Wednesday Night #1318

 Preface
There was a welcome influx of new (and much younger) faces, including three from Europe – lending fresh perspectives, informed opinion and much good information to the evening’s discussion.

The ‘Hundred Dollar Computer’
The socialization process is slowly thrust upon every human from the moment of birth. Not yet having experienced that some things are dangerous, others impossible, the young child filters nothing and believes that everything is possible, Santa Claus real and danger, unreal but never faced. The adult, on the other hand weighs decisions, fears the consequences of error and reasons logically (or illogically) about the consequences of his or her actions. The instruction manual of a tool or instrument of modern technology or of the assembly of furniture from Ikea represents, for the average adult, a formidable barrier to the successful completion of a task.
Nicholas Negroponte, Chairman Emeritus of MIT Media Laboratory is the founder of One Laptop Per Child (OLPC), which was recently featured in a segment on ABC’s “60 Minutes”. A personal experience with a school he and his wife set up in a desperately poor village in Cambodia convinced him that the computer, while representing an insurmountable challenge to many adults is a natural environment for young children. Having devised a virtually indestructible and very inexpensive laptop computer with windup charger, his goal is to provide each Third World child with his or her computer with Internet access.
The early success and ramifications (education of the entire family) of this project mirrors a less sophisticated one undertaken by CIDA about twenty years ago with the university in Zimbabwe, a significant difference being the relatively low cost, sophistication and versatility of the new OLPC laptop.
The biggest concern with a project like these is how robust the computers are; I can’t imagine anything worse than running a school where there are a whole bunch of different computers with different software and you need to find technicians who are willing to work for no money
Despite the potential of teaching otherwise illiterate children and opening the world to them, some questions were raised by Wednesday Nighters as to the loss of the sum, however modest in western terms, invested in computers, that might possibly have been invested more cost-effectively to ease the poverty in developing nations. Furthermore, now that there is an accord whereby recycling computers from developed nations is no longer considered dumping, there are those who believe that a recycling program which complements established goals of ministries of education in the developing world is, at $7 per person, a far more cost effective solution. The problem with the gift of recycled computers is the need for technicians to keep them operational and the need for electricity, not available in many rural areas of underdeveloped countries.
[Editor’s note: Since the 60 Minutes show aired, the Internet has been awash in commentary and discussion of other similar projects, however we would like to point out that the suggestion that investment in computers might have been invested in alleviating poverty misses the point that most development experts make: Education is the key to alleviating poverty.]

Why Not for retired people and/or the elderly?
Noting the success of the project – and the delighted faces of children in Cambodia, Brazil and other places where trials are proceeding, some believe that a similarly simple and indestructible computer could bring equal joy to retirees who have not had the opportunity to develop computer skills at work. Why not such a computer instead of the traditional gold watch? Being aware of the gradual withdrawal of some of our friends because of illness and immobility, some wonder if resistance to new technology might not be overcome if the computer were designed in a user-friendly fashion (i.e. magnified lettering on keyboards, screens set for large print view) and if, rather than enumerating the hundreds of complex tasks it can perform, the capabilities initially described were simply e-mail (to keep in touch with family members) and the vast worlds that are opened up with Internet searches of favorite topics.

Hedge Funds
At least once a year, the subject of hedge funds returns to Wednesday Night, always a topic of interest to those present, possibly because that title is a misnomer, implying the hedging of greater risks with lesser ones. In fact, although some hedge fund managers do take risks leveraging, they more correctly represent the evolution of mutual funds with more efficient rules for managing and diminishing risks and greater specialization and skills of fund managers.
Some Wednesday Nighters expressed the belief that hedge funds should be subject to the same regulations as banks. Our guest and expert, Olivier d’Auriol, stated that only 2% of hedge funds lend money and they should indeed be subject to the same regulations as banks for whom the primary business is to take in deposits and lend money. However, it has been reported “hedge funds have become a key player in capital markets, specializing in high-risk loans to the financially distressed… Hedge funds dominated the $15 billion market for second-lien loans in 2005… Hedge funds also are broadening their portfolios with first-lien loans and revolving lines of credit. Some are even lending to start-ups whose founders don’t want to dilute their ownership by seeking money from venture capitalists.”
Hedge funds are simply legal structures that enable modern asset management for thousands of clients
Today, when a manager is performing well, he is able to attract billions of dollars of investment. This was not the case 50 years ago. This gives him power, which he uses in the market, which is regulated
The problem today is managers have a month-to-month vision, not a long-term one, which is very bad and will inevitably create large market fluctuations
In their recent statement, Jean- Claude Trichet and Ben Bernanke indicate central bankers have serious concerns that investors are underestimating the amount of risk they are taking on in global markets. M. Trichet stated that leveraged buyouts, hedge funds and credit-risk transfers pose three potential risks to the financial system.

Editor’s note: The Economist reports that the German initiative, to introduce a code of conduct for hedge funds in the interests of financial stability, got no further at the G8 summit. American and British financial regulators, and the financial firms they oversee, believe that improving best practice and their own vigilance are enough to prevent a problem in the $1.6 trillion hedge-fund industry from triggering a wider financial crisis.”

The G8 Summit
Curiously the appearance of conviviality at the current G-8 meeting in Heiligendamm, Germany was broken by the differences between the U.S. and Russia on the proposed missile shield although Europe appears to be indifferent to it. President Putin threatened to retaliate against the deployment of limited American missile defences in Poland and the Czech Republic by targeting Russia’s nuclear missiles on Europe again.
It was suggested that the general treatment of this topic failed to do so against the background question of space militarization. Still, analysis of Russian President Vladimir Putin’s reaction provides several possible possibilities, one of which is the hypothesis that Putin wishes to see the world as bipolar with a certain military equilibrium, possibly now being tilted in favour of the U.S. But in bilateral talks with George Bush, Mr Putin proposed joint use of radar stations in Azerbaijan, as an answer to American defence concerns east of Europe.
President Bush may be attempting to take a reassuring line on missile defence while taking a hard line on democratization in Russia. There is some suspicion that Putin would like to return to the days when U.S.S.R. had more influence and is rattling his sabre to demonstrate that inclination. Europeans, however, appear to be more concerned about climate change than they are about missile shields.
It is of course sabre rattling, but it comes at a very bad time when the focus should be on the ‘hot war’ against climate change – that is the real issue

Money can be green
There is an interesting thread between money and environment. The Norwegian Oil Fund, the largest fund in Europe at some $323+ billion, comprises the surplus wealth produced by Norwegian petroleum income and has now adopted sustainability criteria for investments. A number of large corporations such as AT&T, Dow Chemicals, Shell and British Telecom have advocated the triple bottom line (the notion of the triple bottom line is that managers can, and should, look beyond the financial bottom line and attend as well to two other “bottom lines,” namely the social and environmental bottom lines). Investment is essential by these funds, big banks and big financial institutions in new technologies and new solutions to mitigate, if not stem, climate change. [See also: World Economic Forum G8 Climate Change Roundtable statement]
As today’s investment is transnational, the need for transnational regulation and investment criteria that go beyond the simple investment return seems obvious. The CEOs of some 20 of the world’s largest financial institutions have signed the “Declaration on Climate Change by the Financial Services Sector”, the first global statement on climate change by that sector. In it they basically ask for regulation – an unusual, if not unique situation.

“The essence of the declaration is a recognition by financial institutions from around the globe that anthropogenic climate change is real; the cost of inaction will be extremely high; financial institutions must take greater action and integrate climate change into their everyday decision-making; and governments need to do more, namely set ambitious, long-term targets for emissions reduction.” United Nations Environment Programme Finance Initiative (UNEP FI)

[Editor’s note: following the evening’s discussion, Tim Christophersen forwarded a link to the newly-released IUCN study that “highlights the biodiversity business case for the financial sector – the next big challenge after climate change?”]

The Kyoto accord expires in 2012 and steps must be taken to take the accord beyond that date. Even if every nation came on board today, there is no longer time to meet the goals established. Thus, the importance of a decision by the G8 leaders to begin negotiations on the next phase of agreement at the next major UN Climate Conference in Bali, Indonesia, this December. [Editor’s note: they sort-of made the decision]

Nuclear energy
In recognition of reactions heard on successive Wednesday Nights, Douglas Lightfoot has reshaped the message on the Nobody’s Fuel website to reflect his own concerns for people, the environment and a safe source of energy. Increasingly, nuclear energy emerges as the only viable solution but resistance, especially in North America appears to be a currently insurmountable problem.

The perceived problems and answers (With thanks to Catherine Gillbert)

1. Nuclear proliferation leading to nuclear war This is inevitable but is not connected to the use of nuclear energy by the US. The proliferation will come about by unscrupulous scientists from any country selling the technological know-how and equipment from anywhere in the world, particularly from corrupt nuclear states

2. Use of nuclear devices by terrorists The information on making a nuclear bomb is on the Internet, but it is not that simple. North Korea has been trying for ages without much success. It is not the best way for a terrorist organization to attack an American city as we have seen with 9/11. Letting poison into the water supply or a biological warfare virus into the air would be easier and cheaper

3. Nuclear accident The only place that a nuclear accident has caused deaths is at Chernobyl. That accident was caused by rogue scientists carrying out an unsanctioned and unwise experiment. Safety mechanisms are required that cannot be overridden by scientists on site but need intervention from several high-level representatives of the people. Nuclear technology is far safer than mining coal.

4. Nuclear waste disposal The waste from the US light water reactors will be used eventually as the fuel source for fast breeder reactors. We therefore need a safe, monitored but accessible storage space. In-ground storage in stable rock formations with monitoring devices to detect leaks is the best solution. There are several places where there is no infusion of ground water to cause leeching that would spread the radioactive isotopes into the environment. (Note: There is a site in Africa where a fission reaction occurred naturally in the rock because of the high concentration of uranium and as far as we can tell the products were contained in the rock.)

The plight of Stéphane Dion
Politicians aspiring to office are no strangers to Wednesday Night. Stéphane Dion certainly gained an enormous amount of respect for his thoughtful answers and willingness to listen during his visit here, but appears to have been unable to garner the same enthusiasm in Québec beyond the borders of Wednesday Night. It has been suggested by some Dion supporters that the problem lies in the fact that the Liberal Party is wedded to the idea of handlers from Toronto who do not recognize that the population of Canada is not homogeneous and that a vote in each riding is of equal significance. The Toronto faction insists that Mr. Dion’s English is poor, despite evidence to the contrary on the occasion when he was present at Wednesday Night, and that therefore Mr. Ignatieff should be the Leader’s spokesman in English. This strategy is both ill founded and divisive and will be costly in the next election if not reversed.
The Liberal Party has no idea of where the country should be, hasn’t a clue where to go from here and is tearing itself apart

The Market
The Stock market lost two hundred points today, yet there was no panic. This is a typical reaction at the top of the market. People dismiss it as a minor correction. To all appearance, the few remaining bears have turned bullish and the current glitch is viewed as a buying opportunity. In the words of one Wednesday Night technical guru “The bulls are coming; the bulls are coming” He emphasizes that this is not the end. However, he warns “we should prepare for a short, sharp shock – with the possibility rising as autumn approaches”.

The economy
The Canadian economy in the first quarter, has rebounded very strongly at 3.7% annual rate, a two year high and with core inflation of 2½%, a four-year high, and wages rising fast, the Bank of Canada, with a hawkish statement on May 29, made mention of the “increased risk that future inflation will persist above the 2% target and that some increase in the target for the overnight rate may be required in the near term, to bring inflation back to the target.” It is widely expected to tighten as early as July 10 to 4½% and coupled with the six point rise in commodity prices, record mergers and acquisitions ($175 billion), it has propelled the Canadian dollar to 94.80¢ U.S., a thirty-year high. Gold has tumbled $24 on the strengthening of the U.S. dollar.
The U.S. economy, in the first quarter, tumbled to real growth of only 0.60% following 2½% in the fourth quarter, the weakest pace in four years and with core consumer prices at 2½% and rising unit labour costs, Ben Bernanke “expects inflation to remain high and economic growth to be moderate,” the Fed is unlikely to ease monetary policy soon. Productivity is abating, personal income (April) was negative, second quarter earnings outlook of only 3.6% growth, existing home sales declining 2½% (April) and negative leading economic indicators and negative April retail sales are not pointing to a strong recovery in the second quarter. The Dow Jones, after reaching a record 13,676 on June 4, has lost 210 points with the rise by $4.5 in crude oil and gasoline prices reaching $3.50 U.S. Housing permits have plunged to the lowest level in almost ten years. Takeover activities have grown 63% to over $1 trillion so far this year and private equity to $281 billion. Treasuries ten-year term have reached close to 5%, a nine-month high.

• The Federal Reserve is caught in stagflation

Will the Canadian dollar reach parity with the U.S.? It will probably test parity, but settle back in the 90-95 cents

The Prologue

WHEW! We escaped the threat of a July election in Québec by a hair (actually two votes), but now PLQ will have to decide the fate of Jean Charest. Virtually everything to be said about the unfortunate budget has been said by commentators, so we will drop the topic — for now.
One of our summer-time treats is the semi-annual visit of Olivier d’Auriol, Chairman, and Chief Executive Officer of Olivier d’Auriol Asset Management SA and hedge fund guru from La Suisse. (Olivier’s last visit). His presence this week is particularly timely with the topic being not only on Wednesday Night’s menu, but also that of this week’s G8 Summit (“G8 summit to call for hedge fund vigilance“) in Heiligendamm Germany.
Climate change & energy security is also on the agenda of the G8. The position of the United States on climate change appears to remain intransigent and Mr. Harper has not been reassuring about what role Canada will play in the deliberations. So far, what we have to go by is his not particularly perspicacious comment that “My sense was that there is a feeling of optimism around the table but there are some differences of opinion among various countries and there are still some gaps to be bridged.” And he doesn’t seem to have endeared himself to Chancellor Merkel by his speech today to the Canada-Germany Business Club in Berlin Meanwhile, China, vowing to “blaze a new path to industrialisation”, has unveiled its first Climate Change plan whose release may be timed to deflect criticism at the G8 meeting
The theme of the summit, which opens on Wednesday, is fittingly “Growth and Responsibility”, one which we profoundly wish would be taken to heart both at home and abroad by all the leaders who will gather around the G8 table. It is intended to ” [live] up to the G8’s special responsibility to help create stable and reliable conditions for the global economy. At the same time, however, it makes quite clear that this responsibility must be shared by the larger emerging economies such as China, India and Brazil, and that as globalisation progresses, the G8 will become less and less able to bear the burden alone” . Thus the increasing importance of the addition of Brazil, China, India, Mexico and South Africa to form the G8+5.
The Middle East continues in conflagration. On Sunday, the New York Times reported that three months after the “surge” to stabilize Baghdad, two-thirds of the city remain out of the US military’s control”; the conflict in Lebanon expands, and hostilities in the Gaza appear to be waning, but have not stopped. We can only hope that the direct talks between Iran and the United States in Baghdad do indeed constitute “a breakthrough and an opportunity for both countries to deal with pressing issues of national interest as well as security in a region extending from Afghanistan in the east to Iraq and to Palestine and Lebanon in the west”
Talks on Turkey’s application for membership in the EU continue amidst worries about the need to curb the power of the military.
On the home front, the ever-higher climb of the loonie portends an increase in interest rates. No doubt our favorite Central banker will have a comment.