2013-38 How we define exchange rates

The exchange rate is the price of one currency in terms of a foreign currency.
As in:

• the exchange rate of the Kuwaiti dollar in terms of the Vietnamese dong (KWDVND=X) is almost 75000 of dongs for one dollar.
• the exchange rate of the Chilean peso in terms of the Canadian dollar (CLPCAD=X) is about 2/10th of a cent for one peso
• the exchange rate of the Canadian dollar in terms of the Chilean peso (CADCLP=X) - well, check it yourself or see the previous posting.

2013-37 How to check exchange rates

We will be talking about the exchange rates today. Here is how to check them.
1. Find out the symbols for currencies from the Oanda website
2. go to yahoo finance and enter the two currencies as in, for example:
CADUSD
This gives you the price of one Canadian dollar in US dollars, or the exchange rate of the Canadian dollar in terms of the US dollar.
More examples: 
The exchange rate in terms of  the Euro
The exchange rate in terms of the Chilean peso
The exchange rate in terms of the Vietnamese dong
The exchange rate in terms of the Kuwaiti dinar


3. If you want historical information, Oanda.com is a great resource

2013-36 CIBC's mortgages are insured

The CIBC has a fast growing mortgage business. After the Great Recession and its aftermath, this raises concerns about what can happen if the economy gets worse and borrower default rises.

No worries, says the CIBC. Our mortgages are insured. If borrowers default, we get the insurance payments.

This comment shows that Canadian banks learned a lesson from the Great Recession in the U.S.

A couple of comments:
1. So who will pay the insurance? You, that is who. Mortgages are insured with the Canada Mortgage and Housing Corporation (CMHC), a government entity. Banks pay for insurance so it should be ok, unless things get very bad.
Note, however, that CHMC is earning a profit. So we get a profit, and a tail risk.
2. The problem during the Great Recession was adverse selection and lower lending standards. This is a bank-centered article and it does not say a word about whether CIBC is maintaining high lending standards.

2013-35 But things are looking better

While unemployment in Spain is still unbelievably high as you saw in the previous post, things are getting better in Europe

This article is a good example of how you take a pulse of the economy.

1. Retail sales have been increasing (0.7% this month, 0.5% last month)
Consumption is, in most countries, more than 50% of the GDP. When consumers are buying, the economy is growing.

But you have to be careful because, as the article mentions, an unknown part of the increase in consumption was because sales in Portugal and Spain increased a lot, perhaps due to tourism sector rebounding.

Note: the numbers just published are for August. Information comes with a delay. In this case the delay is very short - just a month.

2. Survey of economic activity.
Purchasing manager index - a survey of firms - is above 50. This means that more than half of the managers reported that conditions are better than in the previous month. Purchasing managers are asked about output, new orders, employment and other issues. The answers are coded as: 1 - things are improving; 0.5 - no change, 0 - things are getting worse. The calculated value is a weighted index of answers.
Three things to note:
- purchasing managers are the first to know
- they are asked non-specific questions, so the are likely to answer. No trade secrets are revealed
- the questions are about fact, not opinions

3. Number of unemployed has been falling, third month in a row

2013-34 So how bad is it in Spain

Quite bad.
Unemployment is 26.3%, down from a record of 27.2%.
And youth unemployment (your age) is about twice higher.

2013-33 Shutdown and Canada

Here is a summary form the Globe and Mail and from the National Post

The exact rules of the shutdown are not set in stone. So it is not clear whether there will be any delays on the border.

The markets have already incorporated the shutdown into share prices, so do not expect much reaction. But, as another example of political issues in the US, in the medium run share prices are likely to be lower than they would have been otherwise.

There will likely be little effect on the economy. If the shutdown drags on for more than a couple of weeks, growth in the US will slow; with minor negative effects on our economy.

The big one will come around October 17, when the debt limit will become binding and the US government will not be legally allowed to borrow new money. Perhaps the politicians will come to an agreement by then.

2013-32 Shutdown indeed.

As there was no last moment agreement on funding the U.S. Federal Government, the shutdown started.

What happened?

• The budget has not been approved on time 

How it unfolded? 

• The New York Times provides a useful graphic 

How will it work (or rather - not work)?

• The US government will continue to operate; but only with essential workers
• Non-essential workers will be furloughed. What is a furlough? It is a temporary unpaid leave leave caused by demands of the employer. Most other workers may be unpaid, for the duration of the shutdown, but will be paid afterwards.
• Military personnel will be paid.

The New York Times provides another useful graphics 

Mechanism:

US has an unusual system of government in that the legislative and executive branches are separately elected. In Canada, certain legislation (including on the budget, as is now the case in the US) are automatically votes of confidence in the government. If such a vote fails, the government resigns and a new election is held. Parliamentary majority is usually sufficient, because of party discipline; under a minority government, the governing party needs support from other party or parties to pass legislation.

How is US budget resolution approved?

The House and the Senate need to agree on the resolution, and the president needs to sign it. If the president vetoes the resolution, the House and Senate can override it with a 2/3 of the vote.

In this case, the House and the Senate did not agree.

Why the shutdown?

The Republicans, who have majority in the House of Representatives, tried to impose conditions on the budget resolution. The Senate rejected the conditions.

While one of the conditions involved approval of the Keystone XL pipeline from Alberta to the Gulf-area refineries, the main issue is the Affordable Care Act, or Obamacare. The Republicans are dead set against it; the House held around 43 votes rejecting it.

More details are here

So who is right?

This is politics, but with economic consequences. Here is a comment from robertreich.org:

"[...] the only settled way we know what the American people want is through the democratic process. And the Affordable Care Act (Obamacare) is the law of the land. A majority of the House and Senate voted for it, the President signed it into law, its constitutionality has been upheld by the Supreme Court, and a majority  of Americans reelected the President after an election battle in which the Affordable Care Act was a central issue."

So this is about the Republican party achieving goals by means beyond the normal constitutional system.