On Guard for thee

WELDON’S MONEY MONITOR
December 7, 2010
MACRO-CANADA: We Stand On Guard For Thee …
I have always loved Canada. From the time I read the biographies of Bobby
Orr and Bobby Hull, as a kid, to the times I travelled to Toronto, Montreal,
Quebec City, Prince Edward Island, and the Gaspe Peninsula as a teenager,
to more recent visits to Vancouver for the World Outlook Conference …
…. not to mention my love of the national sport, Hockey, or my time living
with a bunch of „crazy Canucks‟ at Delta Kappa Epsilon, the „hockey frat‟ at
Colgate University, I have always had a place in my heart for Canada, and
for Canadians. From the Maple Leaf flag, to the Montreal Canadian‟s home
hockey jersey, I still feel warm when I hear the Canadian National Anthem …
…“Oh Canada, glorious and free, we stand on guard, we stand on
guard for thee”.
Indeed, Canadians should be … „standing on guard‟ … as the currency pushes
for a violation of „parity‟ to the US Dollar, which, in turn, has put downward
pressure on Exports relative to Imports, causing the Current Account Balance
to collapse into a deepening deficit … in synch with a tightening in monetary
conditions and an intensifying erosion in the core of the Canadian labor
market. Canadians should be on guard, for more macro-market turbulence.
Indeed, as noted in the chart below, Canada‟s Current Account Balance
plunged to its DEEPEST DEFICIT EVER during the 3Q.
Data scalpel in hand we carve into the Canadian Current Account Balance
data to reveal the following facts (all figures in CAD):
3Q Deficit of (-) 17.536 billion not only represents a record deficit,
but it also represents a „deepening‟ of (-) 35.1% relative to the 2Q
deficit of (-) 12.983 billion CAD … and … is (-) 90.9% „worse‟ than
the deficit of (-) 9.186 billion posted in the 1Q.
More pointedly, we note that the deepening deficit within the „terms of
trade‟ (ie: Net Exports) in Goods, pegged at (-) 4.299 billion CAD, relative to
the 2Q, „accounts for‟ 94.4% of the ENTIRE (-) 4.553 billion 3Q slide in the
total Current Account deficit.
Worse yet, the deficit of (-) 6.5034 billion CAD posted during the 3Q in „Net
Exports of Goods‟ … represents a dramatic deepening of (-) 192.3%,
nominally, over the last three months, relative to the 2Q deficit of (-) 2.236
billion CAD … and … defines a complete reversal compared to the 1Q Goods
surplus of +1.103 billion CAD.
Subsequent to the dramatic turn of events in Canada‟s Current Account
Balance as it relates directly to the „terms of trade‟ and a deepening deficit
in the Goods Account … we will be „standing on guard‟ as we await the
October Trade data (due Friday) covering the first month of the 4Q.
Thus we rewind and revisit the September data (via the chart below) which
revealed the second WORST DEFICIT EVER recorded in Canada, exposed in
the chart on display below, pegged at (-) 2.5 billion CAD … representing a (-)
66.7% „deepening‟ relative to the August deficit of (-) 1.5 billion CAD, which
itself represented the fifth deepest single-month deficit ever recorded.
Note the slide in the September Trade Balance, over the last couple of
years, as evidenced in the detailed data shown below:
Sep-10 …
Sep-09 …
Sep-08 …
Sep-07 …
Sep-06 …
Sep-05 …
(-) 2.500 billion deficit
(-) 0.804 billion deficit
+ 3.846 billion surplus
+ 2.741 billion surplus
+ 4.287 billion surplus
+ 6.276 billion surplus
Taking a different perspective on the Canadian Trade data for September,
we examine the chart on display below plotting Canada‟s Monthly Export
Total (white line in top window), versus the Monthly Import Total (orange
line), along with the „differential‟ (negative number equals trade surplus,
positive number means Imports outpace Exports, leading to a trade deficit).
Clearly, the 2007-09 crisis has changed the face of Canada‟s trade dynamic,
with Imports frequently outpacing Exports, and doing so by an increasingly
large degree, leading to the deepening Trade Deficit, which has led to the
RECORD Current Account Deficit. Indeed, October‟s data will be telling,
particularly as it relates to the divergence between Imports (still rising) and
Exports (falling).
Amid the deterioration in Canada‟s terms of trade, and the tectonic shift
from Trade and Current Account surpluses, into a situation defined by
deepening dual-deficits … we note that Canada‟s Employment Situation is
eroding, dramatically, as evidenced in the data released on Friday. Note
specifically the plunge to a NEW LOW in the Participation Rate, as evidenced
in the chart seen below.
In fact, a sizable single-month DECLINE in Canada‟s Unemployment Rate,
which plunged to 7.6% in November, the lowest since January of 2009, after
falling from the 7.9% rate posted in October … does NOT accurately reflect
the „situation‟, and is NOT representative of true „strength‟ in employment.
Rather, the decline in the Unemployment rate reflects a HUGE decline in
the Labor Force, a decline that comes concurrent to the decline seen in the
Participation Rate, as seen in the chart at the bottom of the previous page.
We note text from the Labor Force Survey conducted by Statistics Canada …
… “There was a notable decline in the number of youths
participating in the labor force. As a result, the Unemployment Rate
fell 0.3 percentage points, to 7.6%.”
Indeed, the Labor Force PLUNGED by a HUGE one-month total of (-) 43,600,
which FAR outpaced the rise in Employment, by nearly 3-to-1, relative to
the +15,200 increase in jobs.
Also extracted from the Statistics Canada Survey, we note …
… “Private companies shrank their payrolls by (-) 11,500, while public sector
employment rose by +21,100.”
And, finally, amid the erosion in Net Goods Exports … we note that the
number of Canadians employed in the Manufacturing sector plummeted by a
sizable single-month total of (-) 28,600 …
… to its LOWEST LEVEL EVER recorded … as evidenced in the chart below.
We shine the spotlight on more text from Statistics Canada …
… “Manufacturing employment fell, reducing its share of total
employment to 10 percent, the lowest figure dating back to 1976.
The industry‟s share of total employment was 15 percent in the
early 2000‟s, and 19 percent in 1976.”
Indeed, we „stand on guard‟ for further downside pressure in Canada‟s labor
market situation, particularly in light of the „US-like‟ decline in the labor
force, as unemployed teenagers become „discouraged‟, and the risk of a
chronic, embedded, unemployment dilemma intensifies.
Standing on guard increasingly requires „double-duty‟, as the growing
malaise in the labor market extends to the housing sector, in a way that is
becoming more eerily similar to the US labor-housing scene. Data released
on Monday revealed a sizable single-month decline in October‟s Building
Permits, which fell by (-) 6.5% versus September … led by a DEEP DEFLATION
in Permits for Residential Construction, which plunged by (-) 11.2% during
the month of October.
We note text from the Stats-Can report …
…. “The value of building permits for single-family units fell 9.4%
from September, to C$ 2.0 billion in October. This was the sixth
decrease in seven months, and was attributable to decreases in
seven provinces, led by Ontario and Quebec.”
We stand on guard for tomorrow‟s release of November Housing Starts data,
noting the sizable single-month decline of (-) 9.2% posted in October, seen
in the chart below, strongly suggesting the onset of a double-dip scenario in
Canadian housing.
Of particular interest as it relates to the Canadian housing market, we shine
the spotlight on the 3Q GDP report, released just over a week ago,
containing the following text offering a distinct demand side „tell‟ …
… “Expenditure on ownership transfer costs related to housing
resale activity was down 10%, on the heels of a 13% drop in the
second quarter.”
We also note another „tell‟ linked to the bottom line final domestic demand
dynamic, as it extends from housing, extracted from the 3Q GDP report …
… “Retailers of building materials and garden equipment and
supplies reported a decline in retail trade, partly mirroring the
weakness in housing.”
Digging deeper, we note one more housing-erosion driven „tentacle‟,
gripping the Canadian economy in an increasingly pronounced way, as
evidenced in the text of the 3Q GDP report …
… “Mortgage borrowing declined with the slowdown in the resale
housing market.”
With an increasing use of monetary manpower devoted to standing on guard
over the Canadian consumer, and providing „protection‟ from a worsening
situation as it relates to the labor market and the housing market …
… we note an „intruder‟, a macro-dynamic that is trying to sneak past the
„guards‟, to attack an already „wounded‟ consumer …
… defined by a rise in CPI inflation.
The CPI data is highly disturbing on its own merits …
… but is even more problematic in the med-term, given the fact that the
latest Canadian CPI data covers the month of October, which represents the
first month of three during which the year-over-year „base effect‟ is kicking
into gear, with dramatic upside pressure coming to bear on the figures
thanks to the collapse in commodity prices experienced in the 4Q of 2009.
Our trusty data scalpel in hand, we carve into the Canadian CPI report for
the month of October, with a spotlight on the following text...
… “On a seasonally adjusted basis, consumer prices rose 0.7 percent
in October, the largest increase since January of 2006.”
And …
… “Prices increased in seven of the eight major components of the
CPI in the 12 months to October.”
And …
… “Consumer prices rose 2.4 percent in the 12 months to October,
the largest increase since October 2008.”
Breaking it down further, we note the following data details …
All-Items CPI … rose +0.4% for the month, marking the fourth
monthly increase in the last six months, during which time the CPI
ex-Food and Energy has risen five out of six months, including the
+0.4% increase posted in October.
Subsequently, the All-Items CPI has accelerated on a year-over-year basis:
Oct-10 … +2.4%
Sep-10 … +1.9%
Aug-10 … +1.7%
Jul-10 … +1.9%
Jun-10 … +1.0%
Moreover, we note the breadth of October‟s rise, as noted via the following
CPI components, and their month-month increases:
Clothing-Footwear … up +2.3%
Transportation … up +1.3%
Shelter … up +0.6%
Of interest is the dual-rise posted in the CPI for Goods, and for Services:
Goods …
Oct-10 … +2.5%
Sep-10 … +1.7%
Aug-10 … +1.2%
Jul-10 … +1.3%
Jun-10 … +0.1%
Services …
Oct-10 … +2.3%
Sep-10 … +2.1%
Aug-10 … +2.2%
Jul-10 … +2.4%
Jun-10 … +1.7%
May-10 … +1.6%
Even more „telling‟ is the broad-based upside acceleration in the year-overyear inflation rates, as it applies to a long list of CPI components. Observe
the following data details for accelerating year-over-year rates:
Shelter …
Oct-10 … +2.8%
Sep-10 … +2.5%
Aug-10 … +2.4%
Jul-10 … +2.9%
Jun-10 … +1.6%
May-10 … +1.3%
Transportation …
Oct-10 … +4.6%
Sep-10 … +3.1%
Aug-10 … +2.0%
Jul-10 … +2.7%
Jun-10 … +1.0%
Health-Personal Care …
Oct-10 … +2.7%
Sep-10 … +2.1%
Aug-10 … +3.5%
Jul-10 … +2.8%
Jun-10 … +1.7%
Within the text of the report we uncover this intriguing and informative
„data nugget‟, related to the upside acceleration in Personal Care CPI …
… “The health and personal care index increased 2.7% in October,
after advancing 2.1% in September. Within this component, price
increases were observed for toiletries, cosmetics, non-prescribed
medicines, and oral-hygiene products.”
Indeed, that is a pretty BROAD based path paved by inflation, in personal
care products, a necessity that might be put one level below gasoline and
food, as it relates to consumption staples, relative to discretionary items.
We also find „informative value‟ in the following pair of passages culled from
the text of the CPI report …
… “Consumers paid more for food purchased from restaurants.”
… “Consumers paid more for the use of recreational facilities and services.”
And of course, Canadian consumers paid more for gasoline, and other energy
products, as the increase in Gasoline prices accounted for 0.25 percentage
points, of the 0.70 percentage point increase during October.
Note the data details on display below defining the acceleration in the yearyear rate of change in Gasoline CPI, with the knowledge that the „calendar‟
situation will continue to drive Gasoline prices higher, at least through the
end of January, and MORE SO, if the current upside breakout in the Gasoline
futures market continues:
Gasoline …
Oct-10 … +8.8%
Sep-10 … +3.1%
Aug-10 … +1.5%
Jul-10 … +4.8%
Jun-10 … (-) 2.5%
And, sight unseen … „inflation‟ is working behind the lines, in the form of
„tax‟ inflation, amid the shift in fiscal policies, and a push towards austerity.
We note the following passage from the 3Q GDP report …
… “Personal income increased 0.6 percent. Personal Disposable
Income, however, declined 1.5 percent as income taxes paid
returned to a more typical level.”
The upside acceleration in CPI inflation is problematic for the Bank of
Canada, as it relates to the continued assistance required by the labor
market, the housing market, and the consumer in general …
… particularly in the context of the Central Bank‟s push to „normalize‟
monetary policy in synch with the hikes in the official short-term interest
rate, which has taken the Overnight Lending Rate from its historic low of
0.25%, to the current level of 1.00%, via three +25 basis point increases
implemented since May of this year.
Observe the overlay chart on display below in which we plot the path of CPI
inflation on a year-over-year basis (percent change, black line), against the
Bank of Canada‟s benchmark Overnight Lending Rate (red line) …
… with focus on the fact that inflation is beginning to „run away‟ from the
official short-term interest rate, widening a rarely seen „positive inflation
gap‟, which, in turn, results in a decline into increasingly „negative‟
territory by „real‟ short-term interest rates.
Indeed, with the yr-yr rate of change in Canadian CPI set to accelerate,
potentially significantly, over the next 2-3 months specifically, we highlight
the fact that October‟s +50 basis point acceleration to 2.4%, means that the
„real‟ Overnight Lending Rate plummeted deeper into negative territory,
from (-) 0.90% in September, to minus (-) 1.4% in October.
We will be standing on guard for any shift in the monetary dynamic as it
applies to money supply, which rose to a new all-time high during the month
of October, pegged at CAD 515.660 billion … up by +0.9%, or +4.475 billion
CAD, versus September. Evidence the chart on display below.
However, we note a subtle-yet-significant shift already taking place, as the
rate of expansion in M1 Money Supply is waning. We note that the year-overyear nominal rise in M1 is pegged at +47.494 billion CAD for October,
resulting in a +10.1% yr-yr rate of growth … down from … September‟s rise of
+54.145 billion CAD, versus Sept-09, and its +13.1% yr-yr growth rate.
Thus, the October year-year increase is (-) 12.3% LESS, nominally, than the
September yr-yr expansion, with the (-) 6.651 billion decline outpacing the
+4.475 billion CAD monthly increase.
Evidence the chart below revealing the downward shift, and technical
breakdown, in the growth of Canada‟s M1 Money Supply.
„Telling‟ is the chart perspective offered below, as we shine the spotlight on
the Bank of Canada‟s weekly release of their „Monetary Conditions Index‟,
which measures the relative monetary pressures, either tighter (positive
number), or easier (negative number) as they relate to nominal interest
rates, the currency, and the inflation adjusted level of interest rates.
The MCI currently stands at +1.59 … indicating a tightening in monetary
conditions, a complete reversal compared to the deeply negative readings
that were dominant during 2009, and into early 2010. We specifically note
the long-term trend defining 52-Week Moving Average, which has been
trending higher since late last year, and has pushed into overtly positive
territory, indicating a TREND towards tightening in monetary conditions.
We observe the upward trend that has developed in Canadian Dollar based
LIBOR, as defined in the chart below in which we plot the path of the 6Month CAD-LIBOR … which bottomed in February at 0.695% … before
embarking on an upward track to the current level of 1.44%, in line with the
bullish (higher rates) crossover by the med-term 100-Day EXP-MA, relative to
the long-term 200-Day EXP-MA, with both averages trending higher.
Indeed, during 2010 … CAD 6-Month LIBOR has MORE than DOUBLED
Subsequent to the (relatively) sharp rise in Canadian Dollar based LIBOR, we
note the restoration of a „rate premium‟ north-of-the-border, as Canadian
rates widen their „advantage‟ over US Dollar based LIBOR. Evidence the
chart on display below, in which we plot the „spread‟ between CAD 6-Month
LIBOR and USD 6-Month LIBOR, revealing a push towards a +100 basis point
Canadian „premium‟ over the US, a move above which would constitute a
full-blown, upside technical breakout …
… via the violation of the 2008 high at +110 basis points, and the violation of
the downtrend line in place since the 1992 secular peak.
Despite a dramatic deepening in Canada‟s Current Account Deficit, secular
erosion in the labor market and intensifying signs of a relapse in the housing
sector … the Canadian Dollar remains well bid against the US Dollar, amid
the expansion in the interest rate premium, and the CAD‟s link to the
commodities markets, which continue to rally. We note the push for a move
thru „parity‟, as seen in the long-term monthly chart of the US Dollar versus
the Canadian Dollar.
Also „supportive‟ to the Canadian Dollar, relative to the US currency, is the
continued upside outperformance in the commodity-linked Canadian stock
market, relative to the US stock market.
We evidence the longer-term weekly overlay chart on display below in which
we plot the path of the Ratio Spread created by comparing the Canadian
stock index iShare EWC, to the US Total (stock) Market iShare IYY (stock
market ratio spread, black line) … to … the path of the Canadian Dollar
versus the US Dollar (USD-CAD inverted, red bars) …
… revealing … a tight historic positive correlation, AND, more pointedly, the
current state of upside bullish leadership exhibited by the stock market
Ratio Spread, which is supportive to the Canadian Dollar. Indeed, the move
in the stock market Ratio Spread implies further upside potential in the
Canuck Buck to the tune of +8%, to the 1.08 level.
Still, at the end of the day … Gold is the ONLY thing that is „really‟ standing
on guard for thee, as the Canadian Dollar „price‟ of bullion continues to
SOAR to yet another new ALL-TIME HIGH, as seen in the chart below.
The Canadian Dollar appears poised for a further upside extension relative
to the US Dollar, on the back of a widening interest rate premium, stock
market outperformance, and support from commodity price appreciation.
We are becoming increasingly „friendly‟ towards the CAD.
BUT … the situation is FAR from risk-free, amid erosion in Net Exports, a
deepening Trade Deficit, a RECORD Current Account Deficit, corrosion in the
foundation of the labor market, and a relapse in the housing sector.
Thus, as is the case in an ever-lengthening list of countries …
… Gold stands on guard, as the best „protector‟ of wealth, in Canada.
We remain bullish on Precious Metals.
We remain bearish on EU bond and stock markets, and we remain bullish on
EU Sovereign Credit Default Swap rates.
We remain bullish on Gasoline, and the Energy sector.
We have re-instated our bullish stance on specific commodity markets, with
focus on Cotton, Soybean Oil, Coffee, Platinum, and Orange Juice …
… while we added Wheat and Cocoa to the list yesterday.
We remain bearish on Anglo-Bond markets, with focus on the US.
And, we will continue to stand on guard for THEE.
Finally, in keeping with today‟s Canadian theme, we would like to formally
„introduce‟ the latest addition to Weldon Financial, Katelyn Ellis, mathphysics whiz, and graduate of Canada‟s McGill University. Ms. Ellis will serve
as my new „trading assistant‟, hired to help handle the inflow of „demand‟
linked to our Managed Futures business, and the re-opening of our MacroDiscretionary, Diversified Global „trading‟ Program, along with the
introduction of our new Long-Short Commodity Only „portfolio‟ Program.
Welcome Katelyn, who just passed her Series 3 Exam with flying colors …
… as in the red and white of the Canadian Maple Leaf Flag.
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