Canada GDP: still moving ahead

Statistics Canada's monthly GDP report for November provided an upside surprise this morning. GDP rose an estimated 0.7 percent in the month, easily beating the analysts' consensus estimate of 0.4 percent. Perhaps even more surprising, StatsCan's preliminary estimate for December suggests another 0.3 percent rise. This would leave GDP for all of 2020 more than 5 percent below the 2019 level, a markedly worse performance than in the United States, which recently reported a 3.5 percent fall for the full year.

We may note in passing the inability or unwillingness of the news media to employ reporters who can put these numbers in context for their readers. Check out this report from the CBC website. The sub-headline states that the pace of growth "is slowing to a crawl".  Are they referring to the November data, which annualizes to something not far short of double-digit growth? Or maybe they mean the estimated December gain of 0.3 percent, which equates to an annualized gain of about 4 percent, about twice the Bank of Canada's estimate of the economy's potential growth rate. Either way, it's not surprising that surveys routinely show that the public believes the economy is "in recession".

Presumably the analysts' consensus was significantly lower than the actual outcome because it was assumed that the return of COVID lockdowns would quickly make an impact on economic activity.  That was a reasonable assumption, and it seems quite possible that activity in some sectors was "pulled  forward" into November in anticipation of even stricter lockdowns. If that turns out to have been the case, the preliminary estimate for December may turn out to be overstated: we shall find out when StatsCan releases the final figures, together with full annual data, in early March.

Regardless of how December turns out, January (and the entire first quarter of 2021) is likely to see very weak growth, with lockdowns across the country and the vaccine rollout encountering fresh problems almost every day. One wonders what gloomy terminology the CBC will wheel out if GDP starts to fall again, which seems more than likely. 

A very short post

I've blogged a lot about the pernicious practice of short selling in financial markets over the years. It's impossible for me not to feel vindicated now that hedge funds are getting handed their heads by a group of retail investors co-ordinating their activities through Reddit. It will end in tears, for the Redditors as well as the hedgies, but it might all be worthwhile if financial regulators finally wise up to the fact that this entire practice is unnecessary and harmful. Here are a couple of extracts from past postings on the subject.

First, one from a post called "Get Shorty" from 24 July 2011, at the height of the Greek debt crisis:

The key weapon in doing this will, as usual, be short selling, especially by hedge funds. Financial institutions always defend this practice, arguing that it provides a mechanism for identifying underlying problems quickly and bringing them to a head. As I've suggested in these pages in the past, this is akin to claiming that the school sneak, the kid who rats out his schoolmates for smoking behind the bike sheds, is a major contributor to school discipline. It's not as if the hedgies can claim any special expertise that has allowed them to figure out there is too much sovereign debt in some Eurozone countries. Everybody knows that. The bizarre part is that nobody seems seriously inclined to curb the short sellers, even though the costs, if they succeed in bringing down another debtor, will be borne by the same taxpayers that picked up the tab last time.

Michael Lewis's "The Big Short" painted a knockabout picture of a bunch of geeky oddballs making money by shorting asset backed bonds. However, the role of short selling in the runup to the financial crisis was pernicious. The most egregious example was provided by Goldman Sachs, who reportedly allowed a known short-seller to select ropey assets as collateral for one of their ABS deals, ensuring profits for the short seller as soon as the deal came to market. There may be no scope for that sort of skulduggery with Spanish or Italian bonds, but there's no reason to suppose that the short sellers will be any more scrupulous in their dealings.

The irony is that the hedge funds doing the short selling generally carry far more leverage than Italy or Spain do. Neither of those countries is in anything like as much trouble as Greece. The hedgies are unapologetic about trying to bring the sovereign debtors to their knees. It's long past time for regulators to return the favour.

And this is from a post just a couple of weeks later, on 14 August 2011, after a particularly wild week in global equity markets.

Investors have a perfect right to fall in and out of love with stocks. If you decide you don't like a particular stock that you own, you can try to sell it to someone else who sees things differently; conflicting opinions of value are the basis of every trade. But short-selling allows you to try to make profits out of something you don't even own, at the expense of legitimate sellers and innocent bystanders. Contrary to the claims of its apologists, there's no way that this activity adds anything to the efficient functioning of markets. When it's combined with rumour-mongering, as seems to have been the case with French bank shares this past week, it crosses the boundaries of the merely under-handed and becomes outright malevolent and immoral.

One of the business news networks concocted a graphic this week that purported to show that short selling bans don't even work. Using data for US stocks when such a ban was imposed at the height of the financial crisis in 2008, it appeared to show that over the following two weeks, the overall market was down 18% (if memory serves), while financials, covered by the short selling ban, fell by 23%.

It is, of course, not possible to test a counterfactual, but recall that at the time of the Lehman Brothers failure, there was a wholesale flight from financial stocks. Nobody attempted to stop those who owned bank shares from selling them, so it's not surprising that they fell more than the broader market. But it's surely reasonable to posit that the ban on short selling prevented gleeful speculators from making the carnage immeasurably worse, which is exactly what it was intended to do.

Almost a decade on, I'm quite happy to stand by those statements.  

Careful what you wish for

There are plenty of Donald Trump supporters in Canada: even a quick glance at the readers' comments section on any article in the National Post makes that clear.  However, it's probably fair to say that a majority of Canadians were happy to see Joe Biden win the Presidential election. Having a ringside seat at the circus is fun for one night, but it gets a bit wearing after four years. Prime Minister Trudeau and his Deputy, Chrystia Freeland, must have been hoping for an easier ride after dealing with the mercurial Trump.

Less than a week into Biden's term, those hopes are already looking ragged. On his very first day in office, Biden signed an executive order rescinding the permit for construction of the Keystone XL oil pipeline. This rather peculiar project was designed to transport oil from the Alberta tar sands to refineries on the US Gulf Coast. The US does not actually need the oil: it would all be refined and exported. The very existence of the scheme is evidence of Alberta's growing desperation to get its product to tidewater.

The project is an environmental nightmare, despite its owners' promise to make the pipeline itself carbon neutral by 2030. Tar sands oil is intrinsically dirty and bringing a project of this scale into being would make it almost impossible to meet Canada's "green" targets. The Federal and Alberta governments have been all-in on the project from the start, but it triggered widespread protests by Indigenous groups in North Dakota, prompting the Obama administration to cancel it. Trump revived it by way of an executive order and work resumed, but now Biden, in an early gesture to the more progressive wing of his party, has nixed it again.

Keystone XL assuredly won't rise from the grave again, but Alberta Premier Jason Kenney isn't giving up. He is demanding that the Federal Government make the case for it with the Biden administration, which seems entirely pointless. He wants compensation from the US for the billions Alberta has already spent on it: good luck with that. And he has even gone so far as to suggest that Canada should retaliate against the US and risk starting a trade war if the project does not go ahead.  

You can relax on that score, Premier Kenney, because President Biden is way ahead of you on the trade war front. On Monday the President signed another in the endless stream of Executive Orders that have come across his desk since the Inauguration, this one aimed at strengthening Buy America provisions in government procurement. Protectionism is a big part of the Democratic Party's DNA, and this action is a gesture by Biden towards the more traditional wing of his party.

Canada is, of course, part of a North American free trade deal with the US and Mexico, and the Federal Government in Ottawa seems relaxed about the whole thing. Still, it is an added complication in the cross-border trading relationship and offers further evidence, as if any were needed, that agreements with the US government, however formal they may be, rarely survive the transition from one administration to another unscathed.

All in all the next few months look very challenging for Canada. On top of the challenges posed by the new administration, the country is facing the prospect of a very slow rollout of the COVID vaccines that are supposed to allow the economy to reopen. Canada produces none of these vaccines domestically. Trump signed an order keeping all US vaccine production for US citizens and there is near-zero likelihood that Biden will reverse that. Now the EU, where Pfizer's vaccine is manufactured (specifically, in Belgium) is also contemplating export curbs. 

Against this background there are bizarre suggestions that the Trudeau government is toying with the possibility of a spring election. To my non-political eye that seems almost like a death wish. One thing's for sure: if yours truly doesn't get a vaccine pretty damn quickly, that's one vote that definitely will not be going to Trudeau.  Actually I won't be voting for him anyway, but don't tell him that. 

Retail tales

It's practically a number from another era, but today's Statistics Canada report on retail sales for November is still worth a look. Retail trade rose 1.3 percent in the month (1.1 percent in volume terms). That was the seventh straight monthly rise, and put put retail sales 5 percent higher than their pre-pandemic level or a remarkable 7.1 percent higher year-on-year.  The strength in this sector hints at the effectiveness of the measures the Federal Government has taken to support household finances.* 

Some media commentary on these numbers suggests that the strength seen in November was the result of people "stocking up".  A rise in spending ahead of the holiday season is normal and would presumably be smoothed away by the seasonal adjustment process, but some stocking up ahead of anticipated further lockdowns might be part of the picture here. That might explain the reported 5.9 percent rise in food and beverage sales, even though such stores are not included in lockdowns.  It's not as easy to explain the 2.2 percent rise in sales at building and garden supply stores -- there are few areas of Canada where putting down topsoil or re-laying the patio are on anyone's job list from December to March.

Nine of the ten Provinces saw higher retail activity in November. The sole exception was Manitoba, a fact that is significant because that was the first Province to move back to tighter lockdowns as the second wave of the virus accelerated. All Provinces moved to much more restrictive postures during December, so it is no surprise to learn that StatsCan's preliminary estimate for retail sales in that month is for a decline of 2.6 percent. Lockdowns are in place across the country throughout January -- and very likely beyond as we await more vaccines -- so several months of lower retail activity look very likely.  

* It also raises questions about whether people realize that they may be facing an income tax bill on those support payments in just a few months time. 

Bank of Canada: no change

Amid all the coverage of Donald Trump's departure from Washington and Joe Biden's inauguration as President, it would have been easy to miss a couple of pieces of economic news from Canada today. Let's rectify that. 

Ahead of today's Bank of Canada Governing Council meeting there had been some speculation that the Bank might announce a "micro" rate cut from the current level of 25 basis points. This frankly would have been almost pointless, and in the event the Bank chose to leave its rate settings unchanged and to maintain its quantitative easing program at the current pace of C$ 4 billion per month. 

The Bank's economic outlook, spelled out in more detail in the quarterly Monetary Policy Report, has become rather more optimistic since the previous such Report appeared back in October. The Bank acknowledges that the strong second wave of COVID has set back the economic recovery here in Canada and around the world, and it expects GDP to contract during the current quarter. However, it is optimistic about the likely impact of the rollout of vaccines: it expects that the current tight restrictions will be eased by the end of Q1, giving rise to a solid rebound in the second quarter of the year.

The Bank may have been blindsided by recent events here. Canada's vaccine deployment has been pitifully slow, and we just learned that deliveries of the Pfizer vaccine, one of two approved for use here, will fall to zero next week and only get back to previously predicted levels by the end of February. This is likely to mean that easing of pandemic restrictions will not be possible until some time in March, which implies that the rebound in Q2 will be smaller than the Bank is expecting.

The Bank's forecast looks for GDP growth of 4 percent in 2021, after last year's estimated 5.5 percent drop. Growth is expected to reach 5 percent in 2022, which would appear to imply that real GDP will be back at its pre-pandemic level by about the middle of that year. The current problems with vaccines may mean that full recovery of the economy will take a little longer than the Bank is expecting.

As for inflation, the Bank notes that headline CPI has been at the bottom of the desired 1-3 percent range in recent months, with core measures below the 2 percent target level. It expects headline CPI to head towards 2 percent in the coming months as base effects (mainly relating to gasoline prices) fall out of the calculation. However, it does not expect that uptick to persist; it still does not foresee inflation moving sustainably above 2 percent until 2023, and it continues to pledge to keep rates unchanged until that time. 

As it happens, today also saw Statistics Canada release its CPI report for December. Headline CPI rose 0.7 percent in the month, down from 1.0 percent in November, with weakness evident in airfares and food prices. Excluding gasoline, CPI rose 1.0 percent in December, down from 1.3 percent in November. In line with the Bank of Canada's statement, all three of the preferred measures of core inflation stand below the 2 percent target. However, it is noticeable that the dispersion between these measures is much wider than it usually was in pre-pandemic days, which raises doubts about their usefulness for the Bank as it makes its policy decisions. 

The Bank of Canada's position that rates will stay on hold until 2023 is almost universally accepted in markets, but there are exceptions. Here is one article that suggests that a revival in growth and strong international commodity prices will make the Bank one of the first among major economies to move to tighten policy, perhaps even before 2023. Right now that looks improbable, especially as higher commodity prices would surely strengthen the exchange rate, which would weigh on GDP growth. It would be surprising if the Bank chose to compound that by also raising rates, unless inflation shows signs of coming back much more rapidly than is currently expected. 

 

This year's model

For most of the past year Canadians have been watching the haphazard efforts to control the COVID pandemic south of the border with horror and pity. Sad to say, the time for any sort of Schadenfreude in Canada is long past.  In our most populous Provinces, we are now doing just about as badly as our American neighbours in controlling the spread of the disease, and early indications are that we are going to do a whole lot worse in getting our population vaccinated.

Let's take a look at the situation in my home Province, Ontario. Premier Doug Ford has tried from the outset to strike a balance between keeping COVID under control and keeping the economy moving. Any suggestion that you will never have a strong economy as long as the disease is raging has been largely ignored. Inevitably this led to the economy being reopened too quickly after the first lockdown back in the Spring, with the dreaded "second wave" really picking up momentum as winter set in. 

The Province has claimed all along to be "following the science" regarding the pandemic, and has paid particular attention to the modelling work done by the so-called Science Table. Last week Premier Ford announced that the latest modelling data would "make you fall off your chair", though in typical style he let another weekend go by before either revealing the data or announcing any further restrictions.

On Tuesday (12th) Ford announced a full lockdown in the Province (although in truth there are plenty of exceptions), backing up his decision with the actual modelling data. I have to admit that this is the first time I have looked at this modelling in detail. The data deck is impressive (link here to both English and French versions) but it's quite apparent that most of the modelling consists of simply projecting the current trends for infections, hospitalizations and so on into the future in a linear fashion. 

This naturally produces some scary-looking numbers -- the Science Table noted that "on the worst days" recently the case count has grown by 7 percent. You only need the "rule of 72" to know that extrapolating that growth rate gives you a doubling of cases every ten days. If you project that rate forward for a full month (i.e. three 10-day doublings), you get a daily case rate of 20,000-plus in mid-February, compared to the 3,000 or so we have been averaging recently. These are the numbers that Premier Ford promised would make Ontarians fall off their chairs.

I don't intend to disparage the Science Panel here, but this kind of modelling can produce some very weird results. One member of the Panel commented that a faster growth rate would potentially lead to a 40,000 per day case rate, as indeed it would. Then again, it happens that the number of new cases reported this week has actually been slightly below the levels seen a week ago. Is that a new trend? Maybe, maybe not, but simply projecting it forward would lead to a much different outcome from the one the Province is using to justify its decisions.   

As for vaccinations, the picture is confusing and not at all encouraging. The Federal government has ordered a staggering number of vaccines, enough to inoculate every one in Canada eight times over, but actual deliveries are painfully slow. In true Canadian fashion, there is massive finger-pointing between the Feds and the Provinces over whose fault this is. My guess is the Feds have screwed up, ordering humungous quantities of jabs in an effort to conceal the fact that their dilatoriness has left Canada well down the list to receive actual shipments.

How is this working on the ground?  Here in Niagara there was rejoicing at the news that the regional health body would  receive its first 11,000 doses of the Pfizer vaccine this week. Commentators pointed out that that would allow all care-home residents and workers to get their first shot by Friday. Except...that paltry initial shipment will in fact be arriving over the next few weeks, not all at once.

Let's "model" (i.e. extrapolate) that, shall we? Assume that the vaccines will arrive over a three-week period, and let's round the number for simplicity to 4,000 per week. The population of Niagara Region is about 450,000, so at this rate it would take about 112 weeks, or more than two years, just to give everyone a single shot!  The Trudeau Government is promising that everyone who wants a vaccine shot will get one by September: to put it mildly, that looks like a heck of a stretch.

What's more, it's not just rural backwaters like mine that are seeing these problems. The huge University Health Network in Toronto actually ran out of vaccine over the weekend, with many front-line workers still not treated. And in a sign of the lack of urgency at all levels of government, Toronto Mayor John Tory proudly announced the planned opening of a dedicated vaccine clinic at the Toronto Convention Centre. When it opens next week it will be able to administer.....250 doses per day! Meanwhile Los Angeles is opening a vaccine clinic at Dodger Stadium that will be able to offer up to 15,000 shots per day and the UK is preparing to offer shots through supermarkets. Now THAT should make Ontarians fall off their chairs.   

How bad will it get?

Employment in Canada fell by 63,000 jobs in December, the first decline since April, according to data released by Statistics Canada this morning.  The unemployment rate edged up to 8.6 percent. Total employment remains 636,000 below its pre-pandemic (February 2020) level and a further 488,000 people are still working less than half their normal hours.

The decline in employment was widely forecast, given the rapid re-imposition of lockdowns across the country in December as the COVID second wave gathered pace. We may note in passing that the analysts' consensus, always particularly inaccurate in gauging this highly volatile data series, was looking for the loss of only 39,000 jobs.  However, some details of the report were a little more encouraging than the headline. 

The services sector was inevitably the worst-hit, losing 74,000 jobs in the month as restaurants once again faced tough restrictions.  The part-time nature of much employment in this sector was reflected in the fact that part-time jobs more than accounted for the overall loss in employment, with 99,000 such positions lost in the month. Manufacturing, by contrast, added 15,000 jobs in the month, contributing to an overall gain of 36,500 full time jobs across the country. 

An indication of what may lie ahead can be found in the Ivey Purchasing Managers Index, released earlier this week. The index fell sharply to 46.7 in December from 52.7 in November; any reading below 50 indicates slowing activity. Although the latest reading is far stronger than those seen at the peak of the first wave of COVID, the fact that the index has been moving steadily lower since August is ominous.

With COVID restrictions tightening still further in January -- in Quebec, for example, an overnight curfew begins this weekend -- prospects for the economy and hence for employment look bleak for the first quarter of the year. And beyond that?  Canada's vaccine rollout is proceeding very slowly, with the Provinces blaming the Federal Government for not providing enough vaccines and the Feds blaming the Provinces for not doing a good enough job on distribution. (Spoiler alert: it looks very much as if the Provinces are in the right here). Without a level of immunity that will allow a return to more normal business activity, it is likely that the Canadian employment market will remain weak until the summer. 

Cryptic skeptic

In the fifteen years of this blog's existence I have only written about Bitcoin four times. The extraordinary price action over the past few weeks means it's time to take another look. 

I encounter many acquaintances from my years in the financial services sector on social media, and several of them have been commenting on the Bitcoin phenomenon lately.  I should stress that these are all real people, but I am not giving their names or any clues to their identity, for obvious reasons.

• Person #1 is a confirmed Bitcoin skeptic, arguing that the value of one Bitcoin is now and forever equal to one Bitcoin.
• Person #2 is only slightly less of a skeptic, arguing that if you want to understand the intrinsic value of a Bitcoin, give your wife one as a gift for her birthday instead of the gold bracelet she has set her heart on.
• Person #3 has been thinking about taking a small position in Bitcoin as a portfolio hedge against disaster, but seems to be coming around to the view that physical gold might be a preferable option. 
• Person #4 is a full-on Bitcoin advocate, both as an investor and as an investment advisor, and has unknowingly led me to take a closer look at what is going on here.

A quick scroll through what we might call Bitcoin Twitter allows for no doubt that people who love Bitcoin, really love Bitcoin. It's hard to know whether it's closer to a cult or a religion. It sports its own terminology, in which mis-spelling seems to be a key ingredient: "hodl", "rekt".  And it has its articles of faith: "math + code = truth". 

The underlying rationale for the development of Bitcoin and other crypto-currencies is a mistrust of fiat currencies, which is of course something that crypto enthusiasts share with gold bugs. As one of the latter put it recently, "you can't trust governments with money". Given the explosion of fiat money creation that has been spawned by the COVID pandemic, it is no surprise that people holding that point of view have begun to ramp up the alarmist rhetoric about an imminent end to the fiat currency era, which arguably only began about a century ago with the gradual demise of the gold standard.

Interestingly, Wikipedia provides a definition of "fiat money" as "an intrinsically valueless object or record that is accepted widely as a means of payment". That would imply that Bitcoin is simply a newly-created form of fiat money, one whose sole distinction (and main attraction to its adherents) is that it is outside the control of governments. Here's something interesting, though: one of my earlier posts on Bitcoin, back in February 2019, was prompted by the near-collapse of Canada's biggest crypto exchange. And guess what?  There were immediate calls from investors facing financial losses for the government to step in with a rescue package, calls which were thankfully ignored by the government. You may not trust the central bank, but apparently it's nice to know it's there in case you need it.   

The recent price action in Bitcoin may be driven in part by fears over the demise of fiat currencies, but FOMO -- fear of missing out -- seems to be playing a growing role.  A lot of retail investors are getting involved, on a very small scale. A few days ago on Twitter there was an individual celebrating the fact that he had just set up a monthly purchase plan for Bitcoin, to wild applause from the cognoscenti. He or she stated an eventual ambition "to own one whole Bitcoin". The current price of US$ 30,000 is hardly chump change, but if you can't afford to commit that much to this asset class, you may be swimming in waters that are way too deep and shark-infested for you.

If you've read this far you will presumably have figured out that I am not yet ready to get involved in Bitcoin or any of the other cryptos. And that may very well be a mistake on my part, but I always try to stay away from investments I don't understand, and for now Bitcoin remains firmly in that category.