Update, Canada’s economy from 10,000 feet

Snippet context: Canadians ought not to think we are exempt from either globalization influences or economic problems going forward. Snippet #3: What happens in Greece is particularly important in that it may be ‘precedent setting’ for other Eurozone countries going forward. Snippet #4: Spain and the other Eurozone countries are critical to think about because of possible contagion issues that will impact non-European country economies negatively.

Snippet context: Everyone, be they ‘in the financial markets or not’ ought to be paying close attention to the Eurozone economic issues, as in the end that will affect us all. Snippet #5: Where an increased income tax is imposed on a company, that company’s after-tax earnings and discretionary cash flows are reduced from what they otherwise would be. That in turn, all things equal, will have a negative affect on the companies equity value and share price. Snippet context: Those participating in the financial markets ought to think carefully about what increasingly seems to be the ‘short-term thinking’ of those markets. Today’s Detailed Commentaries North America >> Canada: Update, Canada’s economy from 10,000 feet Why Read: Because Canada, a comparatively small economy by world standards (2011 GDP U.S.$1.7 trillion – 10^th largest in the world – source Wikipedia) seems on a comparative basis to be doing ‘very well thank you’. Canadian’s ought not to be complacent. Commentary: Standard & Poor’s has reduced its outlook for seven of Canada’s largest banks from ‘stable’ to ‘negative’ in the face of what it sees as prolonged increases in both housing prices and consumer debt. This increases the possibility of credit downgrades, but does little else. To date, Canada has largely escaped the economic downturn that has very negatively impacted the economies of other developed countries including those in the 17 member Eurozone, the United Kingdom and the United States. That can’t go on forever, particularly as there are increasing negatives affecting the commodities markets – and hence resource companies and in due course if that continues, resource based economies such as Canada’s. That said, on Friday Canada‘s Finance Department reported that for April and May – the first two months of Canada’s fiscal year that ends March 31, 2013 – the Canadian Federal Government deficit was Cdn$832 million. That was down by over 50% from the same period last year (then Cdn$2 billion). The Canadian Government currently is projecting a Federal deficit of Cdn$21.1 billion for fiscal 2013, dropping further in fiscal 2014 and 2015 (Cdn$ 10.2 billion and Cdn$1.3 billion respectively), with a return to a Federal surplus in fiscal 2016 (Cdn$3.4 billion). To put Canada’s fiscal 2013 Federal deficit projection in some perspective, per capita (per person) it is about one-sixth of the current forecasted U.S. Federal deficit for the current U.S. fiscal year, which ends on September 30. To put Canada’s ‘economy from 10,000 feet’ into further perspective, Canada’s economy is very far from an isolated one in world terms. If the world economy deteriorates further, and it all signals seem to point that way, it is unlikely Canada’s Federal Government will be able to realize on their ‘return to Federal surplus’ forecasts by fiscal 2016. Topical References: S&P cuts outlook on seven major Canadian banks, from The Financial Post, John Greenwood, July 27, 2012 – reading time 2 minutes; and Ottawa’s deficit shrinks as tax income rises, from The Financial Post, Gordon Isfeld, July 27, 2012 – reading time 2 minutes. Brief Commentaries prompted by world headlines Asia >> China: China not exempt from protests and societal disorder On Saturday 1,000 protestors converged on government offices in Qidong, a city of about one million persons located one hour north of Shanghai. The protest was over an industrial waste pipeline. Consider at least two things:

• China’s huge population, some of which has seen its standard of living improved in recent past years in circumstances where in some cases a lower level of attention has been paid to environmental and labour related issues than prevails in most developed countries; and,
• the old adage that ‘you can’t take things away from people and leave them happy’.

A second article reports the pipeline project that was the subject of the protest has been cancelled. See Deutsche Welle article linked under Topical References. Context: While the two ‘things to consider’ do not match up perfectly, both are things that may impact China’s continued growth and prosperity going forward. Topical References: Chinese Citizens Stormed Government Offices Near Shanghai And Forced The Mayor To Strip, from Business Insider, Adam Taylor, July 28, 2012 – reading time 1 minute, accompanying video 5 minutes. The video is difficult to watch as it shows vertically, and is repetitive, but the video gives a perspective of the noise generated by a protest of only 1,000 people; and Chinese city scraps project after pollution protest, from Deutsche Welle, July 28, 2012 – reading time 1 minute. Eurozone >> Greece: Greece on the cusp It appears Greek politicians have agreed on all but 1.5 billion euros of the 11.5 billion euros required to meet the austerity measures to satisfy the conditions needed to receive its promised bailout funding. Assuming that last 1.5 billion euros is agreed, the next things to watch for include:

• does, which it almost certainly will, the promised bailout funding come forward, and if so when. Presumably time is not on Greece’s side at the moment;
• will current financial problems in Italy and Spain come to influence the Greek bailout funding, given that there can be only so many euros in the ‘eurozone bailout pot’; and,
• perhaps most importantly, how will the Greek people react to further austerity over the next months and years.

Context: What happens in Greece is particularly important in that it may be ‘precedent setting’ for other Eurozone countries going forward. Topical Reference: Greek leaders agree bulk of austerity cuts: source, from Reuters, Lefteris Papadimas, July 29, 2012 – reading time 3 minutes. Eurozone >> Spain: Is required Spain bailout funding possible? It is hard not to conclude that a crescendo of economic distress is being seen weekly in the Eurozone. I have questioned many times in these Newsletters (including this one – see commentary on Greek austerity) where ‘all of the euros are going to come from’ to bailout the Eurozone countries currently known or seriously suspected of requiring them. An article on Saturday in London’s Telegraph that reports on an estimate made by what it calls “leading think-tank Open Europe” is a must read, and you ought to take the time to do that whether or not you participate in the financial markets. Context: Whether it is an individual, a family, or a country, overspending has to catch up with one in the end. Spain and the other Eurozone countries are critical to think about because of possible contagion issues that will impact non-European country economies negatively. Topical Reference: Spanish bail-out ‘impossible’, experts warn, from The Telegraph, Angela Monaghan, July 28, 2012 – reading time 4 minutes. Brief Country Risk Commentaries prompted by world headlines Africa >> Tanzania: Tanzania increases corporate income tax Last Friday, July 17, Tanzania’s Energy and Minerals Minister told the Tanzanian Parliament that:

• he was “instructing all (gold) mining companies that have been in operation for over five years to start paying (a 30%) corporate tax”; and,
• audits of all large-scale Tanzanian gold mines are going to be completed to ensure those taxes are paid.

This is but one further example of:

• increased costs that likely will be imposed on foreign mining companies by both developing and developed countries going forward; and,
• enhanced resulting shareholder risk that arises from legislated changes.

Context: Where an increased income tax is imposed on a company, that company’s after-tax earnings and discretionary cash flows are reduced from what they otherwise would be. That in turn, all things equal, will have a negative affect on the companies equity value and share price. Topical Reference: Tanzania tells mining companies to pay 30% corporate tax, from Mining Weekly, from Reuters, July 27, 2012 – reading time 2 minutes.