Sunday, 30 October 2011

Output Gaps in OECD Countries

The OECD Economic Outlook has a table showing output gaps for OECD countries. The output gap is defined as the percentage change of  actual output from potential output. Potential output is also known as the full employment or natural level of output. This is the amount of output that could be produced if the economy used all of its resources efficiently.

The effects of the most recent recession are clear as all of the countries recorded negative output gaps in 2009 and 2010. Canada's -5.2% output gap in 2009 was slightly above the OECD average while Canada's forecasted output gap for 2011 and 2012 are slightly above the OECD average. .Many countries are expected to have negative output gaps in the years 2011 and 2012. Greece, for example, is forecast to have a negative output gap of 11.1% and 11.2% in 2011 and 2012 respectively.

Wednesday, 12 October 2011

General Fusion's New Approach

For BSUS 6600 students there were some questions last class about the state of nuclear fusion.Here is a link to a story about Canadian company General Fusion. General Fusion is a venture capital backed start up company trying a different approach to nuclear fusion.

In related news, here is a link to a story about Terrapower, a start up company partly funded by Bill Gates.Terrapower is working on an advanced nuclear reactor that uses the more abundant uranium 238 rather than the rare uranium 235 used in conventional reactors.

Or, perhaps more research should be done on the liquid fluoride thorium reactor. The fact that China is now interested in this technology should give other countries a push.

Peak Oil and the Quest for Energy

Best selling Pulitzer-Prize winning author Daniel Yergin has a new book out The Quest: Energy, Security and the Remaking of the Modern World.  The world will never completely run out of oil, but the low cost easily accessible deposits are now in decline forcing the exploration and production of oil from more expensive and risky areas. The world demand for energy is going to grow enormously in the coming years and in the book Yergin sets out the factors to consider as the world moves towards energy transition. In essence, the $6 trillion global energy industry is up for grabs. Yergin's view is that technology, innovation and energy efficiency will help to offset rising oil prices. Coming in at slightly over 800 pages this is one heavy read. Here is a link to a Harvard Business Review blog that suggests Yergin's view might by overly optimistic.

Sunday, 9 October 2011

Corporate Tax Rates

From the Guardian, here is a link to an interesting article showing how corporate tax rates vary across countries. Among the OECD countries, America (39.2%) and Japan (39.5%) have the highest corporate tax rates. Canada has a 29.5% corporate tax rate. Among the OECD countries, Ireland has the lowest corporate tax rate at just 12.5% but this has not saved Ireland from being one of the PIIGS.

While the high US corporate tax rate looks ominous, the vast tax loop holes in the US tax code make it possible for some companies to pay very little tax.

 The US is one of the only developed countries to not have a national consumption (sales) tax. European countries have a valued added tax (VAT) and here in Canada we have a GST. Herman Cain has recently suggested the the US should adopt his 999 tax plan. A 9% flat tax on income, a 9% flat tax on sales and a 9% flat tax on corporations.

Sunday, 2 October 2011

Negative Electricity Prices in Germany

For BSUS 6600 students, here and here are interesting stories on how Germany's push for more renewable energy is actually generating negative electricity prices. Renewable energy gets priority access to the grid, so on days when the wind blows and the sun shines fossil fuel powered plants are stopped from running at full capacity to make way for the electricity being generated with renewables.

"The 15 mile-per-hour winds that buffeted northern Germany on July 24 caused the nation’s 21,600 windmills to generate so much power that utilities such as EON AG and RWE AG (RWE) had to pay consumers to take it off the grid."

September 2011, a Bad Month for the TSX

The TSX closed out September of 2011 at 11,623.8 which was a 9.39% drop from the last trading day in August. Using TSX price data from January 1957 to September 2011, the September 2011 drop was the 16 worst monthly return on the TSX. The TSX was down 13.48% over the third quarter of 2011.

Worst Months on the TSX
month TSX returns(%)
1987-10 3019.3 -25.66
1998-08 5530.7 -22.57
1980-03 1797.6 -19.86
2008-10 9762.8 -18.55
2008-09 11752.9 -15.85
1981-09 1883.4 -14.47
2001-02 8078.7 -14.31
1974-08 919.9 -13.89
1969-06 1008.6 -11.46
1973-11 1182.6 -10.94
1982-06 1366.8 -10.87
1957-08 520.2 -10.43
1979-10 1579.3 -10.37
1970-05 828.2 -10.26
1974-04 1099.9 -9.94
2011-09 11623.8 -9.39

Saturday, 1 October 2011

Melting Arctic Sea Ice

Here is a link to a video from The Economist showing how Arctic sea ice has changed since 1979. The economic implications of this melting sea ice is that it will soon be possible for large cargo ships to cross the Arctic ocean. This should make it easier and cheaper to ship cargo between the Atlantic and Pacific oceans.

The environmental implications are more complicated. Less Arctic sea ice means less sunlight being reflected and more heat being absorbed by the Arctic ocean. This will intensify the warming process. One big concern is what effect this warming will have on the large deposits of methane hydrate that are in the Arctic.

The October 2011 issue of National Geographic has a story titled Hothouse Earth, which describes a time  when

"56 million years ago a mysterious surge of carbon into the atmosphere sent global temperatures soaring."

During the Paleocene-Eocene Thermal Maximum, or PETM, period, the Arctic was a tropical climate and the summer water temperature in the Arctic Ocean was around 74 degrees Fahrenheit.

"The oldest and still the most popular hypothesis is that much of the carbon came from large deposits of methane hydrate, a peculiar, icelike compound that consists of water molecules forming a cage around a single molecule of methane. Hydrates are stable only in a narrow band of cold temperatures and high pressures; large deposits of them are found today under the Arctic tundra and under the seafloor, on the slopes that link the continental shelves to the deep abyssal plains. At the PETM an initial warming from somewhere—perhaps the volcanoes, perhaps slight fluctuations in Earth's orbit that exposed parts of it to more sunlight—might have melted hydrates and allowed methane molecules to slip from their cages and bubble into the atmosphere.

The hypothesis is alarming. Methane in the atmosphere warms the Earth over 20 times more per molecule than carbon dioxide does, then after a decade or two, it oxidizes to CO2 and keeps on warming for a long time. Many scientists think just that kind of scenario might occur today: The warming caused by the burning of fossil fuels could trigger a runaway release of methane from the deep sea and the frozen north."

Sector Rotation for September 30, 2011

At the end of each month, I rank a selection of  Canadian ETFs according to their price strength. The ranking is based on a simple average of three month returns, six month returns and twelve month returns.

Canadian size portfolios
iShares S&P/TSX 60 Index (XIU.TO)
iShares S&P/TSX Completion Index (XMD.TO)
iShares S&P/TSX SmallCap Index (XCS.TO)

Canadian industry sectors
iShares S&P/TSX Capped REIT Index (XRE.TO)
iShares S&P/TSX Capped Energy Index (XEG.TO)
iShares S&P/TSX Global Gold Index (XGD.TO)
iShares S&P/TSX Capped Financials Index (XFN.TO)
iShares S&P/TSX Capped Info Tech Index (XIT.TO)
iShares S&P/TSX Capped Materials Index (XMA.TO)

International portfolios
iShares S&P 500 Index C$-Hedged (XSP.TO)
iShares MSCI EAFE Index C$-Hedged (XIN.TO)
iShares MSCI Emerging Markets Idx (XEM.TO)
Claymore BRIC (CBQ.TO)


Rank 10 12 1 13 4 2 9
Above ma(10)? No No Yes No No Yes No

Rank 6 3 8 7 5 11 14
Above ma(10)? No Yes No No No No No