Ed Clark on the Canadian economy; Retail sales preview...blue Christmas?
OCTOBER 20, 2011
Note: An apology to my readers for the lack of activity over the past few days.
Why Ed Clark, for a bank CEO, is alright:
As far as bank CEOs go, Ed Clark is about as good as they come. You may recall that Clark was an outspoken advocate of lowering the maximum amortization length back to 25 years. This no doubt had an effect on on finance minister Flaherty who cut amortization lengths from 35 years to 30 years less than a month after Clark went on record with this statement.
Then you may recall a fantastic interview Clark gave to Peter Mansbridge in which he was remarkably candid about his views on foreign economic issues and how they might affect Canada, as well as his very negative (though entirely realistic) outlook regarding certain Canadian entitlement programs and their sustainability. Hereare a few snippets from that interview:
On the Chinese economy:
"I'm worried about this world economy where you have China running an export strategy that is not sustainable"
On the US economy:
"The US housing situation looks incurable....the fiscal situation is not sustainable"
On Europe:
"Europe is in a fiscal emergency that we don't see a resolution to. It is a deeply troubling economic environment"
On the demographic challenges facing Canada:
"I think the challenge for the next 20 years....if you look at the past 40 or 50 years, you have an extraordinary situation where you've had baby boomers entering the workforce and women joining the labour market.....the population of workers to those not working soared.
As a result, per-capita income was artificially raised and per-capita revenue for government was artificially raised.
Politics was defined as saying, "what more can we give to the population with all this money coming in?" We're now going into a period where the exact opposite is happening. Government revenue will grow more slowly while demand increases.
When you look at this world, the question is, "Who's promise is going to be disappointed? Who's going to bear the fact that we can't deliver what we thought we could deliver?"
That's remarkably honest insight from the CEO of an entity that profits primarily by issuing credit, the flow of which tends to dry up when the economy sours.
Clark delivers insightful speech in Toronto:
Yesterday, Clark gave an excellent speech in Toronto at a business awards dinner. The theme of his speech was to identify the significant structural economic issues that face Canada and give some suggestions on how to create the atmosphere in which these issues can be meaningfully discussed without resorting to demonization or wholly emotional arguments. It's an insightful speech. And though I don't agree with all of it, it is refreshing to hear anything other than incessant cheerleading coming from the leaders and economists at our financial institutions.
The full text of the speech can be found here. Some key snippets:
On impossible promises:
Today's slow growth economy is accentuating economic and social disparities, as well as exacerbating the gap between government revenues and expenses. Political leaders are challenged. Many formed their views and values during the Age of Aquarius, but struggle to apply them in the Age of Austerity. So big questions need to be asked. Tough decisions will need to be made.
In simple terms, in too many countries in the western world, promises have been made that cannot be kept. Promises around health care, pensions and support systems, which seemed affordable at the time. Long-term structural forces make that no longer true -- even if the world were not facing the current economic prospects. This predicament stems from a growth in government programs and commitments made in a world of growing resources and growing choices.
Clark follows this statement with an excellent discussion of the economic and demographic climate that existed at the time these promises were made, and nicely explains why they no longer make sense in today's world.
On US folly: How we're better and how we're the same...
The United States lived a decade of folly where politicians believed they could fight wars, lower taxes, keep interest rates low and have the country consume more than it produced through leveraging its financial system, citizenship and country. Its status as a reserve currency made it effectively immune from market pressures.
Canada's position is different. We are a small country, and were forced in the early 90’s by real market pressures to act. We did balance the budget, and fix the Canada Pension Plan. But we should not assume we can avoid a crisis of potential broken promises in the future.
The same demographic trends that helped grow incomes and government revenues are beginning to work in reverse in Canada too. We have long-term structural imbalances between government revenues and expenses.
Demographic trends are a massively under-appreciated factor set to change the world over the next few decades. As the 'silver tsunami' reaches its crest, it will exert tremendous pressure not only on government spending, but also on assets like real estate and possibly even stocks, as suggested by a recent US Fed paper.
I would point out that while Canada's position is different, we're only marginally better than the US at present. Based on numbers taken directly from Stats Canada, I've calculated the Canadian federal and provincial debt burden to be 110%...Better than the 120% cumulative state/federal debt, but not exceptionally:
On how low interest rates screws over pension plans and retirees:
The effect of prolonged low interest rates on many long dated financial future promises is dramatic – defined benefit pension plans become severely challenged and workers with defined contribution plans face retirement incomes well below those that they had expected.
One of the major social issues I see coming to Canada in the next few years is a growing realization of just how ridiculously unsustainable many of these defined benefit pension plans really are. Discussions around this topic are exceptionally emotional, with promises having been made and people having paid into a pension for most of their working life only to discover that the money may not be there. But with over 60% of all Canadians having no pension coverage at all, the question of who should make up the shortfall will be contentious, to say the least.
Finally, this statement nicely summarizes the biggest issue facing the Canadian economy: The willingness of Canadians to bury their head in the sand and hope things are miraculously resolved on their own. This pertains not only to the long-term structural issues facing the economy, but also to our made-in-Canada housing and credit bubble which grow more dangerous by the day. One need only read the comment section of this blog to see how difficult it is to have a rational discussion on these matters:
In Canada there is a cone of silence around our longer-term issues. Many politicians believe talk about structural reform is like touching the third rail of a subway -- you're bound to get zapped. Unless citizens encourage these difficult conversations, politicians understandably put them off. And as we know the problems don't go away -- they just get bigger with time.
BMO discusses holiday retail sales:
With retailers preparing for the busiest time of the year, BMO has turned their attention to what this Christmas buying season is likely to look like. Their conclusion: "Santa is still coming to town this year for Canada’s retailers, but with a lighter sack than last year."
Let's see how they came to that conclusion:
Anxious about high debt, consumers curbed discretionary purchases, such as recreational services and entertainment, and kept auto sales on cruise control this year. More recently, while vehicle sales sped up in September, retail sales volumes slowed further to 1.5% y/y in July from 2.0% in Q2 and from 5.0% in 2010
"This holiday season, retail sales will be restrained by high household debt, modest wage growth, turbulent equity markets, and cross-border shopping. After pushing debt to a record 149% of disposable income in Q2 (from 110% a decade earlier), households are starting to borrow less. Personal loan growth slowed to 3.4% y/y in July from 5.2% in 2010 and from an average 9% clip in the past decade"
This is no surprise to readers of this blog. Credit dynamics are one thing we follow closely, and the rapid deceleration in consumer credit represents a dying canary that is yet to be fully appreciated.
"Unfortunately, subdued wage gains (just 1.5% y/y in September) and expected modest job growth could slow personal income to 3% y/y by year end, barely topping inflation. This erosion in spending power, alongside weaker equities and global recession fears, has already dented consumer confidence"
As we've seen, consumer confidence and consumer spending are joined at the hip:
It's not all gloom:
Not all households are overstretched; those that aren’t can borrow cheaply. Homeowners who refinance at lower rates will find a few extra dollars in their wallets. Low interest rates should keep Canada’s economy moving forward (albeit slowly) and the jobless rate below long-run norms...As global recession fears abate, consumer confidence will improve. Meantime, steadier gasoline prices and food costs (agriculture prices are down 10% from April’s peak) should reduce inflation in coming months, lifting real wages.
I'm more inclined to believe that even if global recession fears were to abate, which I don't see any time soon, Canadians still must deal with our own unsustainable economy, driven and supported by an unprecedented expansion in credit. The disproportionate role of housing in the current boom should be evident to anyone with a pulse. IF global recession fears abate, this reality still looms large.
Cheers,
Ben
Posted in:
32 Comments
"The same demographic trends that helped grow incomes and government revenues are beginning to work in reverse in Canada too."
Ah it's demographics. Credit growth had nothing to do with it. Because reversing credit growth means lower bank dividends for pension funds.
We live in interesting times, certainly. We can see major forces at work (e.g., demographics, loose monetary policy, etc), but predicting outcomes is a dangerous game.
It's interesting to talk to baby boomers about finances, as many of them have pensions and other perks that the younger generations are finding increasingly hard to obtain. Unless, of course, they join professions dominated by odious public sector unions.
A fundamental question that will become increasingly important into the future was hinted at in Ben's analysis, namely: why should private sector workers (many of whom lack pensions) be on the hook for lavish public sector pensions? To my mind, the problem is not merely one of optimization, but one of morality. Why should a police officer should be allowed to retire at an early age with lavish entitlements, while a private sector worker is left to their own devices? Politicians will try to dodge these issues, but at some point, the anger will become palpable. Wall Street is not going to be the only target of the masses.
+1
Yes, public pensions are generous; but there not as generous as they used to be, at least not in my province. They're all defined contribution now, as opposed to defined benefit. I put in 5%, my employer puts in 7%, which, again, I conceed is generous. But take my brother for example, he was bi#ching about public sector pensions and I asked him how much he had saved for his retirement. The answer - basically nothing. In under 3 years I've contributed over $11K of my own dollars. Most people my age are saving nothing for retirement. What happens when people reach old age with inadequate savings? They live off the taxpayer, that's what. So, although my pension is being subsidized now, I will be much less costly in my golden years, in large part because I ponied up my own dough for years and years, while many others did nothing. Oh, and talk about lavish, my latest statement puts my "personal rate of return" at - 8.99% for 6 months and - 0.94% for 12 months. I have no idea how they can square those numbers.
I worked for 5 years before I was able to even contribute to a retirement plan. The trend, at least in the area I work, is to hire everyone on contracts, not full timers, therefore get no opportunity at a retirement plan. I worked on contract for 5 years and eventually got hired full time. Now that I'm in, I have a direct match, 4% to 4%. So 5% to 7% seems very generous.
Being one of the younger generation, I look around at my friends I went to school with and as a general "rule" most are struggling with lower paying jobs, on contract, no benefits/retirement to speak of, and weak prospects of promotion (since boomers still holding all the upper level jobs). So the pay and benefits of public sector workers would be a dream in comparison.
@ Y Guy_in_Regina:
Pension "savings" whether categorized as defined benefit or defined contribution, are obviously a form of forced savings, in that your contribution is deducted at the source - your paycheck. Most people, if left to their own devise, will NOT save anything.
That's why payroll deductions and monthly mortgage payments for a home are the backbone of economic stability.
All of the CEO blabber about planetary austerity worries, from a 'bankster' with a multi-million dollar annual compensation package and a diamond-coated pension plan, won't change that fact.
Guy_in_Regina: Saskatchewan must be an exception. Most of the other provinces and the Federal government are all still defined benefit. The average Federal plan is roughly 8% of income contributed by the employee, matched by a guarantee by the government that has an actuarial value worth roughly 14-20% of income. However, a much smaller and unrealistic nominal percentage match is used to reduce the employee's RRSP contribution room... this is one of the biggest tax advantages to being a public sector worker, and in my view one of the most unfair.
Hahaha yeah, blame those lazy, entitled government workers, not the private sector employees who are a) too irresponsible to save, and b) too blindly faithful in the "free market" to congregate and demand RRSP contribution-matching from their employers.
All the pro-corporate, union-busting libertarian garbage nonsense spewed in Canada these days makes me sick. I'd love for someone to explain rationally how individual workers trying to feed families negotiating salaries and benefits with billion dollar corporations is anything close to resembling a "free" market.
Great post. I wonder how many realise our country's debt is higher than the US, right up there with Japan and the Euro zone.
http://www.marketoracle.co.uk/Article31044.html
"These statistics indicate that the euro currency countries as a group, the United Kingdom, Japan and, interestingly Canada, are all more deeply indebted than the United States."
"The latest readings indicate that debt to GDP ratios are about: 450% for the Euro zone and the United Kingdom; 470% for Japan, and 410% for Canada. Thus, the Euro Zone, UK, Japan,and Canada ratios are 100%, 100%, 120%, and 60% higher, respectively, than the U.S. debt to GDP ratio of 350%."
Great site, keep the info coming.
While you all discuss the outlook of one criminal CEO, I divert your attention once again to the important issue: The GAO audit report (released yesterday) of the Federal Reserve has uncovered 'conflicts of interest' within the board or directors. Full report http://www.gao.gov/products/GAO-12-18 Image from the report: http://i56.tinypic.com/2n9kfpj.png
If you're too lazy to read, watch it. http://www.youtube.com/watch?feature=player_embedded&v=VmyU23PTA0g
This is big news so I won't bother explaining, other then to say that Canada (along with many other countries) is pretty much a lame duck and at the mercy of the Federal Reserve. If there was any organization and willingness amongst Ottawa to address the economic situation, they would have done so already. Understand that Ottawa does not have the ability to act on it's own, nor does it even have capability of creating sustainable jobs.
Stop reading the BS and keep your focus on the underlying problem. Your government has failed--you're all on your own now.
The major point Ed missed is that vs the world, just how well Carney and crew have navigated Canada. A solid rate policy along with solid job creation. It's great to always focus on negative to get headlines, but the situation is rosy for Re investors, massive wealth creation in Canada will continue. Typical Canadian, always negative, know where the right trade is, watch others make money, will never do anything about the bull market except complain and sit in 0% GIC's.
landlord - it will be seen later how well Carney and crew have navigated Canada. What in your opinion did they do?
They managed to stick to China's belly and sell them some resources, businesses, homes and got all country in a very deep debt. Good for us...
Based on the stats that Ben posted here, this rate policy caused the huge growth in the housing prices increasing the debt burden on the families and promoting the reckless use of the HELOC's to overspend and live lavishly not based on the increased income but on the increased cheap credit availability. They implemented the plan to spend our way out of recession but the recession is not over by all means but the people are already in debt up to their neck and most of them are not eligible for more debt - and where you go for here? Also there are unintended consequences of the government bailing out of the bank systems from their mortgage responsibilities increasing the CHMC involvement. The job growth exclusively in the housing construction industry, almost no building construction in the manufacturing versus housing etc...The huge RE price increase that was caused by the low mortgage rate+longer amortization+relaxed approval procedures plus the immigration rules that prioritized the very wealthy immigrants coming will have very profound consequences on this country. The result is only going to be seen in the future.
The only thing is already very evident, that the situation is not going to be rosy for Re investors as there are no significant number of the people left who are not in debt already and have a good income to be qualified for the mortgage at the current RE prices point. The Last Fools that you are fishing for here, are in the low supply now.
To expand on your points:
Canadian jobs and exports have been deteriorating rapidly and is the biggest threat to sustained growth. The government has never, or will ever create the types of jobs needed for long term growth. Take a good look at what happens when the country prefers to buy homes while importing everything the consumes. Trade balance (exports vs imports). http://i54.tinypic.com/2mo1j13.png Too bad we can't export houses!
In regards to Canadian banks, I suspect that TD (being the largest holder of CMHC mortgage backed securities) will join the federal reserve primary dealer list in order to engage in repo agreements, or in laymen, dumping its soon-to-be bad assets to implode on the Federal Reserve's balance sheet, therefore creating the impression that TD is solvent. By looking at TD's financial statements, they've already started selling off their MBS holdings http://i55.tinypic.com/5x6e4m.png
I'll post the primary dealer list here for future reference, I expect TD will be listed any time soon. http://www.newyorkfed.org/markets/pridealers_current.html
If would like to understand what repo agreements are and how banks are illegally covering their losses, watch the first 20min of this interview with Bill Black who in the early 1980s, helped prosecute over 1000 bankers under the savings and loans scandal.
http://www.youtube.com/watch?v=kxwWrL8pli0
The economy will never get back on track until the corruption is purged out of the system.
Interesting stuff, Greg. Honest question because I'm not sure I understand the logic: Why would TD need to dump CMHC MBSs on to the Fed Reservew balance sheet via a repo agreement? Why are these assets 'soon to be bad'. If they trade with the explicit backing of the Canadian government, wouldn't that mean that all Canadian bonds will soon become bad assets?
To clarify, our banks hold MBSs that are insured by CMHC, making them the issuers who sell their units to investors.
The obvious reason for them selling MBSs to the Fed would be to avoid claiming losses on their balance sheets (in this case pre-capitalizing), which was a similar agreement made between the banks, government and CMHC during the 2008 crises; once the bad assets were hidden, the banks then received TAF loans from the Fed for short term liquidity. These loans can be seen in a document obtained from Bloomberg's FOIA lawsuit.
Understand the term 'mortgage backed securities backed by bonds' really means that in the event of the CMHC being insufficient to pay MBS defaults or interest premiums from payments in arrears, the MBS will be refunded by government bonds.
What is a bond? A bond is a security asset issued by the BOC in order for the government to borrow money, in other words, government debt. This debt will need to be repaid at some point in the future by either generating revenue, increasing taxes, devaluing the currency to boost exports or by imposing austerity measures at worst.
http://i51.tinypic.com/23kes81.png
We can see that our government has been borrowing money to pay its expenses, but the problem going forward is i) how to pay off this debt while the economy contracts ii) keeping interest rates low as higher rates would mean higher interest payments to bond holders, which in turn exacerbates the debt.
With nearly 600 billion in outstanding bonds, and revenue declining, one can see why bailing out CMHC, banks and further stimulus could send our debt-to-GDP over 100%. In that event, why not use the Fed?
Hang on it gets worse...
Now consider what will to happen to government revenue when these four factors representing the majority of GDP start to contract in a global slowdown: i) home price deflation ii) consumer consumption iii) oil prices fall iiii) auto sector slows down
Take those four factors away and our economy will practically be left without a bone. Therefore, the solution has always been to issue more bonds (print money), stimulate the economy and let the next politician deal with it. At least it's worked for the last 40 years, as we now hit the exponential curve where money (debt) starts to compound faster and faster, forcing governments to print more and more.
If this reckless policy doesn't end now, you can kiss your pensions and children's future goodbye.
Let's be clear, I am not fishing for anyone, I have owned for over 25+ years. i have no plans on selling or timing the market. I am one who stays away from fear and negative outlooks. I am thoughtful to it, however, I am not interested in buying stocks. I prefer RE, just as if you bought a REIT - that is what I focus on. We are in it for the long term.
Sure, you just stick your head in the sand. Bravo!
I enjoy your comments. You remind me of the real estate guys i say on TV the other day with blanket statements that real estate is always a great investment! While I agree in theory over time...there are markets / properties that I do not agree with at this time. Math matters. You should get some...or at least acknowledge that not every property is a slam dunk. Heck,,,you imply you are a landlord...are you buying new houses to rent out RIGHT NOW? I would love for you to share an example with the math, because I would be interested.
You are a wannbe RE investor who needs everything perfect to make sense for you. That's not how the world works. You have to take risk reggie. You are better situated for GIC's
Great post.
I attended an economic forum yesterday in Vancouver put on jointly by RBC and the Business Counsel of BC featuring Craig Wright and Jock Finlayson as the key note speakers and they echoed much of the same sentiment of Ed Clark’s comments.
In the Q&A the audience brought up several questions with regards to Canada’s ageing population and the issue of “entitlement”. Both economists responded that this was probably one of the biggest challenges we face in this country going forward, however for any government to tackle this issue head on would likely be political suicide. Some interesting tongue in cheek comments were made about how the current “green initiatives” at the forefront of politics were actually distracting from these much more important domestic issues (They agreed that the number one problem in Canada is lagging productivity in the workforce, stemming from a lack of business investment, which was argued is the only true way to see growth in GDP and thus our standard of living and I assume help fund the future costs associated with the boomer generation) Very strong corporate balance sheets gave them some reason for optimism…
For those that care what they said about BC….with regards to the reversal of the HST in BC, they expect further declines in BC’s dismal productivity numbers as business investment will lag other provinces such as Ontario (with the HST )going forward. Overall it was a rather bleak picture for BC’s economy, increased trade with China has boosted exports making up for declines in US exports, however with growth in China expected to slow a few % pts things in BC will remain challenging and it’s expected that the employment migration to Alberta by younger workers will likely continue its current trend.
With regards to housing, imminent long term risks were discussed, however their specific forecasting was only outwards to the end of 2013, and Mr. Finlayson expects a flat market supported by the continued very low interest rate environment. But he also highlighted another round of tightening to lending rules as a very strong possibility to curb any additional upward pressure.
"In the Q&A the audience brought up several questions with regards to Canada’s ageing population and the issue of “entitlement”."
What do you mean by entitlement?
Ben may be a better person to articulate this, but my understanding of economic entitlement in layman's terms is that it is basically the concept that many people feel they have a legal right to certain economic benefits, namely things like social security, healthcare and pension benefits.
So with the aging population its obvious that demands on these benefits will increase significantly, but how do we continue to pay for them? Options would include increased taxes/premiums on the future workforce or make cuts to these so called "entitlements"...
Great comment. Thanks for sharing.
@ Planner - I agree with you 150%. The "sense of entitlement" in Canada is simply out of control. I do expect a large degree however living in this socialist country. It's the model of the people in Canada, no private healthcare, etc. You are forced many ways, thus expectations are huge. I believe our pensions, etc are in good shape. They also have many many assets they can sell - LCBO, Lottery, Gaming, etc that is worth billions to make up for future shortfalls. Remember, in Canada, the mafia is the government - they control booze, smokes and gambling. Many other assets could go private.
The real problem is private pensions - I don't see Manulife or Sunlife having a strong balance sheet in the future.
"Entitlement"
Just like certain homeowners feeling entitled to house price increases, so much so that when faced with evidence to the contrary, they resort to infantile ad hominem attacks.
When the SHTF, these very same people will feel they're entitled to a taxpayer bailout because they're victims of low interest rates and lax lending rules, all perpetrated by evil bankers and a bad government.
The attack on the social safety net is just beginning. Started by the Tea Pary in the U.S. and promoted by elitists everywhere, including Canada.
The terminology is disturbing to say the least. Nomenclature matters. "Entitlement" is the disdainful monicker du jour.
On the chopping block will be pensions, employment insurance, welfare as well as health care.
Watch out below. Below the poverty line, that is.
It doesn't surprise me that you're in the Maurice Strong camp. Unfortunately, the elite gave the people the wrong medium of exchange, communication.
The world is mobilizing quickly so I suggest you make your move.
Total and complete rubbish, not surprising from a bank CEO. After 30 years of separating the citizenry from their wealth, he has the audacity to declare the coming of the Age of Austerity. Absolutely unnecessary and manufactured artificially by the banking cabal. The bankers are hoarding the money, simple. If there was enough money in the system before, then, pray tell, where has it all gone? The answer is obvious.
Further to my previous comment: Ed Clark is the enemy. Nothing alright about that. Ben, your mandate is not to criticize central banking because you are constrained in what you can publish, because at the top of the pyramid, you are being paid by them, however indirectly. That is understandable, but if the other regulars on here do not see that money is neither created nor destroyed, but the price of it is artificially created by the central banks, then all hope IS lost.
"Ben, your mandate is not to criticize central banking because you are constrained in what you can publish"
Come on.