Sunday, 13 August 2017

Isn't it Raonic?

For a country of its size, Canada produces an embarrassingly small number of sports stars capable of making an impact on the international stage.  Hockey no longer dominates public and media attention in the way it used to, thanks to the arrival in Toronto of NBA basketball (the Raptors) and American League baseball (the Blue Jays).  In other sports, however, especially those focused on individual achievement such as golf, tennis, swimming or track and field, the media pay next to no attention unless a Canadian pops up and notches a victory.  Then it's blanket coverage, for at least a day or two.

Look back to 2016 and there were two Canadians making their mark in a big way.  At the Rio Olympics, 17-year-old swimmer Penny Oleksiak turned in a performance for the ages, including a gold medal and a couple of bronzes.  The press went wild, interviewing everyone from her parents to the guy who cleans the pool where she trains.  Years of achievement and glory beckoned.  This year? Not so much.  At the recent world championships, Oleksiak swam creditably but didn't win anything of note.  As a result, she and her sport barely rated a wire service column on the inside pages of the sports section.

The year 2016 was also a breakthrough year for tennis star Milos Raonic, who broke into the world top ten rankings and got to the finals at Wimbledon, where he was handily beaten by Andy Murray.  This year? Again, not so much. Raonic has been plagued by injuries, has played little and won even less, with the result that the media coverage has largely dried up.

But what's this??  In the past week a "new" Canadian star has appeared in the tennis firmament: 18-year-old Denis Shapovalov.  In a tournament in Montreal, Shapovalov made it all the way to the semi-finals, disposing of both Juan Martin del Potro and Rafael Nadal along the way.  Cue, once again, the media frenzy, with reporters who had never heard of him until this week rushing to laud him.  This article from the Toronto Star will give you the tone.  Not content with asserting that "Shapovalov clearly has our undivided attention", the columnist can't resist taking multiple swipes at poor Raonic, last year's man:

"Raonic just can’t stay healthy for more than a few months at a time, and bombed out of this Rogers Cup early with a wrist problem. His health has been a significant part of the reason he’s so far not been able to win one of the big tournaments in his sport, either a Grand Slam event or a Masters-level tournament."

Yeah, what a loser, eh?  And talking of which, let's take a look at Eugenie Bouchard, the media cynosure of 2015, when she too reached a Wimbledon final.  It's all gone wrong since then: multiple coaches, a lawsuit against the US tennis association, demoralizing first-round losses week after week and, at times, an evident loss of interest in her chosen sport.

This past week, as Shapovalov was burning up the courts in Montreal, Bouchard yet again lost badly in the first round of a tournament in Toronto.  Evidently disheartened, she was unwise enough at her post-match press conference to suggest that it would be a relief to let someone else carry the pressure of being "Canada's tennis sweetheart".  Needless to say this did not go down well with the media, who are even quicker to pile in on a loser than they are to latch onto a winner.  Bouchard's road back to the top has been growing narrower for a while; with the media panting for her to fail, it may now be next to impossible.

So, good luck Denis Shapovalov.  I don't mean on the court -- you've already shown you can handle the world's best.  It's the local media you have to beware of.

Wednesday, 9 August 2017

The mineshaft gap

US rhetoric towards North Korea has certainly ramped up in the last 24 hours, with President Trump fulminating from the boardroom of his New Jersey golf course about America's ability to rain down "fire and fury" unless Pyonyang gets out of the nuclear arms business.  The trigger for the harsher language seems to be a report that US military intelligence believes that North Korea has already managed to miniaturize a warhead that can be fitted atop one of its new ICBMs.

That's quite a change from the confident posturing just a month or two ago, when the same intelligence sources were still expressing the view that a meaningful nuclear threat to the US mainland was still at least five years away.  Those of us with long memories of the Cold War might be just a touch sceptical about all this.

The sainted John F. Kennedy fought the 1960 election in part on the charge that President Eisenhower was weak on national defence. He claimed that the USSR had a huge advantage over the US in nuclear missile capacity -- the so-called "missile gap".  There never was any such gap, and there's plenty of evidence that JFK knew this perfectly well, but it served its purpose during the campaign, in which he narrowly defeated Richard Nixon.  

The whole issue was mordantly satirized by Stanley Kubrick in Dr Strangelove.  The good doctor's plan for surviving a post-nuclear future is to assemble a group of the best and the brightest, naturally including Strangelove himself, in mineshafts.  The deranged General Buck Turgidson worries that the USSR is ahead on that front too: "Mr President, we must not allow a mineshaft gap!"

Despite the bloodcurdling rhetoric out of Pyongyang, there is no doubt that any gap in armaments (or mineshafts) between North Korea and the United States massively favours the latter.  There is little likelihood that Kim Jong-Un would seriously contemplate using any of his arsenal for a first strike -- even an attack against Guam, which the North Korean military has specifically threatened, would prompt a devastating response. Kim may be bad and dangerous to know, but he is probably not mad.

What about the US, which is still the only country ever to have used a nuclear weapon in combat? Plans for a pre-emptive strike are no doubt at an advanced stage, but it remains a remote possibility, given the amount of conventional weaponry that North Korea has in place, aimed directly at Seoul.  The tough rhetoric, from the President itself as well as Defense Secretary Mattis, is more likely intended to bring the North Koreans to the negotiating table -- and, equally, to convince China that the time has come to put serious pressure on its neighbour to do so.

President Trump, for whom nothing on the domestic front has gone right lately, may also feel that tough talk will stand him in good stead with his domestic voters.  He's probably right about that, as long as he doesn't inadvertently spark an actual war.  Presidents Johnson and Nixon, over Vietnam, and George W Bush, over Iraq, soon found that actual combat was not a sure-fire way to win voter popularity.  

Friday, 4 August 2017

Canada jobs market remains strong

StatsCan reported this morning that the Canadian economy added 11,000 jobs in July, the eight consecutive monthly gain. Although the headline was merely in line with the consensus expectation, rather than blowing past it as has been the case for most of this year, the details of the report confirm that the jobs market remained strong at the start of the third quarter of the year.

  • Full-time employment rose by 35,000 in the month, offset by a 24,000 decline in part-time employment.  Taking these two numbers together, there was a healthy 0.6 percent rise in hours worked in the month, for a year-over-year increase of 1.9 percent.


  • A total of 387,000 jobs has been created in the past twelve months, the highest figure in a decade.  The overwhelming majority of these jobs -- 354,000 -- have been full-time positions.


  • The unemployment rate fell by 0.2 percentage points to a nine-year low of 6.3 percent.  This partly reflected a small decline in labour force participation, although the participation rate for the core age group (i.e. excluding the youngest and oldest) was unchanged. 
  • Average hourly wages remain tame, with 1.3 percent year-on-year growth recorded in each of the past three months, barely keeping up with inflation.
The persistent strength in the labour force data over the past year or so has taken some of the focus away from the volatility in the numbers, which used to make it difficult to perceive the underlying state of the jobs market.  For what it's worth, the data on self-employment still seem somewhat erratic, albeit less so than in the past, but for the moment there can be no dispute that the employment situation in Canada is the strongest it has been since the onset of the financial crisis.  

There can be little doubt that Q2 GDP data, due for release on August 31, will be strong, and today's data indicate that the strength has persisted into the current quarter.  This means that the economy is likely to reach effective full capacity by the end of this year, in line with the Bank of Canada's forecast.  Although the persistently low growth in wages will give Governor Poloz and his colleagues something to think about, it is very likely that the Bank will implement another 25 basis point rate increase at its October Governing Council meeting, when it will also release its updated economic outlook.  


Thursday, 3 August 2017

This is getting serious

Another month, another decline in Toronto-area house prices.  The Toronto Real Estate Board (TREB) reported today that home prices in the region fell 6 percent in July.  That's the third straight monthly decline since the Ontario Government introduced a package of measures aimed at reining in the market.  It's all but impossible these days to find anything attempted by the provincial government that goes according to plan, but this surely has.

TREB is trying to put on a brave face.  It notes three factors that, at least in its view, mitigate the pain.  First, prices are still higher year on year, by about 5 percent.  This is true, but it won't stay true for long if the month-on-month declines continue.  Second, it argues that the summer season is usually quiet, with activity often picking up after Labour Day.  That's not much of a mitigation, given that a year-on-year price comparison is by definition measuring the change between comparable periods (i.e., presumably the market was quiet last July also).  Third, it notes that a similar sharp pullback was seen in Vancouver last year, when the provincial government there also imposed market cooling measures.  That market has now begun to see prices rises again, albeit at a modest pace.

Is that Vancouver experience likely to be repeated in Toronto?  The very sharp decline in sales (down a remarkable 40 percent from July 2016) and the rise in listings (up 5 percent) seems to suggest that the entire direction of the Toronto market has changed.  There must be very few potential buyers out there right now who don't think they can afford to wait a little longer in hopes of getting an even better deal.  Moreover, the fact that the Bank of Canada has started to raise interest rates, together with the prospect of tighter regulation of the mortgage market in the coming months, also argues against a sharp rebound.

Recent reports estimate that there are close to 50,000 registered realtors in the Toronto area, although many of them seem to pursue it as a side gig, doing few if any deals.  Despite the number of chancers who have jumped into the "profession" in recent years, real estate fees remain at sky-high levels, close to 5 percent.  Realtors directly contributed to the price spiral seen in recent years, encouraging bidding wars at every turn in order to boost their own incomes*.  Despite their stoical public posture, TREB and its members must be starting to feel very queasy indeed.  It's hard to feel sorry for them.

* As this article reports, fees associated with home sales now account for almost 2 percent of Canada's GDP.     

Friday, 28 July 2017

Rush to judgement

Well, that didn't take long.  Barely two weeks after the Bank of Canada ended five years of ultra-low interest rates by venturing a 25 basis point increase in its target rate,  anonymous officials in Ottawa are apparently fretting via Bloomberg that the Bank's actions could trigger a slowdown in the economy.

Can this possibly be a reasonable fear?  After all, the Bank's new target rate is only 0.75 per cent, and even if it follows through with another rate hike this year, as seems likely, that would still leave the rate negative in real terms -- and way below levels that were considered normal and manageable before the financial crisis hit.  Most business economists interviewed by the media have dismissed the concerns of the unnamed bureaucrats, preferring to believe that the economy is in good shape to withstand not just another rate hike this fall, but also a couple more small upward moves during 2018.

I'm with the business economists on this one, but the truth is, nobody really knows, because we've never been here before.  Ultra low interest rates and large-scale printing of money have never been tried before by any responsible central bank.  Nobody envisaged that the QE-plus-free-money era would last the better part of a decade, engendering a belief on the part of many people that borrowing was essentially free and riskless.  The elevated level of household debt in Canada is apparently a key factor underlying the concerns in Ottawa.

Thoughtful commentators warned years ago that stopping monetary stimulus would be a lot harder than starting it. The caution being shown by the Federal Reserve in raising rates and tapering QE clearly shows that central bankers are aware that they are flying without a compass here. Despite his more hawkish rhetoric in advance of the recent rate hike, it's apparent that Bank of Canada Governor Stephen Poloz is also minded to proceed with extreme caution, ready to reverse course if the economy reacts badly to gradual policy tightening.

As it happens, economic data released today clearly show why the Bank saw the need to start raising rates this month.  Canada's GDP rose 0.6 per cent in May, far ahead of expectations.  It now stands 4.6 percent above its year-earlier level, the strongest such gain since 2000.  The Bank's expectation that the economy will reach effective full-capacity by the end of this year seems certain to be met. The strength in the exchange rate -- up 10 percent in the last two months -- will have to factor into the Bank's thinking at some point, but there is no reason to second-guess the recent change in its policy stance.  

Wednesday, 26 July 2017

How soon is now?

Just about nobody had been expecting the Fed to raise the funds target again today.  Thus, the only real point of interest in today's FOMC press release was the timing of the previously-announced plan to start unwinding QE (or balance sheet normalization, as the Fed prefers to call it). Would the Fed announce a timetable?

No, it would not.  The press release simply stated that the FOMC "expects to begin implementing its balance sheet normalization program relatively soon". Exact timing, as with the further rate hikes that are surely coming, depends on the data flow.

It's hard to blame the Fed for keeping its cards close to its collective chest.  No central bank has ever tried anything like QE before; the experiment has almost certainly run for much longer than the FOMC expected when it launched it; and there is no playbook for unwinding it.  Ending QE will not be like pulling off a bandage,  where the faster you do it, the less it hurts.  Getting this wrong could be way more damaging than tightening rates a little too fast.  All the same, a touch more clarity from the Fed today might have been helpful, if only to avoid the impression that it doesn't quite know how to proceed.  

Monday, 24 July 2017

EU-phemism du jour

The dire warnings from the UK business sector about the consequences of a hard Brexit seem to be sinking in. UK Trade Secretary Liam Fox now says that it would be nice to have a transititional phase between the date certain that the UK leaves the EU (in March 2019) and the full severing of the UK's trading relationships with the Eurozone.  In the usual UK style, Fox seems to imagine that the UK can not only impose such a transitional period on the EU, but also decree how long it should be.

After a month of shambolic "negotiations" on the UK side, the Europeans are starting to lose patience.  Consider this quote from German auto boss Matthias Wittmann: "You need a transition period.  We hope that on the British side that gets deeper and deeper into the intellectual capabilities of those who decide".

That's a charming way of putting it, possibly even nicer in German. What Herr Wittmann really means is "we hope the British can get this into their thick skulls".  One can only say, if that's what Herr Wittmann hopes, he plainly hasn't spent much time with Liam Fox, or with his equally arrogant but incompetent colleagues, David Davis and Boris Johnson.