Wednesday Night #1330

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If one were asked to define the major concerns of the world in which we live, the list would probably include climate change, wars and genocide, human rights, poverty, lack of education, especially the education of young girls and women, the disparity between the wealthy and the poverty-stricken and possibly, proselytizing and claims of superiority by religious groups.

Religion often appears to be at the root of most, if not all of these problems; it is a tool employed by vocal, efficient and ruthless minorities to influence government and exercise control over a majority that is generally inclined to be tolerant. There is little regard for improving the lot of the majority. Meanwhile, western-based Christian religious groups in Africa are attempting to make a dent in the poverty and lack of education of women, offering hope, charity and faith without seeking to influence the political sector. In other countries, some political leaders in order to maintain or strengthen their personal power attempt to transform political philosophy into quasi religions, as did the National Socialist (Nazi) party in pre-war Germany. At a more basic level in some areas, tribal or racial differences, however small they may appear to an outsider, are used as an excuse to achieve dominance of one group, often generating the most brutal genocidal conflicts (Ivory Coast); as is now happening in Darfur, these can morph into killings among rival “gangs” that have nothing to do with the original excuse. Whatever form conflict takes, the end result is never an improvement in the lot of the poor.
Although most religions profess to a belief in man’s stewardship of Nature’s bounty, the strife provoked in the name of whatever god threatens life on earth. The destruction of farmland and habitats, poisoning of sources of drinking water are obvious, However, a large part of the world’s environmental problems is a function of population growth which itself, bears an inverse relationship to affluence. Affluent families tend to have fewer offspring. In short, those who deny education and influence to those over whom they exercise dominance, are major contributors to the early demise of life on earth in addition to the misery of the group that they control.
While the Religious Right is getting most of the media attention in the U.S., there is also a Religious Left that is just as grounded in its faith as the Right
What is truly frightening is that each of these religious groups tries to use its government to enforce a certain religious view – we have freedom of religion, but we need freedom from religion
Canada has failed to draw a distinction between religious expression (opinion) and religious manifestation

A good news story
Overcoming the ravages of war and combating poverty require effort, dedication and ingenuity. In the case of some African children orphaned by poverty and/or the AIDS pandemic hope takes the form of children’s choirs of which there are now about 40. The African Children’s Choir™ which recently visited Montreal recruits the children aged 7-12 principally from villages in Kenya, Rwanda, Sudan and Uganda. The choirs organized by Christian churches tour the world, raising money for orphanages and schools in their own countries. The children are accompanied by teachers so that they attend school every day on tour. This group is based in North Carolina for a year where the children spend two months followed by two months touring, etc. After a year away, those who have reached the age of 12 “retire” and continue their schooling in Africa until the age of 16. To one observer, the children appeared happy, well-adjusted and very well-mannered.

The new financial (dis)order – Heward on the subprime crisis
In a world of overconfidence, fear makes a welcome return
(Fortune Magazine) — For the past five years risk has been the invisible man on Wall Street. Banks, hedge funds, and lenders behaved as if home prices always rise, borrowers never miss a payment, and companies never blunder into bankruptcy.
Now a crisis of confidence that began with subprime mortgage defaults is sweeping the Street, and risk is invisible no more. Banks are wobbling, markets are quaking, and ordinary investors are wondering how badly they’ll be hurt. Risk, as always, will exact its revenge.
(Business Week) — “…the current volatility may herald a shift from an era of risk-taking prompted by low rates to a more risk-averse investing world.”
The month of August is traditionally highly volatile. True to form, this month the world finance roller coaster came to a predictable, thrilling but frightening drop, raising the spectre of past disasters. We now have a stretched credit cycle which ultimately leads to a savage downturn – and that has happened. However as history does repeat itself, we will most certainly recover from the current succession of overconfidence, greed and fear. The market crisis, which had, in fact, been predicted, may not be resolved rapidly. Investors had had little knowledge about the companies in which they were investing. Never before has this fact or the relative strength of currencies shaped markets. A correction was needed which will form the basis of the next speculative up-leg.
Many are understandably puzzled by the direct impact on the world economy of the subprime mortgage collapse. The world has changed from the time when the only large financial centres were London and New York. There has been an unparalleled growth in the financial industry. With Alan Greenspan’s pushing down of interest rates, there was pressure to increase yields for investors. Universities are producing MBAs at an astonishing rate and when these people are hired, their ticket to fame and fortune is to invent new products which sometimes turn out to be not what they were purported to be. After a while, people begin to question what the asset is that is backing the new product and decide that it is not as solid an investment as they had believed; then everything begins to unwind. Obviously the growth of a number of financial centers around the world, coupled with instant communications technologies exacerbates any such problem.
Excessive creativity in the financial sector can generally be counted on to create problems
The packaging of the subprime risk by mortgage lenders and investment bankers to guarantee that the risk would be widely spread is largely at fault. A number of years ago, it was the local Branch Manager who evaluated the loan request, followed the fortunes of the borrower closely, and was accountable for the evolution of the fortunes of the entrepreneur. More recently, however, loans are granted centrally, bundled and sold through intermediaries as Asset Backed Commercial paper (ABCPs) to a buyer who believes he has a secured loan in his portfolio. A recipe for disaster in a downturn such as we are now experiencing.
Another three years of downturn is predicted in the housing market in the U.S. which is on the verge of a recession if the consumer becomes more frightened. We may be entering a consolidation phase. It is impossible to keep the numbers going, but the greed factor over the last quarter led investors to throw out the fundamentals.
Canada is relatively safe because our commodities are needed for infrastructure over the entire world. Canadian banks have not been doing as well as they have in the recent past, largely due to the evolution of the manner in which they granted loans and we need to keep an eye on what is happening with the troubled asset-backed commercial paper (ABCP) held by mutual funds, corporations, universities, etc.
Global wealth will act as an economic shock absorber over the next few months. We are entering a period of slow economic growth, which is beginning to hit Europe and people are coming back to their senses indicating growth at a reasonable rate.
For the investor, preservation of capital is essential. We don’t know enough about the subprime loans, hedge funds, derivatives, short positions or other major problems that are lurking. There is evidence of banking problems in Europe. Expect the unexpected. Currency and interest rates will be the key. Nonetheless, world growth and liquidity will temper the slump; there is a lot of money on the sidelines ready to plunge again and for those who pick stocks carefully, using value as the deciding factor there is good reason to remain optimistic.
Opportunities still abound. Everybody talks about China but that country represents only six percent of the world’s GDP – there is booming growth in Southeast Asia, Japan’s current account surplus has just hit record highs. The pendulum is swinging away from the United States towards Southeast Asia.
Emerging markets continue to be strong. Don’t forget that about 2.5 billon people have joined the economic system over the last years; women in these countries are making great advances to the benefit of the economies of those nations.
Investors, too, have become more mature in risk assessment and computers have become a factor in investment quality and volume as well as in volatility. As yet to be realized in Canada is the need for one federal, rather than multiple provincial regulatory bodies to govern securities trading. There is still the question in the broader context of the troubling lack of transparency in financial markets of whether it is even feasible to establish an international regulatory body.

Foreign ownership – is it all that bad?
A source of concern to some is the change of ownership of Canadian companies to foreign investors and the consequent impact on members of the service industries: lawyers, accountants, communications experts. It has been predicted that even the Alberta Oil Sands may be bought by foreign interests in the foreseeable future. However, it has been pointed out that this represents a healthy evolution in a mature economy, with new entrepreneurs arising, establishing corporations that will replace those that have been internationalized. An increasingly large number of M.B.A.’s are graduating and Canada is coming of age in that domain. It is to be hoped that they will learn to manage more aggressively than many of today’s who regard their companies as an asset to be held only until the right takeover bid comes along.

Francesco Bellini is one outstanding example of Canadian entrepreneurship. Founder of BioChem Pharma, which he sold to Shire Pharmaceuticals Group plc of the UK for nearly $6 billion, he is now CEO of Neurochem, originator of Alzhemed, a medication designed to slow the onset Alzheimer’s Disease. So impressive was the original research that it was granted fast-tracking by the F.D.A. but the company has announced that it has to shelve two-and-a-half years’ worth of data pertaining to Alzhemed, because trial results proved inconclusive.
Whether or not Alzhemed ever reaches the market, Dr.Bellini’s story represents an example of how Canadians should act in the international entrepreneurial race, replacing the mature companies that have slipped from Canadian ownership.

T H E  P R O L O G U E

We are NAFTA-ed out! The intense discussion last week was excellent, informative and at points highly entertaining, but it’s time to move on.
Today’s news is a commodity. Topics are fads, flogged to us by the media with little difference from the way we are subjected to non-stop advertising for the latest toy, gadget, diet, or car (or politician) until it is superseded by a rival or debunked. Bombarded relentlessly with news coverage that ranges from ponderous to downright silly, we often find ourselves if not instant authorities, at the least instant trivia experts, and before we know it there is a new topic and the process starts all over again. We confess that Wednesday Night is often guilty of following the trendy topic, which is why your participation, thoughtful analysis of the more profound questions and divergent opinions are such a remarkable asset.
For our part, with Herb’s help we endeavor to maintain the threads of discussions and to add new dimensions so that when a topic resurfaces, there is some background available to enable us to confirm, reevaluate, modify or even reject our previous stance.
With that preface, and facing the end of the summer season with its long absences of some of our cherished thinkers, we invite you to consider what will be the enduring topics over the next months and to suggest what we should be paying attention to, whether or not it is the news of the moment.
We offer some thoughts:
China looms ever larger whether in terms of the world economy (Stephen Poloz of EDC), human rights, environmental impact or ceaseless poaching of resources in poor countries.
Aging and decaying infrastructure throughout North America will require massive investment to repair and replace it. Recent news is of the bridge collapse in Minnesota, the steam pipe explosion in New York, the deteriorating state of Québec’s highways and overpasses, and last week’s alarm over the huge cracks that appeared in the ceiling at the McGill Metro. What are the causes – negligent construction, environmental depredations, demands that far exceed the designers’ specifications, the practice of public authorities to select the low bidder, or all of the above? Who is responsible?
North America was not alone in undertaking extensive infrastructure development over the last 60 years. How extensive is the problem globally and above all, how can it be solved and is it possible to avert disasters? Who will pay and how?
[This is particularly appropriate topic, given that August 29 is the hundredth anniversary of the collapse of the Québec bridge]
Healthcare makes frequent appearances on the Wednesday Night agenda, most often in relation to concerns about the paucity of doctors in Québec, the endless wrangling over the MUHC and the fate of the Shriners Hospital. But beyond our microcosm and issues of access, blending of public/private practices, nightmare stories about “credit-card care” in the States, world-wide problems including the spread of “diseases of the affluent” to the Third World. Heart disease is by far the biggest cause of global mortality, followed not by HIV/AIDS or Malaria, but by cancer.
An important aspect of healthcare is the cost of drugs reflecting often the huge amounts invested in the development and approval process. We are reminded of this today with the unhappy story of Neurochem Inc., which has revealed data from a key clinical trial that confirmed Alzhemed, its would-be blockbuster drug aimed at slowing the onset of Alzheimer’s Disease, is a dud – this is indeed a blow to the families and victims of the dreaded disease of the elderly.
The Economist worries about the new financial order, including the “securitisation of just about every form of debt into a tradable asset”, and that “The spreading panic has shown up weaknesses in some of the foundations of modern finance” (another crumbling infrastructure). Related to these concerns are the often-discussed underfunded pension plans, the demographics of an aging population, the global shift of populations from rural to urban settings and how could we not mention Income Trusts?
Topical, if not prescient, as usual, the Couchiching Institute devoted this summer’s conference to diversity, social cohesion and citizenship, asking “With our increasingly diverse society, how do we maintain a core set of values and cultural harmony? Is there a mainstream culture? What role do government and business play in drawing on the talents of such a multiplicity of cultures? What does patriotism mean in this new world? Does diversity threaten security?” We would add our deep concern over the spread of fundamentalism in all religions and the increasing frequency with which religion and politics intersect. We commend to your attention CNN’s Christiane Amanpour’s superb and disturbing documentary “God’s Warriors”
In a particularly telling moment, Jimmy Carter reminds her that fundamentalist Christians cannot admit that they are wrong because that would imply that their all-knowing God was wrong. This is, of course, a universal problem for religious leaders.
Last but far from least on our list is The Environment and all its subsets of climate change, energy, renewable (or not) water resources, geopolitical implications and, we would add, emerging economic issues as more companies embrace the thought of “green money”. The most recent example is the increased cost of food as a result of rising demand for corn as a source of ethanol-blended fuel. We fear that in our fervor to be environmentally responsible we may be rushing headlong into a morass of unintended consequences.