Notes From Underground: Oh Canada…

(Will the Collapse In Energy Prices Grease a Cut In Rates Or the Introduction of QE?)

Just some tidying up and refocus on things besides China, Iran and the debt of ingratitude to the fracking revolution. Tomorrow at 9:00 a.m. CST the Bank of Canada announces its overnight interest rate. The bank rate in Canada is currently 0.5% and consensus is calling for a rate cut of 25 basis points to 0.25%. Other market participants are suggesting that BOC Governor Poloz will announce a large-scale asset purchase program (better known as QE). I doubt the BOC will change policy at this time even as the Canadian economy suffers from the severe drop in fossil fuel prices and other commodities.

As Poloz articulated in a speech in Ottawa at a BIS BREAKFAST SERIES January 7 (regarding monetary policy divergence): “It is very important that we understand the reasons for these policy divergences. On one level, they simply reflect actions taken by central banks tailored to their own economies. But the underlying forces acting on the global economy are powerful, slow-moving and affect various economies differently. This means that the theme of divergence – both financial and economic – is likely to remain with us for some time to come.”

The Canadian real-estate market has run hot for too long and even though Canadian banks are not of the sub-prime model lenders, Mr. Poloz will not wish to just continue to inflate property values. It would behoove the BOC Governor to wait to see what the newly elected Prime Minister Trudeau puts on offer from a fiscal stimulus perspective before racing down the monetary stimulus track that many other central banks have followed with no proven success (except for counter-factual arguments).

It is important to remember that Prime Minister Trudeau was a surprise victor in the 2015 election. His economic policy was based on the work of Lawrence Summers, who advised Trudeau to put forward an aggressive plan for fiscal stimulus. It would appear that with Summers’ advice Canada could be the showcase for battling against the onset of secular stagnation. The Canadian debt-to-GDP ratio is 56 percent, low by most G-20 members’ standards, so there is room for a very robust fiscal stimulus package. It would serve Governor Poloz well to wait until Ottawa tables a budget. In addition to fiscal stimulus the BOC has the power of a Canadian dollar that has tumbled 40 percent during the last three years. Canada does have a manufacturing and service sector that benefits from a cheaper currency by increasing exports of automobiles and service-oriented value adds. Governor Poloz, surprise the world and be financially responsible.

***We will always have Paris, or is it Rome, or maybe Athens? While all eyes have been on the Chinese, the Europeans are at each other’s throats over bank bailouts, refugees and IMF involvement in Greece. The banking situation in Italy is on the boil as several Italian financial institutions are choking on hundreds of billions in nonperforming loans (NPL). The ECB’s quantitative easing program had allowed interest rates to drop to levels where low financing costs have allowed some borrowers to remain afloat … barely. But under the new regulations from Brussels and Basel, the Italians are struggling to extend and pretend. The Italian bank stocks have been decimated as Prime Minister Renzi has yet to establish any type of BAD BANK policy so as to ring-fence the NPLs. The loans prevent the banks from lending as they struggle to rebuild their capital base. The Italians are benefiting from the ECB’s use of the German balance sheet, but Renzi has been aggressively attacking Berlin over its refugee policy and its continued insistence on fiscal rectitude. The sovereign bond market is so broken that the Italian 10-year note outperformed the German BUND as the ECB was MOST LIKELY buying sovereign debt to meet its monthly allotment. It’s crazy that the creditor performs with the miscreant borrower.

The Greek government is again locked in a battle with the IMF over the conditions of the third Greek bailout package. The IMF is pushing for tighter restrictions on fiscal stimulus as well as squeezing pension payouts. The Greek leaders seem to be hoping that the world does not need another “prairie fire” to set the entire financial system ablaze. Is the small amount of money that Greece needs worth a new round of contagion? Importantly, the Greek debt markets are reacting negatively as the Greek two-year note has climbed to 12%, sending the Greek 2/10 yield curve to an INVERTED 250 basis points. A month ago the Greek CURVE had fought its way to a positive slope for the first time in years. NOW IT SEEMS THE GREEKS MAY BE ON THE VERGE OF A NEW SOVEREIGN DEBT CRISIS. Oh well, never a dull moment in global macro.


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11 Responses to “Notes From Underground: Oh Canada…”

  1. the american limey Says:

    so how does this fit into the grand scheme of things?

  2. Alex Says:

    You have the love the irony Limey.

    The Americans getting worked up because Russia is meddling with other countries. I thought America had a monopoly on meddling.

    • the american limey Says:

      Yep, we really are “ones” and very big “ones” at that ๐Ÿ™‚ One of the multitudinous problems with this kind of meddling, whoever does it, is that it’s model based. Computing is like a gas, it will fill the available volume, in this case cheaper computers have displaced human intelligence (humint) with “intelligent” models (elint). So we “model” the effects, tweak society and expect the result from the model. Benoit Mandelbrot showed us this was a steaming pile of opportunity YET we continue to meddle with everything rather than just let things happen and work with what we have. One place I was at we got to try and predict where a superball ( remember those) would end up when dropped, from a pipe, in a squash court. We tried everything to come up with a model and never got remotely close. We had access to some pretty sophisticated computing power and weren’t particularly dense, What our watchers were showing us was that once a system is in the wild messing with it tends to cause really really really bad things to happen. When “we” do it we are right, because we have better models, when “they” (pick another country) they are wrong because their model is wrong to start with ( not our “free” market system) and so the results will be catastrophic.

      I suppose what I am saying is that when anyone meddles with this stuff it’s going to frack it up, when you start with different goals you add to the frack AND add to this when you have different intelligence models YOU REALLY have problems and have created a mutant where real kicks your “model” in the happy sacks.

      Let’s remember we have the opportunity to do something about it this year and wonder how we can explain this to other people who can do something about it, the voters. I’ll be out there today chatting with the folks in Ceres, in my fav coffee shop and anywhere else I can find, seeding the questions that people might ask themselves in the SECOND before they tick the vote box. We can’t change the lads in the All-Russia Insurance Company ( my fav reference) BUT we can change the nutters here.

      Sorry to rant but right now this is becoming VERY serious, one chat with the Cato guys has taken this ex limey up a notch. I have lived in a socialist society and it’s not fun. We need to seriously relocate the American dream and show others that we have done so. The very best way to do this is by deed and that’s to say, VERY LOUDLY, frack you all and the legislation you rode in on, We can do that this year provided WE (that’s you and I) take the time to frame our case to our friends and family without seeming like nutters. I do not consider myself to be a savior, just a guy who isn’t too happy about the way things are headed. I made a promise to protect this country and I consider what seems to be happening to be a real threat to what I thought I signed up for when I stood up that day in 2001 and became a proud American citizen.
      End rant

      ps sorry Yra

      • yra Says:

        Limey–no apologies as it a thoughtful rant.It is interesting that the U.S. is pointing its finger at Russia but as a wise Rabbi once explained to me—when you point your finger there are three pointing back at you

      • Joe Says:

        Limey-I enjoyed your rant. At some point things get to the point where things change. I really hope were close, real close to that point.

  3. Rob Syp electric Says:

    With Larry Fink, Jack Bouroudjian calling for 20 to 30 % corrections and Daryl Guppy chartist from Asia saying the reversal pattern is in the Dow aren’t these the best of times and worst of times?

    It’s been great being long the SDS (short S&P 500) it seems like there’s no end in sight for where this thing is going!

    Thank you Yra for having us prepared for moments like these.

  4. mikegre2014 Says:

    “Governor Poloz, surprise the world and be financially responsible.”

    Responsible? Since when is the allocation of capital better handled by the public sector than the private sector?

  5. Dustin L. Says:

    Yra- I agree that the BOC holds here at least to see what the Fed is thinking. If the Fed has doubts about continuing along it’s tightening path, then Poloz may be forced to loosen. However, also in line with your thinking, the Trudeau government should ease Poloz’s burden, at least for now, and as Soros always reminds us, fiscal stimulus is far from always a currency negative (at least in the short-run). Not to mention the old 10-2 is not putting much pressure on Poloz yet. It seems very likely he holds for now. If Poloz cuts, I think that just might be a sign of insider info into the Fed’s intentions…These CB’s are always talking, Davos style. That all said, the Canadian 10 year rates seem to be pricing monetary not fiscal stimulus in Canada. If Summer’s influence is strong enough, investors long Canadian 10-years might get a nasty surprise.

  6. yra Says:

    Dustin–good post and certainly something to keep an eye on

  7. Chicken Says:

    Listen carefully and you can almost hear the hollow herding call of the Machiavellian monkeys over the opening warning bell! ๐Ÿ™‚

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