PrefBlog

Weakness in the Canadian economy late in first quarter is stoking fears of contraction:

Despite the solid growth, the first-quarter result was well below the 2.8 per cent average estimate of economists, and a far cry from forecasts of more than 3 per cent from just a few weeks ago, testament to the disappointingly weak finish to the quarter. March’s real GDP was down 0.2 per cent month over month, even worse than the 0.1-per-cent decline economists had anticipated, marking the second straight month of contraction after a booming start to the year.
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In March, the big drag on growth was from the beleaguered energy sector, which slumped 1.5 per cent month over month. A sharp drop in drilling activity sent oil and gas support services down 14 per cent in the month, while oil and gas extraction fell 0.8 per cent. The manufacturing sector dipped 0.2 per cent in March, adding to its 0.9-per-cent slowdown in February. And retail sales fell 1.3 per cent, reversing course after two straight months of gains.

Overall, output from goods-producing industries slumped 0.8 per cent in March, their worst performance in six months. Services-producing industries were flat for the second straight month.

I confess that I’m surprised to see EU boffins say something sensible about the new economy:

European Union governments should not ban services like home-rental site Airbnb or ride-hailing app Uber except as a last resort, the EU says in new guidelines, seeking to rein in a crackdown on the “sharing economy”.

In guidelines seen by Reuters, the European Commission said any restrictions by EU member states on these new online services should be justified and proportionate to the public interest at stake.

“Total bans of an activity constitute a measure of last resort that should be applied only if and where no less restrictive requirements to attain a public interest can be used,” the draft document says.

In the case of room-renting sites like Airbnb, the Commission said banning short-term lets of apartments “appears difficult to justify” when limits on the maximum number of days apartments can be rented out would be more appropriate.

The guidelines will come as good news for the likes of Uber and Airbnb, which have faced outright bans or restrictions in some cities as established industry players complain of unfair competition.

There is fierce competition in the drones market to make the transition from toys to tools:

So Shenzhen-based DJI is pouring money into its development kit, which allows software developers to write their own applications for specific tasks, similar to the way Apple Inc. does for its iPhones.

Up for grabs is a market for aerial mining surveys, pipeline inspection, search and rescue, crop spraying and hundreds of other commercial tasks that’s expected to reach $127 billion by 2020.
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Farmers were some of the earliest civil adopters, using drones to identify differences in crop conditions. Yamaha Motor Co. has been dusting crops in Japan with UAVs for more than two decades. With the cost dropping for cargo-carrying drones, DJI and others are building crop-spraying and remote sensing vehicles that can help reduce chemical use and improve yields. It has been estimated that precision agriculture will account for about 80 percent of the U.S. market for commercial UAVs.
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The Rwandan government partnered with San Francisco-based Zipline to fly blood bags at 100 kilometers per hour to remote hospitals. Other to watch are Matternet in Menlo Park, California, and startup Flirtey, which said it made the first FAA-approved urban drone delivery of an emergency kit in the U.S. this year.

Steve Denning of Forbes comes up with a provocative but plausible explanation of US malaise:

• A study published in December 2015 by the National Bureau of Economic Research (NBER) shows that start-up activity has been slowing down in the United States for about three decades, dropping sharply over the past 10 years. New firms accounted for about 13% of all companies in the late 1980s, but only about 8% two decades later. In the 1980s and 1990s, small number of young, innovative, and dynamic companies grew at very high rates. But in the post-2000 period, startups contributed less to U.S. job creation than they did in earlier decades.

• The Kauffman Foundation reports that the percentage of adults owning a business has been declining since the 1990s, when the foundation first began to track that number.

• A study by the Brookings Institution found that the start-up rate (the number of new companies as a percentage of all firms) has fallen by nearly half since 1978.
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A rather more obvious suspect [for the cause of declining entrepreneurship] is the burden of Americans’ $1.2 trillion in student loan debt.
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A 2013 report by the think tank Demos found that student debt has a negative effect on income, by making borrowers more risk-averse and discouraging them from moving to another city or taking gambles on new jobs or launching a new business. Even more seriously, student loan borrowers save less early on in their lives, and they tend to be more conservative with their investments, due to constraints on income and credit. When even investing in a home seems too risky, launching a new business is even less likely.
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The student debt crisis is transforming the saving, spending and investment behavior of an entire generation, and is transforming the economy along with it. The trend is not a good one.

Through a set of collective missteps, America has opted to put a crushing debt burden on the segment of society that can least afford it and the group that has the most to contribute the future. This is not just a question of social justice: it is nothing less than an issue of national economic survival.

Unless lawmakers across the country take radical action to address the skyrocketing cost of college, and attendant student debt burden, we can expect U.S. entrepreneurship to continue its frightening decline.

Assiduous Readers who are amused at the emergence of Donald Trump and the Angry White Boys in the US should take a look at the Globe & Mail comments section any time there is a story on Vancouver real-estate. There is a huge population of old-stock Canadians who are entitled to a good career and a detached house in Vancouver. Now that the former is getting more elusive and the latter has roared out of reach for most, they are incensed at the crooks from China who have taken it all away from them; I wouldn’t be surprised to see a fringe party emerge in British Columbia in the next little while.

And finally, for your month-end interest and delectation, is the Official TSX Quote for HSE.PR.B:

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Yes, you read that right, 10.55-22.00, 1×5. I have not checked whether this lamentable state of affairs is due to inadequate Toronto Stock Exchange reporting or inadequate Toronto Stock Exchange supervision of market-makers.

Treasury markets, such as they were, were weak today:

Ten-year Treasury futures contracts for September delivery slid 14/32, or $4.38 per $1,000 face amount, to 129 9/32 as of 11:07 a.m. in New York, based on electronic trading at the Chicago Board of Trade. It was the biggest decline since May 18.
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The odds of a rate increase in June implied by federal funds futures climbed to 34 percent from 30 percent on May 27. They rise to 80 percent by year-end, up from 74 percent three days previously

Janet Yellen did some modest sabre-rattling:

Federal Reserve Chair Janet Yellen said the ongoing improvement in the U.S. economy would warrant another interest rate increase “in the coming months,” stopping short of giving an explicit hint that the central bank would act in June.

“It’s appropriate — and I’ve said this in the past — for the Fed to gradually and cautiously increase our overnight interest rate over time,” Yellen said Friday during remarks at Harvard University in Cambridge, Massachusetts. “Probably in the coming months such a move would be appropriate.”
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“The economy is continuing to improve,” she said in a discussion with Harvard economics professor Gregory Mankiw. She added that she expects “inflation will move up over the next couple of years to our 2 percent objective,” provided headwinds holding down price pressures, including energy prices and a stronger dollar, stabilize alongside an improving labor market.

Several regional Fed presidents, ranging from Boston Fed President Eric Rosengren to San Francisco’s John Williams, have in recent weeks urged financial market participants to take more seriously the chances of a rate hike in the next two months, pointing to continued signs of steady if unspectacular growth in the U.S. economy and the waning of risks posed by global economic and financial conditions.

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An interesting proposal for the stored-energy problem:

But there is another gravity-based energy storage system that does not need any water, and is even less energy and materials intensive. It’s called Advanced Rail Energy Storage (ARES).

Reminiscent of King Sisyphus of Greek mythology, ARES will use surplus wind and solar energy to move millions of pounds of rock uphill in special electric rail cars, converting thousands of megawatt-hours (MWh) to potential energy, enough to power a medium-sized city for several hours. It can sit there storing this energy as long as one wants. When needed, the rail cars roll back downhill, converting this gravitational potential energy to electricity that goes out onto the grid.
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ARES bridges the power gap between large scale battery and flywheel installations and the far larger pumped-hydro. With about an 80% efficiency, somewhat greater than pumped-hydro, ARES has a lower life-cycle cost than batteries, a higher energy-to-power ratio than flywheels and a greater efficiency and far faster ramp-rate than pumped-hydro or compressed air.

Too bad this wasn’t developed in Ontario – but we blew the budget on cheap crap.

Today’s news is that the BOC Policy Rate remains unchanged:

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.

The global economy is evolving largely as the Bank projected in its April Monetary Policy Report (MPR). In the United States, despite weakness in the first quarter, a number of indicators, including employment, point to a return to solid growth in 2016. Financial conditions remain accommodative, with ongoing geopolitical factors contributing to fragile market sentiment. Oil prices are higher, in part because of short-term supply disruptions.

In Canada, the economy’s structural adjustment to the oil price shock continues, but is proving to be uneven. Growth in the first quarter of 2016 appears to be in line with the Bank’s April projection, although business investment and intentions remain disappointing. The second quarter will be much weaker than predicted because of the devastating Alberta wildfires. The Bank’s preliminary assessment is that fire-related destruction and the associated halt to oil production will cut about 1 1/4 percentage points off real GDP growth in the second quarter. The economy is expected to rebound in the third quarter, as oil production resumes and reconstruction begins. While the Canadian dollar has been fluctuating in response to shifting expectations of US monetary policy and higher oil prices, it is now close to the level assumed in April.

Inflation is roughly in line with the Bank’s expectations. Total CPI inflation has risen recently, largely due to movements in gasoline prices, but remains slightly below the 2 per cent target. Measures of core inflation remain close to 2 per cent, reflecting the offsetting influences of past exchange rate depreciation and excess capacity.

Canada’s housing market continues to display strong regional divergences, reinforced by the complex adjustment underway in the economy. In this context, household vulnerabilities have moved higher. Meanwhile, the risks to the Bank’s inflation projection remain roughly balanced. Therefore, the Bank’s Governing Council judges that the current stance of monetary policy is still appropriate, and the target for the overnight rate remains at 1/2 per cent.

The Globe’s David Parkinson longs for more detail:

Beyond that, though, the Bank of Canada had surprisingly little to say. Even by the typically parsimonious standards of Bank of Canada rate statements, this one was on the short side. The bank squeezed in a very brief description of the current state of the country’s economy, without clarifying many of the most burning questions.

Most crucially, while the bank said it expects that the economy will “rebound” from the wildfire-related second-quarter slump, it stopped short of discussing the likelihood that this rebound will be enough to keep overall 2016 growth on track for the 1.7 per cent it forecast in April.

Does this delay the economy’s return to full capacity, the most critical variable in charting the Bank of Canada’s interest-rate path? Is that a significant risk that has emerged to the central bank’s outlook? If it is, the bank isn’t saying so.

One thing I really like to see when wandering around and looking at things is evidence that somebody has actually thought about something. There are so many details in life we do most of our activities on auto-pilot, but it is in business that I really like to see a bit of attention to detail. For instance, there’s a restaurant on Yonge Street that has chairs with racks underneath them. It makes all kinds of sense – the restaurant is close to Ryerson, popular with the kids there and one can well imagine that, particularly in winter, the floor’s going to get somewhat wet and dirty and the kids would really like to put their books and backpacks somewhere else. So the owner put in chairs with racks underneath, so this could be accommodated without losing a chair that could be used by another customer.

Yes, it’s a small thing. By itself it’s not going to make or break the business. But it indicates to me that when the owner went out on his chair-buying expedition, he thought about what would be useful and maybe even spent a little extra money addressing the issue. A small thing, but how often do you see it?

Which brings me to Personal Capital Corporation, which I mentioned on May 20 when news broke that IGM had put a chunk of money into the robo-advisor. It was just a short mention, but it did attract some attention … from Personal Capital Corporation, via eMail:

Good morning,

I’m [redacted] with Personal Capital, and I just wanted to thank you for writing that informative article covering IGM Financial’s investment in us!

For something like this where you mention us, would you be able to add a wealth management page link for “wealth management” in the paragraph over the Preferred Indices table? Here’s the URL to make things easier: https://www.personalcapital.com/wealth-management

Thanks so much for your time!

How about that, eh? Clearly, PCC has some kind of web-search robot that sends a list of mentions to somebody and that somebody tries to keep the buzz going in a useful manner … even when the mention is on an obscure specialist blog like this one. I’ve mentioned thousands of companies on this blog over the years and this is the very first time I’ve received an eMail like this. Good for PCC! I have no idea about the quality of their product or much else about them apart from what I’ve said … but if I was looking for a robo-advisor, either for myself or to recommend to friends or clients, Personal Capital Corporation would be on the long-list, for this reason alone.

So, new reader MA, “Content and Social Media” contact at PCC … this one’s for you: Personal Capital Corporation Wealth Management.

Speaking of robo-advisors, PWF’s venture, WealthSimple, is attempting to enter partnerships with advisors:

Toronto-based robo-advisor Wealthsimple Financial Inc. officially launched its platform specifically for financial advisors, dubbed Wealthsimple for Advisors, on Tuesday.

The platform, originally offered earlier this year as a pilot project for 50 advisors, is mainly intended for advisors who have clients with small accounts that don’t meet minimum account requirements, but that advisors don’t want to sever that relationship. Such an example would be a client’s child.

This platform allows advisors to maintain a relationship with those smaller account clients without spending time on the day-to-day management of the account, says Jason Goldlist, chief marketing officer with Wealthsimple. Instead, advisors can focus on accounts that better fit their business and minimum requirements.
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Advisors interested in working with the robo-advisor can invite clients via email to sign up for a Wealthsimple account. Wealthsimple then handles the investment management of those accounts. Advisors cannot create their own investment portfolios for clients on the platform or recommend their own products.

And I mentioned the automaker and mobility provider jostling yesterday – this also caught the attention of Bloomberg’s Justin Fox:

During a visit to Bloomberg last year, Renault and Nissan Chief Executive Officer Carlos Ghosn grumbled that Alphabet’s (at that point it was still Google’s) self-driving car was a “box” devoid of “seduction and attractiveness,” and said “the car industry will do everything it can to make sure that the product does not become a commodity.”

But auto executives are also familiar with Harvard Business School professor Clayton M. Christensen’s argument that if an innovation comes along that disrupts your way of doing business, there’s often not a whole lot you can do to stop it. The automakers cutting deals with ride-hailing companies are hoping that they can figure out an on-demand business model if it turns out they need to.

Can they? Tom Bartman, a senior researcher at Christensen’s Forum for Growth and Innovation at HBS, is dubious. “Business models can’t change,” he says. Once a business learns how to make money one way, it’s almost impossible to shift gears. Still, there is one slender reed of hope: “While businesses can’t change, corporations can.”

Assiduous Reader BarleyandHops provides two very good links in the comments to May 24. The first of these discusses massive factory automation in China:

One factory has “reduced employee strength from 110,000 to 50,000 thanks to the introduction of robots”, a government official told the South China Morning Post.

Xu Yulian, head of publicity for the Kunshan region, added: “More companies are likely to follow suit.”

China is investing heavily in a robot workforce.

In a statement to the BBC, Foxconn Technology Group confirmed that it was automating “many of the manufacturing tasks associated with our operations” but denied that it meant long-term job losses.
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Former McDonald’s chief executive Ed Rensi recently told the US’s Fox Business programme a minimum-wage increase to $15 an hour would make companies consider robot workers.

“It’s cheaper to buy a $35,000 robotic arm than it is to hire an employee who is inefficient, making $15 an hour bagging French fries,” he said.

And fast-food is indeed being robotically served up in innovation-crazy Japan:

But Pizza Hut in Japan will be the first major chain to utilize robots to actually serve customers in its pilot program later this year.

According to the Wall Street Journal, the company has ordered several models of Pepper, a humanoid robot that is also being tested in the cruise and airline industries, to take orders and accept payment. The program will be tested in select Japanese franchise locations by the end of the year. It’s powered by MasterPass, MasterCard’s digital wallet and mobile payment platform.

To place an order, customers can simply say hello to Pepper to begin the process. They can either tap an icon within the MasterPass digital wallet app through their phone or scan a QR code on a tablet the robot holds. As the customer orders, the robot responds by lighting up and using hand gestures– just like a real human.

An article in the Globe unabashedly discloses the actual reason for Proportional Representation’s popularity amongst certain members of the elite: backroom deals can be cut allowing the top end of the parties’ lists to be populated by those who are otherwise unelectable. They seem quite proud of this end-run around democracy. So … start hob-nobbing and donating now!

“We definitely want any reform that will increase our ability to affect who is being [elected] and to make sure we choose people who will actually promote women’s rights and other oppressed groups’ rights,” said Hilla Kerner, spokeswoman for the Vancouver Rape Relief and Women’s Shelter.
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Some European countries with proportional representation systems, for example, have more women in their legislatures than Canada. Ms. Blomme, a political scientist with the Broadbent Institute, said academic studies have shown that the system increases by up to 8 per cent the proportion of women in legislatures.

8%? In Canada, that’s about 27 seats … get those chequebooks ready!

PerpetualDiscounts now yield 5.56%, equivalent to 7.23% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.00% – OK, maybe just a smidge over – so the pre-tax interest-equivalent spread is now about 320bp, a slight (and perhaps spurious) narrowing from the 325bp reported May 18.

Hurray! Food delivery robots!

When the staff at Starship Technologies in Tallinn, Estonia are ready for lunch, they’ll order a few pizzas just like any other office. But they don’t have a human do the pickup or delivery. Instead, a two-foot high, forty-pound, self-driving robot on wheels will get the job.

The staff made up of engineers and project managers sometimes use a credit line with the local pizzeria. Or they’ll just put cash inside the robot itself. The machine is covered with carefully concealed sensors and nine cameras, so that on a bank of screens in the office, they can get a first-person view of its journey from a couple feet off the ground, traversing pavements and passing by pedestrians to pick up their order. Once they see the robot is in the pizzeria, they’ll hit a button to unlock the hatch so the restaurant can get the cash and put in the hot pizzas.

This is the future of delivery, according to Starship, whose robots are 90-99% automated, according to its CFO, Allan Martinson.

A fascinating example of technological disruption is blockchains in finance:

The risk posed by fraud in the $4 trillion trade-financing industry has prompted banks to start exploring distributed-ledger technology like the one that underpins bitcoin.

Standard Chartered Plc, which lost almost $200 million from a fraud at China’s Qingdao port two years ago, has teamed up with DBS Group Holdings Ltd. to develop an electronic ledger of invoices that uses a parallel platform to the blockchain employed in bitcoin transactions. Lenders such as Bank of America Corp. and HSBC Holdings Plc say they’re looking at blockchain for trade finance and other banking applications.

Blockchain proponents argue that the technology will change the face of banking, helping lenders cut billions of dollars in costs. Trade financing, a centuries-old banking mainstay, may become ground zero for blockchain adoption because it promises to do away with paper invoices and the fraud that accompanies them — if banks can come together around a joint platform.

There was a nice article on Bloomberg about Treasury duration management:

To lock in historically low interest rates, Belgium, Canada, France, Mexico, Spain, Switzerland and the U.K. have all sold debt maturing in 40 to 100 years since 2014, even if infrequently. Not the U.S., which in the interest of keeping sales regular has stuck to securities of three decades or less. That policy has made the globe’s biggest debtor a laggard in a key bond-market metric related to the average maturity of its securities. By this measure, the gap between the U.S. and its peers has never been wider.
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Yet by a gauge known as modified duration, a measure of debt’s price sensitivity to interest-rate changes that rises with maturity, it’s still trailing global peers. Typically, bonds with longer duration gain more when rates fall, and suffer steeper losses when rates rise.

For Treasuries, the figure is 6.2, compared with 8.9 for an index that tracks the sovereign securities of more than 20 other nations, Bank of America Merrill Lynch data show. This month, the gap between the two reached the widest since at least 2006. One of the starkest contrasts is with the U.K., which issues long-dated bonds for pensions and insurers. Its debt has a duration above 10, Bank of America data show.

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“The Treasury likes to see large, liquid markets, and something like a 50-year bond is not going to be particularly liquid,” said James Moore, head of investment solutions in Newport Beach, California, at Pacific Investment Management Co., which oversees about $1.5 trillion. “The Treasury is thinking about and balancing a multiplicity of objectives when they consider issuance, and liquidity and depth are some of them.”

The U.S. hasn’t exactly stood still. The average lifespan of the government’s debt is now about 69 months, up from 49 in December 2008, when it was ramping up short-term bill issuance as part of emergency spending during the financial crisis, Treasury data show.

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The Treasury’s Borrowing Advisory Committee, which includes some dealers, voiced concern over that risk in 2011, when the department last asked the group to consider ultra-long bonds. The topic has been discussed several times at quarterly gatherings since.

The primary buyers of very long-dated debt — pensions and insurers — tend to prefer higher-yielding corporate bonds. Microsoft’s 40-year bond last year was priced to yield 1.8 percentage points above 30-year Treasuries. And other investors may deem ultra-long debt too perilous because of the steep losses they’d incur should yields rise.

It’s interesting to see the car manufacturers jockeying for the new opportunities in fleet management – first, there’s Gett and Volkswagen:

Gett Inc., a taxi-ordering application that competes with Uber Technologies Inc., raised $300 million in a strategic investment from German carmaker Volkswagen AG to fund its growth in Europe and New York City.

Gett, based in Tel Aviv, Israel, has offered rides for as low as $1 and expanded its services to include deliveries of goods. The company hired Wells Fargo & Co. to find investors for the round, people familiar with the matter said in February. Volkswagen’s contribution brings total funds raised by Gett to more than $520 million, the taxi service said Tuesday in an e-mailed statement.

Volkswagen made the investment as part of a push to boost digital offerings and move beyond its diesel-engine manipulation scandal. Mobility services promise strong growth prospects and earnings potential in coming years, VW said Tuesday in a statement.
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With operations in over 60 cities worldwide, including London, Moscow and New York, Gett is a major ride-hailing provider and services will be expanded further as part of the alliance with VW. Last month, it completed its bid to buy London’s Radio Taxis in a move that brought Gett’s car fleet in the city to 11,500, a number the company says amounts to half of all licensed taxis in the city.
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Expanding digital services in connected cars is a cornerstone of VW’s strategy through 2025, which will be presented in mid-June. More than 250 employees are developing the plan, which will comprise eight key initiatives across the group, Mueller said last week at an internal management meeting at the carmaker’s Wolfsburg, Germany, headquarters.

Volkswagen is not the first car manufacturer to get involved in the ride-hailing business. General Motors Co. bought a 9 percent stake in Lyft for $500 million in January and Apple Inc. made a $1 billion investment in China’s Didi this month.

And, of course, Car2Go is a subsidiary of Daimler, while Zipcar is, perhaps more logically, subsidiary of the old-line car rental company Avis Budget, while Hertz is trying to develop the business as a sideline. Meanwhile, Toyota is investing in Uber:

Toyota Motor Corp. said it is making a strategic investment in Uber Technologies Inc. and will offer auto leases to the ride-hailing company’s drivers.

Uber declined to disclose the size of the investment. Toyota wasn’t immediately available for comment. By leasing Toyota cars, Uber will expand its existing program, which also includes Enterprise Holdings Inc.