Our Economy: Will the Growth Continue?

Like with any good "capitalist society", its takes a good blend of multiple conditions working hand-in-hand, harmoniously, so as to give us the opportunity to proposer, and to see and have our standard of living increase over time, for ourselves and for our children.

After a horrendous 2008 and beginning to 2009, the past few quarters in Canada are proving to lay the continued foundation for our society to prosper. Will this continue or is it a result 'all that government spending'?

Economy off to a roaring start in 2010, GDP records highest gain in three years

From Julian Beltrame, The Canadian Press, March 31, 2010

OTTAWA - The Canadian economy bolted out of the gate with its strongest performance in three years in January, with robust activity cited in factories, at construction sites, in mines and the oil patch.

The 0.6 per cent advance in the country's gross domestic product will have significant impact on everything from jobs, to interest rates and even government deficits if its a sign of things to come, economists say.

The dollar, which was up all day, closed up 0.35 cents at 98.44 cents U.S.

It was especially good news for Canada's battered manufacturing sector, which gained 1.9 per cent on the month. This week, both Honda and General Motors announced plans to hire more workers.

"The main message is that the economy has been a lot stronger than even the biggest optimists could have hoped for," said Douglas Porter, deputy chief economist with BMO Capital Markets.

"The economy has risen at better than a five per cent pace the past six months now...that's the best six months since the very height of the tech boom in early 2000," Porter said.

Porter says it likely means Bank of Canada governor Mark Carney will almost certainly raise interest rates in July and could move even sooner. And when he does, it may be a half-point hike that would push mortgage rates higher.

There are also implications for Ottawa's estimated $49-billion deficit this fiscal year, which was based on a 2.6 per cent growth rate. It now could be bettered by a full point, which would mean government revenues will rise and costs, for such things as unemployment benefits, will fall.

Finance Minister Jim Flaherty couldn't resist a shot at Liberal Leader Michael Ignatieff, saying that while Canada is "not out of the woods," the numbers show the government's policies are working.

"We need to stay the course ... and unlike the leader of the Opposition, we're not going to kill jobs by raising taxes," he told the House, a reference to Ignatieff's proposal to delay business tax cuts.

Stronger growth will likely also result in demand for more workers. In another strong economic report issued Wednesday, Statistics Canada said the total hours worked by payroll employees increased 0.3 per cent in January, a precursor to job gains.

A big question remains, however, about what happens with the recovery in the United States, since about three-quarters of Canadian exports head south.

But even there, there was an encouraging signal with the U.S. reporting a strong pick up in factory orders, following an upward revision for the previous month.

"No ifs, ands, buts or excuses," said Scotia Capital economist Derek Holt. "The V (shaped recovery) is even more alive at U.S. factories than previously thought."

Such robust growth coming out of recession is what historically happens as pent up demand, combined with the arithmetic of a smaller baseline, inflates growth numbers. But it wasn't supposed to happen this time because of the continuing uncertainty over the viability of the global financial system and the belief that U.S. consumers were tapped out.

In an interview, Bank of Canada senior deputy governor Paul Jenkins suggested growth may just be getting advanced by extraordinary government stimulus and low interest rates, as well as temporary factors. In other words, the surprisingly strong numbers may not last.

"When you've got that type of stimulus at play, particularly at turning points ... you can get more demand pulling forward," he said.

In January, the Bank of Canada estimated fourth-quarter growth for 2009 would come in at 3.3 per cent, while predicting first-quarter growth for 2010 at a slightly higher 3.5 per cent. The fourth quarter actually turned in a five per cent performance and economists now project the first quarter at between five and six per cent.

In the last five months, the economy has already recouped more than half of its recession losses, with output now up by 2.7 per cent from last May's low.

The rebound has surprised economists, given that the U.S. economy, although it has posted impressive GDP numbers as well, remains in the dumps in the area that impacts Canada most, consumer spending. As well, the U.S. has yet to stop bleeding jobs, while Canada has gained 160,000 since July.

Queens University economics professor Thorsten Koeppl credits the strong performance to the resilience of Canadian households, which have not been hit by a major loss in net worth given that house prices have held. In turn, Canadian consumers appear to be optimistic enough to fuel domestic spending.

But while short-term prospects appear strong, economists also cautioned that, longer-term, things are not quite as rosy.

CIBC analyst Krishen Rangasamy noted manufacturing is getting a one-time bump from the restocking of inventories in the United States. With American stimulus spending receding, a slowdown in the latter half of 2010 in the U.S. would also likely have an impact on Canada.

As well, with each good economic report in Canada, the loonie gains in strength, setting the stage for pain in the export sector later on.

There also remains major weaknesses in the Canadian economy. The output gap is still about two per cent below capacity and employment, while improving, is about 260,000 jobs lower than where it stood in October 2008, and that doesn't account for population growth.

But Porter also offers some reason for optimism. Just as it was not written in stone that the first half of 2010 was going to come in like a lion, there is no guarantee the second half will go out like a lamb, he said.

"I don't think it's a foregone conclusion things will taper off so adversely in the second half of the year," he said. "One has got to be impressed with what is going on in manufacturing, and there's lots of room for manufacturing to grow still."

How "safe" is YOUR pension?

Unlike some 85% of company pension plans in the US that are underfunded and with no real resolve in sight, we’re not nearly that bad off here in Canada.

The reasons for this are, yes, the obvious of stock market declines but add to this the perfect storm of longevity and the current massive wave of retiring baby boomers. Its a perfect storm of increasing and extended benefits and recipients and less and less employees contributing.

OMERS posts $4.3B net gain on investments in 2009, or 10.6 per cent return rate
By The Canadian Press

TORONTO - The Ontario public-sector pension manager known as OMERS says it booked a $4.3-billion net gain on its investments for 2009, with a 10.6 per cent rate of return on its assets that marked its move back into positive returns after a dismal performance a year earlier.

OMERS says the average rate of return for the past five years now stands at 6.6 per cent. That's above the five-year average benchmark return of 5.8 per cent.

Crowley of OMERS said that has pulled its deficit to a deeper $1.5 billion for the year ended Dec. 31, down from a comparable $279 million the previous year.

"Like the majority of the large plans, pension obligations have been increasing at a greater pace than contributions."

He added that another $4.95 billion in net losses from 2008 will continue to affect its overall deficit for the next four years.

Unemployment Progress? – Impact on Interest Rates, Inflation

My initial intentions were to write about my views on the Canadian Federal Budget just released last night. But as it turns out, it was truly a non-event, so I thought I would focus on the state of employment and people’s ability to earn an income.

Today’s U.S. employment headline: The Household survey showed a decent 308,000 increase in February.

"The chances that we are about to see employment conditions stabilize are high. However, job losses still stand at a massive 8.4 million since the recession began in late 2007. The size of the workforce is no higher now than it was in September 1999 and yet the economy is one-fifth larger (as measured by real GDP)."

The total unemployment and underemployment rate stands close to 17% and a record 40% of the unemployed have been without work for over six months.

Businesses see what we see — a recovery that has been engineered by massive bouts of fiscal and monetary stimulus that is likely to be unsustainable. So, against that uncertain backdrop they are opting to tap staffing firms to skate them for now rather than make a commitment to hire full-time staff.

The bottom line is that the U.S. economy is currently about 12 million jobs shy of being at full employment and as such it will likely take anywhere from 5 to 10 years to get back to the prior pre-recession peak in the employment-to-population ratio. This is a signal to us that deflation will be the primary theme for some time to come.

Now although this is a U.S. concern, it will unquestionably affect us, the little brother, here in Canada.

Safety and income at a reasonable price (SIRP) will be one way to play this theme.

What does DEFLATION mean to you?
- low or sustained low interest rates (mortgages and investment)
- Wage pressure non-existent (little if any increases to our pay)
- Our ‘Standard of living’ will only advance marginally

Data Source: David Rosenburg, Gluskin Sheff + Associates Inc.

Canada's Hot Growth: What this means

The Canadian economy grew at a 5% rate: how will this affect interest rates, stock markets and the Dollar?

The Canadian economy boomed back in the fourth quarter of last year, pushing well past expectations and raising the likelihood that the Bank of Canada will start to raise interest rates this summer.”

Real gross domestic product grew at an annual rate of five per cent, a full point above what analysts had expected and the largest quarterly increase in nearly a decade, Statistics Canada reported Monday.

Buchanan predicted the bank will begin tightening interest rates in the third quarter of 2010, when Canadians can expect a rise in the key lending rate to one per cent.

The Bank of Canada and other central banks, particularly the U.S. Federal Reserve, have kept their key lending rates at, or near, the lowest levels possible in order to reduce the cost of borrowing and stimulate spending.

"I think the other thing that was a surprise was the continued strength of household spending and that's clearly a positive sign for the economy going forward and I think it shows that Canadian consumers... are in a bit better shape than their U.S. counterparts," he said.

From the beginning of 2010, we said that we believe the total return on Canadian equities — dividends/distributions plus gains — in 2010 will be higher than the total return on fixed income/Bonds and on cash. In other words, we are ‘somewhat’ bullish on Canadian equities for this coming year.

We are positive on Canadian equities because we believe that the Canadian economy will gain strength in 2010. Be careful about what that means. Our economy had started to recover by the end of 2009, and all indications that we see are that the economy will be more solid and stronger in 2010 than when it began its recovery.

With the economy being stronger at the end of 2010 than it was at the end of 2009, the TSX deserves to be higher at the end of 2010 than it was at the end of 2009. And higher by enough that its return will be better than the returns on fixed income or cash.

Now, be careful with what this means: I have written on several occasions before that logic and the stock markets are not always in sync. So while logic leads us to believe that with a higher GDP throughout 2010 should lead to a higher TSX by year end, “sentiment and emotion” of the markets can have a very different outcome.

Source: The Canadian Press - Rebound from recession: economy logs strong five per cent growth in Q4 2009

We're living longer than ever: StatsCan

As a CFP Professional Financial Planner, I find this information imperative when making all sorts of different projections, from client's finances to estate planning tactics.

The trend of humans living longer will continue (as I have written in past: Demand for Medical Services Will Continue to Expand longevity) as much of what we do is based on one's "life expectancy".

You may simply find this info interesting...

A new study says Canadians are living longer than ever.

The Statistics Canada study, released Tuesday, says life expectancy at birth reached 80.7 years for the three-year period between 2005 and 2007.

That’s up from the average of 80.5 between 2004 and 2006, and 78.4 a decade earlier.

Gains during the past decade were strongest among men, although women still live the longest.

Men’s life expectancy at birth rose 2.9 years to 78.3 in 2005-2007, while among women it increased by 1.8 years to 83.

Provincially, life expectancy at birth in British Columbia was 81.2 years in 2005-2007, highest among the provinces, followed by Ontario at 81 years.

Life expectancy at birth in Quebec was at the national average, while it was below the national average in the rest of the provinces.

The lowest life expectancy was in the three territories combined, at 75.8 years.

Death rate increases

Deaths recorded their largest increase since 1993, continuing a long-term upward trend resulting from a growing and aging population.

In 2007, 235,217 people died in Canada, up 7,138 -- or 3.1% -- from 2006.

Both male and female deaths rose, but the increase was slightly larger among women, 3.2% compared with 3.1 for men.

The infant mortality rate rose to 5.1 infant deaths per 1,000 live births in 2007 from five in 2006.

Source: The Canadian Press

GOLD: An Investment, Hedge or for Protection?

Why gold is rising and will keep rising

While gold has rallied 350% from the lows of 1999 and is up about 285% when adjusted for inflation, this still pales in comparison to the 1976-1980 bull market in bullion. During this period, the price rose by more than 750%. (See chart 1)

To some, this suggests that history is repeating itself and gold is heading beyond US$2,000 per ounce. That might be why John Paulson is launching a pure-play gold fund.

Let’s start with the U.S. dollar, which the price of gold is widely understood to mirror (See chart 2). When the dollar falls, the price of gold has to rise, assuming nothing else has changed in the supply and demand balance.

When fundamentals make gold more attractive, it overcomes its normal relationship, according to J.P. Morgan analyst John Bridges. “Don’t be surprised if gold is strong even on a modest dollar bounce,” he said.

So while the short-term correlation between gold and the dollar index has strengthened recently, it leaves much still unexplained.

Moving onto supply and demand factors, the gold market appears relatively balanced. The decline in mine supply in recent years has been supplemented by increased scrap sales and sustained central bank gold sales. In the first quarter, scrap sales rose sharply as gold re-visited its all-time high.

Meanwhile, central bank reserve sales, which have play ed a key role in keeping gold prices in check during the past decade, have slowed recently, according to Citigroup. In the 1990s, central bankers were acting as a group to reduce their gold holdings, confident that the fiat currencies were a better store of value.

Now gold’s attractions are re-emerging and bankers look set to be net buyers, which should help tighten the market, according to Mr. Bridges, who also sees sharp increases in industry costs supporting the gold price.

With industrial demand for gold limited, unlike other precious metals like silver or platinum, changes in demand are primarily due to fabrication needs, which have dropped sharply since 1997, according to a Citigroup report. Add to that the fact that the economic downturn, coupled with higher prices, further reduced the demand for jewelery, and supply-demand changes add little in terms of explaining bullion’s rise. With the exception of the 1976-1980 period, gold prices show little to no relation to changes in the Consumer Price Index, the firm noted.

So far the massive expansion of the U.S. Fed’s balance sheet and those of other central banks has not affected inflation due to the scale of the de-leveraging and slower money velocity. If it is not current inflation the market is worried about, then its future inflation, right?

The evidence is scant here too. Ten-year U.S. treasury yields have definitely rebounded from their end-of-2008 lows between 2% and 3.3%, but this can hardly be deemed conclusive evidence of inflation fears, according to Mr. Hart at Citigroup.

Yes, the government bond market is highly distorted right now, but markets don’t appear to have embraced the inflation thesis so far. So it can’t be said that gold buying is definitively a result of inflation fears.

Then what about speculation and ETF buying? Looking back to the surge in crude oil to US$147 per barrel in 2008, the market justified the move with an array of structural factors. This might suggest that a similar speculative bubble is forming in gold.

However, one obvious difference is that when oil peaked, the forward market was in backwardation, indicating that the market was expecting a decline in prices. The gold market does not and prices a value of US$1,268 per ounce for June 2014. While ETFs were cited as a culprit for the rise in oil and are also playing a role in the gold market, their impact has been limited of late, Mr. Hart noted.

ETFs may have been active buyers early in 2009, but their activity has leveled off since. There has been a sharp increase in long forward positions in gold at the Commodity Futures Trading Commission (CFTC) and net longs have reached a record.
”However, more often that not, these flows correlate with spot moves and rarely serve as a leading indicator. As a result, speculative positioning hardly represents the main factor driving the recent spike in gold prices,” the analyst said.

Despite all the attention being paid to sales of gold by central banks and the fact that world gold holdings have experienced a broad decline, holdings in industrialized economies are on the rise as a share of total foreign reserves. And this trend was renewed in the first quarter.

There is a popular presumption that developing economies will increase the share of their gold holdings. However, Mr. Hart explains that gold holdings in advanced economies are largely a function of the legacy of the previous gold standard. So if the rest of the world is to move toward the industrial country average of 40% of reserves in gold, then industrial economies would presumably have to sell some of their gold holdings, which would offset upward price pressure.

China does remain a big unknown in all of this and its reported gold holdings seems to suggest a large degree of under-reporting. This is particularly significant now that Chinese authorities can make their purchases on the domestic market.
So what about gold as simply another currency?

First off, this is factually untrue since it does not serve as legal tender in any economy, Mr. Hart points out. Yes, it is an investible asset, like cash, and its supply is limited, so it can serve as a more suitable store of value that fiat money.
“But unlike other assets, it doesn’t yield a return. Holders simply incur capital gains or losses and these are as uncertainas those of other assets over the long term (the relevant time horizon for central banks),” Mr. Hart said.

Then why hold gold? The answer lies in an increasing lack of confidence in paper-based currencies. The debasement of the U.S. dollar has a broad effect that undermines confidence in other currencies. And with central banks and policymakers still far away from removing themselves from their unprecedented fiscal and monetary accomodative positioning, this could continue for much longer.

So it is not a case of whether gold leads the dollar or the dollar leads gold, Mr. Hart explains, rather price movements in both are the expression of the same underlying malaise with the lingering effects of the financial crisis.

“Occasionally, investors lose confidence with currencies, and when this happens, because the pool of gold and related investments is so small, demand for gold can become intense,” Mr. Bridges said.
Some reprint from Jonathan Ratner

Greece & Europe: how their woes will affect us in Canada

Here come the strikes, governments put to the test

First it was Dubai, now Greece. Government spending and excessive debts in dealing with the great recession have put some countries on the brink on bankruptcy.

Today, a history-making event in the 21st century: Greek government employees, namely customs and tax officials, will conduct a 48 hour strike. Next week there will be a 24 hour civil servant, doctor and Communist backed worker strike that will be followed by a general strike called by Greece’s main union on Feb 24th for 24 hours. This is all in protest to Greece’s new fiscal budget and is exactly what other countries will face that will test their will to make tough decisions on spending.

Up next to deal with these tough policy, spending and debt issues: the governments of Portugal, Spain, Italy and Ireland.

The markets continue to have a lack of confidence that these government choices will be implemented as country-denominated bond issues and stock markets trade lower, particularly in Portugal, Greece, Spain, Italy and Ireland.

The European concerns have the euro at the lowest level vs the US Dollar since June ‘09. With this we have seen an assertive increase in the value of the US Dollar, a countertrend to the Dollar’s slide over the past 10 months.

Not surprising Gold has been pulling back (inversely related to the US Dollar) and the Canadian Dollar has also retreated, but not in proportion to Gold and is, thus far, holding up well.

The greater implications for global stock markets? If Greece does not resolve their issues soon (unlikely) and we see the next country, as described above, encounter like issues, there will be a run on liquidity towards safety. And, as ironic as it sounds, the US Dollar is still considered the world’s safest store of value (even with the greatest amount of debt and deficit spending).

Thus, a scenario as depicted above would see a loss of appetite for any risk, US Dollar strength and global equity market and commodity, including gold, sell-off.