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Why Mark Carney's call to stop gorging on debt is serious

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Carney's warning The governor of the Bank of Canada has been warning Canadians for some time now that they're putting themselves at risk by gorging on debt. Yesterday, he issued his harshest warning so far, Globe and Mail economics report Jeremy Torobin writes.

"This cannot continue," Mark Carney said in a speech in Windsor, Ont., noting that while asset prices rise and fall, debt "endures."

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Canadians have used ultra-low interest rates to load up on debt, and the central bank is worried that they'll take on even more given the still-low levels. Eventually, that comes home to roost when rates rise. Given the economic uncertainty and lack of direction of where rates are headed, Mr. Carney is hoping it stops, and he believes consumers are now heeding his advice.

As well, as consumers go on a debt diet and get their finances in order, this will affect the overall economy, leading to what Mr. Carney projects will be "modest" growth.

How serious are his warnings? As the Bank of Canada's numbers show, household debt as a share of personal disposable income has climbed sharply. Still below the rates of the United States and Britain, though getting ever closer, it has topped 145 per cent. Here are some other key facts from the central bank:

  • Canadian families have collectively run a net financial deficit for 37 quarters in a row, meaning "their investment in housing has outstripped their total savings for over nine straight years."
  • Canadian households are "increasingly vulnerable" to shocks, and that risk is growing more quickly than had been projected.
  • Net worth of Canadians is about six times the average disposable income, but the debt-to-asset ratio has climbed to its highest level in more than 20 years.

"While the governor also warned of rising Canadian debt levels, he emphasized the implications for sluggish future consumption growth and also hinted that the responsibility to rein in excessive credit growth will fall not just with the central bank (through higher rates) but also in more direct measures through regulation," strategists Mark Chandler and Kam Bath of RBC Dominion Securities said in a research note today. "However, he also affirmed a belief that mortgage growth is slowing of its own accord."

Behind the 'flash crash' The heart-stopping "flash crash" on May 6 was sparked by a major trader using a computer system to sell futures contracts, leading to rapid-fire selling, U.S. regulators have found. In a report today by the Securities and Exchange Commission and Commodity Futures Trading Commission, regulators said it related to an algorithm to trade a contract that mimics the S&P 500.

Trades were at first absorbed by high-frequency traders and other players but liquidity evaporated.

"One key lesson is that under stressed market conditions, the automated execution of a large sell order can trigger extreme price movements, especially if the automated execution algorithm does not take prices into account," the report said.

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"Moreover, the interaction between automated execution programs and algorithmic trading strategies can quickly erode liquidity and result in disorderly markets. As the events of May 6 demonstrate, especially in times of significant volatility, high trading volume is not necessarily a reliable indicator of market liquidity."

U.S. Steel to shut Hamilton works United States Steel Corp. will shut its steel making operations indefinitely in Hamilton, Ont., starting Monday blaming slumping demand, The Globe and Mail's Greg Keenan reports. The move comes amid a battle between the Pittsburgh-based giant and the federal government over promises the steel maker made when it took over what was then Stelco Inc. in 2007 and also while it's in a contract dispute with the union representing the remaining 900 workers at the plant, who have been without a contract since July 31.

China's numbers ease fears The latest economic numbers from China are easing concerns in some quarters that the engine of the global recovery is petering out. China's purchasing managers index, or PMI, a reading of manufacturing, rose in September to 53.8, above what was expected and up from 51.7 a month earlier.

"A stronger-than-expected September PMI manufacturing report from China appeased markets, raising hopes that China's economy will continue to maintain momentum and support global economic recovery," said Scotia Capital economists Gorica Djeric and Derek Holt.

China's Sinopec strikes deal with Repsol China is continuing its relentless pursuit of global resources, striking one of its biggest deals to date with the $7.1-billion (U.S.) purchase of a 40-per-cent stake in the Brazilian arm of Spain's Repsol. The investment from Sinopec will allow Repsol to develop offshore projects. With the investment from Sinopec, the Brazilian operation has a value of almost $18-billion, which, reports said, will make it one of the biggest privately owned oil concerns in Latin America.

U.S. sells Citigroup shares The U.S. government is, bit by bit, getting out of the financial services industry. The Treasury Department said late yesterday it has sold more than half of the interest it holds in Citigroup after the huge bailout during the crisis.

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And it turns out the bailouts are proving to have been a wise business investment, as well. The Treasury pumped $45-billion into Citigroup under the Troubled Asset Relief Program, or TARP. And so far, it was received back $41.6-billion from sales, repayments, dividends and other distributions, it said.

It still holds 3.6 billion shares and, it said, "the remaining shares of Citigroup common stock held by Treasury have a value of $14-billion at today's closing price."

Yesterday, the Treasury struck a deal with American International Group that sets the stage for the U.S. government to no longer control the insurance giant.

Luxury cars selling out Here's an indicator of a different sort: Flashy, super-expensive cars are selling out. Bloomberg News reports today that all five of Bugatti's World Record vehicle, worth the equivalent of $2.7-million (U.S.), have been reserved. BMW and Mercedes-Benz are aiming for sales gains of 10 per cent this year, while Maserati sales are up 20 per cent. And Ferrari's Aperta are also sold out.

"Since the middle of the year, we've been blessed with record order intakes on a monthly basis," Wolfgang Duerheimer, Porsche's head of development, told the news agency, referring to the new 911 Speedster. "Market sentiment is improving, things are pointing up."

So are shares of the luxury auto makers. BMW shares are up almost 60 per cent this, while shares of Volkswagen, which owns the Bugatti brand, are up 37 per cent. Daimler shares have gained 25 per cent.

From today's Report on Business

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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