Tuesday, September 29, 2015

The Global Property Guide - Spring 2015 Edition

Global Property Guide has just released its Q2 2015 analysis of the global housing market and, in general, the world's housing markets "continue to surge" with some exceptions.

Here is a table showing the year-over-year and quarter-over-quarter inflation-adjusted house price changes in order from highest to lowest year-over-year percentage appreciation:


On an annualized year-over-year basis, among the 39 nations in the analysis, Hong Kong saw the greatest percentage price appreciation at 16.43 percent and Dubai saw the greater percentage price depreciation at -11.72 percent.  During the year to Q2 2015, housing prices using inflation-corrected data have risen in 24 of the 39 nations in the analysis.  Of the total, 22 nations showed stronger upward price momentum and 17 nations showed weaker price momentum.

Let's break the data down by region.  

1.) Asia:  As I noted above, Hong Kong's real estate market is the top performer in the analysis, a significant turnaround from the year before.  It will be interesting to see what impact the slowdown in China's economy will have on Hong Kong's property market over the medium term given that Hong Kong's residential real estate is already severely unaffordable according to Demographia.  Japan's housing market rose strongly on the back of Prime Minister Abe's economic stimulus package.  That said, in five of the ten Asian markets, price performance was worse on a year-over-year basis in Q2 2015 than it was in Q2 2014.  The laggards include Singapore, Taiwan, Indonesia, Vietnam and China.  Here is a graphic showing how the Asian laggards have performed since 2010:


2.) North America:  The real estate markets in both Canada and the United States are strong and showing improvements when compared to 2014.  In Canada's eleven major cities, housing prices have risen by 4.0 percent on a year-over-year basis in Q2 2015, up from 2.03 percent in 2014.  This is the largest year-over-year increase since the first quarter of 2012.  Here is a graphic showing the performance of the Canadian housing market since 2001 in both real and nominal terms:


The best performing Canadian market was in Vancouver with year-over-year price increases of 7.4 percent in Q2 2015.  This compares to 6.7 percent for Toronto, 4.6 percent in Victoria and 4.5 percent in Hamilton.  The biggest falls were in Montreal at -1.4 percent, and Ottawa and Calgary, both at -0.8 percent.

In the United States, both the Federal Housing Finance Agency's seasonally-adjusted house price index and the Case-Shiller seasonally adjusted price index showed improvements when comparing year-over-year data for Q2 2014 to Q2 2015.  Here is a graphic showing the performance of the U.S. housing market since 2001 in both nominal and real terms:


3.) Europe:  It is interesting to see that Ireland's property market is showing significant signs of life after being one of the markets that were driven down substantially during the Great Recession.  Unfortunately, the same cannot be said for Spain, another casualty of the real estate bubble collapse in Europe.  While they aren't present on my table, both Iceland and Estonia had significant price increases on a year-over-year basis in Q2 2015 with Iceland's prices rising by 6.19 percent and Estonia's rising by 8.99 percent.  Other strong markets in Europe include Romania (4.83 percent), Norway (4.26 percent), Germany (3.93 percent), Switzerland (2.76 percent) and the Netherlands (2.11 percent).  

European nations with minimal house price increases on a year-over-year basis in Q2 2015 included Portugal (1.53 percent), Slovakia (0.92 percent), Lithuania (1.15 percent and Latvia (0.65 percent).  

Russia had the third worst performing real estate market in the analysis with a year-over-year drop of 11.13 percent in Q2 2015.  This is not particularly surprising given that Russia's economy has been under significant strain thanks to international sanctions and dropping oil prices.  Spain, Greece, Cyprus, Croatia and Finland were among the losing nations.  Ukraine (Kiev) had the worst performing market in the analysis with a year-over-year drop of 10.64 percent in Q2 2015 following on the heels of a 33.49 percent year-over-year drop in Q2 2014.  We have to keep in mind that Ukraine's central bank has raised its benchmark interest rate to 30 percent in March 2015 and that the overall economy is expected to shrink by 9 percent this year.

This data shows us how widely variable the health of the housing market is both globally and regionally.  With the Federal Reserve once again contemplating its "monetary policy navel", it will be interesting to see how long it is before mortgage rates begin to rise around the world as other central banks fall into lockstep, putting pressure on housing markets where valuations have become stretched when compared to lagging household incomes.

Monday, September 28, 2015

The Zero Lower Bound Problem

The lengthy and rather tepid economic recovery since the so-called end of the Great Recession in 2009 is proving to be problematic for the world's central banks, most notably, the Federal Reserve which has the unenviable position of being the world's lead central bank.  As we now know, the Fed's use of unconventional monetary policies has been only modestly successful with some key aspects of the United States economy still under significant negative pressure, particularly inflation which is below the Fed's comfort zone and the real rate of unemployment which looks something like this:

A recent speech given by Andrew Haldane, Chief Economist of the Bank of England provides us with some insight regarding the issues facing the world's central banks, in particular, the issue of ultra-low interest rates also known as the zero lower bound or ZLB.  As we are all aware, in the past, central banks have widely used interest rates to enact their monetary policies; by raising interest rates, they slow down overheated economies and by lowering interest rates, they speed up economies that are underperforming.  Unfortunately, in the age of the ZLB, this relationship no longer works since interest rates are and have been around the zero percent mark for six long years.  To give us some perspective of how critical this issue has become, here is a chart showing global real interest rates since 1980 for both advanced and emerging economies:


In this chart, the red and blue lines are calculated using the nominal yield on a ten-year sovereign bond minus the one year ahead inflation expectation.  As you can see, back in the 1990s, real interest rates averaged around 4 percent.  With an inflation target of 2 percent, nominal interest rates averaged around 6 percent giving central banks plenty of room to maneuver above the zero lower bound.  As the decades past, this interest rate "headroom" slowly disappeared, leaving central bankers with the dilemma that they face today.  Between 1970 and 1994, a typical interest rate "loosening cycle" was between 3 and 5 percentage points.  Obviously, that cannot occur today with real interest rates sitting at or just above zero.  This means that central bankers are "out of monetary policy ammunition".

Here is a chart showing international central bank policy rates since 2000 and the nations that are included:


The light blue shaded region represents the world's central banks that have a policy rate ranging from 0 to 1 percent; right now, 40 percent of the central banks of the nations that are responsible for 70 percent of the world's have interest rates that would have practically been unthinkable prior to the turn of the new millennium.  As well, some countries in Europe have short-term interest rates that are negative.  As you can see on this chart, Japan has had an official interest rate of zero for nearly two decades:


Mr. Haldane goes on to note that the Federal Reserve, European Central Bank and the Bank of England have all augmented their traditional monetary policy (i.e. setting of interest rates to the zero lower bound) with massive QE programmes, injections of liquidity into the banking system and forward guidance on monetary policies.  This has led to massive bloating of central bank balance sheets as shown here and here:




The need for unconventional monetary policies arose from a technological constraint, the inability for central bankers to set negative interest rates on currency whereas it is possible to set negative interest rates on bank reserves.  It is this inability to set negative interest rates on currency that hinders the effectiveness of monetary policy because there is an incentive for consumers and business to switch to currency when interest rates become negative.  This is the key problem of the zero lower bound and the speaker questions whether the deep roots of the ZLB constraint may be structural (i.e permanent) or, at the very least, long-lasting.

So, what are the speaker's recommended solutions to solving the zero lower bound conundrum?  

1.) Allow the inflation target to float upwards.  For instance, by raising the inflation target from 2 percent to 4 percent would allow 2 extra percentage points of interest rate headroom.  The problem with this solution is that the world's economy over the past three decades has become accustomed to a falling inflation rate scenario.  By deliberately allowing inflation to rise, unforeseen risks could occur.  It may be difficult for the world's central bankers to reign in inflation once it begins to rise.

2.) Allow unconventional monetary policy to become conventional.  Under this scenario, QE and its fellow "Twist" would become "a monetary policy instrument for all seasons".  Unfortunately, as shown in the case of Japan, a lengthy period of QE has proven to be completely ineffective at prodding the moribund Japanese economy back to life.  As well, putting QE on a permanent monetary policy footing would risk the boundaries between monetary and fiscal policy which is controlled by governments.  If a central bank executes its QE program by purchasing government debt, this has an impact on the cost of servicing that debt (which it is supposed to do).  If that purchase is permanent, it has implications for how much debt the government can issue.  Obviously, this scenario would have an impact on "central bank independence".

3.) Allow negative interest rates on currency.  This scenario involves finding a means to levy a negative interest rate on currency through a stamp tax which could include randomly invalidating banknotes with certain serial numbers.  It could also be undertaken by abolishing paper currency or by setting an explicit exchange rate between paper currency and electronic or bank money.  In the last scenario, paper currency would steadily depreciate relative to digital money, acting as a negative interest rate on currency.  Whether any of these options would be accepted by consumers is up for debate.  The speaker notes that Bitcoin is a prime example of a digital currency that has worked and that it could form the template for a new central bank-issued digital currency, doing away with the need for those nasty old fashioned bank notes.

To switch gears for a moment, here is an excerpt from Janet Yellen's speech on September 24, 2015:

"Inflation that is persistently very low can also be costly, and it is such costs that have been particularly relevant to monetary policymakers in recent years. The most important cost is that very low inflation constrains a central bank's ability to combat recessions. Normally, the FOMC fights economic downturns by reducing the nominal federal funds rate, the rate charged by banks to lend to each other overnight. These reductions, current and expected, stimulate spending and hiring by lowering longer-term real interest rates--that is, nominal rates adjusted for inflation--and improving financial conditions more broadly. But the federal funds rate and other nominal interest rates cannot go much below zero, since holding cash is always an alternative to investing in securities.  Thus, the lowest the FOMC can feasibly push the real federal funds rate is essentially the negative value of the inflation rate. As a result, the Federal Reserve has less room to ease monetary policy when inflation is very low. This limitation is a potentially serious problem because severe downturns such as the Great Recession may require pushing real interest rates far below zero for an extended period to restore full employment at a satisfactory pace.  For this reason, pursuing too low an inflation objective or otherwise tolerating persistently very low inflation would be inconsistent with the other leg of the FOMC's mandate, to promote maximum employment." (my bold) 


As we can see from both of these speeches, the world's central banks have backed themselves into a monetary policy corner.  With the world's bond and stock markets dreading the impact of a minute increase of 0.25 percent in the Federal Reserve's federal funds rate and with the mathematical likelihood of the next recession looming, the zero lower bound will prove to be increasingly problematic for the Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan, the Deutsche Bundesbank and their sister central banks around the world.

After all of this, it certainly appears that the Fed (among others) is simply going to raise rates just so that they can lower them again in the future, suggesting that they are concerned about the effectiveness of their experimental policies over the past seven years.

Thursday, September 24, 2015

How Your Employer Can Track Your Work Day

An interesting article from Techcrunch provides us with a glimpse of what the working world may look like in the not-too-distant future.  

According to the article, Humanyze, a new firm founded by Ben Waber, Daniel Olguin-Olguin, Taemie Kim and Dr. Alex Peatland from the human Dynamics Laboratory at MIT has developed a method of tracking every move that an employee makes during a working day.  Humanyze "helps companies improve by understanding their people" through the use of wearable sensors which provide digital data that can be analyzed by the corporate world.  One technology that Humanyze has developed is a smart employee badge that collects the behaviour of employees through their working day which can then be analyzed with the hope/promise of improving productivity and the bottom line.

The Sociometric Badge, a smart badge worn by employees, contains a microphone, bluetooth connection and accelerometer to measure how people moved throughout the office during the day, who they communicated with along with their tone of voice during inter-employee interactions as well as nearly 40 additional types of information that are collected.  It can also capture face-to-face interactions and extract social signals from speech and body movements.  The device resembles a smart phone and each badge collects about 4 GB of data per day which is then uploaded to the cloud where Humanyze can analyze it.  The data is then reduced to 6 key aspects that are the most important to each of their corporate clients.  While all of this may seem rather "Big Brotherish", Humanyze claims that they have taken precautions to ensure privacy by preventing companies from having access to individual's data and that individual's data will not be shared with anyone else.  Content is not recorded and is analyzed immediately without being saved to memory.  Humanyze claims that by "...using this platform, we help organizations unlock the potential of their people, and develop iterative and disruptive innovations to match their evolving business demands."

Here is a video showing how one of their analytical products works:


Note that the data gathered from the smart badge can be used to measure how employees dominate, participate in and take turns in company meetings.  This supposedly increases collaboration and engagement for meeting participants.

This product is suited for:

1.) The retail sector - improvement of employee-customer interaction

2.) Mergers and Acquisitions - identifying cultural and structural differences

3.) Training and Development - tailoring training programs by quantifying the mix of behaviours that lead to success

4.) Human Capital Management - provide tools for recruiting and managing talent

5.) Call Centers - revealing the drivers of employee engagement

6.) Engineering and Technical Teams - mapping the sharing of knowledge within a team to uncover gaps and challenges

On its website, Humanyze cites seven case studies where its product was used.  In one case, they used their Sociometric Badge and Humanyze Analytics System to examine the productivity of the 10,000 employees employed at the call centers for the Bank of America, analyzing the call center's social engagement, team cohesion and job satisfaction.  Their analysis uncovered a lack of social engagement among teammates which led to poorer performance and job satisfaction.  They recommended changes to the company's scheduling which allowed employees to all take lunch at the same time so that they could communicate with each other.  Network cohesiveness as measured by how well employees communicated improved by 18 percent, stress as measured using tone of voice dropped by 19 percent and call completion time improved by 23 percent.  One does have to wonder how much of the improvements were short-term because of the presence of the badges and how long the improvements will last.  Other companies that have used the Sociometric Badge include Cubist Pharmaceuticals, an unnamed IT company, the marketing division of a large German bank and the sales division of an Eastern European Bank.

I find this technology both fascinating and frightening at the same time.  Now that technology has allowed the development of a smart employee badge that can track every word and action of an employee during his or her working hours, how long will it be before corporations around the world adopt this technology under the guise of improving employee morale and productivity at the same time as they intrude ever further into their employees lives?  How long will it be before companies force employees to wear smart badges with no promise of anonymity or privacy of any kind as a condition of employment?


Wednesday, September 23, 2015

The Issue That Canada's Politicians Are Avoiding

Back on February 6, 2015, the Supreme Court of Canada announced its ruling on Carter v. Canada as shown on this document:



The Supreme Court unanimously ruled that people with both grievous and irremediable medical conditions should have the right to ask a doctor to help them die as shown in these key paragraphs:

"Insofar as they prohibit physician-assisted dying for competent adults who seek such assistance as a result of a grievous and irremediable medical condition that causes enduring and intolerable suffering, ss. 241 (b) and 14  of the Criminal Code  deprive these adults of their right to life, liberty and security of the person under s. 7  of the Charter . The right to life is engaged where the law or state action imposes death or an increased risk of death on a person, either directly or indirectly. Here, the prohibition deprives some individuals of life, as it has the effect of forcing some individuals to take their own lives prematurely, for fear that they would be incapable of doing so when they reached the point where suffering was intolerable. The rights to liberty and security of the person, which deal with concerns about autonomy and quality of life, are also engaged. An individual’s response to a grievous and irremediable medical condition is a matter critical to their dignity and autonomy. The prohibition denies people in this situation the right to make decisions concerning their bodily integrity and medical care and thus trenches on their liberty. And by leaving them to endure intolerable suffering, it impinges on their security of the person.

The prohibition on physician-assisted dying infringes the right to life, liberty and security of the person in a manner that is not in accordance with the principles of fundamental justice. The object of the prohibition is not, broadly, to preserve life whatever the circumstances, but more specifically to protect vulnerable persons from being induced to commit suicide at a time of weakness. Since a total ban on assisted suicide clearly helps achieve this object, individuals’ rights are not deprived arbitrarily. However, the prohibition catches people outside the class of protected persons. It follows that the limitation on their rights is in at least some cases not connected to the objective and that the prohibition is thus overbroad. It is unnecessary to decide whether the prohibition also violates the principle against gross disproportionality." (my bold)

While I realize that this subject is as divisive as abortion, it is a subject that is of great interest to me, particularly since, in recent years, I have lost both of my parents, one who endured extreme pain from untreatable multiple cancers and another who lost all dignity as a result of dementia.

At the time of the decision, the Supreme Court gave provincial and federal governments 12 months to craft new legislation to deal with their ruling; since then, nearly eight months have passed and there has been a notable lack of progress from Ottawa on this issue.  The Harper government finds itself between a rock and a hard place because the religious base of the Conservative Party of Canada has a very clear opinion on the issue.

Back in 2012, the Quebec National Assembly's Select Committee on Dying with Dignity released a report that examined in great detail what society's answer is to the suffering that some people experience at the end of life or during a degenerative disease.  Quebec was willing to admit that the debate on euthanasia and assisted suicide was something that could no longer be avoided and that the National Assembly and its elected Members had a duty to deal with this issue as stated here:

"It is also clear that the National Assembly must also turn its attention to this issue. MNAs have a responsibility to focus on major societal debates that are ongoing in the population. It is in fact one of their crucial functions as elected representatives. We must also ensure that these discussions are conducted responsibly and under ideal conditions in order to foster calm, respectful debate."

Sadly, this does not appear to be the case with the federal government.  Leadership on this issue is sadly missing.

After having gone through the issue of dying with dignity with my own parents, here is a key paragraph in the report: 

"Getting society to accept that death, like birth, is a natural phase of life is no small task. However, only when we succeed in this regard will palliative care become a genuine part of the continuum of care."


From my personal and very recent experience, a significant part of palliative care is the use of sedation to induce sleep and continuously relieve the patient's awareness that they are suffering, a process that some regard as euthanasia in disguise.  This is particularly important where the use of pain medications like morphine no longer reduce pain and discomfort.  One of the problems occurring from palliative sedation is the cessation of nutrition and hydration.  In my own case, I can recall having feelings that my loved one was being starved to death, however, many physicians feel that the combination of palliative sedation and withdrawal of nutrition hasten death for the sufferer.

Interestingly, in January 2015, Canada Revenue Agency annulled the charitable status of Dying With Dignity Canada effective on February 15, 2015.  Dying With Dignity Canada was  founded in 1982 to promote choice and dignity at the end of life, educating Canadians about patient rights, advance care planning, providing one-on-one support to individuals who are dying and want to do so on their own terms.  CRA determined that "DWD Canada does not conduct any activities that advance education in the charitable sense" and that they are primarily "political".  In case you missed it, Dying with Dignity was an intervener on the Carter v. Canada case.  Why did CRA annul Dying With Dignity Canada's charitable status?  They claimed that the organization was registered in error as a charity way back in 1982.  It just took CRA 23 years to figure that out and annul their status.  I think that this gives us a sense of where the Harper government stood on the issue.

From this, I think that we have some idea of why the Harper government has pretty much chosen to ignore this rather discomforting subject, preferring to deal with it after the October 2015 federal election, just in case their stance on this issue alienates their base.  As well, any response to the Supreme Court decision will require co-operation between the federal government and the provincial governments who each have their own provincial colleges of physicians, a prospect that must make Mr. Harper rather uncomfortable since he has shown little interest in federal - provincial policy discussions of any type and around any issue.  In response to this very important and looming issue which is of particular importance as Canada's population ages, voters need to ensure that they hold candidates from all political parties accountable for at least taking a firm stand on the issue, particularly since there will be less than four months to craft legislation after the October election date.