Mock Turtle

Home sick last week, I spent some time listening to the radio, where coverage alternated between Obama inauguration previews and the recession. Two days in a row, I tuned in midway to interviews with economists opposed to fiscal stimulus. Both interviewees were upbeat about the prospects of Canada, touting its stronger, more stable fiscal outlook and the ability of monetary policy to turn things around.

Both times, I waited to see who the cheerful contrarian was. Could this happy outlook be credible? Have we underestimated the robustness of the Canadian economy?

Unfortunately, it turned out both speakers were from the Fraser Institute.

So to return to reality: what effect can monetary policy possibly have at this point? The Bank of Canada will likely reduce prime rates to zero tomorrow, but businesses are still facing increased difficulty obtaining credit and consumer rates haven’t moved. If this means that the only way this boon to the banks benefits the economy as a whole is in increased, or more likely, maintained dividends on bank stocks down the road, is there any point in cutting rates at all?

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Or why letting your developed country slide into being a one-trick, resource-exporting copy of a developing one is a poor idea:

The November surplus of $1.3-billion is the smallest since October 1997, and analysts warn that Canada is quickly heading to the land of dual deficits – both for the current account and the fiscal situation.

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Courtesy of McSweeney’s — CRITIQUE OF YOUR POWERPOINT PRESENTATION TITLED “SALES FORECAST, THIRD QUARTER.”

Another highlight was your complete rejection of Tuftean convention through the use of colors without meaning, location without purpose, and position without movement. How daring it was to represent the quarterly shortfalls in revenue with the color purple—the color associated not only with kings but also with the skin of slaves, an obvious yet powerful homage to Alice Walker’s seminal novel. By rejecting the fixed ironic conventions of green and black (colors of mold, death, and despair) for profits and red (blood and lust) for losses, you transcended the common criticism that capitalism is animalistic and decadent. The postmodern color scheme instead offered a fascinating contradiction, one that simultaneously said, “I am master of my destiny,” and “I am trapped by the projections required as a condition of my employment, and am but a slave to outcomes that are way beyond my control,” and “Feel free to have more cinnamon buns, for I seem to have ordered too many.”

Perfect, just perfect. We may as well approach these things as art and take what amusement we can from them, for all the sense they make otherwise…

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After the barrage of happy-happy new year stories on the turnaround that’s no doubt just around the corner, some bracing blasts of common sense from some of the best financial bloggers around.

From the Cassandra Does Tokyo blog, an excellent rant about the “when things get back to normal” school of thought. When massive shifts happen, the old normal isn’t “normal” anymore. Are stocks cheap? How could it ever be possible to tell? The strategists, says Cassandra, seem:

to be implying that is was normal to extend credit as it was during the last eight years; that gains in asset prices (be they a a portrait of Dr Gachet, NYC apartments, Chelsea or Notting Hill pied-a-terres ?) are normal at somewhere nearer to the top of their seemingly almost-exponential three-decade rise; that it is normal that US households continue to live with negative rates of savings or consume en masse beyond their means; or cavalierly burn hydrocarbons at the elevated relative per-capita rates that they do presently; that past income-inequality, now rolled-up into massive eddies of wealth discrepancy that approach those which evoke those prevailing during the enclosures in England are normal, and that their sense of normalcy will swiftly return despite the continued pressure to the contrary upon the financial sector, and households to return to a normalcy of a much different mean than those of the recent past, which in their turn directly the impact the corporate sector with body blows from BOTH the cost and availability of their gearing and the ultimate demand for their products.

The whole thing is worth a read — being based in Japan, “Cassandra” has seen first-hand how significantly economies can change after massive bubbles pop.

On Infectious Greed, Paul Kedrosky puts paid to the idea that there’s any average length of a recession or bear market:

There have been nine recession-induced bear markets in the U.S. since the Depression. They have ranged from just under 100 days long, to a little over 900 days. The average (there’s that dangerous word) is 486 days, with a whopping standard deviation (another dangerous word) of 250 days. In other words, based on this tiny data set — and that is a big part of the problem — we could expect (ahem) recessions to last anywhere from 0 (okay, -12 actually) to 1,000 days. But it’s all crap, from applying averages, to applying standard deviations, to sample sizes, but people pretend it isn’t.

Repeat after me: We have no idea.

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The Financial Times has announced the 2008 winners of “twaddle” awards for ludicrous business phrases and practices — they’re all good, but this one is truly outstanding:

Third is the award for Most Aggravating On Hold Message, which in 2008 was as hotly contested as ever. However, the clear winner was the UK’s Driving Standards Agency for a message that said: “Thank you for your call. The anticipated waiting time for this call is . . . longer than we would expect you to wait. In appreciation of your time, patience and cost implications to yourself, we are terminating this call.” And then it cuts you off.

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Many people were happy to say goodbye to 2008, which will go down in history as the terrifying year we realized absolutely no one is in control of the economy, anywhere. Personally, I’d rather skip through 2009 to 2010 or beyond, especially living in Canada, where the recession fun has just started. Even the BMO economics team, known round here most for its mysteriously rosy view of the Canadian economy, sees grey skies ahead, naming its latest piece on October’s (negative) GDP reading “And So It Begins”.

There are some who see light at the end of — or even halfway through — the 2009 tunnel:

“When the financial crisis starts to abate – and we think that process has begun – one could see inordinately fast recoveries,” said Nick Majendie, chief portfolio manager, independent accounts, at Canaccord Capital Inc. He is looking for the S&P/TSX to gain 30 per cent this year – twice the gain he expects for the S&P 500 – as commodity prices recover.

Yes, folks, it’s a commodities bubble denier — the stock market counterpart to its better-known cousin, the climate change denier.

And then there are those still trying to make this messy, unique crisis into a predictable, and relatively painless event, like Gavin Graham of BMO Asset Management:

“After you’ve had a year as bad as this one, you’ve always seen a fairly substantial, double-digit positive return from the markets the following year,”

And I’ve got some black box program trading systems I’d like to sell you…

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Another helpful headline:

TSX expected to reopen after stall

Was there any question about that? Gigantic Hound’s recommendation of a year-long prorogation of the market aside, the TSX isn’t really designed to stay shut.

Here, by contrast, is an informative headline on the same topic:

TSX to resume trading Thursday

And for bonus points on the same subject, which of these statements would you recommend a TMX official make to restore confidence in the exchange after a full-day shutdown on one of the last trading days of a volatile year. Would it be:

a. “Obviously, we regret that this occurred. We hope people understand that this is very complex technology, and despite our best efforts you’re not going to be able to maintain 100-per-cent availability.”

or

b. “We understand that our clients rely on us to carry out their business and we deeply regret that today they weren’t able to do that. We have been working hard to find the source of the problem and will review what happened to ensure this situation does not recur.”

Vote in the comments.

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From a Financial Post story on how consumers are using non-cash rewards to buy Christmas gifts:

Of those polled by Air Miles, 40% said they were redeeming their points to get Christmas gifts for others, and more than 65% of those polled deemed it socially appropriate to give friends and family gifts that have been purchased with miles or loyalty points.

And the other 35%? WTF? Let me assure you, friends: if you present me with a gift — or, say a bottle of wine — how you happened to acquire it is of absolutely no concern to me…

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Diane Francis gets on the sales tax cut train:

3. The GST and PST should be eliminated immediately for purchases of cars that are fuel efficient. This would reduce consumer prices and help enhance demand for cars.

Great idea. Of course, we already have a rebate program for buyers of fuel-efficient vehicles, it being one of the very few initiatives on the environment the current government has bothered to implement. And the rebates on EcoAuto range from $1000-$2000, which, depending on the make of car you’re buying, eliminates the cost of the GST or most of the GST and PST. While the program is quite successful, there’s no evidence it’s enhancing demand for cars overall, so it’s of very limited use as a stimulus to the auto industry. In fact, year-over-year vehicle sales were down by double-digits in Canada in November, bargain pricing, rebate, and all.

Next?

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It’s amazing how self-reinforcing some concepts can be. For example, the idea that a GST cut is a stimulative action.

It’s true that consumer spending in Canada hit new highs concurrent with the 1, then 2 per cent cut in the GST. Other factors, such as the wealth effect from a peaking stock market, ballooning house prices, and overshooting oil prices, and the short-lived period of Canadian dollar parity with the U.S. dollar at the same time were, of course, the real cause of consumer buoyancy.

But then the UK, as part of a comprehensive stimulus package introduced last month, brought in a cut of 2.5% in the VAT. One small, and somewhat derided element of a 20 billion GBP package that included far blunter tools, and now everyone thinks it’s a good idea.

OK, maybe not everyone. But Derek Decloet this morning has a column suggesting that a GST holiday could be just the stimulus the Canadian economy needs — perhaps a perfect way to help Canada’s beleaguered automakers. Right. Because while no one’s buying cars at the fire sale prices now available, another 5% off, and they won’t be able to resist!

Has Decloet talked to any of the other people in the ROB newsroom? Retailing reporter Marina Strauss, for example, who might be able to talk about the 20% drop in sales some retailers are experiencing this Christmas, even though they’re offering Boxing Day pricing 3 weeks before Christmas? Or maybe Greg Keenan, the auto reporter, who could show him a neat graph showing how sales and prices of vehicles are falling simultaneously in Canada? (OK, I don’t know if he has a graph.)

But not to single out Decloet. There are also the folks at economics blog Worthwhile Canadian Initiative, who have begrudgingly come around to the idea that things *might* get bad enough in we’re-so-special Canada to require, at some ever-closer point in time, fiscal stimulus of some sort. While in theory they’ve no objection to infrastructure projects, our construction workers, they believe, are going to be tied up for the foreseeable future in endless condo building and [cancelled] oil sands projects, so why not just cut the GST — it’s easier! To be fair, they raise some questions of their own:

A GST cut, announced as temporary, like in the UK, could be the weapon of last resort. People would increase spending while taxes are low. It could be implemented quickly if needed. It could have a big temporary bang for the fiscal buck. But we cannot be 100% certain that people would increase spending. And I’m not 100% certain how it would influence deflationary expectations.

Again — prices for many goods, such as flat-screen TVs, are lower this Christmas than last. Aren’t the “deflationary expectations” already there? Does no one else read the retail news in the paper? Does online shopping blind us to changing price environments? Another 5% off is not going to cause anyone to buy anything if they think they can get it for 10% less in two months. Just back away from the GST cut, please, and find another instrument in that fiscal toolbox.

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