Wednesday Night #1412

T H E  R E P O R T

A forecast is not pretense at clairvoyance.  It is risk identification.

If you add reasonably accurate probability, it becomes more credible.  Investors, Analysts, Technicians and the curious attempt to find their way through the current financial labyrinth.  It would appear that the only agreement in this week’s Wednesday Night Salon was that the economy has indeed suffered and that at one point as yet undetermined, at least North America and probably Asia, will outlive and overcome the current situation in an otherwise changed world.

We have not as yet hit bottom, but the rate of decline is slowing Instead of falling off a cliff, we are sliding down a slope .  Homes are not currently being built, a situation that will, of necessity, change.  Asian exports have declined – Japan’s figures down 50%; harbors are being built to store now idle cargo ships, with ship owners losing money even when goods are shipped by water.  There is, as yet, no indication as to where the stock market is heading and as long as there is no further decline, it is, according to some analysts, the best current place for investment in relatively safe securities paying reasonably high dividends. Establishing the right asset mix is critical. As the business cycle takes its course, the stock market will ultimately recover before the real economy, as it normally does.  On a technical basis, Canada’s economy is moving upward, the commodity sector, led by copper, fertilizers, food, is doing well and is set to continue to rise.  Although Canadian bank shares have gained 30%, they may not be able to maintain this momentum in the immediate future because of possible undisclosed commitments. The promise of the Suncor-Petrocan merger announced Monday is reflected in the rise of oil stocks in general, not only in Canada.

European investors, who have not enjoyed the same rebound as North Americans, now look for geopolitical stability and view Canadian farmland as the cheapest, safest and potentially best investment. Europeans investing here will very likely cause a rise in the Canadian dollar.

We have seen the market bottom out for the second time but there is a lot of instability and much more stabilization is required before the true bottom is attained.  With low interest rates and an unpredictable market, the only relatively safe way to make money is to invest for dividends.  President Obama’s policies and actions cannot solve the problem. Their purpose is to buy sufficient time for the markets to settle.  The billions being spent today must of necessity, be repaid, resulting in a burden to be borne for many years by succeeding generations.

The Asian economy is again growing.  Asian countries have cash, China holds U.S. treasury bills and Brazil is doing well.  The problem lies with Europe.  European banks are even more fragile than those in the United States.  Unlike the Americans, they are reluctant to print money, causing them to stagnate.

The big problem with the credit crunch is its effect on international trade in the developing world.  The fear is that of increasing destabilization and unrest unless and until the credit problem is resolved.

The tragedy of Nortel, a Canadian gem, has again been raised at Wednesday Night.  Nortel has introduced impressive technology into the market, their big problem being expensive acquisitions that did not pay off.  If it can be relieved of its resulting debt problem, Nortel should rise again.

Eastern Europe
Romania has just obtained an I.M.F. loan to help solve its monetary problems.  Hungary has a similar problem because of its habit of running deficits over a period of years arising from a reluctance to raise taxes.  The current problem is exacerbated by Hungary’s German-type constitution.  The current Prime Minister may very well be prevented from resigning because of the constitution, which requires parliament to agree on a successor prior to accepting the resignation – an agreement  that until now has eluded the members and shows no signs of resolution.  The situation is so serious that Hungary finds it impossible to sell government bonds.  Their major export, namely automobiles and automobile parts (who knew?), has dried up, compounding the problem.  Its five major banks’ debt dependence on foreign currency exacerbates the problem.

Survival of the planet
The Reverend Thomas Robert Malthus comes to mind on Wednesday Nights in debate between those who believe in necessity being the mother of invention (if it hurts sufficiently, a cure will be found) and those who believe personal or corporate interest too frequently exceed any concern about the future of the planet.  Those who are unconcerned about these risks to life on this planet, believe that birth control, will shrink the population over the next half century causing a shortage of labor leading to more efficient ways of doing things.  Nineteenth century technology is still evident in twenty-first century motorized vehicles, that when the carbon crunch results in unbearable costs, innate human ingenuity will cause something to be done to lead them to become independent of fossil fuels.
The Malthusians remain concerned about potential danger of the tar sands tailing pools, the pollution of the Arctic resulting from the possible total destruction of the seal habitat, over-fishing, potential overpopulation and world dependence on fossil fuels and the plastics derived from them.  Increasing population leads to urban sprawl which, in turn, increases our dependence on fossil fuels.  85% of fuel is carbon-based. Some believe that if we cut carbon emissions by 50%, we will cut our income by 40%, causing a serious unemployment problem, and that if we are going to avoid a catastrophe we must develop alternatives now, while we have time.

THE INVITATION

Much as we would like to turn to other topics, it seems that events condemn us to continue to debate and discuss the economy, particularly the new “Geithner Plan”, which Jay Bryan believes has “real promise” and Paul Krugman, on the basis of the documents leaked  in advance, really isn’t happy about (“Financial policy despair”) Once again, we find ourselves firmly committed to the “don’t know what to think” camp. Tony Deutsch has forwarded an interview in the WSJ with Gary Becker, the 1992 Nobel Laureate in Economic Sciences, who says, “What can we do that would be beneficial? [One thing] is lower corporate taxes and businesses taxes and maybe taxes in general. Particularly, you want to lower the tax on capital so you raise the after-tax return to investing and get more investing going on.” So, please help us sort it all out. There’s a strong possibility we will have our Sage From the West aka Martin Barnes with us to guide us in our thinking.
There will be more as we digest the commentary on President Obama’s press conference – and the significance of the lack of Q & A on international affairs as we run up to the G20 next week, which we find odd in light of Mr Brown’s declarations regarding the partnership of Europe and the U.S. to lead the world out of the morass of the crisis. Shouldn’t we be looking more closely at what is happening in Eastern Europe with Hungary and now the Czech Republic in political turmoil.
Last week, our call for discussion of Education initiatives, enhanced by clips of Google CEO Eric Schmidt on Charlie Rose, resulted in a sometimes impassioned debate that ranged beyond policy and practice, to include ethical issues relating to what is reported to be wide-scale cheating at Montreal universities (or at least one) and was continued in e-mail exchanges with gusto by certain participants. This topic is far from exhausted.
Regrettably, this meant that little attention was devoted to the looming disaster of consumer credit, notably the usurious rates charged by our Oh so conservative financial institutions.  We are convinced that this topic deserves as much attention as – dare we say – AIG bonuses and look forward to exploring solutions.
For those of us who are concerned by the impact of the Tar Sands on our environment, the announcement of the Suncor-PetroCan deal brings some dismay. Some of us would be considerably happier if the trumpeted job creation were not based on “the making of a new, oil-sands focused national champion”. But certainly Mr. Harper must be happy. Of course this doesn’t exactly mesh with Mr. Obama’s policies, but do Ottawa or Calgary/Edmonton care?
On the topic of the environment, how many have been paying attention to the Fifth World Water Forum held this past week in Istanbul? No, not surprising, it has been under-reported and seemingly inconclusive. Although more than 100 countries pledged to improve sanitation and water supplies for those in need, the conference made a number of non-binding recommendations. Some nations [including Canada and the U.S.] refused to recognize access to fresh water as a basic human right, so the final text instead declared water to be a basic human need. Jim Prentice, explained that declaring access to fresh water to be a human right would force countries with large freshwater supplies to export their resources to countries with insufficient supplies. This week also marks the 20^th anniversary of the Exxon Valdez disaster of which Paul Carvalho knows more than most of us. It is distressing to read that the litigation continues and there still is no final settlement for the residents whose livelihoods and habitat were destroyed – and surprise, Exxon is expanding its operations in Alaska today.
On a somewhat lighter note, we call your attention to the enthralling exchange between sometime-Wednesday-Nighter John Moore and Lord Black, with which, we are told, the National Post is thrilled,  given the immense, and highly partisan,  reader response . So far, this is a three-part series:
John Moore: The audience has gone home, but Ann Coulter raves on
Conrad Black: Ann Coulter, John Moore and Me
John Moore: Conrad Black, Ann Coulter and Me
The exchange is entertaining, well written and full of barbs, however, we would raise another question. Having glanced at the comments following the columns, we are becoming increasingly concerned by the venom of the commentators on both sides, the ad hominem remarks – we would not dignify them as arguments – and general lack of any original thinking. What is the usefulness of the Comments threads? And who are these people who have nothing better to do than post their opinions in the middle of the day, when they should be at work, or if not, perhaps brushing up on their spelling and writing skills (not to mention general information) at the local library. Does this new form of commentary by readers do anything for anyone? Letters to the editor are usually thoughtful, witty or at best, thought provoking. Why do our newspapers encourage this largely meaningless internet-fuelled drivel? Is this in the interest of freedom of expression, or does it simply encourage the nut cases?