Word up to Donald Trump: leave well alone

This morning's report that US GDP growth hit an annualized 4.1 percent in Q2, its fastest pace in almost four years, has sent President Trump into paroxysms of joy at his own brilliant economic management.  Self-aggrandizement is what Trump does best, of course, but as we are now 18 months into his term in office, it's no longer reasonable for doubters to say that the economy's performance is all thanks to his predecessor.

If only Trump would just stick to the bragging and leave the actual economy alone.  Full employment and strong growth require careful economic management in order to ensure that the boom does not trigger rampant inflation.  Instead, Trump seems determined to mess things up.  His trade war is certain to raise prices, particularly if he carries through his threat to impose tariffs on all imports from China -- at which point Walmart may as well shut up shop.

Similarly, the entirely unnecessary fiscal  stimulus provided by the administration's tax cuts will add to demand at a time when the economy is already operating at full capacity.  This will not only add to inflationary pressures, attracting the attention of the Federal Reserve, but also boost demand for imports, and we know how Trump is likely to react to that.

In short, his economic program is an incoherent mess that risks jeopardizing a remarkable run of growth.  Just for once, we should tolerate Trump's braggadocio and hope that he doesn't get tempted to keep fiddling with the controls.

Something in the air

Just the facts, ma'am....

In 2005, Air Canada's parent company, ACE, sold 12.5 percent of its Aeroplan frequent flyer program via an IPO, raising C$ 250 million.  This means that at that time, Aeroplan was valued at $2.0 billion*.

Subsequently ACE divested itself of the rest of its ownership in Aeroplan, leaving the program solely owned by Aimia Inc. Aeroplan continued to be Air Canada's frequent flyer program while also expanding into a more general loyalty rewards scheme.

In May 2017 Air Canada announced it would be leaving Aeroplan in 2020 in order to start a frequent flyer program of its own.

Earlier this month Aimia announced it was looking to start offering flights of its own to Aeroplan customers once Air Canada left the program.

On July 25 Air Canada along with three financial partners announced a bid to buy 100 percent of Aeroplan for a total cash consideration of....$250 million.  The buyers would also assume the liability represented by the outstanding frequent flyer points, notionally valued at a further $2 billion.  Aimia has until August 2 -- i.e. one week -- to respond to the offer.

I'm sure there's a story here somewhere.

*  If you're going to start by saying "Just the facts, ma'am" it behooves you to get the facts straight.  Thanks to arithmetical incompetence, I originally stated the total value of Aeroplan as $1.5 billion.  Mi dispiace.    

Pressure on the Bank of Canada -- and the Fed

If the Bank of Canada's interest rate decisions are data dependent, as Governor Stephen Poloz never tires of reminding us, then the data are already starting to build the case for the next rate hike.  Today StatsCan reported a sharp rise in retail sales for May (up 2.0 percent in both current and constant dollar terms in the month) and, more importantly, a further rise in inflation for June. The year-on-year increase in headline CPI reached 2.5 percent in the month, the fastest increase since February 2012.

Much of the blame for the continuing rise in headline CPI lies with gasoline prices, now an eye-watering 25 percent higher than a year ago (tell me about it!)  But in truth, inflation pressures seem to be becoming more broadly entrenched, with seven of the eight major components of the index moving higher in the month.  With recent labour force data showing the economy nearing full employment and wage pressures increasing, there is little reason to expect that CPI will soon start to move back below the Bank's 2 percent target.

Two of the Bank's three favoured core measures of inflation edged up to 2.0 percent in the month, with the third holding at 1.9 percent. This offers some slight relief to the Bank, and probably means that there will be no rate increase at the next Governing Council meeting, set for September 5.  However, a further 25 basis point rate hike by year end looks more likely than not.

Meantime, pressure is also building on the US Federal Reserve, but not from the economic data.  President Trump has started to criticize the Fed's policy tightening   This morning's customary Twitter rant saw Trump arguing that Fed rate hikes, coupled with currency manipulation by the ECB and the Bank of China, are pushing the US dollar higher and thus taking away the US's "big competitive edge", whatever that is.

The weakest student in the weakest economics program in the country would have no trouble figuring out that the major elements of Trump's economic "policies" -- higher tariffs on imports, and a wildly stimulative fiscal policy at a time when the economy is already at full employment -- are a recipe for higher inflation, which is the Fed's major concern.  Good luck explaining that to the very stable genius in the Oval Office.  And don't expect much help from Trump's chief economic advisor, Peter Navarro, who seems to be as clueless as his boss despite holding a PhD from Harvard.

Maybe Trump is simply lining up the Fed to be the fall guy in case the rest of his policies start to go off the rails.  That's bad enough, but consider: Trump is already laying waste to the world trading system, including NAFTA and the WTO.  If he is now starting to take aim at the independence of the Fed, the potential damage to the global economy could be very severe.

  

The Donald and The Bard

Commentators trying to grasp the impact of the resistible rise of Donald Trump have been looking back into history in search of precedents.  Not far back, mind you: the most common comparisons have been with (surprise, surprise) Hitler, which is appropriate enough in light of Trump's love of the Big Lie and his penchant for Nuremberg-style rallies; and Mussolini, who offered much the same mix of depravity and clownishness as Trump.

A new book, "Tyrant: Shakespeare on politics" by Harvard professor Stephen Greenblatt, offers a longer and more interesting perspective.  Greenblatt points out that Shakespeare could not comment on the politics of his own time without risking beheading or worse.  Instead, he figured out how to use stories from earlier times to make points about his own.  Even this was not risk-free: when Elizabeth II saw a performance of Richard II, in which the monarch is deposed, she is said to have recognized immediately that "Richard is me".

Much of Greenblatt's book focuses on the historical plays that start with Richard II and end with Richard III, covering the Wars of the Roses.  The real Richard III may not have been the evil and amoral monarch depicted by Shakespeare -- there is an active Richard III Society still trying to clear the man's name -- but the Bard's text provides plenty of material for Greenblatt.  A bit more surprising is the attention that Greenblatt devotes to a character from one of the less well-known plays, Henry VI Part 2: Jack Cade, a commoner who led a brief but bloody attempt at insurrection.

I've read all of these plays fairly recently and discussed them in depth with a like-minded group of Shakespeare bores.  I'm amazed by how much more meaning Greenblatt is able to tease out of them than we ever could as a group.  In essence, Greenblatt uses Shakespeare to illustrate the well-known thesis that for evil to succeed, it is only necessary for virtue to be silent.  His analysis of the different ways in which people react to the obviously dangerous Richard III is particularly instructive.  Some are active supporters in the hope of reward; some refuse to believe what is going on; some hope that the system will prevent Richard form carrying out his plans, and so on.  Greenblatt refers to all of these people as "Enablers", a term that would probably not have occurred to Shakespeare, but one you suspect he would have liked. 

Greenblatt's analysis is subtle, but he wants to be sure that everyone gets the message.  To cite one example, he suggests that the goal of Richard Plantagenet, Duke of York -- the father of Richard III -- is to "make England great again"..  The word "grab', found in one of Trump's most notorious quotes, is also liberally used in describing Richard's actions.   And when Jack Cade describes himself as "the besom that must sweep the court clean of such filth",  Greenblatt points out the similarity to Trump's pledge to "drain the swamp". 

"Tyrant" is a short book at barely 200 pages and is admittedly not one with mass appeal.  After all, everyone sees Trump 24/7 whether they like it or not, but not everyone has the urge to read Shakespeare.  Even so, it's good to see that a humanities academic at Harvard has found a highly original way not to stay silent while the spectre of tyranny stalks the United States. 

Tim Horton goes to China

A double-double here today, featuring in two of my least-favourite things about Canada: the business coverage of the Toronto Star, and the ubiquitous Tim Horton's "coffee" chain.

A few posts ago I mentioned that the Star had outsourced most of its business coverage to the Wall Street Journal.  Mostly that's been a huge improvement, but some of the old hacks have stayed on, including hapless business columnist David Olive.  His contributions are usually backgrounders on Canadian policy issues, obviously not a strength of the WSJ, or snide criticisms of companies he's taken a dislike to.  Bombardier is a frequent target (Olive wants it broken up), and so is Restaurant Brands International (RBI), the Brazil-based owner of a large number of restaurant chains, including Tim Horton's.

As Olive reports in this column, Timmies is about to undertake a big expansion into China, with plans to open 1500 stores there over the next decade.  Bad idea, says Olive, making the extraordinary suggestion that

It’s likely that RBI, all starry-eyed about high-spending Chinese millennials, isn’t aware that about 400 million Chinese still live in poverty.

I highly doubt if he's right about RBI's lack of due diligence, but even if he is, doesn't that leave well over a billion Chinese who can afford a daily cup of Tim's brown sludge?

Olive thinks that RBI is looking for a big hit in a new market because its business in Canada is stagnating.  He notes that Tim's same-store sales in Canada fell 0.1 percent last year, which he describes as "a five-alarm fire in retailing".  The same-store sales comparison is widely used in retailing but poorly understood outside the industry, and evidently we can count David Olive among those who don't get it.

Tim's continues to open so many stores in Canada that it's inevitable that newly-opened outlets will cannibalize existing ones to some degree.  My own little town is about to get its third Tim's, to serve a resident population of about 17,000, many of whom flee to Florida in the peak coffee-drinking months from December to March.  If you keep opening stores at the rate Tim's does, holding the same-store loss as low as 0.1 percent is a good showing. 

Something else I know from our little town is that we are seeing an enormous number of tourists from China here these days.  Tim Horton's won't be showing up there as an unknown quantity.  What may work against it, however, is that Tim's is very much at the low end of the market in terms of prestige, something which Chinese consumers, those "high-spending millennials", take very seriously.  At the risk of throwing in one too many local references, our wineries here in Niagara consistently report that the biggest-selling item for Asian clients is icewine, which is far more expensive than the regular wines and hence seen as prestigious.

I'm betting that RBI has done its homework before committing to the Chinese market.  It will take some time before success or otherwise can be determined, but I'm betting that if things work out well, we won't hear much about it from David Olive. 

The real, the hypothetical and the Bank of Canada

In line with the analyst consensus, and in spite of the looming threat of further trade tensions with the United States, the Bank of Canada this week announced a further 25 basis point increase in its target rate.  In keeping with the Bank's cautious approach, this is the first increase in six months, and it brings the target rate to 1.50 percent, the highest it has been since the financial crisis hit in 2008. 

The Bank also released an updated Monetary Policy Report, and the press release introducing this report offers the best way of obtaining a quick insight into the Bank's thinking.  In terms of hard economic facts, there is little new to report.  The economy is operating close to full capacity and unemployment is close to a multi-decade low.  Headline CPI has moved above the Bank's 2 percent target, currently standing at 2.2 percent, and all three of the Bank's favoured core inflation numbers have edged upward, to just below the target level.  Although the Bank has seen a few anomalies in the recent data flow, the overall economic picture clearly supports continuation of the slow but sure policy tightening it has undertaken over the past year.

But then, of course, there is the elephant (or Trump) in the room: the incipient trade war with the United States.  The press release offers an interesting insight into how the Bank is trying to take this into account.  Notionally, the Bank considers that US tariffs and Canadian retaliatory measures will dampen both imports and exports, while leading to inflationary pressures that may prove temporary, but could prove more lasting.  The Bank has already attempted to factor in the actual tariffs that have been imposed (steel, aluminum and lumber) into its forecast models.  The economic projections on which it based this week's rate decisions take those tariffs into account as far as possible.

As for the further tariffs that Trump has threatened, especially on the automotive sector, the Bank has doubtless seen the various impact studies that have been published by banks, think tanks and others in recent weeks. No doubt, too, it has done similar work of its own.  However, the Bank is not willing to base its month-to-month policy decisions on the hypothetical possibility that the US will impose tariffs on Canadian-made autos and that Canada will respond with comparable tariffs of its own.

In the circumstances this is surely the only possible approach the Bank can take, but it is worth pondering how the Bank might have to respond if the auto tariffs actually happened.  Although most of the studies published so far show a major impact on the Canadian auto sector itself -- tens of thousands of jobs lost, vehicle output cut in half -- the overall first-round impact on the economy is surprisingly small: not much more than a 1 percent annual hit to GDP growth, which would fall short of pushing the economy into recession.

Given the very tight integration of the auto industries of the US and Canada (and of course Mexico), the costs of realigning production within national borders would be very high, as the US Big Three are no doubt telling the White House.  The cost of vehicles would inevitably rise significantly, which would both add to inflation and crimp household spending power, with knock-on effects throughout the economy. 

In such circumstances the Bank of Canada would not want to compound the problem by raising rates any further.  Indeed it might deem it necessary to reverse some of the tightening it has undertaken over the past year, in the hope of engineering some weakening in the exchange rate that could help offset the impact of the tariffs.  Bank of Canada Governor Stephen Poloz must hope that's a decision he never has to make. 

Surprising strength

Rising interest rates, higher minimum wages and a deepening trade war would seem to be a recipe for trouble for the Canadian economy, yet data released in the last few days indicate a surprising degree of resilience.

Start with the June labour force data, released this morning by Statistics Canada.  The economy added 32,000 jobs in the month, well above the consensus expectation.  The strongest job gains were seen in Ontario, the province generally seen as most vulnerable to the risks posed by trade tensions with the United States (and the province that boosted its minimum wage by the largest amount at the start of the year). Although most of the jobs added in June were part time,  over the past twelve months essentially all of the 215,000 jobs created in the economy were full-time positions. 

One slightly jarring element of the report was the 0.2 percentage point increase in the unemployment rate, which now stands at 6.0 percent.  However, even this can be seen as a positive, since it was caused by a surge of more than 70,000 in the number of people actively seeking work.  Such a rise in the participation rate is usually a sign of improving confidence among would-be workers.

Employment is seen as a lagging economic indicator, so it can be argued that strong data for June reflect how things looked early in Q2,  before the first round of US tariffs came into place, rather than the distinctly gloomier environment we face as the second half of the year begins. The Bank of Canada's Business Outlook Survey is an altogether different sort of indicator, since it specifically asks businesses to assess what lies ahead.  The latest edition, released at the end of June, is unequivocally strong. 

Respondents to the survey reported buoyant sale prospects, continuing investment growth, rising capacity utilization and growing cost pressures, all reflected in a near-record level of business optimism.  The survey is careful to note that most of the interviews took place before the US imposed tariffs on Canadian steel and aluminum at the end of May, but given that the threat of tariffs had been in place for some time before that, it is not clear how far this timing may have affected the results.

How long can this positive mood continue?  Various analysts are starting to come up with estimates of the impact of auto tariffs, which may be the next show to drop in Trump's increasingly deranged trade war, and they're not pretty. This downright panicky analysis from the auto dealers association is more pessimistic than most, but there can be little doubt that the impact of auto tariffs, particularly in Ontario, would be very severe. As the auto makers themselves are no doubt trying to tell the US administration, the impact within the US might be even more harmful, but whether that message will get across remains to be seen.

One more thing....housing data are starting to suggest that the Toronto market is coming out of its year-long funk, with both prices and sales starting to edge higher again.  That news, coupled with the employment data, has caused the market to price in a higher probability of a Bank of Canada rate hike next week.  If the Bank of Canada really is, as Governor Stephen Poloz puts it, data driven and not headline driven, it certainly has at hand all the justification it needs to keep edging rates higher.

Paying for journalism, but whose?

Here is an opinion piece by the Toronto Star's Heather Mallick, taking time out from her usual rants about how awful men are to urge everyone to subscribe to newspapers before they go extinct.

I already subscribe to the Star's print edition, and what exactly do I get for my money?  Well, I get lectured by Ms Mallick and the Star's seemingly endless roster of angry female columnists seven days a week, so there's that.  And my wife likes the sudoku.  But aside from that?  Not so much.

The paper's print deadline, at least for the edition that I get here in Niagara, is now so early that sports results and reports from the previous evening are almost never available.  But that's a minor quibble compared to the bigger issue, which is that less and less of the content of the paper is actually Toronto Star journalism.  Just a couple of weeks ago the Star basically sub-contracted its entire business section to the Wall Street Journal, which has resulted in a huge improvement in that section of the paper.  However, that whirring sound you're hearing is the Star's founder, the left-leaning Joseph Anderson, spinning in his grave at the thought of his organ going into partnership with Rupert Murdoch.

Look through the rest of the paper and you see bylines from everywhere -- Bloomberg, AP, the New York Times, the Washington Post, LA Times and on and on.  The Star's newsroom has been decimated, so for reports on anything much beyond the boundaries of Toronto, the content has to be bought in. The paper's esteemed theatre critic has been replaced by freelancers; the architecture columnist is likewise off the payroll and now appears only occasionally as a freelancer.  The paper is a shadow of what it was even five years ago -- heck, they even made the actual pages smaller a few months back, just to save on newsprint costs.

This may seem to the bigwigs at the Star to be a good way to keep the ship afloat, but there's a downside.  One thing that becomes very obvious as you read the paper these days is that the bought-in content is of a far higher quality that the stuff the Star itself produces.  As I noted above, the WSJ-authored business section is far superior to the Star's, and on weekends, the New York Times section that is delivered to subscribers is so much better than anything the Star produces that you'd think the folks at Torstar would be downright embarrassed.

So, Heather Mallick, be careful what you wish for.  If paying for the Star is only going to get your readers journalism from a stable of far superior newspapers, a lot of people may just decide to direct their subscription money directly to the original sources.