NDP’s Royalty Review Czar Dave Mowat Is a Climate Change Propagandist Trained by Al Gore

I knew I smelled a rat when Notley’s NDP chose ATB President and CEO Dave Mowat to head the royalty review board.

In a process that will surely revolve around “fairness” and other uneconomic nonsense, why would the NDP pick a banker of all things to head the review?

Well, now we know.




Hmm, do you think his thinking might be a bit clouded by Algore’s lies?

Al Gore’s documentary is one of the most deceitful pieces of trash ever created. Rather than provide a thorough critique, it is sufficient to show this:


The x-axis there is supposed to be time. How does the data go backwards in time? That doesn’t make any sense!

I know Algore created the internet with his bare hands and all that, but did he invent a way to break the laws of space-time too? This is total nonsense — climate change propaganda at its worst.

Can Dave Mowat explain this magical graph? Was that part of his propaganda training with Algore?

Heck, the famous Algore graph shows CO2 increases preceding the temperature rise. You fail automatically at science if you observe that A precedes B and therefore conclude that B causes A.

Algore is a shameless liar and anyone trained to spread his lies should not be running a royalty review for Alberta’s oil industry.

It’s seems fair enough to say that Dave Mowat is biased. So he is the perfect guy to push the NDP’s agenda.

Market Lemmings Case Study: Tourmaline Oil Corp.

The fall in oil prices is starting to expose some of the waste in the energy sector, but this central bank fueled bubble is still rife with clusters of error.

The ‘boom’ phase of the business cycle — more accurately described as the malinvestment phase — is where a lot of things just stop making sense. People will shovel money into wasteful investments based on distorted credit conditions and hyped up expectations.

Today our case study is Tourmaline Oil Corp., a favorite in the independent energy growth company category. With a 52-week high of $58.73, the consensus analyst rating is “buy” while presently trading around $39 at 18x earnings. It recently issued $168 million in new shares (at $39.50/share).

CMR analyst Daniel Plainview shows why Tourmaline is an economic black hole relying on the “greater fool.” Regardless of whatever distortions manifest in the stock market, Tourmaline is its present form is a zombie company — not an investment, but just one of many ways to gamble in the stock market casino.

A Question for Tourmaline Oil Corp.: How Do You Make Money?

By Daniel Plainview

When trying to determine the proper price of a stock the conventional rule of thumb is to predict the amount of money that stock is going to make each year over the long term, and then discount those earnings to the present at an appropriate rate for the risk you are taking.

The inverse of this, but it is in essence the exact same methodology, is to use a Price to Earnings ratio to evaluate a stock. The higher the ratio, the more expensive the stock; the lower the ratio, the more likely you are getting a good deal, so long as the future earnings hold up.

But what if the stock you are looking at is in an industry that typically doesn’t make any money?  I’m referring to industries where the company earnings are often affected, to a large degree, by depletion expenses.

Depletion is a non-cash charge and it can ensure that a company generates plenty of cash flow but renders the conventional Price to Earnings analysis moot. Industries with high DD&A (Depletion, Depreciation & Amortization) are generally involved in resource extraction.

Because earnings are essentially meaningless for a lot of resource companies (not to mention the other accounting tricks that can affect earnings) it’s always a good idea to look at a company’s cash flows.  There are three types of cash flows:

  1. Cash flows from operations
  2. Cash flows from investing
  3. Cash flow from financing

While in any given period the cash flows in any of these buckets can be either positive or negative, over the medium to longer term (2+ years) one invariably wants to see that cash flow from operations is positive, cash flows from investing is slightly negative, and cash flows from financing is also negative; with the change in cash position from period to period being immaterial.

What a positive/negative/negative cash flow segmentation is indicative of is 1) the company is making money, 2) that it is reinvesting in the business to grow the business, and 3) it is able to return capital to the shareholder, or at least doesn’t steadily require new financing to fund its investments.

It is with this in mind that we now consider the Canadian oil and gas industry.

Recently the commodity prices that drive the cash flow from operations that Exploration and Production (E&P) companies generate took a tumble.  Both oil and gas prices fell by ~50% from their levels in the first half of 2014.

By itself a single year of lousy prices shouldn’t erode as much value in the markets as what occurred, but what changed is the market is now more pessimistic about prices for all future periods too.

Companies have responded by scaling back their investing, and cutting capital expenditures for the drilling of new wells and building of new facilities.

Generally speaking, oil and gas companies always have to be spending some money on new production in order to maintain overall production levels.  Well performance declines over time, and by how much depends a lot on the geology of the particular “play”.

A really good well might only decline at ~20% per year, but it still declines.  Newer unconventional extraction methods (drilling horizontal multi-stage frac wells into shales) can come down a lot faster: ~50% per year.

So ultimately the goal of any oil and gas company, in any environment, is to have enough cash flow from operations that it can pay for all the cash flow from investing (capital expenditures needed to keep production up), and still have enough left over to pay the shareholder.

Enter Tourmaline Oil: the oil company that has 85% of their production coming from natural gas.  Etymology aside, there are more serious issues with this company’s business model.

In their last earnings announcement in March, they happily proclaimed their 76% growth in cash flow. Sounds good… but wait! There is a footnote: “Cash flow is defined as cash provided by operations before changes in non-cash operating working capital.” So what about capital expenditures?

Here is a chart of Tourmaline’s cash flows, going back to 2009:


The cash flow from operations is in green, and the company’s capital expenditures (only a sub-set of cash flow from investing) are in red.  The black line represents the cumulative amount of cash flow from operations minus capital expenditures (or Free Cash Flow) up to each period.

What this shows is that Tourmaline has spent almost $4.7 billion more on drilling holes in the ground, than it has made from the hydrocarbons those holes have produced, since 2009.  Furthermore, over 25 quarters of results, they have never made more money than they spent: Free Cash Flow has never been positive.

In the company’s defense, they have grown production at an industry-leading rate.  But it really looks like they’re spending a dollar to make fifty cents, and making up for it on volume.

It has gotten to the point where if the company stopped spending money, but continued to earn cash flow from operations (and let us assume the same prices and only a 20% production annual decline), they could not make that money back.  In actuality Tourmaline’s wells probably decline a lot harder than 20%, but the story is bad enough as it is.

These harsh realities force us to ask the question: where did the company get $4.7 billion?  The answer is that they got it from new investors who bought shares in secondary offerings, and some money from raising debt.  It looks as though this external funding process will have to continue ad infinitum; another secondary offering being announced just recently for $168 million.

And investors should keep this in mind: the only reason Tourmaline is able to grow production on a per share basis is because the shares have a decent valuation, but the only reason the shares manage to eke out a decent valuation is because they are able to grow production on a per share basis.  If the shares were to fall enough in price, the amount of dilution created by external financing would make it impossible for the company to grow.

And the last point to make about the company: the management team in prior iterations at Berkeley and at Duvernay were able to successfully build up and then sell the company to a bigger fish.  Duvernay in particular made a lot of people a lot of money as it was sold at the height of the commodity boom in 2008 and Shell paid an unmatched valuation in the transaction (~27x EBITDA).

In fact, the only way Tourmaline’s business model makes any sense is with an M&A exit strategy: ramp up production at any price, and find a sucker to buy it just before the house of cards collapses.

But if investors are assuming Tourmaline will be similarly sold I would only point out that Tourmaline is now worth about $9.2 billion and is the 8th largest E&P company by market capitalization in Canada.  It’s getting to be too big for others to swallow, and suckers like Shell might be hard to find this time around.

Then again, they did just find another 4.25 million suckers…

(Click here for supporting calculations.)

Alberta’s NDP, Unions, and the Minimum Wage

When analyzing public policy, one must typically ignore stated goals and understand the economic incentives that make groups favor certain forms of economic intervention.

Unions, as a group, tend to favor market restrictions that prop up their higher wage rates.

Alberta’s NDP, led by Rachel Notley, favors unions.


This an important factor in the NDP arguing for a 50% increase to Alberta’s minimum wage, despite protests from the business community and anyone with an understanding of basic economic law. NDP goal to hike minimum wage has nothing to do with helping less productive workers make more income, regardless of what their stated objectives are.

Minimum wage laws are a classic form of monopolistic grants of privilege that benefit some groups at the expense of others. Despite the proclaimed objective of minimum wage laws, which is to increase incomes of the most marginal workers, the actual effect is the exact opposite — it makes them unemployable because they are not sufficiently productive to be employed at the legal wage rates. This means that minimum wages will always cause more unemployment than otherwise — any economist who denies this is either a liar or a fool who doesn’t even understand the basic principles of price controls.

Who benefits from such laws? Certainly not the marginal workers, for it becomes illegal to hire them at the wage justified by their productivity. On the other hand, anyone employed above the minimum wage benefits because their competition is reduced. In particular, unions benefit from minimum wage laws. Unions despise cheaper labor competition. Minimum wage laws remove competition of less productive workers by forcing them to be unemployed.

And there is another reason why unions love minimum wage hikes — it is a devious way to increase their own wages. This can work in many ways depending on the labor agreement. Some agreements trigger mandatory wage hikes when statutory minimum wages increase (because wages are based on a percentage above minimum wage). Others have provisions to open wage negotiations if minimum wages go up.

I am not making this up. Economic theory informs us that we should expect nothing less. But consider also a 2004 study in the Journal of Human Resources by economists William Wascher, Mark Schweitzer and David Neumark. They clearly showed that lower-wage union workers usually see a boost in employment and earned income following a mandated wage hike. And those non-union wage workers who are now unemployed or unemployable? Who cares! The union members already have higher wages and protected jobs. So what if this cruel policy leaves in its wake desperate workers who can no longer legally work?

As for the NDP, there should be no doubt that Premier Rachel Notley is a union hack. Most of her career has been in the service of unions. Consider a few facts from her personal history:

She is married to Lou Arab, a communications and public relations staffer for the Canadian Union of Public Employees[2] and a campaign strategist for the party. She lives with him and their two children in the historic district of Old Strathcona located in south-central Edmonton.[17]

After law school, Notley articled for Edmonton labour lawyer Bob Blakely, and went on to work for the Alberta Union of Provincial Employees representing members with Workers’ Compensation cases.

She worked for a short time for the National Union of Public and General Employees (NUPGE),[20] worked at Athabasca University,[21] acted as volunteer co-ordinator for the Friends of Medicare “Romanow Now” campaign, and finally as a labour relations officer for the United Nurses of Alberta.[1]

Can there be any doubt that Notley will seek to benefit her union friends at the expense of other groups in society? Of course not.

Rachel Notley and the NDP are looking to empower unions. They don’t care if they hurt society’s least productive workers, like teenagers, people with disabilities, workers with language barriers, anyone without much experience for any reason, and ethnic or racial groups that may face discrimination.

Some will argue that forcing minimum wages higher makes employers invest in more equipment and develop new technology and this will increase productivity of labor. Therefore, this improves the economy. But this is a silly argument. Capitalists are always seeking ways to increase productivity, so to think they are just sitting around waiting for the government to force price floors on labor to do so is a joke.

But even assuming the employer doesn’t just reduce his quantity of labor demanded, his investment in new capital is limited by savings in the economy. Increasing minimum wage does not increase the total supply of capital available. If anything, capital will merely be shifted from some industries to others in an attempt to offset an artificially higher cost. Capital is not being reallocated because of a market requirement, and so this is not an economic improvement.

Don’t be fooled by anyone who says they want to increase the minimum wage to help the poorest workers. The main concern motivating the NDP to increase the minimum wage is helping unions.

Anyone advocating a higher minimum wage should be ridiculed and shamed out of public office on account of sheer ignorance.

Politicians Are Bad for Your Health

In politics, a classic strategy for dealing with legitimate criticism is to ignore the real issue and just whine about “personal attacks.”

This is a common tactic relied upon by both the right and the left. We see this in the reaction to Conservative Party VP Jordan Lien’s criticism of Alberta Health Minister Sarah Hoffman’s ban of menthol cigarettes.

According to the internet, the following Facebook comment is very bad:


The reaction to this was extremely unfavorable to Lien. People called it “dumb,” “sexist,” “insensitive,” “irrelevant,” “misogynistic” (!), and so forth. One PC party drama queen named Warren Mitchell even declared he was ripping up his membership card in disgust. “I’m done with this *$@%^ party.”

Well, it is a *$@%^ party. But seriously, let’s look at this issue in some detail.

Lien actually raises a completely legitimate point that is lost amidst the chorus of inauthentic outrageHere is the issue:

If it is justified to ban menthol cigarettes for the sake of “public health,” shouldn’t we ban other tasty but unhealthy things? Obesity, like smoking, also uses up resources in the health care system. A 2010 report estimated that direct costs of overweight and obesity represented $6 billion — which is 4.1 % of Canada’s total health care budget.

Serious money.

So, following the logic of Health Minister Hoffman and the Alberta government, perhaps things like candy, soda, fast food, and other wonderful treats that make life worth living should be banned as well.

If not, why not?

A wannabe social engineer like Hoffman cannot provide a reasonable answer. The problem with social engineers, whether they are on the left or right, is that there is no limiting principle to their philosophy. Once a person accepts intervention as an acceptable policy, then any limitation to the intervention is essentially arbitrary. So why not ban everything that is unhealthy, and force everyone to be healthy? Wouldn’t that be wonderful?

To be consistent, Sarah Hoffman should want to ban all the things that have made her obese on the same grounds as her ban on menthol cigarettes. Otherwise, we will have a less healthy society.

“Every Albertan should be able to enjoy a life free of preventable tobacco related disease,” Hoffman pontificated as she announced her government’s menthol cigarettes ban.

“Every Albertan should be able to enjoy a life free of preventable tobacco obesity related disease,” she could be saying on the exact same grounds.

“These changes will help make smoking less attractive to youth,” she declared.

“These changes will make smoking eating too much less attractive to youth,” she could have said.

If not, why not?

Most people realize that it is absurd to ban everything that is unhealthy, but they lack principles and are happy to ban things they don’t like — but don’t ban anything healthy they like, oh no.

Sarah Hoffman may not smoke menthol cigarettes, but her variety of unhealthy lifestyle is also subsidized by taxpayers and also unpleasant for other people.

The only justified solution to this problem is the government should neither ban menthol cigarettes nor unhealthy foods. This is the only consistent and sane conclusion.

Behavior controls are a type of socialism where the negative effects on society are often neglected. Yet it is irrefutable that such controls lead to economic impoverishment. However, even most economists fail to understand this.

Firstly, behavior controls directly concern the use one can make of his or her own body. If the government imposes restrictions on how one can use one’s body, then one will value one’s body less than otherwise. It is important to understand the incentive here: if the government restricts the ways in which one can use one’s own body, it reduces the degree of ownership one has over oneself. Real ownership means exclusive use and control. One way to think of it is like leasing one’s body from the government, and not owning it oneself. You can use the body for approved activities only.

The actual consequence of this is that people will be less likely to invest in themselves, and they will be more likely to “consume their human capital” — in other words, a person will tend to treat his body less well than if one had “full ownership” of it. It is this economic truth that underlies the idea that giving people freedom makes them more responsible (something many find counter-intuitive).

Secondly, and in a more general sense, as with all forms of political interference, this form of regulation hurts one group and benefits another. The group that can no longer perform certain (non-aggressive) activities is worse off than before, while the group that does not want to tolerate the objectionable behavior (like smoking or eating too much fast food) is better off. More specifically, the producers and users of the things whose consumption is now restricted are the ones who suffer. The ones who benefit are the non-producers and non-users of the goods in question. This encourages people to allocate their efforts towards non-productive activities and discourages productive activities. This makes society poorer.

And it is not a good argument to say we need to ban something because it costs the health care system more money. The very nature of socialized health care is to subsidize unhealthy lifestyles. It is impossible for socialized health care not to do this. So you must either accept that this is an inherent feature of your precious public health care or you must reject public health care. Either way, one must reject banning unhealthy choices for this reason.

At this point, someone might even accept this basic economic argument but protest, “Hey, that’s fine but he shouldn’t have said she was morbidly obese! That’s not nice!”

If a woman said the same thing but health minister was a fat man, the outrage would be virtually nonexistent. People would probably think it was funny. But that’s not the point.

Lien could have made his point with no reference to her physique, that is true. Rhetorically, it was very effective to do so. No one would actually deny that the health minister is obese. Obviously, Sarah Hoffman is a rather large woman. It even seems highly plausible that she is morbidly obese if we use the roughest definition, which is simply 25% above a woman’s “ideal weight.”

His comment simultaneously highlighted the arbitrariness of the law and the hypocrisy of a person with one unhealthy tax-subsidized lifestyle banning someone else’s tax-subsidized unhealthy lifestyle. A reasonable person who is not desperate to be as offended as humanly possible should understand this. So it is good to point out the inconsistent principle to illustrate the point.

It’s like people who like to drink alcohol for whatever reason and want snorting coke to be illegal, or vice versa. Such principles are arbitrary, cruel, and hypocritical. “So let me get this straight,” someone says, “this coke-snorting politician wants to ban alcohol? Give me a break.”

The nature of socialist health care is that it functions as mandatory medical insurance where everyone is pooled together, so people acting in healthy ways will always be pooled with people acting in unhealthy ways. If you want socialist health care, you need to shut up and deal with it. 

Anyway, the whole incident reminds me of the classic South Park episode, “Butt Out,” where the comically compulsive over-eater Rob Reiner campaigns fanatically against smoking.

Jordan Lien should have stood up for himself, but instead he gave a pathetic apology like a whiny loser.

If people were serious about public health and justice, they would focus on the substance of the issue. Instead, they are complaining about evil conservative men trying to “keep women down” and “fat shaming.” A dumb politician guy said something mean… on the internet. The horror! And everyone is in a competition to be more and more offended than everyone else, which is how one gets street cred in the attention-seeking world of social media. Apparently, that’s all that matters.

Canada’s Socialist Healthcare and Its Cruel Treatment of Seniors

Canadians are rather deluded. Many of us like to think we have a wonderful healthcare system, but it is just a pathetic lie people tell themselves because it’s easier to believe in a fantasy than learning anything about economics and the nature of government ‘services.’

Among the most disgraceful aspects of Canada’s healthcare system is how it mistreats old people who need to be taken care of.

Let’s say you have a grandmother who has lost the ability to take care of herself and now requires professional daily assistance. She overdoses on some medication because she can’t keep track of how many pills she has taken in a day. Your family takes her to the hospital emergency. After a week in the intensive care unit, your grandmother is moved to the “temporary stabilization” ward for old folks awaiting transfer to a private facility. Of course there were assurances by hospital staff as to comfort and care.

Instead, this is what Grandma gets:

This new room they moved my grandmother into is a disgrace. It’s like a mental institution for old people. People all around are screaming and crying and shitting themselves. There are four people in my grandmother’s room and it is the size of a closet. Grandma is having a nap and asked me to stay beside her bed while she sleeps and not leave her here alone. She said she is tired from crying all day. What a disaster. This place is the last place on earth I would want her to be. I won’t be able to sleep tonight if I leave her here. It’s absolutely horrific. The women in the bed across from her shit the bed and the whole room is making me want to puke. They put alarms on all the old people and if they move from a chair, bed, or anywhere they are placed it goes off with inhumane loudness. The one lady with a soiled bed has gone off four times since I’ve been here, And she said, “For God’s sake you can’t even move in this place with that alarm scaring the heck out of you.”

This is transcribed from the first-person account of a visiting family member. Does it sound like a place you would want your grandmother to be?

This is what our tax money pays for. What a joke. It isn’t even healthcare. It’s just warehousing sick old people. It reminds me a lot of Yuri Maltsev’s stories about Communist Russia’s hospitals.

Socialist healthcare cannot be fixed. If Canadians really had compassion instead of merely the pretense of it, they would demand our healthcare system be completely defunded and all restrictions on the provision of private healthcare be eliminated.

Instead, Canadians will continue to believe the lie and the healthcare system will remain atrocious.

“Resolve to serve no more, and you are at once freed.”

I recently reread Étienne de la Boétie’s The Politics of Obedience: A Discourse on Voluntary Servitude. By far it is one of the greatest pieces of political theory ever written. It was composed in the 16th century but it speaks to the prevailing struggle in all eras of human civilization. It’s good Sunday reading to go with your coffee or your scotch.

How does the state, a tiny minority of people, achieve domination over the far more powerful majority? La Boétie argues that rulers depend upon the consent of the ruled — the tyrant has “nothing more than the power that you confer upon him to destroy you.” This consent can be withdrawn to end the oppression without violence.

Excerpt from Part I:

Poor, wretched, and stupid peoples, nations determined on your own misfortune and blind to your own good! You let yourselves be deprived before your own eyes of the best part of your revenues; your fields are plundered, your homes robbed, your family heirlooms taken away. You live in such a way that you cannot claim a single thing as your own; and it would seem that you consider yourselves lucky to be loaned your property, your families, and your very lives.

All this havoc, this misfortune, this ruin, descends upon you not from alien foes, but from the one enemy whom you yourselves render as powerful as he is, for whom you go bravely to war, for whose greatness you do not refuse to offer your own bodies unto death. He who thus domineers over you has only two eyes, only two hands, only one body, no more than is possessed by the least man among the infinite numbers dwelling in your cities; he has indeed nothing more than the power that you confer upon him to destroy you.

Where has he acquired enough eyes to spy upon you if you do not provide them yourselves? How can he have so many arms to beat you with if he does not borrow them from you? The feet that trample down your cities, where does he get them if they are not your own? How does he have any power over you except through you? How would he dare assail you if he had not cooperation from you? What could he do to you if you yourselves did not connive with the thief who plunders you, if you were not accomplices of the murderer who kills you, if you were not traitors to yourselves?

You sow your crops in order that he may ravage them; you install and furnish your homes to give him goods to pillage; you rear your daughters that he may gratify his lust; you bring up your children in order that he may confer upon them the greatest privilege he knows — to be led into his battles, to be delivered to butchery, to be made the servants of his greed and the instruments of his vengeance; you yield your bodies unto hard labor in order that he may indulge in his delights and wallow in his filthy pleasures; you weaken yourselves in order to make him the stronger and the mightier to hold you in check. From all these indignities, such as the very beasts of the field would not endure, you can deliver yourselves if you try, not by taking action, but merely by willing to be free.

Resolve to serve no more, and you are at once freed. I do not ask that you place hands upon the tyrant to topple him over, but simply that you support him no longer; then you will behold him, like a great Colossus whose pedestal has been pulled away, fall of his own weight and break into pieces.

Once you grasp the power of la Boétie’s argument, there is a visceral moment of realization that has almost a mystical quality. Suddenly the world makes more sense, the same way it did when you really “got” how the free market works, or how you “got” why liberty is just.

— Read the rest of the book — 

RED ALERT! Canada’s Yield Curve is Inverting

The yield curve in Canada shows signs of inverting. We need to watch this carefully as it is a strong indicator that we are heading towards a recession.

This week the rate on 3-month Canadian t-bills went higher than all the other rates out to the 5-year bond.

Here’s why this is important:

The yield curve is a graphical representation of the interest rates for debt instruments over different maturity dates. It normally looks something like this:

normal yield

Economic actors prefer present goods to future goods, so future goods can only be exchanged for present goods at a discount. This gives rise to the phenomenon of interest (hence the term “discount rate” in finance when determining the present value of future cash flows).

The normal yield curve shows that the farther out in time you go for the maturity date, the higher the interest rate. There are two basic reasons. First, there is the issue of inflation, and lenders must take into account the depreciation of the monetary unit over time. Because the money supply is always expanding, the purchasing power of money tends to fall over time. Money paid back in the future is worth less with each passing year.

The second reason for the normal yield curve shape is that the default risk increases over time. The risk of default might be quite low over one year. But over ten years? Twenty years? Uncertainty is greater over that time period. The longer the debt takes to mature, the more one is subject to default risk, and so lenders compensate for this by demanding a higher rate of return.

This explains the shape of the normal yield curve.  But there are unusual situations where the yield curve inverts — the short maturity end of the curve has a higher rate than longer-term debt.  This is not normal, for reasons that should be obvious in light of the preceding discussion.

Putting aside the yield on the 1-month t-bill, we can usually assume that if the 3-month t-bill has a higher rate than the 30-year bond, the economy is going into a recession.

This implies a short-term liquidity crunch. Borrowers are starting to panic over their misguided investments due to artificially low short-term rates. They see impending losses. They will pay more for a 90-day loan than for a locked-in 5-year loan.

Meanwhile, the lenders are growing fearful about the short-term state of the economy as well. A recession pushes interest rates lower because the economy is weaker. Lenders are willing to give up the inflation premium they normally require. They nail down today’s higher long-term rates by purchasing more long-term bonds — which raises their price, and pushes down the rate.

Remember, when central banks are expanding the money supply, they buy up short-term t-bills to bid up their prices and push down their yields. The monetary expansion misallocates capital — investors and businessmen put more money into projects than the “real” economy can support, hence the “boom” phase preceding the “bust.” An inverted yield curve — rising short-term rates — signifies a liquidity shortage. Money is desperately needed right now to sustain capital projects.

(A detailed scholarly treatment of this issue can be found here — it’s a Ph.D dissertation, so it’s interesting albeit kind of dull).

So the inversion of the yield curve normally signals a recession. However, the yield curve is not fully inverted. The 3-month bill’s rate is still less than the 10- and 30-year bond rate. But these longer-term rates are plummeting rapidly.

Look at this 10-year yield totally nosediving:

10 year falling

And the 30-year treasury bond is plummeting as well — investors are giving the Canadian government their money for 1.833%, when just four weeks ago it was 2.3%. A year ago it was a solid 100 bps higher. Investors are giving Ottawa their money for less than 2% for 30 years. The world has gone insane.

(Although if it makes you feel better, it’s even more insane over in Europe. I mean seriously, people are lending the government of France — FRANCE! — money for 10-years at 0.5%. What the heck?! But it’s sweet deal when you’re a primary dealer and can just buy total crap like French 10-year bonds and flip it to the ECB.)

Despite the Bank of Canada’s recent surprise rate cut, the Bank of Canada has been significantly slowing the rate of growth of its asset purchases in recent months, as I reported a few weeks ago.

boc jan15

At the same time, down south, the Federal Reserve — the central bank of our biggest trading partner — has ended QE3 and its balance sheet no longer showing any net growth.


I am not clear how the BoC’s recent rate cut will factor into this, nor am I clear what Yellen and the Fed will do if the US economy shows signs of panic (QE4?), but I think the inversion of our yield curve is related to all this. Remember, short-term rates are lowered by periods of central bank monetary expansion because they buy up debt at the short end of the curve with newly created money. All signs have pointed to the end or at least slow down of high monetary inflation by these central banks. Businessmen who thought all this investment in capital was justified because of distorted interest rates are getting a wake-up call. The truth is manifesting in the debt markets.

So watch the yield curve in Canada closely in the near future. If the 3-month rate goes above the 30-year rate, I’d say there is a 90% chance of recession within six months. If the inversion doesn’t go all the way out to the 30-year, then it may not indicate recession but it still suggests slower growth going forward.


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