Wednesday Night #1471

Pierre Arbour’s foresight and generosity in creating his eponymous Fondation Universitaire continues to foster bright young students through the Master and Doctoral levels providing them with means for acquiring the education that will enable them to make a contribution to the Quebec economy and their fellow humans not only in their chosen fields but to do so with integrity, dedication and professionalism. Last year the Foundation gave 28 scholarships for a total of $273,000 and, given the portfolio’s enviable returns (72%) under Pierre’s management, it promises to benefit even more promising students in the future.
When asked about the secret of success of the portfolio, Pierre replied that a large part of  it was due to his investments in income trusts. Given that this vehicle will largely disappear by the end of this year, the obvious question is with what would he replace them? He is quite optimistic about the future of some of the very strong companies and believes that despite the taxation that they will now face, they may well continue to pay equivalent dividends for several years to come. He added that oil and as investments have also contributed, pointing to the increasing longevity of wells, thanks to technologies that have been developed over the past twenty to thirty years.
Pierre’s generous personal contribution in ideas, time and effort as well as money has benefited not only the laureates, but society as evidenced by the brilliant Iranian-Canadian Scholar whom he introduced,  Laleh Mousavi Eshkevari, currently completing the first year of her Ph.D. in software engineering at the École polytechnique. Laleh paid tribute to the importance of the moral support and motivation that the award gives, along with the freedom to concentrate on her demanding program of study.

Another natural disaster – this time local
Wednesday Night’s resident “Judy geologist” – soon to be rechristened Dr. Disaster – has recently been prominent on the airwaves, discussing the volcanic ash, Mexican Gulf oil spill and now the tragedy of a family buried in a landslide in the their house in the Québec village of St-Jude. Judith pointed out that the media had erroneously  referred to this as a sinkhole, but it was in fact a textbook lateral slide. In this case, the cause may be traced back to the the ancient Champlain Sea and the nature of the clay which was formed in salt water. These susceptible areas are mapped and known, but landslides are easily set off when the area is disturbed, e.g. by excavations, building a new road.

Oil spills
Even if all the organizations involved behaved responsibly, the problem is the product — a product we are addicted to.
It is ironic that today, as worries increase over the Gulf of Mexico oil spill, the American Power Act, which calls for increased offshore drilling, was introduced. Faced with the challenge to move the country from its current situation of dependence on carbon reserves to fuel the energy system, it seems likely that environmental degradation will continue until such time as there are enough viable alternatives available. Meanwhile, the desire to become independent of imported petroleum is likely to outweigh the physical risks of mining petroleum a mile under the surface, especially in such an ecologically rich area as the Gulf of Mexico.
Because of the depth of the drilling, and extreme pressure, the Gulf oil spill is not going to be easily fixed. As the various organizations involved play the blame game, it is inconceivable that BP and its partners would not have ensured every possible redundancy for such a dangerous and technologically challenging project. But it has now become obvious that the regulations were simply not enforced. Production this year is estimated to be 86 million barrels of oil of which some 25% will come from offshore drilling, with all of its inherent dangers and risks of other disasters.
The doomsday scenario is that the oil will be picked up by the Gulf Stream and carried through the Florida Keys, up the East Coast.
Paul Carvalho, documentary film maker whose award-winning  Black Wave, The Legacy of the Exxon Valdez chronicles that sad saga, leaves for Louisiana to investigate the possibility of doing a follow-up film to the one he produced on Exxon Valdez, and referencing the 1969 Santa Barbara spill  and similar disasters – the cost in terms of animal and human life, human suffering and the apparent indifference of governments and corporations who place human appetite for petroleum products for transportation and the fabrication of plastics above the need for marine-based food and a pollution-free environment. Although not nearly as spectacular, it is the tiny spills incurred in the transportation of oil and auto droppings that are killing our oceans –  creating the equivalent of six Exxon Valdez’s every year on both our coasts.  In the space of sixty years, we have witnessed the gradual virtual disappearance of fisheries in various areas of the world owing to these small spills.
Fortunately, BP is able to absorb the cost of penalties and human compensation (which will be far higher than the current cap of $75 million)  but if Exxon Valdez is the model, the non-monetary cost to humans in terms of hardship, divorce and suicide brought on by the endless waiting for closure is incalculable; too often, the time lapse between the disaster and court-mandated compensation  convinces victims to settle for sums far below their actual disaster-related monetary cost. The U.S. Supreme Court rendered a decision in the Exxon case almost twenty years after the event and reduced the punitive damages from $4.5 billion to $507.5 million. We can expect BP to take their fight through the courts, while agreeing to pay all legitimate costs. Furthermore, BP is already following an Exxon example by approaching individuals with offers of immediate payments of $5,000 in return for agreement not to press any future claim.

Europe and the world economy
Forecasting the market these days is almost impossible. Essentially, as Nouriel Roubini has said, the problem is not limited to the PIGS countries, and is a political one rather than economic. If countries such as Greece – in fact most of Europe – have the political fortitude to stick to the adjustment program, it will work. It is not an issue of political analysis, as all depends on how people behave. The U.K. may provide an interesting test – the question is, will the new coalition government be able to deal with the economic problems?
One possibility is that the world will form trading blocks, living within their own boundaries and below their potential. It is possible that Europe could enjoy a relatively low standard of living, with relatively short working hours, secure jobs (for those who work), and the rest with nice transfer payments, with the result that the bright young entrepreneurs would leave for more promising climates.
Angela Merkel has stepped up to the plate to help salvage Greece, but not without some personal political damage and the aid of other countries. The European Union  has taken on political responsibility without the concomitant fiscal responsibility, clearly indicating its vulnerability. Demographics (birth rates, immigrant and guest worker conditions) also play an often underestimated role. In emerging markets, the youthfulness of the population bodes well for consumer items. They don’t want to live like their parents; they want money and to live in luxury.
There are very few countries other than China that are creditor nations. The rapidly increasing debt ratio in the U.S. is  worrisome, especially in view of the conflicting interests that make agreement on measures impossible. The country will be in great difficulty if other countries are unwilling to buy U.S. debt. China is using its creditor status to invest throughout the world, however, there are some causes to worry about the economy – the value of imports now exceeds that of exports for the first time in six years.
In simpler terms, no matter how it is explained, the developed world has been living beyond its means, the problem ultimately correctible only through inflation.
Investment strategy
Money managers continue to try to seek out bargains, whether they are worried about the world situation, or simply about having too much cash in portfolios. The May market was to have been a corrective month, the market overbought and ripe for correction – although not the extreme of last week’s events. A meandering negative market is expected until the end of May, followed by a rise. Considering the world debt problems, it is anticipated that there will be increasing interest in the safety of gold and gold stocks. The market is expected to rise during July and August, pause in September followed by the continuation of a selective rise.
Some Wednesday Night Mavens believe that the United States, which enjoys the advantages of a reserve currency, will undergo a period of inflation, in order to monetize their debt, while some countries such as Greece will default, causing the collapse of the European Union. They see emerging markets and gold – the only stable marker of finite size – as the only safe investment vehicles. Others believe that the bond markets in the U.S. and Canada (along with some of the emerging economies and Australia) should be an important part of any investor’s portfolio.

The U.S. mid-term elections
The common tendency is to throw the ‘rascals’ out … better anyone else than the ones we know
Every president knows that it is during the first year of his term that he must accomplish the bulk of new legislation. President Obama has not had an easy ride, relations with Congress, even with a Democratic majority, have not been good, and the ultimate version of his health care legislation, on which he staked his credibility, gets very mixed reviews.It is doubtful that the climate change bill will get through and the immigration bill has been pushed back on the calendar. Financial reform is possible, but still doubtful. Tax legislation (Bush tax cuts and estate taxes) is also due. As the mid-term election approaches, unless there is a dramatic turnaround in the economy and/or a vast improvement in presidential/legislative relations, it is almost certain that the Republicans will gain a substantial number of seats in both Houses. It is even possible, though unlikely, that the Democrats will see themselves in a minority situation in both houses.
In one word, the issue is jobs – everything else, including the passing of legislation is of secondary importance to most Americans of whatever political persuasion. A significant reversal of the current unemployment rate would be the single most influential factor in the mid-terms.
Although it appears to be a recent phenomenon, with the rise of Fox News, Rush Limbaugh, Glenn Beck and others – Sarah Palin, anyone? – anti-intellectualism is not new in the United States (a fixture since Andrew Jackson) and indeed, the more intellectual presidents have not been the most universally popular ones, nor necessarily the best (e.g. Woodrow Wilson). Anti-intellectualism is common in the outcome of mid-term elections. But there is also the perception that the intellectuals who have been elected have not lived up to the expectations of the public, while an important factor in the current battle is the increasing importance of knowledgeable, educated, right-wing intellectuals.

Iran
Without logical analysis, hatred and/or disdain can sometimes lead to an inappropriate reaction. It is therefore useful to pause and attempt to get inside the head of a perceived enemy before reacting to his apparently illogical action. One Wednesday Nighter has explained Iran’s otherwise inexplicable behaviour as President Mahmoud Ahmadinejad’s method of uniting a population, otherwise hostile to his regime, against a perceived enemy (U.S. and Israel) and his ability to impose a harsh political and social regime on the Iranian people. This scenario sees him provoking the Western World to retaliate with sanctions and goes far to explain some of the otherwise irrational statements and actions of an obviously intelligent, irritating, dangerous head of government. The reaction of the world should therefore be to NOT offer the enemy against which the people can be united; but Political sanctions, not economic ones. No invasion. No provocation and above all no commercial or industrial cooperation with the regime.

Israel and the OECD
The news that Israel has officially joined the OECD has been greeted with varying degrees of surprise and skepticism around the world. However, based on its success  as an innovation and technological powerhouse with an annual per capita gross domestic product approaching $30,000, and the fact that generally its economy and society are comparable to western economies and societies, its election to the “Rich nations’ club” is considered warranted. […  a country of 7.1 million people, only sixty years old, surrounded by enemies, in a constant state of war since its founding, with no natural resources—produces more start-up companies than large, peaceful, and stable nations like Japan, China, India, Korea, Canada, and the United Kingdom?  more ]

T H E  P R O L O G U E

Pierre Arbour has returned from Florida and will present the latest Annual Report of the Fondation universitaire Pierre Arbour; he has promised to bring with him Laleh Mousavi Eshkevari,  one of the remarkable recipients of this unique Scholarship program which awards bursaries at the Master’s and Ph.D. levels to Quebec students in three fields: business (MBA), computer sciences and engineering. We are keen supporters of Pierre’s initiative and look forward to the latest news, not to mention the opportunity to meet with one of the brilliant young recipients of his generosity.
Although Pierre has been away for a while [and has many other interests], we expect he may have some comments à propos McGill’s proposal to raise the fees for MBA students. This is not exactly new; rumors were rife last Fall, but this time the story seems to have real legs.
Adam Daifallah writes in Moving beyond MBA mediocrity : “The battle pits McGill’s administration, MBA students and alumni — who want their school to compete globally with the likes of Harvard and INSEAD [what about LBS, or is that just too presumptuous?]–against the hard-nosed ideologues of Jean Charest’s government who want the master’s program to remain impoverished, thus guaranteeing its continued slide downward in worldwide MBA program rankings, as has been the case for several years.” See also William Watson: Make the MBAs pay
We will also welcome Tony Deutsch’s friend, Professor Harold Waller of McGill, one of the very few political scientists who understands financial matters and whose areas of interest and research include three of intense and on-going interest to Wednesday Night: The U.S. Budgetary Process as a Focal Point of the Struggle Over Public Policy; American Politics; and Israeli Politics. Limiting the number of topics within these areas will require immense control by all! However, we will do our best to suggest only a few, in anticipation of numerous lively attempts to add more during the conversation. In preparation, the industrious among you should read SOCKDOLAGER-A Tale of Davy Crockett, Charity and Congress (Warning – this is long, but throws a good light on the softer side of right-wing American politics)
Meanwhile, our cup runneth over with other news worthy of discussion including, of course, the Greek Debt Crisis, its ramifications for Europe, the EU and the world economy, topics on which Tony Deutsch has been a vigilant source of news and opinion. [Update: Europe agrees rescue package]
As news coverage of the catastrophic [and possibly avoidable] oil spill in the Gulf of Mexico, finger-pointing is already plentiful, especially with respect to the cozy relationship between the regulatory bodies and the oil companies under the Bush administration Regulator Deferred to Oil Industry on Rig Safety . The event has had consequences for the Obama Administration plans for off-shore drilling and any immediate future for the Energy and climate change legislation, along with strengthening arguments against Arctic drilling Meanwhile, Chevron starts its 2.5 km-deep project off the coast of Newfoundland , and Mr. Harper blithely dismisses any safety concerns, saying that it couldn’t happen here because of the federal government’s strong offshore drilling rules. Aren’t you relieved?
The muddled UK election results pose some fascinating questions. If – and it is still a big IF – the Liberal Democrats align themselves with the Conservatives, will they be able to extract an enforceable commitment to electoral reform – proportional representation? At what point might they decide that it isn’t going to happen and pull the plug? What, if any, effect might this have on opening Canada to a similar reform?
Jeremy Kinsman, as usual, offers an excellent analysis of the outcome, while drawing parallels with the Canadian situation.
With the arrest of the Times Square bomber and identification of his ties to the Pakistan Taliban relations between the U.S. and Pakistan have taken yet another turn, with inevitable consequences for the U.S. in Afghanistan.
All of these items have run some of our favorites off the front page. Even Goldman Sachs has disappeared momentarily [Update: Financial Times says: The cull that usually accompanies Goldman Sachs’ biennial selection of new partners promises to be more brutal than usual this year as lower-than-expected turnover of top employees could prompt the bank to oust dozens of its 400 existing partners], although U.S. Financial reform is in play in the Senate, with Paul Volcker a powerful, looming presence, and Tom Friedman’s sardonic commentary Root Canal Politics makes the connection between the Greek riots, UK election results and the American economy – not a happy picture.
At last, what we hope is good news – U.S.-Brokered Mideast Shuttle Talks Begin Again [The talks] are aimed at forging a joint vision of the outlines of a solution based on the creation of a Palestinian state alongside Israel.

Two final completely unrelated items:
The first is Nicholas Kristof’s thoughtful piece on how we might better allocate some of the $14 billion spent in the United States for Mother’s Day “To put that sum in context, it’s enough to pay for a primary school education for all 60 million girls around the world who aren’t attending school. That would pretty much end female illiteracy.” Think about it.
The second is a follow-up to last summer’s wonderful tale of high-seas piracy (maybe) involving the M.S. Arctic Sea. Do read Russia jails ‘pirate’ over Arctic Sea ship mystery, paying special attention to the last couple of paragraphs.