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Canadian Federal Budget


Viking
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Canada is out with a new budget today (Federal Government). And the amount of spending we will see over the next 12 to 24 months is breathtaking. Please note, i did not put this post in the politics section because i am not looking to debate ‘good’ or ‘bad’ about what the Liberals are doing. It is what it is. What i would like to understand is how will this budget impact the Canadian economy (and Canadian businesses) over the next 12 to 24 months? 

My initial read is the amount of government spending will likely result in a short term boost to the Canadian economy over the next 12-24 months. Higher GDP growth in the near term (than otherwise would be the case). Much of the spending looks like it will be driven by deficit spending (not higher taxes). This in turn should be good for businesses and their profitability (and stock prices) in the near term. 

And Canada is not alone. Lots of governments are also running massive budget deficits in 2021 and 2022 (fearful of a disinflation/deflation downward spiral). When Jamie Dimon talks about an economy that rips higher for years is this not a big reason why? What is the negative in the short term?

https://www.cbc.ca/news/politics/federal-budget-2021-freeland-zimonjic-1.5991021

Edited by Viking
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It's war-time spending, and hard to argue against - Covid has killed more people than died in WW II (US). This is a time when you ruthlessly fight to win, and the costs are secondary. Dead is not an option, surviving to thrive is.

Media will focus on the spend. The real benefit is the planned change to the debt maturity profile - rolling out to 10yr and 50yr terms. Very likely as $CAD bonds, with inflation driven rate escalaors and reduced taxation depending on the type of bond (green) and term (infrastructue). Very elegant, very smart, very BoC alumni. 

Nice to see a much more feminist, and practical approach. Like it or not, 50% of the work force is female, and Canada does not have enough workers. There are a great many very smart/industrious women about, and $10/day day-care removes a lot of chains. Again, very elegant, and very smart.

SD.

Edited by SharperDingaan
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43 minutes ago, SharperDingaan said:

Media will focus on the spend. The real benefit is the planned change to the debt maturity profile - rolling out to 10yr and 50yr terms. Very likely as $CAD bonds, with inflation driven rate escalaors and reduced taxation depending on the type of bond (green) and term (infrastructue). Very elegant, very smart, very BoC alumni. 

Two comments on this.

First on the debt maturity profile. 10yr/30yr yields are already back towards pre-COVID levels so while it is nice to see the extended issuance, the attractiveness is not what it once was. Also, the long end of the curve is less influenced by central bank policy so issuing more can 'move the market'. I believe last year Canada was thinking of having more long-end issuance but did not because of possible market impact. Canada is a small open economy and investors do not view CAD debt in the same way as UST's so this shift to long term issuance could push rates higher (who really wants to buy 30yr debt at 2% in the midst of a massive economic rebound?), and is hence not the 'free lunch' it is being marketed as.

Second, I view the green bond as a waste of everyone's time. It's not clear to me that that this will trade at a lower yield (i.e. savings for government) than standard issue Government of Canada bonds, and there are also likely to be a bunch of costs related to setting up the program.

10y30y.PNG

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10yr/30yr yields are already back towards pre-COVID levels so while it is nice to see the extended issuance

Unfortunately the Bank of Canada bought a large portion of them - thus converting long-term fixed government debt to extremely short-term variable government debt.  

For example - the Govt of Canada has issued $14.9b 2.75% bonds due in 2048 and the Bank of Canada bought 40% (~$6b). 

In so doing, the BoC swapped central bank reserves to acquire these.    At some point, the BoC (and therefore the Federal govt) will be paying more than 2.75% on that $6b - perhaps for a long time and at much higher rates. 

Some of you may say - "well by buying 40% of that issue, the BoC helped the Federal Govt get that low rate on the other 60%.   That is false.  Federal govt's spend first, creating financial assets in the private sector banking system.  The debt issuance (as I've explained before) is just a bank reserve maintenance function and not actual borrowing.

Central bank policy makes no sense to me.

wabuffo

Edited by wabuffo
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Also to put into context what is happening, in 2020-2021 GoC issued 267bn short-term bonds (2yr/3yr/5yr) 107bn long-term (10yr/30yr), 2021-2022 they will issue 160bn short-term 121bn long-term (and keep TBills about the same). Relative to keeping proportions the same it means they are issuing an 'extra' 38bn long-term debt.  Now one can compare this 38bn to the total size of the debt outstanding (par value) right now:

  • TBills: 218bn
  • Under 1yr (excluding TBills): 104bn
  • 1yr-5yr: 442bn
  • 5yr-10yr: 120bn
  • 10yr+: 166bn

So while they are extending the term of the debt, it really pales in comparison to what is currently outstanding, particularly the 764bn maturing in under 5yrs. Better hope rates are low forever!

Source on GoC's Bonds outstanding.

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Really says 3 things:

Decision has been made to raise the long end of the yield curve. Own thoughts are 200bp+ over time, and primarily through new issuance of infrastructure bonds that include equity kickers of some type (crowding out). Target total returns of 6%+ to meet DB PP requirements.

Decision has been made to denominate in CAD.  GIC's at higher yields, raising fixed income receipts, enabling the risk-adverse to weather inflation. Denominating in CAD effectively flows QE (diff in rate x ppl) through fixed income earners, where it will be spent on higher COL Either pay through higher rates, or top-ups to pension accounts.

Decision has been made to materially reform Canada's PP system - CPP. OAS, GIS, DB, RRSP, etc. Long overdue, most would think that portability and RRSP changes cannot be far behind. Own thoughts are that the age 71 RRSP forced conversion either gets extended or eliminated. 

Hard to be dissapointed.

SD

Edited by SharperDingaan
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On 4/20/2021 at 2:33 PM, SharperDingaan said:

It's war-time spending, and hard to argue against - Covid has killed more people than died in WW II (US). This is a time when you ruthlessly fight to win, and the costs are secondary. Dead is not an option, surviving to thrive is.

Media will focus on the spend. The real benefit is the planned change to the debt maturity profile - rolling out to 10yr and 50yr terms. Very likely as $CAD bonds, with inflation driven rate escalaors and reduced taxation depending on the type of bond (green) and term (infrastructue). Very elegant, very smart, very BoC alumni. 

Nice to see a much more feminist, and practical approach. Like it or not, 50% of the work force is female, and Canada does not have enough workers. There are a great many very smart/industrious women about, and $10/day day-care removes a lot of chains. Again, very elegant, and very smart.

SD.

what kind of Bs is this selective quote about war and WW2?

over 75 million died in WW2 globally out of a 2.3 billion global population and so far 3 million worldwide for covid out of a much larger world population of 8 billion. spending is beyond WW2 levels for much less deaths. there is just no comparison.

 

 

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Very telling article in the G&M today ... https://www.theglobeandmail.com/business/article-major-banks-insurers-team-up-with-carney-vowing-to-mobilize-trillions/

"One problem on the path to net zero has been the difficulty in persuading companies in various industries to adhere to the standardized methods of both disclosure and getting emissions in check. Mr. Carney, who is also vice-chairman of Brookfield Asset Management, has been a leading force in the push to improve disclosure and shift financial structures to help decarbonize the global economy."

“We can’t get to net zero if we continue to dump hundreds of billions of dollars into fossil fuel companies, particularly ones that are in the midst of expanding their operations – building more coal mines, digging for more oil or building more infrastructure that have lifespans of 20, 30, 40 years,”

Canada is shifting to the standardized measures, and they include the mechanics of what makes up a carbon-credit. New money is only going to be available if operations produce carbon credits (C02 sequesture, etc), and the sale of those credits will repay the financing. An oil-sands plant either lives within its design rated output, or buys monthly credits to cover its incremental production.

Obviously, if you want to expand operations, the preference is to reduce the existing carbon output to create 'space', vs buying them.  And if you want to roll your notes as they come due, you need to get with the program. Great news for Alberta, despiite the political inability to recognize that climate change exists.

SD

 

Edited by SharperDingaan
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1 hour ago, scorpioncapital said:

what kind of Bs is this selective quote about war and WW2?

over 75 million died in WW2 globally out of a 2.3 billion global population and so far 3 million worldwide for covid out of a much larger world population of 8 billion. spending is beyond WW2 levels for much less deaths. there is just no comparison.

 

 

Not BS, we just don't like what it is telling us. 

https://www.philstar.com/world/2021/01/21/2071994/us-covid-19-deaths-exceed-wwii-military-toll-tracker

The total number of combat and non-combat deaths in World War II was 405,399, according to the Department of Veterans Affairs.

As of the evening (Jan 21, 2021), the (Johns Hopkins University) tracker showed that 405,400 people have died from the disease caused by the new coronavirus in the United States.

Granted, in 1942 the US population was 135M, today it is 327M. Adjusted for population, combat/non-combat deaths would be 981K (327/135 x 405). US covid deaths as of yesterday were around 568K, up 163K in 3-months. All else equal, covid deaths equal the population adiusted number by around 2021 year-end (4 months gone + (981-568)/163 x 3). Point? WWII comparisom is valid, as is the war-time level spending to end it.

SD

 

 

 

Edited by SharperDingaan
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With respect to government spending I think the comparison to the World Wars is weak at best (in terms of the necessity of the spending).

One of the things that will be interesting is the future political will across the country to impose higher taxes to pay for the COVID response. Income taxes were introduced around WWI and made permanent after WWII. For me I can see how Canadians would have come to accept income taxes as an acceptable price to pay to put an end to Nazism. But with COVID related government spending there has been such incredible waste and misallocation of resources (e.g. self-employed people getting CRB who claimed negligible net income in 2019, Chinese state-owned companies accessing the wage subsidy, Leon's Furniture getting the wage subsidy and then paying out special dividends, WE Charity fiasco) that I believe a large part of the electorate will be unwilling to accept higher taxes.

All of this probably points to a continued period of endless QE/zero interest rates forever.

 

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Posted (edited)

Well, that certainly happened quicker than expected. Is this just the beginning of central banks moving forward their projection for higher rates or is Canada an outlier...

———————-

Bank of Canada hikes growth forecast, could raise rates in second half of next year

The central bank said Wednesday that it will reduce its pace of Government of Canada bond purchases, known as quantitative easing, to $3-billion a week from $4-billion. The bank kept its overnight policy rate at 0.25 per cent, but shifted its forward guidance for a potential rate hike to the second half of 2022 from 2023.

The bank now expects the Canadian economy to grow 6.5 per cent this year, up from 4 per cent it forecast in January, and notably higher than the 5.8 per cent GDP growth projection the federal government used in its budget on Monday.

This revision is driven in large part by stronger-than-expected growth in the first quarter of 2021. GDP is expected to have grown by around 7 per cent in the first three months of the year despite a second wave of COVID-19 infections and heightened lockdown measures – a stunning 9.5 percentage points higher than the bank forecast in January.

https://www.theglobeandmail.com/business/economy/article-bank-of-canada-hikes-growth-forecast-could-raise-rates-in-second-half/

Edited by Viking
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Agreed there's a lot of waste, but it keeps coming back to we need Covid dead, we need it done now, and we need to win. Yes there is waste, but it is really just another cost of doing business - try to minimize it; but it doesn't wag the dog. WWII is just a scale comparisom, waste was a similar problem back then as well.

Agreed political will is a big component, spending just to get back to where we were isn't going to cut it. It's 2021, most industrial/social infrastructure is 40+ yrs old, and just isn't up to the demands of a 21st century economy - it needs to be replaced. Change is uncertain, we can only guess the costs/benefits, and there are no guarantees - but without it there is no hope for a better life going forward. Tough sell, but you aren't selling to grandpa - you're selling to the kids/grandkids, and for them - the benefits outweigh the costs.

Different strokes.

SD    

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On 4/20/2021 at 9:33 AM, wabuffo said:

10yr/30yr yields are already back towards pre-COVID levels so while it is nice to see the extended issuance

Unfortunately the Bank of Canada bought a large portion of them - thus converting long-term fixed government debt to extremely short-term variable government debt.  

For example - the Govt of Canada has issued $14.9b 2.75% bonds due in 2048 and the Bank of Canada bought 40% (~$6b). 

In so doing, the BoC swapped central bank reserves to acquire these.    At some point, the BoC (and therefore the Federal govt) will be paying more than 2.75% on that $6b - perhaps for a long time and at much higher rates. 

Some of you may say - "well by buying 40% of that issue, the BoC helped the Federal Govt get that low rate on the other 60%.   That is false.  Federal govt's spend first, creating financial assets in the private sector banking system.  The debt issuance (as I've explained before) is just a bank reserve maintenance function and not actual borrowing.

Central bank policy makes no sense to me.

wabuffo

Central bank policy makes no sense to me.

QE makes no sense (imo) but it does not prevent central banks from trying.

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On 4/20/2021 at 9:33 AM, wabuffo said:

Some of you may say - "well by buying 40% of that issue, the BoC helped the Federal Govt get that low rate on the other 60%.   That is false.  Federal govt's spend first, creating financial assets in the private sector banking system.  The debt issuance (as I've explained before) is just a bank reserve maintenance function and not actual borrowing.

Central bank policy makes no sense to me.

wabuffo

Thank you for this comment and it led me to look more into the mechanics of how BoC QE is operating. One question I had, which you may know the answer to. So the BoC currently remits its earnings to the Federal Treasury. I am just thinking about a situation where if interest rates rose, the value of the bonds fell and interest expense on reserves increases, the BoC could run at a loss one year. Does the govt need to write a cheque to the BoC in this scenario? Or could the BoC just run a negative equity position (it's all funny money anyways).

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^The BoC (like all central banks) doesn't mark to market its assets and lives according to its own rules; it's an artificially deconsolidated government subsidiary with an underlying ability to print money/capital and to change the rules of the game, if felt necessary. And some central banks function with a negative balance. So...

The duration risk for the BoC is low. Last year, they absorbed 95% of all federal bills and bonds and, of the bonds, 86% were 5-yr or less (the 5-yr at 0.95% now). But with rates this low, in theory, the BoC could report negative income and be technically insolvent. They now pay 0.25% on "settlement balances" (reserves) and this rate could rise although it remains controlled by the BoC.

Speaking of technical insolvency, there was a recent report describing a little discussed consumer aspect, a picture which is only marginally worse than before the virus crisis response:

https://www.globenewswire.com/news-release/2021/04/08/2206577/0/en/Over-Half-53-of-Canadians-Within-200-of-Not-Being-Able-to-Cover-Their-Bills-and-Debt-Payments-Up-10-Points-Since-December-Reaching-a-Five-Year-High.html

A recent message from the central banker in chief (CDN version): hard work and ingenuity will get us through.

-----

Concerning the last CDN budget, a realization has been made that some kind of shift has definitely occurred. Recently looking at fiscal Italy (Mr. Draghi is now leading), they have decided to go all-in and the market is willing to underwrite the recovery. Commenting on the plan, Mr. Draghi said: "Judged with the eyes of yesterday it would be very worrying. Today’s eyes are very different because the pandemic has made the creation of a great deal of debt legitimate...Debt is good...". 

Enough said.

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