Electric shock

Take a look at this document from the Office of the Parliamentary Budget Officer (PBO) in Ottawa. Over the few years the Federal government, enthusiastically supported by several Provinces, has been firehosing money at manufacturers of electric vehicles, in an effort to persuade them to locate in Canada. As the PBO figures it, a total of C$ 46.1 billion in investments has been announced since 2020 by thirteen manufacturers, including such cash-strapped minnows as GM, Ford, VW and Honda. Remarkably, the total government "investment" to support all of this amounts to almost C$ 52.5 billion.  That's right -- government support actually exceeds the total amount that will be invested in these projects. 

And today we find Prime Minister Justin Trudeau, ramping up the populist rhetoric as his government sinks in the opinion polls, announce that from October 1, Canada will impose a 100 percent tariff on electric vehicles imported from China, which has allegedly ''chosen to give themselves an unfair advantage in the global marketplace".  The stupidity (or is it hypocrisy) is breathtaking, even by Justin's standards. Has  anyone in government paused to consider that if you need massive tariffs even after paying for more than 100 percent of the investment in a particular industry, maybe that's not an industry you can ever be truly competitive in. 

It's true that Canada may not have had much of a choice in this matter. The United States has already imposed 100 percent tariffs on Chinese EVs, and has been leaning heavily on its trading partners to do the same. Locked into the free trade deal with the US and Mexico, and with a new Trump presidency possibly looming, saying no was never a real possibility. What's not clear, however, is that Canada's massive subsidies to the EV industry will pass muster with the incoming US administration, whichever party that may be. Protectionism is never far below the surface in the US, and Canada's subsidies here are egregious in scope. 

In fact, let's hazard a guess at where the first lawsuit may come from. Every Tesla currently sold in Canada comes from a factory in Shanghai and will be subject to the new tariffs come October.  Tesla has somehow contrived not to receive any of the Canadian government's recent largesse.  We await Elon Musk's reaction to today's announcement. 

A Lob-Law unto themselves

Back in the summer of 2023, the Canadian Government summoned the heads of the major grocery chains in Canada to a meeting in Ottawa, demanding that they do something to reduce the rate of food price inflation.  If we're naming names, there were five chains at the meeting -- three Canadian-owned (Loblaws, Metro and Sobey's) and two US-owned (Costco and Walmart).  

The pace of food price inflation has in fact fallen sharply since that first meeting, though there's no evidence that the pressure from the government had much to do with it. The Government has tried to keep the issue on the front pages, even going so far as to hint that it was trying to attract a foreign grocery chain into the Canadian market to increase the level of competition, a bizarre thing for any national government to do. It has also announced its intention to impose a legally-binding Code of Grocery Conduct on the existing quintet.

For the most part, the CEOs of the five firms have largely suffered through all this posturing in silence, with one exception. Loblaws CEO, the multi-billionaire Galen Weston, has been visibly angry about the whole process, blaming the rise in food prices during and after the pandemic mainly on the company's suppliers. He has also begun to warn that the Code of Grocery Conduct as currently propose will tend to push prices even higher, not lower them. 

This week we have found out why Galen can be so confident about this outcome. Loblaws has announced that it will be ending its current practice of cutting the prices of soon-to-expire food items -- bread. veggies, prepared meals and such -- by up to 50 percent in order to get them off the shelves. It portrays this deeply cynical move in an even more deeply cynical way, as providing "more consistency with our competitors".  I don't know about you, but I have generally thought that competition is supposed to help keep prices down, not provide cover for putting them up, but here we are.

As the linked article suggests, this looks a lot like collusion to a lot of people, although one of the quoted experts suggests it is "conscious parallelism" -- watching your competitors and imitating them.  Fair enough, but the timing of this, coming after all the meetings with the government and the threat of the Code of Grocery Conduct, looks very much like Loblaws flipping the bird at the government.  If Galen Weston actually wants a Piggly-Wiggly, or more likely an Aldi, across the street from one of his stores, he's going the right way about it.

UPDATE, January 20:  Well, here's a thing you don't see every day!  Loblaws has reversed its decision to eliminate the 50 percent discount as a result of the uproar its initial announcement caused.  Well done, Galen Weston, but next time, "measure twice, cut once".

Canada's online news scam

Back in June, the Canadian government passed the Online News Act, which was aimed at shielding traditional media outlets from losing revenue to online platforms.  There is no question that the likes of Facebook and Google have been hoovering up a growing portion of the advertising revenue that had previously gone to newspapers and the like.  Rather than moving on from their advertising-based business models, the old media lobbied the government to introduce measures to force the newcomers to share the loot.

As soon as the Act came into effect, Meta/Facebook made it impossible to use their platform to link to traditional media outlets.  This complies with the Act, though hardly in the way that the government intended, and the ban remains in place to this day. Back during the wildfire season in early summer, the newspapers were full of stories that Facebook's intransigence was putting Canadians' lives at risk by depriving them of vital information.

Google took a less confrontational approach, and last month announced that it had agreed a deal that would see it pay C$ 100 million per year to the old media outlets in order to comply with the new law.  As the linked article above shows, details of who will actually get Google's money are now emerging, not without some wrangling. The Toronto Star quickly decided that the overall package was not adequate, which brings thoughts of gift horses and their mouths to mind.  The CBC lobbied for and appears to have been awarded a share of the pot, even though it already receives upwards of a billion dollars of taxpayers' money each year.   

Anyway, now that the deal is in place, presumably we can go onto Google and read stories in the Toronto Star or the Globe and Mail to our hearts' content, right? Don't be silly! If you try to read a story in the Star online you will still be faced with a demand to take out a subscription.  (Try it for yourself, here.)  You could, of course, have taken out that subscription at any time, before all of this nonsense started -- and yet somehow we are meant to believe that it was Google and Facebook that were the ones denying us access to the news. All that's changed is that the Star et al have found a way to get paid twice for being being the same mediocre* newspapers as before.  

Shameless shakedown or devious double-dipping?  Decide for yourself, but in the meantime don't believe everything you read in the newspapers. 

* It's almost Christmas so I'm feeling charitable. 

The slippery slope

There's no denying that the taxpayer-funded health care system in Ontario, in common with much of the world, is under strain at the moment. The impact of years of under-funding has been greatly exacerbated by the COVID pandemic, resulting in delayed surgeries and even occasional, short-lived closures of emergency rooms in rural areas.  

There's also no denying that Ontario Premier Doug Ford thinks the private sector does just about everything better than the public sector, so it's no surprise that his solution to the health care crisis is to start farming more of it out to the private sector. This morning the Premier announced a three-part plan to do just that, starting with cataract surgeries, then moving on to diagnostic tests such as colonoscopies, and then to knee and hip replacement. This is all controversial, to put it mildly. Here are a few preliminary thoughts. 

The first point that needs to be made is that there is already a lot of private money involved in the Ontario health care system. As the linked article notes, there are already 900 private diagnostic and surgical offices in the Province. Moreover, dental and routine ophthalmic care is basically fully private already, and most people do not get any public funding for prescription drugs. Insurance companies enthusiastically fill the airwaves with ads to help with the cost of services the public system does not cover. 

Premier Ford is adamant that the steps being introduced today will not require Ontarians to reach for their credit card when they visit a private clinic. Your health card (known as an OHIP card) will still have you covered.  He is equally adamant that the new clinics will not in any way cannibalize the public system, particularly as regards staffing.  That can surely only be true if there are squadrons of ophthalmic surgeons (and later, orthopedic surgeons) currently sitting around twiddling their thumbs outside the public system, just waiting for the opportunity to open a clinic of their own. 

It can be fairly confidently stated that that's not the case. Staffing for the new clinics will exacerbate the existing shortage of medical professionals in Ontario. A much better solution already exists for that shortage: speed up the process of certifying fully-qualified immigrants to work in the Province's health-care system. 

Cataract surgery and diagnostic testing is one thing, but joint replacement, even relatively routine procedures like knee and hip replacements, is surely another thing altogether.  How many private sector clinics will invest in the premises and equipment needed to carry out these surgeries quickly and safely? Will they really be able to do this at a lower cost than the public sector does?  Then there is the issue of surgical complications. In the UK, which has a fully-fledged private system alongside the NHS, the private sector only takes on routine operations: anything that looks likely to run the risk of complications is quickly punted back into the public system. As in most areas of "public-private partnership", it quickly becomes apparent that the private sector has much more appetite for reward than it does for risk. 

There may well be a case for small stand-alone clinics to cover routine procedures and take the pressure off full-service hospitals. It's much less clear that the private sector will operate such clinics more efficiently and economically than the public sector can. And the really big fear here has to be that,  having whetted his appetite with the relatively minor steps announced today,  Doug Ford will sooner or later press ahead with much wider privatization of health care.  

Given Ontario's proximity to the United States, this recent warning from the excellent UK blogger Chris Dillow about health care problems in that country's National Health Service surely goes double here: In this world, we must guard against the (high) risk that the task of reforming the NHS will be undertaken by vicious incompetents in hock to US insurance companies. There would be very little support for that in any part of Canada, but that doesn't mean Ford isn't thinking about it. Ontario's healthcare system may just have been placed on a very slippery slope. 

The dumbest idea (so far)

The Conservatives are the first party to produce a full-fledged policy platform for Canada's Federal election. We have several weeks to go, but the Tories have already managed to float a proposal that must even now be a front-runner for the dubious honour of being the most bone-headed idea of the campaign.

The Tories want to have a one-month sales tax "holiday" for the month of December.  Party leader Erin O'Toole says this would "give Canada's families a break and...help Canada's small retailers to get back on their feet".  Amazingly, Canada's small retailers are less than impressed. Their spokesmen, Dan Kelly of the Canadian Federation of Independent Business (CFIB) calls the idea "gimmicky" and worries that it might simply "shift consumer demand from one month to another without boosting it overall". I don't often find myself in agreement with Dan Kelly, but he's surely right about that.

The more broad-based Retail Council of Canada also sees the problem. Announcing a December tax holiday would very likely prompt consumers to delay purchases they would otherwise consider making in the fall:  "The last thing retailers are looking for is to flatten their sales in the fall. In that sense, the lag is a drag on sales." 

The Retail Council includes larger retailers than those represented by the CFIB.  Some of those retailers, the Amazons and Walmarts of the world, would undoubtedly be bigger beneficiaries of this half-baked idea than the small businesses that O'Toole supposedly wants to help -- but they're still not in favour of it. 

And then, of course, there's the cost. The centrepiece of the Tory election platform is the need to restore fiscal balance within a decade.  Spending a month's sales tax revenue on a scheme that is highly unlikely to benefit the overall economy is a strange way to start that process.  

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. 

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.     

Laundry list

The leak of the so-called FinCEN papers has put money laundering back on the business pages for the first time in a while. It has also taken a heavy toll on the shares of some of the world's biggest banks, including Deutsche Bank and HSBC. That's a little odd, inasmuch as these 2500-plus documents are mainly "SARs", or Suspicious Activity Reports. Rather than evidence of wrongdoing by the banks, these reports are proof that they have been reporting such transactions to the monetary authorities, which is exactly what they are supposed to do.   

Detection and prevention of money laundering was a pervasive concern during my thirty years in the banking business, particularly when I moved from Canada to London just before the millennium. There were regular (and very tedious) sessions aimed at teaching staff members how to identify transactions that might constitute money laundering. Everyone was trained in the importance of KYC -- Know Your Client. The Compliance Department grew larger, more powerful and more intrusive year by year.

What was my takeaway from all this?  Sadly, it was that you can never quite keep up with the launderers. Every major bank in the world is just about certain that it is laundering money every day -- it just can't effectively identify every single suspect client and every single suspect transaction. Neither can the financial authorities.  That hasn't changed over the years, and it is unlikely that it ever will.      

The Price is wrong? Part 2: the United States

Federal Reserve Chair Jerome Powell used his speech to the KC Fed's Jackson Hole conference to signal changes to the Fed's policy approach. His speech gives a concise summary of the history of inflation targeting at the Fed, but one or two points deserve further emphasis. 

First, the Fed was late to adopt formal inflation targeting, only taking its final step in that direction under the Chairmanship of Janet Yellen, less than a decade ago. Its earlier resistance to such a move can be blamed  at least in part on Alan Greenspan. The wily and ultra-political "Maestro" never wanted to have his hands tied in any way.  The Fed's inflation focus during his term in office was very much a moving target. Believing that the CPI overstated inflation pressures, Greenspan first shifted his attention to the previously obscure Employment Cost Index. When that no longer passed muster, he switched to the even more arcane core personal consumption expenditure deflator, a GDP-related figure that has the distinct disadvantage of being a quarterly number, rather than monthly like the CPI. This is not a sound approach to making policy.  

Second, the Fed, unlike, say, the Bank of Canada, is already tasked with a dual mandate that calls on it to pay attention to both inflation and employment as it sets its policy course. It would perhaps be gratuitous to suggest here that under Greenspan, that seemed to expand to a triple mandate, with propping up the stock market becoming a central pre-occupation: the so-called "Greenspan Put". Leaving that aside, the dual mandate carries over into the changes that Chairman Powell announced this week.  Here is how Powell described those changes: 

Regarding employment: "Our revised statement says that our policy decision will be informed by our "assessments of the shortfalls of employment from its maximum level" rather than by "deviations from its maximum level" as in our previous statement. This change...reflects our view that a robust job market can be sustained without causing an outbreak of inflation.  In earlier decades when the Phillips curve was steeper, inflation tended to rise noticeably in response to a strengthening labor market. It was sometimes appropriate for the Fed to tighten monetary policy as employment rose toward its estimated maximum level in order to stave off an unwelcome rise in inflation. The change to "shortfalls" clarifies that, going forward, employment can run at or above real-time estimates of its maximum level without causing concern, unless accompanied by signs of unwanted increases in inflation or the emergence of other risks that could impede the attainment of our goals."

And regarding inflation: "our actions to achieve both sides of our dual mandate will be most effective if longer-term inflation expectations remain well anchored at 2 percent. However, if inflation runs below 2 percent following economic downturns but never moves above 2 percent even when the economy is strong, then, over time, inflation will average less than 2 percent. Households and businesses will come to expect this result, meaning that inflation expectations would tend to move below our inflation goal and pull realized inflation down. To prevent this outcome and the adverse dynamics that could ensue, our new statement indicates that we will seek to achieve inflation that averages 2 percent over time. Therefore, following periods when inflation has been running below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time."

These are subtle shifts in wording, and as we move towards the post-COVID world, it may be quite some time before they result in any noticeable changes in the Fed's actual policy stance. However, they are an important recognition by the world's most important central bank that the old assumptions about a direct trade-off between inflation and employment no longer apply. For what it may be worth -- doubtless very little! -- I was never a fan of the Phillips curve that Powell refers to here. It looks as if it is about to join the Phlogiston Theory on the scrapheap of old ideas.   

This could get interesting

We learn via CBC that former Bank of Canada and Bank of England Governor Mark Carney has taken on a side hustle. After his spell on Threadneedle Street ended early this year, Carney was appointed as a UN special envoy on climate change and climate finance. Apparently that's not a full-time gig, because he has been providing advice to Prime Minister Justin Trudeau on how Canada should respond to the COVID-19 crisis.

Carney surely knows his way around a crisis.  He was at the helm of the Bank of Canada during the global financial meltdown, and more recently led the Bank of England's response to the Brexit vote and the subsequent chaotic negotiations -- indeed, he agreed to extend his term in London in order to ensure an experienced hand on the tiller on Brexit day itself,  at the start of this year. The fact that Carney served in both Ottawa and London under Conservative governments may be part of his appeal to Trudeau right now, possibly helping to deflect potential criticisms that the Government's pandemic response is politically driven. 

That said, Carney's re-emergence in Ottawa gives us plenty of opportunities for speculation.  For example, how does new Bank of Canada Governor Tiff Macklem feel about it?  The two men seemingly worked well together a decade ago, when Macklem was Carney's Deputy, but Carney is, to put it mildly, not bashful about expressing his views. How will Macklem respond if Carney takes to second-guessing the Bank's, or offering his opinions from the sidelines?

Then there's Finance Minister Bill Morneau to consider. Morneau has been caught up in the ongoing WE Charity scandal, which basically involves suspiciously tight connections and flows of money between a well-connected charity foundation and senior Liberal politicians, including both Morneau and Trudeau himself. Trudeau's Teflon shield seems to be deflecting much of the blame, but Morneau may not be so lucky, especially if Trudeau decides that someone has to go under the bus for appearances' sake.

Carney has long been reported as having political ambitions. Firing Morneau and installing Carney in what is effectively the number two job in the Government would be a bold and risky move, especially as Carney has no seat in Parliament.  Then again, there's a vacant seat in the Toronto area, so a hastily-arranged by-election to get Carney into the House of Commons can't be ruled out.

Lastly, Carney's acceptance of the UN special envoy role reflects a genuine interest in the climate change issue. He regularly raised the hackles of backbench Tories in London by speaking out on the issue. There are reports that Trudeau is looking to use the need to pilot the economy out of the pandemic shutdowns to launch some radical changes, which would undoubtedly focus heavily on "green" issues.  "Green Czar" Mark Carney?  Stranger things have happened. 

It's a start

One of the most widely (and incorrectly) quoted US economic numbers since the start of the COVID-19 pandemic has been the Department of Labor's jobless claims data.  It's been widely quoted because it's a weekly series released with very little time-lag.  It's been incorrectly quoted because many journalists have been summing the weekly figures for initial jobless claims (i.e. people claiming for the first time in each  reporting week) and presenting that number as an estimate of total job losses.  The Department also publishes a series for continuing claims that gives a much better estimate of the cumulative impact of the virus, albeit with a one-week lag. It's part of the same press release -- you don't even have to go and search for it!

Data for the week ended May 23 were published this morning, and provide clear evidence that the gradual reopening of the economy is starting to have an impact. Initial claims for the week were 2,123,000, down more than 300,000 from the previous week's level. Initial claims have in fact been declining week by week since hitting a staggering 6 million at the end of March. 

But check out this report from CNN: its very first sentence states that   "More than 40 million Americans have filed for first-time unemployment benefits since the coronavirus pandemic forced the US economy to shut down in March."  That's arithmetically accurate, but it would surely be better to quote the figure for "insured unemployment", which relates to the week ended May 16.  That figure stood at 21,052,000, a decline of almost 3.9 million from the previous week. The "insured unemployment rate" fell to 14.5 percent from 17.1 percent in the same week. 

Those are still awful numbers, but they seem to suggest that the worst of the job losses may now be in the past.  Although the official May non-farm payrolls data, due for publication on June 5, are likely to be terrible, the fall in claims throughout May should translate into better numbers for June -- but as always, all such bets are off if the pandemic gears up for a second wave.

   

What's up, stocks?

The bad economic news keeps pouring in from around the globe.  More than 16 million jobless claims in the US in the past three weeks....Germany set for recession....Canadian unemployment up more than a million in March....UK retailers falling like flies...heavy crudes selling for as little as $3/bbl....the list goes on.  Nouriel "Dr Doom" Roubini, never one to let a disaster go to waste, is dismissing all the conjecture about whether we will see a U-shaped, V-shaped or L-shaped recovery from all this, has flatly declared that the only shape he sees is an I, heading straight down.

And yet, after a precipitous decline that far outpaced the Great Crash of 1929, equity markets have not only stabilized but begun to show tentative signs of recovery.  After acknowledging that the markets' ability to foretell the future can never be trusted, what can we make of this?  It can't be hope that the virus will soon disappear, even though there are signs in many countries that the longed-for "curve flattening" is happening. At best this crisis still has months to run, especially in countries such as the United States that got off to a slow start in combatting it.

What seems to be driving the market action is a sense of relief that governments are taking unprecedented and aggressive steps to limit the impact of the pandemic on their economies. Some economists and commentators are referring to this as "stimulus", but that's not quite right, because nobody can seriously expect to generate any economic growth while  the virus rages on. What we are seeing is, rather, efforts to create a state of suspended animation, closing off large parts of the economy to prevent the spread of the virus, while protecting as many people as possible from economic hardship.

The more effective this suspended animation phase is, the shorter it will have to be, and markets collectively seem to be making the judgment, at least for now, that it will be short enough not to cause permanent economic damage. One key risk here, of course, is that governments rush to end the lockdown before the virus is truly under control; probably no need to spell out here which government is most likely to get that wrong. Another risk, highlighted by Forbes Magazine, is that companies will revise their earnings guidance down so aggressively that investors will take fright, resulting in another sharp selloff -- though it seems unlikely that the all-knowing Mr Market is unaware of that risk, which should therefore be priced in already. 

Everyone is looking for reasons to be cheerful right now, and after the panic seen a few weeks ago, equity markets seem, against all odds, to be offering just a little glimmer of hope.     

Fire all of the guns at once*

The Federal Reserve took the quite extraordinary step of announcing a huge program of monetary stimulus, including near-zero interest rates and as bond buyback, on Sunday afternoon.  Donald Trump was very happy, and joined the daily White House coronavirus presser to say so: "people in the market should be very thrilled".

People in the market, alas, demurred rather strongly. Global stock futures began to skid right after the Fed move and Trump's endorsement of it. When Wall Street reopened for trading on Monday it was pure carnage, with the so-called circuit breaker, designed to curb excessive moves in the indices, hit within moments of the open.

This morning on Twitter a sagacious commentator (OK, it was me) opined that: Right now, recession is regrettable but unavoidable. Mass deaths are tragic but avoidable. Policy decisions need to be made accordingly. Donald Trump, always transactional in his approach, simply doesn't get that. He still appears to be in denial about the real state of the epidemic, and still appears to believe that what's needed most is to stop the selloff in equity markets and prevent the economy from slipping into recession.

That approach is going to fail on both counts, and "people in the market" know it. In fact, the experience of China should make it blindingly obvious that focusing on the actual epidemic at the expense of all else is exactly the correct approach. Shutting down Wuhan and the rest of Hubei Province created a big short-term hit to the Chinese economy, but less than three months later things there are rapidly getting back to normal.  The US approach -- basically, use up all of your stimulus tools at once while virtually ignoring the advice of the WHO ("test, test, test") -- looks all but certain to result in a much more widespread and long lasting epidemic.  That's very bad for the economy, and that's what the markets are pricing in right now.

In the absence of anything like real leadership from Washington, state and local authorities are stepping into the breach. New York City, to take one important example, is rapidly heading into lockdown, with schools, theatres and restaurants all closed.  As that sort of thing is replicated right across the country, the path of the epidemic will gradually change, though even at best that will take  a few more weeks. And when that happens, of course, we all know who will step up to try and take all the credit. 

* Steppenwolf, Born to be Wild. Perhaps ominously, the next line is "and explode into space"!

UPDATE, March 17: Watching the latest coronavirus press briefing from the White House, and it's clear that Donald Trump finally gets it. Basically saying, let's not worry about a recession right now. Combat the virus, keep people alive, work to make the outbreak as short as possible, and then the economy will come back strong. Yes, sir!

Divergent paths

It's rare to have a day on which both the US Federal Reserve and the Bank of Canada make rate announcements, but today has been such a day.  With the Fed cutting the funds target by a further 25 basis points and the Bank of Canada once again standing pat, the current divergence between the paths of the two central banks is becoming ever more pronounced.

The Fed's decision to cut rates again was fully priced in by the markets.  With the announcement earlier in the day that US GDP growth slowed to an annualized 1.9 percent in Q3, it is arguable that the Fed has fallen a little behind the curve in its easing cycle, a fact which means, alas, that Donald Trump's criticisms of Fed Chair Jerome Powell have at least some validity.

There had been some speculation that today's might be a "hawkish cut" with the Fed altering the wording of its press release to signify that it regards the easing cycle as being at an end. In the event, today's press release varied only slightly from September's, but the changes can be seen as very slightly hawkish.  While the Fed's policy path will remain data-dependent, previous references to acting as needed to sustain the economic expansion have been removed. As with the previous cuts in this cycle, two FOMC members voted to keep rate unchanged. We will doubtless not have to wait long for Trump to take incoherent potshots at Powell and his colleagues. 

Earlier today in Ottawa, the Bank of Canada issued a more detailed than usual release of its own to explain its decision not to cut rates just yet.  Its case for staying on the sidelines rests on the combination of steady growth, which is expected to further narrow the already modest output gap in the next two years, inflation right at the 2 percent target level, and some evidence of rising wage pressures.   

The Bank sees the risks to this baseline forecast coming mainly from "Ongoing trade conflicts and uncertainty (which) are restraining business investment, trade, and global growth."  Strikingly, given the angst in Western Canada in the wake of the recent election, the Bank makes no direct reference to the sorry state of the energy sector, although it does acknowledge the fall in commodity prices generally. 

Interestingly, the last three words of the release are "fiscal policy developments". Justin Trudeau's Liberals promised in their election platform to run significant budget deficits throughout their mandate.  With the Liberals now dependent on the even more deficit-friendly NDP in the new House of Commons, fiscal policy may become a significant source of stimulus in the months ahead.  Governor Stephen Poloz and his team are right to signal that this can and must influence the direction of monetary policy.

With that said, it is hard to see how the Bank will be able to stand aloof from the global easing cycle for much longer.  Canada now has the highest official rate target in the developed world, and the currency is moving higher as funds flow into the country to take advantage. In the meantime there is growing media speculation about an economic slowdown, and not just in the energy sector: both Ford Motor Company and General Motors will shortly be slashing employment in Ontario.  A rate cut during the next three months seems to be a safe bet, most likely when the Bank releases its next updated Monetary Policy Report in late January. 

Getting scared yet?

All of a sudden the business media are in full-on recession watch -- and not without reason.  Just from CNN we learn that growth in China's industrial production has slipped to its slowest pace in seventeen years (though most countries would be very happy with 4.8 percent year-on-year growth); that five major economies, including the UK and Germany, are flirting with recession; and that the US yield curve (2-year vs. 10-year Treasuries) has inverted for the first time since 2007, a development that is generally a harbinger of bad times to come. In response to all this the DJIA plunged 400 points at the open on Wednesday and just kept right on falling.

It's not altogether surprising that a recession may be just around the corner. The global economy has been in expansion mode for the better part of a decade, an usually long time by historical standards.  Central banks stopped providing additional stimulus some time ago, and in some cases have begun to tighten very modestly.  The boost provided by the Trump tax cuts has faded.  On top of all this, the impact of the tariff wars unleashed by Trump is clearly starting to be felt.  Global trade is slowing, with both the US and China reporting falls in exports.

It's interesting, then, that Trump appears for now to have backed away from his latest tariff threat against China. Levies on a fresh array of Chinese products, including many consumer electronics items, were set to take effect in September, but many of these have now been delayed until December 15.  Even more interesting is the reason Trump offered for the decision: he's doing it for the Christmas season, "just in case" the tariffs might have an effect on US consumers.

Trump has always claimed, quite preposterously, that his previous tariffs have been paid by China, rather than US buyers of Chinese products.  White House insiders have gone so far as to say that this is a quasi-religious belief on Trump's part, one from which he can never be dissuaded.  In that light, the decision to suspend the latest tariffs "just in case" represents something of an epiphany, though this being Trump, it's unlikely to mark the start of a more consistent trend toward accurate economic thinking.

What we are clearly seeing in recent Trump pronouncements, including this tariff decision and his repeated attacks on the Federal Reserve, is a growing recognition that his re-election chances in 2020 depend more than anything on the strength of the economy. The thinly-veiled racism and anti-immigrant rants may shore up his base, but that will never be enough to get him back into the Oval Office. Bank of America says it now sees a 30 percent chance of a US recession by election day, and many commentators think BofA is altogether too optimistic.  If, as Bill Clinton famously said, "it's the economy, stupid", stupid's prospects have just taken a significant turn for the worst. 

Ready for the Trump slump?

I ended my last post here, just a week ago, with this quasi-prediction: If Trump wants the Fed to keep cutting rates, he just has to continue making stupid policy decisions.  Looks like a safe bet. 

Well, we haven't had to wait long for next stupid policy decisions.  At the G-20 summit in Osaka in the far-off days of late June, Donald Trump and his Chinese counterpart President Xi seemed to agree to put their trade wars on hold for three months to allow negotiations to continue, much to the relief of global markets.  However, there's no such thing as an agreement when Trump is one of the parties, and late last week he announced further tariffs on Chinese goods to take effect at the start of September.

China responded by briefly allowing the Yuan to trade through the psychologically important Y7/USD level for the first time in a decade -- and Trump immediately responded to that by having his Treasury Department officially designate China as a currency manipulator.  That inevitably plunged  US equity markets into their worst daily decline so far this year.

Paul Krugman argues in the Washington Post that the decision to label China as a currency manipulator is Trump's and Trump's alone.  Indeed,  the wording of the Treasury Department's announcement almost seems to hint at that fact, stating that Secretary Mnuchin acted "under the auspices of President Trump". Trump himself had already tweeted on the subject, leaving Mnuchin and his department very little choice in the matter.

If Krugman is correct in his belief that Trump is winging it, more unhinged decisions are on the way, because there is no sign that Trump is wavering in his entirely incorrect core belief that his tariffs are paid by China, and not by US consumers. The impact on US and global growth is already apparent and can only get worse.  With interest rates already so low (contrary to what Trump professes to believe), there are limits to what the Fed can do to offset the damage.

And what if China retaliates?  It has already imposed tariffs of its own and shelved plans to ramp up imports of agricultural products from the US, and the brief depreciation of the Yuan was clearly intended as a signal that the country will not put up with Trump's shenanigans indefinitely.  Only one side in this dispute has a weapon of mass destruction in its arsenal, and it's not the United States.  If China were even to hint at the possibility of starting to dump its huge holdings of US Treasury bonds, the impact on global markets and the global economy would be instantaneous and profoundly damaging. How many more of Trump's provocations will it take for that weapon to be unsheathed? .

One small step for the Fed

US Federal Reserve Chair Jerome Powell has been signalling a rate cut for some time, and after today's FOMC meeting a cut duly came: a 25 basis point reduction, taking the target range for Fed funds to 2-2.25 percent.  Considering the consistency of Powell's recent hints, it's perhaps a small surprise that the vote was not unanimous: two Governors would have preferred to keep rates unchanged.

It's unlikely that today's move will be sufficient to mollify Donald Trump, whose anti-Fed rhetoric has grown more ludicrous with every passing week.  It's hard to imagine that the modest tightening the Fed has undertaken in the past year, which has left the rate close to zero in real terms, has produced a "deadweight" on the US economy, but that's how Trump affects to see it.

Given the tone of much of the FOMC statement, the decision to cut rates seems more than slightly odd.  The Fed notes that job gains are solid, the unemployment rate is low, and consumer spending is growing more rapidly.  The sole risk to growth that the statement identifies is the global economic outlook, and here one of the principal sources of uncertainty is, of course, the global tariff wars initiated by Trump.  In effect the Fed is cutting rates in order to offset the risks posed by ill-advised US trade policies, a fact that must surely have led to some queasiness at the FOMC.

Looking ahead, the Fed's base case calls for sustained economic expansion, a strong labour market and inflation stable near the 2 percent target.  However, it remains ready to act as appropriate to keep growth and inflation on track.  Bizarre as it seems, the main source of the uncertainties that could derail the US economy and compel the Fed to cut again is just down the street, in the Oval Office of the White House. If Trump wants the Fed to keep cutting rates, he just has to continue making stupid policy decisions.  Looks like a safe bet.   

The incredible shrinking Bomber

Bombardier Inc has received so much Canadian taxpayer money over the years that it's practically a part of the public sector.  Federal and Provincial (Quebec and Ontario) governments routinely justify each new handout by lauding the company as one of Canada's high-tech manufacturing champions.

That's becoming an increasingly implausible claim as the company sells itself off piecemeal.  The latest division on the block is the regional jet (CRJ) division, once a big money-spinner but now a source of nothing but red ink as the order book dries up.  Mitsubishi Heavy Industries is reportedly kicking the tires for a possible takeover of the division, though no deal has yet been concluded.  Bombardier basically gave away its much-ballyhooed C-series jet program to Airbus Industrie last year,  so it's likely that very soon Bombardier's once-sprawling aviation enterprise will be reduced to a maker of executive jets.

This would leave Bombardier as mainly a manufacturer of passenger rail equipment, which is somewhat ironic in itself, given the primitive nature of rail transportation in Canada.  Is this much of a basis for an ongoing business?  Well, consider that Bombardier is currently behind on deliveries on two contracts in Toronto (streetcars and light rail vehicles), with the company on the hook for liquidated damages in the case of the streetcar contract; it's behind on two contracts with Transport for London (trains for London Overground and Crossrail), with free travel for a month promised to London Overground users to compensate for the delays; it's behind on deliveries and paying out compensation on a contract with Swiss Railways; and it's been excluded from bidding altogether on a contract in New York because of serious doubts about its ability to perform.

It's almost always a good idea for conglomerates to take a hard look at their businesses once in a while and focus back on the things they're good at.  The problem with Bombardier is that it doesn't actually seem to be very good at anything any more.  More deadbeat than national champion, alas.  It's hard to see how I and the rest of the taxpayers of Canada are ever going to see any return on our "investment" in the company. 

UPDATE, June 7: Here's the Toronto Star's David Olive with his take on Bombardier.  This sentence tells you all you need to know about Canada's biggest corporate welfare recipient:  "Headquartered in Berlin, the company is among Canada’s few large multinationals..."  The City of Kitchener, Ontario, was known as Berlin a century ago, but Olive is of course referring to the current capital of Germany. 

Populism in action

There were many reasons for the Ontario Liberal Party's shattering defeat in last year's Provincial election, but one policy decision stands out: the partial privatization of electrical transmission utility, Hydro One.  The stage had been set for privatization more than a decade before, when Tory Premier Mike Harris broke up the venerable Ontario Hydro into its generation and transmission components.  However, it took the cash-hungry Kathleen Wynne to pull the trigger on the sale.  By the time the Liberals were booted out of office, only 47 percent of Hydro One remained in public ownership.

You might have thought that the incoming Tories under Doug Ford, with their free market bent, would have been quick to sell off the rest of the company.  Instead, Hydro One has become Ford's favourite whipping boy, even though his government no longer actually owns it.  Even before the election, Ford was railing away at Hydro One's CEO, Mayo Schmidt, dubbing him "the six-million dollar man" on account of his compensation package.

Complicating things somewhat, Mayo had been spreading himself a bit by making an offer to purchase Aventis, a power utility in the US northwest.  It's hard to imagine that Wynne had this in mind when she started selling the company off, and most of the commentary on the deal was severely negative.  In any case, as soon as Ford took office, he began the process of turfing Schmidt out.  This was accomplished quickly, though it is unlikely that the terms of his severance saved the company or the Ontario taxpayer any money.

Then things really turned nasty.  There had been plenty of opposition to the takeover on the part of US state regulators, who had to approve the deal.  Ford's impetuous sacking of Schmidt made it easy to argue that the transaction, far from being an ordinary commercial link-up, would bring power supplies in several states under foreign (Canadian) political influence.  The deal was quickly thrown out, which might have been good news from Ontario consumers' point of view, except for the small detail that it left Hydro One liable to pay Aventis a $103 million drop-dead fee.

Ford has never hinted at remorse over all this, and it's now clear that he isn't yet finished messing with Hydro One.  The company is looking for a replacement CEO, indeed has a candidate lined up, and Ford's team are interfering again.  The mooted compensation package for the new CEO is around $2.9 million, which looks like a bargain compared to Schmidt, but is way too high for Ford's liking.

The Energy Minister, Greg Rickford,  has sternly warned the company -- which, remember, the Province doesn't actually own any more -- that anything more than $1.5 million will attract the wrath of Doug.  What's more, the Province also wants to set limits on the compensation of the entire executive team and the Board of Directors.  Rickford warns solemnly that "this is not a negotiation". It seems likely that the company's senior management will walk away en masse as soon as their contracts allow, and there is little chance that the chosen candidate will take the job at half the promised salary.

A quick glance at social media reveals that this bullying of perceived fat cats is being received very positively by Ford's electoral base.  No doubt that's the whole idea.  Whether people will feel as good when the lights start to go out is a question that can be left for later.

Crypto? Hell no!

It would take a heart of stone not to laugh at the ongoing collapse of the market in so-called cryptocurrencies.  The only real question about this whole business was whether it was a scam or just a bubble.  A little of both, it turns out.

Cryptocurrencies always seemed like a solution in search of a problem.  Sure, the central banks, as guardians of the world's conventional currencies, are far from perfect.  Still, in recent decades they've become a whole lot better at protecting the value of those currencies from the ravages of inflation. If you want to understand the inherent nature of the crypto world, you just have to look at the people promoting it -- everyone from the lugubrious Winklevoss twins to, Lord help us, the Government of Venezuela.  Then there's the fact that crypto currencies are bad for the environment, thanks to the prodigious quantities of energy used in the so-called "mining" process.  All in all, Bitcoin, Ethereum and the rest make tulip bulb mania look like the height of conservative investing.

One sad but instructive crypto-related lawsuit is now before the Canadian courts.  It concerns the country's biggest crypto exchange, QuadrigaCX, which is now in dire straits following the untimely death of its founder, at the sadly premature age of just 30. The company's creditors are looking to recover their assets, supposedly valued at C$250 million, though since the bulk of this represents cryptocurrencies, the real value must be almost impossible to determine.  Nobody knows how to recover the money, because when the founder passed away late last year, he took the only password with him.  At the risk of sounding unduly flippant about this, you don't have to worry about that sort of thing if your investments are in greenbacks, loonies or Euros.

Now there are calls for government to step in and bail the "investors" out of their losses.  Really?  Many of the people who jumped head first into this market did so out of a libertarian desire not to have anything to do with government.  Some of them may also have harboured thoughts of avoiding taxes and money laundering regulations. And now that it's all gone pear-shaped, they want the government to ride to the rescue? 

In a masterpiece of understatement, the writer of the linked article says that a "sympathetic view is not widespread" when it comes to compensating these folks for their losses.  With an election campaign now getting under way, you would have to think that any politician putting forward a platform to "save the greedy crypto speculators" might have a death wish.  For sure, the Bank of Canada should be keeping an eye out for any systemic risks that might arise here, but otherwise, it should allow the whole nasty and pointless mess to fade away, with the losses falling where they belong, and not on the taxpayer.