Friday, 20 October 2017

Bank of Canada has no reason to hike rates

Economic data released by Statistics Canada this morning virtually guarantee that the Bank of Canada will hold interest rates steady when its Governing Council meets next week.

Headline CPI ticked up to 1.6 percent year-on-year in September from 1.4 percent in August.  That's well below the Bank's 2 percent target, and in any case the increase was mainly attributable to a jump in transportation costs, which was in turn attributable to the impact of Hurricane Harvey.  Excluding gasoline, September CPI was up only 1.1 percent.  The Gulf of Mexico oil patch is back in full operation, so that jump will prove transitory, though it may be noted that retail fuel prices in Ontario are still well above their pre-Harvey levels.  The Bank of Canada's three slightly arcane "preferred measures" for CPI were little changed from August, all standing between 1.5 and 1.8 percent year-on-year.

Separately, StatsCan reported that retail sales fell 0.3 percent in August.  If higher spending on gasoline is excluded (again the result of price increases rather than volume changes), the fall in sales was a more noteworthy 1.3 percent. Since Harvey struck right at the end of the month, its impact at the pumps likely crimped other categories of retail spending into September.  The Bank of Canada may also take note of a monthly decline in sales of home-related items (e.g. hardware and furnishings),  which may be evidence that the impact of the slowdown in the housing market is spreading outside the housing sector per se.

Add in the major developments going on in the background -- the aforesaid housing slowdown, with more mortgage regulation coming in 2018; and the signs that the NAFTA renegotiations are not going well -- and the case for the Bank to hold off on further tightening this month is iron-clad. In fact, expectations that there will be one further rate move before the end of this year may now have to be rethought.

Tuesday, 17 October 2017

Flight into danger

Well, that kind of came out of nowhere!  A year or two ago there was plenty of speculation about Bombardier possibly linking up in some fashion with Airbus in order to keep the C-Series aircraft program on track. That talk died away as both the Quebec and Federal governments made cash injections into the company, so the deal announced after trading hours on Monday was wholly unexpected.

And what a deal it is. Although the initial media reports talked of Airbus "buying" a majority stake in the C-Series, the truth is that Bombardier is giving away that stake for no immediate financial return.  Once the deal closes, Airbus will have 50.01 percent ownership, with Bombardier itself retaining just under 31 percent and the Government of Quebec 19 percent. Airbus will have the right to buy out both of its partners: Quebec in 2023 and Bombardier about two years after that.  Airbus will not assume any of Bombardier's debt.

All sides are saying that this deal has nothing to do with the 300 percent tariffs that have been imposed on the C-Series by the US Government at the behest of Boeing.  This can scarcely be believed: a key element of the deal is that Airbus will set up a second production line for the C-Series at its plant in Mobile, Alabama, for the specific purpose of avoiding those tariffs. 

It appears this would require at least 50 percent of the value of the aircraft to be manufactured in the US, and Airbus is presumably confident that this can be done.  Still, Boeing seems unlikely to back down from the fight.  It's easy to imagine the company telling Trump and the Commerce Department that it's being ganged up on by two heavily subsidized foreign rivals. It's easy to imagine Washington agreeing. 

The dream of an independent Canadian manufacturer of passenger jets may be over, but there are some upsides to the deal.  There seems to be little doubt that the C-Series is a good product, so the reluctance of airlines to buy it in large numbers may well have reflected their justifiable doubts that Bombardier could stay alive long enough to deliver the planes.  That concern is now gone, and the marketing clout of Airbus should translate into plenty of new orders.  It had better, because the current order book will not support two production lines for very long.

There is also interesting speculation in the media that there could be co-operation between Canada and Europe on Airbus's next generation of military aircraft.  Since Canada is threatening to cancel an order for Boeing fighters as a tit-for-tat response to the latter's battle with Bombardier, this could well be something that appeals to both sides in the new partnership. With the NAFTA talks seemingly heading for failure, this may also be in the Federal government's mind as it ponders whether to approve the deal.

With the C-Series taken care of, what's next for Bombardier?  Until recently it had been considering spinning off its rail division in order to raise the cash to keep the C-Series aloft.  That opportunity has been taken away by the recent merger between Siemens and Alstom, which leaves Bombardier competing in the global marketplace against a much bigger rival.  The successful parts of the rail unit are largely based in Europe; light rail manufacturing operations in North America continue to be plagued by delivery problems and lawsuits.

The company also retains its business jet divisions, though these too have been facing some difficulties, and of course is still in the snowmobile and jet-ski businesses that it started out with.  Enabled by lashings of public money, Bombardier expanded into all kinds of businesses it could not properly manage.  Maybe resolving one of its biggest problems will allow it to focus on managing the remainder of its empire more effectively.

Friday, 13 October 2017

The General Theory of Trump

Donald Trump's musings this week about how the rising US stock market is erasing the national debt "in a sense" has prompted widespread hilarity, at least if you're the kind of person who can find anything funny in either (a) Trump or (b) economics.  One the surface the hilarity is justified: stock market gains accrue to stock holders, not to the US Treasury, which is the issuer of the national debt.

And yet....we know that Donald Trump watches a lot of cable news TV, so all kinds of facts and ideas flow daily into the roiling nest of vipers inside his head. They then duly emerge in scrambled form in his stream-of-consciousness speeches.  But the facts are in there somewhere, with the result that, almost by accident, he's not always wrong.  Much of what he says about the NAFTA deal, for example, has some basis in fact.

With that in mind, can we piece together anything coherent about the national debt and the stock market?  Start with the proposition that the absolute size of the debt is not indicative of anything very much.  Consider Puerto Rico's debt, much in the news lately.  The widely-quoted figure of US$ 73 billion is an unbearable burden for the territory, but a debt of that size would be relatively trivial for the Federal government, or even for a richer state such as California.  It's the size of the debt in relation to the economy that really matters.

What this means is that if the economy is growing rapidly, the debt burden becomes less onerous over time.  This was well illustrated by the experience of Canada in the 1990s.  After two decades of  irresponsibility, the government finally started to get serious about its fiscal mess. However, although a degree of fiscal tightening was undertaken, what really allowed the debt burden to be brought down to size in well under a decade was a burst of growth in the economy, largely as a result of the loose monetary policy followed by the Greenspan Fed.  For now,  Canada's debt/GDP ratio is still the lowest among developed economies, though the Trudeau government seems determined to put an end to that.

OK, so a growing economy means that any given debt burden becomes less of a big deal over time.  Now, what about stock prices?  The value of any individual stock represents the market's assessment of the future income stream that will accrue to the stockholders, and the value of the entire stock market is investors' collective view of the outlook for corporate profits. 

It is reasonable to assume that profits will grow faster in a fast growing economy than in one that is growing slowly or in recession.  Thus we can suggest that if investors' views as reflected in current stock prices are accurate, the US economy can be expected to show steady growth in the foreseeable future -- which is, indeed, the most recent forecast from the IMF. So: rising US stock prices portend continuing growth for the US economy, and if that happens, the US national debt will shrink in relative importance, if not in actual size. 

That's almost certainly not the "in a sense" that Trump had in mind, and needless to say you can shoot all kinds of holes in it.  Heck, I can shoot holes in it myself, starting with the stock market's very checkered track record as a predictor of the real economy.  But there's the teensiest kernel of truth buried in what Trump said, even if he himself probably doesn't realize it.

Wednesday, 11 October 2017

Peak political correctness?

Either I have slept through the winter and this is April 1, or we have reached the apotheosis of political correctness.  Per this story in the Toronto Star, the Toronto District School Board (TDSB) is dropping the word "chief" from titles like Chief Financial Officer, out of respect for indigenous peoples.

To say that the rationale presented in the article is confusing would be putting it mildly. At one point an actual indigenous person at the TDSB (more about him later) says "The word has a lot of meaning to our people", evidently in a positive sense.  Later an academic who may or may not also be indigenous says the term "carries the weight of being forced to adopt an alien form of governance", which doesn't sound positive at all.

"Chief" is an ancient English word that the indigenous peoples had never used and didn't want, but it was forced on them by the settlers.  Now, rather than coming up with a different word that the indigenous people themselves can agree on (difficult, as there are so many indigenous languages), the English school board in Toronto is proposing to stop using this perfectly serviceable word to describe positions that have very little to do with indigenous people. Remarkably, it seems this process of re-titling has already taken several years, and there is still no indication of what the replacement term might be.     

Years ago I was involved in a major initiative with indigenous peoples and met a whole lot of chiefs, all of whom wore the title proudly.  (They told me that the term "Indian", though no longer much used, was not seen as insulting because until the white man showed up, the indigenous people did not really have a collective term for themselves).  The TDSB may be tying itself in knots for no-one's real benefit: as the TDSB's indigenous arts creator, Dr Duke Redbird, tells the Star, "we do not have a problem with their use of the word for what they want to describe in their own communities".

Oh, and about your own given name, Dr Redbird: Duke??  Cultural appropriation or what?*  A duke is a personage of great importance in many white cultures, so how about.....

* I'm joking.  Just wish the TDSB was joking too. 

Friday, 6 October 2017

Mixed signals

The Bank of Canada and private sector analysts agree that the rapid growth in the Canadian economy in the first half of this year will not persist through the latter half of the year, and a slower pace is expected to persist through 2018 and 2019.  On the surface, key economic data released this weak only partly support this outlook, with strong employment data offset by a weak international trade report.  However, on balance it remains likely that the Bank will leave rates unchanged when its Governing Council meets at month-end.

The headline employment number for September was unremarkable: an increase of 10,000 jobs, in line with the consensus expectation.  However, the numbers behind the headline were much more extreme: an increase of 112,000 in full time employment (one of the biggest monthly increases on record) offset by a decline of 102,000 in part-time employment.  If we take these numbers at face value, the job market was a lot stronger in the month than the headline number makes it appear.  However, such wide and offsetting swings inevitably revive questions about the reliability of the data.

A further quirk in the underlying numbers also raises eyebrows.  Supposedly there was an increase of 25,000 in the number of males over the age of 55 working, and most of the job gains were full-time. Yet it is also reported that employment for males in the 25-54 age group fell by 29,000 in the month, with all of these losses being part time jobs.  There is no obvious explanation for these wildly divergent trends between the two age cohorts, which adds to the difficulty of assessing the overall direction of the labour market.   

The international trade data (for the month of August) are much less ambiguous: they're simply bad.  Canada's deficit in good trade widened to C$3.4 billion in the month from $3.0 billion in July.  The deterioration was entirely due to weakness in exports, which fell by 1.9 percent in volume terms in the month. The export weakness was very broad-based, with shipments of everything from consumer good to chemicals declining in the month.  Export volumes have fallen in each of the past three months, the first time this has happened since 2011.  It is unlikely that the recent relative strength in the exchange rate has yet had an impact on the data, so the weakness in export volumes may well persist for the remainder of the year.

All in all this week's data, together with ongoing events, give the Bank of Canada little cause to tighten policy at its October 25 meeting.  One notable factor is an ongoing strike at a GM plant in Ingersoll, Ontario.  This is leading to layoffs among the plant's suppliers, and is also likely to have a negative impact on October export data.  News of the cancellation of the planned Energy East pipeline project, along with regular evidence that the NAFTA renegotiation process is not going smoothly, add to the signs that the economy is about to face much stiffer headwinds. It begins to look as though there will be no further rate hikes this year, and the pause in tightening may last well into 2018.   

Wednesday, 4 October 2017

Alt-right math

Canadian-born, New Hampshire resident writer Mark Steyn used to describe himself on his website as "the one-man global content provider".  For years, much of the content was entertainment related; Steyn watches a lot of movies, and knows way more about the Great American Songbook than is healthy for a man just entering middle age.

In recent years, however, Steyn's writing has taken a much more serious tone, and a very right-wing one. He is a ferocious climate change denier.  Currently he is embroiled in a lawsuit with Michael Mann, a professor at Penn State. Mann, unaccountably I'm sure, took offence when Steyn saw fit to drag a sex scandal involving the Penn State football team into one of his diatribes about Mann's work.

The main string to his bow, however, is rabid anti-Islamism.  Steyn believes that Europe's fate as an outpost of the caliphate is all but sealed.  It all gets very wearing, particularly given Steyn's tendency to play fast and loose with the facts.

This week, however, the appalling massacre in Las Vegas has driven Steyn over the edge. In this mind-boggling article , Steyn brings up three small terror attacks by Muslims in recent days, in Alberta, Marseille and Stockholm.  The total number of fatalities in these three events runs to less than ten, but in Steyn's mind, they are of far more significance than the 59 killed and 500-plus wounded by a white madman in Las Vegas. This sentence about the perp in Vegas is astonishingly callous: "An old dog taught himself a new trick, on a spectacular scale".  Trick?? Yeah, nothing to see here folks, just an ex-accountant going postal: happens every day -- which, sadly, it almost does.

If you get randomly targeted for extermination, you're not going to care if your killer is a white serial gambler or a "dimwit Mohammedan" (Steyn's phrase).  But what Steyn is saying is that if you're unfortunate enough to be in the line of fire of Stephen Paddock, you're just collateral damage in America's daily life: sorry about the Second Amendment, but that's just the way we do things around here.  If you get stabbed non-fatally in Edmonton, you're a part of history, a victim of a life-and-death interfaith struggle. It's a bizarre and immoral way of looking at the world. 

Friday, 29 September 2017

Bank of Canada will stand pat in October

When the Bank of Canada raised its rate target by 25 basis points in September, the second such increase in less than three months, it faced some criticism on the basis that it had failed to signal its intentions to the market.  This was somewhat unfair, since in fact the market was pricing in a better-than-evens chance of a rate hike by the time decision day rolled around.  It was the consensus among analysts that called it wrong. Still, given Governor Poloz's proclivity for crossing up the market in the early months of his tenure -- something he has since corrected -- there were some grounds for concern over the Bank's communications strategy.

A major speech by Gov. Poloz this week in St John's seems to have convinced both markets and analysts that there will be no further rate move when the Bank's Governing Council meets on October 25.  The speech is worth reading for the insights it provides into the concept of "data dependence" in decision making.  Data are always about the past, and the Bank needs to form policy based on where the economy is going rather than where it has just been.  Thus the Bank augments its use of formal economic models with soft data and judgment in order to reach a view on where monetary policy needs to be set.

This approach allowed the Bank to start toughening up its rhetoric earlier this year, once it perceived that the economy was on track to reach full capacity by year end.  When the GDP growth rate exceeded expectations in the first half of the year, the stage was set for the rate increases that were duly delivered in July and September.  However, as Gov. Poloz emphasized in St John's, the Bank is aware that both positive and negative shocks may lie in the future, so it is not predetermined that the path of interest rates will move steadily higher. 

Some of the recent economic data point to the need for caution on the Bank's part.  Most notably, real GDP stalled in July after eight months of steady gains.  Weakness in goods production, including manufacturing, may suggest that the recent strength in the exchange rate is beginning to have an impact, a possibility alluded to by Gov. Poloz in his speech. The Bank will also want to judge whether the recent sharp slowdown in the housing market, notably in the Toronto region, may be starting to affect consumer confidence and hence household spending.

Longer-term factors may also be turning more negative.  Gov. Poloz delicately referred to rising trade protectionism "in some parts of the world", but just a day before he spoke there was a sharp reminder of just which part of the world Canada needs to be concerned about.  The startling US judgment against Bombardier Inc.'s aircraft division, proposing a 220 percent tariff on the company's jets, seems to have been heavily influenced by the Trump administration: the complainant, Boeing, had sought a tariff of "only" 80 percent.

The Bombardier decision comes amid increasing signs that the NAFTA renegotiations are not going smoothly, with the US making demands that are either unreasonable (e.g. on Buy America rules) or vague (e.g. on domestic content rules for vehicles). It is quite likely that the talks will not conclude by year end, and very possible that a deal will not be reached at all, prompting Trump to pull the US out of the existing agreement.

All in all, plenty of reason for the Bank to take a cautious approach going forward, beginning with no move on October 25.