Bloat-TV

Sure, the holidays are a time for family, but they're also a fine time for binge-watching TV.  This year we've been watching a couple of spooky series that show just how much TV programming has changed over the decades.

We keep being told that we live in a golden age of television, blessed by offerings like Deadwood, Mad Men, The West Wing, Breaking Bad, and on and on.  In the last year or two a lot of well-received material has been originated by Netflix.  Just before Christmas, it dropped (with little fanfare) a sci-fi/fantasy series called The OA, co-written by and starring Brit Marling.  Without spoiling it for anyone who hasn't seen it yet, I can safely reveal that the principal focus is near-death experiences and the people who survive them.

Like the other series I've listed, The OA unspools at a measured pace, with eight episodes of varying lengths.  There's lots of flashing back and forward in time, a large cast of characters and plenty of unexpected twists and turns.  And, like so many other such series, it doesn't actually reach a conclusion: the ending is ambiguous to say the least, and sure enough, a quick Google search reveals that Ms Marling and her co-auteur, the marvellously named Zal Batmanglij, are hoping to secure funding for another series, or two, or even three!

What ever happened to telling a story economically?  The creators of Breaking Bad will freely admit that the story took on a life of its own: for example, the character of Jesse Pinkman was supposed to be written out at the end of the first series, but ended up as a mainstay of the entire six-year run. Marling and Batman say they have a complete story arc for The OA that can unfold over several seasons, but it's very likely that the tale will evolve in the writing.

You couldn't find a sharper contrast for this style of story-telling than The Twilight Zone, which is now available in a 25-disc complete set, and which found its way under our Christmas tree this year.  Each episode runs for less than 30 minutes, yet manages to create from scratch a coherent scenario in which the action takes place.  The stories don't always reach a clear conclusion -- indeed, that's often the point -- but each episode is entirely self-contained.  The show's creator, Rod Serling, gave himself absolutely no wiggle room -- at the conclusion of each week's show, he would briefly appears on screen to offer a teaser about the following week's entirely different episode.

I'm not suggesting that even Rod Serling, genius that he was, could have told a complex story like that of The OA in less than half-an-hour.  However, there are times, watching The OA or even much superior shows like Breaking Bad, when you wish the writers could have reined in their self-indulgence a bit and just got on with the story.  

Holiday potpourri (with added cauliflower)

Just a few brief thoughts before the Christmas break....

* Canada's headline CPI for November was reported yesterday.  The year-over-year rise of 1.2 percent was slightly lower than expected, something which StatsCan attributed to lower food prices.  Ah yes! At this time last year we were enduring the great cauliflower ripoff, with heads of the cruciferous staple selling for as much as ten bucks.  It was all the result of the drought in California, plus the enfeebled state of the Canadian dollar.  This year prices for cauliflower (and other imported produce) have come back down from the stratosphere, resulting in the lower-than-expected headline CPI.

* But of course, the Bank of Canada told us a few months ago that it was no longer going to focus on either headline or core CPI in assessing its inflation target, instead unveiling three oddly-named new indicators.  This month, for the first time, StatsCan has reported the values of those measures.  Two of them -- CPI-common and CPI-trim --are slightly higher than the headline figure.  The third -- CPI-median -- has been at or above the Bank's 2 percent inflation target for the past four months.  Two thoughts here: if the Bank is taking these measures seriously, then the comfortingly low headline CPI measure may not be the best guide to future policy; and, if these measures continue to diverge widely, it will become harder for markets and analysts to assess what the Bank might be about to do next.

* Canada's real GDP unexpectedly fell 0.3 percent in October, abruptly ending the rebound from the impact of the Fort McMurray wildfires.  The weakness was broad-based, but what will concern policymakers most is the sharp decline in the manufacturing sector, with exports of manufactures remaining particularly weak.  If Justin Trudeau is serious about going along with Donald Trump's demand for changes to the NAFTA agreement, Canada will not be negotiating from a position of strength.

* Last but not least, the housing market.  Prices for detached homes in Toronto have risen 27 percent in the last year, prompting the media to declare that the local market is now the "least affordable" in Canada.  That can't really be true, can it?  I mean, if homes were unaffordable, prices would be going down, not rocketing higher.  Evidently there are still plenty of buyers at these prices -- another news story earlier in the week talked of a two-day open house north of the city that attracted 400 viewings and 50 offers.  I understand what the reporters are trying to get at, but I don't think "unaffordable" is the right word.  "Preposterous" or "cruisin' for a bruisin'" might be better.

Best wishes for Christmas and the holiday season to everyone who's been kind enough to read this blog in 2016.  I can't imagine what I'll find to write about in 2017....

My economist can beat up your economist

Watching the UK economy from afar, it's striking how much people's take on what's going on is driven by how they voted in the referendum back in June.  The Remainers (or Bremoaners as the tabloid press has christened them) see economic disaster looming at every turn, while the Leavers are gloating that the most dire pre-referendum predictions have failed to materialize.

Some of the discussion has been truly bizarre.  The "Project Fear" campaign on the Remain side was clearly overdone, though not nearly as mendacious as the Leave side's promises, which have long since been reneged upon.  However, the willingness of Leave campaigners to declare, within days of the vote, that since the sky hadn't actually fallen, everything would be all right, was clearly premature.  It was always going to take some time for the impact of the vote to be felt; so, six months on, where do things stand?

The Guardian has been compiling a monthly report of key indicators, and the latest update can be found here.  As a strong voice on the Remain side, The Guardian chooses to interpret the data in a mildly negative way: the UK economy is "at a tipping point".  Maybe it is, but you'd be equally entitled to see the figures in a much more positive light. Wages and employment are rising, as are house prices and the FTSE.  The biggest negative that The Guardian can point to is the rise in inflation that has been triggered by the post-referendum fall in Sterling.  That could well crimp household spending power in 2017, arresting the expansion of the economy.

Official forecasts from the Office for Budgetary Responsibility concur that growth will slow last year, but no longer think that the economy will be forced into outright recession.  So what do we make of the opinion of Bank of England Governor Mark Carney, that the British economy is in the  midst of its first lost decade since the 1860s, or the Institute for Fiscal Studies' assertions that UK workers face their toughest squeeze on wages since WWII?  The truth is that both of these observations can largely be traced to developments in place well before the referendum, specifically the fiscal squeeze imposed by former PM David Cameron.  Cameron had already put the country through the wringer well before his disastrous and craven decision to hold the Brexit referendum.  History will not be kind.

In economics you can never test counterfactuals, so it will never be possible to know exactly what the impact of the Brexit vote was.  However, it seems reasonable to assert that the longer it takes to come up with some sort of trade deal with the EU, the worse things will be for the UK economy, and the longer the pain will last.  Markets hate uncertainty more than anything, and the Brexit vote, together with the chaotic follow-up by a totally unprepared UK government, has delivered that by the cartload. That lost decade could easily last a whole lot longer.

Sucking and blowing

Here's a surprise.  In its semi-annual Financial Stability Report, released today, the Bank of Canada identifies what it considers to be the most significant risk facing the financial system today: high household debt levels caused by soaring house prices.

So this is unlikely to help.  Just hours after the Bank released its report, the provincial government in British Columbia announced a program to provide interest-free loans to first time buyers who can't come up with a downpayment.  BC is going further than any other province in trying to micro-manage its housing market:  it's just a few months since the government slapped a special tax on foreign buyers, who are blamed for pushing up prices at the top end of the market in Vancouver.  But really, no Canadian government seems able to resist the temptation to mess with housing.  Ontario only recently announced it would increase its existing land transfer tax rebate for first time buyers, also with the stated aim of increasing affordability.  

It's entirely predictable that BC's latest brainwave, like the Ontario tax rebate, will push up overall prices at the lower end of the market, while helping relatively few people to acquire their first home.  And all the while, Governor Poloz and his colleagues at the Bank of Canada must be biting their nails to the quick, as politicians pump the market, and the associated risks,  ever higher.  

Fed up, but no move expected in Canada

As expected, the FOMC today raised its target for the Fed funds rate by 0.25 percent, bringing it to 0.75 percent.  The accompanying statement describes the rate as still "accommodative", which in historical terms it surely is.  The Fed expects to continue to tighten its policy settings in the year ahead, but the statement makes it very clear that the pace of tightening will be entirely data-dependent.  In particular, the FOMC appears likely to focus on the inflation rate, which remains well below its preferred level of 2 percent, despite rising economic activity and a tightening labour market.  Barring a sudden and unexpected uptick in inflation, 2017 seems likely to see rates rising by no more than 25 basis points per quarter.

Meanwhile, back in Ottawa....there is zero possibility that the Bank of Canada will follow the Fed's lead any time soon, despite a gently-rising chorus of voices suggesting it should.  As noted here last week, former Bank of Canada Governor David dodge believes that all central banks should follow the Fed is moving rates in a predictable fashion back to more historically normal levels.  That suggestion, well-argued as it was, seems to have fallen entirely on deaf ears.

Now a former StatsCan economist, Philip Cross, has weighed in on the same subject.  He argues that the need for low rates in Canada largely disappeared in about 2009, when it became clear that Canadian banks were well-capitalized and well-run enough to weather the financial crisis.  What the Bank of Canada is doing right now, he argues, is like "using antibiotics for the common cold".

It's certainly true that there are risks from keeping the low rate environment in place for so long -- it produces distortions in asset markets and leaves few options in the event of another real crisis.  However, Cross's apparent assumption that the only reason for cutting rates was to keep the banks solvent is an oversimplification.  That may have been the initial reason, but even once the stability of the banks was assured, there was still a need to protect the economy from the worst impacts of the crisis as it played out elsewhere, and low rates surely had a role to play in that regard.  It scarcely bears thinking how the Canadian economy would have performed in an environment of rising domestic rates and a strengthening exchange rate.    

That said, there are few signs that the Bank of Canada's "lower for longer" rate policy is working any more.  Low rates were supposed to weaken the dollar -- which they did, at least for a time -- and the weak dollar in turn was supposed to facilitate a "rotation" in the economy, away from dependence on resource extraction.  The sluggish performance of non-oil exports shows that isn't working as planned.

In fact, low rates aren't even providing a boost to activity in interest-sensitive sectors of the economy, such as housing.  This piece from Bloomberg points out that although housing prices in Vancouver and Toronto have been soaring in the low interest rate environment, new homebuilding has been largely stagnant.  Bloomberg seems to want to attribute that to a shortage of appropriately zoned land, and there may be some truth to that in the case of Vancouver.  Overall, however, it is equally plausible to suggest that developers are benefiting from the shortage of property -- the value of each condo they build rises sharply even while the cranes are still on-site -- and so have little incentive to alleviate that shortage by putting up more homes.

Bank of Canada Governor Stephen Poloz knows all of this, which is why he has been an enthusiastic supporter of the Trudeau government's plans for fiscal stimulus.  However, even if monetary policy is largely played-out as a way of boosting domestic growth, the Bank is in no rush to find out what might happen once it embarks on its own course of tightening.

Canada: the non-trading free trader

The Trudeau Government may seem like a lonely advocate for free trade in a world of rapidly closing borders, but here's an odd thing: the importance of trade to Canada's economy has been steadily shrinking in recent decades, despite the Canada-US free trade agreement and NAFTA.  This story from Bloomberg calls Canada "a trading nation that's forgotten how to trade".

In brief,  Canada's goods exports now stand at 31 percent of GDP, down a stunning 14 percentage points since the beginning of the century.  Canada's export growth is the second lowest within the G-20.  Imports are also declining in relative importance, dropping to 34 percent of GDP currently from 38 percent in the year 2000.  This would be a recipe for a full-blown crisis but for the fact that service exports have been increasing strongly in recent years.

The decline in goods exports can in part be blamed on the commodity price boom in the early part of this century, which pushed the exchange rate to a level at which manufactured good exports simply became uncompetitive in foreign markets.  Most experts, including, it appears, the Bank of Canada and the Government, assumed that non-resource exports would bounce back once the currency retreated.  That simply hasn't happened in the past few years, so there must be something else going on, something structural.

Has Canada simply "forgotten how to trade", as the Bloomberg article suggests?  There may be something to that, but it can also be argued that aside from the resource sector, Canadians never really did know how to trade.  Canada's manufacturing exports have always been dominated by branch plants owned by big US companies, including the Big Three automakers and metal-bashing companies like John Deere, rather than by fully Canadian-owned and -managed companies.

Before the Canada-US free trade agreement came along, the so-called "Auto Pact" required the Big Three to maintain a certain level of production in Canada in order to gain tariff-free access to the Canadian market for their US-built product.  The Auto Pact protections disappeared when the free trade deal was made, and the industry's longer-term fate was sealed when the tripartite NAFTA arrangement came along in 1994.  The level of "Canadian" exports always depended largely on decisions made in Detroit;  since NAFTA, those decisions have increasingly favoured investment in Mexico or "right to work" US states rather than in Canada.

The surprise here is that it has taken so long for Canadian policymakers to cotton to the fact that the manufacturing jobs that have been lost are not going to come back just because the exchange rate has weakened. Bloomberg suggests that former Bank of Canada Governor Mark Carney was particularly culpable in this regard, despite warnings from the OECD and elsewhere.  Carney's successor, Stephen Poloz, finally seems to be acknowledging that parts of the export sector are irretrievably lost, which explains his support for more aggressive fiscal policy in an effort to get the economy moving again.  The fact that the Trudeau Government is adopting a much more expansionary fiscal stance suggests that, for all its free trade rhetoric, it too understands that exports are unlikely to provide the growth and employment that they once did.

David Dodge's growth plan

Something that's been evident since the great global experiment with ultra-loose monetary policy began almost a decade ago is that no-one at the major central banks has any clear plan for getting policy back to "normal".  It might have been easy to do so if low rates and QE had quickly restored growth to pre-crisis levels, but of course that didn't happen.  We now have a world of low interest rates, low inflation (apart from asset prices) and stagnant growth, and central banks have little or no ammunition available in the event of another crisis.

Enter, with an important speech last week to the CD Howe Institute in Canada, former Bank of Canada Governor David Dodge.  The media have focused mainly on his call for the Fed, and if possible other central banks, to abandon their current data-driven policy approach, in favour of a pre-announced schedule of rate hikes, designed to bring rates back to a more normal level.  This would certainly create room for easing the next time things head south, but Dodge's rationale is a lot more subtle and complex than that.

Dodge characterizes the macro policy paradigm that served the global economy well from the early 1980s until the onset of the financial crisis as "leaning against the wind".  Monetary policy, and to a lesser extent fiscal policy, were aimed at keeping economies on a path of steady growth and stable inflation.  However, in the past few years, that paradigm has proved ineffective:

"In large part, changing demographics, slower technological progress, and inadequate structural policies have contributed to lower potential growth. In addition, deleveraging by households and banks in the wake of the financial crisis, the structural debt crisis in the eurozone, and the slowdown of trend growth in China are factors that hampered global growth. In addition to lower potential growth, the “natural rate” of interest is lower today than it was in the decade that ended in 2007."

Dodge's explanation for the lower "natural rate" of interest is heavily driven by demographics. An aging population naturally starts to save more, thereby increasing the supply of investible funds. At the same time, that shift from consumption to saving serves to reduce profitable investment opportunities within the economy, driving down the demand for funds. The real "natural rate" of interest may now be 1 percent or even lower, as against 3 percent two decades ago.

One of Dodge's key arguments is that low interest rates, and especially the expectation that they will stay "lower for longer", are now in and of themselves holding back growth, in  a variety of ways.  Low rates work in part by "pulling forward" investment and consumption plans -- borrow while you can afford it -- but if, as is now the case, those low rates are expected to persist indefinitely, that incentive is reduced. Moreover, an aging population sees low rates as a clear signal to save more for retirement.  A low rate, flat yield curve environment makes it difficult for banks to make profitable long-term loans, because mismatching (using short-term deposits to fund longer-term assets) is no longer effective.

To this one could add (though Dodge does not) the demonstration effect of central bank policies themselves. If central banks are constantly signalling their lack of confidence by extending their ultra-loose policy settings, why should consumers or businesses feel confident enough to spend and invest?

Dodge's solution to this dilemma is to throw out the paradigm.  On the monetary policy side, get away from the current data-driven approach and announce a schedule for future rate hikes to get the Fed funds rate up to 1.5-2.0 percent.  To offset the negative impact of such a strategy on economic growth, fiscal policy should be loosened, with a focus on public sector investments designed to boost the longer-term growth potential of the economy.  (Dodge duly notes that this is the approach that the Canadian Federal Government seems to be taking).

It would, of course, be foolhardy for the US to undertake such a course, particularly on the monetary policy side, on its own.  Higher US interest rates, without corresponding moves elsewhere, would inevitably serve to strengthen the US dollar, which would crimp US exports and also pose potentially severe problems for emerging economies.  This is probably the major flaw in Dodge's plan: it all makes good sense, but in a world where governments don't trust one another and central banks prize their independence above all else, how can you ever expect to make it happen?  

In point of fact, something along the lines that Dodge is bravely advocating here may be about to unfold in the US anyway.  Nobody seems to doubt that the Fed will raise rates this month and will continue to tighten through 2017.  On the fiscal side, Republicans always run bigger deficits than Democrats, whatever their campaign rhetoric may have been, and Donald Trump's infrastructure renewal plan seems to be one of the few things that all sides are willing to support.  What's lacking here is any kind of international co-operation, which is something that Trump seems to go out of his way to alienate.  How will a rebalancing of US policies work when most of the rest of the world is sticking to the old paradigm?  We may be going to find out.  

It's all good, on the surface

Canada's economy added 10,800 jobs in November, pushing the unemployment rate down to 6.8 percent.  That's a good thing, right? Well, not exactly.  I've noted here many times that Canada's labour force survey is so volatile as to be almost incomprehensible, but in this case the details point very clearly to one conclusion: the job market is not as healthy as it seems on the surface.

For one thing, all of the new jobs were part-time in nature, as indeed they have been for the past year and more.  For another, the fall in the unemployment rate was almost entirely the result of workers leaving the labour force altogether, which usually means people are giving up looking for work because they have little expectation of finding any.  Then again -- and this is where the unfathomable volatility of this series is so frustrating -- labour force participation had seemed to be improving in recent months, so the decline in November may just be an anomaly, rather than a new, unfavourable trend.

The employment numbers were the second release from StatsCan this week that may not have been quite as good as they first appeared.  On Wednesday the agency reported that GDP grew at a 3.5 percent annualized rate in Q3, way ahead of the analysts' consensus.  Moreover, the wildfire-driven decline in Q2 GDP, originally reported at an annualized 1.6 percent, was revised to 1.3 percent.  The principal driving factor, no surprise here, was a 6.1 percent rebound in energy exports, as the area around Fort McMurray returned to normal activity levels.

What's next?  Probably not more of the same.  Although GDP grew 0.3 percent in September, setting up a strong base for Q4 growth, the improvement in the month was yet again largely down to the energy sector.  Stripping that out, real GDP only rose by 0.1 percent in the month, suggesting yet again that the Bank of Canada's and the government's hopes of seeing the economy rebalance away from its dependence on resource extraction continue to be unfulfilled.

In fact, events may be starting to conspire against that rebalancing happening at all.  This week's OPEC production cut, if it holds (a huge "if") will give a boost to Canada's oil patch.  Just the prospect of that happening has pushed the Canadian dollar back above 75 cents (US), eroding the exchange rate competitiveness that is supposed to give sectors like manufacturing a boost.

And then, of course, there's the Trump factor. The President-elect's condemnation of the NAFTA trade agreement has been mainly aimed at Mexico, but Canada is also a signatory to that deal. There's no realistic possibility that any revision of that deal, assuming that Trump doesn't just cancel it outright, will work in Canada's favour.  In the absence of NAFTA, the US will still be willing to accept Canadian energy exports, albeit in declining amounts as US production continues to ramp up.  For other sectors, however, especially manufacturing, the prospect of a post-NAFTA world is truly worrying.  Bank of Canada Governor Stephen Poloz says it's too soon to tell what the Trump impact on Canada will be.  Maybe so, but it's not too soon to fret about it.  

It's not about the pipelines

Justin Trudeau's government delivered its long-awaited verdict on three pending pipeline projects yesterday, approving two (Trans Mountain and Line Three) and nixing one (Northern Gateway). Right on cue, protesters immediately took to the streets, in Vancouver and elsewhere, to protest the government's temerity in approving any pipeline construction at all.

I don't suppose Trudeau and his colleagues need me to tell them this, but here goes anyway: for environmentalists, opposition to these projects (or to the much bigger Keystone XL pipeline, which may be revived under a Trump presidency) is not about the pipelines.  The environmentalists want to see fossil fuel use phased out as quickly as possible, so they are opposed to anything that allows fossil fuels to be brought to market.  There is no compromise possible here.  If God were to come down from heaven and declare that the Trans Mountain pipeline would never leak, the environmentalists would still oppose it.  They want the fossil fuels to stay in the ground.

The fact that many indigenous communities are also opposed to pipelines -- in the ongoing Standing Rock confrontation, or in the areas in northern British Columbia that have successfully seen off the Northern Gateway project -- is a blessing for the environmentalists.  It allows them to cloak their opposition with a higher cause: native rights.  Truth to tell, however, if the Standing Rock community did a U-turn and decided to support the pipeline, the environmentalists would abandon them in a trice and find another basis for their opposition.  They just want the fossil fuels to stay in the ground.

What about those indigenous groups and their own objections to these projects?  Some of the fears over the potential for polluting vital watercourses are undoubtedly justified, but there's more to it than that.  These communities would be no happier if the proposed project was a railway across their territory, or an airport*.  Once again, it's not really about the pipelines.

I'm probably giving the impression here that I'm all gung-ho to build pipelines hither and yon, and damn the ecology.  Far from it: as the leader of Canada's Green Party, Elizabeth May, has pointed out, with world fossil fuel consumption seemingly having peaked, with fossil fuel supplies abundant, and with the cost of renewable energy falling fast, the economic case for any of these pipelines is far from being established.  Any or all of them may turn out to be a white elephant from day one.

The truth is that "debate" and "compromise" are no longer terms that have any relevance when it comes to pipeline projects, because one side has its mind firmly made up.  That being the case, Trudeau's announcement yesterday just sets the stage for endless rancorous legal debates in the months and years to come -- and by the time any of the projects is approved, let alone built, the economic rationale will very likely have dwindled even further.  

* Or, as The Donald may be about to discover, a wall.  There's a 70-mile stretch of the US-Mexico border that's part of a historic, treaty-protected indigenous homeland.  The people there are determined not to allow Trump or anyone else to put a wall across their land, and the courts will very likely support them.

"Pastcasting"?

We need a new word for something that I did for much of my career as a business economist.  A big part of the job is to try to estimate what key economic numbers will be before they're actually released by the statistical agencies.  This may sound pretty futile to the non-specialist -- why not wait until the real number comes out, and then you'll know for sure? -- but in fact it's one of the key ways an economist can contribute to the bottom line, especially in a dealing room.

How is that possible?  Well, markets don't just react to economic data in a vacuum.  Traders try to set themselves up ahead of time, in order to profit from the data if they've figured it out correctly.  This means that the market doesn't react to the data per se -- it reacts to how the data differs from the market consensus.  A business economist who can estimate the data releases better than his or her peers will therefore set the traders up to make more money than the competition.

You may have noticed that I have been trying hard not to use the word "forecasting" for this function -- because it's not, is it?  You'll regularly read things in the business press like "economists forecast that GDP grew 1.2 percent in the third quarter of the year; official data will be released today", even though the quarter for which they're "forecasting" ended two months earlier.  There's an old saying that "forecasting is difficult, especially when it's about the future"; the customary inaccuracy of the "analysts' consensus" for economic releases often suggests that "forecasting" the past isn't much easier.

What brought on this mini-rant was this story from the Toronto Star today.  It appears that the OECD is going out on a limb and "forecasting" that the Canadian economy "will" grow by 1.2 percent -- THIS YEAR!  By my count there are 33 days left in the year, so for the most part, whatever is going to happen has already happened.  It's not exactly brave, and it's not going to cause anyone to change their behaviour.

So, as I said, we need a new word for this vital but slightly bizarre activity -- but "pastcasting" probably isn't it.

Was this what you voted for?

The UK economy has held up surprisingly well since the Brexit referendum back in June, leading many of the pro-Leave side to start crowing "I told you so".  But wait....

Chancellor of the Exchequer Phillip Hammond, unveiling his Autumn Statement (i.e. mini-budget) this week, revealed that economic weakness and uncertainty caused by the Brexit vote will boost government borrowing by more than 120 billion pounds in the years ahead.  Plans to eliminate the budget deficit -- which previous Chancellor George Osborne originally promised to have got rid of by now -- have gone by the wayside.

Now the Institute for Fiscal Studies is warning that the squeeze on real wages triggered by Brexit will be the worst the UK has seen since the aftermath of World War II.  A lot of the older folks who voted Leave seemed to be hankering after an idealized vision of what Britain was like in their youth.  Looks like they're going to get it.  It may not be quite as idyllic as they remember it.

Donald Trump, theatre critic

US commentators are amused and slightly alarmed that President-elect Trump is wasting his time and his self-imposed Twitter ration on going after the cast of the Broadway musical Hamilton, for supposedly harassing Veep-elect Mike Pence.  See this piece from Slate, for example.

Should anyone really be surprised by Trump's behaviour here?  I'd say not.  In the first place, the man is remarkably thin-skinned, a trait which is unlikely to do him any favours once he actually assumes office.  More importantly, though, I suspect Trump is setting a precedent for how he will behave in the White House.  

It's difficult to imagine a less Trump-friendly crowd than the people attending a hip-hop musical on Broadway: aside from Mike Pence and his party, you could probably count the number of GOP voters in the house on Friday night on the fingers of one hand.  Criticizing people like this plays really well with Trump's electoral base, and he's not about to stop.  The more he can portray his opponents as sore losers, the easier it will be for him to blame them when the wheels start coming off his administration -- which, given the Cabinet of Deplorables he seems to be putting together, may not take long. 

The precedent here, as it has been for much of the US election cycle, is the Brexit vote.  Leave campaigners have wasted no time in rounding on the Remain voters,  or on anyone they deem insufficiently keen to leave the EU:  Bank of England Governor Mark Carney, for example.  The tabloid press has demanded that the "Bremoaners" shut up, and one Tory MP has even suggested that opposing Brexit should be a treasonable offence.  This all sets things up for a nasty bout of finger-pointing (or worse) when the UK economy starts to feel the negative impact of the Brexit vote, as it inevitably will.  

Populists always have to smear their foes at every turn in order to keep their supporters riled up.  For Donald Trump, the Hamilton cast is a convenient early target.  It surely won't be the last. 

Uncomfortably dumb

The Provincial government in Ontario, under the leadership of Kathleen Wynne, is wildly unpopular.  Ms Wynne's personal approval rating is below 20 percent, badly trailing the leaders of the two main opposition parties -- who are not exactly well-liked themselves.  So, with a provincial election now less than two years away, the Liberals are starting to come up with cockamamie schemes to try to win back support.

One of the main reasons for the government's unpopularity is the soaring cost of electricity, which is, now more expensive here than anywhere else in North America.  The price increases are largely the result of the ill-considered "green" measures instituted by Ms Wynne's predecessor, Dalton McGuinty.  He mandated the immediate closure of coal-fired power generation and shoveled vast sums into unreliable wind power, which people in rural areas like mine have been trying to fend off ever since. Ontario routinely sells surplus power below cost to neighbouring jurisdictions.

What to do?  A few months ago, Ms Wynne announced that the Province would remove the provincial portion of the so-called harmonized sales tax (HST) from household electrical bills.  That was good for a few upbeat headlines, but it didn't take long for people to realize that the pennies-per-day benefit of this cut would be immediately outweighed by fresh "green" levies that have already been approved.  Despite the tax cut, Ontarians will be paying more, not less, for power in 2017.  

Today, Wynne's Finance Minister, Charles Sousa, tabled his fall Economic Statement.  A couple of weeks ago, Sousa trailed the idea that housing in Toronto was becoming unaffordable for first time buyers, and hinted that he was going to try to do something about that.  Today we find that the "something" is a doubling, to $4000, of the existing rebate on the land transfer tax paid by first time buyers, to be financed (allegedly) by a higher tax rate on more expensive homes.

Politicians never learn, do they?  The most certain consequence of a tax break like this is that the asking price for starter homes in the Toronto area will rise by $2000 almost overnight.  That's bad enough, but consider this: a few weeks ago, Federal Finance Minister Bill Morneau announced a tightening of mortgage rules mainly aimed at first-time buyers, with the aim of curbing the unsustainable rise in house prices.  And today we see Sousa, whose jurisdiction includes the frothiest market of them all, Toronto, introducing a measure that will have precisely the opposite effect.  Brilliant!

All Keynesians now

The title phrase goes all the way back to the Nixon years, but it seems even more apt now.  Looking for some consolation in the wake of Donald Trump's electoral victory?  This may be it.

Go back just one year, and there only seemed to be one lonely advocate for stimulative fiscal policy in the world: newly-elected Canadian PM Justin Trudeau.  He latched on to the idea of fiscal stimulus about half way through the endless election campaign, and reportedly told his wife, "I think I just won us the election".  So it proved, and in the succeeding months he and his government have dramatically scaled up the infrastructure spending plans that got them elected.

Over in the UK, the Cameron government had been preaching austerity, and to some extent delivering it, ever since it was first elected.  During the Brexit referendum campaign, Chancellor of the Exchequer George Osborne was rash enough to threaten a "punishment" budget of even more spending cuts if the Leave side were victorious.  After the vote, Cameron and Osborne exited the stage as if pursued by a bear, and the fiscal outlook changed abruptly. New Chancellor Philip Hammond, recognizing the potential for damage to the economy during the two years and more before Brexit actually happens, has pledged to keep the spending taps open, delaying sine die any return to fiscal balance.

And then there's Donald Trump.  Much of his economic platform is downright scary, given his focus on trade deals that he perceives as unfair to America.  However, he has also pledged to start a multi-billion dollar spending program to rebuild the country's aging infrastructure.  Since this is something that Democrats will find easy to support, it's very likely to be one of the first thing that Trump does when he assumes office on January 20.  Trump may be a Republican in name only, but he seems sure to follow in a time-honoured tradition of GOP Presidents -- rail against the fiscal irresponsibility of Democrats while campaigning, then spend at a dizzying rate once in office.

I've argued numerous times in this blog that the policy mix governments have used since the financial crisis has been wrong: too much monetary ease, not enough fiscal stimulus.  With the Fed likely to raise rates in December and several more times after that, we may be about to find out if I was right.

Misunderestimated

I guess we should have seen that coming, because Donald Trump certainly did.  The Brexit vote in the UK back in June showed how easily a shameless populist could capitalize on the ill-defined anger* that seems to permeate most "advanced" societies these days.  Trump regularly boasted that he would achieve a "Brexit plus" on election day, and so it has proved.

George W. Bush's accidental coinage about himself, "misunderestimated", provides a useful basis for analyzing what happened yesterday.  It's clear that the leadership of the Democratic Party misunderestimated the challenges of the campaign in both a tactical and strategic sense.

Tactically, the Dems woefully misjudged Trump's persistence and his appeal.  That didn't start with them, of course.  Back during the primary season, Trump's rivals for his own party's nomination assumed he would flame out or lose interest.  Instead of taking him on directly, they attacked each other, and all in their turn fell by the wayside, leaving Trump with no real opponent for the nomination.

Once the general election started, the Democrats made a similar error, largely relying on Trump's own endless gaffes to defeat him, rather than forcing him to concentrate on the issues, on which he was (and is) conspicuously weak.  Hillary Clinton's policy positions were much more detailed and well-articulated than Trump's, but the Democrats were never able to make that count.  Trump, like a certain other right-wing demagogue back in the 1930s, just kept playing the same tune to his captive audience over and over again, and it worked.

Strategically, the Democrats misunderestimated the sheer anger felt throughout the electorate.  The feeling that Washington is a corrupt and incestuous cesspool, completely out of touch with the problems facing Americans in their day-to-day lives, is all-pervading.  This election turned out to be about change, yet the Democrats offered up a nominee who stood foursquare for more of the same.  Donald Trump never had to spell out in any great detail what changes he would make if elected: the simple fact that he was not Hillary Clinton was enough for many of his supporters.

This raises the question: if the Democrats had offered up a "change" candidate of their own, would the result have been any different?  Maybe, but it's unlikely that the change candidate in the Democratic primaries -- Bernie Sanders -- would have done very well.  While CNN was waiting for the results to start coming in last evening, it displayed the results of a number of exit polls it had conducted during the day.  One of these asked respondents what direction of change they would like to see under the incoming President; only 15 percent wanted a "more liberal" shift; a far higher percentage wanted a more conservative government.  This would not have translated into support for Bernie Sanders.

So, what's next?  Trump is already 70 years old, and although he appears to be in robust health (and is abstemious in his habits), he is bound to run out of energy sooner rather than later.  Moreover, although he will enter office with GOP majorities in both the House and the Senate, the next set of mid-term elections, in November 2018, see the entire House up for grabs again.  Realistically, Trump will have no more than a year to make his mark before the electoral machine starts cranking up again.  That is, of course, plenty of time for him to do some real damage.  However, perhaps the greater concern is that he will not have either the ideas or the time to deliver the kind of change that his electoral "base" is seeking.  In that case, the anger that has made this election such an unseemly spectacle at times will be redoubled.  

* Ill defined, but by no means inexplicable.  Living standards across Europe have been stagnant or going backwards since the financial crisis, and most analyses show that the average US worker is no better off in real terms than they were in the 1970s.  Add in the astounding rise in income inequality, and it's no surprise that people are angry. 

Ignore the headline!

Another month, another confusing employment report from Statistics Canada.

The agency reported today  that the economy added 44,000 jobs in October, far higher than the 15,000 consensus expectation.  But......

• All of the jobs added in the month were part-time -- in fact, part-time employment rose more than 67,000 in the month, offset by a 23,000 decline in full-time jobs. 

• The preponderance of part-time jobs in October reflects a longer term pattern: over the past year, the economy has added 124,000 part-time jobs, but only 15,500 full-time.  

• Half of October's new jobs (24,000) were in the construction sector; as the colder months set in, it is unlikely that this sector will remain a source of strength.

• Manufacturing continues to struggle, losing 7500 jobs in the month, which brings the loss over the past year to more than 25,000. 

• Fully 40,000 of the jobs created in October were in Ontario and British Columbia;  the remaining Provinces saw almost no change in employment in the month.

• Despite the rise in the headline employment number, the unemployment rate was unchanged at 7.0 percent. However, to the extent that this reflects an increase in the participation rate, it can be interpreted as a sign of improving worker sentiment. 

Take from all this what you will!  The headline number provides a wholly misleading impression, given the loss of full-time jobs and the uneven geographic distribution of new positions.  The most plausible interpretation of the data is that after the post-fire bounceback during Q3, the economy has continued to expand gradually in the final quarter of the year.  There's nothing here to change Bank of Canada policy.

Deficits stretching all the way to the horizon

Whatever you may think of the specifics of Canadian Finance Minister Bill Morneau's fall fiscal update, tabled yesterday, you can't deny that he's playing a long game.  The key measures Morneau is proposing, especially as regards infrastructure financing, will only be truly effective (or not) over a term far exceeding the life of the current Parliament.  And given the size of the deficits Morneau expects to run in the short term, any course correction after the next election is likely to be very painful.

Let's start with those deficits.  Morneau is now projecting a shortfall of C$25.1 billion for this year.  That is, to put it mildly, a pretty stunning change from last year's $1 billion shortfall.   Although last March's budget initially projected a $29.4 billion deficit this year, that number included a $6 billion "contingency" amount, which has now been eliminated.  This means that the underlying deficit is actually $1.7 billion higher than was foreseen eight months ago.

Looking forward, Morneau expects the deficit to rise to almost $28 billion next year, then fall gradually, reaching $14.6 billion in 2021 -- which is, of course, well into the life of the next Parliament.  There is no timetable for a return to a balanced budget.  What's more, these numbers include no contingency or cushion whatsoever.  In other words, in this fall statement, which is not even a full budget, Morneau has tossed away two of the tools that served Paul Martin well when he was struggling with an even larger deficit problems two decades ago: the contingency provision (which regularly allowed Martin to bring in deficits below original forecasts) and the focus on a two-year planning horizon.  This looks ominous.

As for the infrastructure plans, the proposed sums are huge.  Ottawa is proposing to spend up to $186 billion on transportation, water, green initiatives and the rest over an 11-year timeframe -- that's more than two Parliaments' worth. This is a 50 percent increase over the amount proposed just eight months ago.  Much of the money will go into joint investments with Provinces and municipalities in the usual way -- and cities like Toronto already have their noses in the trough -- but the really interesting part of Morneau's plan is the so-called Canada Infrastructure Bank.

This bank, which will not be set up until early 2017,  will be partly capitalized by the Federal government, to the tune of somewhere between $15 and $35 billion, with the exact amount determined by how successful the bank is in persuading the private sector to co-invest.  Will this work?

It's certainly true that big pension funds, including the major global sovereign wealth funds and Canadian players like Quebec's Caisse de depots or Ontario's teachers' retirement funds, have increasingly been looking to invest in infrastructure as an alternative to equities and bonds.  However, these investors in general show little appetite for what bankers call "completion risk", which is an inevitable element of getting new infrastructure built.  Investors have generally preferred to let the public sector take that risk, and then step in to buy once the project is up and running.  Ontario had a disastrous experience with this with the 407-ETR toll highway north of Toronto, which the provincial government of the day built and then virtually gave away to private investors.  Similarly, private investment in the UK-France Channel Tunnel only materialized when the tunnel was open and operating.

Morneau is gambling that his Canada Investment Bank will be able to change that pattern, attracting institutional investors to become involved at the outset.  If he's right, the government will be able to leverage its own funds to produce far more infrastructure spending than the public purse could finance on its own. If he's wrong, however, the expected boost to GDP from infrastructure investment will be much lower than the Government has been counting on.  It's a worthwhile experiment -- heaven knows, there are not many alternatives available -- but it's by no means guaranteed to work, and it's certainly not going to help much in the immediate future.    

"Outsized"??

The big event for the Canadian economy today will be Finance Minister Bill Morneau's fall fiscal update, in which he is widely expected to put more flesh on the bones of the government's infrastructure plans.  He will probably also admit that the budget deficit is likely to be higher than previously forecast because the economy is growing so slowly.  More on this tomorrow.

Speaking of growth, however, today saw the release of August GDP data.  The economy grew 0.2 percent in the month, but July's growth was revised down to 0.4 percent from the 0.5 percent first reported.  You can see the details here, but think about this:  a "rebound" on this scale, after the dismal (albeit wildfire-related) numbers posted back in the spring has analysts dipping into the thesaurus and coming up with the adjective "outsized".  It's a sign of how accustomed we have become, in the years since the financial crisis, to seeing the economy perpetually teetering on the brink of recession.

Can Bill Morneau do anything about that?  We'll find out later today.  

Carney will stay on for one more year

After a lengthy meeting with Prime Minister Theresa May, Bank of England Governor Mark Carney has announced he will stay on as Bank of England Governor until June 2019.  This will mean he serves six years in the job, as opposed to the customary eight.  However, since he arranged an opt-out clause at the five-year point as a condition of taking the job, it represents a compromise of sorts.

Assuming TM-the-PM follows through on her intention of triggering the formal 2-year Brexit negotiations in March 2017, today's announcement means Carney will be in charge at the Bank at the time the UK actually leaves the EU.  Indeed, 2019 looks like a very interesting year for the UK all around, with Brexit, then a new Bank of England Governor to bed in, and then a general election, unless May sees an opportunity to call an earlier vote.

You wouldn't have blamed Carney if he'd cut and run: he has been under attack from all sides in recent weeks. William (Lord) Hague criticized him for keeping interest rates too low, inadvertently making it very clear why he (Hague) never served in a major economic portfolio -- higher rates would be an absolute disaster for the UK right now.  Michael Gove, one of the unsuccessful bidders for the job now held by May, wrote a diatribe in which he again accused Carney of being an "expert", which now seems to have a wholly pejorative meaning in Gove's lexicon.

And then there's Jacob Rees-Mogg, one of the more unhinged Brexiteers, who has been fiercely critical of Carney because the Governor dared to suggest that the Brexit vote might have consequences that the Bank might prudently need to prepare for.  There were rumours over the past week that if Carney were to hightail it back to Ottawa, Rees-Mogg might get the job, an appointment that would surely have set Sterling on a course towards parity with the Venezuelan bolivar.

Despite May's profession of confidence in Carney today, it's unlikely that any of these dolts will suspend their criticism of him for very long.  It's brave of him to stay, and it's frankly more than Ms May and her team deserve.  

Canada renews inflation target, with a new wrinkle or three

The Bank of Canada has been using an inflation target of 2 percent as its main monetary policy guidepost since 1991. The Bank and the Government review the target every five years and tweak it as appropriate.  Today the Bank announced that the target is to be renewed for a further five years, but with some quite significant changes in the way the inflation level is assessed.

The inflation target notionally focuses on headline CPI, but because of the volatility in that series, the Bank has mostly focused on a "core" measure known as CPIX, which omits items such as gasoline, fruits and vegetables and mortgage interest. However, the Bank has found that CPIX is no longer giving a reliable reading of underlying price trends.  In part this is happening because of administered price changes that have nothing to do with underlying price or cost pressures.  The soaring cost of electricity in Ontario as a result of the Provincial government's aggressive "green" strategy is an obvious example; the cumulative impact of the planned carbon levy in the next few years may well be another.

In the opposite direction, prices for some products behave counter-cyclically, falling when the economy is weakening.  The Bank cites new car prices as an example here. Such price movements do not accurately reflect capacity constraints in the economy, which are one of the key factors the Bank is looking to focus on as it attempts to set monetary policy.

Going forward, the Bank will now look at three new measures of underlying inflation, known as CPI-trim, CPI-median and CPI-common.  These measures, fully described in the technical paper linked above, all attempt to give a more accurate read on inflationary pressures than either CPI or CPIX is capable of doing.

It's tempting at first blush to think that the Bank of Canada is going down the road once taken by Alan Greenspan at the Fed.  The "maestro" was forever searching for new inflation measures to support his gut feel that price pressures were low.  After a brief dalliance with the employment cost index (ECI), he eventually settled on the entirely unmemorable core personal consumption expenditure deflator.  

However, that's not what the Bank of Canada is up to here.  With inflationary pressures as low as they are in Canada right now, there's no need for the Bank to put up any kind of smokescreen.  The purpose of adopting the new measures is exactly as stated: to give the Bank a better read of what's going on.  That said, the proliferation of new measures is unlikely to improve public understanding of the inflation targeting regime.  Given that a large number of Canadians sincerely believe that the inflation rate is way higher than what is reported by StatsCan each month, there are bound to be a few conspiracy theories online and in the letters pages in the next few days.

Bank of Canada: more dovish than ever

In Washington and in London, there is mounting criticism of central banks' dogged adherence to ultra-low interest rate policies.  More and more experts are arguing that low rate policies are setting the world up for more serious problems down the road, while doing nothing to alleviate the problems we are facing now.  It even looks as though the Brexiteers, anxious to deflect blame for the chaos they have unleashed, will use criticism of his low rate policy to turf Mark Carney out of the Bank of England and re-exert government control over monetary policy.

And then there's Ottawa.  This morning the Bank of Canada, as expected, left interest rates unchanged -- but as Governor Stephen Poloz made very clear, an immediate rate cut was certainly discussed, and remains on the table as long as the economy continues to struggle.  The Bank has yet again slashed its GDP growth forecast for the year, which is now a mere 1.1 percent -- and this despite the evidence that the third quarter of the year saw very strong growth, largely reflecting a bounce back from the Q2 slowdown resulting from the Fort McMurray wildfires.

Looking further ahead, the Bank sees GDP growing about 2 percent in both 2017 and 2018, which is slightly above its latest assessment of the economy's long-term potential growth rate. The Bank now expects the economy to reach its full potential output by mid-2018, rather than during 2017 as it previously forecast.  This seemingly pushes any thought of rate hikes back to at least 24 months from now.

The newly-announced changes in mortgage rules are expected to shave about 0.3 percent from GDP by the end of 2018, which the Bank surely sees as a worthwhile cost for limiting the risks posed to the financial system by out-of-control household borrowing. The Bank sees a rather greater impact -- 0.6 percentage points by 2018 -- from a weaker export outlook. Interestingly, it now attributes at least part of this slower outlook to "lost export capacity".  That's the old Bruce Springsteen refrain I've quoted here many times before: "these jobs are going, boys, and they ain't coming back".

So no rate cut today, but maybe one sometime in the future if things don't perk up?  Well, maybe, but it's hard to find many experts who really think that further monetary easing will make a whole lot of difference, especially if "lost export capacity" is taken into account.  We did see one positive indicator for the economy this week -- manufacturing output rose 1.2 percent in volume terms in August, well above expectations. This is further evidence that the Q3 GDP report will be a strong one, but it's evident from today's downbeat comments that the Bank of Canada does not expect that kind of performance to be repeated.

The myth of the "sharing" economy

I don't always have a lot of time for Toronto Star columnist Heather Mallick, and I've said as much in this blog a few times -- to the point where Ms Mallick has blocked me from following her on Twitter!  However, when she can stay clear of the hyper-paranoid form of feminism that's become her trademark, she has a lot of important things to say.  Take, for example, today's column on the so-called "sharing economy"  -- Uber, Airbnb and their ilk.  Ms Mallick doesn't like this, and neither do I.

Let's start with the name, "sharing economy", which seems to have been deliberately chosen to conceal what's really going on and to make it as innocuous-sounding as possible.  Here's a promise (albeit an empty one, since you're never likely to meet me): if I offer to share something of mine with you, I won't ask you for payment.  If I expect to be paid I'm not sharing any more -- I'm selling, and at that point I become a small business.  And that's what all the Uber drivers and Airbnb landlords are.

Ms Mallick has correctly discerned that Uber et al are facilitating transactions between two groups of individuals in the economy.  These aren't her terms, but let's dub them "moneygrubbers" and "cheapskates".  (Hey, I didn't say I was neutral about this).  The moneygrubbers want to raise a little extra cash from something they already own, whether it's the family car or the extra bedroom in the attic.  The cheapskates want to pay less for something than they already do, and damn the consequences.  Technology allows companies like Uber or Airbnb to bring these groups together, and of course to scoop a little cash out of each transaction too, while leaving all of the risks with the actual buyer and seller.

Ms Mallick worries that these trends are part of a general deterioration in the overall quality of life. I'm not sure about that: to take Toronto as an example, I'm sure any survey would find Uber users are far more content with their rides than those who take taxis, although that probably says more about the Toronto taxi industry than it does about anything else.

What Ms Mallick is missing, or at least not making explicit, is that these "sharing" services establish themselves by circumventing or simply ignoring existing regulations.  Once established, they respond to any criticism by pointing to their popularity and demanding that the regulatory regime be amended to their benefit.

Cities all across North America have had their taxi regulations in effect rewritten by Uber's lawyers.  The amendments are never in favour of consumers.  In Toronto. for example, a long-standing requirement that drivers offering rides must be able to communicate in English went by the wayside, as did a requirement to fit vehicles with winter tires in the cold months. Is anyone seriously suggesting that the citizenry are better off thanks to these changes?  Now Airbnb states that it is "begging" city regulators to come up with a new set of rules for its business:  I'm betting that its lawyers just happen to have a draft of such rules ready to go, just in case anyone asks.

It would be naive to suggest that none of the businesses that these companies are disintermediating was in need of a shake-up. Toronto's taxi industry has been a shabby joke for decades.  However, the consequence of the arrival of Uber is that cabbies who have been trying to live within the rules for years are being put out of business by an army of unregulated interlopers, to nobody's long-term benefit. Meanwhile, over at Airbnb there's mounting evidence that "investors" are buying properties in Toronto with the explicit aim of setting up unregulated hotels, and reducing the supply of affordable rental accommodation as they do so.

It's unlikely in the extreme that Heather Mallick will ever read this, but anyway, well said!

That's the whole point!

In its monthly press release on housing market activity, the Canadian Real Estate Association (CREA) reported a small increase in activity across the country.  However, it warned that the recent measures announced by the Federal government to tighten mortgage eligibility rules might put a crimp on things: "For first time buyers, the stress test for those who need mortgage default insurance will cause them to rethink how much home they can afford to buy", says CREA President Cliff Iverson.

Yeah, well, Mr Iverson, that's not an unexpected and unwelcome side-effect of the Federal measures. It's the whole point of the exercise. With the household debt/income ratio rising ever higher -- at over 167%, it's higher than the comparable US ratio was just before the financial crisis -- and with the Bank of Canada unable to act because of the fragility of the entire economy, Finance Minister Bill Morneau saw little choice but to act.

Iverson goes on to say, "The federal government will no doubt want to monitor the effect of new regulations on the many varied housing markets across Canada and on the economy,  particularly given the uncertain outlook for other private sector engines of economic growth."  Good that he sees the big picture, but when he portrays housing as an engine of economic growth, what exactly is he looking at?

Investment in new housing construction, by type of dwelling

This graph, taken from Statistics Canada, certainly does not suggest there is much of a secular upward trend in investment in residential construction.  Like the rest of the private sector, and not only in Canada, the household construction industry has been bafflingly reluctant to take advantage of rock-bottom financing costs.

As a realtor, Iverson may be thinking something else: that the secondary buying and selling activity in homes is itself a producer of growth. Considering that the market is being driven entirely by a borrowing binge that is seriously crimping the disposable incomes of many Canadians, this seems a dubious proposition at best.  Iverson is undoubtedly right when he says that the government will "want to monitor" the impact of the measures (which take effect this coming Monday, October 17), but if he thinks that Minister Morneau will backtrack at the first sign of a correction, he's destined to be disappointed.

Algorithms aren't stupid

Last week's "flash crash" of Sterling, which took the currency to multi-decade lows (and saw the pound trading below parity with the Euro at some airport exchange booths) was quickly blamed on a "fat finger" mistake by a trader, algorithmic trading mayhem at a quiet time in the global trading day, and so on.  Any or all of that may well be true, but the fact that the currency is having one bad day after another once again this week points unmistakably to the underlying cause:  fears over the economic impact of Brexit, which have been heightened dramatically by last week's ill-judged speech by PM Theresa May.

Trading algorithms, and the people who create and use them, aren't stupid.  They're designed to allow firms to react much more quickly to market movements than human traders ever could.  (See Flash Boys by Michael Lewis for an entertaining review of how this kind of trading works, albeit in a different context).  Algorithmic trading may have exaggerated the move in the Pound last week, but it didn't set the direction of travel, which was indisputably the result of the market's rapidly deteriorating view of the prospects for the UK economy.

Expect more of the same, especially if there is any truth to rumours that Theresa May would like to see the back of Mark Carney at the Bank of England at the earliest possible date.

Canada employment data: impossible to analyze

I should probably stop even looking at the Canadian employment data when they come out each month, because the numbers are so astoundingly erratic that they make my brain hurt.  Let's take a look at the September numbers, which were released this morning.

First the headlines: total employment in the economy rose by 67,000 in the month, way above the market's expectations.  Using the usual 10-to-1 US-Canada comparison, this would be equivalent to a 670,000 rise in US non-farm payrolls, whereas we know that the actual gain in US employment for the month was less than a quarter of that.  Canada's unemployment rate, remarkably enough, was unchanged at 7.0 percent, because according to StatsCan's survey, labour force participation rose sharply.  That's usually considered to be a positive sign -- people don't start looking for work if they know there's no work to be had -- but once you look behind the headline numbers, the picture looks a lot less rosy.

For one thing, most of the employment gain was in part-time rather than full-time work.  That has, in fact, been the case throughout the past year.  Although the number of persons employed has risen by 0.8 percent in the past twelve months, aggregate hours worked are only 0.2 percent higher.  That's consistent with the generally sluggish GDP growth that has been evident throughout the period.

The service sector accounted for most of the job gains in September (about 55,000).  The modest rise in employment in the goods producing sector is further evidence that the hoped-for rebalancing of the economy, in response to the weak exchange rate, is proceeding at a glacial pace.

And one more thing: if StatsCan is to be believed, fully 50,000 of the jobs created last month fell into the category of self-employment.  Given that the number of self-employed in Canada is around 2.8 million, that's a remarkable gain for a single month.  If experience tells us anything here, it's that a large percentage of the newly self-employed will wind up back in regular paid employment within a month or two.  This self-employment series is perhaps the most volatile number in a notoriously erratic data set.

The best takeaway from today's numbers is almost certainly not the headline job gain, which will surely not be sustained.  Rather, it's the year-on-year change in employment and in hours worked.  Those numbers show that, with Federal spending initiatives just starting to kick in, the economy is growing, but very slowly.

May: "it's March"

UK Prime Minister Theresa May's announcement that she intends to trigger Article 50 of the Lisbon Treaty by March 2017 signals the end of the "phoney war" period that followed the Brexit referendum in late June.  Now things might really start to get ugly.

For the past few months it's been possible to imagine that the worst potential consequences of the Brexit vote might be avoided.  Ministers talked confidently about retaining the UK's access to the EU's free market, including the all-important "passport" that allows UK-based financial institutions to operate freely in the EU.  This was, of course, the basis on which the Leave supporters campaigned all along.  The economy has held up well in the wake of the vote, prompting some of the more excitable Leave supporters to declare that there's really nothing to worry about.

All of that is changed in the wake of May's announcement.  It is now clear that the Government has largely abandoned hope of retaining free access to EU markets, since Brussels has emphasized that the price of such access is continued free movement of workers between the EU and the UK.  This would, of course, completely nullify the Leave campaign's pledge to "regain control of Britain's borders" -- i.e. to reduce immigration.

The fact that May is explicitly making this a higher priority than trade access shows conclusively that, despite all the rhetoric about the unaccountable EU bureaucracy and unacceptable interference by European courts, the result back on June 23 was almost entirely about immigration. The campaign may not have started out that way, but the Leave side was quite happy to appeal to the baser instincts of the electorate once it became clear that the purely economic arguments could not be won.

The loss of tariff-free access to the EU market will have severe consequences for the UK economy -- and if the financial services "passport" is also at risk, the effects could be devastating.  Companies planning to sell goods throughout the EU will no longer have any reason to locate in the UK -- and those already in the UK may seek compensation for the higher cost of doing business, as Nissan has already indicated it will. Remarkably, Chancellor of the Exchequer Philip Hammond has indicated he will look favourably on Nissan's request, which seems to guarantee a flood of similar demands in the coming months.  The inevitable drying-up of business investment will damage the UK economy for decades to come.

Then there are the political consequences of a "hard Brexit".  May seemed to go out of her way to antagonize Scotland and Northern Ireland this week, making it clear that those jurisdictions would have no say in the process, even though both voted to remain in the EU.  As Scottish First Minister Nicola Sturgeon quickly remarked, this was an odd approach for someone who wants to keep the UK together to have taken. Another Scottish independence referendum seems inevitable, with a different result from the first vote looking very likely.  As for Northern Ireland, people on both sides of the border are adamant that they want to avoid a return to the border controls of the past.  However, if the UK really wants full control of its borders and of immigration, it is hard to see how the land border between Northern Ireland and the Republic can remain open.

There have been surprisingly few signs of "buyers' remorse" among Leave voters over the past few months.  That will change slowly but inexorably over the next couple of years, as the real costs of the electorate's stunningly unwise decision become ever more apparent.

Calming Canada's housing market

Canadian Finance Minister Bill Morneau has announced new measures to ensure that the inexorable rise in housing prices does not lead to a crisis at some time in the future. Morneau's Tory predecessor, the late Jim Flaherty, attempted something similar at the peak of the global financial crisis, and is widely credited with ensuring that Canada was spared the the worst effects of that meltdown.

Foreign buying of Canadian properties is widely seen as one of the major causes of rising house prices, especially in Vancouver and Toronto. During the summer, the government of British Columbia imposed a 15 percent tax on foreign purchases, and the early signs are that the market has cooled somewhat in response.  Despite self-serving protests from Toronto realtors, it seems very likely that Ontario will have to follow BC's lead in the near future.

In the meantime, Morneau has also taken aim at foreign buyers.  Canadians are allowed to sell their principal residence without incurring capital gains tax.  It appears that foreign buyers of Canadian property have been taking advantage of that exemption when they sell up, even though they may never actually have lived in the home at all.  From now on, a property owner will only be eligible for the exemption if he or she was resident in Canada at the time of purchasing the property.

This change should have two beneficial effects.  First, it should produce at least some revenue for the Federal Treasury, though the amount is unlikely to be significant, at least in the short term.  Second, it should immediately reduce the incentive for foreign buyers to invest in Canadian real estate, which should in turn relieve some of the upward pressure on prices in cities such as Vancouver and Toronto.

Morneau's other major change will affect domestic buyers seeking mortgage financing.  At present, borrowers seeking insurance for high-ratio mortgages (which mostly means first-time buyers with low down payments) are subjected to a stress test to see if they could continue to service the debt if interest rates were to rise.  After mid-October, this test will be applied to all borrowers applying for mortgage insurance.  This change will reduce the amount that banks can lend to a large swath of borrowers, which should in turn reduce pressure on house prices (and, as important, on bank balance sheets).

This change is likely to have more impact in the short term than the crackdown on foreign buyers, a fact that Morneau has recognized by delaying its introduction by two weeks so that deals already in the pipeline can proceed.  The inexorable rise in the household debt/disposable income ratio has been raising alarms from Ottawa to the OECD to the IMF for many months.  With no end in sight to the Bank of Canada's low rate policy, Morneau has evidently decided that he cannot simply allow household debts to pile up ever higher, since that simply ensures an even bigger crisis when rates finally do start to rise.

Much of the commentary on today's measures is of the "too little, too late" variety. Possibly so, but at least Morneau is trying, so let's be more positive and say "better late than never".          

Canada GDP: good news is no news

Canada's GDP rose 0.5 percent in July, slightly above the analysts' consensus.  As expected, the continuing recovery in the Alberta oil sands industry, in the wake of May's devastating forest fires, led the expansion. Economists at TD Bank are estimating that growth for Q3 as a whole will be at a 3 percent annual rate, which they hyperbolically describe as a "barn burner".  Of course, if the Bank of Canada is right and the economy's potential growth is now as low as 1.5 percent annually, that may indeed be as good as things are likely to get.

For sure, growth will slow in the final quarter of the year, with oil sands output back to normal and other sectors struggling to gain traction. One small puzzle in today's data is the 0.8 percent decline in construction activity.  The rebuilding activity in the Fort McMurray area may boost that sector in the coming months, although the impact on national GDP growth should not be overestimated.  What's more surprising is that, with housing prices at astonishing levels in Toronto and Vancouver, and with interest rates set to remain at rock-bottom levels far into the future, residential construction activity is generally sluggish. That may be offset by strength in non-residential construction as the Federal infrastructure program speeds up.

The numbers today are generally good, but will Canadians actually find out about them?  In keeping with their usual practice of focusing on the economy only when they can put the word "recession" in the headline, the major media outlets are giving the story as little coverage as possible. That story on the CBC website I linked to at the start?  It's the fifth of five items in the Business section of the home page -- and that section is way down at the bottom.  Apparently the national broadcaster thinks Canadians need to know about Donald Trump's latest piece of appalling behaviour, rather than what's going on in their own backyard.

"It's a pity both sides can't lose"

Henry Kissinger supposedly said that about the Iran-Iraq war three decades ago.  After watching last night's Presidential debate -- I lasted through about half of it before firing up Netflix -- I'm overwhelmed by the same feeling.

America is going to elect as its next President one of two uninspiring septuagenarians.  (I'm rounding up in Hillary Clinton's case, but not by much).  Ms Clinton is a machine politician with demonstrably bad judgment (the private e-mail server) and a fair amount of ethical baggage.  If she has any new ideas, she's keeping them to herself.  Donald Trump is a property developer with a track record of bankruptcies and a reality TV performer with a nice line in bullying.  If he has any good ideas, he's keeping them to himself.

By any normal political calculus, Clinton won the debate last night, but she didn't get anywhere close to landing a knockout blow.  Her failure to follow up when Trump almost bragged about how he profited from the wreckage of so many people's lives in the financial crisis -- "that's called business" -- was distressing.  For his part, Trump appears to think he was too well-behaved last night and is promising to "hit her harder" in the remaining debates -- assuming he actually turns up: his criticisms of the moderator might just be a prelude to walking out in a huff.

Hoo boy -- if watching forty minutes of these aging pugilists last night was enough to wear me out, the next four years are going to be a real trial, whoever wins in November.

Staying low

Might we just have seen evidence that the Bank of Canada's low rates/low dollar policy is starting to pay off?

Speaking in Quebec City yesterday, Bank of Canada Governor Stephen Poloz made it very clear that low interest rates are here to stay. The title of his presentation -- "Living with lower for longer" -- says it all.  The Bank believes that the reduced potential growth rate of the economy -- perhaps as little as 1.5 percent annually -- must condition not only its own policy approach, but also the way Canadians manage their own finances.  A lower growth rate means that the "normal" level of interest rates must be lower than in the past.  That in turn means that Canadians saving and investing for their retirement need to put more money aside.

The Bank remains convinced that the fiscal stimulus measures initiated by the Trudeau government will boost GDP in the second half of this year and beyond, but it evidently sees that interest rates and the exchange rate will need to remain near current levels for a prolonged period.  Bay Street economists' forecasts for when the Bank may start to raise rates are being steadily pushed back, with at least one -- my old shop at TD -- seeing no move before 2019.  

Until recently, there has been little evidence that the low dollar has been doing much to boost the economy.  Employment in the manufacturing sector has continued to shrink, albeit more slowly than before.  However, the new contract agreement reached this week between General Motors and its main union, Unifor (the former CAW) might just suggest that things are changing.  GM's venerable manufacturing plant at Oshawa, Ontario, has long been seen as vulnerable to closure, but the new agreement will see The General investing heavily to continue vehicle assembly there after current model runs conclude in 2019.

What's more, GM will be returning some engine assembly work from Mexico to its St Catharines Powertrain plant right here in Niagara. After years of seeing work flow in the opposite direction, Unifor is right to see this as a triumph.  There have of course been concessions on the union's part, with the defined benefit plans that the auto industry once offered now receding in the rear-view mirror.  Regrettable as this may be, the union is undoubtedly correct in seeing that GM jobs with less-desirable pensions are better than no GM jobs at all.

The union is claiming a big victory here, and vindication of its seemingly risky strategy of targeting GM (rather than Ford or Chrysler) for the pattern-setting first negotiation.  Fair enough -- but it's surely true that GM would have been a much tougher nut to crack if its management did not believe that the low Canadian dollar would be around for many years to come.  Yesterday's speech by Gov Poloz shows that to be a pretty safe bet.

Head of Statistics Canada quits

Wayne Smith, Canada's Chief Statistician,  unexpectedly resigned today, citing a loss of independence at Statistics Canada. The decision relates mainly to the confidentiality of census information, and makes Smith the second Chief Statistician to resign as a result of the former Harper government's abolition of the long-form census.  Who knew number crunching was so political?

The Liberal government has reinstated the long form census, but Smith has apparently been unable to reverse some of the other changes that flowed from Harper's original decision.  There's no reason to suspect any direct political interference in the data as such, but it's never a good sign when something like this happens.

UPDATE, September 17:  The Government has wasted no time in appointing a new Chief Statistician, which suggests Smith's departure was no surprise.

Canadian household debt: onwards and upwards

StatsCanada reported this morning that the household debt-to-income ratio in Canada hit yet another all-time record high of 167.6 percent in the second quarter of the year.  This was almost 2.5 percentage points higher than in Q1, so the rate of deterioration in this already worrisome ratio actually seems to be accelerating.  It's small wonder that almost half of Canadian households now report they are living from paycheck to paycheck.  

But doesn't this graph, taken from the StatsCan release, suggest that the problem may not be that bad? After all, the debt-to-total assets ratio seems to have been falling for the past six or seven years, even as the debt-to-income ratio has mounted.  The main factor driving the positive trend in the debt-to-asset ratio has, of course,  been the steady rise in home prices, which has largely been driven by ultra low interest rates. 

Plenty of Canadians certainly take comfort from the fact that the value of their home is increasing, even as they struggle with their mortgage and other debt payments each month.  Are they right to do so?  Probably not.  The Bank of Canada may be more than a year away from raising interest rates, but as and when it does so, two things can be confidently predicted:  debt payments will become even more of a burden, especially for those paycheck-to-paycheck households; and house prices will stall and then reverse, resulting in a deterioration in the debt-to-asset ratio.

For most Canadian households, the family home is by far the largest asset.  When the market turns, liquidating that asset in order to service an intractable debt burden is unlikely to be easy. 

The Party's over....but which Party?

Ross Douthat wrote an interesting piece recently that neatly sums up this most bizarre Presidential election campaign. His views are always worthy of attention because he's a right-of-centre columnist at the normally left-of-centre New York Times.

As Douthat puts it, Hillary Clinton is "the most disliked nominee of modern times -- except, of course, for her opponent".   It's an odd symbiosis:  Trump would lose in a landslide to any Democrat but Clinton, and Clinton would be trounced by any Republican but Trump.  Douthat actually finds that consoling; he worries that if Trump were to be trounced, the establishment would breathe a big sigh of relief and then ignore the populist pressures that gave rise to Trumpism in the first place. Conrad Black, of all people, makes a similar point here.  

As Douthat sees it, the fact that Clinton is such a lousy candidate makes it unlikely that Trump will be shellacked come November. "Because she can't put him away, we have to take him seriously -- and only by taking him seriously can we learn enough to make sure the next Trump isn't far stronger, and far worse".

Fair enough. But let's ponder Douthat's final sentence:  'Unless, of course, she loses".  Throughout the improbable Trump campaign, much of the media has had the entire Republican Party on death watch.  The assumption has been that Trump would go down in flames so spectacularly that the GOP would implode, with new parties forming around the Tea Party faction and what's left of the party's moderate wing.  Despite some high-profile defections, however, the party has in fact held together remarkably well in the face of the Trump malignancy.  Disaster on election day now seems most unlikely, so if Trump does in fact lose in a close contest, the GOP will probably dust itself down and immediately start preparing for the next round of midterms.

Maybe, then, it's the Democratic Party we should be worrying about,  given the no longer unimaginable possibility that Trump wins.  Consider: the economy is doing OK,  and the party has thrown its full weight behind a highly-experienced candidate who embodies the American political establishment.  And she's defeated by a preposterous, serially bankrupt reality TV show host with no prior political experience!  

How does the party come back from that, if it happens?  The soul-searching will be brutal, and there's every possibility that Democrats take a sharp turn to the left.  Despite all the crowds and enthusiasm whipped up by Bernie Sanders earlier in the year, that's almost certainly not going to wash with a majority of the American public.   

This election campaign has shown that everything you thought you knew about US politics is wrong.  It's unlikely that the rewriting of the rule book will end on election day, regardless of which undesirable winds up in the White House.

Canadian employment rebounds, sort of

Judging purely by the headline number, the August employment report released today by Statistics Canada was encouraging. The number of Canadians in work jumped by 26,000, much higher than the analysts' consensus and largely reversing the 31,000 decline reported for July.  The unemployment rate actually ticked up 0.1 percent, to 7.0 percent, but that reflected an increase in the number of people looking for work, which is often seen as a positive sign.

Dig into the data, however, and it all gets a bit less rosy. Before we do that, though, the usual caveat about the Canadian employment numbers: the wild monthly gyrations in sub-categories (public vs. private employment, self-employment and so on) make it very difficult to discern underlying trends -- and may even cast doubt on the validity of StatsCan's survey methods.

 Take public sector employment, for example.  Today's report shows a 57,000 increase in the number of public employees in August, or about 1.6 percent.  But that comes in the wake of a reported decline of 42,000 in July.  Reports of mass firings and mass hirings in the public sector over the past couple of months are hard to find, and here's the killer point: these are supposedly seasonally adjusted data, so wild swings of this sort are not supposed to happen.  Yet they're a feature of just about every monthly report.

Assuming that we choose to believe that 57,000 figure, it then starts to cast a bit of a shadow over the entire report.  One of the positives that analysts have tried to take from today's number is the fact that there was a strong gain in full time work -- up 52,000 in the month -- offset by the loss of 26,000 part time jobs.  But if all or most of those full-time jobs are in the public sector, that doesn't tell us much about the overall state of the economy.

If we then look at the breakdown by industry, there's further cause for concern.  Most notably, there was only a 3,900 increase in the number of manufacturing jobs in August, and the number of such jobs has fallen by over 17,000, or about 1 percent, in the last twelve months. Far from offsetting the problems in the resource sector, as the Bank of Canada has been hoping (and very likely praying) for several years now, the manufacturing sector is actually adding to those problems, despite the supposed advantage of a weak exchange rate.

Finally, one small local triumph: according to StatsCan the unemployment rate in my own region (St Catharines-Niagara) fell by a full percentage point in August, to 6.8 percent.  It's impossible to slice-and-dice the data enough to confirm this, but it may well be that the weak exchange rate has given a nice boost to the tourism sector, which is now the area's economic mainstay.  That's certainly the impression you get from the number of out-of-Province cars circling the main streets of Niagara-on-the-Lake looking for parking spaces!

An upbeat Bank of Canada

As expected, the Bank of Canada kept its reference rate unchanged at 0.5 percent today.  While acknowledging that GDP growth in the first half of 2016 was lower than expected, reflecting both the Alberta forest fires an a disappointing export performance, the Bank is expecting a solid rebound in the second half of the year, resulting in "above potential" GDP growth.

The Bank's optimism reflects several factors, including a continuing recovery in oil output, rebuilding efforts in Alberta and a boost to consumption resulting from improved child benefit payments.  Exports may continue to be a drag on growth, but the Bank expects the Federal infrastructure spending spree to start having a measurable effect later in the year.  No doubt it is a source of relief to the Bank that the burden of getting the economy moving again no longer falls solely on monetary policy.

As ever, the Bank's press release throws in a couple of caveats at the end. While its concern over the Vancouver housing market seems to have eased somewhat, thanks to a new tax on foreign buyers, the Bank notes that "financial vulnerabilities associated with household imbalances remain elevated". As if to illustrate the point, a survey released today shows that almost half of Canadian households live quite literally from paycheck to paycheck. Almost 40 percent say they are "overwhelmed" by their debt.  And this is with mortgage rates stable at 3 percent or lower!  The Bank must be terrified at the thought of what is likely to happen when the time finally arrives for it to start raising interest rates.