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Central bankers must have the courage to act before a crisis: Don Pittis
Are our bankers-in-chief always condemned to crisis management?
Are central bankers always destined to be too late?
This weekend, two of that august fraternity were strutting their stuff. Former U.S. Fed chairman Ben Bernanke was busy promoting his new book called The Courage to Act. Meanwhile, Bank of Canada governor Stephen Poloz was giving speeches titled Integrating Financial Stability into Monetary Policy.
And in different ways, the two tread the same ground: how difficult it is to rein in a housing boom before it turns into a crisis.
The title of Bernanke’s book has already been pilloried for its hubris.
Voices had been raised for years that U.S. interest rates were too low and that it was driving house prices too high, distorting the economy. But as Bernanke admitted in an interview that played Tuesday on CBC Radio’s The Current, he didn’t act until it was far too late.
Greater than housing
“It wasn’t until August of 2007 that we began to appreciate that the ramifications of the losses on sub-prime mortgages were going to be much greater than just the housing market,” Bernanke told The Current host Anna Maria Tremonti.
Of course by that time, there was really little the U.S. central bank could do to prevent the bubble from popping, setting off a global financial meltdown and necessitating a multibillion-dollar bailout of the banks that had contributed to the crisis.
Years of low interest rates had allowed consumers to borrow recklessly. After they had access to that money, they used it to overinflate the entire economy, buying consumer goodies and bidding up the price of real estate.
By then, it was too late to raise interest rates. It could have been done several years previously, slowing the boom before it became dangerous. So why didn’t Bernanke, or his predecessor Alan Greenspan, act then?
There may be clues from listening to our own central banker’s speech this week.
…click on the above link to read the rest of the article…
U.S. jobs and global gloom may mean more mortgage relief: Don Pittis
Interest rate hikes fade into the future as economic recovery appears to go flat
It seems a terrible thing to cheer about, but a new feeling of gloom may be good for Canadians weighed down by mortgage debt.
A worse-than-expected U.S. jobs report and increasing fears for the state of developing world economies mean that U.S. central banker Janet Yellen may have to once again delay a hike in interest rates.
Fed chair Yellen has repeatedly warned that U.S. interest rates are on the way up. Last month, she delayed that rate rise once again while suggesting the increase could very likely come by the end of this year.
Now a growing number of analysts say a hike in U.S. interest rates will be delayed to 2016 or beyond.
Why U.S. rates matter in Canada
Before going on, I should insert a quick reminder of why U.S. interest rates matter to so many Canadian mortgage holders.
While short-term rates are set by the Bank of Canada, mortgage rates depend on the cost of borrowing money on international bond markets. Before lending long-term cash, Canadian banks like to make sure they can spread the load if rates begin to rise. That means they look to the bond market to set the price of the long-term cash they lend.
When the U.S. Fed rates begin to rise, international bond rates begin to rise as well, and banks must pass along those increased interest interest costs to their customers.
As recently as June, Yellen foresaw not just an autumn rate rise, but her advisers on the Federal Open Markets Committee also suggested that rates would continue to rise at about a whole percentage point each year. In other words, long-term rates that were four per cent this year would be five per cent next and six per cent the year after.
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Canada’s Retail Prices Jump the Most in “Over a Decade”
Canada’s Retail Prices Jump the Most in “Over a Decade”
When Statistics Canada released its July retail sales report today, it dished out a few unwelcome surprises – and a bombshell.
Among the surprises, based on what economists – though perhaps not average Canadians – had expected: Growth in retail sales was a measly 0.5% in July; and growth in June was revised lower to 0.4%, from the originally reported 0.6%. Year-over-year, retail sales rose just 1.8% adjusted for inflation.
The saving grace, sales of auto and parts dealers rose 2% month over month. Without them, retail sales were flat – also worse than economists had expected.
And by province, there were some ugly differences: on a year-over-year basis, not adjusted for inflation – more on that in a moment – nominal retails sales jumped 5.7% in British Columbia and 4.6% in Ontario. But at the other extreme, nominal retails sales edged down 0.7% in Newfoundland & Labrador, and slumped 3.6% in Saskatchewan and 3.7% in Alberta.
These two provinces are the epicenter of the Canadian oil bust, where a deep recession has set in. Home sales are plunging. Layoffs are cascading through the local economies. Uncertainly reigns. And consumers are reacting the best they can.
And here’s the bombshell: over the last six months, retail prices have jumped at the fastest rate in over a decade.
Inflation has obviously been too low in Canada, the US, Europe, Japan, etc. Heaven and earth must be moved by central banks to raise inflation. The Damocles sword of deflation – when money gains in value rather than loses in value – is hanging over our entire civilization.
But OK, when you go shopping, this sort of scenario isn’t quite that visible. What you see are price increases, and some of them are very painful.
…click on the above link to read the rest of the article…
On the economy, politicians debate, central bankers decide
Bank of Canada pushing stimulus; Conservatives, NDP talking austerity. Go figure
The idea that a prime minister is the “steward of the economy” is a convenient bit of fiction, co-created by politicians and the journalists who cover them.
It was an explicit theme of last night’s leaders’ debate; at one point, the moderator actually asked NDP leader Tom Mulcair “why should the electorate hand the national economy over to you?”
- Federal leaders trade pointed barbs during economy debate
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- Follow CBC’s complete election coverage
This notion is convenient to prime ministers because of their need to appear in charge of everything; convenient to opposition leaders, who need to assign blame for everything; and convenient to those journalists who thrive on reductive, easily digestible notions that smell like truisms.
In reality, though, a prime minister gets to decide how federal spending is allocated, and federal spending accounts for roughly 15 per cent of the $1.8-trillion Canadian economy.
Actually, even that is too sweeping: the prime minister decides how a portion of that 15 per cent is spent.
Most federal spending is structurally entrenched (entitlement programs, equalization payments, transfers to provinces, etc.) or politically entrenched.
Enter Stephen Poloz
Still, there is one Canadian official who probably does deserve the steward-of-the-economy title. It’s almost his job description, but you won’t hear much about him during this campaign, because he isn’t running for election, and because most people have only a dim understanding of what he does. He went unmentioned in last night’s economic debate.
But Bank of Canada governor Stephen Poloz not only has the unilateral power to change the financial circumstances of almost every Canadian tomorrow, he is almost certainly considering at the moment whether he should use it.
…click on the above link to read the rest of the article…
Time Bomb under Canada’s Housing Bubble Makes a Loud Tick
Time Bomb under Canada’s Housing Bubble Makes a Loud Tick
The Bank of Canada has been fretting about the ballooning debt of Canadian households. Last year, it repeatedly called it a risk to “financial stability,” perhaps in preparation for raising its benchmark interest rate. Then Canada’s economy tanked.
In July, when the freaked-out Bank of Canada cut its benchmark rate for the second time this year, it admitted that the rate cut comes at the price of “financial stability risks” which “remain elevated.” Governor Stephen Poloz added: “Of particular note are the vulnerabilities associated with household debt and rising housing prices.”
These rate cuts didn’t do much to support Canada’s resource economy that has been spiraling down in the wake of the commodities rout. But they made up for it by inflating the housing bubble even further.
The Teranet–National Bank house price index, released September 14, hit new records every month this year. In August, it was up 5.4% year-over-year. Note how the index has soared since the peak of the prior housing bubble that ended with the Financial Crisis:
The index masks what Marc Pinsonneault, senior economist at NBF’s Economics and Strategy, calls the “dichotomy” of Canada’s housing market. In some cities, price increases are cooling, year over year: Victoria +3.2%, Edmonton +0.8%, Calgary +0.7%. In other cities, prices are actually falling year-over-year: Winnipeg -0.4%, Ottawa-Gatineau -0.4%, Montreal -0,5%, Quebec City -0.7%, and Halifax -1.4%.
But they’re sizzling in Vancouver +9.7%, Hamilton +8.8%, and Toronto +8.7%. And prices for non-condo homes in Vancouver and Toronto – the two cities account for 54.1% of the index – jumped over 10%!
On cue, total consumer debt rose 4.9% year-over-year in July to C$1.86 trillion. A trend that has been picking up speed recently: on a monthly basis, consumer debt jumped in July at an annualized rate of 5.4%. Mortgage debt – over two-thirds of total consumer debt – soared at an annualized rate of 6.9%.
…click on the above link to read the rest of the article…
Interest rate cuts a two-edged sword for Bank of Canada: Don Pittis
Another decrease could spur exports but would announce serious pessimism
Conjure up an image of Bank of Canada governor Stephen Poloz in Hamlet pantaloons, hand to brow, declaiming to the middle distance: “To cut or not to cut?”
A confusion of contradictory economic data means it may be a melancholy choice. If the Bank of Canada were to lower interest rates for a third time this year at this Wednesday’s meeting, the cut could spur exports and challenge other countries that have pushed their currencies lower.
But there is a danger that it may instead be taken as a warning.
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A poll of 40 economists last week by Reuters didn’t rule out another cut in rates. The consensus was that there was a one in four chance of a cut this week, and a 40 per cent chance of another cut “at some point.” But the most likely result, said the economists, was a rate freeze till 2017.
Frozen
More than a year of rates frozen at 0.5 per cent is not a resounding vote of confidence in a Canadian recovery. But in the face of that steady-as-she-goes opinion from economists, another rate cut would be a two-edged sword.
Cutting interest rates would help keep the Canadian property market strong. (Darren Calabrese/Canadian Press)
Lower rates would make it easier for Canadians to keep up their borrowing binge, helping retail sales and keeping house prices strong. More usefully, it would help secure lending for struggling or expanding businesses.
A byproduct of lower rates is a lower loonie. If, as many have said, our shrinking trade deficit can be credited to a low Canadian dollar, then a still lower loonie could be even better.
…click on the above link to read the rest of the article…
Three Worrying Economic Trends Beyond Canada’s GDP Drop
Three Worrying Economic Trends Beyond Canada’s GDP Drop
New data confirms what 79 per cent of Canadians already felt.
The much anticipated quarterly GDP numbers are out, and StatsCan confirmed what 79 per cent of Canadians already felt to be the case — Canada’s economy is in decline. A drop in economic activity of 0.1 per cent in the second quarter of 2015 officially tipped Canada in recession territory (after a drop of 0.2 per cent in the first quarter).
The dip in GDP is what’s making the headlines this week, but there are three other trends in the new data released by StatsCan that suggest the economic slowdown is here to stay. Indeed, as my colleague David Macdonald noted here, “recession is just the tip of Canada’s economic iceberg.”
1. Business investment is down for the third consecutive quarter
This decline comes on the heels of a long post-recession period of weak business investment since early 2012. You may remember the former governor of the Bank of Canada, Mark Carney, famously accusing companies of sitting on piles of“dead money” in the summer of 2012. A quick look at the statistics shows little has changed since.
Business investment in non-residential structures and machinery and equipment from 2010 to 2015, via StatsCan.
The problem is that without business investment, we can expect weaker job growth and a slower economy to continue.
The Bank of Canada cut its interest rate in January 2015 in an attempt to to encourage investment and boost the economy. Unfortunately, all this seems to have done is further distort real estate markets, particularly in places like Vancouver where housing affordability is reaching record lows.
2. A number of key economic sectors are in decline, not just oil and gas
Over the last decade, Canada’s economy has become overly reliant on mining and oil exports. It’s not surprising that when the price of oil and minerals drops sharply, as it has over the last year, our resource sector would be hit hard. But the economic decline extends beyond mining, oil and gas.
…click on the above link to read the rest of the article…
GDP figures from Statistics Canada expected to show second-quarter contraction
Lower loonie expected to boost economy in third quarter
Economists say data out this week is likely to show that Canada slipped into a technical recession in the second quarter, but the contraction should be short-lived.
“A number of positive elements are coming through,” said TD Bank chief economist Beata Caranci. “Even if, like we’re expecting, we get a contraction in the second quarter, the consumption numbers are likely to be fairly healthy.”
According to Thomson Reuters, economists expect Statistics Canada to report that the economy contracted at an annualized rate of 1.0 per cent in the second quarter.
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Among other data expected from Statistics Canada this week are July trade figures on Thursday and the jobs report for August on Friday.
The Bank of Canada cut its key interest rate by a quarter of a percentage point to 0.5 per cent in July amid concerns about the impact falling oil prices and weak exports on the economy.
In its July monetary policy report, the central bank estimated the Canadian economy contracted at an annual pace of 0.5 per cent in the second quarter, but predicted things would pick up in the second half of the year.
Caranci says the benefit of the lower loonie to Canada’s export sector should boost growth in the third quarter.
Although exports were supposed to see a boost sooner, Caranci says the sector’s sensitivity to the loonie has diminished over the past decade as the U.S. — Canada’s biggest trading partner — has been importing more from China and Mexico.
“For every percentage point of deprecation you get to the Canadian dollar you’re getting less of a lift to exporters,” Caranci said. “You’re getting not only less sensitivity but also a more delayed response, so it’s coming in much later than we had been forecasting.”
New Vehicle Sales Collapse in Canada’s Oil Patch
New Vehicle Sales Collapse in Canada’s Oil Patch
Oil spills into the broader economy.
Canada’s economy has split in two. The resource producing economy is deteriorating at a breath-taking pace, broadsided by collapsing commodity prices. For Canada, the most important commodity is crude oil.
West Texas Intermediate has plunged below $39 a barrel, not seen since the Financial Crisis, and Western Canadian Select to a catastrophic $25 (C$33.32) a barrel. Canadian tar-sands producers are particularly hard hit; they’re the globe’s high-cost producers. And the epicenter of this activity is the province of Alberta.
Then there’s the rest of the economy, which is trying not to wobble too visibly as its foundation is breaking up. It is very likely that Canada is in a “technical recession” – defined as two quarters of negative GDP growth. The first five months already outlined a shrinking economy, dragged down not only by the resource sector but also by other weak links [read… It Gets Ugly in Canada].
Now everyone is waiting for the June GDP numbers to be released. Canada is heading into a general election this fall, and the economy is front and center.
But new vehicles sales are still hanging in there. As in the US, the industry is powered by cheap and easy credit. It’s enabled by a frazzled Bank of Canada that keeps lowering the rates. Subprime customers are being aggressively courted by banks and alternative lenders that lust for the easy profits to be made on folks who think they don’t have a choice. And Wall Street makes a bundle repackaging these subprime auto loans into highly rated structured securities.
So new vehicles sales rose 0.4% in July from a strong July 2014, to 177,844 units, setting a new monthly record, for the seventh month in a row, according to the Canadian Auto Dealer. July sales were 14.8% above the past-five-year average. Year-to-date, sales rose by 2.4% over last year.
…click on the above link to read the rest of the article…
QE is “Not on the Table,” says Joe Oliver
QE is “Not on the Table,” says Joe Oliver
In a world where central banks are given free rein over the supply of money and credit, and where any examination of these secretive institutions is considered interference with their “independence,” Finance Minister Joe Oliver’s comments about QE have not gone unnoticed. The other week Oliver was quoted as saying that quantitative easing was “not on the table” as a tool to combat the “economic downturn.”
Economic professors and commentators around the country criticized the Finance Minister, saying that he overstepped his power. Ian Lee of Carelton’s University’s Sprott School of Business said, “You may think that, you may privately say that, but that’s not the sort of thing I think the minister of finance should be saying.” Stephen Gordon, an econ professor at Laval University, agreed, calling the comments “worrisome.”
Because, you know, the Finance Minister is not supposed to comment on the country’s finances. Especially when the federal government is the sole shareholder of the Bank of Canada.
In October 2013, the late Jim Flaherty told reporters something similar. He did not support the US Fed’s bond-buying program known as QE. At the time, Flaherty’s stance was at odds with Bank of Canada Governor Stephen Poloz’s. However, Poloz has stated that a QE decision would be a joint-effort between the Bank and the federal government’s finance ministry.
Quantitative easing, for those who don’t know, is when the central bank prints money and then uses the fiat to purchase government bonds. The new money, once circulating in the economy, appears as a liability on the central bank’s balance sheet, whereas the new bonds are supposed to resemble interest-earning assets. Central bankers do this when they can’t push interest rates any lower. Often it’s after a solid hour of head-scratching when they decide that the problem is that they simply haven’t created enough inflation.
…click on the above link to read the rest of the article…
Low interest rates prompt savers to borrow to invest
Kevin Stone plans to borrow $20K this year to invest in various stocks
Kevin Stone is 28 years old and already has over half a million dollars of debt, including a mortgage and a loan to purchase farmland. But he’s not concerned, because that apparent burden is actually helping fuel his roughly $400,000 net worth.
He’s one of a number of Canadians taking a gamble and borrowing money at historically low rates not to fuel an excessive lifestyle, but to invest in the stock market. It’s a strategy one financial planner warns isn’t for everyone, and even seasoned investors can see things go wrong.
The Bank of Canada recently lowered its benchmark lending rate by 25 basis points for the second time this year. Canada’s major banks partially followed suit and lowered their prime lending rates to 2.7 per cent.
These changes caused the rates for already low variable-rate mortgages, as well as home equity and personal lines of credit, to fall.
The low rates prompted Harry, an Albertan in his 40s who requested his last name not be used for privacy reasons, to look at his $100,000 home equity line of credit, or HELOC, a different way.
He plans to use that money over the next several years to maximize his unused RRSP contribution room. He’s withdrawn funds from his HELOCbefore to pay for a few vacations, but this will be his first time borrowing the money for investments.
Harry plans to use his annual tax returns as large, lump-sum payments against the loan, while paying down the remaining balance at a low 2.2 per cent interest rate.
“I think the bigger risk is not using other people’s money to invest,” says Stone, who blogs about his money maneuvers at Freedom Thirty Five, where he doesn’t shy away from aiming to join Canada’s one per cent. “By taking on these debts today, I can have a longer time to build up my assets.”
…click on the above link to read the rest of the article…
‘Perfect Storm’ Engulfing Canada’s Economy Perfectly Predictable
‘Perfect Storm’ Engulfing Canada’s Economy Perfectly Predictable
Years ago Andrew Nikiforuk, citing experts, warned where Stephen Harper’s priorities would lead us.
Economists, an irrational tribe of short-sighted mathematicians, are now calling Canada’s declining economic fortunes “a perfect storm.”
It seems to be the only weather that complex market economies generate these days, or maybe such things are just another face of globalization.
In any case, economists now lament that low oil prices have upended the nation’s trade balance: “Canada has posted trade deficits every month this year, and the cumulative 2015 total of $13.6 billion is a record, exceeding the next highest, in 2009, of $2.95 billion.”
But this unique perfect storm gets darker. China, which Harperites eagerly embraced as the globe’s autocratic growthlocomotive, has run out of steam.
As the country’s notorious industrial revolution unwinds, China’s stock market has imploded. Communist party cadres are now moving their money to foreign housing markets in places like Vancouver.
Throughout the world, analysts no longer refer to bitumen as Canada’s destiny, but as a stranded asset. They view it as a poster child for over-spending, a symbol of climate chaos, a signature of peak oil and a textbook case of miserable energy returns. Nearly $60-billion worth of projects representing 1.6 million barrels of production were mothballed over the last year.
A new analysis by oil consultancy Wood Mackenzie reveals that capital flows into the oilsands could drop by two-thirds in the next few years.
The Bank of Canada doesn’t describe the downturn led by oil’s collapse as a recession because the “R word” smacks of negative thinking or just plain reality.
Surely lower interest rates will magically soften the consequences of a decade of bad resource policy decisions, Ottawa’s elites now reason.
Meanwhile the loonie, another volatile petro-currency, has predictably dropped to its lowest value in six years along with the price of oil.
…click on the above link to read the rest of the article…
Don’t Call it a Recession!
Don’t Call it a Recession!
“But pretty soon the word “recession” also became too harsh for the delicate sensibilities of the American public. It now seems that we had our last recession in 1957–58. For since then, we have only had “downturns,” or, even better, “slowdowns,” or “sidewise movements.” So be of good cheer; from now on, depressions and even recessions have been outlawed by the semantic fiat of economists; from now on, the worst that can possibly happen to us are “slowdowns.” Such are the wonders of the “New Economics.” — Murray Rothbard, Economic Depressions: Their Cause and Cure
Forty-six years later and Bank of Canada Governor Stephen Poloz has jumped on the semantic fiat bandwagon, calling the “r” word unhelpful. What Canada experienced in the early months of 2015 with the drop in oil prices and its subsequent effects was merely a “mild contraction.”
Okay folks, show’s over, nothing to see here.
“I just find the discussion quite unhelpful,” Poloz told the press, “It’s especially unhelpful when what has happened to the economy is very narrowly defined.”
Yes, narrowly defined to the oil and gas sectors. The other 80% of the economy is doing just fine thank you very much. All those service sector jobs and real-estate related industries, like construction and banking and insurance. Nothing to worry about! Never-mind the fact that energy is a major export and that without these exports there are no imports. Imports that facilitate the real estate, construction, and service sector.
Now Poloz isn’t that clueless. He did mention the “outsize effect” where the oil and gas industry slow-downs start to affect the broader economy. But, remaining in a state of Keynesian ignorance, Poloz felt bold enough to proclaim: “The Canadian economy is undergoing a complex and significant adjustment.”
…click on the above link to read the rest of the article…
Canadian dollar dips below 77 cents for first time since 2009
As strong U.S. dollar helps push loonie to 6-year low, analyst sees possible drop to 73 cents
The Canadian dollar fell below 77 cents against the U.S. dollar on July 17, 2015. (Mark Blinch/Reuters)
The Canadian dollar dropped to below 77 cents against the U.S. dollar on Friday for the first time since March 2009.
The Canadian dollar seesawed above and below the 77-cent level all day before closing at 77 cents US when stock markets closed.
The loonie started falling on Wednesday after the Bank of Canada cut its key interest rate to 0.5 per cent. The loonie lost more than a penny against the U.S. dollar that day, its worst one-day performance this year.
“It’s a perfect storm of events that’s sinking the Canadian dollar,” Adam Button, a currency analyst with ForexLive.com, told CBC News in an interview. He cited the collapse in oil prices that began last summer and the soaring value of the U.S. dollar.
“Almost at the exact same time as the Bank of Canada cut [rates], the Federal Reserve was talking about hiking rates,” added Button. “The U.S. and Canadian economies are wildly diverging at the moment.”
The Canadian dollar could plunge even lower, Button warned. He sees the loonie “on the brink of an 11-year low,” falling as low as 73 cents against the U.S. dollar in the next month.
U.S. economic momentum
Rising inflation in the U.S. helped boost the U.S. dollar at the loonie’s expense today, Karl Schamotta, director of foreign exchange research and strategy with Cambridge Global Payments, told CBC News.
“We see increasing signs of momentum in the American economy, and that’s likely to push the Federal Open Markets Committee toward [an interest rate hike] in the early part of the fall,” said Schamotta.
…click on the above link to read the rest of the article…
