator (their election is complex -- an not via universal suffrage).  How do you govern if you have no troops that can be corralled into implementing your legislative projects.

  1. build a party and getting deputies elected:  In June 2017, the "legislative elections" take place, and it will be Macron's chance to start getting things done.  The right and the left are sure to battle to retain power -- the left for the "acquis" and the right to change the system so that it has a chance to work.
  2. Built a real cabinet of powerful secretaries with both clear mandate and a real drive to affect change.  You may not agree with Trump's agenda -- but the secretaries he nominated believe in their reform agenda...
  3. Create a real political platform that has can convert a successful presidential run with potential legislative success. 
The delay between the legislative elections and the start of Macron's presidential term are not a real problem, his first task, building a strong cabinet -- will be supported by strong ideals -- converting his electoral platform into a governing agenda.  














Friday, May 5, 2017

Trade War: Now the games really start

Canada are not morons, they know that the best way to get Donald Trump's (short) attention span is to get him where it hurts:


  • American coal exported via Canada -- shut that sucker down!
  • Any US production subsidies (an there are a lot)
  • Could go after US airlines -- after all US airlines don't pay the cost of air traffic operations...
Again the issue is that Trump doesn't understand his business (that of being President of the good old US of A).  Canada can create massive pain for Trump, lets not forget that Canada has a $50 billion trade deficit with the US -- the pain will be far more one sided that Trump realizes.


Good weekend all

Wednesday, May 3, 2017

Magic Eight Ball: PMI, Oil & Copper


That was today in London -- the above graph is for copper and when copper falls things are serious.  Now the reason for the fall is that inventories jumped 12% -- obviously the "culprit" is China (not really but that's what going to be written in the press!).

The reality is that the world seems stuck in neutral, and China -- the $1 dollar work shop of the world is feeling the sting.  Despite massive infrastructure spending the country's growth is decelerating, moreover, the government seems to finally take the growing debt problem seriously, forcing banks to recognized off-balance sheet loans as part of the banks' lending and thereby leverage.

On the other side of the planet (i.e. America) we have consumer sentiments rising, but PMI (actual hard numbers manufacturing) slowing to zero growth.  For the past few months, the current American administration has been glowing in the rising consumer sentiments -- unfortunately, with more than 8,000 announced store closures the reality between sentiment and real spending is going the wrong way.  Q1/2017 GDP numbers were meager with a 0.7% GDP growth -- substantially below the 5% to 6% that the current administration is hopping that will be achieved.

Finally, there is oil prices that are down to $47/bbl which is way of the $53/55 range we saw a few months ago.  Again, demand is lagging (and supply is exploding), so prices have only one way to go -- down! (Please note that I have zero idea if oil prices will continue their downward trend).

In America, the world's economic growth engines things are difficult -- the increased level of uncertainty created by the administration (in or out of NAFTA, war with Korea (either ones), fight with allies) has created an environment were investing is delayed -- should there be a demand for investments.  Over the past decade American companies (with few exception) have seen reduced capital expenditure, rather spending free cash in buying up shares -- or M&A activity -- which produces very little (especially since the vast majority of M&A activity is a value destroyer process).

Americans have increased spending power, but this power is skewed; it was revealed a few days ago that nearly 30% of all Americans have zero reserves for contingencies, and that another 20% have less than $250.00 in savings -- enough to last a few days only.  Median income remains exactly where it was 40 years ago (1977), but the top 10% has seen income growth of nearly 10% per annum -- so those who are better off are a lot better off.  Lower down in the food chain:


  • Same income as 40 years ago
  • Everything is more expensive (a new family mini-van is priced at US$ 50k)
  • Less certainty of employment
  • New jobs are at much lower salaries


Debt helped, a lot of young people took on student loan with the hope of improving their lot, unfortunately, a lot of that money was wasted!  Education is one area of the economy that has seen massive inflation -- worse than healthcare, and substantially above all other goods.

A lot of Americans, especially if they voted for Trump & friends, bought the Cool Aid and believe that Trump will:

  • Create better and cheaper healthcare for all
  • Grow the economy by more than 5% per annum
  • Reduce taxes
  • Created a massive infrastructure program
  • Bring back coal as a major source of energy
  • Make America great again

Considering that Trump himself didn't understand how complicated governing was, its natural to understand that his supporters don't understand either.  They view welfare queens as someone else, that their tax rates will fall and that the economy will resemble that of China if only we stop all these damn foreigners selling stuff in our country.  The populist, limited understanding of reality is attractive as a political slogan, unfortunately, it translates poorly in the real world.

Now, returning to our subject of the world economic growth.  China is an export driven economy, and as such the weaknesses of the country are a reflection of G8 weaknesses -- Europe is still suffering from massive unemployment -- 10% in France, and much higher in Spain, Portugal and Greece. Oil prices are weak because of a shift in supply and a reduction (even small) in demand.

Unless, Americans and europeans increase their spending power -- that means less inequality in the US and less unemployment in Europe, the odds of a rebound are small.











Tuesday, May 2, 2017

Alitalia: files for bankruptcy...again

NOTE:   Since I wrote this article the Italian government has agreed to bankruptcy whereby the airline will either be sold (unlikely) or be wound down -- another 12,000 jobs are gone! 

Old joke; How do you make a small fortune in the airline industry?  Start with a large one!

Europe suffers from too many legacy sovereign airlines that simply cannot compete with the new players, or older players that decided to make hard decisions.  While I too would like to earn a Euro 75,000.00 to be a flight attendants its simply not economical, especially one that is restricted to the total number of hours he/she can fly.  This may sound callous but its the truth, in large part a flight attendants is paid a large  multiple of what a a waitress would get.

I focus on salaries and work rules, which are a problem, but its also a culture problem.  I flew Alitalia many times and I was never impressed with the product -- its not a question of how new the equipment was, rather its a question of attitude both on the ground and in the air.  There is a saying as the front so the back -- I am sure that the problems of the customer end of the business reflected similar problems at head office.

What will happen to Alitalia?  I don't know, but one thing for sure is that Etihad Airways is done and gone, and the fact that the employees rejected the latest changes to the airlines management structure is a sign that its time to wind up the airline -- and do it fast too, the routes that Alitalia owns are valuable, right now.

It was announced that the Italian government has given a Euro 400 MM debtor in possession line of credit to keep the airline flying, but like SABENA did a few years ago, its time for Alitalia to take a long walk off a short pier.

This may sound callous, but in fact only a few European airline can survive the brutal competition of new operators; British Airways/Iberia, Air France/KLM, Lufthansa the others no so much I am still amazed that TAP Air Portugal and Olympic airways are still around. The legacy airlines suffer from the usual problem of historical support by governments, in fact many still feel they are civil servants.

The ending of Alitalia is not a drama, the government will assume the pension liabilities and those still interested in flying will re-cycle in other carriers.  While there has been pilot and crew abuse from new startup carriers in the past, the balance between pilot/crew and airlines' demand has stabilized at more reasonable wages (and work rules).

In the greater debate of Europe Vs. Italy the end of Alitalia can be see as a good excuse to get out of Europe, but when Italian see the full mess that is the airline, the fact that this would be the 4th or 5th rescue of the airline, most Italians will agree, lets give up the ghost and do something else with our money.


Monday, May 1, 2017

Canada's house prices -- nose bleed levels

Housing is a fundamental and important component of the economy, its represents a substantial percentage of any country's GDP -- think not only new construction but renovation.  Most in the West, and especially in North America have a conception that housing ownership is a basic component of life, liberty and everything else.  In other words, buying a house should be the first and most important move anyone makes.

House price in Canada didn't correct in the same way as they did in the US (or anywhere else) banks were not affected by the "housing crash" which didn't happen anyway!  After 2008, despite the world correction, oil prices and commodity prices remained high in Canada.  There are no doubts that places like Windsor suffered (Canadian capital of the automobile manufacturing).  Moreover, none of the exotic American mortgage products made it to Canada -- no teaser rates, no NINJA no nothing.  Moreover, mortgage rates in Canada reset every 5 years -- there is no 30 years fixed rate mortgage in Canada, and borrowers are fully liable for their losses (no jingle key concept either).

The discussion in Canada is about housing affordability.  In many cities across the country (the worse are Toronto and Vancouver) prices are very high, when compared to average wages -- probably even worse when compared to median wages.

The American press has been full of terrible stories (manly because one specific mortgage lender is in trouble as opposed to anything systemic), Canadian banks are relatively well provisioned and although some cities will see potentially huge reduction in house prices (20-30%) then reality is that the rest of the country is still in relatively decent shape.  Moreover, with 5 year only fixed rate mortgage and 20 year maximum term there is a limit to what bankers will do in terms of stupid stuff -- the central bank of Canada made the rules very clear years ago, specifically with regards to minimum deposit (25%) and other rules.

Sure Canada's real estate market is due for a correction, its been overvalued for years, but it remains that demand is strong for a variety of factors -- some have to do with Canada's southern neighbors and others have to do with Canada being an attractive immigration destination (people are better received there than in the US).

What is the future of Canada's housing -- crystal ball being missing, I will say that the likelihood of further 10% increase in the house prices over the next 3 years is lower than a 20% decrease over the next 3 years!  The reason is that salaries and income are not tracking, aging baby boomers is also an issue.  However, also an issue is changing demographics -- the Millenum and Gen X&Y rather live in the city than the burbs.

How will this affect the banks?  My guess is little, but I suspect that the baby boomers that were hoping so sell their burb dream to some unsuspecting millenumer -- are about to be disappointed!

C'est la vie!