Atrocious

Statistics Canada reported this morning that GDP shrank at an annualized rate of 0.6 percent in the first quarter of 2015, weighed down by weakness in the oil and gas sector. Remarkably, this was actually a better performance than the US economy: revised data there showed a 0.7 percent pace of decline.

Given the precipitous fall in global energy markets, and considering the extent to which Canadian public policy has bet the farm on the energy sector in recent years, the modest extent of the decline is somewhat surprising. It doesn't appear to justify the epithet "atrocious" that Bank of Canada Governor Stephen Poloz chose to wheel out back in January.

We maybe shouldn't be looking to Gov Poloz for guidance about where the economy goes from here. Since January he has variously opined that the worst of the impact of the oil price decline may already be behind us; that there may be more bad news to come; that the recent data he has seen have been "encouraging"; and that the economy will return to full capacity by the end of 2016. Waterfront fully covered, you'd have to say.

The reaction of markets to today's numbers is telling, however. The Canadian dollar promptly fell by more than half a cent against the US dollar, slipping back below the 80-cent level. Whether you think the GDP numbers are atrocious or not, that looks like a clear sign that traders think a further rate cut is back on the table.

Greek Olive

Maybe it's because of his last name, but whatever the reason may be, the Toronto Star's erratic business columnist David Olive has decided he knows enough about the Greek debt situation to offer his opinions about it.  He doesn't.

So much of the article is wrong that it's hard to know where to start.  Maybe a good place to jump in is the old and much quoted canard that Greeks don't pay their taxes.  This is simply not true.  OECD data for 2014 (which took me less than a minute to find online; you really should try this sometime, Mr Olive) show that the country's tax/GDP ratio was right on the OECD average, and significantly higher than that for several major economies, including Canada, the US and Japan.

This is not to suggest that the Greek tax system is ideal. The same OECD report shows that the country depends to a more-than-average extent, and probably more than it should, on consumption taxes and not enough on income taxes. This leaves plenty of room for the wealthy to avoid paying their share, and there's certainly evidence of that. See this swimming pool story from a few years back, for example.

The fact is,  the average Athenian-in-the-street, the one getting whacked by the austerity measures, has been paying his or her share of taxes.  On the fiscal side, as Olive at least partly acknowledges, Greece's problem is one of excessively generous social programs, rather than inadequate taxation.

Olive's analysis of how Greece and its creditors got into this mess is also wrong -- and I'm actually personally insulted by his version.  He suggests that it was an "open secret", when Greece was admitted to the Euro, that the country had been cooking the books. At the time I was working in the London dealing room of one of the Big Five Canadian banks. We weren't lending to Greece but we were following the situation closely. As the date for adoption of the euro approached,  all the candidate countries were required to comply with a set of tests collectively known as the Maastricht criteria. Each country's performance was monitored by the ECB and European Commission.  These bodies duly reported that Greece was converging towards and then meeting the criteria. It's on this basis that investors, in good faith, bought Greek bonds.

It was only several years later that investigations showed that the Greeks had systematically and repeatedly lied about their true situation in order to gain euro admission. A small number of money centre banks had helped them to do so, using derivatives transactions to conceal the real picture. (If David Olive wanted to attack the role played by the financial sector, this would have been a good place to start). The players representing Athens at the negotiating table have changed, but this pattern of past deception is surely a key reason that it's proving so hard to make a deal today.

Have you noticed that there are more external links than usual in this blog post? I'm sort of trying to make a point. Finding all of these stories and linking them into the text took me, in total, less than five minutes. Real journalists like to sneer at us mere bloggers, but at least we do our research.

Shooting his bolt

Canada's Federal Finance Minister, Joe Oliver, says that the Tories will probably find ways to continue to cut taxes if they win re-election come October. Two questions here: is that a credible promise, and is it likely to be a vote-winner for Oliver and his boss, PM Stephen Harper?

As to the credibility, it's been perfectly clear for many months that the Tories were aiming to leave the Treasury as bare as possible in advance of the election. They've done this by getting the budget into the merest of surpluses, and then making all manner of commitments that will use up all available funds over the next several years -- the income splitting plan, some oddball tax credits, the tax free savings boost and so on. The goal was and is to leave no room for the opposition parties to make spending commitments at election time, unless they are also prepared to raise taxes -- at which point the Tories will pounce.

But if the cupboard really will be bare when the next Finance Minister takes office -- and it certainly looks that way -- it will be equally bare whether that minister is a rookie from the Liberals or NDP, or if it's Joe Oliver back in his current job. In promising further tax cuts,  Oliver is betting that the Canadian electorate will have forgotten by election day that the Tories have already spent any future surpluses. So, the answer to our first question is, further tax cuts are not a credible promise.

But can it be a vote winner anyway?  Both the NDP and the Liberals are promising to roll back some of the Tory giveaways: the NDP will reverse the income-splitting plan, and the Liberals will undo the tax free savings boost. In both cases, these moves will allegedly provide room for new spending initiatives, albeit on a modest scale. There are constituencies for both income splitting and tax free savings, but both measures are seen (correctly) as favouring the better-off, and most of the people who will benefit from them would probably be voting Tory anyway. It's not likely that the desire to save either measure will bring many voters from the NDP or Liberals over to the Tory camp.

So, as regards the second question, the tax cut promise may not be a winning strategy.  Opinion polls, at this early stage, show that about 70 percent of the electorate want to see the back of the Harper government. Harper's only chance of victory lies in the fact that the opposition is quite closely split between the NDP and the Liberals.  Canada's first-past-the-post system means that the Tories could still wind up back in office, as long as neither of the opposition parties succeeds in rallying the anti-Harper vote.  Here's where it promises to get interesting: Liberal leader Justin Trudeau is charismatic but callow and inexperienced, and his family name is still poison in parts of western Canada; NDP leader Thomas Mulcair is cerebral and experienced, but Canada has never elected a socialist government at the national level.

There's still all to play for -- but can we first just enjoy the summer, please?      

There he goes again!

More off the wall comments today from Bank of Canada Governor Stephen Poloz.  The text for a speech Poloz is scheduled to deliver in Charlottetown, PEI suggests that the Bank continues to make it up as it goes along.  Leaving aside the platitudes -- "I must underscore how uncertain the outlook is"; "Recent events make it clear that we live in an uncertain world" -- it seems that Poloz is trying his best to hedge, if not actually row back from, just about every comment he has made on the economy since the start of this year.

Recall that back in January the Bank stunned markets by cutting interest rates, while Gov. Poloz alighted on the term "atrocious" to describe the near term outlook for the economy.  Well, I'm not sure what your idea of the near term is, but here we are just four months on, and Gov Poloz is suggesting that in fact the recent economic data -- for non-oil exports, tourism and employment -- have been "encouraging".  The "atrocious" period, it seems, was really very short indeed.

But perhaps we shouldn't be surprised by this; after all, just last month, when the Bank kept interest rates on hold, Poloz appeared to suggest that the worst of the impact of low energy prices was already behind us. Or is it?  In today's speech, the Governor warns that there's still a risk that lower oil prices could have a larger-than-expected impact on the economy.   Or not: the Bank expects the Canadian economy to return to full capacity by the end of 2016, which seems completely inconsistent with the very slow growth forecasts emanating from the Bank of Canada and just about everyone else.

Confused yet?  I know I am --but not, I fear, as much as the man tasked with setting Canada's monetary policy.

Boston wrong?

I'm opposed to the death penalty as a matter of principle.  I have to admit, however, that if you wanted to make a case for state-sponsored execution, you could do a lot worse than cite the trial of Dzhokhar Tsarnaev, the cowardly, unrepentant Boston bomber.

Massachusetts is a non-death-penalty state, but Tsarnaev's trial was a Federal matter, and the Department of Justice pushed for the maximum penalty.  The jury duly agreed, but it still seems like a mistake. The last Federal execution took place in 2003. It's very likely that we're about to embark on an endless series of appeals, every one of which will throw more light on Tsarnaev's "cause". In the event that he ever is executed, his "martyrdom" may well inspire others to take up the battle.

Far better, surely, to let him rot in jail. It's not as if the US is lacking in perfectly abominable places for this criminal to spend the rest of his life.  Leavenworth?  Angola? I won't be weeping any tears if Tsarnaev does end up getting the lethal injection -- though reportedly, some of the jurors were weeping as sentence was pronounced on Thursday -- but I'd be much happier if the world didn't hear any more about him for a good long time.

Here's a good piece on the subject from Seth Stevenson at Slate.

The unloved Games

In just a couple of months, the Pan Am Games will be staged in the Toronto area -- and the city can barely conceal its indifference.

The Pan Ams are a third- or fourth-rate sporting extravaganza.  Most of the top performers in the various sports won't even show up, in part because the games clash with much more prestigious events -- the tennis players will be at Wimbledon, the women soccer players at the World Cup, Usain Bolt at a party someplace, and so on.  Generally it's smaller cities that host the Pan Ams, and it's a sign of Toronto's desperate quest to be noticed that it even bid for the event.

The buildup to the Games hasn't been helped by some very odd marketing decisions by the organizing committee.  The slogan for the Games is "EPIC IS ON" -- good English, apparently, isn't. I think the ON is meant to make you think of Ontario, which will certainly be helpful if you were about to book a plane ticket to the Toronto in County Durham, England (yes, there is one), but otherwise the slogan has nothing to commend it.

The slogan was introduced by way of a TV commercial featuring athletes doing their thing in various Toronto locales (baseball on Bay Street, kayaking in the harbour and so on), over a song whose main lyric was "ready or not, here I come".  Given that many of the venues had not been completed at the time, a distinctly risky choice.

That ad has now been replaced by one aimed at chivvying the locals into buying tickets, and the organizers have managed to come up with yet another unfortunate tagline: "Now or Never". Given that most locals can't wait for the Games, and the inevitable chaos on Toronto's already gridlocked streets, to be over and done with, it's all but certain that most people will be taking the second option.

Here's an odd thing, though: the Games themselves may be unloved and forgettable, but for once the legacy may actually be worthwhile.  After decades of shilly-shallying, a train linking downtown to the airport will open in June; wouldn't have happened without the Games. A huge derelict area east of downtown Toronto that has defied attempts at development for many years has been transformed into an athletes village, and will be converted into housing when the circus leaves town; wouldn't have happened without the Games.  And there will be some modest but usable sports venues left behind, including a velodrome, a track and field stadium and a new football stadium in Hamilton.

The Pan Am games will be either ignored (most of the time) or resented (if you're trying to get around) while they're on, and soon forgotten once they're over. As for the legacy items, they may not be fully worth the money that's being spent, but in a city that finds it as hard to get things done as Toronto does, they're something to be thankful for.

The truth about K-cups

I don't own a Keurig single-serving coffee maker, or one of its competitors (assuming the Keurig juggernaut hasn't driven them out of business). I make my morning fix in a French press, using coffee that costs me about $14 for a giant container from Costco.  I've tried Keurig coffee a couple of times at places like the service department at my car dealership, and found it weak and muddy.  Still, I know I'm in a minority here -- people seem to like the convenience over all else, and damn the cost.

A couple of months ago, the guy who invented the K-cup and sold the patents to Keurig Green Mountain for peanuts was lamenting what he'd done: not so much the fact that he'd left a fortune on the table, as that he'd inflicted on the world a machine that generated endless mountains of used K-cups to moulder for decades in town landfills. He claimed that he was astounded that the machines had caught on for home use, given the extraordinarily high cost per cup; his idea had been that they'd find a home in places like my dealer's service department.

Today we see this fascinating story, about Keurig climbing down from its decision of a few months ago, to make its second-generation brewing machines incompatible with reusable coffee holders. As a non-user of the product, I had no idea about this, but it turns out that you used to be able to buy a reusable gewgaw ("'My K-cup") that you could fill with any coffee of your choice, and reuse over and over again. No more mountains of one-use K-cups in the landfill, and no more paying the equivalent of $50 per pound for coffee in pre-filled K-cups. There was a consumer uproar when the new machines were set up to be incompatible with My K-cup, and after seeing sales of its machines tank, Keurig has had to reverse course.

Keurig has claimed for some time that it is hoping to introduce recyclable or compostable K-cups by (wait for it) 2020. It had better speed that timetable up, because smart consumers have now been given a clear insight into the company's business model. It was well-known that the machine itself was largely sold as a loss leader, with the profit coming mainly from the subsequent sale of over-priced pods. It's now clear that the company's profitability, and its huge market capitalization, entirely rely on this.  Customers can in fact endlessly refill their own pods with their own coffee; if enough of them now choose to do so, Keurig will be in trouble.  It could, of course, try to increase the price of the machines themselves, but that too is likely to lead to a consumer revolt.

It's a mess entirely of the company's own making, and they seem pretty contrite about it. It remains to be seen whether their customers, or their shareholders, will be forgiving. Me, I'm sticking with the French press -- though, come to think of it, I have to take my car in for service tomorrow, so....

Land of hopeless Tories

Going into the UK general election, there was a consensus among the media and pollsters that just about any result was possible. Maybe so, but one of the outcomes where you could have got quite long odds has turned out to be the actual result: David Cameron's Conservative Party has won an overall majority over all other parties combined*. No more coalition (not that there's much left of the LibDem party to coalesce with): with a slim but manageable overall majority of 12 in the 650-seat House of Commons, the Tories can do things their way.  Here are just a few thoughts on what may lie ahead:

Another election in the near future?  You could have had decent odds before the vote on 2015 being a year with two elections, but the Tory majority has deep-sixed that prospect. Even if the Tories had fallen just short, the fact that three other parties (Labour, LibDem and UKIP) did so poorly that their leaders promptly quit, would have ruled out another vote any time soon.

A referendum on EU membership? Looks almost certain. Cameron promised a vote if the Tories won a majority, as they have now done. He has said he will campaign for the UK to remain in the EU provided some of the terms can be renegotiated, but a lot of his MPs, and much of the pro-Tory press, are ferociously anti-Europe.  The EU vote is certain to be one of the key consequences of Thursday's vote, along with.....

Another referendum on Scottish independence?  The Scottish Nationalists (SNP) under new leader Nicola Sturgeon won 56 of Scotland's 59 seats at Westminster, contributing mightily to the demise of the Labour Party. Many Scottish voters are incensed that the promises made by the main parties at Westminster ahead of last year's referendum have been quickly forgotten.  It will be easy now for the SNP to portray the Cameron government virtually as a foreign occupier, with the Tories almost shut out north of the border. Ms Sturgeon says there can only be another referendum after a fresh election for the Scottish Assembly -- but that election may be only a year away.

More austerity?  It looks that way. As anyone with even a smattering of economics predicted, the austerity measures instituted by Chancellor George Osborne have failed to produce the promised elimination of the budget deficit, because they crimped growth and thereby reduced tax revenues. Osborne has promised to double down on the losing bet, potentially cutting public spending as a share of GDP to levels not seen since the 1930s.

The end of UKIP? The fringe nationalist/anti-immigrant party led by the clownish toper Nigel Farage won only one seat, and Farage himself failed to win election . However, the party's total number of votes won was third largest of any party, behind only the Tories and Labour. Needless to say, UKIP has now come out in favour of electoral reform!  It's unlikely that the party will go away, particularly if the Labour Party, whose disenchanted supporters provide many UKIP recruits, goes into a period of internal strife as it seeks a new leader.

And to end on a slightly comical note: Boris Johnson, Prime Minister?  BoJo is back in Parliament as MP for Uxbridge and remains Mayor of London. If the Tories had gone down to defeat, Johnson would have been odds on favourite to succeed David Cameron as paty leader. He wants the top job, and Cameron has mused in the past that he wouldn't want to serve more than two terms, so....Depending on how you feel about Greek-spouting, bicycling, shock haired buffoons running the country, you may think this is an even scarier prospect that the UK leaving the EU, or Scotland leaving the UK.

* This was so far out-of-line with pre-election polls that a special inquiry is to be held (into why pollsters are so useless).  

Trudeau to Harper: my tax cut's better than your tax cut

It's been clear for some time that tax cuts, as detailed in the recent budget, will be a major plank in Stephen Harper's re-election campaign this fall. Liberal leader Justin Trudeau has now unveiled one of the key elements of the Liberal Party's economic plan: (drum roll please) -- tax cuts!

Not the same tax cuts as Harper's, mind you. The Tories' plan is carefully targeted at their perceived electoral base, with an income-splitting plan that favours families with one high earner, and an increase in tax-free savings limits that will be used almost solely by well-off seniors. Trudeau's plan is aimed at the amorphous "middle class", a vast swathe of the population earning between about $45,000 and $90,000 a year.  People in that income bracket would see their marginal tax rate fall by a couple of points, and would also benefit from a rationalization of two existing child care benefits into a single, more generous payment.  The Liberal plan would also reverse the tax free savings increase, but in the short-term that's a revenue-neutral move, despite the Tories instant attempt to portray it as a tax grab.*

To pay for these changes, Trudeau would undo the Tories' income splitting boondoggle -- which is a risky proposition, given that the first cheques under the scheme will hit the mailboxes of the lucky beneficiaries just before the election campaign gets started.  Trudeau's plan also includes a higher marginal tax rate for the notorious "1 percent" at the top of the income scale, which in Canada means those earning in excess of $200,000. The marginal Federal income tax rate for that tax bracket would rise to 33 percent from the current 29 percent. (Note to wealthy non-Canadians: before you book your ticket here to take advantage of what looks like a low tax rate, you should be aware that each of the Provinces levies its own income tax on top of the Federal tax).

Will Trudeau's plan sway voters toward the Liberals?  There's no doubt that it's a fairer plan, though whether that counts for anything with today's voters remains to be seen.  However, it's risky for Trudeau to be taking on Harper using one of the PM's favourite weapons, the tax cut. The voters know, or think they know, that Harper can be trusted to deliver -- indeed, most of the government's tax cuts will be in place by election day. Trudeau is asking voters to take him at his word.

Moreover, even in planning a minor tax hike for a small segment of the population, Trudeau is taking a risk.  The "lower my taxes" mantra is now so ingrained in the Canadian political psyche that even a tax pitched as a fairness measure could backfire. "Middle class" taxpayers, with some judicious help from the Tory propaganda machine, could easily be convinced that this is just the thin end of the wedge: today the 1 percent, but tomorrow the rest of us, and a return to the discredited "tax and spend" Liberal Party of the past.

What's really sad here is the fact that "tax and spend" is indeed discredited.  Past generations of Canadians paid their taxes and saw roads, subways and hospitals springing up all around them.  Now, thanks to Stephen Harper and like-minded politicians at all levels of government, the public sector is widely seen as a "gravy train" (Rob Ford's favourite term) that needs to be deprived of its fuel. Trudeau's plan does nothing to push back at that consensus. It will be interesting to see whether NDP leader Tom Mulcair, by far the smartest of the three main party leaders, is prepared to carve out a different approach.  

* Contributions to Tax-Free Savings Accounts (TFSAs) are made from after-tax income, so increasing the limit has no immediate tax impact. However, as income earned on TFSAs is not taxed, there is a growing cost to the public purse as time goes by. If you are cynically minded, you might think that the Tories' plan to raise the contribution limit is a thinly-disguised attempt to bind the hands of future governments, by slowing the growth of tax revenues.  

General malaise

It looks as if the implosion of the Canadian manufacturing sector, which began with the North American Free Trade Agreement (NAFTA) two decades ago, will only end when the last factory is shuttered and left to rot.  On Thursday, General Motors announced that it would be ending production of its Camaro sports car at its Oshawa plant, east of Toronto, this coming November. About one thousand jobs will be lost; GM employment in Oshawa, which exceeded 15,000 not much more than a decade ago, will fall to 2600 once the Camaro line closes.

The disturbing thing about this latest closure is that the jobs are not moving to Mexico: the Camaro will, from now on, be assembled at Lansing, Michigan, the very epitome of a US rust belt city. GM is making the move despite the 25 percent decline in the value of the Canadian dollar over the past two years. There could be no clearer indication that the steady collapse of the once-mighty Canadian auto sector is a structural shift, not a cyclical correction.

GM Oshawa's fate matches that of many of Canada's "heritage" auto making facilities. The General's manufacturing plant at Ste-Therese, Quebec, is long gone; the company's powertrain plant in my neighbouring city of St Catharines now employs barely 10 percent as many workers as it did two decades ago.  Chrysler, or Fiat-Chrysler as it now is, withdrew an application for government assistance for its Windsor assembly plant last year, an unusual move that many analysts fear will make it easier for the company to close the plant altogether. Ford has cut back on the number of models it produces at its Oakville assembly plant west of Toronto.

To some extent, these negative developments are offset by expansion of newer auto plants. Even GM is expanding in at least one location, investing heavily in its Ingersoll factory in southwestern Ontario, which opened in the late 1980s as a joint venture with Suzuki.  Perhaps the most successful auto plant in Canada today is Honda's factory at Alliston, Ontario, which manufactures the evergreen Civic model for the entire North American market.  Even these more modern transplant facilities may be vulnerable, however: Toyota recently announced the closure of one of its two assembly plants in southwestern Ontario, with the jobs moving to Mexico.

For now, the auto parts sector seems to be in somewhat better shape, with Magna (now legally relocated to its flamboyant founder Frank Stronach's homeland of Austria but still a major employer in Canada) and Linamar among the major players.  However, given the importance the assembly plants place on just-in-time delivery, it's inevitable that each line closure in Canada will sooner rather than later result in parts making jobs disappearing also.

What of the future? GM is hinting that it might possibly consider making a new model at Oshawa, but will not make a decision until it sees how its contract negotiations with the unions go late this year.  That's quite a shot across the bows. Beyond that, free trade deals in the works with major Asian economies, including the auto powerhouses of Japan and Korea, will put further pressure on the Canadian industry, with little obvious offsetting benefit for Canada. (Hyundai has flatly stated that it will never consider manufacturing cars in Canada).  By rights this should be a huge issue in the upcoming Federal election,  but if the Tories' two-pronged strategy -- sprinkling the stardust of tax cuts while scaring the bejeesus out of the citizenry about terrorism -- is successful, the demise of a major part of the Canadian economy may be largely ignored.