How cars got their name?, Saudi Oil Production to Increases, War = Profit and Canada is Alabama.

Greetings, folks, and a warm welcome to the 12th edition of Friday Finance Weekly! A keen reader, Liam, made an interesting point as a follow-up to my previous post. In Post 11, I commented on how confusing it was to see how the dollar got its name, but there is an explanation. The town was called ‘Joachimsthal’; however, the currency in German is referred to as ‘Joachimsthaler.’ Joachims was dropped at some point and just left it as “Thaler” which I is more similar to Dollar. Now that makes a lot more sense.

In keeping with history’s great panics, the U.S. is a winner again. In the 1980s, people were convinced that rock musicians were recording Satanic messages backwards and hiding them in their songs. Concerned adults held record-smashing parties, formed watchdog groups, and tried to pass preventative legislation. This phenomenon was called the Backmasking Panic. Imagine the creativity required to make a song coherent regardless of the direction it was played in. For younger readers who haven’t seen a cassette tape, this will all sound very confusing. (Source: Atlas Obscura)

Wondering how cars got their names? Well fear not!

That was somewhat interesting I hope. Buick surprised me the most; I know that Lamborghini started as a farm tractor company, but they (‘Buick’) has roots into plumbing. To be honest, I had to double-check that Buicks were even sold in Canada (in case you’re wondering, they are). I won’t repeat this section for a while because, it does feel like clickbait.

Saudi Arabia – the world’s largest oil producer – had been due to unwind long-standing production cuts starting October. However, when the price of Brent Crude (the international benchmark) dropped below $70 earlier this month, some speculators began to question whether OPEC would ever be able to raise production levels.

Last week, Riyadh put those doubts to rest, signalling its commitment to ramp up production beginning December 1st, even if it results in a prolonged period of lower prices. This decision reflects the kingdom’s reluctance to cede further market share and its willingness to abandon its unofficial $100 per barrel price target. Per the IMF, $100 per barrel is the approximate price needed to balance its budget. A well-balanced budget is an increasingly important factor as the Crown Prince seeks to fund a series of megaprojects at the heart of the country’s economic reform program.

To date, Saudi Arabia has accounted for nearly one-third of OPEC’s overall production cuts, reducing its own production by 2 million barrels a day. Beginning December 1st, monthly production will increase by 83,000 barrels per day, per month, until reaching 1 million barrels per day by the end of calendar 2025. The Kingdom believes it has enough alternative funding options to weather a period of lower prices, such as tapping exchange reserves or issuing sovereign debt.

Although increased supply from non-OPEC producers, particularly the U.S., has reduced the impact of the group’s cuts over time, Riyadh’s positioning was clearly reflected in the markets last week. Brent Crude was down 3.5% on the day at $70.87, while the U.S. benchmark dropped 3.8% to $67.06. The share prices of major European oil producers were also impacted, with BP down 4.1%, Shell down 5%, and TotalEnergies down 3.3%. From a global perspective, this makes sense in the context of the Middle Eastern war as well. There is speculation that Israel will strike at Iranian energy infrastructure, that will cause prices to spike so this is perhaps factoring that in. In any event, this is only going to keep the price of my electric BMW depressed for years to come. (Source: FT)

Following up on the Middle Eastern war, you are probably wondering how defense stocks are doing. As major conflicts in Ukraine, the Middle East, and northeastern Africa wage on, aerospace and defense stocks have predictably climbed to record highs. Both Lockheed Martin and RTX shares reached all-time highs on Tuesday, while L3Harris and Northrop Grumman reached their highest prices since 2022. Meanwhile, the iShares U.S. Aerospace & Defense ETF rose 1.2% as the BlackRock-managed fund reached its own all-time high, extending its 12-month gain to 43% (S&P 500 12-month change: 33%).

• Northrop Grumman Corp: $537.13 (14.26% YTD)

• RTX Corp: $124.64 (46.57% YTD)

• General Dynamics Corp: $300.61 (16.25% YTD)

During the height of Saudi Arabia’s invasion of Yemen, Amnesty International reported findings from a survey it conducted on 22 arms companies, which were asked “how they meet their responsibilities to respect human rights under internationally recognized standards.” Fourteen of these companies failed to respond at all, and the eight that did answer provided variations of “we just do what the government allows.” Despite typecasting themselves as innocent bystanders, the millions of dollars spent each year to expedite the decision-making process around international weapons deals speaks to a different truth. As defense stocks soar, an age-old question resurfaces: Do these companies have a moral responsibility to prevent their products from contributing to humanitarian disasters? Sorry, my liberal side got the better of me towards the end. (Source: Forbes, Responsible Statecraft).

Generally, us Canadians feel we are lacking compared to the U.S. The Economist had a great article to put things into perspective. Every day, about $2 billion in trade and 400,000 people cross Canada’s 9,000-kilometer border with the U.S. These types of dynamics have contributed to historical economic synchronicity between the two nations, which have effectively grown in lockstep over the decades. (These are big words for me.) This is now beginning to change.

• Between 2009 and 2019, America’s GDP grew by 27%; Canada’s expanded by 25%.

• Between 2019 and YE 2024 (estimated), U.S. GDP growth is expected to be 11%; Canada’s will have grown by just 6%.

If we account for population growth and consider Gross National Income per capita (i.e., the dollar value of a country’s final income divided by its population), the difference is even starker. According to IMF forecasts:

• Between 2009 and 2019, Canada’s national income per head was equivalent to roughly 80% of America’s.

• By the year 2025, Canada’s national income per head is expected to decrease to roughly 70% of its neighbor’s – our lowest mark in a decade.

For perspective on these figures, if Canada’s ten provinces and three territories were an American state, they would have gone from being slightly richer than Montana (the 9th poorest state) to slightly worse off than Alabama (the 4th poorest state), on a per capita basis.

There are two faltering growth drivers causing the performance gap between the two nations.

1. The Canadian services industry makes up about 70% of GDP. In the wake of the pandemic, Americans were splurging on goods, roughly 40% of which was fueled by output from Canadian factories. American spending has since switched back to domestic services, leaving Canada’s manufacturing sector reliant on household demand and government spending. Unfortunately, Canadian household demand has been decimated by higher interest rates and exacerbated by high existing levels of debt relative to other G7 members. Differences in monetary policy haven’t helped either, with the Canadian government running a mere 1.1% deficit in 2023 compared to 6.3% in the U.S.

2. The second driver ties into Canada’s petroleum industry, which accounts for 16% of national exports. After years of ignoring investment in new production, one of Canada’s most productive sectors has started to lag. In the first seven months of 2024, U.S. crude output grew by nearly 25%, versus just 11% in Canada over the same period. Canada has historically looked to bridge the productivity gap through its aggressive immigration policy; however, integration takes time. Moreover, Canada’s new arrivals are more likely to be unemployed or in low-earning jobs, further dampening income per capita.

The seeds of decoupling were sown long before the onset of the pandemic, and there is no quick fix or reversal. Immigration restrictions won’t help fix Canada’s chronic productivity problem, and its sagging services sector is just the latest in a series of economic ailments. Please remember this when it’s time to vote. (Source: Economist)

Have a fantastic weekend, and please don’t hesitate to send this to friends and family.

Sam