"If money isn't loosened up, this sucker could go down" - George W. Bush warned in September 2008

Wednesday, March 3, 2010

Really great links - lack of global aggregate demand - Bank of Canada - Warren Buffett

Bill Gross (PIMCO) - "To begin with, let’s get reacquainted with the fundamental economic problem of our age – lack of global aggregate demand – and how we got to where we are today"

David Rosenberg - Bank of Canada - "Many pundits come back and say that we have emergency interest rate levels and yet the emergency has passed. This is circular reasoning because a key reason why the emergency has passed is because the Bank (and the Fed) has kept rates at their extremely low levels."
- "While the Bank’s economic outlook for 2009, 2010, and 2011 have undergone changes since the last rate cut in April of last year, there has been no change in when the central bank expects the economy to reach full capacity, which is in the third quarter of 2011. At the time the Bank last cut rates, its forecast was 2.5% GDP growth for 2010 and 4.7% for 2011; the latest published forecasts show 2.9% for 2010 and 3.5% for 2011 (while the economy, looking at the rear view mirror, has not done as badly as was expected, the Bank has since actually shaved its 2011 growth forecast from the time it last eased).
It still must be stated that when the Bank cut the policy rate to 0.25% it had a 4.7% GDP growth forecast for 2011 and that forecast now is down to 3.5%; and the Bank, at the margin, moved today to validate market expectations of a rate hike this summer. It does boggle the mind somewhat."

- "Finally, the Bank cited upside risks to the overall outlook as being “stronger-than-projected global and domestic demand” and downside risks as being “a more protracted global recovery and persistent strength in the Canadian dollar.” As for how I think these risks shape up, let’s just say that the outlook for Europe is particularly clouded at the present time as many countries are responding to heightened fiscal risks via aggressive policy restraint and the latest musings out of the key policymakers at the Fed (Bernanke, Yellen, Dudley) paint a fairly somber picture of recovery prospects stateside. Europe and the USA, as an aside, represent more than 80% of Canadian exports and 20% of GDP.
As for the Canadian dollar, as it stands now, it is already nearly five cents above its fair-value estimate and as such will act as a pervasive overhang for local exporters. As for domestic demand, there is a very good chance that the housing boom will soon come to an end, with or without the help from the BoC, in the aftermath of the recent CMHC changes and what is likely to be a fairly austere federal budget.
All that said, the Bank of Canada opted yesterday to ratify market expectations of a summertime rate hike, and looking at what is priced in, the next question is whether the Bank will follow what is priced in and keep going through to mid-2011 (a 1.75% policy rate).
Either way, the question must be asked as to whether we could be on the precipice of a classic policy mis-step. While the Bank has never successfully led the Fed into a tightening cycle, it actually in the past did try once to get the ball rolling first and it was a mistake of historic proportions — and this also followed on the heels of a 5% GDP growth quarter. What I am talking about was the aborted move by the Bank to raise rates in the spring and summer of 2002 in the very early stages of the post-tech-wreck healing phase, but to only then see the Fed go ahead and ease policy in both November 2002 and again in June 2003. The Bank was then forced into reverse course. In fact, the BoC policy rate, which had been boosted from 2.00% to 3.25% in 2002/03 was eventually cut all the way back to 2.00% in early 2004 (and the Bank then waited three months after the Fed finally embarked on its tightening cycle in mid-2004 to re-ignite the Canadian rate-hiking program)."

David Merkel on Warren Buffett - "My summary of what he is trying to do can be summarized in one sentence: “A business with a big moat, financed by cheap insurance float, will lead to book value growth.” Moat — the business possesses sustainable competitive advantages that are significant. It would be very difficult to reverse-engineer the competitive position of such a business. Float — ordinarily, property-casualty insurers lose money on operations, but make it up on investing the funds that exist because of the delay in time between premium payments and claims. Buffett calls that cost “float,” and indeed over the last seven years, Berky has made money on the insurance operations, far from it being a cost. All the better as he invests the funds generated from insurance operations in businesses that will generate a growing stream of earnings in businesses that have sustainable competitive advantages, such as Burlington Northern and his utility investments."

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