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The vibe is off
Vibey times, boring budgets, a venture-backed midlife crisis, tax + dating simulators, ongoing childcare confusion, Sonic the Hedgehog's worrying lack of RSP
This is the last edition of The huuman Layer until after the Easter break (11th April).
That’s because from Saturday we’ll be in Niagara, ON at the annual Canadian Franchise Conference talking about the difficult balance between automation and human interaction in Small Business ownership. Come say hi!
The big news this week is…bad vibes are impacting real money.
It’s not a full-blown financial crisis anymore - things are calmer now, as we mentioned last week. But vibes are starting to taking over.
Currently getting a vibe check is Deutsche Bank, which fell 14% in value this week. Remember when we said that the near-term would see insurers holding all the cards?
“We’re entering a golden period where insurers are going to be dominating the conversation with numbers, and everyone is, quite rightly, going to absolutely hate it.”
Well…so it has come to pass - and yes - everyone is absolutely hating it. Deutsche Bank did not pass their vibe check - not because of it’s deposits, profitability or holdings (which JPMorgan said were all “solid”) - but because of something called Credit Default Swaps (CDS). CDS are insurances. If a company loans money and defaults on that loan, the bank cashes in a CDS to recover their losses. Therefore the higher the value of a CDS, the higher the insurance premium, therefore the higher the possible risk of default - and Deutsche Bank’s CDS value just reached it’s highest value since 2018 (+220 at one point).
In these ‘vibey’ times, people are actively looking for flaws to justify their anxiety. When those flaws are inevitably found (and an insurers job is, of course, to find those flaws and expose that risk) people (often with vested interests) seize those flaws as proof of a fatal error. And because finance is incredibly complex as an ecosystem, it’s hard to identify what actually is a fatal flaw with massive knock-on effects - and what is just a bad take.
Yep, we’re now entering the wonderful world of ‘vibe check economics’, where harbingers of possible / maybe / perhaps doom can declare the ‘vibe to be off’, and cause people to head for the exit - like turning up to a party where the wrong crowd is making the room feel edgy with an ill-advised, rowdy drinking competition.
Now, some of those off-vibes are based on the general distrust of the finance industry as a whole - and the general sense we all have - that finance ‘likes to take a bit of a risk now and then’. Or as Warren Buffett would eloquently put it:
“Only when the tide goes out do you know who's been swimming naked."
But there are some hard numbers turning the vibe sour. CDS values are one. The other is the numbers around AT1s, which are a special bond designed to prevent bank failures. Credit Suisse last week alone turned $17B USD of AT1s to junk, and because bonds have market value, the market is inevitably going to see a cascade effect.
The general vibe in finance was always ‘debt is risky’ - which of course it is! That’s why we pay a premium to loan money! But the vibe has now shifted to ‘all debt is possibly toxic’, which is being inflamed by insurers hunting down any perceived risk and presenting it as a trophy.
We’re not heading into a ‘vibecession’ as Bloomberg suggested - and btw we should immediately burn that word with fire - but we are definitely in an anxiety-ridden vibe space right now…and no-one is quite sure how we’ll get out of it.
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Top story this week☝️
The budget cometh
A new government budget is due today at 3PM Eastern, so all we can talk about right now is rumour (despite the liquor corporations having already increased their prices). So what do we know? Well, there will be a focus on green energy, which is a given. Since the US Inflation Reduction Act came into force, Canada has been forced to consider how to address green investments, and also consider how to provide relief from inflationary pressures. This links to budgetary relief for the most vulnerable exposed to rising inflation, high interest rates and food poverty. But maybe don’t expect wide-ranging relief. As Chrystia Freehand, the Finance Minister responsible for todays budget said last week:
"The truth is we can't fully compensate every single Canadian for all of the effects of inflation or for elevated interest rates. To do so would only make inflation worse and force rates higher for longer,"
So the government finds itself in a bind. It needs to stimulate near-term growth to see off recessionary worries, but it also needs to be careful with too many money-back-in-your-pocket schemes - because that’s how we got into this high inflation market in the first place (remember CERB?). So any money-back-in-your-pocket is likely to come from GST tax credits in the short-term. Expect some safe policy in the health and childcare space - dental care expansions, disability programmes, more money for ECEs. There’s also likely to be some policy around ‘junk fees’ - hidden consumer charges that inflate the cost of a service. So expect to see AirBnB and ticket sellers having to readjust their product offerings.
Pierre Poilievre is already complaining about any tax increase or deficit spending being the cause of inflation, which is of course…not really correct. Deficit spending was the thing that saved thousands of Small Businesses during the pandemic, and allowed the economy to at least keep running - which was…preferable. But with heavy deficit spending comes unbalanced budgets, and while this budget will be treading a fine line given the current economy, the yo-yo budgets of the past few years will be expected to settle down a bit. It’ll be a boring budget and that’s what we need right now. Link
Millennials still facing a lifetime of work
You know in Sonic The Hedgehog how Sonic collects all those rings and then the slightest setback causes all the rings to scatter and Sonic has to start collecting them all over again? Welcome to the Millennial and GenZ financial horror-show. The UK (and the rest of the western world) is slowly waking up to the reality that people under 43 for the most part just haven’t been able to save for retirement (or a house, or…anything really). Is that concerning? Sure. What’s more concerning though is this increasingly middle-aged iceberg is growing rapidly thanks to post-pandemic job losses and inflationary readjustment - and governments and banks seem to be simply ignoring the problem while steaming ever onward. Perhaps they’re hoping boomer inheritances will somehow resolve the matter, but it seems like that alone would stretch the definition of magical thinking - given that current S&P and bond-tied pensions (i.e all of them) are taking an absolute beating. This is a ‘big problem’ with little imagination being applied, and it’ll be interesting in the coming years (and budgets) to see how it’s all going to be handled - and who is going to take the lead (and the profit). Link
First Citizens Bank buys SVB with a heavy discount. Link
Technology’s Midlife Crisis (video). Link
Don’t plug in random USB drives. Link
Tax Heaven 3000 files your taxes…via a dating simulator (video). Link
The Data Room 🤖
The Data Room provides some insight into Small Business data, and each month(ish) you’ll get a deeper dive in your inbox. Here’s this weeks quick insight:
A tale as old as time
Early Childcare Educators (ECEs) have always been essential to a functioning economy, supporting and nurturing future citizens while empowering their parents to run businesses and build for the future. And while Canada is better than most countries in their approach to ECE (the UK average for childcare is a shocking $24,932 per year!) there is still a lot of work to be done in making ECE sustainable.
In 2021 the Canadian government implemented drastic changes to a system that immediately affected more than 45,000 businesses by dropping in a $27.2 billion dollar investment. Private companies forcibly became non-profits overnight, and, depending on the province, there was little due-diligence or consultation done when the changes were swept into the legislature - and many are still dealing with the fallout.
Child care services have about 1,000,000 children in either full time or part time enrolment, the vast majority (82%) receiving care from large organizations while the remainder are cared for by licensed (10%) and unlicensed (8%) home-based settings. This is a picture of an industry in upheaval with the government’s goal being a reduction in childcare cost that hits $10 a day on average in 2026. The cost of childcare has varied wildly from province-to-province with Quebec being the outlier due to their history of subsidies.
In 2021 the median fee for infant care in Quebec was was $138 per month, while over in Ontario they were having to shell out $1948. That adds up to a $21,720 cost difference over the course of a year. It’s no wonder things needed to change, in 1995 about 42% of children aged 0-5 received some form of non-parental child care, while in 2022 that number sat at 52%.
Most of this change is driven by increased workforce participation in women aged 20-54, with 68% being employed full time as of 2021. However, all that demand doesn’t open up spaces, as of 2022, 78% of child care centres had active waitlists. If that wasn’t enough, 90% of child care centres report that they can’t find the staff to fill vacant positions, largely due to lack of qualifications or too few local applicants to choose from.
Most qualified ECEs earn less than $20 an hour, and when considering the immense workload and safety pressures involved, it’s no wonder that the occupation has fallen out of favour for many. So when we fit all these pieces together we inevitably see: an essential service with an inability to meet demand, worker shortage, and government mandates to dramatically cut costs through subsidies in the next 3 years (requiring businesses to run as non-profits).
Don’t be surprised if child care becomes even more of a talking point in the near future - we’re seeing a service that is in dire need of some careful decision making - that unfortunately has little voice of it’s own in the halls of power.
The Balance Sheet 💬
The Balance Sheet provides Small Business opinion, voices and futures, and each month(ish) you’ll get a deeper dive in your inbox.
If you run a Small Business in Canada, the chances are your books (and therefore your taxes - and possibly payroll) touch one of three ‘cloud platforms’ - Xero, Quickbooks or Wave. So it makes sense to think about how these platforms operate, and how they intend to support Small Business owners (like yourself) moving forward.
The other week we sat down for a chat with Faye Pang, the leader of Xero Canada, to talk about the challenges of making change happen, data responsibility, building trust - and how technology can rewire things for Small Business owners.
Market at-a-glance 📈
BOC Indicators (Link):
BOC Prime Rate: 6.70%
BOC Unemployment Rate: 5.0%
BOC CPI Inflation Rate: 5.9%
BOC $USD Exchange Rate (Link):
Low: 1.3671 CAD [0.731 USD]
Average: 1.3707 CAD [0.7296 USD]
High: 1.3763 CAD [0.7266 USD]
Best GIC Rates (Link):
1-year GIC: 5.25%
3-year GIC: 4.95%
5-year GIC: 5.00%
Best 5Y Mortgage Rates (Link):
Prime Rates (Link):
TD Bank: 6.70%
National Bank: 6.70%
CRA Canadian Pension Plan Rate: 5.95%
CRA Employment Insurance Rate: 1.63%
CRA Minimum Wage per Province: Link
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