Click here to save world.

Something that really needs to stop is otherwise respectable news outlets running stories that include a line similar to “A Facebook group has started and currently has XXXX members”.  This is a totally invalid measure of the support for a topic or group or ANYTHING!  In the last few weeks we have all heard about the group that wants to have a public inquiry into how the police handled the security at the G20 summit. This quote is from a QMI Agency story that ran on July 9th.

“Almost 60,000 people have taken to Facebook to demand a full public inquiry into Toronto police action at the G20 Summit last month.”

Oh WOW!  You mean to say that 60,000 people are SO enraged about this situation that they spent 4.76 seconds to join a Facebook group? That really gets the point across. Joining a Facebook group is exactly the type of protest that everyone loves.  The people love it because they don’t actually have to spend any money, time or effort of any kind to feel like they are fighting the man. The government loves it for similar reasons. People all feel like they are doing something and the government can basically ignore it and it costs them nothing to control. So I guess it’s good for everyone right? The problem is of course is that the cause is left in limbo.

I am using the G20 inquiry for this example but really we can say the same thing about any similar group. We cannot use the number of people in a Facebook group to gauge the number of people that REALLY want an inquiry because there is nothing behind the click. Just a click and boom you are done.  How about this?  Set up a paypal account and have a Facebook group that requires you to donate cash to join.  Something like $10 each minimum but as much as you want to give is fine.  NOW when you get 60,000 users you have at least $600,000 to spend on lobbyists or a legal team that could actually go to Ottawa and start forcing the issue. The other nice thing about this is that you know you have 60,000 people that are willing to give up at least one hour’s work at minimum wage to support the cause. I am guessing that there is a large difference between the number of people that are single click outraged and the number of people that are $10 outraged.

New look!

The site has not been around for that long but it needed an upgrade. The old look was the default for WordPress. This new look is the NEW default but with that totally sweet custom graphic you see above.  Bask! Bask in its originality!

Interest-ing. Bank of Canada at it again.

Well it’s July now and that means that we are approaching the next Bank of Canada announcement. On July 20th they will announce if they will raise interest rates again or not. In June when they were making their announcement it was basically taken as given that the rate would increase. At the time inflation was just over target and economic growth was looking good as well. The rate was raised by 0.25 which everyone expected. This allowed the markets to return to normal operation as it reestablished the operating band.(See the May 28th post if you forget what this is)

At the end of my earlier post on interest rates I mentioned the market lag. Many people read the summaries of interest rate changes and think that it all seems pretty easy. Economy doing bad, put rate down to boost demand. Economy doing well, put rate up to cool it off. It has been established in Canada that any change in the overnight interest rate does not fully impact the economy for six months. This of course makes it much more difficult to know exactly how your changes will affect the economy. What if you predict a strong market and decide to cool it off with higher interst rates only to find that six months later there is an unexpected shock to the system? Now you have a system under shock and your decision to cool things off seems terrible because it amplifies the problem. It works the same in the other direction of course.

Jobs are looking good in Canada with StatsCan reporting that the Canadian unemployment rate dropped below 8% this week. We have recovered almost all of the jobs we lost in the recession. This is of course great news. A recovery ususally comes in the form of higher GDP first and then later, the return of jobs. So everything is looking good. Many people expect the bank to raise interest rates again on the 20th. This month it is a little bit different however. This time two days after the BoC releases their decision on interest rates they release a Monetary Policy Report. This lets us commoners know what Carney and crew are thinking. So we are looking at two possible scenarios.

1. Rates go up 0.25%. Report says the economy is looking strong and the time has come to raise interest rates so that we will have a cushion for any future problems. There will likely be some statements about how the inflation targetting and interest rate adjustment worked well and that our system is functioning as it should. Rightly so, if everything continues as it has been Canada is looking pretty damn good coming out of this.

2. Rates stay the same. Report says the economy is looking good but we have to be cautious as the world comes out of the worst economic slump since the Great Depression. It will mention that while the rates look good for now it can easily be readjusted again in September. The next chance to raise rates is September 8th,2010.

According to the BoC website core inflation is sitting at about 1.8% right now. Slightly lower than they would like. This is a tough choice but Phil’s prediction of the week is choice number two. We want to keep demand cranking so I don’t it is quite time to slow things down.  I could see a higher rate September.

The Americans are back in a growing economy but their jobs have yet to recover and now there is talk of austerity measures. If they start cutting spending too soon it could mean big trouble for their economy. Trouble for them is, of course, trouble for us.

Holy Shit! Tax!

Tomorrow is July 1st! HAPPY BIRTHDAY CANADA!  In order to celebrate we are going to implement a new style tax in Ontario.  HST. Harmonized Sales Tax.  Noone ever likes to hear the words “new tax” and the words usually cause people to go into a foaming-at-the-mouth tirade against whatever current government is implementing it.   In some cases however the idea behind the tax and all the steps that have been implemented with it are not entirely obvious to all the people the new tax will affect. 

Let’s go over the main idea behind the tax and why the government thinks it is a good idea. The main idea is that it decreases the amount of tax that companies will pay on input goods, the materials they use to make other goods and then resell.

That is, there will only be tax on the value added.   This means goods that firms use as inputs all become cheaper. Where they used to have to pay tax on everything they used to make their products now they don’t. What this means is that all goods become cheaper to produce.  When goods become cheaper to produce they become cheaper for the consumer.  This is not a short tem effect, meaning that it is going to take some time to kick in. This is probably what has people the most upset.  All they see is that some things that they only paid one low tax or no tax on before now have the full 13% of the HST.  Being upset is understandable, that is why the provincial government lowered everyone’s income tax last year and why they are sending out checks to people.  You get more if you are a family versus an individual.  The natural reaction to this is to say there is no way the firms are going to pass the savings onto the consumers!  Maybe not right away, but they will. That is the nature of a firm, to maximize profits.  Let’s drop a little game matrix down here and we’ll take a look at the likely outcome.  Let’s make some assumptions before we start. These assumptions help us to simplify the model.

  1. There are only two firms that make jewellery, Phil’s Gold Shop and Dalton’s Gold Shop.
  2. Customers know the price of items at both shops at all times.
  3. There is no collusion between the firms

So what we are saying is that if one firm lowers their price then all the customers will go to them to purchase goods..  This is going to be a hyper quick lesson on basic game theory. (The only kind I know) Please look at this table.

 

 

 Dalton

 

        Phil

 

Keep

Lower

Keep

6,6

0,10

Lower

10,0

5,5

 

We see the possible outcomes for the two jewellery companies when they either keep their prices high or drop them as their costs drop.  Notice that if one firm drops their price even a small amount they capture the entire market.  The first number is the profit Dalton makes and the number after the comma is what Phil makes in each set of circumstances.  The units don’t matter. So here is the quick reasoning that Phil might go through.

  • If Dalton keeps his price high and Phil keeps his price high they each make 6.
  • If Dalton keeps his price high and Phil lowers his price then Phil makes 10 and Dalton makes 0.
  • Phil is better off lowering his price if Dalton sticks with the high price.
  • If Dalton lowers his price and Phil keeps his price high then Dalton makes 10 and Phil makes 0.
  • If Dalton lowers his price and Phil lowers his price then each will make 5.
  • Phil is better off lowering his price if Dalton lowers his price.

When the best choice in both cases is the same this is referred to as a dominant strategy. This is the strategy that the firm will use.  Phil will lower his price. It is easy to see that Dalton will do the same.

I do realize that this is a very simple model but it is with simple models that we can begin to understand why certain elements of the market react the way they do on a larger scale. If there was collusion between the firms and they both kept their prices high then yes, they would make more money and prices would be higher but if just one person lowers their price (remember in the real world there are many more firms in each market) then it triggers a whole series of prices drops until firms are back to making normal levels of profit but with the lower cost of inputs.  This means prices go down. Lower input costs normally mean that firms hire more workers as well, but thats a whole other graph that I won’t show here.

The HST is obviously a vastly more complex issue but there are lots of places to read about it and I try to keep things a little different around here.

Swag!

I almost forgot! The G20 has inspired me to launch a new t-shirt.  Hopefully this will be the first of many! Check it out HERE.

The site is called Zazzle. You give the designs, they handle the printing and shipping and all that. Yes I make a tiny amount of money too.  So, buy one to show your support for globalization OR buy one if you are against globalization and love ironic t-shirts.  You can change the world with enough t-shirts!

G-G-G-G-G20!

The G20 summit/protest is over now and everyone is still trying to sort out what was accomplished.  I think the number one thing that everyone will notice about the news coverage is of course that police cars were burned.  Protestors set fire to police cars! That was the number one story coming out of this weekend.  As always the media focused on the few bad people at the protests and spent very little time discussing the tens of thousands of peaceful, legitimate protestors that showed up. They also did not spend a lot of time discussing the outcome and final declaration made by the summit attendees. 

Let’s deal first with the protestors since that seems to be the main focus of nearly all media attention. We will need to clarify right away that the famous term “black bloc” should not be capitalized. It is a protest tactic, not a specific group.  A bunch of people dress all in black so that they are difficult to tell apart. They mingle in with peaceful protestors and then break away at points to cause damage to property belonging to people they feel are destroying the environment or hurting the dolphins or oppressing them or whatever. They can then rush back into their large group and again be difficult to distinguish from the others.  Once they feel like they have smashed enough windows they all mass together and remove their black clothing, switch back to standard clothing and disperse into the rest of the crowd. All in all, a pretty effective tactic. They smashed a lot of windows and at one point lit a police car on fire, there might have been two burning police cars, not sure.  Anyway, no one knows what they want and everyone assumes they are just punk ass kids that want to smash things. From what I have read the idea is that in order to get the attention of people that only care about money you need to destroy the things they own and cost them money. 

The problem I have is that so many people are looking at these videos and saying that the police left these cars to burn and that for a billion dollars in security that there should have been police there to prevent this.  Many think these were bait cars and some even think that the people smashing them were undercover police officers. The famous “agent provocateurs”. I have no doubt that the police placed plain clothes officers in with many of the crowds, there were even a few videos of them breaking cover to grab the main trouble makers.  What I doubt is that the police burned their own cars. I have no proof either way so I guess there is not much to debate here.  Please don’t message me with the video of the Surete de Quebec officers posing as anarchist at past summits, I have seen it and I have no problem with what they were doing. My guess about what happened is that the police knew where these violent protesters were going, and that maybe they did leave those cars there. It sure became the focus for a lot of the most violent troublemakers.  The police kept the people that felt like smashing things contained in a certain area and allowed them to do their thing.  If they had gone in with shields and batons the violent people likely would have scattered and been much harder to control. Seems like a pretty good tactic by the police. 

As always the problem with the few violent protestors is that they over shadow the people there with legitimate concerns. 

This is what a real protest looks like.

A mass of people showing their views in public, peacefully.  I sure don’t agree with a lot of things in that video but they sure know how to protest properly. (On a side note:  Canada is saying that our foreign aid cannot be used for abortions? What the hell? We settled that issue years ago)  Notice how none of them are yelling things like I am a peaceful protestor. I am being peaceful! and the police are leaving them alone.  Now go look at any of the videos online of what people perceive to be over zealous police.  Hear anything similar in every single one of them?  The people that were getting arrested, for the most part , were in the wrong places.  Places they chose to be however. Not too much sympathy there.  I will admit that there are likely some people that got arrested that shouldn’t have but that will be sorted out. 

I will talk about the final declaration released from the summit tomorrow most likely. I will also try to wrap up the other bits of information I have left hanging in the past posts very soon.

More on BP and the gang

Today a U.S. Federal judge overturned the moratorium on deep water drilling. The moratorium had been put in place by U.S. president Barack Obama shortly after oil began spilling into the Gulf of Mexico.  This is a calm response to a situation which has been understandably causing a lot of people to react quickly to a situation which is highly emotional.

The moratorium called for 33 exploratory wells to that were being drilled in the gulf to stop at their next safe stop point. It also halted any new drilling permits from being issued for any deepwater wells, that is anything below 500 feet of water.

The problem with this type of action of course is that the government has no authority to impose this type of moratorium.  It is similar to many things outlined in Obama’s recent address to the nation.  Two other things that stand out right away are that the government is going to stop BP from paying out a dividend to stock holders and that they will have BP hand over 20 billion U.S. dollars immediately to an independent organization that will deal with paying out compensation to victims of the disaster. BP agreed to both of these things but did not need to.  I imagine BP did these things because if they didn’t they would have looked worse (somehow) than they already did.  BP and all of its subcontractors, so far, have not been accused, let alone convicted of breaking any laws, nor have they been cited for breaking any safety violations.  I am not saying that BP is not responsible for this mess but we have to maintain a level head when dealing with the outcome. 

Right now the limit on personal liability from the spill is something ridiculously low like 75 million dollars.  Right away a proposal was drawn up to increase the limit to 10 billion dollars.  Luckily, cooler heads prevailed and the bill was defeated.  They wanted to punish BP for the Deepwater Horizon spill but I imagine they finally realized they were not sure how this would affect the other 3800 wells in the gulf.  That’s right.  Last I check there are over 3800 wells in the gulf.  North America is thirsty for oil and we need to get it from somewhere right? Right now approximately 0.02% of the wells in the gulf are spilling oil. I guess everyone is fine driving their SUVs around with the oil being pumped out of the other 99.98% of the wells.  We have to remember that anything that the government does is going to affect all those rigs, and all the people that work on them or support them and everyone that buys what they produce.

One nice thing in the Obama address was that he hinted that he might use this to try and get people back on the green energy bandwagon. It was going pretty good there for awhile , then there was the whole recession thing.  I really hope this is a wakeup call to everyone to rethink how we get the energy we use.  I am not entirely sure people are making the connection between the oil spewing from that pipe into the ocean and the cars they drive to work every day. This would be the perfect time to try to get them to listen.

It will be interesting to see how cooperative BP is after the well is capped.  I am guessing that their PR department is basically saying to give in to any reasonable demands until the pipe is capped.  Then they can step back and as people start to forget about this and they can start to push back on the government a bit.  Oh, that PR department is probably also telling their CEO to shut the hell up.  Once the pipe is capped people will start to forget about this a little.  New seasons of American Idol and Survivor will start and everything can get back to normal. The front page of CNN will eventually scale back its coverage to a single link, something like “Gulf Update” or something along those lines. BP will still pay for the cleanup of course, but they can afford it. From what I understand they had about 40 billion US in extra cash each year so even if they dedicated 20 billion a year for the next few years they are still good to go. 

Oh, do you want a long term stock tip from me as a totally unqualified stock advisor?  Buy BP stock soon and hold onto it.  They are not going anywhere. The stock is sitting at $29.68 right now. It will likely go down a bit more until the pipe is actually capped, I expect it to rise soon after that and in the long run it should return to a value somewhere over $50.

This was a long one, thank you for reading.

Blowout Prevention. Billowing Pollution. The BP situation.

So the oil spill continues.  The blowout and sinking of the Deepwater Horizon occurred on April 21st, 2010. BP is scrambling to get the leak plugged but it seems more and more likely that the relief well, which should be complete in August, is going to end up being the final solution. On February 5th, 2010 BP submitted to the National Energy Board of Canada a document asking for the review of a policy it currently has in place.  You can see the submission here. Currently if someone wants to drill in the Beaufort Sea they are required to have the ability to drill a second relief well in the same season. They must be able to show what their plan is to get equipment in place and to create a second well within the same drilling season. This way you couldn’t run into the disastrous scenario where a blowout occurs, the oil spill begins and then the ice becomes too thick and you can no longer access the well to repair the damage. The oil spill would then continue until the next drilling season.   In the document BP explains all the wonderful things they will do to prevent a major oil leak that would not require a relief well.  If you want a good read try paragraphs 20-50.  They explain how amazing BP are at preventing oil spills based on all their experience in the Gulf of Mexico.  Blowout preventers, high safety standards, well trained staff and other things are all listed as ways that an oil leak would be prevented.   It’s too bad that the southern coast of the US had to be covered in oil before anyone realized this is all total bullshit.

Shock and Awe

There is only one way to describe my reaction to the Oliphant report that was released today. A total lack of  surprise.  The Oliphant commission was investigating the dealings Brian Mulroney had with Karlheinz Shreiber shortly after Mulroney’s time as Prime Minister of Canada ended. I will admit that I only read the executive summary of the report but I think this part of the report does a good job of describing the conclusions.

“The conduct exhibited by Mr. Mulroney in accepting cash-stuffed envelopes from Mr. Schreiber on three separate occasions, failing to record the fact of the cash payments, failing to deposit the cash into a bank or other financial institution, and failing to disclose the fact of the cash payments when given the opportunity to do so goes a long way, in my view, to supporting my position that the financial dealings between Mr.  Schreiber and Mr. Mulroney were inappropriate.” 

There you have it. Something that anyone with half a brain could have told you is now officially confirmed.  I guess it is good that this is now on the record and now they can enact new rules to prevent this kind of thing in the future.  It just does seem like something is lacking with this conclusion to the whole situation.  The wording of the statement is telling too.  It could easily have read “accepting cash” or “cash filled envelopes” but instead “cash-stuffed” was used. Definitely makes it sound worse. 

You can read the whole report at the official website. I doubt this is the last we will hear of this.

Our Friend Inflation.

 Back in March the Bank of Canada announced that inflation in Canada had risen to 2.1% for February.  As I have mentioned previously, the Bank of Canada targets an inflation rate of 2% right on.  Something must be done of course! This may not seem like a large difference but the expected inflation rate was lower.  What to do and why? (Is answering my own questions a valid literary style?  Yes it is.)

Eight times a year the Bank of Canada announced any changes it might make  to the target overnight lending rate.  Here is the schedule for 2010 

The overnight rate is the rate at which banks loan each other money if they need to borrow funds from one another when all the accounts clear at the end of the day.  Right now the overnight target is sitting at 0.25%.  This is as low as it can go.  There is what is called an operating band around the target rate of 0.25%. This means that at the end of the day the Bank of Canada(BoC , laziness kicked in) pays 0.25% less than the target rate to banks on any deposits they have left with the BOC.  It also charges 0.25% more than the overnight rate to lend money to the banks.  This of course means that overall the rate at which banks loan to each other should fall right in line at the target rate.  This may seem a bit confusing because the current rate is so low. Currently the rate that the banks get on their deposits and the target rate are the same. This is not the normal situation so consider an easier example.  If the BoC were to set the overnight target rate to 4% then it would lend money to the big banks at 4.25% and pay 3.75% on all deposits left at the end of the day.  At the current rate, banks do not want to leave money in the BoC because they would get 0.25%.  This means that they put their money somewhere else in the market.  This is good for the economy, yay!

Now the problem is that with low interest rates, there is more money on the markets. This means that our friend inflation rises. Since inflation is the BoC’s main target they need to do something about it. 

Here where it gets interesting (for some) in the next little while.  Since inflation is a bit too high and the overnight interest rate is the tool to control it, we can expect higher interest rates in the near future.  This means that June 1st we should expect a rate hike of at least 0.25%.  Since the inflation rate has slowed since February/March(the high level was in part because of the Olympics) the amount of the rise on July 20th is more uncertain.  It will likely be from 0 to 0.5%.  What this means is that the banks raise their lending rates which slows spending over the entire market.  

I will talk a little more about the lagged effects on the market and how the exchange rate is affected by interest rate changes in the next couple of days.

Edit: Originally I posted that the banks got paid 0% on their deposits when the target rate was at 0.25%. This was incorrect and was fixed on June 1st.

The Future, now. Since 2010.