The year of the Draghi

The year of the Draghi
The chase by Marty Cej:

The European Central Bank will determine the direction of global markets today, at least in the early going. The ECB declined to cut interest rates at 7:45 a.m. ET, leaving its benchmark rate at 0.75 percent and satisfying the expectations of half of the economists surveyed by Bloomberg News ahead of the decision. But today's decision is not a moment, but a process, like lunch in the warmer European countries, the ones that need the money, I mean. A month ago, ECB boss Mario Draghi promised to do whatever it takes to save the euro. He'll get a chance at 8:45 a.m. when the market expects him to announce a plan to purchase government bonds in maturities out to three years in a bid to lower borrowing costs for countries that enjoy particularly long lunches. Expectations are so strong that if Draghi doesn't announce the plan -- Monetary Outright Transactions, or MOT for short -- all the gains seen in Spanish and Italian bonds may be reversed within minutes; gold, which has topped $1,700 US for the first time since March, may slump and the euro's recent gains will evaporate alongside Draghi's credibility.

The ECB's rate decision came a short time after Sweden's Riksbank unexpectedly cut its benchmark rate in a bid to weaken the krona and spur exports. Earlier, the OECD cut its forecast for growth for six of the seven largest developed economies due to the euro-zone crisis. The forecast for Canadian growth in 2012 was cut to 1.9 percent from 2.2 percent while U.S. growth was lowered to 2.3 percent from 2.4 percent. Only Japan escaped the knife.

One story that bears closer examination today is an announcement that came from the Real Estate Board of Greater Vancouver late yesterday. Residential property sales tumbled 31 percent in August from the same month a year ago, dropped 21 percent from July and were nearly 40 percent below the 10-year average for the month of August. "Home sales this summer have been lower than we've seen for most of the past ten years, yet we continue to see relative stability when it comes to prices," Eugen Klein, REBGV president said, his hope palpable. The story is more complex than it appears on the surface, I think. It could be a function of the new mortgage rules, the near constant warnings from the Bank of Canada and Finance Minister, or perhaps it's a reflection of the slowdown in the Chinese economy, which is denting demand from overseas. The evidence is mostly anecdotal so we'll need to work hard at nailing down the facts and convincing analysis.

Jobs are a key to market sentiment today and will help establish expectations for the non-farm payrolls report Friday. Outplacement firm Challenger Gray & Christmas said U.S. companies announced 32,239 job cuts in August, a 20-month low, while payroll processing company ADP said U.S. companies added 201,000 new jobs in the month, topping the 140,000 expected by economists. Currently, economists expect to see the U.S. economy added 127,000 new non-farm jobs last month. The ADP data may prompt some to raise their forecasts ahead of tomorrow's release.

Now don't mess up, Mr. Draghi. One more misstep, sir, and we're sending Carney. And you won't like him when he's angry.

Jeff Rubin gets Peak Oil wrong

By Peter Shawn Taylor  | August 07, 2012

Two hundred and twenty five bucks. In April 2008, Jeff Rubin, chief economist at CIBC World Markets, predicted a barrel of oil would cost $225 by 2012. With oil at $118, it was a controversial call.

But Rubin, the best-known bank economist in Canada at the time, was no stranger to risky predictions. In 1989, he announced that the Toronto real estate market was about to crash. It did. In 1992, he said the Canadian economy was about to boom. It didn’t. In 1997, he tangled with manufacturers and fellow economists by declaring that the Canada-U.S. free trade agreement had not improved our productivity. As it happens, last month the Organization for Economic Co-operation and Development reported that “Canada’s key long-term challenge is to boost productivity growth”—so chalk that up as a win for the provocative Rubin as well.

But back to oil. These days, it’s trading under $90 a barrel. So not only was Rubin off by a huge margin, he got the direction wrong. And for Rubin, the stakes couldn’t be higher.

In 2009, he famously quit CIBC to publish his first book, Why Your World Is About to Get a Whole Lot Smaller. It was a No. 1 bestseller and won the National Business Book Award. Rubin argued peak oil supply and rising prices would push up transportation costs and slam the brakes on globalization. Say goodbye to New Zealand lamb in Canadian fridges. Air travel would also become prohibitively expensive. We’d drive less, shop closer to home and generally live in a smaller world.

You can still get New Zealand lamb, of course, as well as cheap vacation deals in Mexico. But Rubin is undeterred. The End of Growth, his new book, continues his argument that oil is the single most important factor guiding global economic progress, or lack thereof. Because of insatiable energy demand from developing countries, oil will become permanently and prohibitively expensive, Rubin claims. And this will bring our era of cushy First World prosperity to an abrupt end. “Living in the static world will be much different than the world we’ve come to know,” he warns. If there’s a silver lining, expensive oil and no growth should help keep our environment cleaner.

It’s another controversial and arresting point of view from the now 54-year-old provocateur, who has by now fully evolved from corporate economist to public sage. As such, he joins the ranks of such famous Canadian pop experts as demographer David Foot, technology guru Don Tapscott, resource-scarcity worrier Thomas Homer-Dixon and a long list of other self-declared wisemen who make a living telling the nervous masses what the future holds.

Is Rubin right about the supremacy of oil and where the future is headed? His 2008 oil call doesn’t inspire confidence. But then again, for pop experts, being right isn’t nearly as important as getting noticed.

Since the Oracle at Delphi, humans have looked to soothsayers to point the way. While ancient Greek prognosticators were famous for their cryptic suggestions, readers today expect (and are willing to pay for) a substantially clearer message. A certain formula has evolved: Take an expert with established credibility. Reduce the fate of the world to a single, simple concept. Create a suitably grim future to attract plenty of media attention. Then, if possible, add a glimmer of salvation, if only to keep readers’ spirits up enough to buy your next book.

Paul Ehrlich’s 1968 jeremiad, The Population Bomb, was in many ways the first big international pop-expert success, packaging an apocalyptic message for mass consumption. Ehrlich, an entomologist by training, declared we were doomed because too many people were living on too small a planet. He claimed Earth could support only 500 million inhabitants, Britain would cease to exist by 2000 and we’d all become vegetarians out of necessity. None of this came to pass, of course.

David Foot’s mega-selling Boom, Bust & Echo established the Canadian gold standard for the pop expert phenomenon a few decades later. Foot, an economist at the University of Toronto, began with the adage that everyone gets one year older every year. Easy enough to grasp. From there, he built a scary vision of dislocations and changes due to aging baby boomers. The biggest calamity was a looming real estate meltdown. “The real estate boom is over,” Foot and his co-author, Daniel Stoffman, wrote in 1996. Firms that recognized the demographic trends—a shift toward small cities and vacation properties, for example—were poised to reap great rewards. Publicly traded resort operator Intrawest was singled out for attention.

Sixteen years after Boom, Bust & Echo, real estate in Canada is largely defined by massive downtown condo booms and continued strong suburban growth. Inflation-adjusted housing prices in many Canadian cities are double what they were in 1996, except in the vacation market, which hammered Intrawest, now in private hands. You don’t hear much from Foot these days.

Other practitioners of the pop-expert model include Canadian academic Thomas Homer-Dixon, who predicted the world was about to be wracked by cross-border wars fought over basic resources such as water. Don Tapscott's warnings about the “peril and promise” of the Internet era go back to the 1990s, and urban theorist Richard Florida of the Martin Prosperity Institute at the University of Toronto argues the survival of every North American city depends on attracting a “creative class” of artists and thinkers. For every pop expert, there’s a single overarching truth that explains all future success or failure.

For Rubin, it’s oil. While pop experts tend to fade from the spotlight long before their predictions pan out or not, Rubin has the unenviable task of flogging a book in the very year his oil price forecast has been proven dead wrong. The solution? In practised pop-expert fashion, he has simply recast failure as a success. “I made a forecast of oil at $200 based on what the price would be if the economy continued to grow,” he explained in a recent interview. Now, he claims his end-of-growth scenario means the world will find it impossible to keep going like it did in the early 2000s, which will henceforth keep oil prices down. “We’ll never see $200 prices, not because oil has become abundant, but because the world will never grow at a pace that can justify that,” he says. Point proven. Sorta.

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