Wednesday Night #1669

The phoenix-like resurgence of the United States economy stands in sharp contrast to the more sensational news from other parts of the world. Despite a temporary six percent correction on the U.S. stock market and the slowdown in payroll growth, possibly weather-related, Wednesday-Night experts appear optimistic. The debt situation has improved considerably, the private sector is thriving in the U.S. and domestic manufacturing is returning. With the U.S. government a major buyer of health care, a reduction in health care costs can be anticipated. U.S. growth has been consistently higher than that in Europe or Japan. Americans talk more of opportunity rather than of equality and/or inequality.
The stock market remains the bellwether of the economy and vice versa; it is doing well despite an anticipated correction which is well overdue. Investment in securities continues unabated, although a correction is anticipated, probably in the near future, possibly in March. The Federal Reserve is believed to have played an important role in this rally. In Canada, energy stocks are doing very well. March is historically a corrective month and 2014 may very well be a roller coaster year in the stock market. Emerging markets are expected to decline and gold prices are still on the rise. The concern for central bankers in the U.S. is said to be related to the possibility that the rate of growth has diminished.

Canada and division of powers
In Canada the century and a half since confederation has caused the implicit meaning of that designation to become more evident with the westward movement of wealth, hence population. The 1829 inauguration of the Lachine canal facilitated the westward expansion of population, gradually moving the axis of the nation westward. In fact, Canada is more aptly designated as a confederation as opposed to a federation, as despite the existence of three levels of government; paradoxically it is the provinces that possess the greater power. The fundamental issue: is that he provinces were designed to look after small municipalities. When the taxing powers were first established, nothing was given to municipalities; the municipalities were not given the power to raise money. Although probably still valid for small municipalities, a new model is required for large cities. It has been suggested that the federal government should have provided municipalities with a budget for municipal development, even at the expense of delaying the implementation of the proposed balance of the federal budget by 2015. Possibly, a constitutional amendment providing regional governments with greater power might have been an option. In the United States, some cities are able to raise money through port operations. In Canada, the federal government has gotten out of the business of running the now relatively autonomous, self-sustaining ports and airports, which some Wednesday Nighters believe should be regionally controlled. The division of powers in Canada is such that all the most expensive infrastructure is the responsibility of the provinces. In an ideal world, there would be an adjustment. Until the early 1940s it was the provinces that had the power; most parts of Canada, with the possible exception of Ontario, would prefer devolution of power

Quotes of the Evening

“Ukraine is very important for Russia – a buffer politically and strategically.”

“Environmental effect on the economy is a very important concern in China.

“Sixty percent of French wine is from Italy.”

“The way risk works you can reduce risk without increasing cost.”
“The market is resilient; it finds a way to compensate for the risk. Cleaning up the environment is another reason to spend.”
“The market only deals with the sphere of accounting….If fracking screws up the environment, it will be absorbed.”

“Because power is in the hands of the provinces, the federation has no power.” “This is one of the lacunae of the constitution.”
“The fundamental issue: The provinces are designed to look after small municipalities.”
“People only worry about things that affect them directly.”
“In the short run, infrastructure spending in the current low interest level plus the G.D.P. and debt level makes no sense.”
“The key government. game is to accept praise when things go well and to be able to place blame when they don`t.”
“The fundamental issue: The provinces are designed to look after small municipalities.”
“Half of Québec and half of Ontario is impoverished. How much money are you going to take from the West to subsidize the East?”
“Disparity of power: the Feds don`t control the money it gives the provinces, so much government money spent is fixed and largely on unproductive things.”

“Today we are educating our students for a workplace that we can`t even imagine.”

P R O L O G U E

Deep sigh of relief – The Sochi Olympics are over, and without any major mishaps. The opening and closing shows were, as expected, spectacular, if perhaps a bit lacking in a spirit of fun. The mascots were terrific, endowed with real personalities, especially the Bear who shed a tear at the closing. Kudos to the designers and programmers who did such a great job; the Russian people can take pride in a world-class show, even if most of them will enjoy no benefits from the $51 billion spent. As John Duffy points out in his thoughtful piece Putingrad: Sochi as the ultimate Potemkin Village, now that the glitter has been packed away, there remains a fear that behind the ostentatious show of normality lies another reality. In the eyes of millions of Ukrainians, anyway, the Russia depicted at Sochi is just another Potemkin village, concealing behind its glittering facade an angry, domineering and violent Russia bent on restoring its imperium. Sochi has been a great show. But once the set gets struck, the sorrow and the horror that was danced around so stylishly remain intractably present.
Will there be follow-up stories on the displaced inhabitants of the area, environmental damage, or crumbling infrastructure? We doubt it.

Having counted up their medals – and found the tally satisfactory (we do wish there were less emphasis on this aspect of the Games) – and humorously apologized for being awesome –  Canadians can now return to their more mundane concerns.
We will  certainly not attempt to rival the extensive coverage by CBC, the Globe & Mail, and others, but point you to our much-admired sage,  Joe Schlesinger, who sums up Canada’s two-week love affair with this event: Why Canadians take the Winter Olympics so seriously — The Winter Olympics really are something special, combining as they do the elements of a rollicking roller derby with the poetry and elegance of ballet.

The economy – global, national or local is never mundane. We are happy to have Jim Mylonas with us to discuss BCA’s two latest Geopolitical Strategy Reports. The January 17 Weekly Report, written by BCA’s chief global strategist, Chen Zhao, suggests that there are some stunning similarities between now and the second half of the 1990s and, after amplifying this theme, concludes that there is no fundamental change in the broad economic and financial environment that has prevailed since the 1990s, though we operate in an extreme form of it today. … while central banks must wage a serious battle against deflation by maintaining negative real rates, that rate is obviously too low for financial markets. The inevitable consequence of this battle is over-inflated asset prices to say the least, if not bubbles.
The monthly January report reviews last year’s results and concludes that The upcoming year will be primarily defined by the ongoing divergence in political risk between DM and EM economies. This is a theme that we identified twelve months ago in our 2013 Strategic Outlook and that we expect to see play out in earnest this year.

Meanwhile, despite the ongoing problems in the Middle East, our most immediate concern must be how Vladimir Putin will react to the latest events in Ukraine. While hosting the Olympics, he had to maintain a relatively benign expression (insofar as that is possible for any former KGB person), now it’s back to Moscow. As the Guardian – whose coverage has been superb- headlines: Russia feels double-crossed over Ukraine – but what will Putin do?  Reuters sums up the situation:   Russia’s Putin faces tough choices over Ukraine — President Viktor Yanukovich’s loss of power deprives Putin of an ally vital to his hopes of keeping Ukraine, the cradle of Russian civilization, in what he sees as Russia’s orbit.
His hopes of building a huge trading bloc, grouping as many former Soviet republics as possible to challenge the economic might of China and the United States, could be in tatters.
But making a stand over Ukraine, or getting drawn into a new bidding war with the European Union to win sway over the cash-strapped country, would be risky.
Moscow can ill-afford to improve the $15 billion financial bailout package it offered in December. But more forceful measures, such as taking over mainly Russian-speaking areas of eastern Ukraine, would risk triggering a more serious conflict. In other words, the West must hold its collective breath while waiting to see what Putin will do.

At a local level, it is the parlous state of Quebec’s economy  and the imminent threat of a provincial election that is of deepest concern. Germain Bourgeois forwarded Quebec dans le rouge — Un montage réalisé à partir des reportages sur le Québec dans le rouge et des dernières recherches sur la productivité et les finances publiques de la province, a grim update. Not to be outdone in the gloom department is the Montreal Economic Institute analysis by Youri Chassin Quebec government debt in 2014 /La dette du gouvernement québécois en 2014. M. Chassin’s further reflections in Pas d’austérité, pas de prospérité are eminently reasonable – we believe that even Kimon who opposes almost all mention of austerity would agree. The collective wringing of hands does not, sadly, appear to deter Mme Marois in her relentless march towards yet another sovereignty debate – she has already promised a White Paper (Marois promises public hearings on the future of Quebec).

[In contrast: The Miracle of the Singapore Budget 2014 — Instead of taking down the wealthy or the high income earners down a peg or two or the property owners, the government has somehow pulled it off without raising income taxes for either corporates nor individuals, introducing property gains tax or other forms of wealth taxes in general thereby preserving the reward for working and husbanding one’s store of wealth, which had it been earned particularly by oneself, has already been taxed.]

Our only good news is from Montreal where Denis Coderre is exceeding all expectations according to an uncharacteristically laudatory article in La Presse Denis Coderre, un sans-faute en 100 jours. The positive statements from political rivals are a refreshing change from the consistent sniping that pervades exchanges at other levels of government. And lo! The Gazette agrees — Denis Coderre’s 100-day highlights — only dealing a glancing blow at the appointment of Philippe Schnobb as head of the Société de transport de Montréal. With M. Coderre at the helm, perhaps  Céline Cooper’s Montreal as its own city-state? is realistic. It certainly sounds better than the Orwellian Administrative Region 06.
The Liberal Party’s policy convention has ended, with generally good reviews from non-partisan observers. Although some are cranky that a full economic platform  was not unveiled, others reasonably point out that to do so a year or more away from the elections would do nothing except offer the opposition a target. Still, some like Stephen Gordon writing in Maclean’s are not enamoured of the policy proposals coming out of the convention with their calls for ‘national strategies’ on so many different topics.  The threatened disruptions by the Conservatives were not evident, unless one counts the dust-up over General Leslie.
A number of voices suggest that Mr. Trudeau’s emphasis on the plight of the middle class is unfounded, although on Sunday, the Globe & Mail revealed that Canada’s middle-class is mortgaging its future to stay afloat, making the Canadian dream “a myth more than a reality. “That’s the blunt assessment of an internal Conservative government report, an unvarnished account of the plight of middle-income families that’s in contrast to the rosier economic picture in this month’s budget. (Middle-class dreams a ‘myth’ in troubled economy: internal government report)
John Mauldin’s weekly newsletter opens with the following quotation attributed to Larry Summers:

“Inequality has emerged as a major issue in the US and beyond. A generation ago it could reasonably have been asserted that the overall growth rate of the economy was the main influence on the growth in middle-class incomes and progress in reducing poverty. This is no longer a plausible claim.
“The share of income going to the top 1 per cent of earners has increased sharply. A rising share of output is going to profits. Real wages are stagnant. Family incomes have not risen as fast as productivity. The cumulative effect of all these developments is that the US may well be on the way to becoming a Downton Abbey economy. It is very likely that these issues will be with us long after the cyclical conditions have normalized and budget deficits have at last been addressed.” – Lawrence Summers (in the Financial Times

Aside from our amusement that there is now a new entry in the economic lexicon– Downton Abbey economy – this brings to mind the considerable advance publicity for the conversation between Chrystia Freeland and Larry Summers during the opening hours of the Liberal Policy convention and the fact that we have not been able to find a single mention of it in the pretty intensive coverage of said convention. If anyone can shed some light on what was said – and why it has been muted – we would be grateful.
We are grateful to Tony Philbin for reminding us of this thoughtful piece by Hugh Segal : Why Guaranteeing the Poor an Income Will Save Us All In the End
“The real problem in our approach to poverty reduction is that it depends on the state and its employees assessing whether poorer fellow citizens are deserving of support. This is both deeply inefficient, fraught with bureaucratic excess and causes the wrong incentives to prevail. Young welfare mothers lose welfare benefits (for housing or their children) when they find work. And, in most Canadian provinces and American states, welfare pays far less than the poverty line itself.The answer, in terms of poverty reduction for working age people, is the same as it has been over decades for seniors — automatic top-ups for those who fall beneath the poverty line.”