Wednesday Night #1385

The doom and gloom which naturally surrounded the discussion of the world economy was alleviated by the most welcome return of Vithal Rajan, who has spent a number of years in India building organizations to empower the poor, notably the Dalit or ‘Untouchables’. He is a firm believer in microcredit because it gives the poor the ability to make their own decisions as to what they want to do with money that they borrow and repay on commercial terms. Most recently, he has become involved in bettering the lot of the Muslim population which, he notes, is often as badly off as the Dalit.

Chil Heward introduced Anita Nowak, whose impressive c.v. includes background in the private sector in Marketing, Corporate Communications & New Business Development, followed by her current fundraising activities which began with her alma mater, the Desautels Faculty of Management, and led to her current position as Director of development for the Study Foundation (while pursuing a Ph.D. at McGill in her ‘spare time’). Additionally, she is an inveterate traveler and newly returned from Rwanda, where she worked to provide a women’s collective with microcredit loans that have changed the lives of some 36 families. She also reports that the rate of progress and infrastructure development is exceptional, with many foreign investors in evidence. It was also noted that in this week’s elections in that country, Rwandan women secured 56% of parliamentary seats – a world record.
The Financial crisis
Canadians appear to have complacently viewed the meltdown in the U.S. financial sector as a foreign event happily leaving us relatively untouched, thanks to the healthy state of our commodities market,- which some experts suggest will also drop -. In fact, nothing could be farther from the truth. Several Canadian banks were involved in the CDS (Credit Default Swap) market whereby banks decided to venture into the insurance market, writing insurance against someone else defaulting.
We are living through an amazing period in the financial history of the global economy that will continue for many days to come. The absolute incompetence of the regulatory authorities (SEC) is the first thing to strike the informed observer. The drama as yet to be played out will depend on the reaction of the U.K. and other major world countries.
The situation is very serious in Russia, where the stock market has dropped by over sixty percent (and is now closed), wiping out many of Vladimir Putin’s friends, possibly putting his own political future in jeopardy. [Editor’s update: On Friday (the 19th) the Russian stock market soared nearly 30 per cent after the government rescue plan to boost liquidity by more than $100bn revived investor confidence following the biggest crash in a decade. However, on September 22 it was announced that Moscow widens emergency funding . Some observers suggest that there could be serious political turmoil ahead, with the possibility that Medvedev may take the opportunity to sideline Putin.
It is predicted that global growth may slow to 2%. Even emerging markets have been slowing down, although our emerging markets expert maintains that China’s growth will be at 8%, India’s around 7%, other Asian countries and Brazil, around 5%. However, the problem with emerging markets is their lack of liquidity. Further, as the recent Russian adventure in Georgia has shown, risk is high, at a time when investors are highly risk averse. Middle East countries (Saudi, Emirates) are not suffering, but some of their recent acquisitions are causing ‘indigestion’ and the stock markets in Dubai and Saudi are down as is the real estate market in Dubai, – in part due to overbuilding -.
China has reduced interest rates and a 500 basis point reduction is anticipated in the U.S. and U.K.
The truth of the matter is that the business cycle is in recession with a growth rate estimated at only 2%. Much of the wealth that we believed to exist, does not. Not a great deal can be done other than to allow the cycle to continue. Japan underwent a somewhat similar crisis and has been able to survive and recover, but that process took fourteen years.
We are not in a traditional recession, but rather a collapse of major parts of the U.S. and global financial system. The emotional aspect – the lack of trust between institutions – has a major impact on liquidity. Additional factors are solvency and transparency making predictions perilous. Not all the losses have become evident and institutions refuse to lend money to the system. In retrospect, if a comparison is to be drawn with the Great Depression, it is probable that many of the post 1929 recovery period opportunities were World War II related. There has been some alarming news today regarding the Reserve Primary [money market] Fund, indicating that even these funds with relatively low returns, but assured liquidity, are in trouble.
Where are there opportunities? Opportunities exist but are difficult to find. For the investor, the best strategy would probably be investment in small, entrepreneurial, flexible companies, which, in the current climate, if they are successful, could be bought out. In the health care and biotech sectors, M & A activity is increasing as the big pharmaceutical manufacturing sector faces the dual problem of a number of products coming off patent and a dearth of marketable new products in the pipeline. Communications and environmental technologies offer very interesting opportunities. Companies that produce consumer goods to meet the demand in the emerging market countries like China and India. Opportunities exist in emerging markets for small, knowledge-rich, service-oriented, culturally sensitive Canadian companies. Promising sectors include renewables, public health management, IT for education, contract farming and marketing of food.

India
With the world’s fastest growing number of millionaires and billionaires, India is seen by some observers as the worthy successor to the United States as a world leader. In truth, there are two Indias: one, clustered around urban centers, in which some thirty million people are wealthy and two hundred million are considered middle class. This India represents a relatively small percentage of the population that numbers over a billion [1,147,995,904 July 2008 estimate], composed of people of numerous cultures, [15 official] languages, [plus English] and religions. The second India, largely rural, is the one in which much of the population lives in abject poverty.
The disparity between identifiable segments of the population is evident. The large Muslim segment of the population suffers discrimination on the basis of language and religion.
Government revenue is almost totally from indirect taxes; public education and health care are terribly under funded. Lack of investment in agricultural infrastructure combined with degradation, desertification, chemical pollution, have resulted in declining productivity in a country where some 80% of the population is either directly or indirectly dependent on agriculture. FAO figures show that productivity per unit of land in India is no greater than that of Nigeria.
In the face of these apparent roadblocks to success, India is working as a nation – under a system best described as managed chaos, which will likely get worse – largely because there are no single large pressure groups – the people are fractured along linguistic, ethnic, cultural, economic and many other lines. By the same token, it is an example of flourishing multiculturalism and has been for a couple of millennia.
Elections
The U.S.
The financial crisis is already having an impact on the U.S. elections and, as more and more Main Street Americans worry about their 401Ks and other savings, the silliness of the last few weeks’ debate of lipstick on pigs and related topics is disappearing. Polling figures for Obama are strengthening. McCain’s choice of Sarah Palin as a mobilizing factor amongst the evangelicals may not be very popular in more established Republican circles. Criticism of the outright lies in some of the McCain statements is becoming more widespread. There is much anticipation as we move towards the first presidential debate at the end of next week (a week that promises continued emphasis on the financial crisis) and the vice-presidential debate on October 2, and little doubt that the latter will outdraw the simultaneous Leaders debate in Canada.
Canada
Some believe that there will be a Conservative majority – and major inroads by that party in Québec. As that possibility becomes more widely accepted, there is likely to be a strong reactionary push for the candidate of any party but. Already, the CSN, a traditional backer of the Bloc has freed its members to vote for whichever candidate in their riding has the best chance of beating the Conservative, just as Newfoundland Premier Danny Williams has advocated in his province. Whatever the outcome, we are assured that Maxime Bernier will triumph in the Beauce, despite the publication of Mme Couillard’s forthcoming book.

T H E  I N V I T A T I O N

Where is money safe today? Where should the investor be? Cash? What currency? To whom can you turn for advice that is not tinged with self-interest? What institution can you trust? We have heard that even proverbial Swiss banks may not be that safe (ex.UBS) …. One Wednesday Nighter suggests that we should start each evening with these questions and see if the answers change over the weeks.
The failure of Lehman, the sale of Merrill Lynch and the tottering of AIG are creating yet more turmoil in the U.S. economy [and, not incidentally, showing the woeful failure of John McCain to understand the issues]. Ben Bernanke must be thrilled to hear Alan Greenspan weigh in.
Analyses abound and some of the best will appear on the screens of Wednesday Night, including excerpts from Charlie Rose’s conversation with Robert Rubin and Lawrence Summers of last Wednesday and related videos
We have also received advance notice of Rodrigue Tremblay‘s analysis, The U.S. Financial System in Serious Trouble, to be published this Wednesday.
We welcome your contributions to the growing collection of analyses.
As usual, our preoccupation with North American markets may have somewhat blunted the impact of news from elsewhere including this intriguing item: Russia Market Drop May Temper Medvedev Georgia Moves
Last week, we got somewhat off track (failing to take full advantage of Kimon‘s wisdom and experience, although his comments on being a political candidate were fascinating! -we will certainly make amends this week) with a discussion that focused almost entirely on the forthcoming elections in Canada and the U.S., and disappointingly little consideration of economic and geopolitical issues, something we hope to redress this week, although we feel sure that at the very least, there may be some comment on Sarah Palin’s (in)famous interview with Charlie Gibson.
We thank the BBC for reminding us Haven’t we seen this [U.S.] election before? and for giving some fascinating insights into the not-so fictitious characters. But not even Aaron Sorkin could have dreamed up Sarah P.
Admittedly, whatever happens in the U.S. election has consequences for the entire world, but it seems fair to say that the same is not true of Canada’s unwanted, unloved, voting exercise.
Sadly, as discussed last week, Canada’s role in the world has been greatly diminished, except as a source of oil, water and other natural resources. And today we read that “Use of Internet in Canadian campaign is ‘digital equivalent of a lawn sign’.”
We are struck by the lack of attention paid to the devastation of Hurricane Ike, which of course did not disrupt a major political clan gathering. We also wonder if there is less sympathy for oil-rich Texas than for Louisiana and Mississippi, or is it that Texas is home to George W.? Speaking of whom, he took his time getting to Texas to survey the damage – not like the rush to be seen (away from the RNC) as Gustav made his way to the landfall. Oh, right, he’s busy overseeing the economy.
But this was a devastating storm. More than 30,000 people remain in shelters, and 2 million are without power.Texas emergency workers have rescued more than 3,300 people trapped by flooding. The estimated 40,000 people who fled Galveston have not yet been allowed to return. Officials say the city may not be fit for human habitation for months.
For the tekkies among us, this item: ‘Big bang’ experiment is hacked
Last, but not least, reminders of some special Wednesday Nighter events:
John Curtin’s new film, “To Hell with Manners”, will be broadcast on CTV Saturday evening (September 20) at 7pm
On Wednesday, September 24, the McGill Chamber Orchestra, of which Hans Black is Chairman of the Board, will present Dorothée Berryman “In Concert” with songs from the great American songbook: Porter, Rodgers and Hart. Billy Strayhorn’s Lush life….and perhaps one or two French ”chansons”.
And on October 2, the benefit “Gentle the condition” concert organized by Brigitte Garceau’s Foundation with the enthusiastic support of Beryl Wajsman’s media and personal contacts. One of the beneficiaries is De la rue à la réussite the cause that Brian Morel has championed from its very beginnings.