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Home Capital scandal may presage a slowdown: Don Pittis
Is false income data a symptom of an industry that has run its course?
Could the scandal at Home Capital just be the beginning? The Canadian alternative mortgage company halted its shares after it was revealed that some of its brokers had been falsifying information on the income of mortgage customers.
As the soaring housing markets in Alberta and Saskatchewan go off the boil, a gradual weakening in Canada’s roaring real estate business may reveal more irregularities in the market.
It is a phenomenon we have seen happen so frequently that the uncovering of scandal in a market is often seen as a cause rather that a symptom of a market’s decline. Sometimes they go hand in hand.
On a conference call yesterday Home Capital CEO Gerald Soloway insisted that the problem with its brokers was not an indication of a mortgage fraud crisis across Canada. Home Capital’s delinquencies remain low, and the company says it has stopped doing business with the brokers that investigators had shown to be pretending customers’ income qualified them for mortgages.
Pressure to succeed
It is hard to draw a direct line of cause and effect between the first few scandals in a weakening market and that weakening.
But as markets get into trouble, more and more accounts get shuffled off to the riskier end of the business. Pressure to succeed intensifies. People trying to make a living are more willing to take shortcuts. And it is only as the markets weaken that shortcuts — or outright fraud — are revealed.
There are many examples but the most notorious case is Bernie Madoff, author of what many consider be the biggest swindle in U.S. history. Madoff’s scheme was to accept investors’ money and falsify the income statement on their investment returns. Even as other funds began to do badly, Madoff’s remained strong.
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What U.S. Fed chair Janet Yellen doesn’t know: Don Pittis
Continued risks to a U.S. and Canadian economic recovery keep us guessing about interest rates
If everyone is so confident interest rates are going to go up in the autumn, why doesn’t U.S. Federal Reserve chair Janet Yellen just say they are going to go up in September? The answer is risk.
Before yesterday’s monetary policy statement from the Fed, released on paper without the benefit of an explanatory news conference, there was some speculation she would make that very announcement. But that’snot the way it turned out.
“The Fed effectively did this in 2004” — putting the markets on notice that a move would come soon — “shortly before it last embarked on a rate-increasing cycle,” said the Financial Times in an article anticipating the central bank’s latest pronouncement.
Seeking hints
But instead, the people who read each statement to glean the smallest hints about what the Fed will do next were disappointed about how little information it contained. There was a little optimism and a little pessimism but there was one sentence that summed up the gist of the538-word release.
“The Committee continues to see the risks to the outlook for economic activity,” said the statement unanimously agreed upon by Yellen and her advisors.
As Prime Minister Stephen Harper and the industry he championed discovered, risks are events that seem to come out of nowhere. The oil price plunge, followed by a general collapse in commodities prices, in a matter of months turned Canada from one of the world’s hottest economies into one on the verge of recession.
In the case of the U.S. economy, there are similar events that could change what has been a relatively positive outlook.
…click on the above link to read the rest of the article…
Forget politics, here is what the economy needs: Don Pittis
Try seeking a recovery as if Canada weren’t in election mode
If Prime Minister Stephen Harper could wave a magic wand and make the Canadian economy boom, you’d think he would do it now.
It’s well-known that one of the main barriers for an existing government to get re-elected is a sagging economy. And despite Conservative Finance Minister Joe Oliver’s boasts on job creation and growth, there are plenty of signs that Canadians are hurting.
Oil and the loonie are plunging. And while Bank of Canada governor Stephen Poloz would prefer us not to use the word “recession” because it is “unhelpful,” it seems clear that Canada is in or close to that.
- Recession talk looms over federal election campaign planning
- Bank of Canada’s Poloz calls R-word ‘unhelpful’
The fact that governments cannot snap their fingers and fix the economy is in some ways reassuring. It shows that the conspiracy theorists who think the world is being controlled by powerful cliques in smoke-filled rooms really are just wacky.
Part of the problem is that politics is complicated. Despite his government’s ability to pass practically any legislation, in so many ways, Harper’s hands are tied by external forces and those created by his own party.
That is why an imaginary government that did not have to worry about politics might do things differently.
One of the most obvious things to do when an economy is weakening is to spend. While it may be smart to run surpluses when the economy is booming, you don’t have to be a fanatical Keynesian to think it’s good to spend that surplus when the private sector economy is shrinking.
In this case, Harper is partly restricted by his own ideology. Switching from a balanced-budget, small-government focus to Keynesian largesse would seem like a flip-flop and could alienate a neo-conservative core.
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Plunging loonie means inflation in store: Don Pittis
Falling Canadian dollar means there are bargains to be had, but not for long
Taking a shortcut through an underground mall yesterday, I saw a couple who looked like Pan Am visitors ogling the low price of jewelry outside a little downtown Toronto shop.
Normally, we think of U.S. prices being cheaper than anything you get north of the border. But something special is going on with some Canadian goods right now.
- Canadian dollar falls to lowest level since 2004
- Weak Canadian dollar gives visitors a reason to cheer
As the Canadian dollar trades at lows not seen since 2004, it means that this year’s July sales may offer the best bargains you will see in a while. But it will come at a cost.
Statistical quirk?
The latest plunge is in some ways a statistical quirk, as you can see in the graph below. By falling under 77.85 cents US — the low hit on March 9, 2009 — suddenly the loonie was worth less that it had been through all the oil-boom years of the 2000s.
The Canadian dollar is trading at lows not seen since 2004. (CBC)
While it may be just statistics, there is also a reason why that quirk may be significant to long-term pricing, ushering in a new round of sharply higher inflation.
Some goods, like fresh food and energy, can change on a day-by-day or a week-to-week basis. If there is frost in Florida, a shortage of oranges shows up in grocery store prices within days.
But for many other goods like clothes, jewelry, books, appliances and cars, prices are far less volatile, says Victoria-based retail consultant Richard Talbot.
Last year’s prices
In some cases, wholesale prices for goods already in the supply chain were set months ago. Mom-and-pop retailers especially will often set their markup on the wholesale prices they paid so that profit on current inventories will be calculated based on what they paid their wholesalers.
“Generally retailers order at least a year ahead of time,” says Talbot. “Until that stock is expended, the prices would remain much the same.”
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Fed chair Yellen tells Canadian homeowners to watch out: Don Pittis
Your mortgage rates are going up, and U.S. Fed chair is pretty specific on how much
The financial analysts think they have it figured out. After listening to U.S. Federal Reserve chair Janet Yellen’s speech and her wily answers to questions from reporters, the consensus seems to be that a rate rise is coming later this year — the first one probably in September.
While that date is of crucial interest to market wheeler-dealers, for Canadian mortgage-holders Yellen had a far more important message. It is especially important in a week when Manulife warned that for many home owners, a rate hike could be trouble.
While a large majority of Yellen’s advisory committee agrees that the economy will require a rate rise before the end of the year, Yellen herself said the exact moment of such a rise really doesn’t matter.
“The importance of the timing of the first decision to raise rates is something that should not be overblown, whether it is September or December or March,” said Yellen in response to a question. “What matters is the entire path of rates.”
Best guesses
Of course neither Yellen nor the rest of the Federal Open Markets Committee members actually know for sure where the economy is headed. All they can do is make their best guesses, based on examining all the latest economic indicators, then sort of sum up to come to a collective conclusion.
As Yellen said yesterday, the committee’s best guess is that the U.S. economy has begun expanding moderately after a sickly first three months of the year. Jobless figures show that the supply of surplus labour is gradually being used up.
Consumer spending is still pretty soft, they conclude, but the housing market has perked up. On the downside, business investment in plant and equipment remains soft. So do exports.
…click on the above link to read the rest of the article…
Janet Yellen’s clout today is especially hefty: Don Pittis
The sense that change is afoot lends power to the U.S. central banker’s words
If you live in a cave and survive on nuts, berries and the odd roasted squirrel, what U.S. Federal Reserve chair Janet Yellen says today won’t make much difference to your life. At least not right away.
But for the rest of us, from Saskatoon to Shahjahanpur, what she says will matter. The powerful Yellen may talk softly, but she carries an enormous stick.
- Rate hike could leave mortgage holders stretched: survey
- Janet Yellen warns on high stock market valuations
- Rate hike may be warranted this year, Yellen says
Of course the U.S. central bank always has a certain amount of clout. But there are reasons that Yellen’s pronouncements today on interest rates may be more newsworthy than usual.
The first thing is the way Yellen’s message will be presented. Even when the Fed issues a written statement, market analysts go over the wording with a fine-toothed comb, interpreting subtle changes in wording.
Like the printed statement, Yellen’s speech will also be carefully penned, but emphasis can lend special meaning to a prepared text.
Most revealing of all is the question and answer period, when Yellen stands up and, in the glare of camera lights, faces the slavering wolves of the financial press who will try to tempt her into tiny indiscretions.
Adding to the import of today’s speech and news conference is the timing. It may be an illusion, but it feels as if the world is currently on the knife edge of change, what mathematicians call an inflection point, where things, once trending one way, suddenly begin trending another.
In the fullness of time we may find out we were wrong, but today part of Yellen’s impact will be the sense that change is afoot.
…click on the above link to read the rest of the article…
Climate change will push Canadian business onside
Companies seem conservative today, but just watch when they reach the profitable tipping point
Until he lost his shirt in the Dirty Thirties, a relative of mine was an influential businessman in southern Saskatchewan. Among his interests was a livery stable, with a blacksmith, harnesses, buggy whips and everything you needed to keep horses on the road and in the field.
Horses are still with us, of course, but today it is hard to realize what an enormous industry they supported only a hundred years ago.
As skeptics scoff about Prime Minister Stephen Harper’s grudging concession on the G7 agreement to end the use of fossil fuels, I think it is useful to remember how quickly businesses can completely transform an economy once they get the bit between their teeth.
“If we can get companies putting their innovative genius to work on solving environmental problems, we’re going to find solutions that we can’t even imagine today,” says Stewart Elgie, a professor of law and economics at the University of Ottawa.
He is confident that when it comes to fighting climate change, business will pull its share of the load. But we have to get over a hump.
Horse sense
A hundred years ago, the saddlery and harness business had its own industrial journals, well worth perusing. United States Leather, making a product essential to harnesses, was one of the 12 founding companies in the Dow Jones Index.
An inspection of one of world’s biggest monthly harness trade magazines, produced in Walsall, England — a world hub of harness and saddle making — shows that to a large extent, the industry did not see the end coming.
“Whilst some commentators (quite correctly) predicted disaster for the saddlery and harness trade,” says a commentary published by Walsall Council, “others were more complacent, dismissing the motor car as an unreliable and expensive plaything which would never catch on.”
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Why Europe can’t let Greek economy crumble: Don Pittis
EU must find solution that does not propose stripping elderly of pensions
There are vultures in the financial community snapping their beaks and waiting for a Graccident.
If you haven’t heard the term before, Graccident is the latest rhetorical bastardization of the English language after Grexit, wherein you attach the first letters in Greece to something bad.
In this case, Graccident means that despite everyone’s best intentions to patch up a solution to the Mediterranean country’s economic woes, at some point things will go horribly wrong. The Greek financial house of cards will fall and the country will crash out of the eurozone, sending Greece spinning into bankruptcy and a perilous future.
- Greece promises bailout deal by Sunday, EU not so sure
- Greece says it has no plans for capital controls as debt crisis deepens
- Greece raids reserves to make IMF debt payment
While Greece’s leaders will suffer if the country accidentally collapses, the reputational damage for the European Union will be much worse.
And worst of all, the only ones who will benefit if it happens are those financial vultures betting fortunes on bond spreads and other derivatives that will make them a pile if everything goes sour.
“A precarious situation in Greece is getting worse and the probability of an accident in which governments both in Greece and the rest of Europe lose control is high,” said well-known economic commentator Mohamed El-Erian on the business TV network CNBC earlier this month.
Playing chicken
When two sides in a financial negotiation are playing chicken, there is always a possibility that both will think the other will give way at the last minute. Accidents do happen.
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The potential bond crisis most people have never heard of
While 007 goes from strength to strength, his financial namesake may be heading for a fall
“The name’s Bond,” goes the famous line. But in this case, it’s not James Bond. While nearly everyone knows every detail about the 007 super spy, his lesser-known financial namesake is many times more important.
The James Bond franchise is expected to continue strongly with the autumn arrival of Daniel Craig speeding through the streets of Rome inSPECTRE, but those in the financial know worry about the spectre of the other kind of bond heading for a crash.
Four out of five bond traders worry the market could collapse in a disorderly sell-off.
- Bank of America forecasts another rate cut for Canada
- Impact of low dollar and oil has yet to feed into Canadian economy: Poloz
And while Bond villains jump right out at you, bond villains are hard to finger.
At their most basic level, bonds are anything but complicated. They are simply a legal arrangement where one person agrees to lend money to someone else for a fixed length of time at a fixed rate of interest.
Popping the bond bubble
In the public imagination, if we think of them at all, bonds are the epitome of safety. Which is why it is strange to read in one of the world’s most reliable business publications, the London Financial Times, that experts are terrified of an imminent crash in bonds that could destabilize the global economy.
The interest rates on Canadian bonds have been falling for decades, meaning existing bonds have risen in value. That could be about to change. (Pete Evans/CBC)
“This market could pop,” leading bond trader Brad Crombietold the FT. “There is more tension and anxiety over valuations than for a long while.”
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Canada’s truthiest election campaign begins: Don Pittis
True or not, politicians defend their promises with passion and confidence
The Harper Conservatives are the balanced-budget party. You might as well get that into your head now, because you are going to be hearing it repeated till election day.
This is also the economic stewardship party, the spending-on-transit party and the party fighting for the poor and middle class. Yesterday, Finance Minister Joe Oliver even implied they were the fight-against-climate-change party.
An independent analyst might dispute those statements. In fact, independent analysts in newspapers and columns across the country have been doing just that this week following Oliver’s federal budget. But in what is shaping up to be Canada’s “truthiest” election campaign, scientific evidence doesn’t strictly matter.
Truthiness, as coined by U.S. comedian Stephen Colbert, is something expressed as a truth because it is a feeling from the heart without evidence or logic.
After reading a wonderful piece by Oxford economist John Kay called “How beliefs became truths for the political establishment,” it struck me that this is exactly what we are seeing in our own Canadian (pre-) election campaign.
As well as claiming a balanced budget, Oliver promised spending on transit and other infrastructure and tax breaks that would stimulate the economy. But there may be less substance to these boasts than appear.
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