Wednesday Night #1568

The arrival of Clive Rustin with his brother Tony added extra flavor to the evening. Clive had come to Montreal for his annual March ski holiday, but has found himself cycling along the Lachine canal in the abnormally warm temperatures.

Quebec budget – the dog that did not bark?
Curiously and uncharacteristically, both Québec and Ontario have announced their proposed budgets before the Feds have done so, a fair indication that not much change in tax legislation can be anticipated in the forthcoming federal budget.
Tony Deutsch reminds us that Quebec’s proposed investment in Natural resources is hardly a new idea – Diefenbaker introduced a “Roads to Resources” program in the 1950s (see http://www.republicofmining.com/2011/12/15/northern-vision-northern-development-during-the-diefenbaker-era-roads-to-resources-thesis-by-philip-isard/ for more information)
Our pre-ancestral ancestors have, through having endowed us with their carbon-rich remains, rendered Québec rich in natural resources. In 2012, Québec profits from half the mining investment in Canada.
With the information at hand, it is difficult to assess accurately, but in general terms and without knowledge as to whether the investment would be direct or indirect, the Government of Québec’s stated proposal to invest in the mining industry, although very favorable to the current government in terms of re-election, appears highly risky to some Wednesday Nighters, given that by natural logic, the investments will be made in areas where there are no other investors. To do otherwise would have a negative impact on the financial industry. The cynics see that the major beneficiary would be the Liberal Party in the next election, facing an opposition that has favored greater investment in the mining industry, clamoring to gain mining rights from Québec through to Newfoundland.
In the equity market, Wednesday Night mavens point to the favorable return on stocks compared the current low interest rates, with bond interest rates currently below the rate of inflation. It is anticipated that stocks will not be especially inexpensive and interest rates are expected to rise. The growth path for most equities over the next four to five years is anticipated at a modest four to five percent.
As for the United States economy, the view has not changed in this sub-par recovery phase and is not expected to change over the next few years. The consequences of the steep increase in the price of gasoline as well as other energy sources, have not been adequately assessed, but may possibly be a function of which party and which candidates are elected in November.
Oil price and demand
There are indications that the Iran atomic bomb issue will be addressed, followed by a spike in oil prices, with as yet unassessed effect on the election and on consumer spending. A very weak growth is anticipated in the next few years of this, the sub-prime recovery, phase. At this point, caution would be prudent.
Oil prices are synchronized with world risk factors, thus favoring an increase in inventory. Demand for oil in India and China has not diminished, leading to a belief that the demand will continue to increase regardless of price. Greater efficiency in developed countries could possibly reduce that demand, but this is not believed to be the case either in developing nations, nor in China nor India. Optimistic Wednesday Nighters tend to favor the theory that the world has only begun to touch the planet’s wealth of petroleum that can be transformed into fuels, albeit at higher cost of extraction. They also express the belief that increasing prices will provide an incentive to develop alternative fuels, new technologies and greater fuel efficiency. The less optimistic, while not denying that possibility, point to the offsetting world population, constantly increasing in numbers and affluence. The influence of the growth in size and complexity of increased fuel consumption by a growing population increasingly infringing on farmland has not been adequately assessed.
The UK
Those of us Canadians of British ancestry or of other ancestry, born under the Union Jack, cannot but be saddened by the decreasing affluence and influence of the former “ruler of the waves.” It is difficult for us to interiorize the necessity for austerity in the U.K. due to the effects of the current accumulated British deficit and the many years that will be required to overcome them.
Russia
One would suppose that the post-Tsar, post-Stalin Russian regimes would lead to the current quasi-democratic regime in Russia, with oligarchs working in concert with the government to make money. That does, in fact, not appear to be the case. The population of Russia appears to be satisfied with the stability and as they demand more freedom, the government is expected to respond by becoming increasingly responsive and democratic.
Quebec Healthcare
Very high on the list of the expressed essentials for the population of Québec, as elsewhere in Canada, is a responsive system of affordable public medical insurance funded through the general revenues of the province. It is evident that our government has failed to meet that objective, not only in Montreal where approximately six hundred thousand citizens representing approximately thirty percent of the population are unable to find a family physician, but in other areas of the province as well. A like situation in England provides little consolation to Quebeckers. The shortage of physicians in Toronto is said to be at 8%. We heavily subsidize the education of medical students until graduation, yet deny many citizens the right to freely access the skills and knowledge which they have funded. Unfortunately, it is the underprivileged and recent immigrants who are most affected, having neither the means to pay physicians practicing outside Medicare nor access to those who might be able to help them obtain the necessary care. A secondary effect is the overcrowding of emergency services, affecting the entire population, especially those requiring immediate attention. This is partially offset by an efficient system of triage but is not acceptable in an advanced culture such as ours. The solution is evident and available, but should be accorded a greater importance than political considerations. As the baby boom bulge passes through the period of high biological maintenance, the problem will inevitably be exacerbated.
World economy
The half-year lull in activity in the Euro zone cannot be considered to indicate in any manner that the crisis has come to an end. Greece continues to have major issues as do Portugal and Spain, and Germany, just emerging from a recession can anticipate a period of inflation. A major flaw in the E.U., otherwise considered an incredibly successful endeavor is the failure to permit the central bank powers equal to those of central banks in other countries of the world.
A view of the global economy indicates that China’s growth has dropped from 10½% to 7½% but still that country remains very healthy. China has been discretely investing in commodities around the world, paying with accumulated U.S. Securities. Some countries are moving to domestic versus export consumption. Latin America’s commodity based on commodities, is predicted to suffer some problems. In the U.S., the markets have been doing very well with few bumps but the identity and political affiliation of the next President will be a factor in future performance. Canada is doing well but we are selling our oil at a lower rate than is the rest of the world. There have been good companies here that pay a good dividend, growing at a good rate.

Prologue

What an incredible St. Patrick’s Day weekend! We hope you basked in the record temperatures and the promise of Spring. Did you observe/hear the migrating Geese? We cannot remember ever seeing them this early and there was non-stop traffic overhead. Obviously they had better luck with flight patterns and landings than the poor travellers at LB Pearson airport. So next time, fly Canada Goose.

U.S. primaries
For what seems like forever, Wednesday has followed a caucus or primary somewhere – Super Tuesday was expected to take a bit of edge off the process a bit, but no relief is in sight as none of the candidates have the delegate count and this week is no exception – it’s Illinois and 69 delegates are in play with Romney and Santorum only 4% points apart according to one poll. [)Update: (Reuters) – Republican Mitt Romney cruised to an easy victory over top rival Rick Santorum in Illinois on Tuesday, moving him one step closer to clinching the party’s volatile battle for the presidential nomination.]
Romney picked up Puerto Rico’s 20 delegates over the weekend, which is hardly surprising after Santorum did the equivalent of telling the Commonwealth to ‘speak white’. Tact is certainly not his strong suit. Meantime the HBO movie of Game Change is out. There’s a very thorough piece in the National Post by Scot Stinson that reminds us of Sarah Palin’s ongoing legacy and the problems it causes for the Republican Party.

Budgets
This week, we will also have the Quebec Budget to slice and dice in light of a possible election. We are told that the plan is to continue to tighten spending in order to present a balanced budget once again by 2014. – is this realistic? Minister Bachand has also predicted that by 2015, Quebec should be running a $2 billion surplus, which will go toward paying down the province’s substantial debt. Believable?
The Prime Minister seems pretty confident in advance of the federal budget, billed as the most frugal, tight-fisted economic strategy since Paul Martin’s in 1995. Mr Harper is off to Asia (again!) this week. This time to Thailand, Japana and South Korea where he will be at the Nuclear Security Summit – possibly less explosive than the House of Commons?

More important to us this week is that the always-generous Peter Berezin, Managing Editor of BCA Research, has once again offered to share with us the firm’s (gloomy) monthly outlook and Special Report. Just to give you a taste:

“The ECB’s liquidity injection has reduced the tail-risk of a euro-wide bank run, and this should benefit risk assets in the near term. However, the underlying structural problems in Europe remain unresolved and investors should expect another bout of market weakness by the middle of the year.
The Special Report in this month’s Bank Credit Analyst argues that the turmoil in the euro area resembles a classic balance of payments crisis. While the outward symptoms of this crisis have manifested themselves in the form of higher sovereign borrowing rates and banking-sector distress, the underlying problem is that the peripheral economies are caught in a downward growth spiral. Getting out of this spiral will require higher inflation in core Europe.”

The Greek Crisis appears to have been stemmed, at least for the moment, however,Der Spiegel asks (and answers): “So is the euro crisis over? By no means. The situation in Greece will take a turn for the worse again in a few weeks. The other euro nations will have to use the time until then to get their own houses in order — especially Germany.”
Kimon Valaskakis is putting the finishing touches on the new-and-improved version of his Perils of Austerity paper which he presented last November to Post-Cannes Meeting of the G8-G20 Research Group. He will be presenting it on Wednesday Night to another gathering (AHEPA), so WN will have to wait for the Perils 2012 version. We note, however, that he was one of the early critics of austerity as the cure for ailing economies, a crusade that he shares with Paul Krugman and most recently, Giles Merritt (see Europe’s Fairness Crisis)

You may remember that before coming to BCA, Peter was at Goldman Sachs in New York as Vice President and Senior Global Economist. Therefore, we cannot resist wondering what comments he may have on the Greg Smith rant published as an op-ed by the NYT (Now referred to by some as The Goldman Sachs muppet manifesto – which prompts us to applaud Michael Moore’s statement “nowhere in America except @ Goldman Sachs is the word ‘muppet’ an insult” . We suspect that Peter will more likely agree with Terence Corcoran’s view that Goldman rant light on logic – one of the bits of information contained in the Corcoran piece intrigued (appalled) us – he mentions that a “survey of the firm’s 30,000 employees …[while] … the group of nearly 12,000 vice presidents….”. It’s not the findings – it’s the ratio of VPs to employees that caught our eye. One veep for every 2.5 employees? Surely not. If true, pity the .5 employees who must report to two veeps (we love statistics!) The BBC, in one response to the story commissioned Those Quit My Job Goldman Sachs Blues (and any number of spoofs have appeared including the not-very-clever Why I am leaving the Empire, by Darth Vader (too bad, the concept was promising). Much better is this headline from Robert Reich If You Took the Greed Out of Wall Street, All You’d Have Left Is Pavement

Enough about Goldman Sachs and on to another Sachs:
Jeffrey Sachs as next World Bank President?
(Emerging Markets reports that “the bid by Jeffrey Sachs to capture the presidency of the World Bank appeared to be generating a groundswell of support in Latin America last night after three more countries lent their support to his bid. Explicit backing by Chile and Colombia and strongly-worded support by Mexico came a day after Emerging Markets revealed that Uruguay was backing Sachs, who set out his agenda in an exclusive interview in this newspaper. Haiti is already backing him. … Sachs has also received the endorsement of six other countries – Kenya, Bhutan, Jordan, Malaysia, Namibia and Timor-Leste.” Good for him, but where are the developed countries and BRICS?

BRICS = among others, China and Russia. There are intriguing political developments in China that we tend to ignore as we are preoccupied by economic and geopolitical issues. This week, however, we would suggest two excellent analyses in the Daily Telegraph (both written by former Sauvé Scholar Malcolm Moore). The first is Cultural Revolution continues to cast shadow. And the second is Bo Xilai analysis: a light that burned twice as bright – but half as long which followed the news of the purging of Bo Xilai

As to Russia, the Wall Street Journal has an excellent piece by Melik Kaylan Russia’s Stake in Syria and Iran — If Tehran returns to a pro-Western orientation, Moscow’s stranglehold on the central Asian republics will be over. On a different note, seems that Mr. Putin’s love for staged photo-ops is coming back to haunt him – this time it’s with a (four-legged) tigress

As technology was prominently featured last week, we feel it is only appropriate to point to this delightful bit of research from the Washington Post Fact Checker in response to President Obama’s statement about Rutherford B. Hayes’ (remember who he was?) reaction to the telephone. Now, when asked what you know about President Hayes, you are on solid ground if you reply that he had the first telephone installed in the White House.

For your calendars
Titanic: The Canadian Story, the documentary based on Alan Hustak’s book of the same title, will be broadcast on CBC TV (main channel) on Thursday April 5th from 8-10 pm. The French version (which is slightly different – naturellement) will air on Radio-Canada on Friday April 6th, with the 1st episode at 9pm, then the 2nd will be on after the news at 10:55pm.

Paul Shrivastava advises that Montreal Degrowth conference is now open for registration. Please pass along the message to Wednesday Nighters.