A battle over the global economy

Some days, the big stories in the economy are all about a good, old-fashioned duel: Greece versus Germany, Canadians versus their TVs, and China versus itself (more specifically: China’s slowing economy vs. a massive equity bubble).

Today we’re tackling a few of those questions – with no set judgments on who will win.

In the mean time, a seven-day rally on the TSX, and a global rally more generally, ended yesterday, partly on slumping Chinese export data. But there are lots of U.S. numbers to watch for today that could turn the tides one way or another, including retail sales and earnings from JPMorgan & Chase, Johnson & Johnson, Wells Fargo, Intel and finally, Shaw.

To start you off for a day of conflict, the question of who goes to jail for financial wrongdoing. In France, the heir to the Nina Ricci fashion and perfume house has been convicted of tax fraud in connection to the “Swiss Secrets” HSBC banking case. Her daughter was also convicted, in a trial that could set a significant precedent for how prosecutors see tax evasion cases. At the Financial Post, Claire Brownell also has a great read on how so many crooked mutual fund dealers manage to evade justice. 

Canadians vs. TV. As part of the Canadian regulators’ Let’s Talk TV hearings, the Canadian broadcasting and telecom industry has been an exciting place to watch lately: there’s the fissure over Super Bowl commercials, over consumer access to cheaper, more flexible TV packages, there have been allegations of meddling in broadcasters’ journalism (resulting in the removal of Bell’s president), and much more. (Rogers, one of the “Big 3” Canadian telecom companies, owns Maclean’s.) The latest twist is anger from the Canadian Media Production Association over a CRTC decision to remove the required negotiating terms between producers and broadcasters – terms producers say they still need.  This is all part of a broader discussion about the digital shift in TV, and it includes some stark realities about Canadians’ changing feelings toward their TVs (and their home phones.) One consulting group says 95,000 fewer households households had TVs last year compared to the previous year, compared to a 13,000 drop in 2013. (Meanwhile, they expect that more than a third of Canadians won’t have a home phone line by the end of the year.) Where are all those sets of eyes going? You probably know: Internet streaming, including Netflix. Almost four million Canadians had subscribed to the streaming service by the end of last year.

China vs. itself. There are two stories about China right now: the slowdown and the bubble. The first is the slowing economy, from slumping prices for producers to the news yesterday that exports saw a 15 per cent year-on-year decrease last month (and there’s likely to be more of this when GDP numbers come out tomorrow). The second story is about the incredible rally in Chinese equity markets, with Hong Kong’s index seeing a massive boost from mainland cash in recent days – outdone only by the size of the surge on the mainland itself. According to the FT, the Hong Kong market is seeing record volumes, and the Shanghai Composite  has gained almost 70 per cent in the last half-year alone. The source of the rally has been a topic of constant conversation and head-shaking, and while some analysts have said the market is still safe, others have vehemently insisted that this is a massive, untenable, ready-to-burst bubble. (That includes the FT’s renowned Alphaville blog, for which you can sign up for free. Alphaville has a running habit of putting Chinese equity news under the same headline nearly every time: “This is nuts. Where’s the crash?”) So, where is the money coming from? The surge to Hong Kong has been attributed to mainland investors, who see HK securities as comparatively cheap, as new channels for the restricted Chinese renminbi to move to Hong Kong have been opened up by the government as part of the larger liberalization of the currency. More generally, the money seems to come from mainland Chinese retail investors – that is, regular people – who have high rates of savings and, with the restricted renminbi and an already overheated property market, relatively little they can do with the excess cash. Secondly, the scale comes from debt, or margin lending, which allows investors to borrow to buy securities. Bloomberg notes outstanding loans for Chinese stock purchases are now at $264 billion – a record – about double the margin debt for the New York Stock Exchange. The Chinese regulator has intervened to temporarily ban some of the largest margin lenders, but those bans are about to expire, and anyways, it doesn’t seem to have stemmed the flow of debt. The picture of bubbly equities and a slowing economy is distracting, incongruous, and very, very risky.

Germany vs. Greece. Speaking of incongruous, pity the European Central Bank, which must balance two noisy, fighting, utterly different economies (and then 17 more). Today the same story continues: on rumours that Greece is preparing to default on its next IMF bill, the country’s bond yields soared (they do that a lot), and the result was (as always) a flocking to the safest, most conservative sovereign debt in the eurozone: German bunds. On intense demand, the 10-year yields are expected to shortly follow the lead of shorter-term debt, and head negative, which means borrowers would theoretically end up paying the German government for the privilege of holding their debt. The strength of the German economy, which has near full employment, puts the ECB in an awkward position. While they’re trying to battle low growth and deflation with a massive bond-buying program, Angela Merkel’s government is getting worried about the threat of inflation, and pledging to cut debt – at the end of last year, the country had 74 per cent debt-to-GDP, and Merkel hopes to get it to 61.5 per cent this year, compared to Greece’s 175 per cent – and the EQ program, plus the safe-haven search, is pushing down their yields. Germany is credited as the chief force behind austerity measures for debt-wrecked countries like Greece (although other countries, including small Baltic economies who choked down their own austerity measures, are also firm supporters). But as Greece attempts to scrape cash out from under the couch to pay their bills, it’s telling how wildly different the picture between the two countries is, and how deeply unusual the situation in the erozone continues to be – throwing basic concepts like the idea of a lower boundary for bond yields into disarray. (Of course, if a “Grexit” actually occurs, all bets are off.)

You vs. the Apple Watch. Ah, the eternal question. Get a few tips on “How not to be a jerk while wearing the Apple Watch” from this Bloomberg video, which allows you to contemplate again the relative rudeness of looking at your watch versus your phone, whether the watch will ease your distraction-addiction (no), and some of the weirder features, like the ability to send your “heartbeat” to someone (your boss?? Your grandmother?). Verdict: if you’re not careful, it will make you insufferable.

Need to know:
TSX: 15,383.59 (-4.84), Monday
Loonie: 79.42 (-o.07), Monday
Oil (WTI): $52.36, Tuesday (8 a.m.)