QE Carney: Loonie monetary policy

Mark Carney Leaves Canada With ‘Stealth QE’ Rising At Fastest Pace Since 2009

Carney has much practice devaluing the Canadian loonie.  He is perfectly suited as the new head of the Bank of England.  From Zerohedge:

As Mark Carney steps aside from his role at the Bank of Canada to undertake all manner of easy money in the UK, we thought a reflection on the ‘stealth’ QE that he has been engaged with, very much under the radar, in the US’ neighbor-to-the-north was worthwhile. It seems quietly and with little aplomb, Carney’s BoC has grown its balance sheet by over 21% YoY – the most since 2009. If that was not enough to make someone nervous, the quantity of Canadian government bonds on the BoC’s balance sheet has grown at a remarkable 46% YoY! All of this has taken place during a time when ‘supposedly’ the Canadian economy has been reasonably strong and foreign demand for debt high. With Canada’s CAD267bn debt due in 2013, we suspect this ‘stealth’ QE will continue to rise.

Where is this easing reported in the Canadian news media?  Inflation in Canada is rampant–that can be seen in the price of housing alone.  But who is covering the monetary expansion of the loonie?  So now we Canadians who have Canadian dollars suffer the abuse of both ZIRP (zero interest rate policy) and QE.

It’s all monopoly money.

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Is it time to buy US? II: February deficit $223 billion

I lamented in May 2010 that the US federal budget deficit was $83 billion, or about $8.90 per person per day.  Now the Washington Times (hat tip: the American Thinker) reports that the US government has posted its largest monthly deficit in history, $223 billion in February.  Now that means that the US government borrowed nearly $26 per person per day.  Clearly, the fundamentals that have caused the US dollar to depreciate against commodities is getting much worse not better:  the US government is borrowing three times as much money as what it was only 10 months ago.  This is proof that the debt death spiral is a reality in our times.

Now here is what has been happening:  (1) the US government borrows money but doesn’t find sufficient lenders whether domestic or foreign, so the Federal Reserve bank lends to them the remaining shortfall.  This is called quantitative easing because the money is created out of nothing.  But that is not the end of QE: for Bernanke is also buying old debt as it turns over and finds no new borrowers (see “Hyperinflation when?“).  QE greatly increases the amount of greenbacks that are in the money base:  view (chart below) and be afraid and weep.  (2) Next, commodities go up in price because too many dollars are chasing too few goods–food riots start happening in poorer countries.  (3) Then, consumer prices go up.  (4) Lastly, workers will get cost of living adjustments if indeed their employer can pay them at all.  In any case, the last thing to adjust to this whole mess is people’s take home pay.  But unfortunately, the adjustments will be too little too late because the next round of QE has already taken place and the spiral of hyperinflation has reached the next stage even before they receive their next pay cheque.

The newly elected Republican Congress?  They swept into power with Tea Party momentum.  But they can’t or rather they won’t fix anything.  Their puny little efforts to reduce the deficit are a joke.

My investment approach remains steady (current portfolio is up 88% above book) :

Short:  US dollar

Long:  Canadian oil & gas; Canadian gold mining; physical gold and silver (via Sprott Physical Gold Trust, Sprott Physical Silver Trust)

Finally, in my opinion, those who are telling people it is a great time to exchange your loonies for greenbacks and to go long on US stocks are really not doing their readers a favor; they seem ignorant of the fundamentals.  Yet even Warren Buffet’s famous and flippant advice about gold is little better.  What, pray-tell, Mr. Buffet, do you suggest to the American people regarding how they might protect themselves from this robbery?  Remember these words of Alan Greenspan (hat tip: Monty Pelerin):

The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. Deficit spending is simply a scheme for the confiscation of wealth.

… the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold.

Is it time to buy US? I. Studying the fundamentals

Blogging has been a great help to DIY investors.  They can formulate their own strategies in writing, see what works, and share their knowledge with others.  Bloggers often have skin in the game; it might not be very much skin, as many are not rich people, but they are real investors and not like young journalists who don’t really have much hands on experience with trading or owning anything more elaborate than index or mutual funds in their RRSP accounts.

One of the clear reasons for thinking that many financial journalists are not particularly knowledgable about investing is that they are always engaging the advice of “experts” who are wrong most of the time.  Blogger Devon Shire is hypercritical of Robert Prechter, whose predictions are often dead wrong.  Another famous talking head is Dennis Gartman, whose own fund, HAG.TO, has remained essentially static since the fund began in 2009 while the stock indexes have greatly improved.  So why is this guy on TV?  He’s doing worse than an ING Direct savings account, where at least your money gets 1.5% interest.  The original investors of his HAG’s IPO at $10.00 are still 35 cents below water.  In the meantime, the Dow Jones and the TSX are both up about 60%.  How can a fund lose money in these conditions?  Why does Dennis Gartman get on TV and why do so many financial advisers read his famous Gartman Letter?  I think it may be because the journalists and the advisors are themselves incompetent.  At least all the many sheep following Warren Buffet around can say he is the best investor of all time.  A proven track record is actually a sign of competence.  But what proves that Gartman or Prechter know what they are talking about?

Bloggers, who have skin in the game and gain experience as they go, thus contrast with financial journalists.  Consider the Financial Post’s John Shmuel has a column with the title, “Lofty loonie spells buy opportunity”; but just a few weeks ago, he’s done columns on why Canadian stocks will outperform.  So why would he change his mind?–Or does he even see the contradiction? Well, as a journalist, he’s not actually trying to present a coherent strategy but information as it comes to him.  So I find that journalists can be great sources of information but terrible sources for eking out an investment strategy.  Why does Shmuel think that the lofty loonie spells a buying opportunity for US equities?  It seems for no better reason than that loonie is at a three year high.

Well, I did a few blogs about how and why I short the US dollar by using leverage in my US margin account to buy Canadian gold mining or oil and gas companies (e.g., abx, gg, erf, pwe, pgh).  The dividends from the oil and gas companies cover the interest charges and some.  Later, I added the selling of put options on the same equities, and reduced my overall cost of carry, because the leverage is now pushed off to some time in the future and I don’t actually have to pay interest on it today.  Has this strategy worked?  Extremely well.  Now that the loonie is at a three year high, will I now go long on the greenback or US equities as Shmuel’s article advises?  I don’t think so.  Consider the following chart (source Yahoo! Finance, straight line is mine):

What we see is that the loonie hit a low of $1.61 in 2002 and has basically improved in a nine year trend against a dollar.  Once the extremes of 2008-2009 are removed, a secular trend emerges which would suggest that the greenback will continue to move down against the loonie unless the fundamentals that caused this trend are changed.  If we looked at gold or oil against the dollar, we will see the same trend.  What we are seeing in the chart is US dollar inflation.  Not that the loonie is much better, but what happens in periods of inflation is that the cost of commodities rise.  Since the Canadian dollar depends so much on commodities, then whither commodities so the loonie.  If the price of commodities is increased by the inflation of the US dollar, can we expect this trend to reverse?  I think so if any of the following events were to happen:

(1) If Bernanke gives up QE.

(2) If Stephen Harper announces a deficit budget in the order of 150 billion or more (its is currently projected at 45.4 billion).

(3) If the US Congress makes serious cuts or attempts to balance the US federal budget.

(4) If the Chinese and other foreign investors decide to abandon Canada.

Let’s discuss each of these issues:

(1) If Bernanke gives up QE. I fully expect him to announce QE 3 in the next few months.  If he doesn’t continue to implement QE then the US government will have to make serious cuts of a trillion or so dollars from its current spending.

(2) If Stephen Harper announced a deficit budget in the order of 150 billion or more.  The Canadian population is about 1/10th that of the USA.  Therefore, the Canadian deficit would have to reach 150 billion in order to match the magnitude of the US deficits of 1.5 trillion.  I don’t see this happening under Harper’s watch.  In fact the trend is that the deficit is dropping in Canada.

(3) If the US Congress makes serious cuts or attempts to balance the US federal budget. This won’t happen until a cost cutting president gets elected.  It may actually never happen.  But the new Republican House is arguing over small cuts which won’t make any difference in a 1.5 trillion or so deficit.  Cut a few hundred billion out of that, and you are still over $1 trillion.

(4) If the Chinese and other foreign investors decide to abandon Canada. Right now, China, Korea, Thailand, Japan are all pouring money into Canadian resources.  Heck, foreigners are even buying our sovereign debt.  I see this trend continuing, as Canada has what these economies need, commodities.

The economy in the US is bad.  I’ve lost money in the US in a bad real estate deal started in 2008.  You won’t see me fall into that trap again unless the secular trends change.  My feeling is that my reasons for shorting the US dollar haven’t changed because the loonie has improved to $1.03 US.  This is a sign of secular trend not a buying opportunity for US stocks.

And if you ask me why I expatriated from the US?  I’ll tell you now that it’s so that at least one of my dad’s four children will still be able to take care of him in his old age.

Update:  Why pick on the Financial Post and John Shmuel?  David Berman has a similar article at the Globe & Mail: “Bruised greenback an opportunity for Canadian investors.”  Like Shmuel, he makes it clear that the US dollar is at a low but doesn’t seem to deal with any of the secular trends that put it there and then irrationally states:

It seems likely that the worst of the freefalling is over, given that the factors that drove the dollar down – including massive deficits and stimulative monetary policies – will probably move in reverse as the economy improves.

But he provides no actual proof that the US economy is improving.  That’s just baseless optimism as far as I can see.  Personally, I doubt that the damage of the QE that Bernanke’s already done has run its course.  Some inflationistas believe that when the economy actually improves, that’s when we will see the full effect of monetary inflation, because then velocity and credit will also expand.

Jeet kune do investing II: Toyota RAV4

I consider a car a consumable not an investment.  Yet as an investor who strives to have “no style” –like Bruce Lee’s Jeet Kune Do, a style which is no style–today I signed a deal to buy a second RAV4 in two years.  This is not a necessity.  We do have the flimsy excuse that my assistant’s car has given up the ghost and he can now purchase my 2001 Pontiac Montana which probably has at least three years of life to go.  I could have driven it for a lot longer.  But here is why I’ve decided to buy the RAV4 now instead of waiting:

The price was identical to last year’s purchase, though the financing was a little different.  Toyota was under a lot of pressure last year because of all the negative publicity and Congressional scrutiny.  I chalked up this political harassment to Toyota’s main competitor being the US government itself, seeing as Obama had just bought two car companies, GM and Chrysler with taxpayers’ money.  So I felt that the bad publicity and the political harassment was unfair, and that Toyota was like a value stock, and besides, C.J. (my wife) needed a car.  You buy a value stock when you know the fundamentals are sound, but the market has abandoned it.  Toyota, which had become the number one car manufacturer in the world, had never offered 0 % financing until last year, when we bought C.J.’s RAV4 with 48 months 0 %; and this year’s RAV4 I’m getting at for 36 months 0 %.

Once I drive that car off the lot next week, Toyota Credit will have floated us over CDN $70,000 at 0 % (my RAV4 and the remaining debt on C.J.’s).  Why is that a jeet kune do move?  Because in times of inflation or hyperinflation, debt is the best hedge.  I am anticipating that cars are going to go up in price in the next few months because of commodity inflation, and 0 % financing will be an historic anomaly because credit will become increasingly expensive–to be honest I was surprised that anyone would still offer 0% today.  I expect the US dollar to experience hyperinflation in the near future.  The Canadian loonie will likewise experience high inflation, though not hyperinflation, as the Bank of Canada seeks desperately and unsuccessfully to keep the loonie at par with the greenback.  My gut feeling is that inflation will pay for all of the depreciation on both of these vehicles, and three years hence we will have become the clear winners, for we will have paid Toyota back in devalued currency.   If not, well, we will have paid no interest on the loans, so no big deal.

Finally, when hyperinflation hits the world and believe me, I think it is already well under way, people will be desperate to get their hands on real goods, for their currency will be increasingly worthless–and the bottom may fall out of the real estate market too.  As for cars, they are a real good.  Consider this anecdote from the colorful South American hyperinflationista, Gonzalo Lira:

A true story: In ’73, at the height of the Allende-created hyperinflation, an uncle of mine, who was then a college student, was offered an apartment in exchange for his car. That’s right—an apartment. He owned a crappy little Fiat 147—a POS if ever there was such a thing—but cars in Chile in the middle of that hyperinflation were so scarce, and considered so valuable, that he was offered an apartment in exchange. To this day, my uncle still tells the story—with deep regret, because he didn’t follow through on the offer: “That Fiat was in the junkyard by ’78, but that apartment still stands! And today it’s worth nearly a half a million dollars!” Actually, I think it’s worth a bit more than that.

In the style that is no style, the jeet kune do investor must be able to anticipate the future.  The best way to do that is to study the past.

A note of caution:  this is not a recommendation to the esteemed readers of this blog to go out and buy a car.  It relates to our personal circumstances and investment style–or no style (see Jeet kune do investing I).

Canada’s currency manipulation: the inmates are in charge of the loonie bin (update 2)

UPDATE 2:  I asked Denis, my economist friend, how much of the US treasuries is owned by the Canadian government and how much would be owned by the private sector, and he suggest consulting the Bank of Canada balance sheet.  It is clear that the total assets on the balance sheet are 60.8 billion, which means that there is no way that the government of Canada could have lent $134 billion to the US, and that most of the ownership of these US securities must be in the Canadian private sector and can be explained by covered interest arbitrage.  Nevertheless, the reason why this arbitrage happens is because the Bank of Canada has kept the interest rates at low levels and is therefore to blame if the loonie is inflating like crazy.  Denis provided me with the following chart of interest rates:

UPDATE:  Thanks to the comment by blogger 101 Centavos, I finally asked my local Canadian economist if he could tell me what the number $134 billion means.  He says it is not the Canadian government alone that holds this debt, but all Canadian holders both sovereign and private.  I am going to try to reach him by telephone for clarification.  Meanwhile, in the words of the ever opinionated Emily Latella of Saturday Night fame, “Never mind”.

[Please note: the updates above are intended to substantially correct  what follows, which is the original post]

I am thinking about writing a blog for the American Thinker about the announcement that China would spend another 5.4 billion in the Canadian resource sector, this time to buy 5.4 billion of Encana’s natural gas holdings.  My view is that China’s purchases of Canadian resources is more about diversifying themselves out of US treasuries.  But  I found a table updated in November 2010, which shows that the Chinese have actually increased their US treasuries by $265.3 billion since November of 2009 (the chart only goes back that far).  Meanwhile, one stat jumped off the page.  In that same period, Canada has increased its holdings of US debt by $84 billion! I am shocked.

Canadians greatly fear the death of the manufacturing sector.  So now they will tolerate this.  But I am dismayed and shocked that our government is manipulating the Canadian dollar so that it will not rise against the US.  The immorality and the bad management of this situation is beyond words.

A couple years ago, I thought that given the bad fiscal policy of the US government would lead to the loonie soaring against the US dollar.  But now I see that rather than allow that to happen, the Canadian government is subsidizing the American lifestyle and the American bubble.  So that finally explains to me why the loonie remains at par and why price inflation is slow to happen in the US–why price inflation is happening in Canada the same as elsewhere in the world.