Posts Tagged ‘canada’

file0002092489128

The threat to quantitative easing – or QE – is like a nuclear deterrent. If rates are forced up by the markets, we will use QE, suggests the Bank of England, and therefore there is no need for it, as markets price in what might happen if they don’t heed the bank’s words. That is the theory. It is as if Mark Carney bestrides the banking stage, with his finger always near the red button marked QE, and as a result the markets dare not release their venom, for fear that they will be caught out by detonation. The reaility seems quite different, and yesterday Mark Carney had another go; putting on his poker face and staring at the markets: “Go ahead,” he seemed to be saying, “make my day.” Alas, the markets are still not buying it.

The markets have been pushing up yields. The yield on UK government ten year bonds has risen from a low of around 1.5 per cent a year ago, to 2.8 per cent at the time of writing. The Bank of England says rates are going to stay low until 2016, but the markets are far from convinced.

It is presented as bad news but actually it may be quite the opposite. The Bank of England says rates may rise once unemployment falls to 7 per cent, providing inflation does not show signs of rising sharply. The markets are saying they think this will happen in 2015; the Bank of England is saying 2016. So to try to convince the markets, Mark Carney has to try to talk down the prospects of the UK recovery without – and get this for an impossible mission – dampening confidence.

Yesterday Mark Carney spoke. In fact he was speaking at the East Midlands Conference Centre. So that’s quite a journey for Mr Carney, from Canada to the East Midlands Conference Centre – whatever next, the Andromeda galaxy perhaps?

Give the new governor at the Bank of England credit, he was transparency itself. He said: “Our forward guidance provides you with certainty that interest rates will not rise too soon. Exactly how long they stay low will depend on the progress of the recovery and in particular how quickly unemployment comes down. What matters is that rates won’t go up until jobs and incomes are really growing.” He also said: “We will have to see the rate of unemployment, currently 7.8 per cent, fall at least to a threshold of 7 per cent before even beginning to consider whether to raise Bank Rates.” Note that: even considering raising rates.

He then went at great lengths to spell it out: getting unemployment down to 7 per cent will be tough. So why then are markets pushing up rates? Mr Carney said one possibility is that: “Markets think that unemployment will come down to 7 per cent more quickly than we do. Since the aim of our policy is to secure recovery as quickly as possible, that would be welcome. But policy is built not on hope, but on expectation. And we estimate there is only a 1 in 3 chance of unemployment coming down that quickly.”

So note that: he is saying there is a one in three chance that rates will rise before 2016.

Finally, he made a reference to the US. When the Fed revealed plans to start reducing QE soon, many assumed the Bank of England would follow – leading to yields on bonds rising, and fast. You may be interested to know, that for the last three months, the yield on US government bonds has been higher than the UK equivalent. This changed this week, however, as markets rushed to safety over fears of a Syrian conflict escalating. On the subject of US and UK rates, Mr Carney said: “While much has been made of the special relationship between the US and UK, it is not so special that the possibility of a reduction in the pace of additional stimulus in the US warrants a current reduction in the degree of monetary stimulus in the UK.”

So it’s all pretty clear. The Bank of England has no plan to up rates soon. The markets responded by pushing up market rates. Soon after Mr Carney sat down yesterday, the yields on UK government bonds rose.

The markets are not buying it. Carney may yet be forced to push the ‘more QE button’ after all – it is just that the decision is not just his. Carney has a politburo – or a Monetary Policy Committee – that must vote to extend QE. And the markets don’t believe Carney’s colleagues will allow him to press the button.

© Investment & Business News 2013

file3161249328321

We have all heard the gripe; most of us have uttered it too. The author of this article certainly has. Why this obsession today with kids having to go to university. It seems you need a degree for anything. Some graduates are leaving university and taking on apprenticeships. It is absurd, of course it is. Yet, maybe it is not as absurd as we have been led to believe. New research suggests that graduates are good for us.

There has been a change in common sense. There was a time when having a good education was prima facia a good idea. But now, the queues outside the Job Centre made up of graduates, or the number of graduates working for minimum wage suggests that degrees are not what they used to be. We tell our kids to go to university. They run up massive debts. And they enter the job market with skills that are no more relevant than a handful of CSEs (That’s assuming you are old enough to remember what a CSE is). Is it an example of madness Britain, a country that has fallen in love with debt, or alternatively is it that the government (and to be fair, the last government was just as guilty – maybe even more so) has found a new wheeze to keep the unemployment data down; to keep young people off the jobs market for as long as possible by getting them to go to university?

It is just that the second of those arguments does rather fly in the face of economic theory. If it really is the case that degrees are meaningless these days, then UK plc, and indeed its government courting popularity, would encourage more potential graduates to get jobs instead because this would stimulate demand, which in turn would create more demand and the need for more jobs.

Now the National Institute of Economic and Social Research has produced a report on behalf of the Department for Business Innovation and Skills which suggests graduates are good for UK plc.

Looking across much of the developed world, the report found a strong correlation between rising productivity and the increase in number of graduates.

Between 1994 and 2005 UK labour productivity per hour rose by 34 per cent. Over the same period the share of the work force with a university degree rose from 12 to 18.9 per cent. The report suggests that at least one third of this growth can be attributed to the growing number of workers with degrees. However, even in 2005 the share of the workforce holding a university degree in the UK was below that of Finland, the US, Japan and Canada. The report said: “If the Higher Education sector in the UK were to expand towards the size of the US, this could be expected to raise the level of productivity in the UK by 15-30 per cent in the long-run.”

The report also found that graduates, on average, are paid 70-180 per cent more than workers without formal educational qualifications. It said: “Within the UK, the wage premium for graduates is higher than average, at about 160 per cent relative to workers without formal educational qualifications. Wage differentials should be closely correlated with productivity differentials, since firms face a hard budget constraint and relative wages are determined to a large extent by employer demand.”

If you want to read the report in full, see: Graduates and economic growth across countries

Here are three observations.

Some university degrees are better than others.  It may be true to say that some graduates benefit enormously from their qualification. But that does not mean all do.

The report referred to here was looking at data up to 2005. A lot has happened since then. But it is important that we take a long-term view. Right now, graduate unemployment is too high. But that does not mean it will always be that way. Let’s not make a judgement about the worth of education from the very narrow perspective of a country recovering from its longest ever economic downturn.

Technology is making the future even harder to predict than normal. Who knows what skills will be in demand in a decade’s time? Maybe in an environment of such rapid change, a good education is a good basis upon which individuals can build.

© Investment & Business News 2013

Sometimes data is too good to ignore, and the latest Economics Review from the ONS contains such data. It shows that the star of the recession of 2008 was Canada. In Q1 of this year, Canadian GDP was no less than 5.1 per cent up on the pre-recession high.

US GDP was 3.2 per cent up, German GDP 1.3 per cent up, but French GDP is still 0.8 per cent below the pre-recession peak. In Japan GDP is now 1.3 per cent below peak, and for poor old Blighty, GDP is still 2.6 per cent below peak. Within the G7, Italy has suffered the worst performance, with GDP currently 8.6 per cent below peak.

Japan saw the steepest rate of decline during the recession, however, and at one point GDP was 9.2 per cent below peak before its recovery began.

So far, all is good for Canada. Just bear this mind, however. Levels of household debt in Canada seem high; they have risen since 2007, and are now even higher than in the UK and much higher than in the US. Meanwhile, Canadian house prices to both income and rent, relative to their historic average, seem excessive.

There are parallels between Canada today, and the US and the UK in 2007.

© Investment & Business News 2013

282

Shale gas and oil – -it is everywhere, or at least if feels that way. It is in Russia, and the US, China, Argentina, Venezuela, Brazil and Mexico. It is in Libya and Algeria, Pakistan and Indonesia. It is in Australia and South Africa, and, at the other end of the world, it is in Canada.

For some more good news, there is some in the UK too, and for the really good news, most of it is up north, so there will be no need to spoil the aesthetic qualities of southern England’s rolling hills with wind farms. Instead all we need to do is dig up the Yorkshire Dales, and other areas that Londoners hardly ever visit.

Here is some bad news. There are also deposits in the south – bring back wind farms.

In all, the Energy Information Administration (EIA) reckons there are 26 trillion cubic feet of shale gas and 0.7 billion barrels of shale oil in the UK. So what does that mean? Well, the UK currently consumes around 3 trillion cubic feet of gas a year, so 26 trillion would last around ten years. Click here .

Actually, compared to some countries the UK is small fry. The EIA reckons that China has over 1,000 trillion cubic feet of shale gas – or a quadrillion, as they also call numbers with nine noughts. The countries that make up the top ten, in terms of reserves of shale gas – with the largest first – are: China, Argentina, Algeria, US, Canada, Mexico, Australia, South Africa, Russia and Brazil. As for shale oil, Russia has 75 billion barrels, followed by the US, China, Argentina, Libya, Venezuela, Mexico, Pakistan, Canada and Indonesia. You may have noticed there is a pretty good correlation with size of country – Venezuela, perhaps, is the exception.

All in all, analysts are talking about there being enough shale gas and oil to feed world demand for ten years. You may have noticed that the global economy slipped into recession just as oil started to approach $150 a barrel. The good news on the US economy went from a trickle to gushing torrent, just as the price of gas fell. The cost of energy matters, and may yet be the key to determining economic strength.

Stop: let’s repeat that STOP. The EIA says its estimates of shale oil and shale gas resources outside the US are highly uncertain and will remain so until they are extensively tested with production wells. As for the UK, the jury is out on how practical it is to access shale gas and oil deposits, and not everyone is all that keen on the idea of digging up Yorkshire, or fracking in a country as small as Britain. Some might choose to switch the r in the word ‘fracking’ to a u and then add the suffix awful.

We keep hearing about how shale is not a global warming gas. Well, maybe that is right, but as this article points out: “Gas fracking involves the release of significant amounts of methane into the atmosphere in the form of ‘fugitive emissions’ – an extremely powerful greenhouse gas (72 times the warming potential of carbon dioxide over 20 years).” See: Gas fracking will cause ‘irreversible’ damage, says Conservation Council of WA 

The clue may be in the name. On the south coast of England there are what the EIA calls Jurassic-age shale formations. We have all heard of the Jurassic-age and know it happened a long time ago. Less of us have heard of the Carboniferous age, which occurred from around 359.2 million years ago, to 299 million years ago. There are reserves of Carboniferous age shale gas in northern England. In other words, we are talking about reserves of shale gas and oil that have been sitting in the ground for a very long time. And in just ten years we are talking about digging up a big chunk of these reserves that have sat in the ground for hundreds of millions of years; that took hundreds of millions of years to form. Does that strike you as a good idea? How do you think future historians, from say 200 years in the future, will respond when they read about all this so-called “good news on shale gas” in 2013?

What we forget is that the Earth’s climate has changed over millions of years, and it changed as carbon dioxide was sucked out of the atmosphere and deposited in the ground. In just a few years we are reversing a process that took place over millions, maybe even a billion years.

Just to play devil’s advocate, here is question for you: what will shale gas exploration do for renewables? Will investment into shale gas and fracking crowd out investment in renewable energies?

Remember Moore’s Law. In its literal sense, this refers to computers doubling in speed every 18 months or so. But use Moore’s law as a metaphor for rapidly increasing technology and maybe it can be applied to renewables.

Where renewable technologies differ from other energy industries and yet are similar to the computer industry is that the generation gap between each stage in their development is quite small. It can take three decades to build a nuclear power plant, months to build wind farms, and just days to install solar panels.

The more we invest in renewables, the cheaper they get, and the progress rate in the efficiency of the technology can be very rapid.

Forward wind the clock 20 years, and assume that in 2013 the world moved away from carbon fuels and instead invested billions, even trillions, in renewables. Is it not possible that by 2033 our energy would be much cheaper than it is today?

James Martin, in his book ‘The Meaning of the 21st Century’, said: “The world’s reserves of oil, not counting the undiscovered ones, have a value of about 60 trillion US dollars… coal reserves have a similarly high value. If humanity set out to save energy and move to non-carbon forms of energy… much of this vast amount of energy would be abandoned. Both oil-rich countries and petroleum companies want to hang on to their potential wealth.”

Apologies if this sounds like a conspiracy theory, which is not something this column tends to support, but why don’t we hear as much hype about renewables as we do about shale gas, when, by the way, surveys show that most people do not think wind farms are aesthetically ugly at all.

For the EIS report, go to Shale oil and shale gas resources are globally abundant 

© Investment & Business News 2013

If QE in the US is coming to an end, what does that mean for the rest of the world?

Two countres that may be vulnerbale are Canada and Australia.

There are certain parallels between the Australian and Canadian economy today and the US and UK in 2007/08.

Take household debt.

Or take house prices:

Both the Canadian and Australian economies may be large and independent enough to be relatively immune from the effect of changes in US monetary policy.

However, such large levels of household debt combined with historically high house prices, does appear to suggest vulnerability, and if interest rates were to rise globally, the two economies may be susceptible to a sharp slowdown, maybe something more serious.

© Investment & Business News 2013

UK house prices may be rising again, but they are still too expensive. Or so is the inference from data published by the OECD this week.

In fact, suggests the OECD, UK house prices to rent are 31 per cent higher than the historical average since 1980, and to income they are 22 per cent above average. That may seem a tad worrying.

But then again in Canada, average prices to rent are 64 per cent over the Canadian long-term average, and price to income is 30 per cent over average. In Australia the extent of apparent over valuation is 37 and 21 per cent respectively.

The OECD data suggests that house prices are also more over-priced in Belgium, Norway, and Sweden than they are in the UK.
In France and Sweden, the ratio of price to rent and income, is at a similar level to the UK.

They are much cheaper in the US, Germany, Japan, and Ireland. Okay, as long as interest rates are so low, maybe house prices could be affordable in the countries where they are apparently overvalued. But what will happen if interest rates rise?

If interest rates go up because the economy is doing well, then that may be fine.

But supposing they rise because of external factors, for example because of rising wage costs in China, or because there’s less money sloshing around global money markets, or rates rise because as the baby boomers retire, they draw down savings. See: the Great Reset 

© Investment & Business News 2013

Last year I did a list of each country’s national debt divided by population to see what the next generation might either pay interest on or pay back.

Examples in $1000 per head:

UK 26.5

Ireland 35

Germany 28

France 31

Spain 17.5

Italy 38

Japan 83

USA 29

Canada 37

Norway 39

Australia 11.5

So what you might say? As a percentage of GDP it’s not so much … well that’s got naff all to do with it too unless there is a current a/c surplus … if you cut someone’s hair it adds to GDP but it hardly pays the £26,500 you owe on top of the £10,000 on your credit card.

Obviously, in the UK, with the old folks about to fund the out of work young folks as well as the civil servants, NHS etc (biggest GDP earners presumably and therefore the biggest ‘so what’ in this whole sad tale) this black hole is here to stay for a long time.

To get away from the obvious side of the story let’s have a look at the other side of the loans – the £26,500 each and every one of us had borrowed on their behalf… someone is the lender and so they will either ask for it back one day or extend the loan forever and the borrowers (you) will pay the interest. As the banks already went bust then presumably the debt is met by bond issuance from each government … “wow government – must be safe” bonds of course.

So who owns the bonds? i.e who is hoping to get paid back?  As it’s not countries per se nor banks so much, it must be the pension funds and the pension funds have your money in trust for when you retire. So the money they are going to give to you one day is indirectly the money you already owe ? And in order to realise that money, the pension funds have to redeem the bonds so the government has to find the money to give the pension providers to give to you….. enough of that … the real truth is that the government bought votes by indirectly spending your pension fund over the past few decades. The government borrowed from the very people it was robbing at the time. Many pension plans will have to go pear-shaped… whose will be first?  Do you doubt this? In that case just tell me who is going to produce your £26,500?

Any thoughts out there?

Patrick O’Connormist is this week’s guest contributor to The Money Spy blog