As Trump stresses ‘America First’, China plays the world leader

I find it hard to argue with this conclusion, but I didn’t see it coming.

” ‘If anyone were to say China is playing a leadership role in the world I would say it’s not China rushing to the front but rather the front runners have stepped back leaving the place to China,’ said Zhang Jun, director general of the Chinese Foreign Ministry’s international economics department.”

Cry me a river: Louisiana residents without flood insurance face uncertainty

Those residents without flood insurance are eligible for up to $33,000 in FEMA individual disaster assistance funds, although most will likely receive less than that, based on payments following other major disasters.

It’s not clear to me why the government should subsidize home owners who choose not to get flood insurance.  They’re home owners.  What about tax payers who don’t own homes? Why should they subsidize home owners?

I think Jesus said it best.

For everyone who has will be given more, and he will have an abundance. But the one who does not have, even what he has will be taken away from him.”  Matthew 25:29

Source: Louisiana residents without flood insurance face uncertainty

The Puerto Rico crisis, explained – Vox

Here’s a great, timely summary of the financial problems in Puerto Rico.  It looks like things will get pretty messy before the US government steps in to bail-out the Puerto Rican government.  And who will benefit from the bail-out?  The holders of Puerto Rico’s bonds, of course.

Q. Who would be crazy enough to invest in Puerto Rican bonds?

A. “a high-income person living in a high-tax state”

I think the best term for describing this fiasco would be “the Puerto Rican Put”, anomalous to the Greenspan Put that led to the 2008 asset bubble in the U.S.  Investors were assured that Greenspan would keep interest rates low so they could invest in bonds without worrying about rising interest rates.  Another example would be the implicit (but not explicit) backing of FMHA bonds by the US government.   When the security behind the bonds (ie home mortgages) tanked the government bailed out the bond holders (not the home owners).  It’ll happen again in Puerto Rico.

“What’s this business about Puerto Rican bonds and taxes?All municipal bonds are exempt from federal income taxes. In additional, if you buy municipal bonds issued by the place where you live, those bonds are exempt from state and local income taxes as well. Such bonds are known as triple tax exempt, and they’re a big deal for municipal finance and high tax places like New York and California. But Puerto Rico’s bonds are triple tax exempt regardless of where you live.This is not a huge deal for most Americans, but for a high-income person living in a high-tax state it can be a very big deal and it helped fuel a lot of lending to Puerto Rico that wasn’t necessarily thought through in a very serious way.”

via The Puerto Rico crisis, explained – Vox.

Hotel Euro Union – Eric Reguly in the G&M

U-turn of the euro could be an exit threat after Greece – The Globe and Mail.

“Roach Motel”?  I think columnist Reguly meant “Hotel California”:  Call it the Hotel Euro Union.

The beckoning lady with the Mercedes Benz and the pretty boys she calls friends invite the stranger to stay for the night. Such a lovely place. He ignores the voices down the corridor…This could be heaven or this could hell.
You can check-out any time you like, but you can never leave.
What a nice surprise.  Bring your alibis.

Change of heart re: Greece

A couple of weeks I ago I thought the Greeks deserved the catastrophe that is approaching them. After all, they’ve brought it upon themselves through decades of living beyond their means and electing irresponsible leaders.

Now that it’s time to settle the accounts, I think the terms that the Germans and French are demanding are too strict; they’re trying to save the Euro and correct decades of mismanagement (in Greece) with some gut-wrenching strictures.

My main concern is with the human suffering that the strictures or Grexit will impose. The EU, the Brits, the US, and Canada should get read to help Greek civilians get access to food and medicine.  They won’t be able to afford enough of either if they have to pay with drachmas.

My secondary concern is the potential for civil war/military coup. Human suffering will dramatically increase political unrest and encourage the Colonels and the neo-Nazi Golden Dawn party.

My tertiary concern is that if the West doesn’t step in to help the Greeks the Russians will, gladly, in return for cooperation on defense (naval bases) and energy programs (pipelines).

Seniors and the generation wealth gap

This is a great analysis of the big and growing wealth gap between us Baby Boomers and our kids.

Author Tamsin McMahon attributes this generational wealth gap to a combination of “financial discipline, public policy and good timing”. 

  • “Good timing”?  Better to call it luck, as in winning the “ovarian lottery“.
  • “Public policy”? “Turnout among younger voters is notoriously low, so politicians naturally target their campaigns to the seniors who actually show up on election day.”
  • “Financial discipline”?  With good timing and public policy on our side, we Boomers didn’t need no stinkin’ financial discipline.  That was for our parents.

Seniors and the generation spending gap.

Three Cheers for the Lawyers! (I think)

Here’s today’s Press Release from the Ontario Trial Lawyers Association regarding its revelation that Canadian auto insurance companies have been gouging customers for years.  The gist: these companies’ government-regulated rates-of-return have been maintained at 12%.

I gather the Trial Lawyers Association is upset by some of the no-fault regulations that Ontario (and some other provinces) introduced as a means of helping the auto insurance companies meet the (artificially) high ROR ceiling without raising rates.

A major study released today shows the need for immediate reductions in Ontario motorists’ high auto insurance premiums, the Ontario Trial Lawyers Association says.

The study, conducted by York University Schulich School of Business Professors Fred Lazar and Eli Prisman, reveals in 2013 alone, consumers likely overpaid by $840 million.

“Auto insurance companies in Ontario have had a relatively free ride during the past 20 years. It is conceivable that premiums have been too high and as a result, consumers in Ontario have paid too much for auto insurance,” the professors’ report says.

“We estimate that consumers in Ontario may have overpaid for auto insurance by between $3 and $4 billion over the period 2001 to 2013.”

The report says that the profit benchmark set by Ontario’s insurance regulator at 11 per cent return on equity, should be no more than 5.5 per cent given today’s low interest rate environment. Ontario’s insurance regulator recently changed the profit cap, allowing insurers to earn even higher profits.

The Ontario Trial Lawyers Association (OTLA), which commissioned the new study, calls on government to roll back the high rates that Ontario motorists pay, while halting any further reductions to auto insurance benefits. Insurers reduced coverage in 2010, while profits soared even higher.

“It is now up to the government to do the right thing and implement an immediate, orderly reduction in the profit cap and ensure that savings are passed along to consumers,” said Steve Rastin, President of OTLA. “We must also ensure that coverage is not cut further for the thousands of injured car accident victims in Ontario,” he added.

OTLA also recommends that Ontario’s Auditor General conduct a fully independent review of auto insurance in Ontario.

“It’s time for the Auditor General to step in to examine every aspect of auto insurance. For too long, we have not had all the facts and we simply cannot leave it to big insurance and their consulting actuaries,” Rastin said.

“We need a thorough and truly transparent review that gets to the heart of costs in the insurance business. For example, we know that insurers spend millions on assessments just to deny legitimate claimants – about 50 cents for every dollar of treatment. Insurers should not be able to count those assessments as part of the overall claims cost. We need to put an end to that practice and also curb the abuse of accident victims who must endure endless intrusive assessments,” added Maia Bent, President-Elect, OTLA.

Link to the Press Release Ontario Trial Lawyers Association

Airline Merger Wars – Legacy Airliners/Legacy Crews

I fly cross-country three or four times a year, almost always with United Airlines which has one of the worst On-Time Departures in the industry.  This exerpt from Air&Space magazine’s article on airline mergers explains part of the reason: planes and passengers have to wait for the a crew from the correct collective bargaining unit.

Even when a merger appears complete to the public, such as the 2010 marriage between United and Continental Airlines, the inner workings often take years of litigation and negotiation to settle. United is in the midst of a four-year plan to integrate the two carriers; it has managed to execute a labor agreement for the combined flight crews, but operation is another story. Fly United today and you’ll be serviced by a crew from United, or a former Continental crew in United uniforms, but never a mix of the two companies on a single journey.

“They’re kind of doing things in steps,” says a flight attendant hired by Continental in 1983 who now works for United after the merger. Under the current union negotiations, legacy United and Continental airliners can only be flown by their legacy crew, but these airplanes are moved around to meet a route’s demand. “Management can switch planes several times on any given route,”

via Airline Merger Wars- page 1 | Flight Today | Air & Space Magazine.

David Letterman Visits the Bank of Canada

This is a light-hearted look at the Bank of Canada’s surprise drop in the Bank’s overnight lending rate.  The author is a heavy-hitting economist, Douglas Porter, Chief Economist, BMO Financial Group, Toronto

David Letterman Visits the Central Banks

Most of the financial world focused on the ECB’s long-awaited decision to embark on full-scale QE this week, and they miraculously managed to exceed expectations. But that was far from the only surprise that central bankers unleashed in 2015. Following last week’s stunner from the Swiss National Bank to let the franc loose, the past week brought a rapid-fire run of interest rate cuts from Denmark, India, Turkey and, of course, Canada. Suffice it to say the BoC’s rate cut caught almost everyone by surprise—we thought we had been brave last week, when we suggested that the Bank would not raise rates in 2015, and that the Canadian dollar could weaken as low as 80 cents (US) later this year. The Bank did us one better on the rate front, promptly sending the currency close to our full-year target within a matter of days. Now forgive me dear reader for lapsing into irony and sarcasm, the lowest form of humour, but the shock of the rate cut left us scrambling for explanations for the decision. Here are my Top 10 (admittedly ironic) reasons:

10. Household debt levels weren’t high enough already. After four years of scolding Canadians about taking on too much debt, the Bank has pretty much said “oh, never mind, we’ve got your back”, despite the fact that the debt/income ratio is at an all-time high of 163%.

9. Home prices weren’t hot enough. Even the prospect of lower rates, or at least the confirmation that rates are not going up anytime soon, could further fuel a still-hot housing market. While Alberta will soon be limping, prices in a few other regions are already plenty frothy.

8. The C$ wasn’t falling fast enough. Even before the rate cut, the Canadian dollar had dropped 12% since the start of 2014. With the further 3% plunge in the currency since the Bank’s rate cut, it is now down at its second fastest clip ever over such a stretch outside of the financial crisis.

7. Record low long-term bond yields weren’t low enough. Again, even before the rate cut, Canadian 10-year yields had already punched below 1.5%, providing a market-led windfall for borrowers in any event.

6. The economic and financial backdrop wasn’t uncertain, exciting and volatile enough. Most believed that a stable, predictable Bank of Canada policy was one anchor we could count on. Not so. With Canadian consumer sentiment already buffeted by all the uncertainty surrounding falling oil, the C$ drop and Target’s shocking retreat, the Bank decided to amp things up another notch.

5. Canadians were saving too much. After finally managing to nudge above 5% of income in 2012 and 2013, the savings rate fell back below 4% in Q3 of last year. Apparently, the playing field needs to be tilted even further in favour of borrowers, at least in the Bank’s eye.

4. Car sales weren’t strong enough. Besides housing, the other big-ticket item that finds heavy duty support from low-low interest rates would be auto sales. And, they have racked up record sales in each of the past two years, and were bound to find even further support from plunging gasoline prices. The Bank decided to throw another log on the inferno.

3. Pension plans were getting too comfy. After finally getting back into fully funded status by the end of 2013, the surprise plunge in bond yields pushed many plans back into a deficit last year. By essentially ratifying the latest plunge in yields with its rate cut, the Bank has just made life that much more difficult for pension plans.

2. The BoC wanted to share in the fun of getting flat-footed in its forecasts. True, there were a few voices calling for the possibility of a rate cut, perhaps later this year. But no one had called for a move in January, and the Bank gave zero hint that a rate cut was a possibility in its prior statement in early December.

1. The Leafs needed a lift. Hey, when you only have a hammer, every problem (no matter how unsolvable) looks like a nail.

Somewhat more seriously, the Bank argued that the move was an “insurance policy” to protect the economy against the ill effects of plunging oil prices. But, insurance policies are not free lunches; they have a cost. Many argued in the immediate aftermath that the Bank made the correct decision and/or there was nothing to lose from the move. I would respectfully disagree. Besides the obvious risks to financial stability alluded to above, arguably the biggest risk is that the move may well backfire in terms of supporting demand. A common remark I received in the wake of the rate cut was “what does the Bank know that we don’t know about the economy?” Far from helping growth, the rate move could actually increase consumer and employer anxiety and uncertainty. More fundamentally, the economy’s shape is arguably already heavily skewed by the persistence of negative real interest rates, and the cut threatens to make the skew grotesque. The one saving grace was that the TSX responded big-time to the move, and is now in positive terrain on a year-to-date basis. We have not changed our forecast on GDP growth as a result of the rate cut, holding at 2.1% for the year (which, coincidentally, is where the Bank trimmed its view to this week).

Looking ahead, we suspect that the Bank isn’t done yet. Even with core inflation stubbornly rising to 2.2% last month, and even with consumer spending holding up nicely, the Bank is concerned about the hit from weaker capital spending and the potential follow-through to the job market. After two declines in a row, next month’s employment report takes on added import (due February 6). The Bank said if current oil prices persist (“around $50”), this would shave their real GDP growth forecast in H1 from a 1.5% average to 1¼%, and widen the output gap, and push the closing of the gap into 2017. Thus, the case for a second insurance move looks supported by oil prices merely moving sideways, let alone falling further. (The Bank’s take on lower oil prices shifted in a mere 8 days from “are likely, on the whole, to be bad for Canada” to “unambiguously negative”.We are pencilling-in another rate cut next meeting (March 4th). This could be delayed or even cancelled should, during the weeks ahead, the loonie weaken significantly more, oil prices improve materially (closer to $60), or the U.S. economy markedly revs up with signs this is rippling across the border. Absent those factors, we look for the Canadian dollar to weaken further, and we have chopped our mid-year forecast low to 77 cents. Here’s hoping that this revised call is not also hit within the next week.



Douglas J. Porter, CFA | Chief Economist | Managing Director, Economic Research
BMO Financial Group | 100 King Street West | 3rd Floor | Toronto, ON, M5X 1H3

Toss the bastards in jail

Eric Reguly, writing in the Nov. 15 Globe & Mail, has the right approach to stopping banks’ bad behaviour: if fines and the odd firing are no deterrent to bad bank behaviour, … the obvious answer is shareholder rage. The trouble is, shareholders are not enraged. They have not grabbed pitchforks and torches and stormed CEOs’ houses when the multibillion-dollar fines are paid to secure settlements. Instead, they meekly accept the fines as if they are a cost of doing business, a sleaze tax, if you like.

In some cases, the bank shares actually rise when the fines are announced. The reason? Because in each of the settlements, the fines could have been far worse and, in no case, have the penalties threatened to put the banks out of business. The era of destroying terminally vice-ridden companies is, apparently, long gone. The last time that happened was in 2002, when Arthur Andersen, one of the Big Five accounting firms, was convicted of obstruction of justice for shredding documents in the Enron case. Some 85,000 employees eventually lost their jobs. Regulators and the governments that employ them no longer have the appetite for collateral damage in the form of massive job destruction.

So if fines don’t work, and regulators and government prosecutors won’t put the most corrupt companies out of business, what is needed to clean up the banks? That’s easy. Toss the bastards in jail or close the offending individual bank business for a few months or a year. That would hurt.

Banks’ bad behaviour won’t change until executives do the perp walk – The Globe and Mail.