Wednesday Night #1483

Written by  //  August 4, 2010  //  Herb Bercovitz, Reports, Ron Meisels, Wednesday Nights  //  Comments Off on Wednesday Night #1483

Almost every rule of Wednesday Night was broken on this occasion, but there was much jollity and mirth at the beginning of the evening.
Unusually, we started off with a word quiz. Gerald Ratzer stumped the assembly with the words parging and crazing. It appears that several Wednesday Nighters have recently indulged in these exotic behaviors without knowing their proper appellation.
Ron Meisels added some information regarding his association with Caldwell (Caldwell Meisels Canada Fund). [Update: The symbol for the Caldwell Meisels Canada Fund is: Ticker Front End: CWF104 and Deferred: CWF004], but reminds us that it is not yet cleared for Québec.
Wednesday Night also celebrated with a champagne toast the news of Ron’s sudden marriage (after 22 years) to Nancy Lydon, an event that has its origins 22 years ago on August 16, when he and Nancy met through David’s insistence.
In addition to the previously announced special guests, Peter Berezin and Christopher Halstead, Sam Stein introduced a friend of long-standing, Howard Johnson, a consultant in international development, specializing in rural development, who works for a number of international financial institutions, such as the World Bank. Howard now lives in Oslo, but works in areas such as the higher hill ares of Nepal, with the poor farmers  and with the fishermen of Mozambique.
Wednesday Night also learned about a remote Canadian area, Barkerville, B.C. (population 6), once the center of the 1861 gold rush. The history of gold mining in the intervening years has been marked by major ups and downs, but gold is once again an object of considerable investment interest. Hans Black’s Interinvest has recently acquired a major interest in Williams Creek Exploration (WCX),  according to Global InfoMine “a relatively low risk gold focused company, acquiring, exploring, and if warranted, developing mining properties and placing such properties into production in Canada”. WCX is one of the oldest companies of its type in the country;  some of the grants, called F grants, date to before the existence of B.C. as an entity of Canada.

Discussion of China generally revolves around the economy, environment, human rights and, sadly, often natural disasters. However, there is a much under-reported demographic/linguistic issue. Some 30 years ago, the Han (Mandarin-speaking) population represented about 27% of the total. Today, it represents over 90%. With the migration of some 80 million people to the southern areas, which are Cantonese-speaking, the government has attempted to impose Mandarin – the official language – on the local television. The entire complexion of the country is being changed – quite successfully.

The world economy
As the world appears to be recovering from what might be described as a financial near death experience, there are two views of Europe. One is that it (or, more accurately, European investors) is left with a great deal of money which they appear hesitant to spend. A more probing analysis considers the role of the ECB in strengthening the European banks, by purchasing ‘dodgy’ debt from them and remitting safe euros to the banks. Today, about 50% of the Greek debt is held by the ECB. While nobody likes the idea of a bailout, the alternative is a financial and banking crisis.  In the face of widespread fears of a “double dip” recession, and despite the much publicized problems of the PIGS (Portugal, Ireland, Italy Greece and Spain), the euro block is doing well but apparently reluctant to spend. Contrary to concerns that bailouts of the largest economies generally don’t work out satisfactorily, Greece has implemented the promised tough corrective measures and is expected to emerge stronger and healthier.
Spain’s problems are largely attributable to the housing market. However, the involvement of  Spanish banks was that of the more traditional mortgage holder – as opposed to the sub-prime market –  and it is therefore unlikely that Spain will  undergo the same drastic experience as, for instance, California.

Of the BRIC countries ( Brazil, Russia, India and China) Brazil may  be the  riskiest. Like Russia, Brazil has benefited from the commodities boom, which has permitted the government to throw a lot of money at social problems – but without resolving them. Massive inequality has not changed; nor has the strong populist streak. If commodity prices were to soften, the recurring  threat of hyperinflation would be back and the country’s poor education performance would further drive the economy down.
In the near-term situation Russia, is relatively solid, the oil revenues strong, stable, inflation dropping and the ruble may strengthen . Long-term prospects are different.  However, not unlike Japan, the birth rate is low and  the death rate high. With the lack of population growth, many remote cities are becoming deserted.   The best and the brightest tend to leave. The political situation, too, is worrisome; governance is shaky, with  backtracking on market reforms over the last 5 years, and a very high cost of  doing business (according to the World Bank Index, Russia ranks below Ethiopia and Zaire). There is an urgent need to free up the economy, reduce red tape and corruption and encourage  entrepreneurs. Within Russia, there appears to be much nostalgia for Soviet Union and embarrassment that in the ’90s Russia was  perceived as a beggar extending a tin cup to the West.  Thus, now that Putin has money and has given much of it to building up the military, it is likely that there will be other manoeuvres in the former Republics, such as recent events in Georgia.

U.S. economy
There is fear that the possibility of double-dip recession is reasonably high in the U.S., with growth sufficiently weak that unemployment will increase again [Update, latest figures show rate changed in July].
To continue the analogy of the near death experience, the U.S. finds itself in fiscal and financial purgatory with the uncertain probability of either continuing (possibly eternal) punishment or redemption. Of the alternative courses of action, ‘debauchery’ appears to be more promising than frugality.
Consumer spending, which represents 70% of the U.S. economy, is down in the U.S. as is consumer debt (much of which reflects defaults on mortgages, rather than paying down of debt), slowing the recovery and so the stimulus – fiscal and monetary – must continue. At the same time, there is a need to produce a plan for dealing with the unfunded liabilities, e.g. Medicare and Medicaid. Inflation is viewed as a minor risk; the prospect of deflation being far more worrisome.  The banks are currently relatively secure as they hold a only relatively small percentage of the debt. Some braver analysts see a logical response to the lack of potential revenue arising from the pains of the current recession as being the Fed taking some unorthodox steps including possibly investing in equity. This would constitute a powerful stimulus, and would be in keeping with the Fed’s mandate to maintain full employment and keep inflation around 2% but one (perhaps seen as creeping socialism) not at all likely to be acceptable to the American public, despite its presumed advantages. A higher employment rate and greater return on investment would have a powerful positive effect on the U.S. economic picture as was successfully achieved during the Asian Crisis of ’97 in Hong Kong.

The market
I have recently heard the market referred to as manic depressive – two days it’s manic and then it’s depressive
Market Analysts believe that based on the behaviour of the market in the past two weeks, the probability of a double dip is very remote. We witnessed a significant event at the end of the week of July 19, namely, a sharp decline followed by a 190 point reversal in a single day, very significantly marking the start of a market surge. The two hundred day moving average has been breached and the market is expected to continue to rise until at least the end of August or mid September when, even if a sell-off were to occur, the market would still be ahead of the game for the rest of the year.
While Canada is viewed as a stable, well managed economy and there have been some major foreign acquisitions of Canadian resource companies, despite the strength of the Canadian dollar, there has been surprisingly little M&A activity by Canadian firms in Europe.

The current debate over the security of the Blackberry is the source of a dilemma as security and confidentiality in communication is in the interest of both terrorists and governments. Inexplicably, RIM refuses to modify the system.


We are looking forward to welcoming Martin Barnes’ new BCA colleague, Peter Berezin, who joined BCA earlier this year after several years at Goldman Sachs and before that at the IMF – yet another under-qualified BCA person of the type we have grown to know and love!

Another returnee after a long absence (though not as long as Daniel’s), Chris Halstead is  Enterprise Customer Service Manager for Oracle. Chris, a transplanted (to Toronto) Montrealer, was also a Concordia classmate of Marc Nicholson and one of the Model UN alumni. He went on to Queen’s, where, if our failing memory serves, he was in the first cohort of Operations and Information Technology MBAs.

Dov Zigler will also be back this week, having recently returned from Silicon Valley.

In the wake of last Wednesday’s none-too-encouraging discussion of the economy, Gerald Ratzer forwarded Gold Promises and Currency Lies  a newsletter whose author takes a dim view of stimulus stating that it is  “nothing more than perpetuating debt into a distant future where there is no bank with a foreclosure stamp hovering over the ersatz value of our G8 economies.”, however, as Tony Deutsch points out from his bucolic retreat:   The legitimacy of the anti-stimulus party has to be based on the idea that no one knows when the Greek scenario emerges. It is a good idea to stop with the stimulation before that. How much before that? 
Meanwhile, E.J. Dionne, Jr. wonders if a nation [can] “remain a superpower if its internal politics are incorrigibly stupid” and argues for Senate reform as a key element of the solution.
His view on taxes is diametrically opposed to that of David Rubenstein of the Carlyle Group, interviewed by Charlie Rose last Friday. Mr. Rubenstein appears more worried about a) private equity image and b) the complexity of the Dodd-Frank Bill (takes too long to find the loopholes?)
Robert Reich feels strongly that We Really Shouldn’t Keep the Bush Tax Cut for the Wealthy
What we really should be debating is whether to raise the highest marginal tax rate higher than it was under Bill Clinton and use the proceeds to give the middle class a permanent tax cut.
Is Paul Krugman right to “worry that those in power, rather than taking responsibility for job creation, will soon declare that high unemployment is structural, a permanent part of the economic landscape – and that by condemning large numbers of Americans to long-term joblessness, they’ll turn that excuse into dismal reality”? Defining Prosperity Down

But you can sleep peacefully tonight: The Conference Board (of Canada) said today that  there’ll be no double-dip recession for the world economy this year, despite the dampening effect of European countries struggling with deficits.

China is much in the news (when isn’t it?) with several pieces on the new indigenous innovation policy. Indigenous Innovation is a new cry – something we wish our own politicians would espouse more clearly and consistently.
China Fuels Trade Tension With Policies, Report Says
(WSJ) “Indigenous innovation is a massive and complicated plan to turn the Chinese economy into a technology powerhouse by 2020 and a global leader by 2050,” says the report. “What is worrisome for the business community is that these indigenous innovation industrial policies are headed toward triggering contentious trade disputes and inflamed political rhetoric on both sides.”
(AFP) US to press China on controversial technology policy
U.S. Chamber of Commerce Report: China’s Drive for ‘Indigenous Innovation’ – A Web of Industrial Policies Overview and Executive Summary
The Economist offers analysis of the changing work force in The rising power of the Chinese worker , and in The next China  describes some of what are becoming ‘footloose” (relatively speaking) international companies, moving away from the coast and towards the interior.
“As the supply of migrant labour dwindles, the workshop of the world is embarking on a migration of its own
The next China may instead lie closer to home: within China’s borders, but away from its coasts. Three inland provinces are wooing Foxconn, the Taiwanese electronics company which raised pay in its coastal plant after a string of suicides by workers. Another, Anhui, is only a few hundred kilometres up the Yangzi river from Shanghai, but its income per person belongs to another realm. Foreigners invested $3.8 billion in the province last year, pursuing cheaper land and labour.”

The fallout from the Wikilieaks continues, despite general agreement that they didn’t reveal much that wasn’t already known. However, they serve to emphasize the difficulties of the Obama  Administration,  which is trying to extricate itself from  Iraq as quickly as possible, as confirmed by the President’s speech on Monday. Opinions are sharply divided as to the wisdom of the timetable and Foreign Policy offers a gloomy analysis of the foreign relations problems faced by the U.S.  around the world. Not the least of which is how to deal with Pakistan, whose president has just announced that the international community is losing the war in Afghanistan.  [Note Bloomberg’s ironic – maybe – comment  with respect to the disastrous floods in Pakistan:  “Islamic militant groups in the region and the U.S. government both have built public support in the past by providing assistance to bolster government attempts.”]
Maybe if Bill and Hillary had invited some heads of state to THE wedding things would go better?

In case you had doubts, it is official,  New study finds that Gulf oil spill is the largest in history   and just as the news appears to be relatively good about the static kill in the Gulf, Canada’s own Enbridge has become the new Bad Boy  Enbridge warned of corrosion in Michigan pipeline weeks before spill‎ – who will their Tony Hayward be?  Back to BP; Reuters reports that the company has said it will sell $25 billion to $30 billion of assets to pay for the spill and on Tuesday announced it had agreed to sell its Colombian oil unit to a consortium of Canada’s Talisman Energy and Ecopetrol, Colombia’s national oil company.

The UAE/Saudi /RIM confrontation should provoke some discussion among our tekkies and all the BlackBerry fans- The Economist headline The United Arab Emirates and BlackBerry? Cherchez la server  resumes the problem neatly.

The census debate continues, with the hardly-surprising news that statisticians from around the world, who are meeting in Vancouver, support maintaining the long form.

Late-breaking news pointed to by our West Wing Medical Doctor: CMA issues five-pillar plan for health-care reform
In a new report entitled “Health Care Transformation in Canada: Change that Works, Care that Lasts,” the CMA says health-care reform is urgently needed if the system is to remain sustainable in the future. (CBC) Help transform medicare, CMA tells Canadians

Finally, no matter how serious these matters, the impact of climate change has finally been understood by Canadians when the National Post headlines: Iceberg Shortage Sinks N.L. Tourism, Gin Business. Now that is serious and we fervently hope that Stephen Harper and Jim Prentice will get on this right away (sending Canadian Navy vessels to tow icebergs closer? Just please, do not fan with hot air from Ottawa.)

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