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10 of the Best Canadian Stocks to Buy in October & Hold Forever

If you’re looking for some of the best Canadian stocks to buy in 2021, you’ve definitely come to the right article. And, the fact that you’re looking…

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This article was originally published by Stock Trades

If you’re looking for some of the best Canadian stocks to buy in 2021, you’ve definitely come to the right article.

And, the fact that you’re looking for the top Canadian stocks shows you believe there is value right here at home.

Canadian stocks and the Toronto Stock Exchange in general have had a poor reputation in terms of returns. Many investors looking to learn how to buy stocks in Canada skip the Canadian markets and head down south for more growth.

But, there’s money to be made when it comes to Canadian stocks and the Canadian stock market, especially in the environment we’re heading into, that being a re-opening of the economy and rising interest rates.

We know how to identify the best stocks in Canada

In fact, I’ve achieved annualized returns of over 22.76% over the last five years since I swapped my strategy to specifically target Canadian growth stocks.

Proof? Here’s a snapshot of my returns pulled directly from Qtrade. Which by the way, is in my opinion the best brokerage platform in the country (you can read my Qtrade review here.)

But don’t fret, the 10 top Canadian stocks listed below aren’t slouches, and they have some potential to post outsized returns.

10. Agnico Eagle Mines (TSE:AEM)

Agnico Eagle Mines

It’s been a long time since a Canadian stock in the material sector has been featured so prominently on this list of top stocks.

With the possibility of inflation coming and interest rates increasing, Canadian investors would be crazy to leave their portfolios without any exposure to gold.

As we can see in recent times, gold is making a comeback, and the rising price of gold miner shares is providing some stability to Canadian’s portfolios.

There are a few things I look for in particular when I’m looking at a long term gold play. The first one is mining jurisdictions.

Are there opportunities to make more with smaller, more speculative mining companies? Absolutely.

In fact, we relayed both Leagold Mining and Semafo to Premium members back in 2019, and both companies were scooped up via acquisitions, resulting in some nice returns.

However, for a long term play we want gold companies that mine in safe jurisdictions, where there is relatively little risk of political or regulatory interference.

Agnico Eagle Mines (TSE:AEM) fits that bill. The company primarily operates in Canada, Finland, and Mexico and owns 50% of the Canadian Malartic mine.

In 2020, the company produced 1.74 million ounces of gold, which at the current gold price of $1800/oz~ would equal $3.12 billion USD in revenue.

Agnico has issued guidance that gold production will increase by 300,000 ounces in 2021.

The company is the second largest gold producer in the country with a market cap of $17.6 billion, behind only Barrick Gold.

The company used to be a single mine producer, but has expanded at a rapid rate since the financial crisis of 2008, adding more than 5 mines to its portfolio.

Additionally, through further developments the company plans for a 25% increase in production by 2022.

Agnico has also just achieved Canadian Dividend Aristocrat status, with a 5 year dividend growth streak after its most recent increase in the fall.

Over the past 5 years, Agnico has grown its dividend at a pace of 34.34% annually, and its most recent increase more than doubled this rate as it pumped its dividend up by 75%.

Its yield is small at 1.93%, but with significant cash flow generation in the company’s future, I expect its dividend growth rates to increase.

Agnico Eagle Mines 5 year performance vs TSX

TSE:AEM Vs TSX

9. Pollard Banknote (TSE:PBL)

Pollard

The lottery is a great business, but unfortunately the government benefits the most.

Pollard Banknote (TSE:PBL) provides investors one way to participate in the lottery business, while also getting a piece of the growing “iLottery” space.

Pollard Banknote is the number 2 producer of instant lottery tickets in the world. This is the core of Pollard’s business, and it’s a very good business.

The business has high barriers to entry as there are regulations about importing lottery tickets, so Pollard is likely to hold on to its competitive position.

Pollard has grown its instant lottery ticket revenues at a 9% compound annual growth rate since 2012.

The most exciting part about Pollard is its 50% ownership in NeoPollard Interactive.

This is a 50-50 joint venture with NeoGames that is focused solely on the iLottery space, giving states the ability to operate lotteries on the internet.

This is a very new industry, but it is growing rapidly and NeoPollard Interactive is the most successful operator in the industry.

Just 8 states offer instant lotteries on the internet, and NeoPollard operates three of them. And the iLotteries in NeoPollard states have much better higher penetration, indicating that NeoPollard is better than its competitors.

We think it’s inevitable at this point that eventually every jurisdiction that runs lotteries now will add iLottery and given NeoPollard’s success so far, I expect NeoPollard is going to win a lot of business as states and countries legalize it.

The growth in Pollard’s base instant lottery ticket printing business, and its new iLottery business, will ensure the company keeps up its excellent growth.

Over the last 5 years, Pollard has grown revenue 13.7% annually, and it has grown its bottom line even faster, with earnings per share growth of 28.8% per year.

Growth was slower in 2020 because of COVID-19 lockdowns, but analysts expect growth to accelerate again in 2021. Analysts are estimating that Pollard’s revenue will grow 13.3% and earnings per share to grow 7.3%.

But that should just be the beginning. If iLottery takes off like we think it will, Pollard is going to grow into a much larger company.

Even though iLottery is just starting, Pollard Banknote has already proven to be a fantastic investment for shareholders. A $10,000 investment in Polalrd when it went public in 2005 would be worth over $91,400 today.

Over the last year the stock price is up 261% as investors are catching on to the potential of its iLottery business.

Pollard pays a modest dividend, with the yield currently 0.29%. But Pollard does look like it will be growing its dividend.

The company raised its dividend by 33% in 2019, and as earnings grow and the iLottery business matures, I expect the dividend will grow a lot as well.

Bottom line is there is an opportunity to invest in Pollard at the start of a revolutionary growth story, all while Pollard’s core business continues to produce profits.

Pollard Banknote 5 year performance vs TSX

TSE:PBL Vs TSX Index

8. Goeasy Ltd (TSE:GSY)

Goeasy Ltd

Over the last half decade, there’s been somewhat of an emergence in a particular niche industry in the financial sector, and that is alternative lenders. One of the best Canadian stocks in that niche? Goeasy Ltd (TSE:GSY).

Goeasy Ltd is a small-cap Canadian stock that provides non-prime leasing and lending services through its easyhome and easyfinancial divisions.

The company has issued $5 billion in loans since its inception.

It also continually works to increase Canadian borrower’s credit scores, with 60% of customers increasing their credit scores less than 12 months after borrowing.

The company provides loans for a wide variety of products including furniture, electronics, and appliances. Goeasy has become an attractive alternative for Canadians due to strict lending restrictions placed on Canada’s major financial institutions.

A lot of investors view Goeasy’s business model as predatory. If something doesn’t adhere to your principles, don’t invest in it.

Much like tobacco or alcohol, some investors aren’t willing to support companies with such products. But you can’t deny that what Goeasy is doing is working, and it’s working well.

Since 2001, Goeasy has grown revenue at a 12.8% compound annual growth rate. In fact, the company has never had a year since 2001 where revenue was flat or lower than the year before.

If we look towards recent years, from 2015 to 2020 the company doubled revenue, confirming the fact that alternative lenders are catching on in a big way.

Even more impressive is the company’s earnings, as net income since 2001 has grown at a pace of 31% annually. To grow net income at a compound annual rate of more than 30% over 2 decades just highlights how strong this company has been.

That’s exactly why a $10,000 investment in Goeasy Ltd in 2001 would be worth over $1 million today.

The company is also growing its dividend at one of the fastest rates in the country. The company has a 39.8% 5 year annual dividend growth rate and has raised dividends for 5 consecutive years, including the most recent increase of 47%!

Overall if you’re looking for a growth play in the financial sector, I don’t think there is a better option than Goeasy Ltd. 

Despite a global pandemic, the stock has still provided excellent returns to current investors, and has provided significant returns to Premium Members when we highlighted it in 2018.

We used to have the stock higher on this list, but its run up in price has caused us to drop it down a bit. But make no mistake about it, this is one of the best stocks on the TSX Index today.

Goeasy ltd 5 year performance vs TSX

TSE:GSY Vs TSX

7. TFI International (TSE:TFII)

TFI International

TFI International (TSE:TFII) is a stock we covered extensively at Stocktrades Premium, especially during the peak of the COVID-19 pandemic, and the company has more than tripled off those lows.

TFI International is a trucking and logistics company. The company operates in four segments: Package and Courier, Less-Than-Truckload, Truckload, and Logistics. Along with 31,000 employees, it has over 500 terminals across North America.

The company has operations in the United States and Canada, and following its recent acquisition of UPS’s Less-Than-Truckload freight business, the bulk of its revenue, almost 75%, will come from the US.

So why were we extremely bullish on TFI during the pandemic over at Stocktrades Premium, and why are we still bullish on them despite the huge price increase in 2020 and 2021?

While mass panic selling was occurring, TFI International’s stock was not immune to the sell off. The stock quickly plummeted in March, hitting the $24 range. Fast-forward a year and the stock is currently trading 365% above those levels.

With the strong financial position the company was in, it went on the hunt for struggling companies, and ended up purchasing Gusgo Transport, Fleetway Transport, CCC Transportation, APPS Transport, Keith Hall & Sons, assets of CT Transportation, the dry bulk assets of Grammer Logistics, and assets of MCT Transportation, DLS Worldwide, and the aforementioned UPS Freight business.

Yes, it’s a lot, CEO Alain Bedard was very busy putting capital to work. TFI took advantage of the situation and bought assets at discounted rates, highlighting the ability of its management.

Although the company has struggled to increase its top line over the last 5 years (5.6% annual revenue growth) its become much more efficient and as a result its bottom line has improved. Earnings over the last 5 years have increased at a 21.5% clip annually.

The UPS Freight acquisition is transformational for the company. As mentioned, TFI International will now be more weighted towards business in the US, as opposed to the past when most revenue came from in Canada.

When TFI International purchased UPS Freight, it was roughly breakeven, with margins around 1%. Management has guided they think they will improve margins to 10%, which will provide a lot of earnings growth to go along with the revenue growth. Analysts estimate earnings per share will grow 21.8% in 2021 and 25.2% in 2022.

This growth in profits should allow TFI International to continue growing its dividend. The company has a 9 year dividend growth streak and has raised dividends at a 10.3% clip annually over the last 5 years after the most recent 11.5% increase in the fourth quarter.

It only yields around 1.05%, but with the dividend making up only 24.5% of trailing earnings, it should have plenty of room to grow.

The company used to be #3 on this list, but we’ve reduced it due to a huge run up in price. However, it’s still a great long term option for Canadians.

TFI International 5 year performance vs TSX

TSE:TFII Vs TSX 5 YEar

6. Shopify (TSE:SHOP)

Shopify Logo

A list of top Canadian stocks wouldn’t be complete without the top performing Canadian stock in recent memory, Shopify (TSE:SHOP).

Shopify was lower on this list, however due to a dip in price, it’s now becoming fairly attractive again.

Shopify offers an e-commerce platform primarily to small and medium businesses globally. They operate in two primary segments, subscription solutions and merchant solutions.

Subscription solutions allow merchants to conduct business through Shopify’s tools, while merchant solutions help businesses become more efficient via Shopify Payments, Shopify Shipping, and Shopify Capital.

Since the company’s IPO in 2015, Shopify has returned over 4100% to investors. The company has been labeled “overvalued” by analysts and investors throughout its history, but despite this it simply fails to disappoint.

Over the last 5 years, Shopify has achieved revenue growth of 70.1% annually. This type of revenue growth from a company the size of Shopify is extremely rare.

Now, the company is seeing slowing growth as over the last 3 years revenue growth sits around 65.1% annually, but this is still a company that is growing at a rapid pace.

Make no mistake however, the company is expensive. Trading at over 48 times sales and 18 times book value, you’re paying a premium for continued growth even after the recent pullback.

Overall, the company is expensive, and could face significant volatility moving forward in terms of price, especially if the company were to post a large earnings miss. It will need to keep up with expected growth rates in order to maintain its share price, and this isn’t an investment for the defensive investor.

If you don’t have a quick trigger finger in terms of selling stocks, in my opinion there will be few investors who are disappointed 5-7 years down the road if they bought Shopify even at these levels.

The company is still growing rapidly and has a large cash balance to reinvest in its business.

The stock was one of the first recommendations over at Stocktrades Premium, and members who bought when we highlighted the stock are now sitting on returns in excess of 700%.

Shopify 5 year performance vs TSX

TSE:SHOP 5 Year Returns Vs TSX

5. Nuvei (TSE:NVEI)

Nuvei Logo

Going off the board with this pick, Nuvei (TSE:NVEI) is one of Canada’s newest IPOs.

The company went public in August and its share price has performed quite well.

As of writing, Nuvei’s share price is up by ~86% in just over eight months of trading. Not a bad return for those who got in early.

Is the jump in price justified? When compared to the valuations that peers commanded, we felt that the company’s IPO pricing did not do the company justice.

As we discussed with Premium members, there was a price disconnect which offered an attractive risk to reward opportunity.

Prior to listing, Nuvei was the largest privately held fin-tech company in the country. The company provides payment-processing technology for merchants.

Their suite of products serves both online and in-store transactions and counts Stripe, Paypal, Fiserv, Lightspeed POS, Global Payments, Shift4 Payments and WorldPay among its competitors.

On a trailing twelve-month basis, Nuvei generated US$339M in revenue and US$43B in gross transaction value (GTV). Nuvei grew revenue by 64% in fiscal 2019 and over 50% in 2020.

Since going public, the company has attracted plenty of attention. There are 13 analysts covering the company – 11 rate it a “buy” or “outperform” and 2 rate it a “hold”.

Although the company is not yet profitable, the expectation is for the company to turn a profit next year. They also expect 29% revenue growth in 2021.

It is important to note, that newly listed companies carry additional risk. They have less public history for investors to look at to asses the business model.

Can it meet lofty estimates?

New listings are particularly vulnerable to performance as compared to expectations. Given this, IPOs such as Nuvei are most appropriate for investors with a higher risk profile.

Performance of Nuvei Vs TSX since its IPO

TSE:NVEI vs TSX Index 5 Year

4. Telus (TSE:T)

Telus dividend

There is limited 5G plays here in Canada. We’re often forced to head down south to the American markets if we want exposure to high-growth 5G opportunities.

While Telus (TSE:T) doesn’t exactly boast world beating future potential, the stock is the best telecom stock to own in the country today in terms of both 5G exposure and overall growth.

Telus is part of the Big 3 telecom companies here in Canada, and is the stock you want to buy if you want exposure to a more pure-play telecom company.

Unlike Rogers Communications and BCE, Telus doesn’t have a media division and instead has invested in business models that drive higher margins like telehealth and security.

This should allow Telus to not only grow its dividend, which is the best dividend in the telecom sector, but should also allow it to drive top and bottom line growth.

The last 5 years have not been favorable to Canadian telecoms in terms of growth. In fact, Telus has only grown revenue by 3.7% annually over the last 5 years and earnings have remained relatively flat.

However, the environment has completely changed for these companies. Telecom infrastructure is difficult to construct and extremely costly.

On one hand, this is a huge benefit to a company like Telus. Unless they’re willing to share towers, it creates a barrier to entry that is almost impenetrable. 

On the other hand however, it makes development of new infrastructure extremely expensive, and telecom companies often carry a large amount of debt to do so.

When interest rates are high, we can expect these companies to struggle. However, now that we are in a low interest rate environment, this bodes well.

Even if rates were to increase, they’d likely still be well below levels we’ve witnessed in quite some time.

Analysts are predicting double digit revenue growth for the company in 2021, which can be compared to shrinking revenue growth expected from both Rogers Communications (-3.4%) and BCE Inc (-0.8%).

Telus 5 year performance vs TSX

TSE:T Vs TSX Index 5 Year

3. Parkland Fuels (TSE:PKI)

parkland fuel dividend

Parkland Fuels (TSE:PKI) is one of Canada’s largest and one of North America’s fastest independent marketers of fuel and petroleum products. Parkland serves motorists, businesses, consumers, as well as wholesalers across Canada and the United States.

The company’s growth is primarily driven through acquisitions, evident by its purchase of Chevron Canada’s downstream fuel business making them the sole distributor for Chevron branded fuels.

Another positive from the company’s acquisition heavy strategy is the fact that a variety of brands allows it to distribute its products to a wide range of markets across North America.

Parkland has had some impressive growth rates over the last 5 years, averaging revenue growth of 20.9% annually. Over that same timeframe, the company has also grown earnings at clip of 20.3%.

Considering the company pays a healthy dividend, I think it would be a mistake for Canadians not to capitalize on the stock still being down from pre-COVID levels. This is a company that could benefit significantly from the inevitable reopening.

The company is a Canadian Dividend Aristocrat having raised dividends for 7 straight years and pays its dividend on a monthly basis, making it even more attractive to Canadian investors wanting a steady income stream.

Analysts expect marginally shrinking revenue in 2021, coming in at -2.7%. This is a far cry from the company’s historical averages of 20% annual growth, but we’re ok with this.

As long as the company can maintain its dividend and continue to be in a strong position to grow moving forward, we’ll be patient and let it recover from this unprecedented pandemic.

Parkland Fuel 5 year performance vs TSX

TSE:PKI Vs TSX 5 Year

2. Brookfield Renewable Partners (TSE:BEP-UN)

Brookfield Renewable Partners

Brookfield Renewable Energy Partners (TSE:BEP.UN) is a pure-play renewable energy company here in Canada, and has been one of the fastest growing companies in the sector by a longshot over the last half decade.

Brookfield Renewables has over 21,000 MW of capacity and nearly 5300 facilities across four continents.

Over the long run, Brookfield looks to give shareholders annual returns of 12-15%. 

This is a lofty goal, but one that the company has easily achieved over the last half decade.

In fact, over the last 5 years, Brookfield Renewables share price is up roughly 200%. And this is including its huge correction as of late as renewables have taken a hit.

Its acquisition of Terraform Energy back in March of 2020 made it the largest pure-play renewable energy company in the world, and if you’re looking for a company to give you exposure to the renewable sector, Brookfield is in our opinion, best in class.

The shift away from fossil fuels and into renewable forms of energy generation is a shift that is still very much in its infancy, but is one we feel is inevitable.

We’re not saying oil is going to disappear overnight. We’re not that extreme.

In fact, we still feel that there will be many uses for oil extending well into the future. Energy generation may just not be one of them.

In terms of dividend, the company currently yields 3.58% and the dividend is well covered by funds from operations.

Brookfield has stated it plans to grow the dividend anywhere from 5-9% annually over the next 5 years, which is actually an uptick in dividend growth compared to its previous 5 years.

Make no mistake about it though, Brookfield, due to its size and popularity, is one of the most expensive renewable energy plays in the country right now.

If you’re looking to take a position, it’s important you understand that there is likely to be significant swings in the company’s share price. The pullback since the start of the year is probably a great time to buy this renewable energy leader.

Brookfield Renewable 5 year performance vs TSX

TSE:BEP.UN Vs TSX

1. Royal Bank of Canada (TSE:RY)

Royal Bank dividend

Considering this list is primarily made for growth stocks, it did feel somewhat weird including The Royal Bank of Canada (TSE:RY).

However, this Canadian bank stock is simply too good right now to not be included on a list of the best stocks to buy in Canada.

Royal Bank is a global enterprise with operations in Canada, the United States, and as we’ll see the importance of later, 40 other countries.

It is a well diversified bank, with personal, commercial, wealth management, insurance, corporate, and capital market services.

The company is Canada’s most valuable brand, and has been for the last half decade. RBC currently sits at Canada’s second largest company in terms of market capitalization, falling just behind another stock on this list, Shopify.

On average over the last 5 years the company has grown revenue by 6% and earnings by 3% on an annual basis.

With a dividend yield in the 3.5% range and an 8 year dividend growth streak, it’s one of the best dividend payers in the country.

A very interesting note: RBC paid out more in dividends in 2019 than Shopify had total revenue, despite Shopify being the larger company market cap wise.

The Canadian banking industry is one of the strongest investment sectors in the world, highlighted by the fact that no Big 5 financial institution cut their dividend during the 2008 financial crisis, and no Big 5 institution has done so yet during the COVID-19 era.

Regulatory agencies asked the banks to preserve liquidity and not raise the dividend in 2020 as a preventative measure to both clients and shareholders. It’s rare that I’d consider no dividend growth a good thing, but in the situation we’re in, I’ll take it.

It’s expected the banks will be allowed to raise their dividends again this year.

Royal Bank knocked earnings out of the park during a global pandemic, and as a result has caught the attentions of a lot of investors. The stock has fully recovered from the COVID-19 downturn and is now back at all time highs.

Why has Royal Bank fared better than most? Well, this is primarily due to the fact it has the most global exposure out of any of the other banks.

This has allowed it to be exposed to a multitude of economies at different stages of recovery. Compare this to a bank like Toronto Dominion, who almost has all of its revenue exclusively in Canada and the United States.

Moving forward, in my opinion the Royal Bank is simply a must have in the majority of Canadian’s investment portfolios.

Royal Bank 5 year performance vs TSX

TSE:RY Vs TSX Index







Author: Dan Kent

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Economics

This Year’s Thanksgiving Dinner Will Be The Most Expensive In History

This Year’s Thanksgiving Dinner Will Be The Most Expensive In History

Thanksgiving Day, an annual national holiday in the US, began as a way…

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This Year’s Thanksgiving Dinner Will Be The Most Expensive In History

Thanksgiving Day, an annual national holiday in the US, began as a way to celebrate the harvest and other blessings of the past year. Nowadays people celebrate the holiday with massive feasts and watch football. But one thing consumers won’t be giving thanks to this year is soaring food inflation that could make Thanksgiving 2021 one of the most expensive on record.

“When you go to the grocery store and it feels more expensive, that’s because it is,” Veronica Nigh, senior economist at the American Farm Bureau Federation, told CBS News. She said food prices in 2021 jumped 3.7% versus a 20-year average of 2.4%. Turkeys and all the trimmings will cost 4% to 5% more this year than a year ago.

Rising food prices have been an ongoing issue since the beginning of the pandemic, as disrupted supply chains and adverse weather conditions around the world have made supplies of crops dwindle. Global food prices are at fresh decade highs and have begun to hit the wallets of consumers. 

September’s Consumer Price Index for food was up 4.6% from a year ago. Prices for meat, poultry, fish, and eggs were up the most, soaring more than 10%. The rise in food prices has spooked the Biden administration. 

Several factors contribute to food inflation, including supply chain snarls, higher transportation costs, and labor shortages. Next year, food inflation may rise further as fertilizer prices jump

“Agriculture is like everybody else — it’s impacted by the supply restraints we’ve seen,” Nigh said. She said 10% of food costs only come from farming, while the rest (90%) are trucking, wages, distribution, and warehousing. 

Besides soaring food costs, consumers may experience widespread supply chain challenges that could make certain food items critical for Turkey Day harder or impossible to find because of shortages. Dr. Krishnakumar S. Davey, president of IRI Client Engagement, published a note explaining IRI’s basket of availability, demand, price, and promotion for Thanksgiving is “recording significant out-of-stock rates on several Thanksgiving-related grocery categories at this time.”

According to Consumer Reports, there is some good news: “turkeys in all sizes will be in abundance.” 

But there’s a dark side to Thanksgiving this year, that is, an income-inequality story which means the top 10% of Americans will be spending more while the working-poor might skip the holiday entirely due to affordability issues. 

Tyler Durden
Tue, 10/26/2021 – 22:30

Author: Tyler Durden

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Economics

The True Feasibility Of Moving Away From Fossil Fuels

The True Feasibility Of Moving Away From Fossil Fuels

Authored by Gail Tverberg via Our Finite World blog,

One of the great misconceptions…

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The True Feasibility Of Moving Away From Fossil Fuels

Authored by Gail Tverberg via Our Finite World blog,

One of the great misconceptions of our time is the belief that we can move away from fossil fuels if we make suitable choices on fuels. In one view, we can make the transition to a low-energy economy powered by wind, water, and solar. In other versions, we might include some other energy sources, such as biofuels or nuclear, but the story is not very different.

The problem is the same regardless of what lower bound a person chooses: our economy is way too dependent on consuming an amount of energy that grows with each added human participant in the economy. This added energy is necessary because each person needs food, transportation, housing, and clothing, all of which are dependent upon energy consumption. The economy operates under the laws of physics, and history shows disturbing outcomes if energy consumption per capita declines.

There are a number of issues:

  • The impact of alternative energy sources is smaller than commonly believed.

  • When countries have reduced their energy consumption per capita by significant amounts, the results have been very unsatisfactory.

  • Energy consumption plays a bigger role in our lives than most of us imagine.

  • It seems likely that fossil fuels will leave us before we can leave them.

  • The timing of when fossil fuels will leave us seems to depend on when central banks lose their ability to stimulate the economy through lower interest rates.

  • If fossil fuels leave us, the result could be the collapse of financial systems and governments.

[1] Wind, water and solar provide only a small share of energy consumption today; any transition to the use of renewables alone would have huge repercussions.

According to BP 2018 Statistical Review of World Energy data, wind, water and solar only accounted for 9.4% 0f total energy consumption in 2017.

Figure 1. Wind, Water and Solar as a percentage of total energy consumption, based on BP 2018 Statistical Review of World Energy.

Even if we make the assumption that these types of energy consumption will continue to achieve the same percentage increases as they have achieved in the last 10 years, it will still take 20 more years for wind, water, and solar to reach 20% of total energy consumption.

Thus, even in 20 years, the world would need to reduce energy consumption by 80% in order to operate the economy on wind, water and solar alone. To get down to today’s level of energy production provided by wind, water and solar, we would need to reduce energy consumption by 90%.

[2] Venezuela’s example (Figure 1, above) illustrates that even if a country has an above average contribution of renewables, plus significant oil reserves, it can still have major problems.

One point people miss is that having a large share of renewables doesn’t necessarily mean that the lights will stay on. A major issue is the need for long distance transmission lines to transport the renewable electricity from where it is generated to where it is to be used. These lines must constantly be maintained. Maintenance of electrical transmission lines has been an issue in both Venezuela’s electrical outages and in California’s recent fires attributed to the utility PG&E.

There is also the issue of variability of wind, water and solar energy. (Note the year-to-year variability indicated in the Venezuela line in Figure 1.) A country cannot really depend on its full amount of wind, water, and solar unless it has a truly huge amount of electrical storage: enough to last from season-to-season and year-to-year. Alternatively, an extraordinarily large quantity of long-distance transmission lines, plus the ability to maintain these lines for the long term, would seem to be required.

[3] When individual countries have experienced cutbacks in their energy consumption per capita, the effects have generally been extremely disruptive, even with cutbacks far more modest than the target level of 80% to 90% that we would need to get off fossil fuels. 

Notice that in these analyses, we are looking at “energy consumption per capita.” This calculation takes the total consumption of all kinds of energy (including oil, coal, natural gas, biofuels, nuclear, hydroelectric, and renewables) and divides it by the population.

Energy consumption per capita depends to a significant extent on what citizens within a given economy can afford. It also depends on the extent of industrialization of an economy. If a major portion of industrial jobs are sent to China and India and only service jobs are retained, energy consumption per capita can be expected to fall. This happens partly because local companies no longer need to use as many energy products. Additionally, workers find mostly service jobs available; these jobs pay enough less that workers must cut back on buying goods such as homes and cars, reducing their energy consumption.

Example 1. Spain and Greece Between 2007-2014

Figure 2. Greece and Spain energy consumption per capita. Energy data is from BP 2018 Statistical Review of World Energy; population estimates are UN 2017 population estimates.

The period between 2007 and 2014 was a period when oil prices tended to be very high. Both Greece and Spain are very dependent on oil because of their sizable tourist industries. Higher oil prices made the tourism services these countries sold more expensive for their consumers. In both countries, energy consumption per capita started falling in 2008 and continued to fall until 2014, when oil prices began falling. Spain’s energy consumption per capita fell by 18% between 2007 and 2014; Greece’s fell by 24% over the same period.

Both Greece and Spain experienced high unemployment rates, and both have needed debt bailouts to keep their financial systems operating. Austerity measures were forced on Greece. The effects on the economies of these countries were severe. Regarding Spain, Wikipedia has a section called, “2008 to 2014 Spanish financial crisis,” suggesting that the loss of energy consumption per capita was highly correlated with the country’s financial crisis.

Example 2: France and the UK, 2004 – 2017

Both France and the UK have experienced falling energy consumption per capita since 2004, as oil production dropped (UK) and as industrialization was shifted to countries with a cheaper total cost of labor and fuel. Immigrant labor was added, as well, to better compete with the cost structures of the countries that France and the UK were competing against. With the new mix of workers and jobs, the quantity of goods and services that these workers could afford (per capita) has been falling.

Figure 3. France and UK energy consumption per capita. Energy data is from BP 2018 Statistical Review of World Energy; population estimates are UN 2017 population estimates.

Comparing 2017 to 2004, energy consumption per capita is down 16% for France and 25% in the UK. Many UK citizens have been very unhappy, wanting to leave the European Union.

France recently has been experiencing “Yellow Vest” protests, at least partly related to an increase in carbon taxes. Higher carbon taxes would make energy-based goods and services less affordable. This would likely reduce France’s energy consumption per capita even further. French citizens with their protests are clearly not happy about how they are being affected by these changes.

Example 3: Syria (2006-2016) and Yemen (2009-2016)

Both Syria and Yemen are examples of formerly oil-exporting countries that are far past their peak production. Declining energy consumption per capita has been forced on both countries because, with their oil exports falling, the countries can no longer afford to use as much energy as they did in the past for previous uses, such as irrigation. If less irrigation is used, food production and jobs are lost. (Syria and Yemen)

Figure 4. Syria and Yemen energy consumption per capita. Energy consumption data from US Energy Information Administration; population estimates are UN 2017 estimates.

Between Yemen’s peak year in energy consumption per capita (2009) and the last year shown (2016), its energy consumption per capita dropped by 66%. Yemen has been named by the United Nations as the country with the “world’s worst humanitarian crisis.” Yemen cannot provide adequate food and water for its citizens. Yemen is involved in a civil war that others have entered into as well. I would describe the war as being at least partly a resource war.

The situation with Syria is similar. Syria’s energy consumption per capita declined 55% between its peak year (2006) and the last year available (2016). Syria is also involved in a civil war that has been entered into by others. Here again, the issue seems to be inadequate resources per capita; war participants are to some extent fighting over the limited resources that are available.

Example 4: Venezuela (2008-2017)

Figure 5. Energy consumption per capita for Venezuela, based on BP 2018 Statistical Review of World Energy data and UN 2017 population estimates.

Between 2008 and 2017, energy consumption per capita in Venezuela declined by 23%. This is a little less than the decreases experienced by the UK and Greece during their periods of decline.

Even with this level of decline, Venezuela has been having difficulty providing adequate services to its citizens. There have been reports of empty supermarket shelves. Venezuela has not been able to maintain its electrical system properly, leading to many outages.

[4] Most people are surprised to learn that energy is required for every part of the economy. When adequate energy is not available, an economy is likely to first shrink back in recession; eventually, it may collapse entirely.

Physics tells us that energy consumption in a thermodynamically open system enables all kinds of “complexity.” Energy consumption enables specialization and hierarchical organizations. For example, growing energy consumption enables the organizations and supply lines needed to manufacture computers and other high-tech goods. Of course, energy consumption also enables what we think of as typical energy uses: the transportation of goods, the smelting of metals, the heating and air-conditioning of buildings, and the construction of roads. Energy is even required to allow pixels to appear on a computer screen.

Pre-humans learned to control fire over one million years ago. The burning of biomass was a tool that could be used for many purposes, including keeping warm in colder climates, frightening away predators, and creating better tools. Perhaps its most important use was to permit food to be cooked, because cooking increases food’s nutritional availability. Cooked food seems to have been important in allowing the brains of humans to grow bigger at the same time that teeth, jaws and guts could shrink compared to those of ancestors. Humans today need to be able to continue to cook part of their food to have a reasonable chance of survival.

Any kind of governmental organization requires energy. Having a single leader takes the least energy, especially if the leader can continue to perform his non-leadership duties. Any kind of added governmental service (such as roads or schools) requires energy. Having elected leaders who vote on decisions takes more energy than having a king with a few high-level aides. Having multiple layers of government takes energy. Each new intergovernmental organization requires energy to fly its officials around and implement its programs.

International trade clearly requires energy consumption. In fact, pretty much every activity of businesses requires energy consumption.

Needless to say, the study of science or of medicine requires energy consumption, because without significant energy consumption to leverage human energy, nearly every person must be a subsistence level farmer, with little time to study or to take time off from farming to write (or even read) books. Of course, manufacturing medicines and test tubes requires energy, as does creating sterile environments.

We think of the many parts of the economy as requiring money, but it is really the physical goods and services that money can buy, and the energy that makes these goods and services possible, that are important. These goods and services depend to a very large extent on the supply of energy being consumed at a given point in time–for example, the amount of electricity being delivered to customers and the amount of gasoline and diesel being sold. Supply chains are very dependent on each part of the system being available when needed. If one part is missing, long delays and eventually collapse can occur.

[5] If the supply of energy to an economy is reduced for any reason, the result tends to be very disruptive, as shown in the examples given in Section [3], above.

When an economy doesn’t have enough energy, its self-organizing feature starts eliminating pieces of the economic system that it cannot support. The financial system tends to be very vulnerable because without adequate economic growth, it becomes very difficult for borrowers to repay debt with interest. This was part of the problem that Greece and Spain had in the period when their energy consumption per capita declined. A person wonders what would have happened to these countries without bailouts from the European Union and others.

Another part that is very vulnerable is governmental organizations, especially the higher layers of government that were added last. In 1991, the Soviet Union’s central government was lost, leaving the governments of the 15 republics that were part of the Soviet Union. As energy consumption per capita declines, the European Union would seem to be very vulnerable. Other international organizations, such as the World Trade Organization and the International Monetary Fund, would seem to be vulnerable, as well.

The electrical system is very complex. It seems to be easily disrupted if there is a material decrease in energy consumption per capita because maintenance of the system becomes difficult.

If energy consumption per capita falls dramatically, many changes that don’t seem directly energy-related can be expected. For example, the roles of men and women are likely to change. Without modern medical care, women will likely need to become the mothers of several children in order that an average of two can survive long enough to raise their own children. Men will be valued for the heavy manual labor that they can perform. Today’s view of the equality of the sexes is likely to disappear because sex differences will become much more important in a low-energy world.

Needless to say, other aspects of a low-energy economy might be very different as well. For example, one very low-energy type of economic system is a “gift economy.” In such an economy, the status of each individual is determined by the amount that that person can give away. Anything a person obtains must automatically be shared with the local group or the individual will be expelled from the group. In an economy with very low complexity, this kind of economy seems to work. A gift economy doesn’t require money or debt!

[6] Most people assume that moving away from fossil fuels is something we can choose to do with whatever timing we would like. I would argue that we are not in charge of the process. Instead, fossil fuels will leave us when we lose the ability to reduce interest rates sufficiently to keep oil and other fossil fuel prices high enough for energy producers.

Something that may seem strange to those who do not follow the issue is the fact that oil (and other energy prices) seem to be very much influenced by interest rates and the level of debt. In general, the lower the interest rate, the more affordable high-priced goods such as factories, homes, and automobiles become, and the higher commodity prices of all kinds can be. “Demand” increases with falling interest rates, causing energy prices of all types to rise.

 

Figure 6.

 

The cost of extracting oil is less important in determining oil prices than a person might expect. Instead, prices seem to be determined by what end products consumers (in the aggregate) can afford. In general, the more debt that individual citizens, businesses and governments can obtain, the higher that oil and other energy prices can rise. Of course, if interest rates start rising (instead of falling), there is a significant chance of a debt bubble popping, as defaults rise and asset prices decline.

Interest rates have been generally falling since 1981 (Figure 7). This is the direction needed to support ever-higher energy prices.

Figure 7. Chart of 3-month and 10-year interest rates, prepared by the FRED, using data through March 27, 2019.

The danger now is that interest rates are approaching the lowest level that they can possibly reach. We need lower interest rates to support the higher prices that oil producers require, as their costs rise because of depletion. In fact, if we compare Figures 7 and 8, the Federal Reserve has been supporting higher oil and other energy prices with falling interest rates practically the whole time since oil prices rose above the inflation adjusted level of $20 per barrel!

Figure 8. Historical inflation adjusted prices oil, based on data from 2018 BP Statistical Review of World Energy, with the low price period for oil highlighted.

Once the Federal Reserve and other central banks lose their ability to cut interest rates further to support the need for ever-rising oil prices, the danger is that oil and other commodity prices will fall too low for producers. The situation is likely to look like the second half of 2008 in Figure 6. The difference, as we reach limits on how low interest rates can fall, is that it will no longer be possible to stimulate the economy to get energy and other commodity prices back up to an acceptable level for producers.

[7] Once we hit the “no more stimulus impasse,” fossil fuels will begin leaving us because prices will fall too low for companies extracting these fuels. They will be forced to leave because they cannot make an adequate profit.

One example of an oil producer whose production was affected by an extended period of low prices is the Soviet Union (or USSR).

Figure 9. Oil production of the former Soviet Union together with oil prices in 2017 US$. All amounts from 2018 BP Statistical Review of World Energy.

The US substantially raised interest rates in 1980-1981 (Figure 7). This led to a sharp reduction in oil prices, as the higher interest rates cut back investment of many kinds, around the world. Given the low price of oil, the Soviet Union reduced new investment in new fields. This slowdown in investment first reduced the rate of growth in oil production, and eventually led to a decline in production in 1988 (Figure 9). When oil prices rose again, production did also.

Figure 10. Energy consumption per capita for the former Soviet Union, based on BP 2018 Statistical Review of World Energy data and UN 2017 population estimates.

The Soviet Union’s energy consumption per capita reached its highest level in 1988 and began declining in 1989. The central government of the Soviet Union did not collapse until late 1991, as the economy was increasingly affected by falling oil export revenue.

Some of the changes that occurred as the economy simplified itself were the loss of the central government, the loss of a large share of industry, and a great deal of job loss. Energy consumption per capita dropped by 36% between 1988 and 1998. It has never regained its former level.

Venezuela is another example of an oil exporter that, in theory, could export more oil, if oil prices were higher. It is interesting to note that Venezuela’s highest energy consumption per capita occurred in 2008, when oil prices were high.

We are now getting a chance to observe what the collapse in Venezuela looks like on a day- by-day basis. Figure 5, above, shows Venezuela’s energy consumption per capita pattern through 2017. Low oil prices since 2014 have particularly adversely affected the country.

[8] Conclusion: We can’t know exactly what is ahead, but it is clear that moving away from fossil fuels will be far more destructive of our current economy than nearly everyone expects. 

It is very easy to make optimistic forecasts about the future if a person doesn’t carefully examine what the data and the science seem to be telling us. Most researchers come from narrow academic backgrounds that do not seek out insights from other fields, so they tend not to understand the background story.

A second issue is the desire for a “happy ever after” ending to our current energy predicament. If a researcher is creating an economic model without understanding the underlying principles, why not offer an outcome that citizens will like? Such a solution can help politicians get re-elected and can help researchers get grants for more research.

We should be examining the situation more closely than most people have considered. The fact that interest rates cannot drop much further is particularly concerning.

Tyler Durden
Tue, 10/26/2021 – 22:10







Author: Tyler Durden

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China’s Central Bank Condition Has Consistently Told You Everything About Global (not) Inflation

For several years now, we’ve been harping constantly and consistently about what’s on the PBOC’s balance sheet; or, really, what conspicuously isn’t…

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For several years now, we’ve been harping constantly and consistently about what’s on the PBOC’s balance sheet; or, really, what conspicuously isn’t in very specific line-item numbers. Briefly, simply, if dollars are being extended into China, as has been claimed over the years, particularly the last few, they’re going to show up on the Chinese central bank’s balance sheet.

Specifically, foreign assets. More specifically, foreign reserves.

There’s a difference between those two which historically has meant quite a bit (we’ll get to that in a moment). Going back to 2017 and 2018, the level of foreign assets (which includes reserves) has been beyond stable, constant to the point of clear manipulation. As I wrote last year:

According to the People’s Bank of China (PBOC), the balance of foreign assets reported on its balance sheet for the month of June 2020 was RMB 21,833.26 billion. At the end of the prior month, May, the balance was, get this, RMB 21,833.33 billion.

Rampaging global pandemic, dollar crashing, dollar smashing, global recession questions, massive, complex economic forces to go along with huge changes in financial conditions, as well as questions about those conditions, and the Chinese system pretty much in the middle of everything. The second largest economy in the world, one which is made (and broken) by incoming (or outgoing) monetary flows of which the central bank has involved itself heavily right from the very start of modern China.

And foreign reserves on the central bank balance sheet, the fundamental basis by which Chinese money exists, this moved by the tiniest RMB 70 million? In case you are wondering, it works out to a monthly change of -0.0003%. Nuh uh. No way. That’s a number which was quite obviously engineered.

Just about sums the whole thing up; as does this chart:


What should grab your attention is the slight, though somewhat more noticeable increase in reported foreign assets during this year. We’re being asked to believe this is Jay Powell’s flood of “too much” money finally making its way into the right places; and this general data from China seems to be at least some level of consistent with the idea.

Once you get into the details, though, what’s going on over at the PBOC actually adds to the evidence of its opposite. Dollar problems, scarcity, maybe even growing and outright global money shortage.

Before we get to that, however, we have to back up and review those details. To do that, we’ll begin all the way back in the pre-crisis period when “too much” eurodollar money was a legitimate, provable condition worldwide.

Dollars between 1995 and 2007 were in such worldwide overabundance even the monetary illiterate like Ben Bernanke couldn’t help but notice them – though, captured by his rigid and rigidly incoherent ideology, the Federal Reserve’s Chairman could only muster some nonsense about a global savings glut.

His Chinese counterparts suffered no such illusions, being forced by the monetary onrush to alter both banking and monetary policies for this “hot money” excess. Up until August 2007, that is. No, this is not a coincidence.

Start with the rising blue mass above which is the PBOC’s definition for all its various foreign assets. I’ve then added the dashed black line to begin breaking out the precise pieces within the category. This line represents that vast majority – but not all – of foreign assets, labeled by China’s central bank as “foreign exchange.”

The remainder is left to two other classes. The first is official gold holdings, which for our purposes we’ll ignore (as much as it pains me, the real world ignores it, too). What’s left is what’s always left over in these things: other foreign assets.

It’s in this “other” where both the fun and monetary literacy begin.

The implications are pretty obvious, as are their connection to the burgeoning Global Financial Crisis in a way that pegs said crisis as the only thing it could have ever been: a global dollar shortage. Not subprime mortgages, a systemic rupture in the bank-centered eurodollar system so bad it forced even invulnerable China into some visible countermeasures.

And here (above) you can see one of those: other foreign assets. What is other? Your guess is as good as mine (OK, maybe I might have a slightly better idea having spent enough time poking around, but even then not so much better because this stuff is left opaque by Communist design). For right now, “what” doesn’t matter.

It does matter that whatever it might be that is in “other”, this shows up at the exact moment the global dollar rupture hits in August 2007. Immediately, two things pop out on the PBOC’s balance sheet: fewer foreign exchange assets but more of other. Eurodollar shortage, fewer dollars organically register as foreign exchange. 

In lieu of market-based dollars, though, look what happens to the growth of total foreign assets which is maintained at a nearly constant growth rate by the addition of other foreign assets. It is a workaround, a fill-in to keep up the flow at the margins. A rescue, of  sorts, to buy some time for the eurodollar world to normalize.

For the first few months of 2008, there seemed to be some hope the Federal Reserve’s (how naïve everyone was) “rescues” could work (TAF, overseas dollar swaps “somehow” being overbid by US banks with mostly German names). Foreign exchange pops back up for the PBOC – but only until March 2008.

Bear Stearns.

Taking a guess as to “contingent liabilities” within “other”, Bear was the final straw for China as most of the rest of the world. Too expensive to maintain, Chinese authorities realized they’d instead have to ride out the growing (not past tense) storm; they’d have to switch to other even more opaque tactics unreported anywhere.

After trying to offset the first phase of the GFC1 dollar shortage with “other”, the Chinese then moved to a completely stealth CNY peg (stealth because the back half of whatever transactions don’t show up anywhere). You can see this two-step above; first the jump in “other” while CNY still rises, then total CNY peg as foreign exchange assets stop growing at the same fast pre-crisis rate.

Unlike “new normal” America and Europe, the Chinese emerged from the ensuing Great “Recession” believing their situation/potential hadn’t been altered. A big enough chunk of the eurodollar system seemed to agree – for a time.

Chinese monetary authorities spent 2010 and most of 2011 letting these “other” foreign assets roll off the balance sheet; if actually contingent liabilities, then repaying, terminating and getting out with CNY rising likely making the repayments and retirements economical (and worth whatever cost, so long as nothing really changed for China’s long run).

But, as you can see (two above), a second eurodollar problem erupts in 2011 while the PBOC is still unwinding whatever it had done from late 2007/early 2008. While this meant another stoppage in inbound eurodollar flows, China’s economy appeared able to weather the breakdown (which was focused more on Europe) and with CNY still rising no emergency monetary measures appeared necessary (there was a fiscal “stimulus” package).

At least none of the same outward type which might end up in “other” foreign assets; something else was being done, from September 2011 forward, monetary officials clearly began pegging the aggregate foreign exchange balance on the PBOC’s balance sheet.

The Chinese weren’t so lucky by 2014. Although dollar inflows were restored in 2013 (Reflation #2), there was a serious break during that summer (Summer of SHIBOR) which was consistent with a then emerging emerging market currency crisis (dollar shortage) wrongly blamed on the “taper tantrum.”

Right from the start of the following year, dollars began to disappear again (falling foreign exchange). Already having introduced another batch of “other” intervention right in January 2013, officials instead went back to stealth CNY manipulation (ticking clocks).

It didn’t work, either, as China suffered massive dollar destruction which then caused internal RMB destruction (bank reserves and currency). The freight train of Euro$ #3 hit the system by August 2015, causing CNY to plummet all-at-once, even triggering a flash crash across global stock markets within two weeks from yuan’s crash.

Perhaps understanding what was coming, the PBOC simply got the hell out of its way rather than risk being further sucked into the rising negative money vortex:

A demonstration how even other foreign assets are more like a last resort kind of thing.

The central bank would stay out of the eurodollar’s way until early 2016, coming back in because of the immensely costly damage done to CNY, the RMB system, as well as China’s and the global economy as a whole. The start of ’16 one of those situations that really did demand another last resort.

When confronted by the next one, Euro$ #4, again a clear reluctance to appeal to “other” foreign assets. There had already been a lack of dollars coming back, very few, anyway, during Reflation #3 (2017’s absurdly weak “globally synchronized growth”) leaving China dollar exposed to begin 2018.


Through the middle of 2018, once again the PBOC relied on this other peg to its aggregate foreign exchange balance in the same way it had back in 2012. Only this time, CNY was dropping like a stone, with officials apparently content to accept that outcome.

By October 2018, however, the situation must’ve been judged untenable, at least substantially more serious and dangerous, such that “other” foreign assets began to rise slightly but clearly to somewhat offset foreign exchange assets then declining.

The stealth peg to PBOC’s foreign exchange must’ve been overwhelmed by Euro$ #4’s late 2018 landmine. In its aftermath, CNY would eventually decline more in 2019 despite the offset in China’s “other” foreign assets, as this globally synchronized deflation wore down economies and markets (repo) all over the world.

What does all this mean?

Quite a lot of things we don’t have time or space to get into here, some different things, but among the commonalities is how “other” foreign assets continuously represent a last ditch kind of rescue or at least attempted offset to what therefore has to be among the more serious of already serious dollar shortages. There is no question how these results all fit together.

And, as I began at the outset, it is intuitive. If dollars are actually coming in, in reality rather than Jay Powell’s lying mouth, they show up at the PBOC as foreign exchange.

If they aren’t coming in, China’s balance sheet begins to break down in these specific ways, including, at key times, some sort of increase in other foreign assets.

This brings us back, and up to speed, with the first chart I presented. There has been an increase the PBOC’s reported holdings of total foreign assets which at first might appear on the surface as at least some trickle from the “too much” money we’ve heard all year about. It’s not.

What is it? Other foreign assets. Near entirely:

Foreign exchange assets gained the tiniest sliver, but since June (when CNY went sideways) nothing.

Instead, other foreign assets have picked up going all the way back to January. Yes, the same January.

This January:

There are obviously screwy things going on with the PBOC’s balance sheet, already on top of already screwy things (why a straight line for foreign exchange) that aren’t as obvious. And we know that screwy stuff corresponds religiously to monetary shortages, another eurodollar problem rather than whatever it is Jay Powell is telling the media to report to the public.

Odd developments which long predate delta COVID, aren’t trade wars or subprime mortgages. It’s the same thing repeating since all the way back in August 2007. Again, no coincidence “other” foreign assets showed up at exactly the same moment the eurodollar system broke.

The mainstream theme or narrative for 2021 has all year been inflation, inflation, inflation. In actual monetary terms, which is what inflation must be, shockingly it’s actually been the whole opposite: deflation, deflation, deflation.

You don’t have to take my word for it. The evidence if everywhere (just start with bonds).


Whereas the TIC data is pretty unambiguous about this situation, the PBOC confirms the same from its own figures which are, once you orient them properly, only slightly less explicit even if we have no specific idea the exact transactions the Chinese are being forced into. Yet again.

Whatever those are, China sure isn’t being compelled to undertake them because there’s too much money in what remains the eurodollar’s world.










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