Mark Carney Kicks the Can

Sunday, June 10th, 2012

Submitted by James Miller of the Ludwig von Mises Institute of Canada

Mark Carney Kicks The Can

Bank of Canada Governor Mark Carney takes a lot of cues from his U.S. equivalent and fellow central banker Ben Bernanke.  Both took interest rates to anorexic levels in light of the financial crisis in 2008.  Both used their positions of power as stewards of the people’s money to bail out the big banks.  Both take credit for the gains of their respective stock markets and for guiding their economies through the global recession.  Both are forever on a quest to rid of the world of the boogeyman of deflation.

And both are sewing the seeds of their own destruction by keeping interest rates artificially low and ultimately driving unsustainable investment that must eventually be liquidated.  All around the world, the boom bust cycle continues to occur due to central banks attempting to induce economic growth with money printing.  China’s economy is continuing to come apart as manufacturing output and real estate prices plummet.  These sectors were bid up by double digit increases per annum in the country’s money supply over the past decade.  Since inflationary growth, by definition, can’t go on forever, as its continuance results in what Ludwig von Mises called the “crack-up boom” and destruction of the currency, the chickens of the People’s Bank of China’s reckless monetary policy are finally coming home to roost.  The PBOC has responded to the downturn by recently cutting interest rates for the first time since 2008 in what will likely be a vain effort to reinflate the bubble.

Over in Europe, the year over year change in the broad money supply has dropped dramatically since 2010.  This provided the spark for the sovereign debt crisis which shows no sign of slowing down unless Angela Merkel and Germany concede to further inflationary measures by the European Central Bank.  Just like her support for the big banks and the austerity measures that ensure idiotic bankers don’t take too much of a loss on their holdings of euro government bonds, Merkel will likely give in to money printing in the end as she has already endorsed the push for a political union.

And now in Canada, Mark Carney announced a few days ago the Bank of Canada will keep its benchmark interest rate steady at 1%.  This announcement comes despite his previous warnings over the enormous increase in Canadian private debt.  But of course the run up in debt couldn’t have occurred if interest rates were determined by market factors only.  Had supply and demand been allowed to function freely, interest rates would have risen as a check on the swell in debt accumulation.   Carney won’t admit this though.  Like all central bankers, he has made a habit of boasting the positive effects of his low interest rates policies while avoiding blame for the negative consequences.

He is a bartender who gleefully takes the drunk’s cash while replying with “who, me?” when said drunk drinks himself to death.

What makes the promise of continually low interest rates especially worrisome is not only does it tell the market to keep accumulating debt, but it is also an attempt to keep what some are calling a nation-wide housing bubble from deflating.  Over the past decade, Canadian home prices have shot up at a far steeper pace compared to the decades that preceded it.  In recent years, the acceleration in home prices has been fueled by the Bank of Canada’s historically low overnight lending rate which went from 3% before the financial crisis to .25% in 2009 and now rests steadily at 1%.  The BoC has already acknowledged that its interest rate policies directly affect mortgage rates.  Many Canadian media publications and investment newsletters are pointing out this trend and warning of a potential collapse.  The BBC even did a report on it.  There is nothing potential about a sharp downturn in home prices however; it will happen.  It’s only a question of when.

With China and Europe leading the pack, the world economy is beginning to take a turn for the worse.  The orgy of money printing which took place over the past few years has slowed down significantly; even in the U.S.  Central bankers are standing at a precipice in which they must decide if they will forge ahead and prime the monetary pump to paper over the various malinvestments caused by their previous interventions or actually allow for a contraction and the market to adjust to a new path of sustainable growth.  If history is any indication, the latter is not a considerable option as it would be devastating to the banking sector which is reliant on piggybacking credit expansion off of an uninterrupted flow of newly printed monies.

Carney’s decision to keep interest rates suppressed is yet another instance of a central banker unable to face reality.  The malinvestments will continue to accumulate and will have to be liquidated at another date.  What Carney has done to mitigate the looming debt and housing bubble is effectively kick the can down the road.  He has revealed through his actions the undeniable truth which holds for all central bankers: that they have no other card to play but the printing press.  As legendary investor Marc Faber has noted,

“I do not believe that the central banks around the world will ever, and I repeat ever, reduce their balance sheets. They’ve gone the path of money printing… And once you choose that path, you’re in it and you have to print more money.”

The Austrian theory of the trade cycle developed by Mises a century ago tells us that credit expansion is bound to end in depression.  To quote Herbert Stein’s Law, the business cycle theory essentially boils down to “if something cannot go on forever, it will stop.”  The debt fueled boom in Canada is a house of cards.  No matter how much money printing or interest rate manipulation Carney attempts, the collapse in inevitable.   His record, along with Ben Bernanke’s, will eventually be one of dismal failure.

Tags: Angela Merkel, Bank Of Canada, Bank Of Canada Governor, Bank Of China, Ben Bernanke, Bust Cycle, Central Banks, China, Crack Up, Debt Crisis, Digit Increases, Global Recession, Ludwig Von Mises, Ludwig Von Mises Institute, Mark Carney, Money Printing, Money Supply, Pboc, Sovereign Debt, Vain Effort, Von Mises Institute
Posted in Markets | Comments Off

Canada Market Radar (April 23, 2012)

Sunday, April 22nd, 2012

Canada Market Radar (April 23, 2012)

Major TSX Groups – One Year

Source: StockCharts.com

Major TSX Groups – Year-to-Date

Source: StockCharts.com

Major TSX Groups – Month Ending April 20

Source: StockCharts.com

Strengths

Carney Says Canadian Economy Almost Back to Full Capacity – Bloomberg

Carney, speaking in an interview with the Canadian Broadcasting Corp., said the country’s underlying inflation rate has firmed in the last several months and the central bank expects the economy to grow at “above trend” rates in 2012 and 2013.

http://www.bloomberg.com/news/2012-04-21/carney-says-canadian-economy-almost-back-to-full-capacity.html

Canada should be firing on all cylinders by next year, report says – The Globe and Mail

The report pointed ominously to a “persistence” of excess supply of labour – in recent months, and for the near future.  And that’s in spite of a monster job creation month in March, when 82,300 jobs were added. Indeed, the economy has now recovered all of the 430,000 jobs lost in the recession and added an additional 180,000.  But Scotia Capital economist Derek Holt said the monthly “body count” of jobs is less important than what’s happening to paycheques. He said Canadians are barely keeping up with inflation.  “People are not making anything beyond putting gas in their car, filling their grocery carts and heating their homes,” he said.  Bank of Canada Governor Mark Carney expects the so-called output gap to close sometime early next year.

http://www.theglobeandmail.com/report-on-business/economy/canada-should-be-firing-on-all-cylinders-by-next-year-report-says/article2406874/

Weaknesses

Canada in the minority opposing more IMF firepower – The Globe and Mail

Mr. Flaherty fought the creation of that international firewall until the end – and kept on fighting after the matter was settled at meetings of G20 finance ministers and central bank governors on Thursday and Friday. At a press conference Friday evening, Mr. Flaherty kept up his months-long attack on the bigger members of the euro zone, repeating that they haven’t done enough on their own to deserve international help.  “They need to step up to the plate and overwhelm this issue with their own resources,” Mr. Flaherty said. “There are adequate resources in Europe to address these issues and they ought to be employed.”

http://www.theglobeandmail.com/report-on-business/international-news/canada-in-the-minority-opposing-more-imf-firepower/article2409991/

Opportunities

Investors are the casualties in a booming oil patch – The Globe and Mail

Confidence in Canada’s energy sector is being shaken by a host of issues making investors unsure about the payoff from Alberta’s boom. The reasons for worry are many and varied, but they collectively point to a deeper issue. Faith in Canada’s energy business is eroding. Those who once viewed the oil sands in particular as a glittering money factory suddenly have important new reasons to be skeptical. Despite the vast sums pouring into Alberta and Saskatchewan oil fields, the earning power of the sector is being strained, and its ability to fund its growth while also spinning big profits is now under question. That challenge is critical, since success for the energy sector’s development is key to Canada’s overall economic performance

http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/investors-are-the-casualties-in-a-booming-oil-patch/article2409657/

Threats

Canada Dollar Rises Most in 7 Weeks on Carney Statement – Bloomberg

Canada’s dollar appreciated by the most since March against its U.S. counterpart as the prospects for higher interest rates attracted buyers.  The Canadian currency had its largest gains versus the yen and Brazil’s real after Bank of Canada Governor Mark Carney said the removal of economic stimulus may be “appropriate,” given stronger growth and inflation.

http://www.bloomberg.com/news/2012-04-21/canada-dollar-rises-most-in-7-weeks-on-carney-statement.html

Canada March Consumer Price Index Report – Bloomberg

Consumer prices rose 1.9% between March 2011 and March 2012, following a 2.6% increase in February. This 0.7 percentage point difference was largely the result of slower year-over-year increases in prices for food and energy.  Food prices rose 2.2% in the 12 months to March, following a 4.1% increase in February. This slower increase was the result of a month-over-month decline in food prices in March 2012, while a year earlier food prices had been on the rise.

http://www.bloomberg.com/news/2012-04-20/canada-march-consumer-price-index-report-text-.html

High oil prices threatened by … high oil prices – The Globe and Mail

The fivefold increase in oil prices over the past decade has created boom times in Alberta, in North Dakota and in crude-producing regions across the globe, but the era of $100-a-barrel oil may be sowing the seeds of its demise.  Oil-consuming nations, such as the United States and China, have become preoccupied with security of supply, amid predictions of “peak oil” in which the global energy industry will have trouble keeping pace with rising demand.

http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/high-oil-prices-threatened-by-high-oil-prices/article2409670/

Tags: Bank Of Canada, Bank Of Canada Governor, Body Count, Business Economy, Canadian Broadcasting Corp, Canadian Economy, Central Bank Governors, Derek Holt, Excess Supply, Firing On All Cylinders, Fri, G20 Finance Ministers, Globe And Mail, Grocery Carts, Mark Carney, Market Radar, Members Of The Euro, Monster Job, Output Gap, Said Canadians, Scotia Capital, Underlying Inflation Rate
Posted in Markets | Comments Off

The Economy and Bond Market Radar (April 23, 2012)

Sunday, April 22nd, 2012

The Economy and Bond Market Radar (April 23, 2012)

Treasuries were more or less unchanged this week. U.S. economic data was broadly in line with estimates and Treasuries didn’t move around much this week. One interesting data point that was released this week was housing permits, which rose faster than expected to 747,000 (seasonally adjusted annualized rate). This can be easily seen in the chart below and has finally broken out of the range that it occupied for the past three years. This appears to be a very favorable development, as new housing activity looks as if it is finally picking up.

Strengths

• As mentioned above, housing is showing some signs of life and appears to be picking up.
• India’s central bank cut interest rates this week and China has indicated a willingness to ease monetary policy in the near future. The global easing cycle continues.
• Retail sales rose a very strong 0.8 percent in March, well ahead of expectations and with broad-based strength.

Weaknesses

• Spanish 10-year bond yields rose above 6 percent this week as the market rotates through southern Europe, with the current focus on Spain.

• Weekly initial jobless claims rose to 386,000 this week, continuing the recent trend of higher readings.

• The Bank of Canada has become more hawkish and indicated that rates may be headed higher on better-than-expected economic growth and higher inflation.

Opportunity

• After a disappointing first-quarter GDP result, the Chinese are likely to ease monetary policy as early as this quarter.

Threat

• Rising oil and gasoline prices combined with liquidity implications of global easing, led by Europe, may raise the prospect of a reappearance of higher inflation going forward.

Tags: Bank Of Canada, Bond Market, Bond Yields, Economic Data, Economic Growth, First Quarter, Gasoline Prices, GDP, inflation, Initial Jobless Claims, liquidity, Market Radar, Monetary Policy, Quarter Gdp, Retail Sales, S Central, Signs Of Life, Southern Europe, Treasuries, Willingness
Posted in Markets | Comments Off

Tampering with Canadian Pacific risks Canada’s National Dream, in Ackman’s Proxy Fight

Thursday, March 29th, 2012

by Jay Nordenstrom, TalkRail.ca

Is it worth risking an irreplaceable national transportation system for a questionable promise of a couple of extra pieces of silver?

That’s what Canadian Pacific shareholders need to ponder before voting at the railway’s annual meeting in Calgary on May 17. Their dilemma results from a messy proxy battle launched by Pershing Square Capital Management, a New York hedge fund with ownership stakes in retailers J.C. Penney and Target, as well as McDonald’s and Wendy’s.Pershing Square’s CEO, Bill Ackman, wants shareholders to give him the power to drastically revise CP’s board of directors, its management and their way of running what is already a profitable transcontinental railway. He wants to replace current CP president Fred Green with former CN president Hunter Harrison, who would return from retirement in the U.S. CP profits and dividends would allegedly increase rapidly thanks to a new corporate culture that would include large reductions in locomotives, freight cars and employees.

On the other side of this dust-up is the current CP board. It is headed by former Royal Bank of Canada chairman and CEO John Cleghorn and includes two bright lights recently brought aboard from the U.S. rail industry, one of whom was Harrison’s operations chief at CN. These heavyweights and an outside rail analyst hired by the CP board endorse the current multi-year growth plan, which was presented to investors in Toronto on March 27. The plan hinges on steady increases in traffic, revenues and profits, as well as cost control.

Pershing Square’s argument rests on its view that CP has not been performing as well as CN of late. There is some truth in this, but there are also extenuating factors that are being addressed by CP now. A new management team totally unfamiliar with CP is unlikely to fix these glitches and miraculously unlock hidden value in something as complex, capital intensive and physically challenging as a 23,700-kilometre, continent-wide railway. It’s like expecting a supersized steamship to pull a 90-degree turn mid-ocean.

The reality of railroading is that no two railroads are alike. Nor should they be expected to perform identically. CP and CN handle different mixes of freight traffic, take different routes (even between the same cities) and grapple with different topographical and climatic conditions. These factors can severely affect performance year-to-year.

The two railways also have widely variant funding histories. From 1919 to 1995, CN was a Crown corporation that enjoyed extensive public support. This left a plush infrastructure legacy that continues to have a positive effect on its performance as a privatized railway.

As an investor-owned company throughout its 131-year history, CP has always had to run hard to meet the challenges posed by CN, some large U.S. railways that cross the border and other forms of indirectly subsidized transportation, such as trucking. These challenges have been met and dividends have been paid consistently.

If this CP approach is so flawed, why has CN’s current president been adopting some of the technologies and customer-friendly service techniques CP has pioneered and employed for many years?

CP shareholders also need to consider the views of major freight shippers, who have a huge stake in the future of a nation-spanning railway that helps support Canada’s economy, its global competitiveness and thousands of jobs on and beyond its rails. Among those in favour of the CP team’s growth plan are the senior executives of mining giant Teck Resources, Paterson Global Foods, Consolidated FastFrate and Mosaic, the world’s leading producer of potash and concentrated phosphate.

It’s worth recalling the track record of others who promised untold riches if investors just put certain railways in their hands. As the fourth generation of my family to work in and around the rail industry, I had a ringside seat for the fallout from misguided decisions to install these prophets of profit at the helm of several U.S. railways. The result was asset stripping, service cuts, line abandonments, employee layoffs, insolvency and government intervention.

Do unsubstantiated claims of ever-increasing CP dividends make Pershing Square’s bid a risk worth taking? Tampering with the railway long known as our national dream could be dangerous for investors, shippers, employees and the public. It risks turning CP into a national nightmare. That’s no way to run a railway.

Copyright © TalkRail.ca

Tags: Bank Of Canada, Bill Ackman, Canadian, Canadian Market, Ceo John, Cp Board, Cp Rail, Freight Cars, Hunter Harrison, J C Penney, John Cleghorn, Mining, National Dream, National Transportation System, New Management Team, Pershing Square, Pershing Square Capital, Pershing Square Capital Management, President Fred, Proxy Battle, Proxy Fight, Royal Bank Of Canada, Steady Increases, Target, Transcontinental Railway
Posted in Markets | Comments Off

Eric Sprott: Investment Outlook (February 24, 2012)

Sunday, February 26th, 2012

Unintended Consequences

By Eric Sprott & David Baker

2012 is proving to be the ‘Year of the Central Bank’. It is an exciting celebration of all the wonderful maneuvers central banks can employ to keep the system from falling apart. Western central banks have gone into complete overdrive since last November, convening, colluding and printing their way out of the mess that is the Eurozone. The scale and frequency of their maneuvering seems to increase with every passing week, and speaks to the desperate fragility that continues to define much of the financial system today.

The first major maneuver took place on November 30, 2011, when the world’s G6 central banks (the Federal Reserve, the Bank of England, the Bank of Japan, the European Central Bank [ECB], the Swiss National Bank, and the Bank of Canada) announced “coordinated actions to enhance their capacity to provide liquidity support to the global financial system”.¹ Long story short, in an effort to avert a total collapse in the European banking system, the US Fed agreed to offer unlimitedUS dollar swap agreements with the other central banks. These US dollar swaps allow the other central banks, most notably the ECB, to borrow US dollars from the Federal Reserve and lend them to their respective national banks to meet withdrawals and make debt payments. The best part about these swaps is that they are limitless in scope – meaning that until February 1, 2013, the Federal Reserve is, and will be, prepared to lend as many US dollars as it takes to keep the financial system from imploding. It sounds absolutely great, and the Europeans should be nothing but thankful, except for the tiny little fact that to supply these unlimited US dollars, the Federal Reserve will have to print them out of thin air.

Don’t worry, it gets better. Since unlimited US swap lines weren’t enough to solve the problem, roughly three weeks later, on December 21, 2011, the European Central Bank launched the first tranche of its lauded Long Term Refinancing Operation (LTRO). This is the program where the ECB flooded 523 separate European banks with 489 billion euros worth of 3-year loans to keep them going through Christmas. A second tranche of LTRO loans is planned to launch at the end of February, with expectations for size ranging from 300 billion to more than 1 trillion euros of uptake.² The good news is that Italian, Portuguese and Spanish bond yields have dropped since the first LTRO went through, which suggests that at least some of the initial LTRO funds have been reinvested back into sovereign debt auctions. The bad news is that the Eurozone banks may now be hooked on what is clearly a back-door quantitative easing (QE) program, and as the warning goes for addictive drugs – once you start, it can be very hard to stop.

Britain is definitely hooked. On February 9, 2012, the Bank of England announced another QE extension for 50 billion pounds, raising their total QE print to £325 billion since March 2009.³ Japan’s hooked as well. On February 14, 2012, the Bank of Japan announced a ¥10 trillion ($129 billion) expansion to its own QE program, raising its total QE program to ¥65 trillion ($825 billion).⁴ Not to be outdone, in the most recent Fed news conference, US Fed Chairman Bernanke signaled that the Fed will keep interest rates near zero until late 2014, which is 18 months later than he had promised in Fed meetings last year. If Bernanke keeps his word, by the end of 2014 the US government will have enjoyed near zero interest rates for six years in a row. Granted, extended zero percent interest rates is not nearly as satisfying as a proper QE program, but who needs traditional QE when the Fed already buys 91 percent of all 20-30 year maturity US Treasury bonds?⁵ Perhaps they’re saving traditional QE for the upcoming election.

All of this pervasive intervention most likely explains more than 90 percent of the market’s positive performance this past January. Had the G6 NOT convened on swaps, had the ECB NOT launched the LTRO programs, and had Bernanke NOT expressed a continuation of zero interest rates, one wonders where the equity indices would trade today. One also wonders if the European banking system would have made it through December. Thank goodness for “coordinated action”. It does work in the short-term.

But what about the long-term? What are the unintended consequences of repeatedly juicing the system? What are the repercussions of all this money printing? We can think of a few.

First and foremost, without continued central bank support, interbank liquidity may cease to function entirely in the coming year. Consider the implications of the ECB’s LTRO program: when you create a loan program to save the EU banks and make its participation voluntary, every one of those 523 banks that participates is essentially admitting that they have a problem. How will they ever lend money to each other again? If you’re a bank that participated in the LTRO program because you were on the verge of bankruptcy, how can you possibly trust other banks that took advantage of the same program? The ECB’s LTRO program has the potential to be very dangerous, because if the EU banks start to rely on the loans too heavily, the ECB may find itself inadvertently attached to the broken EU banking system forever.

The second unintended consequence is the impact that interventions have had on the non-G6 countries’ perception of western solvency. If you’re a foreign lender to the United States, Britain, Europe or Japan today, how comfortable can you possibly be in lending them money? How do you lend to countries whose sole basis as a going concern rests in their ability to wrangle cash injections printed by their respective central banks? Going further, what happens when the rest of the world, the non-G6 world, starts to question the G6 Central Banks themselves? What entity exists to bailout the financial system if the market moves against the Fed or the ECB?

The fact remains that there are few rungs left in the financial confidence chain in 2012, and central banks may end up pushing their printing schemes too far. In 2008-2009, it was the banks that lost credibility and required massive bailouts by their respective sovereign states. In 2010-2011, it was the sovereigns, most notably those in Europe, that lost credibility and required massive bailouts by their respective central banks. But there is no lender of last resort for the central banks themselves. That the IMF is now trying to raise another $600 billion as a security buffer doesn’t go unnoticed, but do they honestly think that’s going to make any difference?⁶

When reviewing today’s macro environment, we keep coming back to the same conclusion. The non-G6 world isn’t blind to the efforts of the Fed and the ECB. When the Fed openly targets a 2 percent inflation rate, foreign lenders know that means they will lose, at a minimum, at least 2 percent of purchasing power on their US loans in 2012. It therefore shouldn’t surprise anyone to see those lenders piling into alternative assets that have a better chance at protecting their wealth, long-term.

Tags: Bank Of Canada, Bank Of England, Bank Of Japan, Central Banks, David Baker, Debt Payments, Eric Sprott, European Banking System, Eurozone, Firs, Fragility, Global Financial System, Investment Outlook, Last November, Liquidity Support, Maneuvers, National Banks, Swiss National Bank, Thin Air, Unintended Consequences
Posted in Markets | Comments Off

Why Are Canadians Whining About Pensions (Kolivakis)

Thursday, February 9th, 2012

Bill Curry of the Globe and Mail reports, Ottawa looks abroad for OAS pension solutions:

The Conservative government is looking abroad to find the best way to phase in a higher qualifying age for Old Age Security.

Human Resources Minister Diane Finley argued Sunday that Canada is one of the only countries in the 34-member Organization for Economic Co-operation and Development that isn’t already raising their retirement age.

Ms. Finley was asked directly on CTV’s Question Period whether the government’s plans would see Canadians having to wait until age 67 – rather than the current 65 – in order to qualify for Old Age Security.

“That’s one option. But let’s look at it. It used to be people were expected to have a life expectancy [of] between 68 and 71. Now it’s 81, and they’re still expecting to retire at the same age,” Ms. Finley said. “Almost all of the other countries in the OECD have already moved in this direction. The U.S. started doing this a little close to 20 years ago.”

Ms. Finley, 54, continued the government’s practice of offering hints at the government’s pension reform plans without specifically spelling out when the change would take effect or what it will involve.

“What I’m saying is that in terms of implementing it, we’re not going to tell people that they have to adapt within two years to a dramatically different model. … We’re going to make sure that people my age and younger have time to adjust their retirement plans,” she said.

Alice Wong, the Minister of State for Seniors, told the House of Commons last week that more information on the changes will be in the 2012 budget. The date of the budget has not been announced.

One heavyweight that stepped into this debate is the Bank of Canada’s former governor, David Dodge, who hopes Harper steps up on pension reform:

When it comes to pension reform, David Dodge has seen this movie before – twice – but he hopes it ends differently this time.

Prime Minister Stephen Harper has refused to answer repeated questions in the House as to whether he is planning to raise the eligibility age for Old Age Security to 67 from 65, leading opposition parties to howl that he is refusing to come clean.

However, Mr. Dodge – the former governor of the Bank of Canada who was deputy minister at the Finance Department during the deficit-slashing mid-1990s – hopes the government does just that. Moreover, in an interview Friday, Mr. Dodge suggested Mr. Harper should take advantage of his majority government and even raise the age for the Canada Pension Plan, something other governments have shied away from, and which the current Conservatives say is not on the table and not necessary.

“At least since the mid-1980s we’ve known we were going to have to do something,” he said. “We knew that back in ‘97 when we did the revisions of the CPP. At the time the decision was we were doing so much to fix that adding one more layer – i.e. the gradual increasing of the age – was probably too much to bear. So, we didn’t do it, although we certainly talked about it, and the finance minister and officials at the time talked about it and realized we really should do it. But we didn’t because we were doing so much else.”

“So, quite frankly,” he continued, “we’re at least 15 years late in getting started in raising that age of entitlement for CPP, OAS and the normal expectation as to how long people would work in the private sector with private-sector pension plans. That’s absolutely clear, and because labour participation rates will start to fall later this decade, we’re up against the wall. It would have been a lot better if we’d done things in 97, it would have been even better if we had done things in 85 when we first looked at this under the Mulroney government, because you need a long phase-in.”

David Dodge is right, time to get on with pension reform. But it’s more pressing than just raising the retirement age. We need a ‘radical rethink’ of our pension system which I already alluded to when I went over Prime Minister Harper’s speech at Davos:

• Increase the retirement age to 67 (people are living longer; some economists think we need to raise the retirement age to 70)
• Review cost-of-living adjustments (COLAs) and cut when necessary
• Scrap all private companies’ defined-benefit plans and consolidate them into a few large public defined-benefit (DB) pension funds. Companies should focus on producing goods and services, not managing pensions.
• Consolidate all municipal and city pension plans into large public DB plans
• Consolidate all Crown corporations DB plans into one large DB plan
• Expand CPP to all Canadians and get the funding right
• Cap CPPIB and all large public DB plans at a certain size and create new ones as needs arise
• Make pensions portable so no matter where people work, their pensions are safe, secure, well managed and will follow them
• Last but not least, get the governance right and improve it continuously.

Canadians whining over an increase in retirement age are wrong but so are others who think that this is the only adjustment needed to bolster pensions.

Let me be more blunt: we need to get our collective heads out of our a*&es, stop fear mongering, stop peddling to interests groups, and start getting on with some serious pension reform which introduces common sense measures and builds on the success of our large defined benefit plans.

I’m tired of watching interests groups from all sides of the political spectrum cry, scream, bitch and whine about pension reform. Wake up already, look what’s going on in Europe, especially in Greece where partisan politics has destroyed the country. Having escaped the carnage that has rocked other nations, we’ve been lucky in Canada, but our good fortune could change at any time and we better be prepared.

Finally, don’t be scared of working past 65. Work is good for you, it’s healthy. It keeps your mind young and sharp. I see my 80 year old father working 10 hour days as a psychiatrist and he never complains. Admittedly, he’s lucky, he’s healthy, loves his job, his colleagues, and feels good helping mentally ill patients. Wish more Canadians had his attitude when it comes to work. Below, Canadian politicians doing what they do best, screaming at each other. Absolutely pathetic.

Tags: Alice Wong, Bank Of Canada, Bill Curry, Canadians, Conservative Government, Countri, David Dodge, Diane Finley, Eligibility Age, Globe And Mail, House Of Commons, Life Expectancy, Mail Reports, Member Organization, Minister Of State, Oas Pension, Oecd, Old Age Security, Outlier, Pension Reform, Pension Solutions, Question Period, Retirement Age, Retirement Programs
Posted in Markets | Comments Off

Miserly bonds yield to generous dividends

Sunday, February 5th, 2012

This Week: CLAYMORE S&P/TSX CDN DVD ETF Ticker: CDZ / TSX

Miserly bond yields won’t pay for a nice dinner these days. For that, you need the generosity of dividend-paying equities. Add the promise of capital gains and you may even opt for the nicer bottle of wine.

Bond investors are suffering from the lowest yields in a generation. Quality, five-year corporate bonds are yielding about 2.4%. That’s about half the average for the past decade. Compare that to equity dividend yields, which, at about 2.7% for the S&P TSX 60 Index, are the best in a decade, barring a period of extreme valuations in late 2008. In other words, equity dividends are higher by a third of a percentage points than quality bond yields, and that’s before the dividend tax credit and before any capital gains. (See Chart of Yields below)

What brought us to this upside-down wonderland? Last year’s poor showing by Canadian equities, combined with the Euro-zone crisis saw panicked investors flock to the safety of quality bonds. They were the best performing assets last year. Quality corporate bonds with maturities of about five to seven years returned about 9% in 2011.

Bonds prices are now hitting their ceiling and cannot go much higher. However, nor will they fall soon with the U.S. Federal Reserve committed to near-zero rates into 2014 and our own Bank of Canada likely to follow suit. More reason then for investors to look elsewhere for income.

The other factor pushing up dividend yields are record corporate profits that are as high now as they were just prior to the 2008 recession. Companies have been spending those profits buying back their shares and on dividends – both good for equity investors.

Eventually, the upside-down will right itself, as investors shun bonds in favor of dividend-paying stocks. That will push bond yields up and dividend yields down. To benefit from this, we have been re-allocating our Canadian equity exposure to ETFs of higher dividend-yielding quality companies.

Two we considered were iShares DJ Canada Select Dividend ETF (XDV/TSX) and the Claymore S&P/TSX Dividend ETF (CDZ/TSX). Both have consistently outperformed for years.

XDV, with a current yield of about 3.9%, holds the 30 biggest companies by market cap that also pay a dividend. As a result, 55% of the ETF is in banks and insurers.

The yield on CDZ is lower at 3.2% and its price-to-earnings ratio is higher at about 15.3 times but it is much more diversified. It holds 60 companies, all of whom have consistently raised dividends over the last five years and have at least $300 mln in market cap, though the average is $8 billion.

Energy and industrial firms are the biggest sectors with nearly half the ETF weight, followed by financials (though not the big banks or insurers) and then consumer discretionary firms like Tim Hortons, Shaw and Cogeco.

Of the two, we opted for CDZ mainly because of its diversification. XDV’s overweight in financials, especially in a period of increasingly heavier regulation of banks and insurers, makes us nervous.

Its diversification has also helped CDZ far outperform XDV as well as XIU/TSX, the biggest S&P/TSX 60 ETF. Over the last five years, CDZ has returned 23%, compared to XDV’s 9.4% and XIU’s 8.0%. XDV’s financial overweight helps link its return closely to the S&P/TSX 60, which has a 32% financials weighting.

One thing to note: iShares bought Claymore a few weeks ago. It has not said it will change Claymore products and given the success and distinctive approaches of CDZ and XDV, I doubt these two ETFs will be affected and even if they are, it likely won’t harm unitholders.

The Claymore takeover may also be to the benefit of Canada’s other ETF managers, including BMO, Horizons, RBC and Vanguard as they carve out their own space from a growing ETF market place.

The biggest winners will be investors, more of whom are investing through ETFs, either directly or through investment managers. In fact, Morningstar said recently that U.S. firms managing ETF portfolios saw assets grow my 43% last year as investors opted for top-down, asset-allocation strategies that minimized stock-specific risk.

Dividend Yields rarely exceed Bond Yields

Charts courtesy of Bloomberg L.P. Click on Chart for Larger Image

The archerETF Global Tactical Portfolio

archerETF offers Global Tactical Portfolio Management.

Our outlook is Global: we invest across countries, sectors, commodities and other asset classes to improve returns. Our management is Tactical: we strive to select the right opportunities at the right times in response to changing market conditions to manage and minimize portfolio risk.

Please call us at TF 1-866-469-7990 for more information.

Tags: Bank Of Canada, Bond Investors, Bond Yields, Bottle Of Wine, Canadian Equities, Canadian Equity, Corporate Bonds, Corporate Profits, Dividend Paying Stocks, Dividend Tax Credit, Dividend Yields, Equity Exposure, Equity Investors, Euro Zone, Generation Quality, Investors Flock, Nice Dinner, Quality Bond, TSX 60, Zero Rates
Posted in Markets | Comments Off

Mark Carney: Canada’s Growth in the Age of Deleveraging

Friday, December 16th, 2011

Here, without further comment is Mark Carney’s speech to the Empire Club/Canadian Club of Toronto, from earlier this week, which The Globe and Mail’s Jeffrey Simpson called ”so intelligent in its analysis and perceptive in its recommendations that it stands as the best speech by any public figure in Ottawa in a very, very long time.”

****

from Bank of Canada Governor, Mark Carney’s speech:

Introduction

These are trying times.

In our largest trading partner, households are undergoing a long process of balance-sheet repair. Partly as a consequence, American demand for Canadian exports is $30 billion lower than normal.

In Europe, a renewed crisis is underway. An increasing number of countries are being forced to pay unsustainable rates on their borrowings. With a vicious deleveraging process taking hold in its banking sector, the euro area is sinking into recession. Given ties of trade, finance and confidence, the rest of the world is beginning to feel the effects.

Most fundamentally, current events mark a rupture. Advanced economies have steadily increased leverage for decades. That era is now decisively over. The direction may be clear, but the magnitude and abruptness of the process are not. It could be long and orderly or it could be sharp and chaotic. How we manage it will do much to determine our relative prosperity.

This is my subject today: how Canada can grow in this environment of global deleveraging.

How We Got Here: The Debt Super Cycle

First, it is important to get a sense of the scale of the challenge.

Accumulating the mountain of debt now weighing on advanced economies has been the work of a generation. Across G-7 countries, total non-financial debt has doubled since 1980 to 300 per cent of GDP. Global public debt to global GDP is almost at 80 per cent, equivalent to levels that have historically been associated with widespread sovereign defaults.¹

The debt super cycle has manifested itself in different ways in different countries. In Japan and Italy, for example, increases in government borrowing have led the way. In the United States and United Kingdom, increases in household debt have been more significant, at least until recently. For the most part, increases in non-financial corporate debt have been modest to negative over the past thirty years.

In general, the more that households and governments drive leverage, the less the productive capacity of the economy expands, and, the less sustainable the overall debt burden ultimately is.

Another general lesson is that excessive private debts usually end up in the public sector one way or another. Private defaults often mean public rescues of banking sectors; recessions fed by deleveraging usually prompt expansionary fiscal policies. This means that the public debt of most advanced economies can be expected to rise above the 90 per cent threshold historically associated with slower economic growth.²

The cases of Europe and the United States are instructive.

Today, American aggregate non-financial debt is at levels similar to those last seen in the midst of the Great Depression. At 250 per cent of GDP, that debt burden is equivalent to almost US$120,000 for every American (Chart 1).³

Several factors drove a massive increase in American household leverage. Demographics have played a role, with the shape of the debt cycle tracking the progression of baby boomers through the workforce.

The stagnation of middle-class real wages (itself the product of technology and globalisation) meant households had to borrow if they wanted to maintain consumption growth.⁴

Financial innovation made it easier to do so. And the ready supply of foreign capital from the global savings glut made it cheaper.

Most importantly, complacency among individuals and institutions, fed by a long period of macroeconomic stability and rising asset prices, made this remorseless borrowing seem sensible.

From an aggregate perspective, the euro area’s debt metrics do not look as daunting. Its aggregate public debt burden is lower than that of the United States and Japan. The euro area’s current account with the rest of the world is roughly balanced, as it has been for some time. But these aggregate measures mask large internal imbalances. As so often with debt, distribution matters (Chart 2).

Europe’s problems are partly a product of the initial success of the single currency. After its launch, cross-border lending exploded. Easy money fed booms, which flattered government fiscal positions and supported bank balance sheets.

Over time, competitiveness eroded. Euro-wide price stability masked large differences in national inflation rates. Unit labour costs in peripheral countries shot up relative to the core economies, particularly Germany. The resulting deterioration in competitiveness has made the continuation of past trends unsustainable (Chart 3). Growth models across Europe must radically change.

Use full screen for the easy read:

Mark Carney’s Empire Club Speech -121211

Tags: Balance Sheet, Bank Of Canada, Bank Of Canada Governor, Banking Sector, Borrowings, Canadian Exports, Countr, Empire Club, Financial Debt, Global Gdp, Globe And Mail, Globe Mail, Jeffrey Simpson, Mark Carney, Number Of Countries, Public Debt, Recession, Relative Prosperity, Speech Introduction, Trade Finance, Trying Times
Posted in Markets | Comments Off

Here Comes The Global, US-Funded Liquidity Bail Out

Wednesday, November 30th, 2011

As expected, the Fed has just bailed out the world once again:

• FED, ECB, BOJ, BOE, SNB, BANK OF CANADA LOWER SWAP RATES – BBG
• ECB, FED other major central bank to lower the pricing of existing USD liquidity swaps by 50BPS

And as we have been writing every single day, the worldwide dollar crunch is now confirmed:

• At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar

And finally, a promise to bailout Bank of America when it hits $4.00 again:

• U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets.  However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.

This means that the global situation is far, far more dire than the talking heads have said. Luckily, when this step fails, which it will, Mars can always come and bail us out.

For release at 8:00 a.m. EDT

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.

These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points.  This pricing will be applied to all operations conducted from December 5, 2011.  The authorization of these swap arrangements has been extended to February 1, 2013.  In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.

As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant.  At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise.  These swap lines are authorized through February 1, 2013.

Federal Reserve Actions
The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013.  The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points.  In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary.  Further details on the revised arrangements will be available shortly.

U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets.  However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.

Information on Related Actions Being Taken by Other Central Banks
Information on the actions to be taken by other central banks is available on the following websites:

Bank of Canada

Bank of England

Bank of Japan

European Central Bank

Swiss National Bank

Frequently Asked Questions: Foreign Currency Liquidity Swaps

Tags: Backstop, Bailout, Bank Of America, Bank Of Canada, Bank Of England, Bank Of Japan, Basis Points, Boj, Central Banks, Domestic Currencies, ECB, Financial Institutions, Financial Stability, Global Financial System, Global Situation, Liquidity Support, Overnight Index Swap, Snb Bank, Swap Rates, Swiss National Bank
Posted in Markets | Comments Off

The Economy and Bond Market Cheat Sheet (October 31, 2011)

Monday, October 31st, 2011

The Economy and Bond Market Cheat Sheet (October 31, 2011)

Treasury yields were higher this week as European leaders reached an agreement in principle to recapitalize the region’s banks, address the Greek debt situation and expand the European Financial Stability Facility. This agreement largely removed the threat of another full-blown financial crisis and money shifted back toward riskier assets.

Another piece of good news that supported riskier assets this week was the release of third quarter GDP data. GDP rose 2.5 percent in the third quarter, matching expectations but also quieting some critics expecting the U.S. to fall back into a recession.

Strengths

• The resolution of the immediate crisis in Europe was the most significant positive event this week.
• GDP rose 2.5 percent in the third quarter as consumer spending rose 2.4 percent.
• September durable goods orders, excluding the volatile transportation sector, rose 1.7 percent. This is the largest rise six months.

Weaknesses

• Consumer confidence fell to the lowest level since March 2009, which was the bottom of the global financial crisis. Concerns surrounding jobs and real incomes drove the survey down.
• Global news flow continues to point toward an economic slowdown as U.K. factory orders fell to the lowest level this year, the Bank of Canada sharply reduced its fourth quarter GDP forecast and expectations are for growth to slow below four percent in Brazil next year.
• Inflation risks remain as the Reserve Bank of India raised interest rates by 25 basis points due to stubbornly high inflation.

Opportunities

• With the European news behind us for the time being, investors will refocus on economic data such as next week’s ISM manufacturing report, the Federal Reserve Open Market Committee (FOMC) meeting and October unemployment data.

Threats

• While the current European plan to deal with the crisis is a positive step forward, many details still need to be worked out. Moreover, the plan does not deal with potential problems in other European countries such as Portugal, Spain and Italy.

Tags: Bank Of Canada, Bank Of India, Brazil, Canadian Market, Consumer Confidence, Debt Situation, Durable Goods Orders, Economic Slowdown, European Leaders, European News, Gdp Data, Gdp Forecast, Global Financial Crisis, India, Inflation Risks, Ism Manufacturing, K Factory, Open Market Committee, Quarter Gdp, Real Incomes, Reserve Bank Of India, Treasury Yields, Unemployment Data
Posted in Brazil, Canadian Market, India, Markets | Comments Off