CAD is vulnerable despite optimism about Canadian economy


We get a new Atlanta Fed GDPNow forecast today and if past versions are a guide, today's wholesale inventories will be a key factor. Wholesale inventories are one of the least glamorous bits of data you can imagine. As a rule, if inventories are on the rise, it means retail-ers farther down the chain are not buying, and retailers are not buying because they have or foresee a drop in consumer demand. In this case, consumer demand is more small company and industrial than the literal end-user, the household. We would actually like to know what proportion of wholesale invento-ries is imported. Imagine how geeky it feels to have such a wish.

See the chart. October was a "good" month, showing a shortage of supply and thus encouragement to wholesalers to stock up. The question is whether they did too much, too little or got it just right. It should go without saying that if they did too little, prices will rise, aka inflation. Some (not all) of wholesale price rises is captured in the producer price index.


In the US, PPI tends not to feed CPI (due Friday), mostly because so much of the supply chain is im-ported.

Okay, imported from where? Consider Canada, the second largest trading partner (after the EU). We import about $278.1 billion as of 2016 and export about $266 billion for a total US deficit of about $12.1 billion. Twelve billion may be a drop in the bucket to the US but it's a big deal in Canada, which is on a charm campaign to "hug an American," according to the WSJ. Besides, the US has a surplus in manufactured goods of about $36 billion and when you include services, including financial services (and sales of newsletter), the net is a surplus for the US, not a deficit.

Canada is talking behind the scenes with state governors (think Detroit) and others to form a wedge against Trump abandoning Nafta. PM Trudeau is on the case personally. The WSJ reports "Ottawa is betting that friends in high places across the U.S. will recognize the damage tearing up Nafta could do to supply chains and growth—and pressure the Trump administration to leave the pact alone." Canadi-an ambassador MacNaughton says Canada is "depending on facts to win the day." Good luck with that. The Trump presidency is a fact-free zone.

And yet we are seeing some small glimmerings of political compromise, as in the immigration situation this week. Trump is awful but perfectly willing to change positions, since he doesn't actually have any principles, let alone an ideology. The workers who would suffer from ending Nafta are to some extent the same folks who voted for Trump. He knows which side of the bread his butter is on. The alternative scenario is it kill Nafta and give incentives to Canadian companies to move across the border. Eeek.

That brings up Mexico, which is facing an election. If Trump does kill Nafta, he can't allow a bi-lateral trade deal with Canada while kicking Mexico out altogether, can he? Besides, Congress has something to say about Nafta, which is a treaty as well as a trade deal. Nobody is saying Canada is going to "win" in the Nafta talks that start up again later this month, but Trump not being able to kill Nafta is probably a small factor behind the firmness of the CAD. At the same time, analysts expect the Bank of Canada to lift rates in step with the Fed, if not faster, the more powerful factor. We have our doubts about both events, keeping Nafta and the BoC hike. The CAD is vulnerable.

But traders are full of optimism about the Canadian economy and the outlook for rate hikes. The WAJ reports "Investor opinion has coalesced around expectations the rate increases will begin as soon as the BOC's next meeting on Jan. 17, with between three and four increases expected in 2018. That is im-portant because it implies that Canada's central bank could be more vigorous than the Federal Reserve in executing its return to monetary policy norms that prevailed before the 2008 financial crisis. Fed of-ficials have signaled they expect to raise rates three times this year."

Traders are overly optimistic about US inflation and rate hikes, too. We expected a rise in inflation-fuelled yields in 2017 and didn't get it. The same thing could be happening now. Analysts look at the breakeven rates, the divergence between regular T-notes and TIPS. It's over 2% for the first time in nine months, according to Reuters. "It settled Tuesday at 2.035%, its highest level since March 7." Okay, this is expectations, not hard data. The whole thing can come crashing down if Friday's inflation data disappoints. We had CPI at 2.2% in Nov, but the Fed's PCE version, is 1.8% and 1.5% in the core.

Unless Mr. Powell changes the metrics the Fed uses when he takes over in February, this is not the pic-ture of an economy bursting at the seams and needing a hike.

Change of heart: Even before Jamie Dimon changed his mind about bitcoin, last week we changed our mind about it, too. Taking a traditionalist or moralistic stance is silly. We can complain that it's not really money, but gold isn't money, either--and we have been a quiet gold bug for decades, if for differ-ent reasons than most. It is true, however, that as a store of wealth or savings vehicle, bitcoin offers no yield and is overly price-variable—just like gold.

Our change of heart comes about because even if bitcoin crashes, it's not going to burn. It's here to stay. The people—sophisticated investors, wild-eyed speculators, regular Joes—want it, right alongside drug runners, kidnappers and arms merchants (not to mention people hiding assets ahead of a divorce). They like the alternative to government money. Many think they will escape taxation (good luck with that) but the bottom line is, bitcoin is in demand for many reasons and will continue to be in demand. Demand suffices to legitimize it.

Here's the remaining problem with bitcoin: just as when individual banks issued their own banknotes in the 1800's (including Southern banks during the Civil War), the holder of bitcoin has no recourse if the "issuer" embezzles it or goes bankrupt. And banks going under and impoverishing the public was a key reason why the issuance of currency was restricted to the US government.

Also, when you trade stocks, bonds or commodities, you have recourse to the broker. In the case of fu-tures, every trade is guaranteed by the Exchange. The rule of law protects the investor, if not always to the extent the investor would like. Remember Refco going under. Futures traders were fully protected and got back every penny. Traders in Refco's spot FX brokerage lost everything or nearly everything. Brokers go broke all the time. When the Swiss franc was unpegged from the euro a few years ago, sev-eral European brokers went under. US residents were protected because they are allowed to spot FX only with US-registered and regulated brokers.

This brings up the issue of valuable state regulation vs. intrusive, expensive state regulation. A smart trader always looks at the capitalization of his broker. Do we really need the government to do it for us? Oh, yes, indeed. How many average Joes know how to judge the credit-worthiness and liquidity depth of a broker? We were trained as bank loan officer and wouldn't feel confident taking a run at it. Now consider the "issuers" of crypto-currencies. What do we know about their credit-worthiness, char-acter, unhackability, or anything else? Zip.

US Politics Tidbit: The calls for entertainer Oprah Winfrey to run against Trump in 2020 were no flash in the pan. Oprah has no government experience but is smart, reads books, has empathy, and speaks in a well-organized and adult manner. Presumably she consults experts when needed and doesn't think she knows it all already. As far as we know, Oprah doesn't lie. Oprah has style and piz-zazz, two things Hillary sorely lacked. Most of all--did we mention this?--Oprah reads.

Why not Oprah? Reagan was pretty dim but he did the work, putting in hours reading and writing about policy issues and talking about them with well-informed people. Nothing says a political leader has to be a lawyer. Oprah would charm the pants off Kim Jun Un instead of talking about the size of his but-ton. We might even get bi-partisanship back in Congress. What an idea.

Oprah could not, literally, be worse. Nobody could be worse. Trump is the absolute rock bottom of un-fitness and repulsiveness. And the probability of getting him out of office is not really all that high and certainly not imminent. In a face-off between Oprah and Donald, we say it would be no contest. All those white women who vote Republican out of habit would have to wake up. After black women ran the table in Alabama and Virginia in the last elections, let's see if white women join them in 2018 mid-terms.

Age is probably not an issue but Oprah will be 65 when the 2020 election rolls around. Trump will be 74. Having TV entertainers as government leaders is really pretty silly. Plato wanted philosopher-kings, people trained to govern. And yet businessmen have made decent government leaders before and we have evidence that Oprah is a capable business person, whereas Trump has all those bankruptcies and lawsuits. Herbert Hoover is blamed in part for the Depression, but he was one hell of an organizer and went on to manage big projects competently. Still, the shadow of Berlusconi is still in the room (and in Italian rooms, even if he can't run himself, having been convicted of a crime).



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