New Year's resolution

New Year's resolutions are not something I usually bother with, but this year I'll be making one that I have every intention of keeping.  I'm going to swear off making on-line comments on newspaper articles.

Getting involved with the troglodytes that hang around the comments boards has always been a fool's game.  During the Greek debt crisis a few years ago, it was received wisdom that the chief problem was that those feckless Hellenes just didn't pay their taxes.  Fix that, and all would be well.  A quick check of the OECD website produced a table showing that in truth, the taxation-to-GDP ratio in Greece was much higher than in most other countries.  Pointing this out earned me a quick invitation to, well, go away, along with the OECD and the horse we rode in on.

There are plenty of more recent examples I could quote, but the key thing I'm noticing now is that commenters have become even more irascible and contemptuous of facts*.  I suppose if Donald Trump keeps getting away with it, a lot of other people feel they can too. So in 2018 I'll be confining myself to expressing my opinions here, and staying well away from the Great Wen that the comments boards have become.

* UPDATE, December 31: When I wrote the original post I was looking for a particular quote to include.  Couldn't find it because I thought it was HL Mencken but in fact it's Hannah Arendt: 

“The ideal subject of totalitarian rule is not the convinced Nazi or the convinced Communist, but people for whom the distinction between fact and fiction (i.e., the reality of experience) and the distinction between true and false (i.e., the standards of thought) no longer exist.”

Thanks for stopping by in 2017, and happy new year!    

New Year's lack of resolution

You've got to love this new survey from CIBC on Canadians' financial priorities for 2018.  Fully 25 percent of respondents said that debt reduction was their main goal in 2018, compared to 15 percent opting for "just getting by" and smaller percentages for things like boosting investments or saving for a vacation.

Here's the thing, though.  Debt reduction has been identified as the main priority in the survey for each of the past eight years.  And what has happened to household debt during that period?  This has:

An undertaking of great advantage

I've largely ignored Bitcoin in this blog, for a variety of reasons.  Although the Blockchain technology that lies behind cryptocurrencies seems likely to be of lasting importance, it's far from certain that the cryptocurrencies themselves, at least as we presently know them, will last.  A number of central banks, including the Bank of Canada, are musing about launching cryptos of their own.  It's likely that serious people, as opposed to money launderers or speculators, would prefer their Blockchain-driven currency to be sponsored by a central bank rather than by the Winklevoss brothers*.

Another reason I've written very little about Bitcoin is that although it shows all of the classic signs of a bubble, it's always very difficult to predict when the air will come rushing out.  Still, it's hard not to laugh when you see the struggling beverage maker Long Island Iced Tea change its name to Long Blockchain, as happened last week, and immediately see a surge in its stock price.  Maybe I should change the name of the blog: "Let me say this about Blockchain" has a nice ring to it.

I think I am on solid ground if I say that most of the latecomers to the Bitcoin frenzy, the kind of folks remortgaging their homes to get a piece of the action, haven't the faintest idea what it's about or how it works.  Nothing new there, either:  one of the most famous scams at the height of the South Sea Bubble of 1720 involved "a company for carrying on an undertaking of great advantage, but nobody to know what it is".  Bitcoin has certainly brought great advantage to early investors; later ones, I'm guessing, not so much.  

* I may be the only person in the world who came out of "The Social Network" feeling that the "Winklevi" looked a whole lot more honourable than a lot of the other players, so I'm certainly not suggesting there's anything wrong with their profiting from Bitcoin. 

A waste of time and energy

Just before it closed up for the holidays this past Friday, Finance Canada released a set of long term fiscal projections.   Thanks to the stronger GDP growth seen in the past year or so, the baseline forecast now sees the Federal deficit falling to zero by....(drum roll please) 2045, almost a decade earlier than was projected last year.

It's hard to know whether to laugh or cry.  There will be at least six more elections before 2045, so any assumption of policy continuity is a complete non-starter.  And of course, we could be looking at the collapse of NAFTA, the demise of fossil fuels, wars and rumours of wars and any number of events that simply cannot be foreseen.

It's a good idea to have a baseline forecast in place to benchmark yourself against but really, what possible value is there in looking this far into the future?  And yet the media have been lapping this up, even complaining that it's naughty of Finance Canada to release it so close to Christmas each year.  My suggestion for next year: don't bother updating the report at all -- it's junk economics.

Over to you, Governor Poloz

Statistics Canada reported this morning that consumer prices rose 2.1 percent in the year to November, up sharply from a 1.4 percent year-on-year increase in October. This is the first time headline CPI has moved above the Bank of Canada's notional inflation target since January and only the second time it has done so since 2014.  While StatsCan identifies fuel prices, up a hefty 19.6 percent, as the main culprit for the rise in inflation, there are plenty of signs that price pressures are becoming more broad based, with seven of the eight sub-components of CPI rising*. 

Until this latest report, there had been some comfort for the Bank in the fact that its three slightly arcane core inflation measures were significantly below the 2 percent target.  However, two of those indices have also now moved up to just below the target level.

Governor Poloz has stressed that the Bank's future rate decisions will be data-driven, and that the Bank is still inclined to proceed cautiously.  Still, the fact that CPI is moving higher even though the exchange rate has been relatively stable makes it very likely that another rate hike will be forthcoming in January.

* The exception: clothing and footwear. 

Non-residents a non-factor?

A new report from the Canadian Government's housing agency, CMHC, seems to suggest that only about 5 percent of the country's housing stock is owned by non-residents.  Ergo, in the instant opinion of the news media, foreign buyers are not the primary cause of the unaffordability of housing in major cities, particularly Toronto and Vancouver.

No doubt there are other factors at work, especially the availability of cheap money and the apparent willingness of many Canadians to take on enough debt to choke a horse. All the same, there do seem to be grounds for assuming that the CMHC's data are understating the influence of foreign buyers and, credit where it's due, many of the problems with the data have been picked up in the comments on the linked article.

• The data are based on self-reporting, which is intrinsically problematic.  For example, how are dual passport holders classified? 

• Given that the ownership of the overall housing stock changes hands only gradually, it would be more informative to know what proportion of sales were attributable to foreign buyers, rather than what proportion of the country's total housing stock they now own.

• CMHC's data appear to count a home as foreign owned only if the owner is not resident in it, yet it is well known that many Asian buyers have purchased properties for their offspring attending Canadian universities, often registering the properties in the child's name. Such properties should surely be counted among those foreign owned, but in the CMHC's methodology, they aren't.  

Regardless of these problems with the numbers, it seems reasonable to conclude that the lion's share of the blame for high house prices should not be laid at the door of foreign buyers.  That blame belongs with the central bank, as well as with lenders who have continued to dole out money even as warnings of building stress levels have become ever louder.  The evident intention of the Bank of Canada to keep raising interest rates, coupled with new mortgage stress tests in the New Year, could make 2018 a much trickier year for the Canadian housing sector.

All housing, all the time

It's forecasting season in Canada, and the housing industry is front and centre.  Following on from yesterday's rosy forecast for house prices from Royal LePage, today brings several more tasty morsels.

• Here is a much less bullish outlook from another huge realtor, ReMax, forecasting that Toronto-area housing prices will fall sharply in early 2018 as a result of new mortgage stress tests (see yesterday's post), before bouncing back later in the year to end up basically unchanged from current levels.

• Here we have the Canadian Real Estate Association (CREA) predicting that those same mortgage rules will lead to a more than 5 percent fall in home sales in 2018, with prices nationwide edging lower. 

• Here is a report, originally from Bloomberg, suggesting that borrowers facing problems as a result of the new mortgage rules are increasingly turning to unregulated mortgage lenders, paying fancy prices for the privilege and increasing systemic risk.

• And if that's not scary enough, here is a report on new data from Statistics Canada showing that Canadian household debt has reached yet another record high, at 171.1 percent of disposable income. 

You've got to love the last sentence in that final story, a quote from a gent at the Credit Counselling Society: "Canadians need to gain control of their finances and use a budget/spending plan to effectively manage their expenses".  Good luck with that one, sunshine -- you're going to be a busy boy in 2018. At least, that's my forecast.

Guess who's forecasting higher house prices!

Today brings us a new forecast that house prices in the Toronto region will rise 6.8 percent in 2018, the fastest rate for any major Canadian conurbation.  Here's a link, but before you open it, try and guess what kind of person or company is making the forecast. 

Got it in one, I'm guessing.  The rosy forecast is from Royal LePage, one of Canada's largest realtors.  Now there are good reasons to think that the long-term direction of house prices in Toronto is upward.  The region's population growth is steady, thanks in part to the fact that it is the preferred destination for new immigrants.  As a result, demand for new housing units can be expected to increase.  At the same time, new construction, particularly for detached family homes, remains sluggish.  Developers blame this on zoning and planning restrictions, but it seems more likely that slapping up condo towers hither and yon is more lucrative.

All of that may be true, but there are headwinds that the market is certain to face next year.  One is the introduction of new stress tests for borrowers.  Studies suggest that 20 percent even of existing borrowers would fail to meet these tests, so it seems likely that the percentage of would-be new buyers who fail to meet the new criteria may be even higher.  The Royal Le Page forecast acknowledges this, but expects it to have an impact only at the start of the year.

Then there's the economic environment.  Royal LePage thinks that strong job creation and income growth will support housing demand.  Indeed it would, but most forecasts call for the slowing in growth that was already evident in Q3 GDP figures to persist into next year.  If that doesn't happen, the Bank of Canada will certainly continue its policy of gradual monetary tightening.  Either slower growth or rising borrowing costs could easily invalidate Royal LePage's rosy scenario -- and we could well be looking at both.

But who takes house price forecasts from realtors seriously anyway?*  I believe it was the philosopher Bertrand Russell who used the term "arguing against interest", best defined through an example:  if I tell you there is no God, you can safely ignore me, but if the Pope starts telling you there is no God, that's a different matter altogether.  If realtors predicted a softer housing market once in a while, it would be easier to take them seriously. 

* Aside from me, I guess.

The one about Nazis

Spoiler alert for viewers of The Crown who have not made it to Episode 6!

We are devouring the second series of The Crown at a two-episodes-per-night pace.  It amazes me that, with the Queen and Prince Philip still very much alive, the producers are so willing to air the Royal Family's dirty laundry.  One episode in this series was entirely about Philip's long-rumoured philandering; Princess Margaret seems like a high-class tart; and the Queen Mother is portrayed as an insufferable and humourless snob.

Last night we watched episode 6, in which the Duke and Duchess of Windsor were depicted as not merely insufferable snobs, but also as Nazi fellow-travellers.  The producers have been very careful to keep everything about the show in its proper time period, from the cars to the twinsets that the Queen often favours.  So I was a bit surprised to find a major error in protocol as it applies at the Foreign Office.

Early in the episode, incriminating documents about the Windsors are translated by a Foreign Office linguist. He barges into his boss's office, to be greeted with a bark of "Don't you know how to knock?"  The two of them then go to a senior diplomat's office, carefully knocking on the door before entering.  Here's the thing: almost the first thing I was told when I started work at the Foreign Office many years ago was: never knock on a door. Even if you suspected that the Permanent Under Secretary was in flagrante with his secretary at that very moment, you just walked in unannounced.  I never encountered that practice anywhere else and I'm surprised that nobody mentioned it to the people making The Crown.

It's probably not a spoiler if I reveal to you that the Duke of Windsor seems to have been a conniving sack of sewage.

Bank of Canada: no change

The strong employment data released last week led some market participants to think that the Bank of Canada might tighten policy further at its Governing Council meeting this week.  However, the consensus expectation was for no change, and today the Bank confirmed that it will be keeping its overnight rate target at 1 percent.

The press release notes that developments in the economy since the Bank's previous meeting in October have been broadly in line with expectations.  Growth has begun to moderate from the rapid pace seen in the first half of the year.  However, it is striking to note how much of the release is devoted to developments that could lead the Bank to tighten policy again before too much longer: strong employment gains, rising wages and an upward creep in inflation, both headline CPI and the Bank's favoured "core" measures.

The market is currently pricing in no more that a one-in-three probability of a rate hike at the Bank's next policy meeting, set for January 17.  If the economic data, particularly regarding employment and wages, remain as strong as they have been recently, a rate move at that meeting or at least by the end of Q1 seems much more likely than not.

That said, there are at least two wild cards that the Bank will have to take into account.  First:  new mortgage "stress tests" will be introduced in the new year, applicable to non-insured mortgages. Studies suggest that as many as one in five mortgagees could fall short of the new tests, a number that would only be increased by further monetary tightening.  Second: NAFTA.  The "drop dead" date for the talks has been pushed back to March from the end of this year, but there are plenty of indications that the negotiations are not going well.  The negative impact on Canada of a US withdrawal from NAFTA is debatable, but the Bank of Canada would surely want to avoid making a bad situation worse with an ill-timed rate move. These wild cards are likely the main reason that the market is not more confident about a rate hike in January.

It's all over for Bitcoin!

I don't pretend to understand Bitcoin and I certainly don't understand why investors and hedge funds are falling over themselves to invest in something so essentially ephemeral.  I know a bubble when I see one, and this can't end well.

But we now have a clear sign that the party will soon be over:  the Bank of Canada has published a research paper suggesting that it may start to look at setting up a cryptocurrency of its own.  If the regulators are showing up at the door, it's surely a sign for the speculators to move on to the next shindig.

UPDATE, December 4: And it's not just Canada that wants in. Now Venezuela is talking of setting up a cryptocurrency.

More extraordinary job gains in Canada

StatsCan reported this morning that Canada added 80,000 jobs in November, fully eight times as many as the analysts' consensus had predicted.  This pushed the jobless rate down by a remarkable 0.4 percentage points, to 5.9 percent.  This is the lowest jobless rate since February 2008, at the inception of the financial crisis.

Details of the report are, for the most part, as encouraging as the headline. Although more than 50,000 of November's new jobs were classified as part-time, the addition of 30,000 full-time jobs was in and itself way stronger than the analysts' consensus.  Moreover, the month saw 30,000 new jobs in manufacturing and 16,000 in construction, meaning that the focus of job gains is firmly in the productive sector -- indeed, 72,000 of the new jobs were in the private sector, with little change in either public sector employment or self-employment.

In the past 12 months full-time employment has grown by 441,000, or 3 percent, with part-time employment falling slightly.  Somewhat perplexingly, total hours worked in the economy rose only 1 percent in the year.  One possible explanation for this is that companies are more confident about using new employees to boost production, rather than relying on overtime work by the existing workforce.

The strength in employment seems to suggest that the much-anticipated slowdown in GDP growth may not be as pronounced as some have forecast, though it needs to be kept in mind that employment is generally seen as a lagging indicator.  (StatsCan reported separately today that real GDP rose at a 1.7 percent annualized rate in Q3, in line with expectations but significantly slower than in the first half of the year).  With the Bank of Canada already signalling that it sees the economy operating close to full capacity, it seems likely that a further rate hike will be forthcoming during the winter months. All such bets will, however, be off in the event that the ongoing NAFTA renegotiations collapse.

Bank of Canada: the risks are still the risks

The Bank of Canada released its semi-annual Financial System Review this morning.  Introducing the Report to the media, Governor Stephen Poloz noted that the key risks identified by the Bank are the same as they were six months ago, and indeed the same as they have been for several years now: high and rising household indebtedness, and imbalances (read: overvaluation) in the housing market.

Gov. Poloz pointed out that household indebtedness continues to rise faster than household incomes. As the OECD noted earlier this month, Canada's households are now the most indebted in the developed world.  The increase in debt has seemingly not yet been affected by the Bank's increasingly urgent warnings, or its steps toward tighter policy.

Poloz noted that steps by the Government to regulate high-ratio mortgages (less than 20 percent down-payment) more tightly have reduced the issuance of such mortgages.  However, the Bank is concerned over a possible deterioration in the quality of non-high ratio mortgages, with amortizations stretching beyond 25 years and more such loans being taken out by highly-indebted households. New regulations will be forthcoming in the new year to regulate these mortgages more closely and ensure that the borrowers can withstand a rise in interest rates.  The Bank welcomes this prospect, though one wonders whether Poloz ever asks himself why the lenders need the Government to impose such prudence on them, rather than adopting it themselves.

As regards the housing market, Poloz notes that the froth seems to have come off the Toronto area market in response to steps announced by the Ontario Provincial Government back in April.  However, the Bank is waiting to see whether Toronto house prices follow the pattern set in Vancouver, where the effect of earlier government measures seems to have faded, with prices starting to rise again.  Poloz also notes that the fundamentals of the market are strong, with demand driven by rising population and employment.

The Bank's conclusion is that Canada's financial system remains "resilient".  That message is likely to be reinforced over the course of this week by the release of  financial results for the major banks.  The first of these, Scotiabank, today announced an 11 percent year-on-year rise in profits, a remarkable result considering nominal GDP is rising at less than a 6 percent pace.  So far there has been little evidence of any impairment in the banks' credit quality, despite the surge in household debt. Some commentators are suggesting that Gov. Poloz sounded a little complacent today, but for now, he seems to be on solid ground.   

Good news is no news

Canada's fiscal deficit for the first half of the current fiscal year (April-September) came in at C$ 5.9 billion.  That marks a sharp reduction from the $ 7.8 billion deficit posted in the same period last year, and suggests that the deficit for the full year could fall well short of the budget projection of just under $20 billion.

Remarkably, among the major news outlets only the Toronto Globe and Mail considers these strong numbers worth reporting online.  It will be interesting to see if space for the story can be found in the weekend print editions.  Doubtful, I'd say: advertisements for Black Friday and Cyber Monday sales have made it all but impossible to find any editorial content in the papers over the past week or so.

That's a pity, because there seems to be a lesson in these numbers that's worth hearing, and not only here in Canada.  When the Trudeau government announced its first budget a couple of years ago, featuring a return to stimulative deficit financing, it was roundly castigated in the media for wild irresponsibility.  Today's data seem to suggest, not for the first time, that stimulating economic growth is a sure-fire way to keep fiscal pressures under control.  And as George Osborne and now Philip Hammond over in the UK could tell you, austerity for austerity's sake produces neither a stronger economy nor a balanced budget.

This is not to give Trudeau and his Finance Minister Bill Morneau a free pass.  If the economy slows in the second half of the fiscal year, as most forecasters expect, the deficit for the full year may well end up much closer to the budgeted figure than today's partial data seem to suggest. Longer term, it is regrettable that the Government has no real plan for bringing the budget closer to balance.  Still, good news is good news -- except, apparently, when it gets in the way of the advertising copy.       

UK economy: officially a disaster

Chancellor of the Exchequer Philip Hammond is generally seen as the only functioning adult in Theresa May's Cabinet, so needless to say he is widely reviled by the hardline Brexit fanatics.  Today he tabled a budget that underscores just how badly the Brexit fiasco is already hurting the UK economy, with no improvement in sight for at least the next several years.

This summary from The Guardian captures all the main points and includes some useful glosses from the paper's political editor. (Kudos to her, by the way, for using the obscure legal term "resile"!)  A couple of things particularly stand out:

• UK GDP growth is already the lowest among developed countries, and, painfully for Brexit supporters, below the rate being achieved by the EU.  Hammond has now had to lower the official forecast not just for this year (to 1.5 percent from 2.0 percent), but for each of the next five years -- that is, well beyond the date of Brexit itself. The budget offers no specific explanation for the lower projections, but maybe one isn't really needed.

• Government borrowing for the current year will be lower than originally forecast.  It is projected to continue to fall gradually over the five-year forecast horizon, though not as rapidly as Hammond forecast last year.  Remember when George Osborne embarked on the austerity trail back in 2011?  The deficit was supposed to be gone by now.  Instead, half a decade of supposed fiscal responsibility has exerted a serious drag on the economy, with no end in sight. 

It's a depressing picture. Let's give the last word to the satirical website, The Daily Mash:  "Economic growth is bollocks and we don't need it, say Brexiteers". Or was that from The Daily Telegraph?

He's finally gone!

Unpredictable to the last, Zimbabwe President Robert Mugabe abruptly resigned this morning, just as impeachment proceedings against him were getting under way.

I never met the old rogue, but I feel like I have been following his career for half a century.  When I went for my day of interviews at Cambridge in the winter of 1966-67, one of the hot topics in international affairs was the future of what was then Southern Rhodesia.  The white minority government led by Ian Smith was resisting the efforts of the UK Colonial Office to move toward independence with black majority rule, as had happened all across Africa in the preceding decade.  Instead, Smith and his cohorts were threatening a unilateral declaration of independence, or UDI.

So I found myself getting into a lively discussion of Rhodesia and UDI with one of my interviewers that cold winter's day.  The interviewer was none other than Simon Schama, just a few years older than me but already taking on a teaching role in the university.  I can't have said anything too stupid or outrageous to Schama or the other interviewers, because I wound up getting accepted into the college.

While I was studying, UDI indeed happened, prompting the UK to impose sanctions on Rhodesia.  When I graduated, my first job was with the UK's Foreign and Commonwealth Office in London, where the Rhodesia situation was front-and-centre on a daily basis. Mugabe was already a major player in the resistance to Smith by then, having founded ZANU, the Zimbabwe African National Union, back in 1963. 

A combination of sanctions and Mugabe-led guerrilla activities through the 1970s finally made Smith's position untenable in 1980, and Mugabe became the first Prime Minister of the renamed Zimbabwe in that year.  It's remarkable to look back and see how he was regarded at that time: as a heroic resistance leader and all-round exemplar of liberation and enlightenment.  However, it did not take long for tribal rivalries to resurface, with a low-key civil war breaking out in 1981 between Mugabe's ZANU and the rival ZAPU, led by Joshua Nkomo.

Late in the 1980s the ZANU/ZAPU conflict ended, with Mugabe now assuming the Presidency and Nkomo taking a senior position in the government. For a number of years the economy seemed to recover well, but Mugabe's dictatorial ways soon put an end to the progress.  A combination of expropriations, venality and outright incompetence turned Zimbabwe from "Africa's breadbasket" into a basket case.  With inflation reaching Weimar Republic levels and living standards collapsing, millions of Zimbaweans fled the country, with most heading to South Africa. 

Mugabe contrived to stay in office despite losing the 2008 election to Morgan Tsvangirai, but it appears that his determination to see his second wife Grace succeed him finally led the army and the long-suffering populace to oust him.  The key question now is, how can Zimbabwe rebuild after the decades lost under Mugabe's misrule? 

Can the agricultural sector be reformed so as to restore some of the country's former export capabilities?  The farmlands taken from the white planter class were distributed to new owners, who may not wish to give them up.  Will South Africa look to return its 2-3 million Zimbabwean immigrants quickly to their homeland?  The migrants are a major burden on the South African economy (and a convenient scapegoat for its high crime rate), but it would be almost impossible for Zimbabwe to reabsorb them quickly, given the very high unemployment rate that already exists. 

Perhaps most important, will Zimbabwe's foreign friends come to its aid with more than just kind words?  The UK, as Zim's former colonial master, would be a logical place to turn for help, but the government in London is bogged down in the Brexit morass, and the anti-foreigner mood among UK voters might make it difficult to offer much material support.  A more likely source of help is China, which has been investing massively in east Africa for a number of years.  The opportunity to add another state to its growing roster of friends in the region will surely prove irresistible to Beijing, and whoever takes over from Mugabe will not be in any position to drive a hard bargain.

Roll out the pork barrel

The next Provincial election here in Ontario is set for June 7, 2018.  A few months ago, Premier Kathleen Wynne and her unlovely crew were insanely unpopular with the electorate: at one point the Premier's personal approval rating dipped as low as 14 per cent, a depth to which even Donald Trump has not yet sunk.  With nothing much to lose, and a strong local economy providing a healthy revenue boost, the Liberals have embarked on a truly astounding series of targeted giveaways aimed at buying back the lost voters.  There was yet more largesse in yesterday's Fall Economic Statement from Finance Minister Charles Sousa.

My aging memory isn't good enough to recall all the money that's been thrown around, but this list should be representative enough:

• The minimum wage, currently C$ 11.60/hour, will jump to $14 at the start of 2018 and will hit $15 at the start of 2019 -- the latter increase being, of course, contingent on the Liberals being re-elected in June.

• The small business sector has been warning loudly that the higher minimum wage will be a job killer, so Sousa's statement yesterday included a cut in the corporate tax rate to offset some of the impact.

• Prescription drugs will be provided free of charge to everyone under the age of 25, starting in January. At the moment only seniors get their drugs paid for. 

• Tuition fees for college have largely been eliminated for lower-income students.

• Homeowners can get a smart home thermostat for nothing.

• The Provincial portion of sales tax on electricity bills has been waived, as part of a series of measures to stem the dizzying rise in energy costs resulting from the Government's "green" initiatives.

And so on.  According to Sousa, the Government will run a balanced budget in each of the next three years despite all of this new spending. We will have to wait and see what the Provincial Auditor, who has been loudly and repeatedly critical of the government's accounting standards, has to say about that.

These are not all bad initiatives, by any means, although the long-term costs for the short-term energy price relief will be enormous.  What grates is the sheer gall of the Government in assuming that a raft of giveaways just ahead of the election will suffice to make the voters forget the incompetence and scandals that have been a feature of the administrations run by Wynne and her predecessor Dalton McGuinty.

The Liberals are leaving nothing to chance.  Canadian governments are always big buyers of media advertising, but the scale of the marketing effort being put behind these measures is startling.  There's scarcely a prime-time ad break that doesn't trumpet one or other of these initiatives.  The ads are blatantly partisan, but a recent rewrite of the rules by Wynne's government leaves plenty of wiggle room, and they're using all of it.

I'm immune to being bought with my own money, but I'm not sure about my fellow citizens. Will people re-elect a government with a leader they heartily dislike just to get their hands on a free thermostat?  We shall see. 

Some things never change -- Tories, for example

It's now more than five years since we came back to Canada from our fourteen-year sojourn in the UK.  Looking back across the Atlantic has been a mostly depressing experience. First there was the Cameron/Osborne austerity policy, entirely ineffective and hugely damaging; then the whole Brexit referendum fiasco, created by Cameron entirely for the purpose of seeing off the rebellious right wing of his own party, with disastrous results; and now the Brexit "negotiations" themselves, with a clearly overwhelmed Theresa May presiding over a Cabinet of schemers and buffoons, with a sex scandal or two thrown in for good measure.

My wife commented a while back that it's a good thing we don't live there any more: we'd be angry all the time, and we're too old to live like that. She's right. I think what would make me angry -- and still does, even at a safe distance -- is that the Tories are only ever motivated by what's good for their party, not what's good for the country.  Did Boris Johnson ever really believe the lies he told on the campaign trail back in 2015?  Surely not, but he saw them as a way to power, and that was enough.

A friend recently gave me a quirky book called "The strange death of Liberal England" by George Dangerfield.  It was published in 1935 (though its style seems older than that) and it deals with the years leading up to the Great War.  The names of some of the players are familiar -- Balfour, Asquith, Lloyd George -- but the detailed history of the period is less well known, and offers some interesting foreshadowing of more recent events.

From 1906 to 1910 the Liberals had a majority in the House of Commons, but their ability to pass legislation was repeatedly thwarted by the Tories, who used their huge majority in the unelected House of Lords to turn everything back.  A fresh election left the two parties almost tied, with the Liberals agreeing to support limited Home Rule for Ireland in return for the Parliamentary support of Irish MPs.  The death of King Edward VII and the accession of George V presented the Liberals with an opportunity to bring in legislation eliminate the Lords' effective veto, backed by a threat to create as many as 500 new peers (all Liberals) if the Lords attempted to veto the move. After a closely-fought and rancorous debate, the legislation passed, and the Lords have never since that time been able to overturn legislation passed in the "lower house".

Deprived of the Lords as a weapon, how did the Tories respond?  Determined to oppose the Liberals at every turn, they chose to make nice with the Ulster Unionists, Protestants intransigently opposed to Home Rule -- "Home Rule is Rome rule".  One of the delights of Dangerfield's book is his startling frankness: he doesn't like Tories very much, and he views the Unionists with nothing short of contempt: "they cared for no-one but themselves".

The Tories didn't much like the Unionists or what they stood for, but needs must, and so an unholy alliance was formed.  It's that alliance that prepared the ground for all the troubles that followed -- the rising in 1916, the post-Great War conflict that ultimately led to the creation of the Irish Free State, with the six most Protestant counties of Ulster gerrymandered off to create Northern Ireland, and the decades-long "Troubles" that flared up in 1969 and were only ended by, of all people, Tony Blair, with the Good Friday Agreement.

That Agreement allowed something resembling real peace to reign over all Ireland for the first time in almost a century, with the border between the Republic and the North fading into insignificance. Sadly ironic, then, that one of the many potentially baleful consequences of Brexit could be the return of a "hard" border between the two jurisdictions, with unpredictable consequences.  And tragically, the hapless May is only able to govern at all through a devil's bargain with -- who else? -- the Unionists.

Having conspired in the division of the island for partisan political reasons a year ago, and having never looked past military force to keep it in place ever since, the Tories may be about to leave their mark on Ireland all over again.  And all because of a partisan decision by David Cameron that went wildly wrong. Truly, some things never change.

Canadian job market still very strong

Labour market data for October, released by Statistics Canada this morning, surely put to rest any suggestions that the economy is facing a prolonged slowdown.  The marginal decline in GDP for August reported by StatsCan earlier this week, coming in the wake of a flat reading in July, had led some analysts to proclaim that the run of strong data seen through the first half of the year was definitively at an end.  It seems nobody told the labour market.

The headline number -- an employment increase of more than 35,000 -- was well above the analysts consensus, which had called for a rise of just 15,000.  The details of the report were even stronger than the headline.  Full time employment rose 88,000 in the month bringing the increase over the past two months to a remarkable 200,000*.  Part-time employment fell by more than 50,000 in October.  On a year-over-year basis, full time employment has risen by 397,000, partially offset by a decline of 88,000 in the number of part time jobs.  Although the unemployment rate ticked up to 6.3 percent in October, it stands 0.7 percentage points lower than a year ago.

There are signs that the tightness in the labour market is having an effect on earnings.  The year-on-year rise in average hourly earnings in October was 2.4 percent, the fastest gain since April 2016.   As recently as April of this year, this increase had been as low as 0.7 percent. Although the Bank of Canada has signalled its intention to be cautious in making any further tightening moves, this is a trend it will be following closely in the months ahead.

The one caveat that needs to be kept in mind in assessing this very strong employment report is that employment is usually a lagging indicator of economic activity.  This may mean that the strength in employment as the economy enters the final quarter of the year simply reflects the strong growth seen in the first half.  If this is the case, the deceleration in GDP growth seen in Q3 may translate into slower employment gains in the month ahead. That caveat aside, there is little to dislike in today's report.

*  Remarkably, it looks as though the strike at a GM plant in Ingersoll, Ontario from mid-September to mid-October, which led to widely-publicized layoffs across the Province,  had no discernible impact on the national employment numbers.

Friendly fire

It's not common for retired central bankers to criticize the current incumbent, so this intervention by former Bank of Canada Governor David Dodge is noteworthy.  Dodge thinks that the high level of household debt should induce the Bank to tighten more rapidly, so as to discourage further debt accumulation.  As Dodge notes, the Bank seems to be pausing its tightening cycle, possibly for many months,  with its benchmark rate at just 1 percent, far below the 3 percent that the Bank itself regards as a neutral level. 

Based on his comments to the House of Commons Finance Committee in his semi-annual testimony this week, it seems that Gov. Stephen Poloz may think the exact opposite -- that the high level of debt may mean that excessively rapid tightening could sink the economy. Poloz told the parliamentarians that the Bank had "recalibrated" its economic model in regard to household income and debt, and went on to say that "the economy is likely to respond to higher interest rates more than it did in the past". 

This seems intuitively obvious, but also ominous.  Despite some slowing in the most recently reported months, the economy is operating very close to full capacity.  Even though inflation is tame, conventional wisdom would suggest that this should entail setting interest rates at least at a neutral level, or even slightly higher.  If fears over household debt mean that even in current circumstances, the Bank feels powerless to tighten its policy stance, it's hard to imagine a set of economic conditions in which it will ever be able to move rates back to more "normal" levels.

Canada GDP data: not so scary

Canada's GDP fell 0.1 percent in August, its first decline in ten months.  Everyone from the Bank of Canada to the Bay Street analysts coven had been warning for some time that the rapid pace of expansion seen in the first half of the year was bound to moderate.  Still, today's report of an outright decline came as something of a shock.

Look behind the headline number and it becomes clear that the economy is not about to plunge from heady expansion straight into recession.  Of the 20 sectors reported by Statistics Canada, 12 expanded in the month.  There was significant weakness in both manufacturing and resource extraction (including oil and gas), but the official release makes it clear that the declines in output in these sectors were mainly the result of the maintenance shutdowns that always occur at this time of the year.

Coming in the wake of a basically flat performance in July, the fall in GDP for August ensures that the result for the full third quarter of 2017 will be weak, though an outright decline remains unlikely.  This is consistent with the view from the Bank of Canada, Department of Finance and elsewhere, that the economy's growth rate is likely to slip from the 3 percent-plus rate seen in the first half of the year to something nearer 2 percent over the next two years.

The Canadian dollar promptly weakened by almost half a cent against its US counterpart when the data were released.  Expectations that the Bank of Canada would tighten monetary policy further at its December 5 rate setting meeting are being quickly unwound.  With continuing uncertainty over NAFTA and household indebtedness, the Bank may well find it has no opportunity to resume its removal of stimulus until the second quarter of next year.

What should he have done?

This is not the kind of topic I usually write about, and I do so now with some trepidation, but there's something about one of the day's major news stories that I can't get my head around.

The actor Kevin Spacey has come out as gay, which I suspect is a surprise to absolutely no-one.  He did so after another actor I'm not familiar with accused him of a drunken but unconsummated sexual assault more than three decades ago, when the accuser was only fourteen years old.  Spacey says he doesn't remember the incident,  apologizes if it did happen, but also says that after years of keeping very quiet about his private life, he's now living "as a gay man".

The gay community is outraged that by coming out in response to an accusation of pedophilia*, Spacey is giving credence to the old slur that gay men are a danger to young boys.  As one Twitter writer has put it, Spacey has invented something that didn't exist before: a bad time to come out. But here's the thing: it wasn't Spacey that chose this time to come out.  He was outed by his accuser as both a gay man (which is fine) and a pedophile (which definitely isn't).

What was he supposed to say?  In the current finger-pointing frenzy around Hollywood,  a denial of the entire incident would probably not have been believed, and nobody would have believed him if he said he wasn't gay.  Spacey was put in a difficult position here; his response may not have been ideal, but it's very possible that the gay community has amplified its negative impact by making such a fuss about it.

The way things are going in the movie industry right now, it won't be long until another scandal comes along and knocks Spacey off the front pages.  In the meantime, he must be pondering the wisdom of his decision not to be open about his sexual orientation all along. 

* Strictly speaking the incident here is hebephilia as the accuser was 14 years old. Pedophilia refers to adult sexual activity with prepubescent children. 

An idea of limited value

Linda McQuaig has been a fixture of Canadian public life for many years, as a left-leaning, nationalistic newspaper columnist and occasional activist. She ran unsuccessfully for Parliament, as a candidate for the left-ish NDP, in the 2015 federal election.  Anyone who has had a running feud with Conrad Black can't be all bad, and a lot of McQuaig's ideas make a lot of sense.

But not, alas, this one, published on the op-ed page of the Toronto Star. Ms McQuaig is justifiably angry at the way that Sears Canada has been run into the ground under its American venture capitalist owners.  She is especially incensed at the way those owners have extracted large amounts of money from the company in the form of special dividends, then fired all of the company's employees without severance and with their pensions chronically underfunded. 

Ms McQuaig may be wrong when she suggests that Sears might have survived under different management, but the rest of her analysis is largely correct.  However, she veers wildly off track when she tries to suggest a way of preventing this kind of thing from happening again.  "No", she says, "I'm not advocating the overthrow of capitalism" (phew!) but something she says is "easier -- changing our corporate laws so that those controlling corporations can be held personally liable for money owed to their employees". 

That's right: she wants to put an end to limited liability.  Can I suggest gently that she hasn't thought this through very carefully?  The type of people who have shafted Sears Canada employees are certainly the unacceptable face of capitalism, but they are very much a subset of the universe of shareholders.  Millions of Canadians directly own corporate shares as part of their savings; millions more are set to rely on corporate or individual pension plans that invest heavily in the stock market. 

Ms McQuaig can't just take away limited liability from nefarious individuals she happens not to approve of.  If it's removed, it's removed for the wicked and the righteous alike. She may not think she's "advocating the overthrow of capitalism", but that would surely be the effect of putting an end to limited liability.

The kind of behaviour that killed Sears Canada and left its employees in the lurch has little to do with limited liability ownership.  What allows the "cartoon capitalists" (love that term!) to strip all the value out of a company is their access to vast amounts of debt, with the interest payments tax deductible.  If the authorities want to curb bad behaviour, this is surely the place to start, but even here it would be necessary to move very cautiously, because judiciously-used debt is a perfectly legitimate part of most corporate balance sheets. 

Doubling down or tightening up?

This has been a big week for Canadian economic policy. Tuesday brought Finance Minister Bill Morneau's Fall Economic Statement, while this morning we had the Bank of Canada's scheduled rate announcement. The early takeaway here is that the stage is clearly set for fiscal and monetary policy to start pulling in different directions -- never a good thing.

For the past six months or so, Bank of Canada Governor Poloz has been claiming that the Bank's ultra-easy monetary stance has been the primary factor in the economy's surprisingly strong growth, currently the fastest among the G-7 nations.  The Bank now believes that the economy is nearing full capacity, and hence decided to start removing stimulus during the summer. 

Hold on there, says Minister Morneau: it's the Trudeau government's stimulus plan that's working, and because of that, the government will be "doubling down".  Recall that during the election campaign of 2015, Justin Trudeau took what was seen as a considerable gamble in pledging the Liberals to introduce a fiscal stimulus program.  The key word in the plan was "modest", which Trudeau indicated would mean deficits of no more than $10 billion (all figures in Canadian dollars)  for no more than a couple of years. 

Once safely in power, the Liberals moved quickly away from the "modest" part, announcing substantial spending plans financed by deficits of upwards of $20 billion and no firm plan for a return to balance. It is far from clear that the party would have been elected if it had specifically promised this during the campaign: the opposition parties would have been quick to remind Canadians just how painful it had been to escape the country's last fiscal morass in the 1990s.

Back in the spring of this year, Morneau estimated that the deficit for 2017 would reach $28 billion.  Six months on the shortfall is estimated to reach less than $20 billion, thanks to the revenue boost resulting from unexpectedly strong GDP growth.  Hence Morneau's assertion that his fiscal plan is working and his pledge to "double down".  The Fall Statement includes a variety of measures aimed at the amorphous but much-loved "middle class", as well as a wide range of increases in program spending.

The opposition Tories are expressing alarm at what they see as a lack of fiscal discipline.  In truth, the projections are not excessively worrisome.  The growth projections, showing a significantly slower pace of expansion through 2018 and 2019, are in line with the Bank of Canada's.  There is no target for a return to fiscal balance, but the deficit is projected to decline steadily from year to year. The Government's initial fiscal plan saw public debt rising by $100 billion in four years; now it will take seven years for it to grow that much.  The public debt-GDP ratio will fall gradually.

All of that being said, it's hard to gainsay the fact that Morneau is giving up a lot of his room to manoeuvre here.  In the event that the economy falls short of his expectations,  the deficit may start to mount alarmingly, especially if the government tries to offset the slowdown through further stimulus measures.

And if the forecasts are correct and the economy does not slow down unduly?  Then we would have a situation in which the Bank of Canada is gradually reducing monetary stimulus to avoid a resurgence in inflation, even as the government is continuing to stoke demand.  As expected, the Bank left its overnight rate target unchanged at 1 percent today, but it continues to see the economy at or near full capacity, and hence warns that further reduction in monetary stimulus will still be needed.

It's been many years since we had monetary and fiscal policy in any kind of harmony.  For much of the Stephen Harper era, the Bank of Canada was forced to adopt a cheap money policy because fiscal policy was inappropriately restrictive.  We now seem to be going the other way:  Trudeau and Morneau's open purse strings may force the Bank to tighten monetary policy faster than it would ideally like.  Don't these guys talk to each other?           

Bank of Canada has no reason to hike rates

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

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

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

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

Flight into danger

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

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

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

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

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

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

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

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

The General Theory of Trump

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

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

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

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

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

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

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

Peak political correctness?

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

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

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

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

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

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

Mixed signals

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

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

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

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

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

Alt-right math

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

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

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

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

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

Bank of Canada will stand pat in October

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

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

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

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

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

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

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

Uneasy

One of the new offerings that showed up on our Netflix menu this month was Easy Rider, described as a "counter-culture classic". My wife had never seen it, so we thought we'd give it a go.  We were a little surprised by how poorly it was rated by the Netflix audience -- but then we watched it and all became clear.

The movie is a real dog's breakfast.  The first half is basically a hippy travelogue. The dialogue is mostly unscripted, which is not a good thing.  Director Dennis Hopper uses lots of long tracking shots of the magnificent scenery of the US west, with the protagonists (Hopper and Peter Fonda) engaging in mumbled conversations with each other and the various folks they meet.

Things start to take a darker turn when Jack Nicholson enters the "story" as a low-rent lawyer.  Jack is a far better actor than either Hopper or Fonda, and he leers his way through the middle of the movie before meeting a violent end.

Hopper and Fonda make their way to Mardi Gras in New Orleans (that's the "easy" part in the title). Neither the city nor its famous bacchanal looks the least bit appealing here.  Hookers are hired, drugs are consumed and the pretty tableaux of the first half of the movie are replaced by a blurry series of cross-cuts that are evidently intended to simulate the effect of LSD.

And then suddenly we're back on the bikes again, and the movie reaches a sudden and violent conclusion.  It's all wrapped up in just over 90 minutes but it seems much longer.

I don't remember Easy Rider as being this bad when I first saw it and I certainly don't recall the sixties being as tawdry as this.   Still,  at least the music stands the test of time -- well, apart from "If you want to be a bird".

Enough of the self-abuse, Justin

This past July marked 150 years since the establishment of the confederation of Canada, which started out with just four Provinces.  An occasion for celebration, you might think, and for much of the country it was just that.  In Ottawa, however, there was a distinct odour of self-loathing. Commemoration of the country's many real achievements was almost entirely drowned out by hand-wringing over the way the country has mistreated its indigenous peoples.  Anti-Trudeau segments of the media were vocal in castigating the government for setting such a downbeat tone on a supposedly happy occasion.

It hardly need be said that the treatment of indigenous peoples by Canada (and by our larger neighbour to the south) has been shockingly bad.  Best estimates suggest that there were about 25 million people living in North America when the white man "discovered" the place.  A very high percentage were killed by diseases to which they had no natural immunity (notably smallpox) and the rest were either penned into smaller and smaller tracts of their traditional territories or subjected to forced assimilation. It's not without justification that Canada's indigenous peoples like to render the first line of the national anthem as "O Canada, our home on natives' land".

Given this sad history, you can certainly make a case for the Government to acknowledge past transgressions at the Sesquicentennial celebrations, and to pledge to do better in the future.  After all, that was directed mainly at a domestic audience.  But how, then, do we explain Justin Trudeau's frankly bizarre speech to the United Nations General Assembly in New York this week?

At a time when madmen in Washington and Pyongyang are uttering blood curdling threats of nuclear annihilation; a time when a Nobel Peace Prize winner is presiding over ethnic cleansing in Myanmar; and a time when the ongoing stream of refugees on Europe's southern shores is starting to be matched by a similar influx at Canada's southern border, Trudeau chose to air Canada's dirty linen to the world. Much of his speech focused on the sins many generations of white Canadians have visited on their indigenous neighbours, leaving many still living in inadequate housing, with no access to clean water and facing poverty, unemployment and a variety of addiction issues. He also described to the Assembly members, who must have been mildly bemused by this detail, the steps his Government is taking to try to fix the problem, including splitting responsibility for indigenous affairs between two ministries instead of one.  

Worthy as all of this is, it's surely a matter for domestic consumption rather than something to be paraded before the most distinguished international assembly in the world. What makes this even harder to explain is that Canada has been busily lobbying for a seat on the UN Security Council.  Trudeau described Canada as "a work in progress"; it may well be that the Security Council will tell him to apply again when he's finished his homework.

Just a small deficit

Canada's Department of Finance has released its Annual Financial Report, and at least on the surface, it's mostly good news.  The Federal deficit for the year to March 2017 was C$ 17.8 billion, far higher than the $ 1 billion shortfall in the preceding fiscal year but markedly lower than the $23.0 billion projected in the budget back in February.

The way in which the smaller-than-expected deficit was reached is a little confusing. Revenues actually fell by $ 2 billion (less than 1 percent) from the preceding year, but the shortfall was smaller than had been expected at budget time. Program spending increased by more than 5 percent,  well above the rate of inflation, but this was less than had been budgeted.  Lastly, public debt service charges were slightly lower than budgeted because interest rates remained lower than the Department of Finance had projected.

It is unlikely that the smaller-than-expected deficit for the Government's first full fiscal year will be repeated in the near term. The Trudeau government has intentionally set out on a fiscal path that aims to stimulate the economy through a multi-year pattern of deficit spending. While the strong economy may keep revenues buoyant for much of the current fiscal year, program spending is unlikely to remain below target.  The Financial Report notes that much of the shortfall in spending in the year to March reflected slow disbursement of infrastructure transfers to Provinces and municipalities. Infrastructure investment was a major plank in the Liberal election platform, and it is very likely that the Government will do everything it can to get the money out the door more effectively from now on.

Is the prospect of continuing deficits anything to worry about?  The Department of Finance doesn't want you to think so. Page 10 of the linked report has a graph showing deficits as a percentage of GDP over a three-decade stretch.  The 2016-17 shortfall equates to just 0.9 percent of GDP.  This is certainly way smaller than the 4-5 percent shortfalls routinely seen at the start of the 1990s, a period of insanity that we can hope no-one in Ottawa wishes to repeat.  

Perhaps more pertinently, the Financial Report notes that the net debt of the entire public sector stands at just 27 percent of GDP.  This is by far the lowest in the G-7 -- indeed the average for that group is apparently 83 percent, though this is heavily influenced by the outsized debt of Japan and, to a lesser extent, Italy.  In truth, Canada's fiscal position is not a major cause for concern, but it would be a huge surprise if we don't start to hear the opposition decrying Trudeau's "financial irresponsibility" as we start to head towards, oh joy, the 2019* general election.

* Originally I stated wrongly that the Federal vote would be in 2018. We already have the tantalizing prospect of Provincial and municipal elections next year, so the trifecta of adding in the Feds as well would have been altogether too much!

Yawn! Household debt hits another new record

Statistics Canada reported this morning that the household debt to income ratio in Canada jumped more than one percentage point in the second quarter of the year, reaching a new all-time high of 167.8 percent.  At the same time, household net worth (which primarily means the equity value in family homes) fell slightly. Separately, survey data suggest that reliance on home equity lines of credit continues to increase and that seniors are. remarkably enough, now going into debt at a faster rate than younger Canadians. Is there any way that this debt spree ends well?

Logically, we should be at a pivot point now.  Consider these factors:

• House prices have been falling in the key Toronto market since April, when the Ontario Provincial Government announced a package of measures to calm the market.  Falling house prices should mean that those Canadians still looking to enter the housing market will need to take on less debt in order to do so.

• The collapse of housing prices should have alerted people to the fact that a stable level of household net worth (i.e. the equity in the family home) is scant consolation when debt is too high.  Over the past four months or so, millions of people have seen the value of their home fall sharply, and the marketability of that home dwindle, while their debt burden has remained unchanged. Now that StatsCan is reporting a small decline in household net worth for Q2,  this truth should be doubly apparent.

• The modest rate increases delivered by the Bank of Canada since June, and the evident risk that more will soon follow, have triggered a tsunami of advice from financial advisors, urging Canadians to ensure that their debt burden remains manageable.  

None of these three factors has been in place for very long, and they can have had little if any impact on the Q2 data released this morning.  The current quarter is a different matter: if, in the face of these cautionary signals, it emerges that households have continued to amass further debt, there will be only two possible conclusions,  neither of them palatable.  Either Canadians are too reckless to rein in their debts when they clearly should, or they are simply unable to do so.  If debt continues to increase, the Bank of Canada will have to think long and hard about how far and how fast it can tighten monetary policy. 

And I bet she voted for Brexit

True story.  This past Sunday morning I was waiting near the main gate of Christ's College in Cambridge, waiting for my sister to pick me up.  There was a lot going on. Graduates I had enjoyed a reunion bash with the previous evening were dropping off their keys at the Porters' Lodge and taking their leave.  People who had been attending an engineering conference in college were also bringing their bags for storage and preparing to leave town.  And there was a charity walk under way, with hundreds of people parading in an almost unbroken stream through the college for local good causes. There were army cadets waving big, green styrofoam fingers to show them the way.

Two Polish ladies who had been at the engineering conference came to the Porters' Lodge, paid their bills, handed in their keys and asked for their luggage to be stored.  Then they came out to the courtyard (which dates back almost half a millennium) for a last look round.  There's quite a small sign asking visitors not to walk on the exquisitely manicured lawn;  only Fellows of the college are permitted to set foot on the hallowed turf.  Maybe they didn't see the sign because of the stream of charity walkers, or maybe they didn't care, but one of them walked a few paces onto the grass to get a better angle for a selfie.

She was immediately spotted by the porter who was returning from putting her bags in storage. He called out in a loud voice, "Off the grass, please".  She obeyed at once, but not before the charity marchers had taken notice.  As they passed me, one middle-aged female walker said quite loudly to her companion. "There's always one, isn't there?"

Stephen can't wait

By the time the Bank of Canada's rate decision was announced by Gov. Stephen Poloz this morning, financial markets were pricing in a better-than even chance of a rate hike.  In contrast, a majority of business economists did not expect the Bank to move until October, when it is due to release its updated economic outlook.  One-nil to the market, then: the Bank raised its overnight rate target by 25 basis points to 1 percent, the second such increase this year.

The Bank's press release indicates that it made the move today in response to the steady flow of strong economic data, most notably the remarkably robust Q2 GDP numbers released last week. Earlier this year the Bank surprised markets by suggesting that the economy would reach effective full capacity by the end of this year.  Today's statement notes that GDP is now higher than the Bank had expected, which implies that we may already be almost at full capacity.  Although the Bank expects the pace of growth to slow in the second half of the year, and although it still sees some surplus capacity in the labour market, it clearly opted for an early move to avoid "falling behind the curve".

Remarkably, Canadian financial markets are now pricing in more tightening by the Bank than is currently priced in for the US Federal Reserve.  At least three more rate hikes are now expected, with one of them coming before the end of this year.  The Bank's release today is careful to note that further moves will be data-dependent, and there are at least two factors that should deter it from moving too quickly.

First, the economy's growth is heavily reliant on consumer spending, which makes up 64 percent of GDP.  Consumer debt, already at record levels, continues to grow, and it is hard to know the point at which even moderately higher rates might cause consumers to ease back on their spending.  Second, the prospect of higher rates is pushing the exchange rate ever higher: after this morning's announcement it spiked above 82 cents (US), its highest level in more than two years.  The Bank is anxious to see a higher level of export growth and will not want to see the currency strengthen unduly.

All of that said, more rate hikes are surely coming, with the next move probably in October.  The hand-wringing from financial experts about the problems that will be caused for households is already at a fever pitch.  Those of us old enough to remember a time when the Bank Rate was in double digits and rates would move around by a percentage point at a time can be forgiven if we feel slightly bemused by this.

The lonely goatherd (and shepherd and rancher)

Interesting article in the Sunday edition of the Toronto Star today, explaining how changing consumer demand is gradually leading corporations to reduce their investment in traditional livestock and focus instead on lab-created meats made from plant protein. This may well be the case, and you might suppose that it will be a great cause of rejoicing for groups like PETA, as well as fart-fretting environmentalists.

Except, of course, that if raising animals as a food source becomes a no-no, there may not be very many animals left to be treated ethically.  According to Statistics Canada, as of this past July 1 Canadian farmers owned 13 million head of cattle, 14 million hogs and about 600,000 sheep. Imagine that all "real" meat was banned starting tomorrow:  how many of those animals do you reckon would still be left alive by the end of this month?  Farmers aren't going to keep feeding animals they can't sell.  You can't release them into the wild, and there are far too many of them to put into zoos, even supposing that PETA and others would allow you to do that.

A world without animals raised as a source of food will be a world with a whole lot fewer animals. Is that an example of an unintended consequence?  I don't suppose this is news to PETA, but it's probably not something that has occurred to the majority of people.

Slob and Thug

Remember Rob Ford, the late Mayor of Toronto?  People who met him used to say that even if you disagreed with his politics, you couldn't help but like the guy.  He may have been a slob, but he was a lovable one.

Lovable is not a word that could ever be applied to his brother, Doug Ford.  When Rob fell seriously ill during the 2014 municipal election campaign, the thuggish Doug stepped into his shoes, only to be beaten by John Tory.  Well, it now looks as if Doug is gearing up to go after the job again in October 2018.  He plans to make a formal announcement to that effect on September 11.

Rob and Doug Ford were cut from the same political cloth.  Though reasonably wealthy, their appeal was and is based on unashamed populism.  Taxes are bad and the politicians at City Hall are riding a "gravy train" that wastes taxpayers money every day.  It's far from true, but as Donald Trump and Nigel Farage could both tell you, the truth doesn't seem to count in politics these days.

John Tory's term as Mayor of Toronto has been considerably calmer than Rob Ford's, but not all that different in substance.  Taxes have been kept low and services have been allowed to erode, with the books only kept close to balance by an endless stream of accounting tricks.  Decisions on transportation, an area in which Toronto is hopelessly underserved for a city of its size, have been blatantly politicized, at the expense of sound planning.

Next year, then, right-leaning voters will in effect have a choice between a real Ford and a scrubbed-up version.  Who is to say they won't opt for the real thing -- Thug Ford -- over the ersatz version, Tory John?  Toronto needs better, and just possibly, better may soon step forward.  The city's Chief Planner, Jennifer Keesmaat, has just announced she will be stepping down from her post in September, to pursue unnamed "new opportunities".

Keesmaat has regularly been overruled by Tory on key planning issues, from the insane Scarborough subway scheme to the rebuilding of the decrepit Gardiner Expressway.  Yet when she told Tory of her intention to quit, he reportedly pleaded with her to stay.  Maybe he realizes what a strong opponent she will be if she decides to take a run at his job.  Torontonians who are not paid-up members of 'Ford Nation" will be hoping that she does just that.

UPDATE, 8pm August 31: Jennifer Keesmaat has already moved to quell speculation that she might run for Mayor in 2018. Pity.

Bank of Canada: it's when, not if

Statistics Canada reported today that Canada's real GDP rose at a 4.5 percent annualized rate in the second quarter of the year, almost a full percentage point higher than the expert consensus.  This was the strongest pace of growth for any single quarter since 2011 and means that the first half of the year has seen the strongest gain since 2002.

The strength in Q2 was broadly based. Household final consumption expenditure built on the strong gains seen in Q1, rising a further 1.1 percent, driven by a 1.9 percent surge in goods purchases. Exports jumped 2.3 percent in volume terms, led by a very strong gain of more than 9 percent in energy sales.  Business investment rose only 0.5 percent in the quarter, but as this came in the wake of a robust 3.1 percent rise in Q1, it is clear that non-residential investment is once again contributing to the overall economy, after several disappointing years.

The sole area of weakness in the data was housing investment, which saw a 1.3 percent decline in the quarter.  This was largely due to technical factors, and it is not yet clear whether the market cooling measures introduced by the Ontario government early in the quarter will have a longer-term dampening effect.

There is little to suggest that the pace of growth will slow significantly any time soon, but a few areas of possible concern can be identified.  The growth in consumer spending is undoubtedly continuing to be fed by rising household indebtedness, and it remains to be seen how this will hold up as the Bank of Canada continues to tighten policy.  Business inventories have been rising strongly; for the moment this accumulation is clearly intentional, but it could produce some overhang in the event that final demand growth begins to slow.  Finally, the impact of Hurricane Harvey may be felt in the latter part of the current quarter and beyond.

Today's data have led money markets to price in better odds -- about 1 in 3 -- of a Bank of Canada rate hike in September.  This can no longer be ruled out.  However, it still seems more likely, given the lack of inflationary pressures, that the Bank will hold off until its October meeting, when it will also issue its updated economic outlook.