Wednesday Night #1420

Kimon Valaskakis’ efforts towards the reality of global government are moving forward, not only with progress in establishing the New School of Athens, but reaction to the current financial crisis in which inadequate banking and investment regulation has had a world wide domino-like effect, and is coming from both the political and investor camps. Their agendas are converging, although their time frames are not.
In this context, Angéline Fournier’s account of the recent International Bar Association’s 20th Annual Conference in Bermuda on the Globalisation of Investment Funds was particularly pertinent. Long term, there is a need for cooordinated regulation and greater transparency to meet the chalenges of globalization of investment. Investors have certainly changed their attitude in the past five years and will possibly be more careful in the future, more aware and demand greater transparency – but we must bear in mind that without regulation to protect them, they will quickly revert to the greed (and stupidity) that has guided them into the current crisis.
Similarly, global corporate social responsibility is impossible to achieve in the absence of global corporate law. This is the argument put forward by Edward Luttwak in Turbo-Capitalism. Corporations are supposed to be regulated at the national level, but in the era of globalization, this is ineffective, and today no organization has the mandate to impose a world-wide codified corporate legal system, but possibly this would be a role for the WTO – which would have to change the perception of its mandate from punishing governments to disciplining corporations.

In the current crisis Canada has been generally praised for its conservative banking laws which, in fact, have been a mixed blessing as the resulting obsession with security has, in a sense, tended to stifle creativity. As previously with regulation in the airline industry, strict regulations have made it difficult for competitive banks to establish themselves. Banks’ relative inability to assess manufacturing risks creates a lacuna that can only currently be filled by non-banking financial institutions, such as GECapital.

World markets
The election of a minority government in India has been beneficial to the Indian market. The population is young and good values are to be had. In the past week, the rupee has strengthened against the U.S. dollar – as has the Canadian dollar. Oil prices have risen (obviously some countries are building strategic reserves as there is still too much production and hundreds of fully loaded tankers are riding at anchor in ports around the world)  as have gold and precious metals and commodities. Some predict an impressive rise in the fourth quarter of this year for the Australian economy.
Our emerging markets expert is bullish on the American dollar, Asian currencies and the currencies of nations that have the natural resources that Asian countries want, especially those related to agriculture, like potash. Given the cold and wet spring that North America has suffered, it is obvious to all that agricultural commodity values will rise.
Canada, particularly western provinces will do well, especially Saskatchewan which has become very prosperous in recent years. In addition to wheat and potash, Saskatchewan has yet to develop its oil industry which will ultimately bring increased prosperity to that province. There is talk that the tar sands are essential to U.S. energy needs [still an issue that will have to be resolved in light of the Obama administration’s commitment to clean energy]

Investment strategy
The market has room to grow, but it won’t grow in a straight line
The days of the widow and orphan purchases and lifelong possession of Bell Telephone shares have long past and today’s strategy has changed from buy and hold to trade. The long term holders of General Motors bonds have seen the value of their investment drop by over ninety percent over the years. Today’s investors will have to take into account many factors including the psychology of investment as well as the solidity of the company. The sudden collapse of the market in September and October has led investors to flee the market and with the current low interest rates, the yields of interest-bearing instruments are unusually low, leading to much greater liquidity looking for a home. The swift market recovery has enticed would-be investors (institutional, rather than individuals for the moment) back into the market, often with little thought for relative value, or regard for fundamentals.
Investors, particularly in China, are buying and warehousing commodities in the anticipation of increased value as the economy recovers. The only explanation for the current high retail price of oil relative to the price of crude can be the building of strategic reserves. The greed effect appears to have returned and recalling the period from 1974 to 1984 when interest rates rose to twenty-two percent and inflation increased significantly; it is a traders’ market and the prudent investor will avoid the error of indefinitely holding rapidly rising securities whose prices are more a reflection of greed than value. It is anticipated that we will begin to feel the effect of inflation somewhere around 2012.

Microcredit
Sheila Arnopolous recently attended a meeting of some 200 members of Women’s World Banking; mostly women, they work to connect poor women among the bottom billion of the planet to microcredit loans and help them to gain economic and social empowerment. She described the gathering as “the other side of the capitalist coin where women with an impressive knowledge of money and investment could use their understanding of the financial system for the benefit of the entrepreneurial poor.” The success of micro financing, with over 97% of the loans repaid continues to create more wealth and opportunity – especially for women in poorer countries in the world – enhanced by the ripple effect of earning and investment in the least affluent world communities.

The  Mulroney-Schreiber inquiry continues to be a topic for Wednesday Night, in this instance the cost to the taxpayers of some fifteen million dollars for the inquiry plus an additional 2.1 million for Mr. Mulroney’s legal expenses and as reported, the taxation people accepted payment of tax on only half the proceeds. The obvious question is whether the average citizen would be treated differently, to which the answer possibly is, very likely not. Unlike other countries where the recovery of tax appears to be more important than the cost of that recovery, Revenue Canada is said to be prepared to more realistically negotiate the optimum settlement that is advantageous to both parties than the maximum that would prove more costly than beneficial. No virtue is seen in incurring a cost of prosecution that would exceed the proceeds of that prosecution. The question as to whether personages are treated more respectfully than other citizens remains unanswered.

Although gold is not likely to return as the measure of the value of currency, gold ATM’s have begun to appear in Germany, Switzerland and Austria, dispensing thin sheets of gold for the equivalent of approximately $42.25.

T H E  I N V I T A T I O N

Sri Lanka  – the battle is over, but the word ‘war-torn’ comes to mind in a particularly poignant way – the work of reconciliation and reparation of damage to the social fabric caused initially by the British and later abetted by India must now begin. Given that the greatest concentration of the Tamil diaspora is in (Toronto) Canada, this must be of concern and the Harper government will need to address the issue with intelligence and empathy – two qualities that we are not used to seeing in afore-mentioned government.

The trial of Aung San Suu Kyi on trumped-up charges that she violated the conditions of her house arrest – we cannot help but wonder if the midnight swimmer, who is now being described as a reporter, was encouraged to visit her so that the junta could bring these charges. David Kilgour is in the forefront of the protest in Canada, reminding us that she is one of Canada’s few honourary citizens.

As the Swat Valley is turned into a humanitarian disaster area, the New York Times reports that Pakistan is rapidly adding to its nuclear arsenal even while racked by insurgency, raising questions on Capitol Hill about whether billions of dollars in proposed military aid might be diverted to Pakistan’s nuclear program. In light of last week’s discussion of the increasing number of madrassa-trained members of the military, worries about Pakistan increase.

And then, there is the U.S. policy regarding the Middle East and Israel – as TIME puts it succinctly in assessing Netanyahu’s visit to Washington: “Netanyahu, like any Israeli Prime Minister, has an overwhelming incentive to get along with Israel’s single most important ally; Obama, for his part, needs to fashion a peace process that produces results, for which he requires Netanyahu’s cooperation.”   Meantime, we are breathing a deep sigh of relief that the Pope has returned from his visit relatively unscathed and having done the right thing (in our opinion) by calling for a Palestinian homeland

All of these topics are grist for the mill of Kimon Valaskakis, our global governance guru, who will be joining us along with Angéline Fournier.

India‘s elections are completed and the results are in. Manmohan Singh, and the coalition led by his Congress Party have won an overwhelming victory in national elections. Expectations that the new government will bring stability and economic changes made the Sensex stock index jump more than 17 per cent on Monday, forcing trading to close for the day to let markets cool down. Al Jazeera  has excellent coverage.

On an unrelated financial topic: Goldman Sachs Group Inc. and Morgan Stanley have formally asked the Federal Reserve for permission to repay a combined $20-billion (U.S.) in federal bailout money. The requests are pending, and no decision has been made on whether the investment banks will get approval to repay the money and sever ties with the TARP.  We can’t quite grasp the idea that these companies have to ask for permission to pay back money.

On the environment and energy fronts:

The UN has published the first draft Climate treaty negotiating texts to help bridge a “great gulf” between options for rich nations to cut greenhouse gas emissions  – good idea or not?

Paul Krugman  has come down firmly on the side of the Waxman-Markey bill, noting that “Al Gore has praised the bill, and plans to organize a grass-roots campaign on its behalf. A number of environmental organizations, ranging from the League of Conservation Voters to the Environmental Defense Fund, have also come out in strong support.” Other Wednesday Nighters are not happy and suggest that the Obama administration is backing away from some of its earlier commitments.

U.S. Commerce Secretary Gary Locke and U.S. Energy Secretary Steven Chu have announced significant progress that will help expedite development of a nationwide smart electric power grid.

Our comments would not be complete if we did not draw attention to the latest tar sands debate: “The Norwegian government may have secured environmental plaudits for its pledge to become one of the world’s first carbon-neutral countries. But that has not stopped it angering green groups this week, after it refused to condemn a Canadian tar sands investment by Norwegian oil firm StatoilHydro, in spite of pleas for it to intervene and use its two-thirds ownership of the firm to block the move.”

Along with these developments with international impact, we must also turn to a few Canadian items.

The Mulroney-Schreiber inquiry continued throughout the week  and Mr. Mulroney’s testimony drew mostly scathing comments from the media – and posters on media sites. Possibly the comment by the former PM that drew the most derision was that he didn’t treat [the cash received from Mr. Schreiber] like the rest of his revenue because he had no “support staff,” For the multitudes of Canadians who manage to maintain records of their financial transactions without ‘support staff’, this was hardly an endearing comment.

We would be remiss if we did not mention the Conservatives’ attack ads on Michael Ignatieff – our reaction is best summed up by the inimitable Rex Murphy: Tories attack: bad manners, bad politics  “There is an unacknowledged element in all attack ads. They say as much about those who design those ads, as about their ostensible target. These ads may well remind Canadians of something they already know – that Mr. Ignatieff was a long while before he chose, or deigned, to become a full Canadian. But they will also remind Canadians of something they know just as well, and do not like in the main: that the Harper Conservatives are a brittle, humourless and by-default-mean congregation. The ads, I predict, will hurt the Conservatives, far more than they will trim the rising Ignatieff Liberals.”

Finally, welcome news to many: U.S. Supreme Court to review Black’s fraud conviction   – now will that be before or after the replacement for Mr. Justice Souter is announced?