The United States, Canada and Mexico formally signed the new USMCA* trade deal in a low key ceremony at the G20 in Buenos Aires this morning. However, with a Democrat majority set to take over the House of Representatives in little more than a month, uncertainty over trade within North America will persist for many more months. Meanwhile, there are growing indications that the Canadian economy faces a prolonged period of sluggish growth.
This morning Statistics Canada reported that real GDP growth slowed to a 2.0 percent annualized rate in Q3 from 2.9 percent in the prior quarter. Both business fixed investment and residential investment declined in the quarter. While it is possible that the slack in business investment partly reflected uncertainty over the trade negotiations, these numbers suggest that the economy may not prove resilient in the face of rising interest rates. Household consumption was virtually unchanged in the quarter, while -- somewhat perversely, given the trade uncertainties -- goods trade provided a boost to the overall growth rate.
The quarter ended on a weak note, with StatsCan reporting that GDP fell 0.1 percent month-on-month in September. This virtually locks in a weak final quarter for 2018, and there are few reasons to be optimistic that growth will pick up significantly in 2019.
This week's announcement that General Motors will be closing its venerable Oshawa assembly plant in 2019, as part of its global restructuring, has produced an outpouring of doom and gloom in Ontario. The woe is arguably overdone. About 2500 salaried workers will lose their jobs, which is obviously devastating for the families involved, but recall that before the original NAFTA replaced the old Auto Pact, employment at the plant was as much as ten times greater than it is now. This week's announcement is the last, and statistically the smallest, of many restructurings that have hit in Oshawa over the past two decades.
Employers all across the country are fretting over a shortage of skilled workers, so the economy should easily absorb those Oshawa workers that do not choose to retire. There may be a short-term impact on consumer sentiment, but unless there are more such announcements to come, the macroeconomic effects should be relatively minor.
Of much more concern is the collapse in oil prices. The global decline in the price of crude has raised concerns over the outlook for the world economy, but the decline in prices received by producers in Alberta has been much more severe. With all pipeline development essentially halted by legal action, rail capacity fully utilized and demand for oil sands crude in the US steadily eroding, Alberta crude has been trading at ever-widening discounts to the WTI benchmark. In some recent trading sessions, Alberta crude has been changing hands at as little as US$ 10/bbl. Wells are being abandoned and workers are losing their jobs. The daily cost to the Canadian economy has been estimated as high as C$ 80 million.
There is no relief in sight. The Alberta government is scrambling to purchase additional railcars in order to allow more crude to be shipped by rail, but this will take time. Meanwhile, it is being projected that the US will become a net exporter of crude some time next year, further undercutting Canada's export prospects. Unless a way can be found to ship Alberta oil to supplant imports in eastern Canadian refineries -- and that pipeline project is stalled indefinitely -- or to ship it to tidewater for export to Asia -- likewise stalled -- the outlook for the sector is undeniably grim.
Last but not least, how long can the US economy's sugar high, created by the Trump administration's tax cuts, continue? Official data show that US GDP growth in Q3, at 3.5 percent, was almost twice the pace seen in Canada. However, the cautious tone of this week's remarks from Chairman Jerome Powell suggest that the Fed may be starting to trim its expectations for future growth. All in all, it seems likely that the Bank of Canada will have little reason to raise rates any time soon -- and it may not be too long before we start wondering whether it has accumulated enough ammunition to fend off the next downturn.
* Stamping its little foot, Canada has announced that it will officially refer to the new deal as CUSMA. That's an odd choice in that it doesn't actually work in Canada's second official language, French. In the meantime, Mexico is calling it either TMEC or MUSCA, which happens to be the Latin term for a fly. And a quick Google search reveals that "cusma" is a Peruvian Spanish name for a sleeveless shirt.
Friday 30 November 2018
Monday 26 November 2018
Happy holidays to you too, General!
Toronto newsmedia began reporting on Sunday evening that General Motors was about to announce the closure of its assembly plant in Oshawa, Ontario (just east of Toronto), with the loss of about 2500 jobs. This morning the company made the closure official, as part of a major corporate cost-cutting exercise that will see it close five plants in North America and a further three in other parts of the world. About 15 percent of the company's hourly workforce will lose their jobs, along with a hefty 25 percent of salaried staff.
A lot of history is being torched here. The current Oshawa plant has been operating since the late 1950s, but GM has been the biggest employer in the city for much longer than that. Canada's own auto pioneer, Colonel Sam McLaughlin, set up shop there early in the twentieth century, selling his business to GM's predecessors in 1918. And on the US side of the border, the plant to be closed in Hamtramck*, MI is the last auto assembly plant within the limits of the city of Detroit, so this is surely the end of an era.
What's behind all this? It depends on who you ask.
General Motors says it's all about positioning the company for the future. The list of products that the company is discontinuing is heavy on sedans, from the tiny Chevy Volt to the chunky Buick LaCrosse. Customer demand has shifted abruptly away from this body type towards SUVs in recent years. Today's move by GM mirrors similar steps taken by Ford earlier this year; that company has effectively withdrawn from the sedan market is North America, apart from the sporty Mustang.**
If you consult the local media, you can find at least one respected business commentator, Eric Reguly at the Globe and Mail (paywall, sorry!) willing to point the finger of blame at Donald Trump. It's unlikely that GM would be closing a viable operation at Oshawa just to placate Trump, who doesn't seem too happy about all this anyway. However, the current administration has fed the SUV feeding frenzy through its watering-down of environmental measures, contributing to the demise of the sedan. Moreover, Trump's steel and aluminum tariffs remain in place despite the recent conclusion of trade negotiations, and GM has spoken of the impact these are having on its cost of doing business.
If you listen to the main Canadian union in the auto industry, Unifor, what we may be seeing here is yet another attempt by GM to shake governments down for more subsidies. That's also a view you can hear from callers to local talk radio stations. It's not at all far-fetched: the Oshawa plant has been under threat for many years but has always escaped closure, thanks in part to government money. Even with today's announcement, the plant is likely to stay open well into 2019, giving plenty of time for the Federal or Ontario governments to step forward with yet more blandishments, as the City of Oshawa (and of course Unifor) are already urging them to do.
One further factor may have sealed Oshawa's fate: its location. The North American auto industry is highly integrated across borders, with materials and components criss-crossing the border as vehicles are put together. Most of Ontario's auto and parts plants are in the southwest of the province, giving quick and easy access to the US border. Oshawa, unluckily for it, is on the wrong (i.e. east) side of Toronto. As that city's roads and rails become more and more congested, it must be harder and harder for GM to achieve the just-in-time cross-border deliveries it needs at an acceptable cost.
Talk radio hosts in my neighbouring city of St Catharines, home to a GM powertrain plant, are breathing a sigh of relief today that the 2500 or so jobs there have been spared in this round of cost cutting. It would be unwise to be complacent about that: GM's longer-term strategy clearly involves a shift toward electric vehicles. The gas-and-diesel, engine-and-transmission assemblies that are St Catharines' forte may not be needed for much longer.
* Strictly speaking Hamtramck is a separate municipality, but as it's completely surrounded by Detroit proper, I think the point stands.
** Initially when I posted this I said the surviving Ford sedan was the Camaro, which is of course a Chevy. I've never been much of a car guy, but still!
A lot of history is being torched here. The current Oshawa plant has been operating since the late 1950s, but GM has been the biggest employer in the city for much longer than that. Canada's own auto pioneer, Colonel Sam McLaughlin, set up shop there early in the twentieth century, selling his business to GM's predecessors in 1918. And on the US side of the border, the plant to be closed in Hamtramck*, MI is the last auto assembly plant within the limits of the city of Detroit, so this is surely the end of an era.
What's behind all this? It depends on who you ask.
General Motors says it's all about positioning the company for the future. The list of products that the company is discontinuing is heavy on sedans, from the tiny Chevy Volt to the chunky Buick LaCrosse. Customer demand has shifted abruptly away from this body type towards SUVs in recent years. Today's move by GM mirrors similar steps taken by Ford earlier this year; that company has effectively withdrawn from the sedan market is North America, apart from the sporty Mustang.**
If you consult the local media, you can find at least one respected business commentator, Eric Reguly at the Globe and Mail (paywall, sorry!) willing to point the finger of blame at Donald Trump. It's unlikely that GM would be closing a viable operation at Oshawa just to placate Trump, who doesn't seem too happy about all this anyway. However, the current administration has fed the SUV feeding frenzy through its watering-down of environmental measures, contributing to the demise of the sedan. Moreover, Trump's steel and aluminum tariffs remain in place despite the recent conclusion of trade negotiations, and GM has spoken of the impact these are having on its cost of doing business.
If you listen to the main Canadian union in the auto industry, Unifor, what we may be seeing here is yet another attempt by GM to shake governments down for more subsidies. That's also a view you can hear from callers to local talk radio stations. It's not at all far-fetched: the Oshawa plant has been under threat for many years but has always escaped closure, thanks in part to government money. Even with today's announcement, the plant is likely to stay open well into 2019, giving plenty of time for the Federal or Ontario governments to step forward with yet more blandishments, as the City of Oshawa (and of course Unifor) are already urging them to do.
One further factor may have sealed Oshawa's fate: its location. The North American auto industry is highly integrated across borders, with materials and components criss-crossing the border as vehicles are put together. Most of Ontario's auto and parts plants are in the southwest of the province, giving quick and easy access to the US border. Oshawa, unluckily for it, is on the wrong (i.e. east) side of Toronto. As that city's roads and rails become more and more congested, it must be harder and harder for GM to achieve the just-in-time cross-border deliveries it needs at an acceptable cost.
Talk radio hosts in my neighbouring city of St Catharines, home to a GM powertrain plant, are breathing a sigh of relief today that the 2500 or so jobs there have been spared in this round of cost cutting. It would be unwise to be complacent about that: GM's longer-term strategy clearly involves a shift toward electric vehicles. The gas-and-diesel, engine-and-transmission assemblies that are St Catharines' forte may not be needed for much longer.
* Strictly speaking Hamtramck is a separate municipality, but as it's completely surrounded by Detroit proper, I think the point stands.
** Initially when I posted this I said the surviving Ford sedan was the Camaro, which is of course a Chevy. I've never been much of a car guy, but still!
Thursday 22 November 2018
Moving target
It's all go at the Bank of Canada these days. Fresh from announcing the establishment of its new online Financial Stability Hub, the Bank has revealed that it is re-examining the entire basis of its monetary policy framework, which comes up for renewal in 2021. This press release summarizes the Bank's preliminary thoughts and contains a link to the full speech by Senior Deputy Governor Carolyn Wilkins.
By way of background, the Bank of Canada has based its monetary policy around a 2 percent inflation target for almost three decades. The policy is set via an agreement between the Bank and the Federal Government that is reviewed and updated every five years. This agreement comes up for renewal in 2021, and Ms Wilkins' speech makes it very clear that the Bank is looking for much more than cosmetic changes this time.
As the press release indicates, lessons the Bank has learned in the wake of the financial crisis have led it to believe that a wholesale review is necessary. There are two key factors: first, the Bank's estimates of a "neutral" rate of interest is much lower than it was before the crisis; second, the fact that nominal rates of interest may be lower in the future than they were historically may lead to excessive risk taking (read: borrowing) by households and businesses.
The problem with the lower neutral rate of interest is that it implies that the Bank has much less room to provide conventional forms of monetary stimulus when crises hit. If, as the Bank currently believes, the neutral rate is in a range of 2.5-3.5 percent, it has very little leeway to cut rates unless it moves into negative territory, something it has avoided until now.
As for excessive risk taking, it is tempting to suggest this reflects a too-narrow view of inflation on the Bank's part. It has used all kinds of inflation measures over the years, including its current trio of core indices, but these have all related to consumer prices in one way or another. Its conception of the neutral rate is likewise driven by its target for inflation at the consumer level. It has become apparent in the past two decades, and especially during the financial crisis, that tame consumer prices do not necessarily mean that monetary policy is correctly calibrated. The financial crisis was driven by run-ups in asset prices that central banks, led by the Greenspan Fed, chose largely to ignore.
Ms Wilkins' speech is explicitly intended to start a debate on the issues, and to get things going she lays out some of the alternatives being considered by the Bank. There have been suggestions in many countries that a 2 percent target is too low; would 4 percent perhaps allow more policy flexibility? Ms Wilkins notes that such a step would be hard on those living on fixed incomes, an important consideration as populations age, and could backfire if it triggered concerns that the target, once moved, could be subject to repeated change.
Other possibilities outlined by Ms Wilkins would require more drastic change. They include price level targeting; an explicit dual mandate, requiring the Bank to hit targets for both prices and output; and nominal GDP targeting. Each of these brings its own problems, not the least being that they would be much harder to explain to the general public than the present (deceptively) simple target.
Not, of course, that there's anything new about that. Ms Wilkins notes that average inflation since the 2 percent target came into effect in 1991 has been "pretty darn close" to the desired level. However, I would wager that if you stopped Canadians at random on the street and asked them what the current inflation rate is, not one in ten would give you a figure lower than 5 percent, and many would insist stridently that it's a whole lot higher than that. Good luck changing that, Ms Wilkins!
By way of background, the Bank of Canada has based its monetary policy around a 2 percent inflation target for almost three decades. The policy is set via an agreement between the Bank and the Federal Government that is reviewed and updated every five years. This agreement comes up for renewal in 2021, and Ms Wilkins' speech makes it very clear that the Bank is looking for much more than cosmetic changes this time.
As the press release indicates, lessons the Bank has learned in the wake of the financial crisis have led it to believe that a wholesale review is necessary. There are two key factors: first, the Bank's estimates of a "neutral" rate of interest is much lower than it was before the crisis; second, the fact that nominal rates of interest may be lower in the future than they were historically may lead to excessive risk taking (read: borrowing) by households and businesses.
The problem with the lower neutral rate of interest is that it implies that the Bank has much less room to provide conventional forms of monetary stimulus when crises hit. If, as the Bank currently believes, the neutral rate is in a range of 2.5-3.5 percent, it has very little leeway to cut rates unless it moves into negative territory, something it has avoided until now.
As for excessive risk taking, it is tempting to suggest this reflects a too-narrow view of inflation on the Bank's part. It has used all kinds of inflation measures over the years, including its current trio of core indices, but these have all related to consumer prices in one way or another. Its conception of the neutral rate is likewise driven by its target for inflation at the consumer level. It has become apparent in the past two decades, and especially during the financial crisis, that tame consumer prices do not necessarily mean that monetary policy is correctly calibrated. The financial crisis was driven by run-ups in asset prices that central banks, led by the Greenspan Fed, chose largely to ignore.
Ms Wilkins' speech is explicitly intended to start a debate on the issues, and to get things going she lays out some of the alternatives being considered by the Bank. There have been suggestions in many countries that a 2 percent target is too low; would 4 percent perhaps allow more policy flexibility? Ms Wilkins notes that such a step would be hard on those living on fixed incomes, an important consideration as populations age, and could backfire if it triggered concerns that the target, once moved, could be subject to repeated change.
Other possibilities outlined by Ms Wilkins would require more drastic change. They include price level targeting; an explicit dual mandate, requiring the Bank to hit targets for both prices and output; and nominal GDP targeting. Each of these brings its own problems, not the least being that they would be much harder to explain to the general public than the present (deceptively) simple target.
Not, of course, that there's anything new about that. Ms Wilkins notes that average inflation since the 2 percent target came into effect in 1991 has been "pretty darn close" to the desired level. However, I would wager that if you stopped Canadians at random on the street and asked them what the current inflation rate is, not one in ten would give you a figure lower than 5 percent, and many would insist stridently that it's a whole lot higher than that. Good luck changing that, Ms Wilkins!
Wednesday 21 November 2018
Canada fiscal update: all deficits, all the time
I posted here on November 2 that Finance Minister Bill Morneau would very likely use his Fall Economic Statement to announce the Trudeau government planned to continue the deficit financing path it adopted from the first day of its mandate. After all, Trudeau himself is reported to have said that it was his pledge to run deficits in order to stimulate the economy, initially viewed as a foolhardy gamble, that won him the election in 2015.
Today Morneau delivered the fiscal update and it turns out that (ahem) I was right. The government is planning on about C$ 17.5 billion in new spending over the next five years. To be more precise, it's planning to forego revenues of about $ 16.5 billion as it attempts to assist Canadian businesses to compete with the massive tax cuts instituted by the Trump administration: tax expenditures, rather than spending per se, although the bottom line impact is, of course, the same.
Morneau argued in his speech that Canada could not afford to match the US tax cut directly because to do so would cost billions in lost revenues. How does that differ from what is being announced today? The problem with the straight corporate tax cut instituted in the US is that there's no guarantee that corporations will actually invest the windfall. US corporations have shown over the past decade that they are quite willing to sit on mountains of cash, and there's no guarantee that the Trump windfall won't just be added to the pile.
Morneau's approach involves capital cost allowances and write-offs, with a particular focus on clean energy investments. Companies will only benefit from tax reductions if they undertake qualifying investments, which the government hopes will drive long-term growth and higher productivity.
As for the bottom line, the proposed measures will increase the deficit this year and in each year of the five-year planning horizon. A shortfall of $19 billion is now seen for the upcoming year, tapering to $12 billion in 2023. This will result in a very gradual decline in the debt/GDP ratio, but Morneau was careful to point out that on that measure, Canada's fiscal position is already the best among developed economies.
Recall that before the 2015 election, Trudeau's specific promise was to run deficits of $10 billion, but return the budget to balance by 2019. Today's update has no timetable for a return to balance. Canadians voted for the relatively cautious deficit plan in the last election, but what is being proposed now is quite different and may start to stir memories of the deficit spiral of the 1980s and early 1990s.
That's certainly how the opposition Tories will try to spin it, perhaps hoping that voters have forgotten that many of the biggest deficits in that era were run up by Tory governments, and that it took a Liberal government to straighten things out. On one reading, Doug Ford's victory in the Ontario provincial election, when he trounced a tax-and-spend Liberal election platform, might suggest that the Trudeaucrats won't be as lucky come next October as they were in 2015.
It seems, however, that the federal Liberals are judging that Ontario's vote was a "get rid of Kathleen Wynne at all costs" tidal wave that won't be repeated across the country. There are enough signs of buyers' remorse in Ontario -- Doug Ford's popularity has fallen sharply -- to suggest that might be the case. Today's fiscal update can be seen as the starting gun for next year's election; it seems very clear that Canadians will be offered a very stark choice, at least in terms of economic policy.
Today Morneau delivered the fiscal update and it turns out that (ahem) I was right. The government is planning on about C$ 17.5 billion in new spending over the next five years. To be more precise, it's planning to forego revenues of about $ 16.5 billion as it attempts to assist Canadian businesses to compete with the massive tax cuts instituted by the Trump administration: tax expenditures, rather than spending per se, although the bottom line impact is, of course, the same.
Morneau argued in his speech that Canada could not afford to match the US tax cut directly because to do so would cost billions in lost revenues. How does that differ from what is being announced today? The problem with the straight corporate tax cut instituted in the US is that there's no guarantee that corporations will actually invest the windfall. US corporations have shown over the past decade that they are quite willing to sit on mountains of cash, and there's no guarantee that the Trump windfall won't just be added to the pile.
Morneau's approach involves capital cost allowances and write-offs, with a particular focus on clean energy investments. Companies will only benefit from tax reductions if they undertake qualifying investments, which the government hopes will drive long-term growth and higher productivity.
As for the bottom line, the proposed measures will increase the deficit this year and in each year of the five-year planning horizon. A shortfall of $19 billion is now seen for the upcoming year, tapering to $12 billion in 2023. This will result in a very gradual decline in the debt/GDP ratio, but Morneau was careful to point out that on that measure, Canada's fiscal position is already the best among developed economies.
Recall that before the 2015 election, Trudeau's specific promise was to run deficits of $10 billion, but return the budget to balance by 2019. Today's update has no timetable for a return to balance. Canadians voted for the relatively cautious deficit plan in the last election, but what is being proposed now is quite different and may start to stir memories of the deficit spiral of the 1980s and early 1990s.
That's certainly how the opposition Tories will try to spin it, perhaps hoping that voters have forgotten that many of the biggest deficits in that era were run up by Tory governments, and that it took a Liberal government to straighten things out. On one reading, Doug Ford's victory in the Ontario provincial election, when he trounced a tax-and-spend Liberal election platform, might suggest that the Trudeaucrats won't be as lucky come next October as they were in 2015.
It seems, however, that the federal Liberals are judging that Ontario's vote was a "get rid of Kathleen Wynne at all costs" tidal wave that won't be repeated across the country. There are enough signs of buyers' remorse in Ontario -- Doug Ford's popularity has fallen sharply -- to suggest that might be the case. Today's fiscal update can be seen as the starting gun for next year's election; it seems very clear that Canadians will be offered a very stark choice, at least in terms of economic policy.
Saturday 17 November 2018
Gotta know when to fold'em
This posting is not about one of my usual topics. It's about the Netflix show "House of Cards", specifically the final series. If you haven't seen that, what follows may include a few things that could spoil your enjoyment of it -- although, if you do read on, you will see that I hardly think that would be possible.
For better or worse I have watched every episode of House of Cards. I started with the original UK series, which was dark and violent but spiced with a little dark humour. It gave us the briefly popular expression, "You might think that; I couldn't possibly comment".
The first series of the US remake followed the original very closely -- sometimes, scene for scene. It was Netflix's first attempt at a prestige drama series, and once they realized they had a hit on their hands, they commissioned a whole lot more of it. By the end of the recent (and final) series, there were more than 70 episodes. The plots became harder and harder to follow, but it always seemed reasonably plausible -- a Bizarro West Wing, if you like.
Then Kevin Spacey, who had played Senator-then-President Francis Underwood, had his little fall from grace. Filming for the final series was already under way. Netflix and its producers could have just walked away right then, but they took the fateful decision to kill off Spacey's character and rewrite the remaining episodes around his widow and successor Claire Underwood, played by Robin Wright.
Bad mistake! There have been long-running dramas before where the producers didn't quite know when enough was enough; the final series of The Wire is an obvious example. However, that was a masterpiece compared to the last run-out of House of Cards, which is truly abysmal. What went so badly wrong? I think there were several factors at play.
The Spacey factor. Kevin Spacey is a great actor. In his best roles he combines a suave exterior with an unmistakable inner menace. This made him perfect for the Underwood role. The recurring motif of "breaking the fourth wall", lifted from the British original, allowed him to communicate his nefarious intentions to the audience with a quizzical grin, allowing viewers along for the ride as his schemes played out.
Robin Wright is a good actor, but not one with much facility at humour. Her Claire Underwood is the ultimate ice maiden in every respect -- severe hairstyle, drab clothing, all-business dialogue. Her too-frequent breaches of the fourth wall are just menacing, rather than conspiratorial as Spacey's were.
The plot factor. The usual approach for a final series is to tie up the loose ends in some surprising ways, allowing the audience a last chance to hang with some well-loved or cordially-hated characters. A number of characters from the earlier series of House of Cards play important roles in the final episodes, but the main players (apart from Claire Underwood) are two people we've never met before. These are the Shepherd siblings, rich, rabidly right-wing, and evidently modelled on the Koch brothers. Introducing these newbies inevitably required the kind of scene-setting that's normally taken care of in a first series.
The result of bringing in the Shepherds is that the plot very quickly becomes difficult to follow. This isn't helped by the fact that the writing seems to be of a much lower calibre than before, possibly because of the rewriting needed to dispose of Kevin Spacey's role. Even the directing seems to suffer. If you want to sample the final series to see if I'm right about all this, just watch the fourth episode, a jumpy and incoherent mess.
The reality factor. Even while Spacey was still on board, the show's producers were fretting that the real world (i.e. Trumpistan) had turned so crazy that they might never be able to top it in a fictional universe. This seems to have seriously daunted them, and in response they didn't so much jump the shark as cartwheel over it and leave it floundering in their wake. The final series has a higher body count than a two-hour session of Call of Duty, there are threats of nuclear Armageddon .. and by the time the credits roll for the final time, there are more loose ends than a dollar-store rug.
I once wrote here that the modern tendency for series to bloat made one long for the return of a writer like Rod Serling, who could tell a complete story in less than thirty minutes. House of Cards stands out as a sad example of what happens when financial considerations are allowed to trump all else.
For better or worse I have watched every episode of House of Cards. I started with the original UK series, which was dark and violent but spiced with a little dark humour. It gave us the briefly popular expression, "You might think that; I couldn't possibly comment".
The first series of the US remake followed the original very closely -- sometimes, scene for scene. It was Netflix's first attempt at a prestige drama series, and once they realized they had a hit on their hands, they commissioned a whole lot more of it. By the end of the recent (and final) series, there were more than 70 episodes. The plots became harder and harder to follow, but it always seemed reasonably plausible -- a Bizarro West Wing, if you like.
Then Kevin Spacey, who had played Senator-then-President Francis Underwood, had his little fall from grace. Filming for the final series was already under way. Netflix and its producers could have just walked away right then, but they took the fateful decision to kill off Spacey's character and rewrite the remaining episodes around his widow and successor Claire Underwood, played by Robin Wright.
Bad mistake! There have been long-running dramas before where the producers didn't quite know when enough was enough; the final series of The Wire is an obvious example. However, that was a masterpiece compared to the last run-out of House of Cards, which is truly abysmal. What went so badly wrong? I think there were several factors at play.
The Spacey factor. Kevin Spacey is a great actor. In his best roles he combines a suave exterior with an unmistakable inner menace. This made him perfect for the Underwood role. The recurring motif of "breaking the fourth wall", lifted from the British original, allowed him to communicate his nefarious intentions to the audience with a quizzical grin, allowing viewers along for the ride as his schemes played out.
Robin Wright is a good actor, but not one with much facility at humour. Her Claire Underwood is the ultimate ice maiden in every respect -- severe hairstyle, drab clothing, all-business dialogue. Her too-frequent breaches of the fourth wall are just menacing, rather than conspiratorial as Spacey's were.
The plot factor. The usual approach for a final series is to tie up the loose ends in some surprising ways, allowing the audience a last chance to hang with some well-loved or cordially-hated characters. A number of characters from the earlier series of House of Cards play important roles in the final episodes, but the main players (apart from Claire Underwood) are two people we've never met before. These are the Shepherd siblings, rich, rabidly right-wing, and evidently modelled on the Koch brothers. Introducing these newbies inevitably required the kind of scene-setting that's normally taken care of in a first series.
The result of bringing in the Shepherds is that the plot very quickly becomes difficult to follow. This isn't helped by the fact that the writing seems to be of a much lower calibre than before, possibly because of the rewriting needed to dispose of Kevin Spacey's role. Even the directing seems to suffer. If you want to sample the final series to see if I'm right about all this, just watch the fourth episode, a jumpy and incoherent mess.
The reality factor. Even while Spacey was still on board, the show's producers were fretting that the real world (i.e. Trumpistan) had turned so crazy that they might never be able to top it in a fictional universe. This seems to have seriously daunted them, and in response they didn't so much jump the shark as cartwheel over it and leave it floundering in their wake. The final series has a higher body count than a two-hour session of Call of Duty, there are threats of nuclear Armageddon .. and by the time the credits roll for the final time, there are more loose ends than a dollar-store rug.
I once wrote here that the modern tendency for series to bloat made one long for the return of a writer like Rod Serling, who could tell a complete story in less than thirty minutes. House of Cards stands out as a sad example of what happens when financial considerations are allowed to trump all else.
Thursday 15 November 2018
Ontario economic statement: neither sizzle nor steak
Less than six months after taking office, Doug Ford's Ontario provincial government has been going through a rough patch. A string of allegations about sexual harassment, cover-ups and other misbehaviour have forced Ford into an early "recalibration" of his Cabinet.
Ford and his team were probably hoping that this week's Fall Economic Outlook would get the focus back onto its policy agenda. Good luck with that -- just a couple of days ago, Finance Minister Vic Fedeli became the latest to be accused of sexual misconduct* -- and by none other than Patrick Brown, who was ousted as leader of the PC Party, and ultimately replaced by Ford, earlier this year. Brown has a tell-all book coming out this week and has been all over the media plugging it.
The statement that Fedeli delivered today is usually characterized as a "mini-budget", but on this occasion there is so little of substance that the term "micro-budget" seems more apt. To begin at the bottom line, Fedeli now says that this year's deficit will be C$14.5 billion. This is $1 billion lower than Fedeli claimed when he first took office, but still almost twice as large as the deficit the former Liberal government had proposed.
Why the lower number now? Fedeli claims that the government has already reduced spending by $3.2 billion, but this simply reflects its well-advertised intention not to proceed with some of the previous government's pie-in-the-sky election promises. Actual spending cuts by the new government have, to date, been nugatory. The "spending cuts" have been offset by a $2.7 billion fall in revenues, most of it accounted for by the government's ideologically-driven move to abolish the cap-and-trade carbon pricing scheme it inherited.
As far as actual policy changes are concerned, the government is taking steps to remove anyone earning less than $30,000 per year from the provincial income tax rolls. This is a creditable move, although of course many such low income earners will still be liable for Federal income taxes, and today's move is further diluted by the fact that the minimum wage increase set for January 2019 has already been cancelled. At the other end of the tax scale, a planned increase for the highest income-earners has been scrapped.
In terms of non-revenue measures, a small number of "watchdog" positions in the public service will be eliminated in the name of cost saving. Rental controls on new-build homes will be eliminated. Plans for a third French-language university in the province have been cancelled. And in another step to portray the government as a friend to the bibulous, opening hours at provincially-owned liquor stores (which is all of them) will be extended to 11 pm.
Fedeli stated soon after taking office that the task of restoring the budget to balance would be a lengthy one. Based on the pace he has set so far, that looks like the safest of bets.
* Fedeli strenuously denies the charge -- and just for clarity, the accusation is not that he misbehaved with Patrick Brown!
Ford and his team were probably hoping that this week's Fall Economic Outlook would get the focus back onto its policy agenda. Good luck with that -- just a couple of days ago, Finance Minister Vic Fedeli became the latest to be accused of sexual misconduct* -- and by none other than Patrick Brown, who was ousted as leader of the PC Party, and ultimately replaced by Ford, earlier this year. Brown has a tell-all book coming out this week and has been all over the media plugging it.
The statement that Fedeli delivered today is usually characterized as a "mini-budget", but on this occasion there is so little of substance that the term "micro-budget" seems more apt. To begin at the bottom line, Fedeli now says that this year's deficit will be C$14.5 billion. This is $1 billion lower than Fedeli claimed when he first took office, but still almost twice as large as the deficit the former Liberal government had proposed.
Why the lower number now? Fedeli claims that the government has already reduced spending by $3.2 billion, but this simply reflects its well-advertised intention not to proceed with some of the previous government's pie-in-the-sky election promises. Actual spending cuts by the new government have, to date, been nugatory. The "spending cuts" have been offset by a $2.7 billion fall in revenues, most of it accounted for by the government's ideologically-driven move to abolish the cap-and-trade carbon pricing scheme it inherited.
As far as actual policy changes are concerned, the government is taking steps to remove anyone earning less than $30,000 per year from the provincial income tax rolls. This is a creditable move, although of course many such low income earners will still be liable for Federal income taxes, and today's move is further diluted by the fact that the minimum wage increase set for January 2019 has already been cancelled. At the other end of the tax scale, a planned increase for the highest income-earners has been scrapped.
In terms of non-revenue measures, a small number of "watchdog" positions in the public service will be eliminated in the name of cost saving. Rental controls on new-build homes will be eliminated. Plans for a third French-language university in the province have been cancelled. And in another step to portray the government as a friend to the bibulous, opening hours at provincially-owned liquor stores (which is all of them) will be extended to 11 pm.
Fedeli stated soon after taking office that the task of restoring the budget to balance would be a lengthy one. Based on the pace he has set so far, that looks like the safest of bets.
* Fedeli strenuously denies the charge -- and just for clarity, the accusation is not that he misbehaved with Patrick Brown!
Wednesday 14 November 2018
The banks are alright
The Bank of Canada today made an important addition to its website: the Financial Stability Hub, "a dedicated space....for timely analysis and research on financial stability issues". The Bank and its political bosses at the Department of Finance were little short of smug at the domestic banking sector's stability during the financial crisis a decade ago. With the next financial conniption only a matter of time, the Bank evidently thinks it's important to get an early start on convincing investors and depositors that the system is well-prepared and resilient.
The new Hub is off to a flying start, with three new papers added on the first day. A couple of these are worthy of comment: a report on the vulnerability of the financial system to house price corrections, and an analysis of the impact of recent policy changes on the mortgage market.
The paper on house price corrections is rich in acronyms, introducing us to a "suite of models" known as FRIDA: Framework for Risk Identification and Assessment. FRIDA and her less pronounceable offspring (including CDM and MFRAF) allow the Bank to model the macroeconomic impact of a house price correction and increase in financial stress. The Bank has specifically modelled the impact of a nationwide 20 percent fall in house prices. It considers this an improbable scenario, but it is worth noting that in the key Toronto and Vancouver markets, this would represent less than a 50 percent retracement of the price increases recorded in the past five years.
The results from FRIDA are reassuring. Thanks to tightened regulations, Canada's banks have more, higher quality capital than in the past. As a result, the scenario under consideration would result in lower bank earnings over a five-year time horizon, but would not threaten capital positions. That said, the Bank recognizes that things could turn out worse if a house price correction were to coincide with some other shock to the system -- a national recession, for example, or a loss of international investor confidence. It appears FRIDA will be set to work examining some of these additional risks in future reports.
As for the impact of policy changes on the mortgage market, the Bank cannot quite avoid taking a self-congratulatory tone. Its policy changes are having "a clear impact" on the market, and in particular the "number of new highly-indebted borrowers has fallen". This is worth focusing on, because the Bank's definition of "highly indebted" is terrifying: it refers to borrowers taking on a mortgage loan equivalent to 450 percent or more of their annual income. The Bank provides various measures of how its tighter rules have affected this segment, but the broadest measure is that the overall percentage of new borrowers falling into the highly indebted category has fallen from 18 percent to 13 percent.
The report also looks at regional trends in mortgage lending. Overall growth in the mortgage market has slowed in response to tighter rules and a pullback in house prices. The biggest declines have been seen in the formerly overheated Toronto and Vancouver markets. The number of new highly indebted borrowers in those markets has also fallen, but it remains worryingly higher than in the rest of the country. This suggests that even if the financial system as a whole could weather a correction, the level of pain in some parts of the country could still be extremely high.
One further vulnerability in the market gets only a passing mention in the report, but will bear watching as things evolve. Tighter mortgage rules at the major banks have pushed more borrowers into the arms of private lenders, whose lending criteria are unregulated and undoubtedly less stringent. In Toronto, the only area for which the Bank appears to have data, these lenders have boosted their share of overall mortgage lending, though it still stands short of 10 percent. The systemic issue here is not whether these folks, both borrowers and lenders, will run into trouble if house prices tumble. They undoubtedly will. But if I were the Bank of Canada, what I'd be worrying about is, what is the source of the money that the private lenders are so enthusiastically shovelling out?
The new Hub is off to a flying start, with three new papers added on the first day. A couple of these are worthy of comment: a report on the vulnerability of the financial system to house price corrections, and an analysis of the impact of recent policy changes on the mortgage market.
The paper on house price corrections is rich in acronyms, introducing us to a "suite of models" known as FRIDA: Framework for Risk Identification and Assessment. FRIDA and her less pronounceable offspring (including CDM and MFRAF) allow the Bank to model the macroeconomic impact of a house price correction and increase in financial stress. The Bank has specifically modelled the impact of a nationwide 20 percent fall in house prices. It considers this an improbable scenario, but it is worth noting that in the key Toronto and Vancouver markets, this would represent less than a 50 percent retracement of the price increases recorded in the past five years.
The results from FRIDA are reassuring. Thanks to tightened regulations, Canada's banks have more, higher quality capital than in the past. As a result, the scenario under consideration would result in lower bank earnings over a five-year time horizon, but would not threaten capital positions. That said, the Bank recognizes that things could turn out worse if a house price correction were to coincide with some other shock to the system -- a national recession, for example, or a loss of international investor confidence. It appears FRIDA will be set to work examining some of these additional risks in future reports.
As for the impact of policy changes on the mortgage market, the Bank cannot quite avoid taking a self-congratulatory tone. Its policy changes are having "a clear impact" on the market, and in particular the "number of new highly-indebted borrowers has fallen". This is worth focusing on, because the Bank's definition of "highly indebted" is terrifying: it refers to borrowers taking on a mortgage loan equivalent to 450 percent or more of their annual income. The Bank provides various measures of how its tighter rules have affected this segment, but the broadest measure is that the overall percentage of new borrowers falling into the highly indebted category has fallen from 18 percent to 13 percent.
The report also looks at regional trends in mortgage lending. Overall growth in the mortgage market has slowed in response to tighter rules and a pullback in house prices. The biggest declines have been seen in the formerly overheated Toronto and Vancouver markets. The number of new highly indebted borrowers in those markets has also fallen, but it remains worryingly higher than in the rest of the country. This suggests that even if the financial system as a whole could weather a correction, the level of pain in some parts of the country could still be extremely high.
One further vulnerability in the market gets only a passing mention in the report, but will bear watching as things evolve. Tighter mortgage rules at the major banks have pushed more borrowers into the arms of private lenders, whose lending criteria are unregulated and undoubtedly less stringent. In Toronto, the only area for which the Bank appears to have data, these lenders have boosted their share of overall mortgage lending, though it still stands short of 10 percent. The systemic issue here is not whether these folks, both borrowers and lenders, will run into trouble if house prices tumble. They undoubtedly will. But if I were the Bank of Canada, what I'd be worrying about is, what is the source of the money that the private lenders are so enthusiastically shovelling out?
Wednesday 7 November 2018
HELOC to pay
Canadian households' debt to income ratio seems to have stopped rising in recent quarters, and even retreated modestly, although it still remains near 1.70, well above the peak level recorded in the United States ahead of the financial crisis. The housing market has gone off the boil, with the result that mortgage lending growth has slowed.
That's all well and good, but there's another form of household debt that's causing concern for the Bank of Canada: the Home Equity Line of Credit, or HELOC. As this article from the Financial Post reports, the average outstanding balance on these lines of credit is C$ 70,000; a quarter of HELOC borrowers only pay down the interest each month; and the repayment schedules that borrowers describe to the Financial Consumer Agency of Canada (FCAC) look "optimistic".
Borrowing more money against the family homestead when property prices are rising is a time-honoured Canadian tradition, and in a sense the HELOC is just a new way of playing an old game. In its most benign form, remortgaging is a low-risk way of securing funds for property improvement, and this was the original notion when banks started making HELOCs available to their customers.
The FCAC is now concerned that some HELOC borrowers are not using the vehicle responsibly -- it has become a means of financing day-to-day consumption rather than investing in home improvements. Borrowers with no clear repayment strategy are likely to find even the interest payments burdensome as rates continue to rise. In the event of a downturn in property prices, the equity against which the line of credit is secured will start to shrink, potentially creating asset quality issues for the lenders.
For the last decade, household debt has seemed to be a looming problem that never quite erupts, and the rising concern over HELOCs is unlikely to signal an imminent crisis. However, many homeowners seem quite happy to enter retirement still burdened by mortgages and HELOCs, and there are ads all over the TV encouraging retirees to slap a reverse mortgage on their homes in order to boost their spending power. The younger generation would be well advised to temper its expectations for a windfall when my own cohort passes on.
That's all well and good, but there's another form of household debt that's causing concern for the Bank of Canada: the Home Equity Line of Credit, or HELOC. As this article from the Financial Post reports, the average outstanding balance on these lines of credit is C$ 70,000; a quarter of HELOC borrowers only pay down the interest each month; and the repayment schedules that borrowers describe to the Financial Consumer Agency of Canada (FCAC) look "optimistic".
Borrowing more money against the family homestead when property prices are rising is a time-honoured Canadian tradition, and in a sense the HELOC is just a new way of playing an old game. In its most benign form, remortgaging is a low-risk way of securing funds for property improvement, and this was the original notion when banks started making HELOCs available to their customers.
The FCAC is now concerned that some HELOC borrowers are not using the vehicle responsibly -- it has become a means of financing day-to-day consumption rather than investing in home improvements. Borrowers with no clear repayment strategy are likely to find even the interest payments burdensome as rates continue to rise. In the event of a downturn in property prices, the equity against which the line of credit is secured will start to shrink, potentially creating asset quality issues for the lenders.
For the last decade, household debt has seemed to be a looming problem that never quite erupts, and the rising concern over HELOCs is unlikely to signal an imminent crisis. However, many homeowners seem quite happy to enter retirement still burdened by mortgages and HELOCs, and there are ads all over the TV encouraging retirees to slap a reverse mortgage on their homes in order to boost their spending power. The younger generation would be well advised to temper its expectations for a windfall when my own cohort passes on.
Friday 2 November 2018
Canadian economy: still edging ahead
Statistics Canada reported this morning that the Canadian economy added 11,200 jobs in October. While this was marginally below the consensus expectation for a gain of 15,000, it was sufficient to push the unemployment rate down to 5.8 percent, matching a four-decade low, in part because labour force participation edged lower. The economy has added 205,000 jobs in the past year, with 173,000 of these representing full-time positions.
Full-time jobs more than fully accounted for the October increase in employment. There were 34,000 full-time positions created in the month, offset by a decline of about 22,000 in part-time employment. Here, however, we have to enter one of the caveats that often accompany Canadian employment data: by StatsCan's reckoning, most of the new full-time jobs (approximately 22,000) in fact represented self-employment, a category that shows remarkable volatility from month to month. Reflecting the moderation in employment gains in recent months, the year-on-year rise in average earnings fell marginally to 2.2 percent.
A second report from StatsCan today suggested that Canada's international trade sector is largely stagnant, but the data need to be interpreted carefully. Imports reportedly fell 1.5 percent in volume terms in September, which could be a sign of sluggish domestic demand, but the decline largely reflects the fact that StatsCan had to revise August import data sharply higher because of the late reporting of some major transactions. Exports were marginally lower in the month, a result of declining sales to countries other than the United States. However, with the US economy powering ahead and NAFTA uncertainties seemingly lifted, prospects for export growth remain positive.
Earlier in the week, StatsCan reported that real GDP rose 0.1 percent in August, its seventh consecutive monthly gain. This was above the consensus expectation for no change in the month, but in truth details of the report were not strong. All of the increase was the result of higher output in the services sector, mainly finance and insurance. The goods-producing sector was essentially flat in the month, despite gains in oil and gas extraction.
What are the policy implications of this week's reports? It is becoming more apparent that the Canadian economy is lagging further behind that of the US, which continues to benefit from the sugar rush provided by Trump's tax cuts. That underperformance may well be seized on by Finance Minister Morneau as justification for continued deficit spending when he tables his Fall Fiscal Update on November 21. As for the Bank of Canada, the data suggest that there is no real pressure to move interest rates rapidly toward more neutral settings. If the Bank's actions are data-dependent, this week's data clearly suggest further tightening will lag behind the pace set by the Federal Reserve, which implies that the exchange rate will drift moderately weaker over the winter months.
Full-time jobs more than fully accounted for the October increase in employment. There were 34,000 full-time positions created in the month, offset by a decline of about 22,000 in part-time employment. Here, however, we have to enter one of the caveats that often accompany Canadian employment data: by StatsCan's reckoning, most of the new full-time jobs (approximately 22,000) in fact represented self-employment, a category that shows remarkable volatility from month to month. Reflecting the moderation in employment gains in recent months, the year-on-year rise in average earnings fell marginally to 2.2 percent.
A second report from StatsCan today suggested that Canada's international trade sector is largely stagnant, but the data need to be interpreted carefully. Imports reportedly fell 1.5 percent in volume terms in September, which could be a sign of sluggish domestic demand, but the decline largely reflects the fact that StatsCan had to revise August import data sharply higher because of the late reporting of some major transactions. Exports were marginally lower in the month, a result of declining sales to countries other than the United States. However, with the US economy powering ahead and NAFTA uncertainties seemingly lifted, prospects for export growth remain positive.
Earlier in the week, StatsCan reported that real GDP rose 0.1 percent in August, its seventh consecutive monthly gain. This was above the consensus expectation for no change in the month, but in truth details of the report were not strong. All of the increase was the result of higher output in the services sector, mainly finance and insurance. The goods-producing sector was essentially flat in the month, despite gains in oil and gas extraction.
What are the policy implications of this week's reports? It is becoming more apparent that the Canadian economy is lagging further behind that of the US, which continues to benefit from the sugar rush provided by Trump's tax cuts. That underperformance may well be seized on by Finance Minister Morneau as justification for continued deficit spending when he tables his Fall Fiscal Update on November 21. As for the Bank of Canada, the data suggest that there is no real pressure to move interest rates rapidly toward more neutral settings. If the Bank's actions are data-dependent, this week's data clearly suggest further tightening will lag behind the pace set by the Federal Reserve, which implies that the exchange rate will drift moderately weaker over the winter months.
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