"History, real solemn history, I cannot be interested in.... I read it a little as a duty; but it tells me nothing that does not either vex or weary me. The quarrels of popes and kings, with wars and pestilences in every page; the men all so good for nothing, and hardly any women at all - it is very tiresome." Jane Austen spoken by Catherine Morland in 'Northanger Abbey'
So Long Mr. F. (R.I.P)
Canada's Minister of Finance suddenly resigned earlier this week. The government's major fiscal policy plank is to "balance the budget" next year in 2015 and according to their press briefs and ex-Minister in charge Mr. Flaherty, that goal will be reached for sure; no need to stick around. All is well, carry on.
I don't have a Canadian chart equivalent but the chart mashup shows the U.S. sectoral balances to demonstrate that a country with a modern monetary system and who is an autonomous issuer of its own non convertible currency can always pay its federal government bills and when necessary can go into a deficit at the federal level to do so. The bottom panel shows the U.S. sectoral balances going back to post WWII and for most of the time the feds ran a deficit.
The ability to deficit finance is a feature that does not extend to provincial or municipal (state & local) governments nor does it extend to the corporate and household private sector; everyone except the federal government has to operate on surpluses otherwise they run out of credit (Greece, Detroit, BlackBerry etal).
What does the sectoral balance chart show? The Private Sector balance (Savings less Investment) plus the Public Sector Balance (Taxes less Government Spending) plus the Foreign Sector Balance (Imports less Exports) always results in a balance sheet bottom line of zero! It can be no other way; it's an accounting fact. it's the way we keep score.
ie: The private sector balance is equal to the addition of the government and trade balances; or "... private sector saving is the source of net finance for the government deficit and the international capital account deficit." Source Material: monetaryrealism.com
Well guess what folks... Canadian exports are not booming, there is a global slowdown in demand for commodities, finished products and services and a falling CA$ which is good for exporters has not yet materially changed the current account balance which remains in a deep funk since the Pit of Gloom in March 2009. The CA$ dropping is however affecting the private sector balance with increased costs on import prices and a rising cost of living for our consumer dominant society.
I suspect that Mr Flaherty and Canadian Finance Ministry staff have seen a sectoral balance chart before and they know that their federal government surplus goal IS GOING TO DEPRESS THE PRIVATE SECTOR EVEN FURTHER because the math tells us that a shrinking federal government deficit in the absence of a positive current account increases the private sector deficit and forces the private sector to either sell off assets (labour, equipment, and fixed assets like real estate) or go deeper into hock to maintain spending (lifestyle).
But the government also knows that their ideological policy of "balancing" the federal budget always sounds good in question period and in media sound bites because every tax payer has a visceral reaction to the notion of having to balance 'the budget" and this fear of "going broke" is a prelude to staging the coming federal election where we will hear that the federal "surplus" will be "spent" funding the most deserving lobbies and loyalists and that will energize the job creators.
Look at the chart again and notice the U.S. federal government surplus during the Clinton years of the late 1990's and the subsequent March 2009 crash and reversal back to federal deficit financing. The federal surplus led directly to the private sector deficit which caused weak hands to liquidate, repair balance sheets and build up savings again.
So Long Mr. Flaherty, nice timing on your exit. The new guy Joe Oliver cut his teeth with Merrill Lynch investment banking and probably also understands sectoral balances but finance ministers are hired on ideology not merit.
Jim Flaherty (1949-2014) died April 10, 2014 soon after his resignation.
"So Long Marianne" Leonard Cohen
Live at Wembley Arena, London 2012
Bear in a China Shop
Bloomberg News is reporting today that "Chinese real estate developer with 3.5 billion yuan (US$566.6 million) of debt has collapsed and its largest shareholder was detained. Zhejiang Xingrun Real Estate Co. doesn’t have enough cash to repay creditors that include more than 15 banks, with China Construction Bank holding more than 1 billion yuan of its debt. The real estate company’s majority shareholder and his son, its legal representative, have been detained and face charges of illegal fundraising, the officials said."
The lower panel of the chart mashup above shows the maturity structure of corporate bonds issued to LGFVs (Local Chinese Government Financing Vehicles)
Debt servicing is another potential source of vulnerability. LGFVs will need some combination of cash or financing to repay maturing debt. If refinancing, LGFVs could, depending on market conditions, have to pay higher interest rates. Over 50 percent of subnational government debt was expected to mature by the end of 2012 based on NAO 2011 (China’s National Audit Office). However, most infrastructure projects were not expected to generate significant cash flow for 10 years or even longer. Land sales, operating profits (such as highway fees), local fiscal revenues, or inter-governmental transfers could help repay part of the maturing debt. However, it is likely that a majority of the maturing debt was either rolled over or repaid by new borrowing. The recent update from NAO (2013) confirms that much of this debt was serviced with new borrowing (gross issuance was much higher than the increase in the stock of debt). Specifically, gross debt issuance was equivalent to more than 50 percent of 2010 local government debt stock in the past two years, but the net debt stock increased only by 13 percent. According to NAO (2013), about 40 percent of 2010 debt stock was either repaid or reclassified as private debt. It is not clear how much LGFV borrowing contributed to debt repayment, but given tightened credit restrictions on new LGFV loans in 2011–12, a fairly big share of LGFV borrowing likely went to servicing maturing debt.
Back in April 2013, The Financial Times reported:
A senior Chinese auditor has warned that local government debt is “out of control” and could spark a bigger financial crisis than the US housing market crash. Zhang Ke said his accounting firm, ShineWing, had all but stopped signing off on bond sales by local governments as a result “We audited some local government bond issues and found them very dangerous, so we pulled out,” said Mr Zhang, who is also vice-chairman of China’s accounting association. “Most don’t have strong debt servicing abilities. Things could become very serious.”
The International Monetary Fund, rating agencies and investment banks have all raised concerns about Chinese government debt. But it is rare for a figure as established in the Chinese financial industry as Mr Zhang to issue such a stark warning. “It is already out of control,” Mr Zhang said. “A crisis is possible. But since the debt is being rolled over and is long-term, the timing of its explosion is uncertain.”
Mr Zhang said many local governments had invested in projects from public squares to road repairs that were generating lacklustre returns, and so were relying on financing rollovers to pay back their creditors. “The only thing you can do is issue new debt to repay the old,” he said. “But there will be some day down the line when this can’t go on.”
A Ponzi Scheme is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned by the operator. (Wikipedia)
What are you doing?
"GDP growth continues to be low in the U.S. and real total household wealth has stagnated and real median household income has actually been declining." Jeff Gundlach (DoubleLine Funds).
And yet the NYSE Investor Margin Debt is at historic highs. Is this really a good time to be getting levered up? Or is it a better time to unload a burden of debt?
On his way to the Theatre of Pompey, where he would be assassinated, Caesar passed the seer and joked, "The ides of March have come," meaning to say that the prophecy had not been fulfilled, to which the seer replied "Aye, Caesar; but not gone." (Wikipedia)
Stocks After 5 Years
Real Estate After 7
In case you missed my query on my Real 10 Year Canadian Yield chart 'Is this the start of a "Seven Year Itch"?' Here it is again.
Periodicity: the quality or character of being periodic; the tendency to recur at intervals.
The Class Divide
Consumer confidence depends on where you live, what you are employed at, the availability of goods and services and the affordability and benefits of the above.
Clearly the experience is much different across the class divide.
Canadian Dollar Inflation
On several occasions on this blog, as recently as the "2014 Resolution" post, I have voiced my dismay at Canada's unwillingness or maybe its inability to use its great natural resources and citizenry to produce physical and intellectual value.
The recent "Unemployment Update" and "Share of Wealth" posts underlined the educational problems. This chart mashup highlights the inflation break out in Canadian Dollar terms. A falling $CAD relative to the $USD unit is going keep Canadian exports to the U.S. attractive to U.S. buyers, but our much bigger reliance on consumption to generate an economy is going to produce a lot of inflation and consumption barriers to the Canadian Consumer (Feb 10, 2014 post) who is at peak debt levels.
Equity risk rises as inflation eats away at disposable income.
While we wait for the various Canadian real estate boards to report their most recent data sets over the next 10 days, I noticed a tweet today from SoberLook.com Two myths about the Ukrainian conflict reminding us that:
"Russia may retaliate with a cut in oil and gas exports to undermine Europe’s resolve." and "To investors at least, events in Ukraine could matter very much."
March 2014 is the 5th year anniversary of an important bull market fraught with peril especially in real estate markets where sentiment can flip to no-bid very quickly as market participants review their positions especially at the periphery where equity evaporation cannot be easily defended by income. In the suburbs and less populated markets, employment can dry up unexpectedly forcing commuters to become more competitive.
As oil spikes go, the last one was August 2013, and before that it was May 2011, and before that, the biggie... July 2008 (Chart). We all know what happened to real estate prices in Canada, they plunged and the cash market, the TSX Real Estate Index, dropped 51% in 10 mos (Correction Tables).
History, Charts & Curated Readings
"Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement; and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." George Santayana Vol. I, Reason in Common Sense