Notes From Underground

The election that never should have happened is in the books and the result proved that personal arrogance masquerading as public policy is a poison unless you live in a totalitarian dictatorship. Michael Ignatieff pursued a no-confidence in the hope of achieving his desire to become prime minister of Canada. His roll of the dice has cost the long esteemed LIBERAL PARTY its position in parliament and brought to the fore a more left-oriented NDP.

More importantly,it resulted in an outright majority as the TORIES and Prime Minister Harper attained enough support to be able to deliver a pro-growth/pro-investment budget. Jack Layton, the leader of the NDP, was the biggest winner as his electioneering style was greeted with enthusiasm by those voters tired of the self-serving desires of Professor Ignatieff. More importantly, the Quebec-based Layton was able to achieve enough votes to deliver what is hopefully a death-blow to the Party Québécois, which has been a drag on investors’ views of Canada for the past two decades or more.

The LOONIE sold off today even with the positive election results as the large long positions and the continued selloff in commodities led to some profit taking. Canada will be an interesting investment situation in the next year as the TORIES push for corporate tax cuts. The Bank of Canada has recently been worried about the surge in private credit growth so if tax cuts take place it will be important to see if the BOC would begin raising rates to offset the stimulus of lower taxes. The best investment environment has proven to be one of FISCAL STIMULUS with rising INTEREST RATES for that was the period of the early Reagan years that generated so much investment flow into the U.S.

If Prime Minister HARPER crafts an aggressive tax cut-based budget, it means that BOC GOVERNOR MARK CARNEY may have to allow low interest rates for the fear of igniting a more robust rally in the CANADIAN DOLLAR. It is a good time to look at the CANADIAN crosses to determine where the CANADA stands to perform the best. As usual, get the charts out and consult the technicals.

Turning to Europe, the 2/10 yield curves of the three PIIGS continue to invert as a sign that those economies are under severe stress. The Greek 2/10 is presently 840 basis points, Portugal is 190 basis points and Ireland is 85 basis points. Regardless of what the headlines say, the EURO-based sovereign bond markets are signifying something very different  as the AUSTERITY being forced upon the profligate is beginning to take an economic toll. Today, Matthew Lynn at Bloomberg had a column, “BOND VIGILANTES IGNORE THE NEXT STAGE of EURO CRISIS.”

This is the first article that has been published in the more public media that has cited the coming potential problems in France. The author raises many good points that have to make it to our radar screens. This is not be an alarm but to make us all aware of the continuous problems that plague the EU. If the U.S. FED ever moves to remove the huge amount of liquidity and CONGRESS becomes serious about budgetary matters, then the light will shine on the huge problems that confront the European Union. Oh well, on with the show.

Tags: austerity, Bank of Canada, Canada, Congress, Euro, Fed, France, interest rates, Jack Layton, Liberal Party, Loonie, Mark Carney, Michael Ignatieff, NDP, PIIGS, Stephen Harper, Tories

This entry was posted on May 3, 2011 at 7:03 pm and is filed under Canada, Debt Market, Europe. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.