Carbon Emissions, 1990 - 2009

In an article titled "O Canada", The Economist points out that Canada recently withdrew from the Kyoto protocol. The Kyoto protocol does not apply to the world's two largest emitters (China and the US). The huge increase in emission by countries like China, Turkey, Australia and Spain are cause for concern and make it more difficult to engage in future climate treaties. Domestic energy policies focused on a low carbon economy are the best way to go, but these seem to be the most difficult politically. Since about 2/3 of global greenhouse gas emissions comes from energy, any serious effort to reduce emissions is going to have to come from reducing fossil fuel consumption and increasing renewable energy. Climate change, energy security, peak oil, new technology and green consumers are all examples of big drivers of renewable energy. Green jobs, a topic that is very much discussed by politicians, is not necessarily a good argument to put forth.We still have time to build a clean and secure energy future, but the window of opportunity is closing fast.

Renewables are the fastest growing component of the energy mix, but renewables account for a small proportion of total energy demand.

Data sourced from REN21

M2 to Gold and Inflation

By most conventional measures of inflation, like the CPI, inflation does not appear to be too great of a problem for developed economies. For the US, inflation is running at 3.5% per year while for Canada it is 2.9% per year. The Canadian inflation rate is near the upper band of the Bank of Canada's target rate of 3% but so far, there is no strong indication from the Bank of Canada that it will raise interest rates in the near future. Inflation rates in China and Britain are slightly higher than 4% per year while Japan is experiencing deflation.

Another measure of inflation is to compare the M2 money supply with gold prices. The chart below shows this ratio for the US. The money supply is measured in billions of dollars and gold is measured in dollars per ounce which means that the vertical axis is measured in billions of ounces of gold. By this measure, inflation is a much bigger problem and more closely resembles what happened in the 1970s. Notice also, that the M2 to gold price ratio is indicative of equity performance. During the long bull run in equities (1980-2000) the ratio was rising. Since 2000, however, the ratio has been falling indicating a drop in the real value of money. Today's $9.6 trillion dollars of US M2 only buys 5.5 billion ounces of gold. Stocks do not do well in inflationary environments.

 

One other point. The calculation of US CPI is somewhat controversial (especially with respect to substitutes and hedonics). In the 1980s and 1990s, changes were made to the way that the CPI was calculated. If the original method of calculating the CPI is used, then current US inflation is running above 10%.

More Holidays Please, We're Canadian

The Economist has an interesting chart showing employee holiday entitlement in different countries. Workers in Austria, Greece, France and Spain enjoy the most number of holidays per year, while workers in Canada have the fewest.

Fewer holidays might mean that Canadian workers are more productive. According to the Conference Board, however, Canadian productivity is downright dismal. There are several reasons for Canada's low productivity including low investment in machinery and equipment, low R&D intensity, weak innovation record, and a low number of Canadians with advanced degrees in science and technology. There is also some evidence that workers in Canada are paid less than their marginal product of labour.  So, Canadian workers enjoy fewer holidays and are less productive than workers in many other countries. Perhaps, we need more holidays.

More Ominous Signs

Michael Riesner, Head Equity Technical Analyst, at UBS has put together an interesting set of slides (UBS Cross Asset Overview). In the slides there is lots of evidence of divergence and major tops being made. 2012 could be a difficult year for equity markets around the world.

Is the US Headed for a Recession?

Lakshman Achuthan of ECRI sticks with his call from September 30 that the US is headed for a recession.   While many people focus on the GDP numbers, the Gross Domestic Income (GDI) numbers are more accurate and as he talks about in the video, GDI is barely growing. Add this to concerns about the job market, retail sales and industrial production and there is enough negative news to indicate the making of a recession. Moreover, some of the yield spreads are now indicating recession. In particular, the spread between BB (Junk Bonds) and AAA Bonds or Government treasuries is now at recessionary levels.

There are problems in other countries as well. Of the 8 countries regularly tracked by the St. Louis Federal Reserve, Australia and Germany are the only two where real incomes coming out of the most recent recession are above their averages. Paradoxically, Germany has been benefiting from the debt mess in Europe as a low euro is good for Germany's exports.

A Tough Year for RIM

It has been a tough year for Research in Motion. RIM's share price is down almost 70% on the year to date.  The systematic risk, as measured by beta, doesn't look too bad as it is hovering around 1. The beta values are calculated using a rolling window of 200 days. Technically, however, the stock looks weak. On the positive side, Jim Cramer recently released RIM from the sell block meaning that in his view, RIM is no longer a sell. There is lots of talk about what RIM is worth and what its next move will be but for now the picture is not bright.

Sector Rotation for November 30, 2011

At the end of each month, I rank a selection of  Canadian ETFs according to their price strength. The ranking is based on a simple average of three month returns, six month returns and twelve month returns.

Canadian size portfolios

iShares S&P/TSX 60 Index (XIU.TO)

iShares S&P/TSX Completion Index (XMD.TO)

iShares S&P/TSX SmallCap Index (XCS.TO)

Canadian industry sectors

iShares S&P/TSX Capped REIT Index (XRE.TO)

iShares S&P/TSX Capped Energy Index (XEG.TO)

iShares S&P/TSX Global Gold Index (XGD.TO)

iShares S&P/TSX Capped Financials Index (XFN.TO)

iShares S&P/TSX Capped Info Tech Index (XIT.TO)

iShares S&P/TSX Capped Materials Index (XMA.TO)

International portfolios

iShares S&P 500 Index C$-Hedged (XSP.TO)

iShares MSCI EAFE Index C$-Hedged (XIN.TO)

iShares MSCI Emerging Markets Idx (XEM.TO)

Claymore BRIC (CBQ.TO)

Commodities

iSHARES GOLD TRUST (IGT.TO) Ticker XCS XEM IGT XEG XFN XGD XIT Rank 12 9 1 11 10 3 14 Above ma(10)? No No Yes No No Yes No Ticker XMA XRE XIU XMD XSP XIN CBQ Rank 7 2 6 5 4 8 13 Above ma(10)? No Yes No No No No No

Renewable Energy Base Increases in 2010

In 2010, there where some big increases in the usage of renewable energy to generate electricity. Between 2009 and 2010, solar base increased 70% while wind base increased 24%. Asia experienced the biggest increase in renewable energy projects.

Rising Production Costs of Oil

In the IEA's latest edition of their World Energy Outlook, global oil consumption is expected to rise from 88 million barrels of oil per day to 99 million barrels of oil per day in 2035 (an average annual growth of about 0.5% per year). Most of the increase in oil consumption will come from emerging economies while most of the increase in production will come from the Africa and the Middle East. The costs of oil production are expected to rise in most places in the world. Latin America is expected to experience the largest increase in breakeven costs due to their deep water oil projects. Breakeven costs in North America are not expected to increase that much which seems odd considering the high costs of producing from non-conventional sources like tar sands and shale deposits.

China's Foreign Exchange Reserves

Due to strong exports and foreign investment into China, China has been piling up an enormous amount of foreign exchange reserves (currency, gold and special drawing rights with the IMF). Approximately 2/3 of these reserves are in US dollar assets (US treasury bills, US treasury bonds). A linear regression model indicates that China is accumulating an average of $33 billion per month.At the end of September 2011, China held $3.2 trillion in foreign exchange reserves.

A High CARBS Diet for Economic Growth

Thanks to Richard Park for bringing this important new acronym to my attention. Citigroup analysts have defined a new group of countries Canada, Australia, Russia, Brazil, and South Africa (CARBS).

"

What are the CARBS? They are the countries that combine very large commodity assets with high stock market liquidity. In many ways, they have exhibited similar characteristics so far over the course of the commodity cycle.

What have they got. The five CARBS economies have some 29% of the global landmass, inhabited by only 6% of the world’s population, and are thus disproportionately important as exporters of commodities. They produce between a quarter and a half of most key commodities."

The CARBS have a large share of the world's resource assets and a large share of global production of these assets. The increasing importance of resource scarcity and population growth indicates that resource exporters like the CARBS should do well in terms of economic growth.

Here are how the CARBS compare on a number of different indicators.

Global House Prices for 2011 Q3

The Economist's global house prices indicator shows housing in Australia, Canada and France as  looking overvalued on several  measures (house prices, prices against income, prices compared to renting).

Euro North vs Euro South

The great divide between Euro countries in areas like unemployment, productivity, competitiveness, and investment makes it seem rather obvious why a common currency makes little sense.

Investing in 5 Year US Government Bonds

With so much uncertainty affecting global financial markets, it is difficult to find good investment opportunities. The response has been a flight to safety. If you cannot make money at least try to preserve what you have. In the recent 5 year government bond auction the yield fell below 1% for the first time ever. With these record low yields, negative returns are becoming the norm.

Swiss Monetary Base

In a recent post I presented a chart showing how the US monetary base has been increasing dramatically. Under normal situations, an increase in monetary base expands broader money supply measures like M2  because of fractional reserve banking. If banks hoard the money and don't loan it out, then increases in the monetary base have little impact on the broader money supply measures. In other words, the money is not getting into the hands of consumers and businesses. Now, the Swiss central bank is doing the same thing.
Well, at least there is no fear of inflation.

On Goldman Sachs

Here are two interesting posts about Goldman Sachs. First, it is harder to get into GS than it is to get into Harvard. 300,000 people applied to GS in the past 2 years and only 4% were hired. Harvard's acceptance rate is 6.2%. Second, with the appointment of Mario Monto as Italy's new Prime Minister GS may be ready to take over the world.

Be Fed Chairman for a Day

The San Francisco Fed has a neat interactive game that tests your ability to be a Fed Chairman. Try running the model with a low federal funds rate (which the Fed has been doing over the past few years).

Game Theory Tells Us the Euro is Dead!

Tyler Durden has a very nice post showing how game theory can be used to analyze the current euro zone disaster (see here). This is a very interesting must read for followers of game theory. Here is the game. Question: is there a dominant strategy?

Skiing in Dubai

For BSUS 6600 students. Did you know that you can ski in Dubai? While it may be 100 degrees F outside in the desert, it is a cool 28 to 30 degrees F inside. The facility has 5 runs varying in difficulty from beginner to expert. The energy requirements are huge. Jeff Rubin writes in his book that it takes an energy requirement equal to approximately 3,500 barrels of oil per day to run the complex.

A Big Jump in CO2 Emissions

An interesting post from Clean Break about a big jump in CO2 emissions.

"The bad news: Emissions from the United States, China, India and other developing countries took a giant leap in 2010, bringing total global emissions 6 per cent higher than the previous year, according to the latest data from the U.S. Department of Energy."

A 6% increase in CO2 from one year to the next is a huge increase. Reducing CO2 emissions down to 350 ppm, a level deemed safe, becomes increasingly difficult when emissions are growing so fast.

A Shakeout in the Solar Industry

Thanks to Tej Kumar for sending me these two interesting stories (here and here) about how the solar industry is going through major restructuring. One challenge facing solar makers is that the price of polysilicone (a key ingredient in the manufacturer of solar panels) has fallen dramatically since 2008. The low price of polysilicone is knocking smaller less competitive companies out of the market place. Polysilicon accounts for one quarter of the cost of a finished solar panel (see here). While lower prices are good for consumers and should help to spur wider adoption of solar power, low prices eat into profit margins and this puts pressure on companies to find ways to increase competitive advantage. For large well organized companies, reducing costs might be enough. Sunpower, a large US company that we study in week 3 of BSUS 6600 is looking to cut next years operating costs by 10%. First Solar, the other big US solar company is looking for ways to consolidate its manufacturing. For other companies, vertical integration or horizontal integration are obvious choices to remaining in business. For some companies, survival through M&A activity may be the only option. Lower prices for polysilicone also puts pressure on governments to reduce or eliminate generous feed in tariffs. Germany and Spain have already cut subsidies for solar power and Ontario is currently reviewing its micro FIT program. On top of this,  the euro debt crisis is slowing solar panel installation in Europe.

The impact on the share prices of publicly traded solar companies has been a disaster. Over the past 6 months, for example, a  basket of solar stocks (in blue, grey is the S&P 500) has lost 50% of its value.

Greece Buying More Oil from Iran

Given the Greek financial mess, one wonders who is selling oil to Greece. Here is a story from Reuters about where Greece is buying oil.

"More than two dozen European traders contacted by Reuters at oil majors and trading houses said the lack of bank financing has forced Greece to stop purchasing crude from Russia, Azerbaijan and Kazakhstan in recent months.

Greece, with no domestic production, relies on oil imports and in 2010 imported 46 percent of its crude from Russia and 16 percent from Iran. Saudi Arabia and Kazakhstan provided 10 percent each, Libya 9 percent and Iraq 7 percent, according to data from the European Union.

"They are really making no secret when you speak to them and say they are surviving on Iranian stuff because others will simply not sell to them in the current environment," one trader in the Mediterranean said."

Imports of Iranian oil into the US are subject to sanctions but oil imported from Iran is fully legal in Europe and Asia.

PIIGS and their Bond Yields

The yield spread on 10 year Greek bonds over 10 year German bunds has attracted a lot of attention of late, and with good reason now that the yield on Greek bond yields is 32% higher than on German bunds. The spread between Portugal 10 year bonds and German 10 year bunds is also in double digits. The spreads on Italian and Spanish debt are around 5%. Not too shocking except that, in the case of Italy, Italy has $2.6 trillion dollars of debt outstanding (which is more than all of the other PIIGS combined). In order to save the euro, the European Central Bank is going to have to crank up the printing presses to print massive amounts of euros although German's and any students of the Weimar Republic would resist this.

Gold Price Seasonality

There have been lots of analysts suggesting that now is a good time to buy gold because gold prices exhibit seasonal patterns and returns are highest in November and December. As the chart below shows, November and September are the best months while October, June and March are the worst months.

Sector Rotation for October 31, 2011

At the end of each month, I rank a selection of  Canadian ETFs according to their price strength. The ranking is based on a simple average of three month returns, six month returns and twelve month returns.

Canadian size portfolios

iShares S&P/TSX 60 Index (XIU.TO)

iShares S&P/TSX Completion Index (XMD.TO)

iShares S&P/TSX SmallCap Index (XCS.TO)

Canadian industry sectors

iShares S&P/TSX Capped REIT Index (XRE.TO)

iShares S&P/TSX Capped Energy Index (XEG.TO)

iShares S&P/TSX Global Gold Index (XGD.TO)

iShares S&P/TSX Capped Financials Index (XFN.TO)

iShares S&P/TSX Capped Info Tech Index (XIT.TO)

iShares S&P/TSX Capped Materials Index (XMA.TO)

International portfolios

iShares S&P 500 Index C$-Hedged (XSP.TO)

iShares MSCI EAFE Index C$-Hedged (XIN.TO)

iShares MSCI Emerging Markets Idx (XEM.TO)

Claymore BRIC (CBQ.TO)

Commodities

iSHARES GOLD TRUST (IGT.TO) Ticker XCS XEM IGT XEG XFN XGD XIT Rank 9 12 1 13 6 3 10 Above ma(10)? No No Yes No No Yes No Ticker XMA XRE XIU XMD XSP XIN CBQ Rank 7 2 8 5 4 11 14 Above ma(10)? No Yes No No No No No

US Money Supply and Bank Excessive Reserves

For ECON 2000 students, here is a graph showing how US M2 has responded to an increase in base money.

 Here is a graph showing excess reserves at banks.

QE2 and Foreign Banks

Here and here are interesting posts about where the money from QE2 went. Much of the QE2 money went to foreign banks, which is not too surprising, given the way the Fed operates.

Big Government Defaults Since 1999

Here is a nice chart showing economic growth before and after some big government defaults.The economies of Argentina, Uruguay, Russia and Indonesia grew faster in the years after the default. An orderly default allows countries to wipe the sleight clean and re-organize economic priorities in an orderly manner. Default should only used as the last option, but sometimes it is a necessary step to take for countries to rebuild themselves. How the situation in Greece plays out is currently an unanswered question but financial markets have already priced in a partial default with the expectation that holders of Greek government debt are likely to get between 10 and 20 cents on the dollar. This is much lower than the 50% writedown that EU leaders recently agreed to.

Output Gaps in OECD Countries

The OECD Economic Outlook has a table showing output gaps for OECD countries. The output gap is defined as the percentage change of  actual output from potential output. Potential output is also known as the full employment or natural level of output. This is the amount of output that could be produced if the economy used all of its resources efficiently.

The effects of the most recent recession are clear as all of the countries recorded negative output gaps in 2009 and 2010. Canada's -5.2% output gap in 2009 was slightly above the OECD average while Canada's forecasted output gap for 2011 and 2012 are slightly above the OECD average. .Many countries are expected to have negative output gaps in the years 2011 and 2012. Greece, for example, is forecast to have a negative output gap of 11.1% and 11.2% in 2011 and 2012 respectively.

General Fusion's New Approach

For BSUS 6600 students there were some questions last class about the state of nuclear fusion.Here is a link to a story about Canadian company General Fusion. General Fusion is a venture capital backed start up company trying a different approach to nuclear fusion.

In related news, here is a link to a story about Terrapower, a start up company partly funded by Bill Gates.Terrapower is working on an advanced nuclear reactor that uses the more abundant uranium 238 rather than the rare uranium 235 used in conventional reactors.

Or, perhaps more research should be done on the liquid fluoride thorium reactor. The fact that China is now interested in this technology should give other countries a push.

Peak Oil and the Quest for Energy

Best selling Pulitzer-Prize winning author Daniel Yergin has a new book out The Quest: Energy, Security and the Remaking of the Modern World.  The world will never completely run out of oil, but the low cost easily accessible deposits are now in decline forcing the exploration and production of oil from more expensive and risky areas. The world demand for energy is going to grow enormously in the coming years and in the book Yergin sets out the factors to consider as the world moves towards energy transition. In essence, the $6 trillion global energy industry is up for grabs. Yergin's view is that technology, innovation and energy efficiency will help to offset rising oil prices. Coming in at slightly over 800 pages this is one heavy read. Here is a link to a Harvard Business Review blog that suggests Yergin's view might by overly optimistic.

Corporate Tax Rates

From the Guardian, here is a link to an interesting article showing how corporate tax rates vary across countries. Among the OECD countries, America (39.2%) and Japan (39.5%) have the highest corporate tax rates. Canada has a 29.5% corporate tax rate. Among the OECD countries, Ireland has the lowest corporate tax rate at just 12.5% but this has not saved Ireland from being one of the PIIGS.

While the high US corporate tax rate looks ominous, the vast tax loop holes in the US tax code make it possible for some companies to pay very little tax.

 

 The US is one of the only developed countries to not have a national consumption (sales) tax. European countries have a valued added tax (VAT) and here in Canada we have a GST. Herman Cain has recently suggested the the US should adopt his 999 tax plan. A 9% flat tax on income, a 9% flat tax on sales and a 9% flat tax on corporations.

Negative Electricity Prices in Germany

For BSUS 6600 students, here and here are interesting stories on how Germany's push for more renewable energy is actually generating negative electricity prices. Renewable energy gets priority access to the grid, so on days when the wind blows and the sun shines fossil fuel powered plants are stopped from running at full capacity to make way for the electricity being generated with renewables.

"The 15 mile-per-hour winds that buffeted northern Germany on July 24 caused the nation’s 21,600 windmills to generate so much power that utilities such as EON AG and RWE AG (RWE) had to pay consumers to take it off the grid."

September 2011, a Bad Month for the TSX

The TSX closed out September of 2011 at 11,623.8 which was a 9.39% drop from the last trading day in August. Using TSX price data from January 1957 to September 2011, the September 2011 drop was the 16 worst monthly return on the TSX. The TSX was down 13.48% over the third quarter of 2011.

Worst Months on the TSX

month	TSX	returns(%)
1987-10	3019.3	-25.66
1998-08	5530.7	-22.57
1980-03	1797.6	-19.86
2008-10	9762.8	-18.55
2008-09	11752.9	-15.85
1981-09	1883.4	-14.47
2001-02	8078.7	-14.31
1974-08	919.9	-13.89
1969-06	1008.6	-11.46
1973-11	1182.6	-10.94
1982-06	1366.8	-10.87
1957-08	520.2	-10.43
1979-10	1579.3	-10.37
1970-05	828.2	-10.26
1974-04	1099.9	-9.94
2011-09	11623.8	-9.39