Wednesday Night #1618 with Peter Berezin

Peter Berezin’s appearance at Wednesday Night always attracts a large audience of economists and followers of the dismal science. This month’s Special Report from BCA Research dealing with the somewhat more academic topic of Human Intelligence And Economic Growth From 50,000 B.C. To The Singularity brought a star-studded group to the table, including David Culver, O.C., former Chairman and CEO of Alcan, and an enthusiastic venture capitalist who delighted with a selection of management wisdom gained through his many years of practicing that art.
Major points from the Report include:
— Rising human intelligence has been the underlying driver of long-term economic growth. Before the Industrial Revolution, gains in intelligence were the product of cultural, and perhaps genetic, changes.
— Once humanity was freed from the Malthusian trap, a virtuous cycle began in which higher levels of material prosperity led to improved environmental conditions, including better nutrition and education. This, in turn, led to further gains in intelligence.
— Although these environmental factors, at least in the developed world, appear
to be stalling, technology offers a way forward.
— If Moore’s Law continues to hold, computers will be able to simulate a human brain by 2030. This, along with breakthroughs in genetics and nanotechnology, could boost human intelligence by a previously unfathomable magnitude, ultimately triggering a “technological singularity”.

The U.S. economy
The sequester deadline of March 22 will probably presage more spending cuts. In the normal sequence of events, such measures would have an adverse effect on the economy, but in this instance, the U.S. economy is growing at an increasingly rapid rate, expected to outweigh the negative effect of reduced government spending. Both political parties are eager to fulfill the American public’s hope of economic recovery and are expected to suppress political differences in order to meet that expectation. Once the Cliff/Sequestration issues are behind them, in order to maintain its leadership role among nations, the U.S. government will have to face the task of reinventing itself as it succeeded in doing following the end of World War II when technological development played an important role in placing the U.S. in a leadership position. Although President Obama’s budget provided for investment in technology in which the U.S. is highly advanced, the sequestration has cancelled that and this could be disastrous long-term [see The Sequester Is Going to Devastate U.S. Science Research for Decades]. The president is not an advocate of austerity, but it is being imposed by the actions of Congress, despite the clear lessons coming from Europe (e.g. the Italian elections, Portugal …).
Although not a consensus, in general Wednesday Nighters believe that the U.S. will recover much – if not all – of its former strength: American are scared and when they are scared, they act, whereas when Europeans are scared they freeze.
The next Cliff is the Jobs Cliff  — However, even if there is a full recovery, it is unlikely that we will ever return to anything close to full employment; the world is  already producing more and more wealth with fewer and fewer people.  There is a notable paradigm shift evidenced by the number of man-hours p/a required to produce a unit of GDP, which has been falling for the last 150 years. Conventional wisdom says that with more productivity come more jobs, but that is not true – the whole point of increasing productivity is to do more with less. We are going through a a very significant structural adjustment in the global economy and during that process we struggle to figure how what will become of the mass of people who are only semi-skilled and for whom there are no jobs. If history is any predictor of the future, we will adjust to a new era when increased productivity through the use of technology, coupled with greater longevity, will provide the survivors of the human stage with advances different in nature, yet similar in results to the various industrial revolutions in the human history of the world.

Meantime, resource-based economies, such as Canada’s, are not a successful development strategy [case in point is the Keystone XL pipeline, which, after huge investment will yield only 50 permanent jobs].
China with a new government is moving in a new direction, turning a production/export economy into a consumption and eventually services economy – and will probably succeed as the government does not have a Congress to block its actions.

World economy
Mobility of capital and people is key to any consideration of how the world economy will evolve. Pointing to France’s recent experience with a number of wealthy citizens faced with high tax rates moving to more favorable tax climates (a recent article in the Financial Times Top executives join France exodus underlines the problem), Kimon believes that rather than globalization of economics and law, there will ultimately be a number (perhaps as many as 20) large blocks of nations with similar values and governance and a return to continental/regional protectionism, which in turn will limit the governing capacity of individual nations. The proposed TransAtlantic Trade Agreement may be the template for others.

The solution for an ailing Europe is voluntary default, which the European Central Bank has not as yet mastered. It is believed certain that reality will force Europe will change its value system because the current system is not delivering satisfaction.
The agility with which very young children master computers and other electronic devices should allay the fear of those who believe that the introduction of technology would create a huge unemployment bubble. The introduction of a guaranteed income policy would effectively temper the reluctance to take advantage of the added life value of industrial technology.
Because of low prices, in 1898, there was money to be made in the stock market. The upward trend since then has witnessed the Dow-Jones index rise, reaching a new high. However according to the Wednesday Night Market Maven, although the rate of rise of the index has been diminishing, a minor decline may very well still be a good time to invest.

The Prologue

Peter will be with us to talk about the two latest BCA Special Reports in Bank Credit Analyst. The first, Peter says, examines the apparent puzzle of why the U.S. continues to run a sizable current account deficit despite the fact that the dollar seems quite cheap based on most valuation measures. BCA argues that there are good reasons for the dollar’s cheapness and that the real trade-weighted dollar is likely to weaken by about 10% over the next five years.
The most recent Special Report argues that rising human intelligence has been the underlying driver of long-term economic growth. Looking out, breakthroughs in genetics and nanotechnology could boost human intelligence by a previously unfathomable magnitude, ultimately triggering a “technological singularity”.
It is certainly a welcome outlook in view of the singular lack of human intelligence displayed in Washington during the run-up to sequestration – about which our assorted economists will no doubt have comments. Opinions have been divided on how critical the impact of the $85bn cuts will be. The Guardian gave priority to the Office of Management and Budget report reminding its readers that  Government officials have warned that the order for the cuts would be “deeply destructive” to the economy and national security, and Canada’sJim Flaherty is worried especially about the impact on exports, but believes that it will be a tempest in a teapot in terms of the U.S. economy. David Brooks shows real exasperation, maintaining that “there is room to do the [necessary] trimming. But to do it the way we’re doing is just an insult to the idea of governments. You just take a simple statistic. What does government do that most people like? Most of it we call discretionary spending on education, Head Start, grants for universities. That’s like 14 percent of the budget. It’s taking almost half the cuts, so all the big programs that actually lead to the debt are getting almost excluded from the cuts. All the little programs, they are getting savaged. And so it’s just a mindless exercise.” Throughout the commentaries of whatever political stripe courses one refrain – it’s time the U.S. Congress puts a stop to the seemingly endless series of fiscal crises – the next is expected on March 27 when the government would face a shutdown if Congress doesn’t reach agreement on the budget. There was a faint glimmer of hope on Sunday in the exchanges on Meet the Press between Gene Sperling and Speaker Boehner – but is it enough?
If anyone is in doubt about how to explain limits on Debt, we recommend DEBT LIMIT – A GUIDE TO AMERICAN FEDERAL DEBT MADE EASY. – YouTube  (Thank you, David Mitchell)
Kimon returns after a highly successful sojourn in Paris and will share with us some exciting recent news regarding the forthcoming Reinventing The West conference which will be held in June at the Chateau de la Muette (HQ of the OECD) in Paris.
At home, a number of leadership hopefuls continue to debate Reinventing the Liberal Party of Canada. As Andrew Coyne said almost two months ago in his column Hold off on the coronation of Justin Trudeau, for now “the nine candidates … make an impressive bunch, all in all. If several are lacking in political experience or name recognition, that should not detract from their many personal and professional accomplishments”. The debate format is improving with each round, and Sunday’s was often lively, but important questions remain about substance vs. charisma, leadership vs. electability, and the wisdom of throwing the vote open to a new ‘class’ – the supporters  [not full, card-carrying members of the party, but eligible to vote in the leadership contest]. There is also the media take vs. the live commentary from the public that accompanies each debate; they often do not match up. One more debate to go – in Montreal on March 23rd – before the election on April 14. Today’s headlines trumpet that Justin Trudeau’s camp has signed up some 150,000 supporters. Stay tuned.
Several Wednesday Nighters, including Michael Judson and Marie-Claude Johnson, are attending the PDAC International (Prospectors & Developers Association of Canada) convention this week. Joe Oliver, Canada’s Minister of Natural Resources, delivered the keynote speech. Not surprisingly, his comments included the statement that realizing the potential of mining is essential to the government’s goal of jobs, growth and long-term prosperity, and that discoveries in Ontario’s Ring of Fire, northern Quebec and Northern Canada will provide economic growth for years to come. According to the press release from the Ministry,  he also highlighted the progress in modernizing Canada’s regulatory regime – both north and south of the 60th parallel. The government’s Responsible Resource Development plan attaches firm timelines to the reviews of major projects. It moves Canada closer to “one project, one review,” thereby ensuring that the regulatory regime for major natural resource projects is among the most efficient, effective and competitive in the world. This of course says nothing about environmental reviews, but at least, he confirmed the government’s commitment to consulting with Aboriginal groups, ensuring meaningful input and engagement from the very beginning of major projects. He took this opportunity to announce the launch of the updated Exploration and Mining Guide for Aboriginal Communities, designed to encourage Aboriginal participation in mining projects. We look forward to hearing Michael Judson’s views on the keynote and other developments at the conference.
Mining is always associated in our mind with Africa and particularly these days with the DRC where, despite the UN-brokered peace agreement with Uganda and Rwanda,the future looks far from bright. However, we cannot ignore South African President Jacob Zuma’s remarks on the eve of South Africa’s first hosting of the BRICS Summit. He reportedly advised Western governments and businesses to rethink their investment strategies and is quoted as saying they have a “psychological problem” and are still prone to lecturing Africa. He also reportedly accused [foreign] mining companies of not being interested in fostering support industries in host nations, and only in extracting ore. He apparently prefers the Chinese model, although there are other African and non-African nations who might disagree.
Mention of Africa this week must include the crucial March 4^th elections in Kenya. There have inevitably been hiccups in the process, including numerous failures of the biometric voter ID system, however, with a few sad exceptions, it seems that the day has passed without major violence and voter turnout has been high. The real test will come after the ballots have been counted. And what will be the reaction if the Jubilee Coalition – whose candidate, Uhuru Kenyatta and running mate William Ruto, are both under indictment of the ICC for inciting violence in the last election – wins? A sidebar to the CNN coverage of the election by John Githingo, explains the High stakes in Kenya’s election
We could continue with a number of other reflections on the news, but in the interest of returning to Peter’s theme of technology, we would point you to the development of the amazing LivesOn app, debuting next month for Twitter …”When your heart stops beating, you’ll keep tweeting,” the company’s tagline reads. By employing artificial intelligence technology, LivesOn can analyze your main Twitter feed – learning typical likes, tastes, and syntax – to create “new” tweets. Words fail us, so we invite you to read on.
Inevitably, we were also drawn to the very recent news that not only have the remains of Richard III been exhumed and identified, but now scientists have exhumed the heart of Richard the Lionheart (not buried with his body) in an effort to ascertain whether or not he died from a poison-tipped arrow.  Just imagine the scene(s) if historical figures, or parts thereof, had been accompanied by the LivesOn app …
Finally, for our favorite Technical Analyst, John Evdokias offers ‘DILBERT’ CREATOR: Here’s Why I Predicted Market Manipulators Will Make The Stock Market Crash 20%
“The 20% estimate is based on the fact that 20 is a big round number and more likely to happen than 30%. I don’t like to over-think these things.”