Even the Communist Chinese Think Canada’s Socialist Healthcare Is Dumb

So some Chinese government officials wanted to learn a bit about Canadian healthcare. It seems they were baffled by the stupidity of our system.

Becky Akers writes:

Ah, Canadian medicine! Single-payer, socialist paradise, totally “free” (sic for “paid for by others”)! As American communists continue their attempts to nationalize the entire medical industry, not just the insurance companies that pay for it, they insist that Canada’s method is the world’s best.

Alas, “Chinese government officials” who know a thing or two about totalitarianism disagree. A group of them visited our northern neighbors because they were “interested in learning about Canada’s health care system.” “…[O]ne of British Columbia’s regional health authorities … had only begun outlining” how things work there, yet “already his guests seemed confused.”

He started explaining the basic principles again, in even simpler terms: The government decides what are medically necessary procedures and those procedures are covered by universal health insurance, free at the point of delivery.

…Residents cannot go outside the system and pay for their own medically-necessary treatments, unless they want to travel to another country.

“Stop there,” the translator said. “It’s that last part that is confusing the delegation. They think you’re saying that Canadians cannot spend their own money on medically-necessary health care.”

Yes, he assured them, that’s right.

The translator pressed him: “You mean to say that if you’re sick and want to pay for treatment, that you aren’t allowed to? Even though it’s your own money and there is a doctor willing to accept it?”

Yes, that’s right.

There was a pause as the translator relayed the answer to the delegation and the delegation conferred among themselves. Finally, the translator spoke up: “They say that even the Chinese communist system is not this restrictive!”

And this potentially fatal authoritarianism is many Americans’ ideal, the scheme they hope to inflict here.

— Thanks to LRC

The Price of Oil and the State of the Economy

A large number of people have been asking me about the price of oil and what it means for the economy. Rather than just repeating myself all the time, I am writing this article.

SOME CLARIFICATIONS

I feel it is important to clarify how the law of supply and demand works, because I hear a lot of incorrect analysis from people who should know better. If you understand the law of supply and demand, I recommend that you skip to the next section.

Consider the following statement: “The price of oil is falling, and this is increasing the demand for oil — this will push the price of oil back up!”

This proposition is completely wrong.

Let me show you an ordinary supply and demand graph, like anything you will see in an introductory economics textbook.

supply and demand

The x-axis is quantity, and the y-axis is price. The intersection of the demand curve and the supply curve is where the market clears — everyone can buy the amount they want to buy, and everyone can sell the amount they want to sell. Simple enough.

Now consider the following graph, which depicts a change in demand. Specifically, it shows an increase — the demand curve shifts to the right (D1 to D2).

What is happening here? Demand has increased, and the price goes up. What is not happening here? The increase was not caused by a lower price — instead, it caused an increase in the price. The rise in demand is the cause, the rise in price is the effect.

We know for a fact that the price of oil has fallen dramatically in the second half of 2014. Why? Reduced demand, increased supply, or both?

Much of the world is in economic trouble. China is slowing. Japan is a mess. Europe is a disaster. When much of the world is in recession or heading for recession, we expect the demand for oil to fall. And even in the US, where the economy is stronger, oil consumption has fallen 8% since 2010 (there are many reasons for this, but I will not go into it here). So falling demand is a reasonable explanation for the fall in oil prices.

There is also the issue of increasing supply. OPEC is still pumping, business as usual, even though the price is down. Shale oil producers have been producing in a frenzy. There is a greater supply of oil.

Here’s what it looks like:

The graph shows an increase in supply (the supply curve has shifted to the right). The market clears at a lower price. Less supply (S1) has become more supply (S2). The quantity demanded goes from Q1 to Q2.

The price of oil has been falling in the second half of 2014. It fell very fast. Supplies have not increased much since June. This makes me believe that falling demand is the primary cause in this situation.

Now let’s look at a situation where there is “inelastic” supply (meaning it is not very responsive to price) and a fall in demand.

This is an extremely “non-price-sensitive” supply. The Saudi head of oil production has proclaimed that they will keep pumping even if the price drops to $20 a barrel. The other producers need money, so they will keep pumping. They cannot trim production and influence the price. The Saudis have considerable influence in on the supply-side of the market. That’s why the supply is inelastic.

Let’s return to the initial proposition we considered: the oil price is lower, so there will be increased demand for oil. This is bad analysis. Part of the problem is in the fact that “demand” and “quantity demanded” are often used interchangeably. But essentially it is mixing up the issue in the first and second graphs.

The price of oil is down.  The supply has increased. The demand has not increased — the quantity demanded at the new price is greater than at the higher price. This is not the same as saying a lower price of oil will increase the demand for oil. An increase in demand would — in the language of economics — imply a rightward shift of the entire demand curve.

A falling price does not increase demand, it increased quantity demanded. These things sound similar, but they are analytically different and this is important to understand at an elementary level.

Now with that boring stuff out of the way, let us look at the current situation with the price of oil and the economy.

SHALLOW CONSPIRACY THEORIES

I regularly speak with a lot of presidents and CEOs in the Alberta oil industry. A commonplace view is that price collapse is all the result of the Saudis pushing down the price of oil because [insert reasons here].

There are some amusing conspiracy theories floating around as well, particularly that which avers the US and its Saudi allies are manipulating the oil price to drive down the price of oil to hurt some evil countries, like Russia (America’s archenemy) and Iran (Saudi Arabia’s archenemy).

(I want to quickly point out that this is perhaps the only time in my entire life where people have complained about oil market manipulation driving the price… DOWN! Usually it’s greedy capitalists or crooked OPEC producers manipulating the market to drive the price UP to rip everyone off. But I digress.)

Realistically, how much of the blame rests on the Saudis? Maybe some, sure. But I don’t think it’s that much.

After all, how much does Saudi Arabia have to do with the price of steel, coal, and iron ore?

stell

How much do the Saudis influence the price of copper (which, by the way, is almost as much of a barometer for the world economy as oil)?

copper price

COMMODITY COLLAPSE

We see that oil is not the only commodity with a collapsing price. Maybe instead of market manipulation, it’s a sign that the global economy is not as strong as everyone had hoped.

The phony economic boom of the last two decades is slowing down, exposing what the Austrian business cycle theory refers to as “malinvestment.”

The distortion in commodity prices are the result of central banks collectively expanding their balance sheets from $5 trillion to $16 trillion in the last 10 years.

We also need to think about think about China, which has driven a great deal of the marginal demand for commodities in the last several cycles.

China’s radical growth levels were not going to last forever, and investors should have known better. But I guess that’s why they call it a “mania” and “irrational exuberance.”

China went from $1 trillion GDP to $9 trillion GDP in 13 years — an insane growth level that would be impossible but for printing press finance.

The incredible Keynesian-mercantilism started by Deng in the early 90s resulted in China’s demand for oil quadrupling from 3 million barrels per day to 12 million per day. Before then, the $20 price for a barrel of oil was, all things considered, was pretty much the same as it was 100 years when adjusted for inflation. Which makes sense given the basic balance of harder-to-get oil and improving technological methods over time.

The story is the same elsewhere. In the crackup boom phase of the cycle, iron ore prices hit 9x their historic range at the peak, and copper prices hit 5x their historic range.

copper iron

As with the other industrial commodities, there has been massive investment in petroleum production to feed the world’s unsustainable growth projections. Huge scale undertakings in the Canadian oil sands, US shale, and various deep-sea drilling projects, driven by these consumption forecasts and cheap credit, have resulted in major production increases. The bubble finance hype machine over the “Fracking revolution” in US shale led to a 4x increase in oil production with wells that would be uneconomical in a sane world.

So now there is too much oil production and not enough demand. The market needs to normalize, and that means the price of oil (and other commodities) needs to fall so sanity can be restored.

US shale in particular is a nasty bubble — the next “subprime” crisis.

North Dakota needs an oil price of around $55 per barrel at the wellhead and a fleet of about 140 rigs to sustain production at the current level of 1.2 million barrels per day, the U.S. state’s chief regulator told legislators on Thursday. . . . Breakeven rates for new wells, the level at which all drilling would cease, range from $29 in Dunn county and $30 in McKenzie to $36 in Williams and $41 in Mountrail. These four counties account for 90 percent of the drilling in the state.

Breakevens in counties on the periphery of the Bakken play, which have far fewer rigs, range up to $52 in Renville-Bottineau, $62 in Burke and $73 in Divide.

But Flint Hills Resources’ posted price for North Dakota crude was just $32, Helms said, compared with almost $49 per barrel for WTI. Wellhead prices, which are roughly an average of the two, are around $40 and have been falling since the start of this year.

Even before prices hit these minimum levels, drilling will slow sharply. The number of rigs operating in the state has already fallen to 165, down from 191 in October, according to the department. . . .

To keep output steady at 1.2 million b/d for the next three years, the state’s producers need a price of $55 rising closer to $65 in the longer term to support a fleet of 140-155 rigs.

Helms’ projections confirm North Dakota’s oil output will start to fall by the end of the year unless prices rise from their current very depressed level.

http://www.reuters.com/article/2015/01/09/bakken-oil-breakeven-kemp-idUSL6N0UO2QR20150109?feedType=RSS&feedName=rbssEnergyNews

Unlike conventional projects, shale wells enjoy an extremely short life. In the Bakken region straddling Montana and North Dakota, a well that starts out pumping 1,000 barrels a day will decline to just 280 barrels by the start of year two, a shrinkage of 72%. By the beginning of year three, more than half the reserves of that well will be depleted, and annual production will fall to a trickle. To generate constant or increasing revenue, producers need to constantly drill new wells, since their existing wells span a mere half-life by industry standards.

In fact, fracking is a lot more like mining than conventional oil production. Mining companies need to dig new holes, year after year, to extract reserves of copper or iron ore. In fracking, there is intense pressure to keep replacing the production you lost last year.

On average, the “all-in,” breakeven cost for U.S. hydraulic shale is $65 per barrel, according to a study by Rystad Energy and Morgan Stanley Commodity Research. So, with the current price at $48, the industry is under siege. To be sure, the frackers will continue to operate older wells so long as they generate revenues in excess of their variable costs. But the older wells–unlike those in the Middle East or the North Sea–produce only tiny quantities. To keep the boom going, the shale gang must keep doing what they’ve been doing to thrive; they need to drill many, many new wells.

Right now, all signs are pointing to retreat. The count of rotary rigs in use–a proxy for new drilling–has fallen from 1,930 to 1,881 since October, after soaring during most of 2014. Continental Resources, a major force in shale, has announced that it will lower its drilling budget by 40% in 2015. Because of the constant need to drill, frackers are always raising more and more money by selling equity, securing bank loans, and selling junk bonds. Many are already heavily indebted. It’s unclear if banks and investors will keep the capital flowing at these prices.

http://for.tn/1xLDxc9

I think long-term Canadian oil sand projects will have a stronger future, because they have more fundamental validity and less bubble finance hype (although there is some of that, of course). And while it it doesn’t seem like it to individual market participants, prices ultimately determine costs and so lower prices will push costs down. Rates of return in the market tend to equalize across different industries — there is not legitimate reason why people should forever expect above-market wages and investment returns in the oil business.

CENTRAL BANKS BACKING OFF?

Because I believe the Austrian business cycle theory is correct, I think China’s tightening of monetary policy has been a major factor here.

Likewise the Federal Reserve, with its 7x increase in the size of its balance sheet, culminating with a “taper” and proceeding into deflation mode following the end of QE3. That’s right, deflation mode. They did not just “taper” the rate of growth on the monetary base then hold it steady. The Fed actually sold off 10% of its assets starting in September before jumping back into open market operations with $250 billion in purchases. This kind of behavior is very disorienting for the market, with capital markets adjusting to money being sucked out and then pumped back in. But it helps explain the strengthening of the USD and the bloodshed in the commodities markets.

fed deflation

Then on Jan 15 came the Swiss National Bank’s surprise decision to end its foolhardy 1.20 EUR peg before Drahgi opened the ECB money floodgates. In its Keynesian desperation to diminish CHF purchasing power, the SNB’s balance sheet increased fivefold since the financial crisis and it amassed assets equal to 100% of the nation’s GDP — which is even more extreme than the insane BOJ, if you can believe it. With this development, the franc soared against the Euro and the US dollar and baffled everyone, even destroying a couple of FX firms overnight in one fell swoop.

Things will get crazy as some central banks tighten and others keep printing. These currency dislocations could lead to a currency crisis somewhere, but that is hard to predict. In any case, the insanity meter is in the red.

WHAT ABOUT GOLD?

Gold and oil often move together. And when the US dollar strengthens, gold usually weakens. But we are not really seeing this. Gold has been quite resilient amidst falling commodity prices and is performing well so far in 2015.

gold price

In this case, I’m not entirely sure what this means. On the one hand, it could indicate that a recession is less likely. On the other hand, it could indicate that investors are worried and are hedging against danger, like more aggressive central bank interventions.

CONCLUSION

The “correction” is healthy. It means reallocating resources to their most economical use. But it is painful — like a heroin addict going into detox.

It would be good for the world if oil went down to $20 a barrel and stayed there for 20 years, but I think the “peak oil” thesis is basically correct, and prices will rise again. We might not see a radical swing like in the 2008 crash, where we went from $37 back to $80 within the year.

The timing for all this depends on what happens in the recovery phase. Major readjustments need to occur. These adjustments could be brutal and quick, and the economy could resume a healthy course within a year, so long as the myriad governments take a “laissez-faire” approach. If governments impair economic adjustment with more taxes, spending, and inflation, we’ll just get a huge mess because the economy is straining against maximum debt levels and a huge bounce-back recovery a la 2008-2009 is not going to work this time.

So there you go. Prepare for some trouble. Hold cash.

Did Canada’s Housing Bubble Just Get Popped?

Canada’s housing market has soared while the US market crashed.

Canada has the most overvalued housing market in the world:

The WSJ recently commented:

Canada, for example, is very open to foreign investors, which means that in an age of unprecedented global liquidity cash-rich wealthy individuals who are looking for places to park their excess funds can do so in its housing market far more easily than in Japan, with its closed system.

Now, the Canadian government is eliminating “its controversial investor Visa scheme, which has allowed waves of rich Hongkongers and mainland Chinese to immigrate since 1986.”

The story continues in The South China Morning Post:

Canada’s government has announced that it is scrapping its controversial investor visa scheme, which has allowed waves of rich Hongkongers and mainland Chinese to immigrate since 1986.

The surprise announcement was made in Finance Minister Jim Flaherty’s budget, which was delivered to parliament in Ottawa on Tuesday afternoon local time. Tens of thousands of Chinese millionaires in the queue will reportedly have their applications scrapped and their application fees returned.

The decision came less than a week after the South China Morning Post published a series of investigative reports into the controversial 28-year-old scheme.

The Post revealed how the scheme spun out of control when Canada’s Hong Kong consulate was overwhelmed by a massive influx of applications from mainland millionaires. Applications to the scheme were frozen in 2012 as a result, as immigration staff struggled to clear the backlog.

In recent years, significant progress has been made to better align the immigration system with Canada’s economic needs. The current immigrant investor program stands out as an exception to this success,” Flaherty’s budget papers said.

For decades, it has significantly undervalued Canadian permanent residence, providing a pathway to Canadian citizenship in exchange for a guaranteed loan that is significantly less than our peer countries require,” it read.

Under the scheme, would-be migrants worth a minimum of C$1.6 million (HK$11.3 million) loaned the government C$800,000 interest free for a period of five years. The simplicity and low relative cost of the risk-free scheme made it the world’s most popular wealth migration program.

A parallel investor migration scheme run by Quebec still remains open. Many Chinese migrants use the alternative scheme to get into Canada via the French-speaking province and then move elsewhere in Canada. The federal government has previously pledged to crack down on what it said was a fraudulent practice.

Flaherty also announced yesterday the scrapping of a smaller economic migration scheme for entrepreneurs.

All told, 59,000 investor applicants and 7,000 entrepreneurs will have their applications returned, Postmedia News reported. Seventy per cent of the backlog, as of last January, was Chinese, suggesting more than 46,000 mainlanders will be affected by yesterday’s announcements.

The Immigrant Investor Program, which has brought about 185,000 migrants to Canada, was instrumental in facilitating an exodus of rich Hongkongers in the wake of the 1989 Tiananmen massacre and in the run-up to the handover. More than 30,000 Hongkongers immigrated using the scheme, though SAR applications have dwindled since 1997.

The investor visa plan is truly stupid and should be eliminated. The idea of requiring loans to the government in exchange for citizenship is incredibly perverse. All money lent to the government is wasted and hurts the economy. The Chinese and Hongkongers who participated in this program could have really invested that money in productive endeavors instead. But this is a double-whammy to the Canadian economy, because to pay back those loans the Canadian state must tax its citizens, which hurts the economy even more.

But what effect will this have on Canada’s housing bubble? It will reduce demand for Canadian real estate. That obviously doesn’t help keep prices high.

Yet the really critical factor is central bank policy. The Bank of Canada is not up to date on its financial statements, but as of November it held more assets than ever. I am interested to see whether Poloz will “taper” with his American counterparts.

My intuition says that he won’t. Poloz wants to keep down the Canadian dollar and subsidize exports.  The Bank of Canada has been expanding its balance sheet since mid-2010. Canada’s M1 money supply has grown dramatically. Canada’s housing prices are high. Canada’s interest rates are low. Yield on Canadian government bonds have fallen below American bonds. Yet consumer prices are not rising quickly, so the Bank of Canada sees its policy as an epic success so far.

— Read more at zerohedge

Capital Is Flowing Out of the U.S. Faster Than Ever

The US Treasury Department reports that Japan and China — the biggest holders of America’s debt by far — has dumped $40.8 billion in US bonds.

Interestingly, government bonds were not the only products being sold. Foreigners sold:

  • $5.2 billion in Freddie Mac, Fannie Mae, and Ginnie Mae bonds.
  • $5 billion in corporate bonds
  • $116 million in bonds composed of packaged US mortgages.

And they also sold $26.8 billion in US stocks.

All counted, this withdrawal of foreign capital is greater than during the 2008 crisis. It is greater than any time in history.

The Fed’s QE3 program, which creates $85 billion per month to suppress interest rates, is rapidly losing its effectiveness.

It prompts the worrying question: How big is QE4 going to be?

Read more at Money and Markets

Another Reason for Protectionists to Hate China

Protectionists hate China because their wages are “too low,” and that’s “not fair.”

(Mostly it’s not fair for the Chinese, whose wages would rise if their government would not print so much of its currency to prop up the US dollar.)

Prime Minister Harper wants more tariffs on Chinese goods.

Wait until the protectionists see this video. “Child labor! Child abuse!” they will cry. They will plead for more tariffs.

Apparently the boy makes a salary of 4000 RMB, which is about $675 in Canadian dollars. Not bad.

Chinese Slowdown Puts a Drag on Energy Markets

Oil is the world’s most important commodity. Its market provides a good indication of where the economy is going.

The price of oil fell for five days before jumping today because of strong consumer confidence numbers in the US. The push down had been largely due to news from China.

Chinese manufacturing activity fell in May after months of slower growth. Its PMI hit a seven-month low of 49.6. A value below 50 indicates a contraction.

Oil consumption in OECD countries has fallen the last few years. In the rest of the world, it is has grown. The biggest of these consumers is China.

China is the world’s major exporter of manufactured goods. The decline in manufacturing activity implies the world’s slowing demand. This in turn will result in a reduced demand for energy.

China is a major factor in the marginal demand for oil. The oil price is not set by speculators, but supply and demand. Producers pump as much as they can. Chinese demand — in no small part driven by radical monetary expansion — is largely responsible for the boom in oil prices, from $20 a barrel in 2001 to current levels.

Chinese slowdown will cause oil prices to fall. When the economy is growing, oil prices rise because there is greater demand for energy. Prices fall when demand falls. This is elementary economics. The price of oil will decline.

— Read more at Marketwatch

Are Chinese Women Smarter Than Warren Buffett?

Warren Buffett is one of the world’s most successful investors. He is also a well-known critic of gold as an investment. He believes buying gold is “stupid.”

Middle-aged Chinese women did not get university economics or finance degrees. They do not understand the difference between economic schools of thought. But they have lived under brutal Communism. They have suffered extreme poverty. They understand what it takes to preserve wealth under tyranny.

These Chinese women are buying gold. More than Indian fathers. From a recent report:

On Sunday afternoon, a microblogger in Beijing logged into Sina Weibo, China’s leading social media platform, to gossip about the “auntie” next door. It’s a broad term of respect for an older woman, and his followers understood precisely what he meant when he tweeted, “The auntie next door used all of her retirement savings to buy gold. When asked what she’d do if prices keep dropping, she replied that if everyone kept buying gold, the price wouldn’t drop…”

This might strike a conservative investor as reckless. But in China, where gold has long been a national obsession, a mid-April record crash in global gold prices has been seen as an unprecedented buying opportunity. According to reports in China, Chinese have purchased 300 tons of gold worth more than $16 billion since the crash.

These people are not trading gold futures on margin. They are allocating their savings to precious metals.

Photos of crowds packing jewelry shops and emptying their shelves are now regular features in the news media. On Monday, a police officer in Shanxi province tweeted, in regard to his actual aunt: “My aunt’s family has a gold store, and my colleague who’s in the market for some gold for his mother asked if I could get him a cheap price. I asked, and my aunt said first come and take a look to see if anything catches your eye. But at the moment the display cases are empty, and they are unable to get new inventory. All I can say is that the power of the Chinese is frightening.”

China’s voracious appetite for gold is long-standing. At Chinese jewelry stores, the spot price for gold is always prominently displayed. Calculators and scales are never out of a customer’s reach. Gold jewelry is desirable, but so are gold bars, and any jewelry store that considers itself full-service will stock ingots of various weights. (In April, an investor in Guangzhou bought 44 pounds of the bars, according to a local newspaper.) Special commemorative bars in various weights and designs were issued for the 2008 Beijing Olympics and the 2010 World Expo in Shanghai.

The current rush is unusual in two ways. The first is its epic scale. The second is that, according to both traditional and social media, aunties are doing most of the buying.

This activity is widespread in China. When something is widespread in a country with 1.35 billion people, it’s a real phenomenon.

Social media tends to take a less critical, and more personal, view of the aunties. Depictions involving mother-daughter interactions, in particular, are very common. On Saturday, Zhongxiao Fang Fang Fang, the handle for a microblogger in Shenzhen, tweeted: “Yesterday my mother called me to say the price of gold has fallen, and to ask me to go to Hong Kong to buy gold. I said I didn’t want any. She very calmly said it would be good to prepare a dowry so I can get married!”

Reported elsewhere:

Perhaps the majority of Americans cannot comprehend the unusual feelings Chinese people have toward gold and silver. They’ve never considered that rather than being afraid to invest in gold, the Chinese are more afraid that they won’t possess gold. Maybe what Chinese aunties care about is not the price of gold tomorrow, their desire is perhaps nothing more than to buy gold, to delight in gold, to hold it. Chinese aunties’ gold investment strategies are simple and unsophisticated, they just “buy what they want.”

What do the Chinese aunties know that Warren Buffett doesn’t?

Read more at Bloomberg

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