Wednesday Night #1304

February 28, 2007

We are all a-twitter with the countdown to the 25th, but must settle down and take matters (somewhat) seriously this last week of the 24th year.

However, of course, there is nothing more serious than the Oscars, which seem to have attracted more attention for the fashions, or non-fashions, on the Red Carpet than for the films honoured. While it IS an evening of fluff – albeit Big Business fluff – we admit to sharing the public’s fascination with the event, including the tiny moments of suspense before an envelope is opened when one can still wonder if somehow all the pundits could have been wrong.
For some Wednesday Night Oscars – or perhaps we should consider this week’s awards the warm-up Golden Globes? – we offer the following and are open to other nominations:
Best Financial Drama
China, where the stock market tumbled nearly 9% , rattling markets from Hong Kong to Singapore and as far away as New York amid fears of a slowdown in China’s economy. [This is the correction Ron Meisels promised us last week?]
Best actor in a supporting role
John Negroponte, newly appointed #2 at the U.S. State Department is off to China next week Tough job, but at least he’s highly qualified.
Leading actress in a feature improv
Condoleezza Rice in Iran-Iraq and the U.S. of A [see: Rice softens over Iran role in Iraq]
Most promising comeback
After last week’s (WN #1302) discussion of Gold, we have been interested in the forecasts in our (new-to-us) investment newsletter, The Daily Reckoning It seems that Wednesday Night is as usual ahead of, or at least right on the curve.
Best David & Goliath story
Kay Mallarkey (love the name!), a wonderfully feisty lady who has successfully taken on British banks for overdraft fees (she was charged £90 for a £2 overdraft). We like this story
Bring on the bad guys – promising script
Big Bad Banks are in the news here as well as in the UK. Minister of Finance Flaherty is discussing ATM charges with the Canadian banks (last year, Canada’s six biggest banks reported combined profits of $19-billion)
Most promising successor to “Night of the Living Dead”
Just when we thought that the European Constitution had been temporarily swept under the carpet(See WN #1301) , Lo! The BBC tells us that “The corpse of the European Constitution is coming back to life and staggering around the EU’s corridors of power”
Best maxim for investment strategy
“Our Law of Stupidity tells us that useful information declines by the square of the distance from the source.” [The Feb 27 Daily Reckoning on the US mortgage crisis] Elaborating on the theme, it continues: “As the lending business became more and more ‘sophisticated’, lenders and borrowers took leave of eachother. Finally, they forgot they’d ever met.”
Most improbable storyline
Hijab halts girls’ soccer game [Calgary Herald]
Most timely analysis
Foreign Affairs March/April issue based on the premise that “if wars always produce losers, it is also true that most wars have their fair share of winners, too. So, four years into the fighting, what institutions, countries, ideas, or individuals are better off because of the war? Who, in essence, are Iraq’s winners?” Amongst the usual suspects (Arab dictators, price of oil and … China), we find a piece by David Frum on Samuel Huntington, an interesting choice.
An Inconvenient Truth – Canadian Style
“British Columbia introduced an energy plan Tuesday that focuses heavily on increased conservation and new technology, with an aim of being self-sufficient in electricity by 2016.”
Inconvenient Truth II
Investigative journalism reveals idol with feet of clay “eco-warrior Al Gore’s bloated gas and electricity bills 20 times national average”
Most gratuitous violence in a screenplay
The clear winner in this despicable category must be Iraq again for the car bomb murder of 18 boys playing on a football field; the oldest was 15.
Best detective series
The Max Stern Art Restitution Project which has just announced the recovery of Portrait of Jan van Eversdyck, by Nicholas Neufchatel. Featured on this series is Clarence Epstein a sometime Wednesday Nighter.
Best party lootbag
We’ll have to postpone this award until March 27, possibly until after the federal election, if there is one this Spring.

The Report

It was duly noted at the beginning of the evening that this would be the last evening of the 24^th year and would be followed on March 7 by the Gala Celebration of 25 years of Wednesday Nights. Several members of the self-appointed committee were present, but appropriately tight-lipped about events planned for the 25^th.

Market ‘Correction’?
We tend to denigrate Disneyworld as the quintessential model of human superficiality, with its phoney mimicry of the real world, yet its popularity increases with each successive generation. The comfortable ride as the roller coaster slowly ratchets up to its summit above the artificial village below is pleasant, each metre’s climb more exciting. The brief pause at the top is inevitably followed by the sudden, rapid, heart-stopping descent to the end of the ride.
At the end of a very active day trading yesterday, the TSX had lost almost 365 points and the Dow, over 416. It would appear that the world’s exchanges were reacting to an overdue decision on the part of the Chinese government to revalue the Yuan and to clean up its banking system. There is talk of China implementing a tax on capital gains. The fear was that these initiatives would affect that country’s purchase of commodities and in turn, the world economy, heralding the long anticipated end of the bull market. However the price-earning ratios have not increased significantly, leading to the belief that a correction is yet to come.

[Editor’s note: The Daily Reckoning, published a delightfully simple, albeit not simplistic explanation of what is happening:
“It could be the beginning of the end. Central banks and the financial industry have made money very easy to get. People took the money, and naturally, they spent it; they invested it.
“But sooner or later, the lenders will want it back. When that happens, the borrowers will have to scrape around…. And when everyone is trying to raise cash – by selling things – the things they are selling will go down in price, because there are so many of them for sale.
“This makes it harder for the people who are trying pay off their loans to get the money they need. Some of them won’t be able to, so the loans themselves will go bad; they’ll become worthless because they will never be repaid. And so, the lenders themselves will be hurting, because they won’t be getting the money they lent out back. It’s been spent. Or it’s been poorly invested.
“The whole thing gets to be a big mess…because people discover that they don’t have as much money as they thought they did.”
… a little more precision. You might have found Tuesday’s worldwide stock market slump shocking or unnerving. But you shouldn’t have found it surprising. There are some threats to your money that are unpredictable – wars, natural disasters, thefts. But there are other menaces that are inevitable, and the inevitable result of a big bubble is a big pop.
Anyone who says he was ‘surprised’ by the big drop in stock prices just wasn’t paying attention.
The quantity of money is increasing at a rapid pace. Just this week we discovered that the euro money supply is now going up at its fastest rate in 17 years – nearly 10% per annum. Dollars are increasing at about the same rate. And in India, the money supply is going up at a 21% rate. And yuan? We don’t know, but we bet it would take our breath away.
Why so much money? Because we are in the bubble phase of a credit expansion. And one of the highlights of this period is that the Bank of Japan will lend money at less than 1%. This tempts speculators to enter the ‘carry trade‘…

[Editor’s note: which succinctly described in an e-mail from Tony Deutsch “ involves borrowing in a low-interest currency (Yen or SWF) and using the proceeds to buy bonds denominated in a high-interest currency.The buyer assumes the foreign-exchange risk.When the SWF and/or the Yen rises, all hell breaks lose.That happened yesterday.”]

Anyone with any sense could see that all this fresh and eager money was going to get a lot of people in trouble. And anyone who bothered to read the headlines could see the trouble coming in fast.
Just a couple of days ago, even, Alan Greenspan warned that the nation could be in recession by the end of the year. Why? Because the housing market was going soft. Manufacturing is already in recession. Housing looks like it is headed for recession too. January new house sales, for example, were down 16.6% – the sharpest decline in 13 years. Sub-prime lenders are going broke. And the LATimes says, ‘Mortgage Delinquencies [still] Rising.’
And now the central banks are threatening to pull the plug on this tub of liquidity.]

Other investment instruments
Of far greater concern is the large unregulated market in derivatives. Following the initial launching of shares, a company does not make money as the result of increasing stock prices, but can do so by borrowing. Debt is not only a less expensive instrument than increasing equity but normally only shows up as a footnote in financial statements. Banks and credit card companies routinely sell loans, debts or credits at a discount. In what might be considered analogous to insurance of large potential risks, debt is bought and resold in secondary and tertiary markets at a discount, including cross border swaps of debt in order to minimize the effect of fluctuations in exchange rates, and options to buy debt. In the absence of regulation, this huge market is risky with the life span of hedge funds reported to be less than three years.

Climate Change – Can we afford Kyoto?
When one devises a model to extrapolate backwards that can be demonstrated to also work in forward extrapolation, it is most probable that the model is accurate. Such is the case of models predicting climate change. Although there remains a small segment of denial, global warming is no longer a hypothesis; it is a proven theory.
If, as appears virtually certain, Canada is unable to implement Kyoto goals by the 2010 deadline, the protocol will permit a delay until 2020 at an increased rate of implementation. Part of the problem is that our Prime Minister appears to act as if the agreement had been signed on behalf of the then Liberal Prime Minister of Canada as opposed to a binding commitment by the government of Canada, regardless of the party in power.
Countering the New Conservative Government’s insistence that Canada cannot afford Kyoto and there’s no point in trying to meet the goals because it would be impossible; others see a great opportunity for Canada to develop solutions and technologies that would have applications far beyond Canada’s borders, thus turning the Kyoto Challenge into an opportunity. One outstanding example is the International Test Centre for Carbon Dioxide Capture (ITC) at the University of Regina, which is solely devoted to the development of industrial CO₂ capture technologies, which capture the CO₂ for subsequent storage or use instead of releasing it into the environment.
The effectiveness of Carbon dioxide capture (“sequestration”) at the smokestack is questioned by some, however, Saskatchewan is taking a leading role in the development and deployment of coal-based technologies andwith Alberta is building the world’s first power station to gasify coal by treating it with steam to produce methane and oxygen. (C+4H2O→CH4+2O2). Whether or not this is viable will depend on the availability of water and the energy required to produce the steam as well as the relative cost of production.
While North America refuses to reduce carbon dioxide emissions, and India and China continue to burn coal, Europe, especially England and Germany have acted to contribute to the solutions. In the United States, Governor Schwarzenegger is extremely pro-active in working to reduce the problem there and British Columbia has just introduced an energy plan that focuses heavily on increased conservation and new technology, with an aim of being self-sufficient in electricity by 2016.
More than fifty percent of the world’s electricity is produced by coal, especially in China and India. Shell, Alcan and Alcoa have been working to reduce the production of carbon dioxide in processing their products, although the continuing use of carbon anodes by aluminium refineries requires attention in order to further reduce carbon dioxide emissions.

Shortages of physicians in Québec
Inexplicably, especially during this pre-election period, the shortage of family physicians has not come to the forefront as a political issue. Perhaps, because illness is an intermittent problem for most people and the majority of voters prefer to accept handouts that slightly reduce the burden of less costly but more immediate issues, there is not the groundswell of protest that one might have expected. By limiting the number of new family physicians practicing in various centres the government saves the greater cost of referrals to specialists, tests and X-rays. Then too, as was pointed out last Wednesday and reiterated in James Mennie’s excellent column in The Gazette, the government of Québec consistently neglects Montreal in favour of the regions, very likely due to overwhelming party loyalty and disproportionately small number of seats in the Montreal Region, permitting all parties to ignore it in favour of the rural areas of the province. [Peter Trent’s tyranny of the rurality]
The lack of opportunity for foreign-trained physicians to obtain their license to practice in Québec, further exacerbated by the expense of the re-qualification process, which must be borne by the individual, and the reluctance of the College of Physicians and Surgeons to welcome and license qualified foreign specialists, all contribute to reducing chances of a partial solution to the shortage through immigration.
A bright note is the news that Vithal Rajan is considering a return to Canada (Montreal) to address this issue through the establishment of a form of Microcredit union for such physicians.

[Editor’s note: It seems that the Conservative government is listening to Wednesday Night. Canadian Press informs us that Jason Kenney, secretary of state for multiculturalism, is blaming the 440 (!) professional regulatory agencies within provincial jurisdiction, such as those that regulate the legal and medical professions, for difficulties immigrants have in getting their foreign credentials recognized in Canada. He accused them of practicing “the politics of closed labour markets.” Kenney also said Immigration Minister Diane Finley will soon make an announcement about the creation of a foreign credentials office. It will be interesting to see how the 440 agencies take this news.]