I'm currently reading a really awful book*, "Empire of Debt", by Bill Bonner, the founder of the Daily Reckoning website. Much of it is gibberish, the writing style is overwrought and at times it veers alarmingly close to outright racism. I'm only persisting with it because it gives me a bit of insight into what passes for thought among the US libertarian fringe. They're the kind of people who agree with Margaret Thatcher that "there's no such thing as society", and they probably think that the Tea Party are a bunch of communists. Bonner holds just about everyone in the utmost contempt: Abe Lincoln, President Roosevelt (both of them), Ronnie Reagan, Alan Greenspan and a whole panoply of lesser lights come in for sustained abuse.
Bonner's right about one thing, though: if central banks make money essentially free, as they have for the last half decade and more, rational people will stop saving and start borrowing. And if you further convince those people that a house is not just a place to live, but a foolproof treasure trove of wealth that will ensure a comfortable retirement, then you'll just about guarantee that house prices will spiral into the stratosphere. Which is, of course, what happened in the US prior to the 2008 crisis, and is still happening in the UK and Canada.
Canada's main financial regulator, the Office of the Superintendent of Financial Institutions (OSFI) is worried about this. One of its head honchos gave a speech in Toronto this week warning that the level of home prices poses a serious risk to the entire economy. Although he made reassuring noises about the strong capital base of the major Canadian banks, he also offered the less comforting statistic that sixty percent of Canadian bank lending is real estate-related.
That's right: the main impact of the ultra-easy monetary policy pursued by the Bank of Canada in recent years has been to create an unproductive and potentially hazardous housing bubble. It hasn't boosted business investment, as Mark Carney regularly noted when he railed against the "dead money" sitting on corporate balance sheets. It hasn't even boosted home building in any material way, except for shoebox condominiums in Toronto and Vancouver. It's just inflated the value of the existing housing stock, making large numbers of homeowners unjustifiably smug about their "wealth" while excluding millions of others from the market altogether.
Back when I was still living in the UK, I wrote a couple of times that the policy mix there was wrong: what was needed was a bit less fiscal rigor and a bit more monetary discipline. The same is true in Canada today. Well, less fiscal rigor is on the horizon: the federal Tories are quite open about the fact that they will introduce a big tax cut just before next year's general election. Will we also get some monetary tightening? There is a growing number of people (count me as one) who feel that the Bank of Canada is altogether too relaxed about the recent rise in CPI. But there's no sign that Governor Stephen Poloz will raise rates any time in 2014, and once next year rolls around, he may shy from doing anything to frighten the horses in the run-up to the election. It's starting to get just a little bit worrisome.
* My excuse, and I do feel I need one, is that I bought it at a charity stand in the local mall.
Friday, 27 June 2014
Riverbend
OK, so maybe I'm the last person in the blogosphere to know about this, but....I just found out this week that the wonderful Baghdad Burning blogger, Riverbend, posted again on her blog in April last year. Her harrowing and often heartbreaking story of life in Baghdad appeared almost daily between the Bush-Blair invasion of 2003 and 2007, when she and her family fled to Damascus and she abruptly stopped posting.
If you want to understand what's going on in Iraq right now, and particularly if you want to stoke your righteous anger at Dick Cheney and Tony Blair as they deny any responsibility for the current mess, you need to read the very extensive archive on Riverbend's blog site. It's still my favourite blog of all time.
It seems Riverbend and her family have moved on from Syria to an unnamed, third Arab country. It so happens that I'm writing this on the first day of Ramadan, so, Riverbend, whoever and wherever you are, as-salaam aleykum, and happy Eid.
If you want to understand what's going on in Iraq right now, and particularly if you want to stoke your righteous anger at Dick Cheney and Tony Blair as they deny any responsibility for the current mess, you need to read the very extensive archive on Riverbend's blog site. It's still my favourite blog of all time.
It seems Riverbend and her family have moved on from Syria to an unnamed, third Arab country. It so happens that I'm writing this on the first day of Ramadan, so, Riverbend, whoever and wherever you are, as-salaam aleykum, and happy Eid.
Monday, 23 June 2014
Flight of the dodo
In a number of recent blog posts I've mentioned the ludicrous military bluster that the Harper government up in Ottawa seems to have adopted in lieu of a foreign policy. Blinded by its pro-Israel bias, Harper's gang has taken a much harder line on the possibility of rapprochement with Iran than any of the countries that are actually involved in dealing with Tehran. And fixated on the votes of the million-and-a-half Canadians who claim Ukrainian descent, the Canadian government has been stamping its little foot on the sidelines of the crisis in the Donbass region, imposing sanctions on all and sundry and calling Vladimir Putin names.
To back up all this loud talk, Canada carries a remarkably small stick. Seventy-five soldiers have been posted to Poland. (Seventy-five? Is that even a platoon?). A couple of patched-up, thirty year old fighter jets have been sent to join NATO patrols over the Baltic. And now it seems that eighty Canadian air force personnel are being deployed to Romania.
But, as we learn today, they might not actually be Canadian. For reasons that are not exactly clear (saving money? Lack of suitable candidates?), the Canadian air force has been hiring significant numbers of foreign flyers. The initial spin on the story was that these skilled pilots would be training Canadians to do the job, but it appears that they are in fact carrying out frontline missions themselves.
I have no time for mindless militarism under any circumstances, but if a government is intent on talking that particular talk, you'd think it would first make sure that it's in a position to walk the walk as well.
To back up all this loud talk, Canada carries a remarkably small stick. Seventy-five soldiers have been posted to Poland. (Seventy-five? Is that even a platoon?). A couple of patched-up, thirty year old fighter jets have been sent to join NATO patrols over the Baltic. And now it seems that eighty Canadian air force personnel are being deployed to Romania.
But, as we learn today, they might not actually be Canadian. For reasons that are not exactly clear (saving money? Lack of suitable candidates?), the Canadian air force has been hiring significant numbers of foreign flyers. The initial spin on the story was that these skilled pilots would be training Canadians to do the job, but it appears that they are in fact carrying out frontline missions themselves.
I have no time for mindless militarism under any circumstances, but if a government is intent on talking that particular talk, you'd think it would first make sure that it's in a position to walk the walk as well.
Thursday, 19 June 2014
So far, so OK
The Fed's gradual "taper" of its quantitative easing program seems to be going well. This week the FOMC decided to reduce its monthly bond purchases by a further $10 billion, to $35 billion, down from a peak of $85 billion. Fed Chair Janet Yellen stressed that the Fed intended to keep interest rates steady for some time even after the QE purchases stop altogether, which implies that no increase is likely until well into 2015.
There have been some signs of higher inflation lately, but Yellen characterized these as "noisy". This is not a term I recall from my economics texts, but it implies that the Fed believes the price pressures are one-offs, related to events like the Iraq crisis and last winter's severe weather. This always makes me nervous -- price pressures are always one-offs, until suddenly they're not -- but markets are certainly reassured. It's remarkable to see US equities close to all-time highs as geopolitical headwinds continue to strengthen, though perhaps this is an indication of the degree to which the US has managed to reduce its dependence on imported energy.
The Fed's plan of inaction is certainly good news for Bank of Canada Governor Stephen Poloz. With the Canadian economy lacking much in the way of forward momentum, he is most reluctant to do anything to tighten the monetary screws. Inflation has moved up remarkably quickly in recent months, all the way to the Bank's 2 percent target*, but like the Fed, the Bank appears to see this as a response to transient pressures rather than a dangerous new trend. In addition, housing prices remain uncomfortably high in many areas of the country, a vulnerability that the OECD called attention to just last week., However, it seems likely that policy steps to address this would be more likely to involve pressure on the banks to cut lending, rather than any moves on the rate front. As long as the Fed stays its hand, the Bank of Canada will be able to do the same.
Things are rather different over in London, where Bank of England Governor Mark Carney is setting the stage for an early rise in rates. It may be that there's nobody more surprised by this than Carney himself. He only arrived on Threadneedle Street a year ago, and promptly issued "guidance" to the market that policy settings were likely to remain accommodative for a long time to come. In the event, the economy (particularly employment, which was the focus of Carney's guidance) has performed more strongly than anticipated, and house prices continue to reach stratospheric levels, especially in central London. Last week Carney told a City audience that rates were likely to rise rather sooner than markets were pricing in; a rate move by the end of this year seems all but certain.
In London, Ottawa and Washington, there's not much doubt that the next rate move will be upwards: only the timing is uncertain. Things are, however, much different at ECB headquarters in Frankfurt. Growth in the Eurozone is somewhere between tepid and non-existent, and inflation is down to 0.5%, far below the bank's 2 percent target -- and some member countries are already experiencing disinflation. The European rate cycle is totally out of synch with the rest of the world, with the ECB's unprecedented adoption of a negative interest rate (minus 0.1%) unlikely to be its last.
The fact that conditions in the rest of the world have improved to the point that rate hikes are on the table may be good news for Eurozone growth, especially if the ECB's actions help to keep the Euro relatively weak. The political outlook may be another matter, however: the recent elections for the European Parliament showed a rising level of discontent with the past half-decade of austerity. It may not just be UK voters who get the chance to vote on continued EU membership in the next few years.
*UPDATE, 20 June: And as of May, according to data released today, up to 2.3%. In response, the Canadian dollar has strengthened as markets anticipate that the Bank of Canada will have to hike interest rates, or at least hint at a tightening bias. I have my doubts: Poloz has sounded ultra-dovish since his first day in the job.
There have been some signs of higher inflation lately, but Yellen characterized these as "noisy". This is not a term I recall from my economics texts, but it implies that the Fed believes the price pressures are one-offs, related to events like the Iraq crisis and last winter's severe weather. This always makes me nervous -- price pressures are always one-offs, until suddenly they're not -- but markets are certainly reassured. It's remarkable to see US equities close to all-time highs as geopolitical headwinds continue to strengthen, though perhaps this is an indication of the degree to which the US has managed to reduce its dependence on imported energy.
The Fed's plan of inaction is certainly good news for Bank of Canada Governor Stephen Poloz. With the Canadian economy lacking much in the way of forward momentum, he is most reluctant to do anything to tighten the monetary screws. Inflation has moved up remarkably quickly in recent months, all the way to the Bank's 2 percent target*, but like the Fed, the Bank appears to see this as a response to transient pressures rather than a dangerous new trend. In addition, housing prices remain uncomfortably high in many areas of the country, a vulnerability that the OECD called attention to just last week., However, it seems likely that policy steps to address this would be more likely to involve pressure on the banks to cut lending, rather than any moves on the rate front. As long as the Fed stays its hand, the Bank of Canada will be able to do the same.
Things are rather different over in London, where Bank of England Governor Mark Carney is setting the stage for an early rise in rates. It may be that there's nobody more surprised by this than Carney himself. He only arrived on Threadneedle Street a year ago, and promptly issued "guidance" to the market that policy settings were likely to remain accommodative for a long time to come. In the event, the economy (particularly employment, which was the focus of Carney's guidance) has performed more strongly than anticipated, and house prices continue to reach stratospheric levels, especially in central London. Last week Carney told a City audience that rates were likely to rise rather sooner than markets were pricing in; a rate move by the end of this year seems all but certain.
In London, Ottawa and Washington, there's not much doubt that the next rate move will be upwards: only the timing is uncertain. Things are, however, much different at ECB headquarters in Frankfurt. Growth in the Eurozone is somewhere between tepid and non-existent, and inflation is down to 0.5%, far below the bank's 2 percent target -- and some member countries are already experiencing disinflation. The European rate cycle is totally out of synch with the rest of the world, with the ECB's unprecedented adoption of a negative interest rate (minus 0.1%) unlikely to be its last.
The fact that conditions in the rest of the world have improved to the point that rate hikes are on the table may be good news for Eurozone growth, especially if the ECB's actions help to keep the Euro relatively weak. The political outlook may be another matter, however: the recent elections for the European Parliament showed a rising level of discontent with the past half-decade of austerity. It may not just be UK voters who get the chance to vote on continued EU membership in the next few years.
*UPDATE, 20 June: And as of May, according to data released today, up to 2.3%. In response, the Canadian dollar has strengthened as markets anticipate that the Bank of Canada will have to hike interest rates, or at least hint at a tightening bias. I have my doubts: Poloz has sounded ultra-dovish since his first day in the job.
Sunday, 15 June 2014
Still crazy after all these years
You might think Tony Blair would have the sense to keep his head below the parapet as Iraq teeters on the brink of implosion. But he's not that smart, and he's got his "reputation" to defend, so he's come out with a statement to the effect that none of this is in any way the result of the US-UK invasion back in 2003.
He is, of course, delusional, and it's heartening to see how many experts have rounded on him unmercifully. And non-experts -- at the time I'm posting this, there are 1168 comments on the BBC website article, and by the time you click on the link, no doubt there will be more. If there are any in there defending him, I sure haven't found them.
He is, of course, delusional, and it's heartening to see how many experts have rounded on him unmercifully. And non-experts -- at the time I'm posting this, there are 1168 comments on the BBC website article, and by the time you click on the link, no doubt there will be more. If there are any in there defending him, I sure haven't found them.
Thursday, 12 June 2014
Bubble boys
I'm guessing Mark Carney must be behind this: UK Chancellor of the Exchequer George Osborne is to give regulators (mainly the Bank of England) new powers to restrict mortgage lending, in the hope of preventing the development of a housing bubble. Back when Carney was at his old job at the Bank of Canada, he and the Finance Minister, the late Jim Flaherty, similarly tightened restrictions on Canadian banks, a move that went a long way toward ensuring that the country's economy came through the financial crisis relatively unscathed.
We'll come back to Canada later, but in the meantime, what should we make of Osborne's moves? It's unlikely that he can do much to curb the eye-wateringly high prices at the top end of the London property market. That market is largely driven by foreign money, from the Middle East, Asia and Russia among other places, looking for a safe haven away from the prying eyes back home. Rather, Osborne's (and presumably Carney's) concern is over purchasers of more modest means who may be taking on excessively large amounts of debt. Therefore, the key element of the new rules will be to allow the Bank of England to set a maximum multiple of household income that homebuyers can borrow.
This is not without political downside for Osborne. Bragging about how much one's home has increased in value is a time-honoured tradition among the English middle classes. If the new rules really do put a brake on the market, plenty of homeowners will not be happy. Moreover, the housing price bubble is largely confined to the London area, or at least driven by London-based money. Potential buyers in other parts of the country may well be angered if the rules mean that they, too, are unable to obtain financing.
There's also the intriguing question of what Osborne's initiative, and Carney's likely role in bringing it about, may tell us about the course of UK monetary policy. Carney's attempts at providing "forward guidance" to the financial markets have gone badly, mainly because the Bank's forecasts for growth and employment have turned out to be too low. Carney has continued to stress that the Bank is in no hurry to start raising interest rates; maybe not, but Osborne's measures may well be a sign that the Bank is starting to think more seriosuly about the problems that may emerge once the tightening cycle begins.
Meanwhile, back in Canada, the Bank of Canada has just released its Financial System Review, and one of the key risks it identifies is....consumer debt and the overbought housing market. Despite the much-vaunted success of the Flaherty-Carney measures during the financial crisis, household debt-to-income ratios remain close to record levels. The housing market continues to move ahead, with prices up more than 8% from a year ago. The Toronto and Vancouver media are replete with startling stories of ferocious bidding wars on properties.
It's not clear what Bank of Canada Governor Poloz is going to do about this, not least because the tone of the Review is so different from the "what, me worry?" approach he has taken to monetary policy over the past year. Maybe the needed action will have to come from elsewhere in Ottawa, perhaps at the government's mortgage insurer, CMHC. This week, the OECD expressed concern about the overvaluation of Canadian home prices and suggested it was unwise for the government to allow CMHC to provide 100% insurance cover for high-risk mortgages. Neither the banks nor consumers would applaud if that coverage was taken away, but a housing market in which homeowners pocket all the gains, while taxpayers are on the hook for the losses, will always be prone to unhealthy bubbles.
UPDATE, 14 June: It didn't take long for Carney to drop the other shoe. In a key speech at Mansion House in London on Thursday evening, he warned that interest rates were likely to rise sooner than the markets were anticipating. Certainly more direct than his earlier, ham-fisted attempts to provide "forward guidance".
We'll come back to Canada later, but in the meantime, what should we make of Osborne's moves? It's unlikely that he can do much to curb the eye-wateringly high prices at the top end of the London property market. That market is largely driven by foreign money, from the Middle East, Asia and Russia among other places, looking for a safe haven away from the prying eyes back home. Rather, Osborne's (and presumably Carney's) concern is over purchasers of more modest means who may be taking on excessively large amounts of debt. Therefore, the key element of the new rules will be to allow the Bank of England to set a maximum multiple of household income that homebuyers can borrow.
This is not without political downside for Osborne. Bragging about how much one's home has increased in value is a time-honoured tradition among the English middle classes. If the new rules really do put a brake on the market, plenty of homeowners will not be happy. Moreover, the housing price bubble is largely confined to the London area, or at least driven by London-based money. Potential buyers in other parts of the country may well be angered if the rules mean that they, too, are unable to obtain financing.
There's also the intriguing question of what Osborne's initiative, and Carney's likely role in bringing it about, may tell us about the course of UK monetary policy. Carney's attempts at providing "forward guidance" to the financial markets have gone badly, mainly because the Bank's forecasts for growth and employment have turned out to be too low. Carney has continued to stress that the Bank is in no hurry to start raising interest rates; maybe not, but Osborne's measures may well be a sign that the Bank is starting to think more seriosuly about the problems that may emerge once the tightening cycle begins.
Meanwhile, back in Canada, the Bank of Canada has just released its Financial System Review, and one of the key risks it identifies is....consumer debt and the overbought housing market. Despite the much-vaunted success of the Flaherty-Carney measures during the financial crisis, household debt-to-income ratios remain close to record levels. The housing market continues to move ahead, with prices up more than 8% from a year ago. The Toronto and Vancouver media are replete with startling stories of ferocious bidding wars on properties.
It's not clear what Bank of Canada Governor Poloz is going to do about this, not least because the tone of the Review is so different from the "what, me worry?" approach he has taken to monetary policy over the past year. Maybe the needed action will have to come from elsewhere in Ottawa, perhaps at the government's mortgage insurer, CMHC. This week, the OECD expressed concern about the overvaluation of Canadian home prices and suggested it was unwise for the government to allow CMHC to provide 100% insurance cover for high-risk mortgages. Neither the banks nor consumers would applaud if that coverage was taken away, but a housing market in which homeowners pocket all the gains, while taxpayers are on the hook for the losses, will always be prone to unhealthy bubbles.
UPDATE, 14 June: It didn't take long for Carney to drop the other shoe. In a key speech at Mansion House in London on Thursday evening, he warned that interest rates were likely to rise sooner than the markets were anticipating. Certainly more direct than his earlier, ham-fisted attempts to provide "forward guidance".
Friday, 6 June 2014
Tin soldier
"I am a little tin soldier who wants to jump into your fight" -- Tin Soldier, The Small Faces
There are so many reasons to dislike the current Canadian federal government, under Prime minister Stephen Harper. The bullying of opponents....the evisceration of social programs...the mindless fiscal austerity. At times, though, it's foreign policy that rankles the most, and this is one of those times.
Canada's stance toward the rest of the world has encompassed at least two honourable phases. In time of war, Canada was a reliable ally: in both world wars, the allies were always happy when "Johnny Canuck" showed up, well equipped, well trained and ready to fight. In more recent times, Canada became one of the most effective peacekeepers in the world, always ready to commit well-trained soldiers to the hottest trouble spots.
And now? Canada has neglected its military to a remarkable degree. The forces have shrunk in numbers, and thanks to unimaginably incompetent procurement, the army, navy and air force are all stuck with obsolete (and in some cases downright dangerous) equipment. You'd think it might behoove the government of the day to keep a low profile.
That's not Harper's style. He's become a one-man wrecking crew on the world stage, a bit like the kid in the schoolyard who tries to goad others into fighting each other. Look at the Ukraine crisis. Motivated by the fact that as many as a million and a half Canadians can claim Ukrainian ancestry, Harper has taken a fiercely pro-Kyiv stance. Fair enough, except that he's in no position to back it up: Canada's contribution to the NATO buildup in the region is....seventy-five soldiers!
And this week, Harper has made an even bigger fool of himself and the country. Ahead of the D-day gathering in France, Harper let it be known that he was opposed to any of the G-7 leaders talking with President Putin. So much for that. President Obama spent a few minutes with the Russian leader, and Chancellor Merkel appears to have brokered a meeting between Putin and new Ukrainian President Poroshenko that offers the best chance yet of resolving the crisis peacefully. Apparently nobody has told Harper that you don't need to negotiate with your pals, but you have to talk to your enemies if you want to sort out your differences.
Maybe, as well, nobody has told Harper that if it wasn't for the sacrifices made by Russia and Ukraine during what those countries refer to as the Great Patriotic War, there wouldn't have been any D-day ceremonies for him to attend in the first place.
There are so many reasons to dislike the current Canadian federal government, under Prime minister Stephen Harper. The bullying of opponents....the evisceration of social programs...the mindless fiscal austerity. At times, though, it's foreign policy that rankles the most, and this is one of those times.
Canada's stance toward the rest of the world has encompassed at least two honourable phases. In time of war, Canada was a reliable ally: in both world wars, the allies were always happy when "Johnny Canuck" showed up, well equipped, well trained and ready to fight. In more recent times, Canada became one of the most effective peacekeepers in the world, always ready to commit well-trained soldiers to the hottest trouble spots.
And now? Canada has neglected its military to a remarkable degree. The forces have shrunk in numbers, and thanks to unimaginably incompetent procurement, the army, navy and air force are all stuck with obsolete (and in some cases downright dangerous) equipment. You'd think it might behoove the government of the day to keep a low profile.
That's not Harper's style. He's become a one-man wrecking crew on the world stage, a bit like the kid in the schoolyard who tries to goad others into fighting each other. Look at the Ukraine crisis. Motivated by the fact that as many as a million and a half Canadians can claim Ukrainian ancestry, Harper has taken a fiercely pro-Kyiv stance. Fair enough, except that he's in no position to back it up: Canada's contribution to the NATO buildup in the region is....seventy-five soldiers!
And this week, Harper has made an even bigger fool of himself and the country. Ahead of the D-day gathering in France, Harper let it be known that he was opposed to any of the G-7 leaders talking with President Putin. So much for that. President Obama spent a few minutes with the Russian leader, and Chancellor Merkel appears to have brokered a meeting between Putin and new Ukrainian President Poroshenko that offers the best chance yet of resolving the crisis peacefully. Apparently nobody has told Harper that you don't need to negotiate with your pals, but you have to talk to your enemies if you want to sort out your differences.
Maybe, as well, nobody has told Harper that if it wasn't for the sacrifices made by Russia and Ukraine during what those countries refer to as the Great Patriotic War, there wouldn't have been any D-day ceremonies for him to attend in the first place.
Wednesday, 4 June 2014
The limits of cheap money
Something I think we can say we've learned from the economic events of the past half-dozen years: throwing cheap money around may prevent disaster, but it can't be relied on to stimulate growth. That's not a new lesson, of course. Keynes famously identified the risks of a "liquidity trap", and economists have always warned that in the absence of underlying demand, expansionary monetary policy is akin to pushing on a string. Still, there can be no doubt that the limits of monetary policy have never before been so uncomfortably clear.
You can see evidence of this all around the world, but for Exhibit A today, let's look at Canada, where central bank Governor Stephen Poloz has yet again left the benchmark interest rate at one percent, in the face of the economy's continuing failure to post strong growth. Like the US, Canada experienced an exceptionally severe winter this year, resulting in a slowdown in GDP growth in the first quarter. There are high hopes that things will rebound in the current quarter, piggybacking on an expected bounceback in the US, where the slowdown in Q1 was even more pronounced than in Canada. However, despite the supposed benefit of a weaker exchange rate, Canada's export sector has delivered nothing but disappointment in recent months.
Data released this week show that exports fell yet again in April. It's starting to look as though Canada's international trade problems are not related to price competitiveness per se, but may instead be structural. Manufacturing may never recover the losses suffered over the past couple of decades, leaving hopes of export gains far too dependent on the energy sector, which is encountering increasingly severe problems in getting its product to foreign markets. There's not a whole lot the Bank of Canada can do about that.
With the US Federal Reserve taking a very measured approach to removing its own monetary stimulus, there's no immediate pressure on the Bank of Canada to act. But there are clouds on the horizon. When Gov. Poloz took over the job less than a year ago, he mused aloud about deflationary risks. No more: CPI has moved up to the Bank's 2% target, perhaps a little faster than the Bank had expected. This is no surprise in light of the fall in the Canadian dollar, and as that decline seems now to have stopped, perhaps upward price pressure from this source will abate. Still, the Bank has a bit less breathing room than it might have hoped.
In addition, the Bank has to take account of the fact that household debts remain uncomfortably high in relation to disposable incomes. Much of that debt is housing-related, and the continued upward pressure on house prices in certain markets (most severely, but not exclusively, in Toronto) adds to the risk that some consumers will take on debts that they won't be able to service once rates do start to rise. The banks seem to be chafing at the bit to offer deals to mortgage borrowers, and it may soon be necessary for Gov. Poloz or Finance Minister Oliver to rein them in again.
What it all comes down to, in Canada as in the rest of the developed world, is that flooding the system with cheap money was the easy part. Pulling back that stimulus, without triggering another recession or even a further crisis, is something nobody seems to have figured out just yet.
You can see evidence of this all around the world, but for Exhibit A today, let's look at Canada, where central bank Governor Stephen Poloz has yet again left the benchmark interest rate at one percent, in the face of the economy's continuing failure to post strong growth. Like the US, Canada experienced an exceptionally severe winter this year, resulting in a slowdown in GDP growth in the first quarter. There are high hopes that things will rebound in the current quarter, piggybacking on an expected bounceback in the US, where the slowdown in Q1 was even more pronounced than in Canada. However, despite the supposed benefit of a weaker exchange rate, Canada's export sector has delivered nothing but disappointment in recent months.
Data released this week show that exports fell yet again in April. It's starting to look as though Canada's international trade problems are not related to price competitiveness per se, but may instead be structural. Manufacturing may never recover the losses suffered over the past couple of decades, leaving hopes of export gains far too dependent on the energy sector, which is encountering increasingly severe problems in getting its product to foreign markets. There's not a whole lot the Bank of Canada can do about that.
With the US Federal Reserve taking a very measured approach to removing its own monetary stimulus, there's no immediate pressure on the Bank of Canada to act. But there are clouds on the horizon. When Gov. Poloz took over the job less than a year ago, he mused aloud about deflationary risks. No more: CPI has moved up to the Bank's 2% target, perhaps a little faster than the Bank had expected. This is no surprise in light of the fall in the Canadian dollar, and as that decline seems now to have stopped, perhaps upward price pressure from this source will abate. Still, the Bank has a bit less breathing room than it might have hoped.
In addition, the Bank has to take account of the fact that household debts remain uncomfortably high in relation to disposable incomes. Much of that debt is housing-related, and the continued upward pressure on house prices in certain markets (most severely, but not exclusively, in Toronto) adds to the risk that some consumers will take on debts that they won't be able to service once rates do start to rise. The banks seem to be chafing at the bit to offer deals to mortgage borrowers, and it may soon be necessary for Gov. Poloz or Finance Minister Oliver to rein them in again.
What it all comes down to, in Canada as in the rest of the developed world, is that flooding the system with cheap money was the easy part. Pulling back that stimulus, without triggering another recession or even a further crisis, is something nobody seems to have figured out just yet.
Tuesday, 3 June 2014
OptimISM or pessimISM?
It's not often, these days, that I find myself wishing I was back in an investment bank dealing room. But it might have been fun to be there yesterday (Monday). Here's why.
One of the most important tasks of a dealing room economist is to provide instant analysis of official data releases. As soon as the key data appear -- employment, inflation, GDP, for example -- the traders want to know how they should react. As the "expert", you're expected within a minute to provide a quick rundown of the numbers themselves, including the key issue of how they relate to market expectations, and offer some guidance as to how the market might react.
For the most important numbers, this is going on simultaneously in every dealing room on the planet, and it leads to what a colleague of mine used to call the "8:31 effect". Most of the key data in the US are released at 8:30 in the morning, so within a minute, all the economists have given their first take on what the numbers mean, and the traders are off to the races.
Now of course, after 8:31 the economists have time to dig deeper into the data. Quite often the details convey a different message from the headline number, and when that happens, the "8:31 effect" can quickly unwind. Within an hour or so, the economists will have produced a written commentary on the data for traders and clients, and then it's time for a quick vente latte before starting to prepare for the next day's data.
So....on Monday of this week, the key scheduled data release in the US was the Institute of Supply Management (ISM) purchasing managers index (PMI) for May. (It happens that this is one release that isn't published at 8:30, but let that pass). The initial announcement was that the index had fallen from its April level, belying market hopes that the data would show the US manufacturing sector recovering from its weather-related difficulties in the first quarter of the year. The immediate impact, unsurprisingly, was that stocks took a bit of a hit.
Within the next hour or so, all of the economists at the big dealing houses would have put out a reasoned analysis of the data, giving their considered views of whether this was just a blip to be corrected within a month or two, or a sign that the US economy was facing greater headwinds than anticipated. But wait! A couple of hours after the initial release, the ISM popped back up on the screens to admit that actually, the index had risen in May, not fallen! Cue a reversal in stocks, and a lot of economists hastily explaining to anyone who would listen why their firm conclusions of just a short while ago were now just dust in the wind.
And wait again! Shortly after the revised announcement, the ISM popped up again with an admission that it had misapplied its seasonal adjustment factors. It now unveiled a third number, lower than the revised version but still showing an improvement over the April report. Markets seem to have taken the ISM's word for it this time, because both the DJIA and S&P ended the trading day at new all time highs.
Nobody gets hurt and nobody dies when this sort of snafu occurs, but it's far from being a no harm, no foul kind of event. Huge sums of money ride on these data releases, and no doubt a few dealers who may have got caught on the wrong side will have called up the ISM (conveniently out of the way in Arizona) to demand assurances that this will never happen again.
And as for the poor economists, it must be hard to know where to turn when even the supposedly hard, real world data keep moving around in front of your eyes. Maybe helps explain why so many academics like to shun the real world and stick to mathematical models.
One of the most important tasks of a dealing room economist is to provide instant analysis of official data releases. As soon as the key data appear -- employment, inflation, GDP, for example -- the traders want to know how they should react. As the "expert", you're expected within a minute to provide a quick rundown of the numbers themselves, including the key issue of how they relate to market expectations, and offer some guidance as to how the market might react.
For the most important numbers, this is going on simultaneously in every dealing room on the planet, and it leads to what a colleague of mine used to call the "8:31 effect". Most of the key data in the US are released at 8:30 in the morning, so within a minute, all the economists have given their first take on what the numbers mean, and the traders are off to the races.
Now of course, after 8:31 the economists have time to dig deeper into the data. Quite often the details convey a different message from the headline number, and when that happens, the "8:31 effect" can quickly unwind. Within an hour or so, the economists will have produced a written commentary on the data for traders and clients, and then it's time for a quick vente latte before starting to prepare for the next day's data.
So....on Monday of this week, the key scheduled data release in the US was the Institute of Supply Management (ISM) purchasing managers index (PMI) for May. (It happens that this is one release that isn't published at 8:30, but let that pass). The initial announcement was that the index had fallen from its April level, belying market hopes that the data would show the US manufacturing sector recovering from its weather-related difficulties in the first quarter of the year. The immediate impact, unsurprisingly, was that stocks took a bit of a hit.
Within the next hour or so, all of the economists at the big dealing houses would have put out a reasoned analysis of the data, giving their considered views of whether this was just a blip to be corrected within a month or two, or a sign that the US economy was facing greater headwinds than anticipated. But wait! A couple of hours after the initial release, the ISM popped back up on the screens to admit that actually, the index had risen in May, not fallen! Cue a reversal in stocks, and a lot of economists hastily explaining to anyone who would listen why their firm conclusions of just a short while ago were now just dust in the wind.
And wait again! Shortly after the revised announcement, the ISM popped up again with an admission that it had misapplied its seasonal adjustment factors. It now unveiled a third number, lower than the revised version but still showing an improvement over the April report. Markets seem to have taken the ISM's word for it this time, because both the DJIA and S&P ended the trading day at new all time highs.
Nobody gets hurt and nobody dies when this sort of snafu occurs, but it's far from being a no harm, no foul kind of event. Huge sums of money ride on these data releases, and no doubt a few dealers who may have got caught on the wrong side will have called up the ISM (conveniently out of the way in Arizona) to demand assurances that this will never happen again.
And as for the poor economists, it must be hard to know where to turn when even the supposedly hard, real world data keep moving around in front of your eyes. Maybe helps explain why so many academics like to shun the real world and stick to mathematical models.
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