Wednesday Night #1419

T H E   R E P O R T (photos and videos)

It was an evening rich in market and economic matters, enlivened by assorted luminaries including several members of the McGill Pension Board who arrived from a dinner honoring Tony Deutsch, who has stepped down as head of the PAC.

The markets
We must recognize that over the past 25 years people have developed unrealistic expectations about the returns capital can generate.  Have the stock markets bottomed out?  If stock market indices were indeed both a record of the past and predictor of the future, technical market analysts would not find employment.  The recent rapid ascent of the markets has given rise to euphoria, at least partially unwarranted.  Indeed they provide some expectation of more encouraging times, but although the worst is probably behind us, much of the current optimism is based on a slowing rate of decline in figures such as job loss, rather than a real improvement; the rise could be hard, bumpy and long.  Signals are mixed; there have been miraculous upward moves by financials and information technologies, encouraging signs in Southeast Asia and growth and economic stimulus in China.  There will inevitably be changes in the U.S. banking system but their nature is as yet unpredictable.  The situation in the U.K. is sad. People are bewildered and afraid. Credit is not available to even companies with fine balance sheets. Taxes have risen and the government is in a shambles.   In Canada, the preponderance of finance and resource sectors as a percentage of the T.S.X. results in exaggerated swings in the index reflecting more the fortunes of these sectors than the economy as a whole, hence more difficult to interpret as a predictor of the future. The market is an important forecasting tool, but when it predicts disaster and that disaster does not occur, investors tend to become overconfident and overreact.  There was sudden growth from September 2008 until March first this year.  Investors turned from cautious to confident to greedy.  The market appears to have bottomed out and shown signs of recovery but the economy has not.  Knowledgeable Wednesday Nighters believe that the crisis in the real economy has yet to be reached.  The next six months can be expected to be a time of volatility especially for financials and energy stocks – half of the TSX.  The banks have been a profitable investment for a period of time and now, as infrastructure programs are beginning to come through, construction and materials stocks are  on the rise. Pharmaceuticals are also good defensive investments. The next half year will be volatile with rising food prices and reduced supplies leading to geopolitical risks.  Food crises can be seen as a precursor of human conflict.  The investment management business is no longer the pleasant, leisurely activity of the past  as the traditional (Waren Buffet) approach  of buy and hold has been replaced for pension funds and institutions by far more active trading.  Because of their nature it is not easy for pension funds to change their philosophy, but certainly they will have to in today’s economy.  With low interest rates, people living on fixed incomes are searching for secure investments paying adequate dividends, not an easy task in today’s market.

Currency volatility has become an important factor.  There is much money waiting to be invested with no clear indication as to where to invest it.  Although Canada’s position is currently more favorable than that of the United States, the currencies of the two countries appear to be intertwined, with some political determination of what the exchange rate should be.  If this is indeed true, and if the prediction of the falling value of the American dollar is valid, there is a risk that the  Canadian dollar will be affected adversely, either reach par with or exceed that of the U.S. or lose its value vis-à-vis other world currencies. On the other hands, as commodity prices inevitably go higher there should be positive consequences for resource-rich countries like Australia, Canada, South Africa.

Pakistan – a bad situation badly handled
The situation is slipping out of control. With last week’s meeting in Washington of the presidents of Afghanistan and Pakistan, the world is more than ever focused on what President Obama terms the fragile government of Pakistan and its inability to deliver the basic services necessary to build a strong civil society and gain the support of the people,  which he believes is an even greater danger than vulnerability of Pakistan’s nuclear arsenal to the insurgent Taliban forces. China, however has become a very big player in the area and is already engaging in cooperation with Bangladesh. The education system has been changed and today the madrassa is considered equivalent to traditional secular schooling and qualification for employment in the civil service, or the military. This has shifted the nature of the Punjabi- controlled Pakistan military, of which something like 60% has only a madrassa education – thus, much of the Islamist support is actually to be found within the ranks of the military and the insurgency is far greater and more dangerous than appreciated. This situation is bound up with Afghanistan and further complicated by the role of Pashtun in the two countries. Iran’s position is also shifting because of its relationship to Afghanistan.  India, meanwhile is doing what it can to protect itself from threats from Pakistan and appears to be encouraging Pashtun nationalism within its own borders.

Mulroney
The former PM’s testimony has provoked derision and skepticism among media commentators and Wednesday Nighters alike. Mr Mulroney seems to have a unique perception of the legislation and tax laws regarding the need to have declared the monies delivered to him in the now-famous envelopes, i.e. he said he considered the money a retainer and that according to his understanding of tax laws, he did not have to pay taxes until that income was declared. However, he never explained satisfactorily why he kept the money at home or in a safe deposit box.  He engaged in lengthy self-aggrandizing accounts of his importance on the world stage, leaving the impression that he had single-handedly effected the unification of Germany, and thus was a natural choice to undertake international representation for Mr. Schreiber, but never explained exactly what he was doing.
It is a sad time for Brian Mulroney and for Canada.  Whether or not his dealings with Karlheinz Schreiber were legal, this situation is demeaning to the country and to the office of Prime Minister.  The amount of money exchanged was relatively small in the larger picture of politics and lobbying, but opinions are divided as to whether the cost of the inquiries ($40 million at a conservative estimate)  is warranted to determine how to establish a system of integrity (probity) in public office.
Regrettably, the days are long gone since Westmount Mayor McEntyre was outraged at being forced by the provincial government to accept remuneration for his services as Mayor.  His solution was to have it put into a fund for the purpose of holding an essay contest for students and purchasing books as prizes. In an ideal world, politicians and electors would not only be squeaky clean but would also put the best interest of their community and country ahead of their own personal interests.  Whether myth or fact, public service was at one time considered more an honour than a livelihood.

The Somali pirates
In response to the story that the local community in Puntland has turned against the pirates, it was suggested that the reason likely has much more to do with the rival power bases (imams versus pirates) and that the anti-pirate sentiment could be encouraged by the Saudis, at which point it becomes problematic  as an islamist movement rather than one that aims to clean up the community. [ Editor’s note: See BBC story Call to blockade Somali Islamists]   Unfortunately, the international community has little or no credibility – it was after all, European fishing fleets that ravaged the fishing beds. Possibly the Chinese would have the credibility, but that solution offers its own set of problems.

T H E  I N V I T A T I O N

Congratulations to Beryl and the MetropolitaIn on their first birthday and the news that Alan Hustak has joined the masthead as Creative Editor – not sure about that title, but ‘creative’ certainly applies to Alan.
Congratulations are also in order to Michel Kelly-Gagnon, named to the Top 40 under 40 – a much-deserved accolade.
We are also very pleased – and comforted – by the naming of Pierre Marc Johnson as Quebec’s representative in Canada-European Union trade talks. Although he did a superb job of handling the inqury into the de la Concorde overpass collapse, this role is much more suited to his many talents.

As always these days, the world economy continues to dominate our thinking – at least for those who have not been preoccupied with President Obama’s successful gig as a stand-up comedian at the White House correspondents dinner, or the arrival of the Star Trek prequel.
Chil Heward will report on his recent quick trip to the U.K. and remains cautious about the outlook – along the same lines as Ron Meisels’ warning that the mini-bulls we will see are only for the most intrepid (and well informed) investor. [Ron is in Winnipeg this week but advises “Today’s decline is totally within or forecast, and may last another week. Buy stocks that go up. If they don’t go up, don’t buy them (Mark Twain). Seriously, use declines to pick up stocks, like Canadian Tire.”]

The banks’ stress tests: Reuters quotes a Fed official as saying that financial markets are indicating they trust the results (what else would a Fed official say?). The National Post takes a positive Canadian view, citing Desjardins  analyst Michael Goldberg’s opinion that there are M&A opportunities for Canadians as a result. The WSJ – who should be all in favour – suggests that Intense lobbying by the U. S. banks led the U. S. Federal Reserve to significantly scale back the size of the capital hole facing some of the nation’s biggest banks shortly before concluding its stress tests.

India votes – we have mentioned it before, but believe that the extraordinary news of  The untouchable who would be PM warrants our attention and amazement, as does the whole process of the vote in the world’s largest democracy. As always, the BBC offers extensive, informative coverage of an unequalled organizational feat – some 714 million eligible voters, with almost four million officials taking part – the mind boggles.

While Pakistan becomes more and more of a basket case – again, the BBC offers excellent coverage – and peace talks with India are on hold.

We should add to our concerns the Pope’s visit to the Middle East – his diplomatic blunders to date have made us cringe and a visit to the emotional epicenter of world politics worries us, generating as it does headlines such as:
Pope comes under criticism in Israel: The Vatican had to play down Pope Benedict’s teenage membership of the Hitler Youth on Tuesday as Israeli disappointment at a lack of emotion in his remarks on the Holocaust dogged his tour of the Holy Land- and this Pope’s Wartime Past Becomes an Issue .

Encouraging news for healthcare reform in the U.S.  says a wary Paul Krugman
” Six major industry players — including America’s Health Insurance Plans (AHIP) … have sent a letter to President Obama sketching out a plan to control health care costs. What’s more, the letter implicitly endorses much of what administration officials have been saying about health economics… the health industry letter talks of ‘reducing over-use and under-use of health care by aligning quality and efficiency incentives.’ It also picks up a related … theme, calling for ‘adherence to evidence-based best practices and therapies’.”  The last part of this quotation is particularly appropriate as Dr. Ofer Avital of Evidence Matters will be with us.
Reminder: if you haven’t had a chance, do read the excellent NYT Magazine piece on the Dutch approach to socialized medicine and other aspects of the citizens’ lives.

Some questions left unresolved last week:
Informed comment on the results of the ASEAN finance ministers’ meeting and the implications for the world economy of the ratification of the Chiang Mai  Initiative. – Any takers?
The Science, Technology and Innovation Council has released its first report , which says the country ranks sixth out of the G7 grouping in business research and development as a proportion of gross national product, despite federal tax breaks and funding. Canada  also ranks 14/19 countries ranked by the OECD. What is to be done? And how quickly can it be accomplished?  Guy Stanley, Margaret Lefebvre, Karl Moore and Richard Bruno  would be especially welcome contributors on this topic.
Do read Disruptive technology/innovation

We fail to acknowledge as often as we should the wonderful contributions that many of you make to the dialogue of Wednesday Night that continues throughout the week. A small, but indicative sample follows.
John Evdokias sends us a useful link to Daily Corruption News via Transparency International with this comment “f you have not yet made this site available to the night-owls…everyone needs a small dose of reality, just as they start to feel safe.” We wonder where corruption begins and ends vis à vis sheer greed and incompetence. A topic worthy of debate.

Corruption, venality and related issues remind us of the Somali pirates and this fascinating development in the saga :
”For the first time in this pirate-infested region of northern Somalia, some of the very communities that had been flourishing with pirate dollars — supplying these well-known criminals with sanctuary, support, brides, respect and even government help — are now trying to push them out. Grass-roots, anti-pirate militias are forming. Sheiks and government leaders are embarking on a campaign to excommunicate the pirates, telling them to get out of town and preaching at mosques for women not to marry these un-Islamic, thieving “burcad badeed,” which in Somali translates as sea bandit. There is even a new sign at a parking lot in Garoowe, the sun-blasted capital of the semiautonomous region of Puntland that may be the only one of its kind in the world. The thick red letters say: No pirates allowed.”
To which Stephen Kinsman reacts with the following excellent suggestions:
‘Now, there are several things we have to do, some of which are as follows:
1. Keep up the pressure against pirates, including their facilities ashore, with respect to all waterways; international or national;
2. Help those in some form of authority develop Puntland into a country;
3. With the approval of that local authority, set up a naval shield to exclude foreign fishing within 200 miles of Somalia until the fishing beds have recovered from their current states of depletion,  and in the meantime introduce and implement measures to help in the process;
4. Demand  the International Maritime Commission pass an act as soon as possible allowing any naval vessel to seize and arrest any ship polluting international or national waters, with provision for prosecution of owners and captains in an international court if necessary where the penalties can be prison and fines that are meaningful;
5. Where international aid and donations to Puntland are concerned, formal supervision by donor nations and accountability are to be the rules.
We have a super opportunity to help the people of Puntland develop and implement systems of government and governance suitable for them. Let’s have the courage to exercise the measures necessary to their fullest extent and thus work that opportunity into a reality and ensure its success.”

We look forward eagerly to Kimon’s comments on these suggestions for proactive global governance and their feasibility