Financial Post - Diane Francis

Goldman Sucks

Diane Francis — Fri, 20 Nov 2009 19:39:00 GMT

Big money bailout brigade: the Wink and the smirk in power

Goldman Sucks, or rather Sachs, this week tried to pull off a “Profumo” public relations stunt to repair its reputation as a greedy corporate welfare bum.
John Profumo was a married, British defense minister and aristocrat who, during the Cold War, was caught with prostitutes. He resigned in disgrace, then announced he would teach poor people and be a social worker in the slums of Glasgow or some other hell hole.
This is a time-honored technique, which is both cynical and slightly sincere, deployed by rich guys who never gave a hoot about the down-and-out but who suddenly find themselves in the same boat. Their empathy toward others, with whom they find themselves suddenly aligned, is simply another symptom of their own narcissism.

Profumo Redux
In Goldman Suck’s case, the firm is trying to makeover its “brand” which has suffered, as it should, due to the role the firm played in bringing about a collapse in the world financial system as well as its current behavior.
A year ago, Goldman’s fat-cat payroll was backstopped by single parent mothers and other American taxpayers to the tune of US$10 billion. The bailout was so successful that the firm was saved, converted itself into a bank in order to perpetually get taxpayer backstoppiing (as a deposit-taking institution instead of just an investment bank) and is making record profits due to its near-monopoly position.
It also worked so well that the US$10 billion was repaid in full months later.

Mea greedy
The “Profumo” move by Goldman took place last week and involved business “social work” as well as a carefully scripted apology.
Goldman’s Lloyd Blankfein did the mea culpa as he accepted an award as “CEO of the Year” in New York City by Directorship Magazine. Go figure.
“We participated in things that were clearly wrong and we have reason to regret and we apologize for them,” he said.
The “things” were not specified, undoubtedly on the advice of Goldman’s army of lawyers defending multiple class-action and other litigations against the firm for its past deeds.
The piece de resistance was the “social work” announcement.
Goldman said it will team up with its largest shareholder, Warren Buffett of Berkshire Hathaway Inc., to assist 10,000 small businesses with US$500 million.

The insult
If that was a tip it would be an insult, particularly in New York. Goldman has set aside US$16.7 billion for year-end bonuses, equivalent to the total economic output of Bolivia or Iceland. That means the US$500-million “social work” scheme is 3% of its bonuses.
The point is that Goldman’s ridiculous profitability is directly attributable to the US$10-billion bailout (which is paid back) but also to another US$30 billion it hasn’t paid back in the form of an indirect bailout funneled through AIG.
Washington bailed out AIG's counterparties, to whom it owed hundreds of billions, because AIG had sold to them unbacked credit default swaps (a form of insurance on bond values). Goldman was not only ahead of the queue in collecting its counterparty IOU, but its US$30 billion is reported to have been 100 cents on the dollar.
Clearly, Washington (under Republicans then) should have taken huge equity interests in return for bailout funds, as happened in Detroit (under Democrats).
This is why Goldman’s “Profumo” won’t work now or ever until it is forced to pay back, with interest and penalties, that US$30 billion it got indirectly.

Why I love Sarah Palin

Diane Francis — Wed, 18 Nov 2009 13:30:00 GMT

Pretty as a beauty queen and just as stupid as many of them.

The best thing that ever happened to America is the ascension of Sarah Palin to star status. She is the reigning queen of the political freak show where candidates are invaded, ogled, sliced, diced and spliced by a public hungry for human train wrecks.
Palin, former Republican vice presidential candidate, with her narcissism, loopy religious beliefs and latest book with its attacks on everyone and everything is the best "news" to come along for months. After all, Britney Spears is on meds and under control and the dysfunctional football players and rap stars are in jail or on parole for beating girlfriends or dogs or rival brutes.

Yes I love Sarah Palin because she will divide the Republican Party and marginalize it for a few elections unless the GOP gets its act together. She already demonstrated that she, with God and Todd on Her side, will vanquish those who trespass against those time-honored, minority views concerning abortion or universal health care.

For instance, she attacked a fellow Republican "progressive" in New York, who was pro-Choice, so effectively that she and like-minded religious fanatics cost the party the election. They ignored the Party's nominee, backed an independent and the Democrat came up the middle. She popularized the "death panels" mythology which concocted that civil servants will sentence old sick people to die...as if U.S. insurance companies don't do that now by denying coverage or as if Congress doesn't do the same thing by failing to impose universal health care.

For these and other reasons, any right-thinking American has to love this woman. She will lead the fanatical lemmings over the cliff so that the United States can avoid being governed by people who are superstitious, ignorant and intolerant.

So let's wish her every success.

Cirque du Soleil's next frontier

Diane Francis — Mon, 16 Nov 2009 18:30:00 GMT

Lamarre, Laliberte, Moscow's Mayor and Russian managing partner Craig Cohon

Daniel Lamarre is President of Cirque du Soleil and spoke with me on Saturday about his company’s exciting partnership in Russia and Ukraine with George Cohon and Craig Cohon.
He has worked for nine years with Cirque founder and proprietor, Guy Laliberte, who is easily the world’s most successful impresario with 18 shows running worldwide and two new concepts about to launch in Vegas and Chicago (for a few weeks before going to Broadway).
Laliberte and Lamarre have been an unbeatable team. Guy is one of the world’s greatest entrepreneurs too. Some 25 years ago was playing his accordion and walking on stilts for quarters as a street performer. Likewise, Daniel migrated into show business from journalism.
“My background is communications, public relations and broadcasting,” he said. “Then I joined the circus.”

A large multinational
Cirque has 1,800 employees in its Montreal head office where shows are designed, scored, cast, rehearsed, staged and marketed. Another 1,000 work in Vegas where Cirque has several permanent shows in casino-resorts and is about to open its newest about Elvis Presley. In total, there are 5,000 Cirque employees around the world.
“We are doing 18 shows as we speak. Elvis opens December 16 in Vegas and an experiment opens on November 18, a Vaudeville show in Chicago. It will be there for 3 months to try it out before going to Broadway to the Beacon Theatre.”
Laliberte is a billionaire and jet-setter who likes to party, play poker all night and recently paid $30 million to take a trip into space with Russian technology. But he remains the Cirque’s hands-on Chief Creative Officer.
“Guy is very involved. He just got back from Russia and is working on the two new shows. He is gifted in looking at performances prior to openings. He has this eye – I call it the eye of the public. He’ll say `love the act but it’s too avant garde for the public’ and so on.”

Cirque succession
Laliberte a few months ago sold two 10% shares in his company to raise capital for expansion. When asked whether it will ever go public, Lamarre said: “I hope not. I like the independence we have as an organization. For the first time in my life, I have a feeling I’m on a mission. This is a Canadian institution which we need to protect. Ask any Montrealer and they will say they own Cirque…and the [Montreal] Canadiens.”
The premiere in Russia has been a huge hit so far and next year a tri-city tour is planned.
Some 30% of Cirque’s performing artists are Russian and Ukrainian, the largest ethnic groups represented. Next, are Chinese artists which is why the vast Chinese market is the next target for Cirque’s management team.
In true fashion, Cirque will be making its first, splashy entry there at Shanghai’s Expo 2010 world’s fair.
“We are contracted to design the Canadian Pavilion at the Shanghai World’s Fair. It will give us an amazing window and we are very excited and very proud about it,” he said.

(Photos: Cirque performers from Eastern Europe and Susie and George Cohon, who took McDonald's Canada into Russia and now the Cirque with son Craig)

Cirque du Soleil's latest triumph

Diane Francis — Fri, 13 Nov 2009 15:05:00 GMT

Guy Laliberte prepares for his space flight in Russia.

Cirque du Soleil is an amazing global brand created by Guy Laliberte who, 25 years ago, was playing his accordion for quarters as a street performer.
Today he is the world’s greatest impresario and Cirque’s 5,000 artists, musicians, designers and producers currently have 18 shows underway with two more about to be launched, one in Vegas and another in Chicago on its way to Broadway.
But the Cirque’s latest unique “home run” is its recent foray into Russia and eventually Ukraine, starting with its sell-out premiere in Moscow on Oct. 23 of a show called “Varekai”.
The launch is an impressive Canadian success story and Laliberte once again showed he’s the world’s foremost “performer”. He bought a seat for $30 million on a Russian spacecraft to promote the Cirque and garnered more publicity than Canada itself worldwide.

Bigger than Canada
Daniel Lamarre, President and CEO of Cirque du Soleil for nine years explained the impact: “We did an in depth analysis of all media coverage we got on the space mission around the world. The independent audit showed we got US$100-million worth of free advertising globally...more coverage outside Canada than the Canadian government got as a whole. We got three times’ the coverage Formula One does with all of their races.”
Lamarre has waited years for the right fit to enter the tricky Eastern European market. Ironically, some 30% of the Cirque’s artists worldwide are Russian or Ukrainian but finding a partner was difficult.
He ended up with a talented father and son team from Canada, George and Craig Cohon, who launched McDonald’s and Coca Cola respectively in the former Soviet Union. Their efforts have been so propitious that they have been dubbed, in circus parlance, the “Flying Cohons”.

Enter the Cohons
“For the last four or so years, people have been approaching us there,” said Lamarre in a phone interview last week. “One morning I woke up and said `George Cohon brought McDonald’s to Russia and he would be perfect.’”
George suggested that his son, Craig, would be best suited to do the heavy lifting as managing partner in Moscow. Craig lived four years in Moscow and speaks Russian.
The rest will be showbiz history.
“There was concern that Russians wouldn’t buy tickets online but they did,” said George Cohon. “The tent show will stay in Moscow until December 13 or so then go to another country. In 2010 there will be another show. This was a huge hit.”
Lamarre said the space flight was a huge bonus.
“It showed that Guy had confidence in Russian technology. To the Russians, this was a big, big compliment,” he said.
The Moscow pre-sales were as robust as mature markets like Toronto and other cities in Canada, he added.

New Russia
Craig said Russia is a great market and has changed since he left in 1994.
“Everything was free but there was nothing,” he said. “Today everything’s available but wow it’s expensive. There’s also freedom of movement and a new economic model. I like to call it state supported and controlled capitalism.”
He said the acceptance of Cirque is rooted in the Russian culture.
“The Russians love great entertainment and have the cultural understanding to appreciate it. They are wonderful audiences. As for the Cirque, there is an old Russian proverb which says ‘those who don't take risk never drink champagne’. We are about to pop open a bottle.”

Christina Gold: Canadians competitive with Americans

Diane Francis — Wed, 11 Nov 2009 19:17:00 GMT

Christina Gold spoke recently about the workplace and management differences between Canada and the United States with National Post editor-at-large Diane Francis. Ms. Gold is chief executive of Coloradobased Western Union Co., a US$5.3-billion-a-year financial institution operating in 200 countries and transferring about 17% of the world's remittances. She immigrated to Canada from the Netherlands at age four, grew up in Montreal, attended Carleton University and sped up the ranks of Avon North America's Canadian operations before taking its top position in 1993 in New York City. From there, she joined telecom provider Excel Communications as CEO and in 2006 took over the reins at Western Union. For several years, she has been on Forbes' list of the 100 most powerful women in the world.

Q What are the differences between Canadians and Americans in business?
A Canadians are really good listeners and patient because there's more balance in terms of lifestyles in Canada and working with people.I went to work in New York City first, right into the hub of everything. The focus there was on career, achievement and things like where you went to school. People were much more driven toward achievement -- not that Canadians are not, but Americans are from the get-go. I started working and looked at Step One in order to get to Step Two, but not Step 10. I never had a goal to be a CEO. That wasn't my starting point whereas that's more the case in the U.S.

Q Are there differences in terms of training, business education and ongoing professional development?
A I would give the U.S. stellar points in terms of training and development and business schools. But in the last two decades, Canada has been getting up to speed. The U.S. was ahead sooner. I have only a bachelor degree, not an MBA. I have taken courses over the years but in retrospect I wish I'd gotten an MBA. The U.S. has built an incredible workforce because of this.

Read more

Health care reform will happen

Diane Francis — Tue, 10 Nov 2009 13:51:00 GMT

Health care reform in the U.S. is more than halfway home and even a watered-down version will boost its beleaguered economy.

Americans this weekend began crossing their biggest psychological Rubicon: opposition to universal health care. Once on the other side, they will they will have eliminated the single biggest fear among the population, will remove a major burden for businesses and, by so doing, benefit the economy by loosening consumer spending.

Universal health care is not just smart and fair social policy; it is also smart economic policy.

It works this way: If a worker in Canada or Europe or Japan loses his or her job, it's a psychological and income blow. But if an American worker loses his or her job, the family faces financial ruin if sickness strikes any member because they are without health care coverage. Bridge coverage is available but unaffordable for anyone but the wealthy.

Worse yet, if a major illness is diagnosed during unemployment, a worker becomes unemployable, bringing about a life sentence of poverty.

Little wonder, then, that consumer spending has ground to halt in the United States, which makes the economic meltdown that much harder to combat or ever solve.

On Saturday, the House of Representatives squeaked through its version, leading Republican detractors to warn that the Senate will kill the initiative.

Not so.

The momentum is there and the Senate may water down health care reform but it will pass some version. By the next election, this will become one of the most popular and beloved policies since social security and medicare. It will have the added benefit of allowing governments to rein in and tackle costs.

The economic case for health care reform is the real story:

1. The U.S. spent 16.2% of its GDP on health care plus up to 3% more on litigation concerning medical bills while other countries spend 10% and nothing on litigation because bills are paid by everyone.

2. People with serious illnesses are uninsurable and are stuck in jobs they cannot leave or remain unemployed because they are unemployable.

3. Tens of millions of uninsured people in the U.S. end up with health problems that become a drain on the society and economy in the long run.

4. Doctor, nursing, hospital and drug costs are out of control in the U.S. because of litigation and greed. American doctors over-service those with health insurance, and patients over-demand. Over-doctoring is commonplace.

5. Detroit's three automobile companies went bust in large measure due to "legacy" or gold-plated health care promises of Canadian-type coverage at America's excessive prices. This burden was not unique to the auto sector and has driven many jobs offshore in manufacturing.

These are the reasons why Republicans and the Senate should, and will, pass some form of health care reform. A Canadian or European-style health care tab would eventually shave 5% in costs off the U.S. economy of US$13.8 trillion and another 3% by eliminating litigious ambulance chasers.

This is not pie in the sky. Governments outside the U.S. deliver medical care better than does America's mixed public-private sector system. The proof exists all over the world except in the minds of partisan ignoramuses defending the indefensible.

Time to do what's right for America's 307 million people.

Saskatchewan: all Canadians must reduce emissions

Diane Francis — Fri, 06 Nov 2009 19:29:00 GMT

Premier Brad Wall of Saskatchewan is not a happy camper these days following publication of a recent report funded by TD Bank and prepared by the environmental groups the David Suzuki Foundation and the Pembina Institute.

The report quantifies the cost of meeting Ottawa’s plan to cut greenhouse gases by 20% from 2006 levels in the next decade. The brunt of costs will fall on the three westernmost provinces which produce the lion’s share of Canada’s fossil fuels.

This has raised fears about another National Energy Plan confiscation by a Canadian federal system, based on emissions penalties imposed on producing provinces.

The push back was immediate from Alberta. Wall, in an interview with me this week in Regina, added his concerns which are legitimate.

“Our utility company is facing a huge challenge because of its dependence on coal which is about 50%,” said Premier Wall. “Saskatchewan has 3% of the population of Canada, 3% of the economic output and 9% of emissions.”

“But the report by TD, Pembina and Suzuki are frustrating and I’m not sure how helpful this will be. It is divisive and says here it is and here’s what you will pay. It plays into unity issues and it’s east versus west which is not helpful,” he said.

Premier Wall makes several compelling points:

Alberta and Saskatchewan have already stepped up to the plate significantly in terms of providing money for carbon capture to reduce emissions. Canada’s other provinces, and the feds, have not made anywhere close to the same commitment.
Secondly, any tax imposed – cap and trade or carbon taxes – must be earmarked exclusively to research and retrofit in order to solve the emission problems.
Federal governments, both US and Canada, have not yet done enough to finance research into solutions.

He added that Alberta was the first to impose a carbon tax, followed by B.C. In addition, Alberta has budgetted C$2 billion toward carbon capture technology research and development to reduce emissions and Saskatchewan has allocated C$1.5 billion for the same purpose involving two major projects.

“A province of one million people [in Saskatchewan] is already prepared to spend C$1.5 billion – work out the per capita investment [$1,500 per person]. So tell me who’s going to do more?” he asked.

(If Ontario committed the same $1,500 per person it could result in a research commitment of C$17 billion.)

“We [in the west] understand we have a job to do – on emissions – and are prepared to do something about it,” he said. “The challenge is to find a jurisdiction willing to do more. We’re stepping up. Who else is?”

On the issue of cap and trade levies collected by governments he said: “If we end up in North America with levies that go to government as a tax, then I have a big issue with that. That’s a transfer of wealth. All that money should be poured back into finding answers. If cap and trade goes to anything other than renewables or technology research then it’s not environmental policy but a tax.”

Hear, hear.

CMHC problems Part II

Diane Francis — Tue, 03 Nov 2009 13:30:00 GMT

Canada's real estate markets: risky business like financial gymnastics

Last week, I wrote about how Ottawa has been creating a housing bubble in Canada with taxpayer money which is why residential real estate prices rise in defiance of rising unemployment and recession.
The bubble, I concluded, is the result of low interest rates and Canada Mortgage and Housing Corporation’s dramatic increase in mortgage backstopping for people who put only 5% down. In January, CMHC was allowed to insure up to C$600-billion in mortgages, up from C$450 billion the year before.
The issues raised were solvency because of the ease of credit, market distortion as well as the fact that CMHC represents an indirect and increasing bailout to Canada’s profitable banks.

Lots of worries about CMHC
I have been flooded with emails and letters from high-ranking people who agree with my concerns and raise others from the real estate, mortgage and securitization sectors.
In response The Post published a letter last week defending CMHC from its CEO Karen Kinsley who summarized her agency’s role: “Unlike many other countries, Canada’s prudent lending and mortgage insurance practices have allowed Canadians to continue to enjoy the benefits of homeownership.”
There is not question that CMHC has enhanced homeownership with economic benefits for all. But here is what a mortgage expert, David O'Gorman who is President of MortgageLand Inc., wrote about mortgage execution in Canada:

n     Only one in 20 properties are physically inspected if mortgage-insured by CMHC, according to industry guesstimates. This is because CMHC and lending institutions rely on the use of Automated Valuation Systems (AVMs) and Risk Assessment Theory Systems (RATs). They use other data bases such as MLS to create “values” then appraise without physical inspection.
n     There is nothing wrong with using AVMs and RATs as back-ups to evaluating properties, but not doing physical inspections each and every time despite the lending of hundreds of thousands of dollars is not what a lender, whose loans are not insured by CMHC, would likely do.
n     The result of using these computerized systems is to accelerate approval rates for the banks, who receive CMHC mortgage-insurance backup.
n     One of the characteristics of the mortgage/real estate meltdown in the US was the speed of credit approval as a result of the over-use of AVMs & RATs.

Like US sub-prime issues
Another characteristic similar to the U.S. meltdown is the fact that AVMs, RATs, no physical inspections and speedy credit approvals enhanced a form of mortgage fraud known as “boost and flip”.
In Canada, these frauds are “rampant”, said O'Gorman. They involve a home buyer obtaining a stolen identity, buying a property at a value higher than true market value of the property and approaching a lender with a 5% low down payment and getting a CMHC-insured mortgage. Title fraud is lessened in Ontario because of its online title system but not elsewhere in Canada.
If the property is bought quickly for C$450,000 (and worth only C$365,000) without physical inspection, which would slow down the process, the deal closes and the fraudster disappears with the C$85,000 difference in value minus the 5% down payment for a net profit of $62,500 per unit.
By the way, this was a fraud perpetrated on a large scale involving thousands of Miami condos.

Smartest guy in the room on markets

Diane Francis — Fri, 30 Oct 2009 19:34:00 GMT

Prem Watsa and Fairfax Financial made billions on the meltdown

Property and casualty insurer Fairfax Financial Holdings Ltd. of Toronto not only weathered the greatest financial storm since the Depression, but profited mightily and continues to do so. Its 2009 third-quarter results, released Thursday -- it earned US$562.4-million, up from US$467.6-million a year ago, while revenue increased to US$2.21 billion from US$2.16 billion -- reflected its steady hand at the helm. Yesterday, founder, chairman and CEO Prem Watsa talked with me about the results and future financial conditions.

Q. In March, when markets turned, you hedged 25% of your equity portfolio (after removing hedges in late 2009) why?

A: “Stock prices have gone up considerably from March 2009, 50% to 60%, but we continue to test parameters. We look at the biggest potential risk such as a drop in stock markets of 50% and, at the same time, a one-in-250 catastrophe in the insurance world such as a US$100 billion natural disaster. This would be a hurricane hitting Miami or a major earthquake in California.”

“By hedging 25% of our equity portfolio with a short at 1062 on the S&P 500 index we reduced our exposure so that we can better absorb both those events with basically no impact on our cash in our holding company. That’s the type of protection we like to provide our shareholders and company with.”

Q: One commentator noted that Fairfax’s stock has declined by 3.4% this year, why?

A: “We are long-term investors and our company is a long-term investment. Short term fluctuations are market driven and not value driven. We began in 1985, 24 years ago, with US$30 million in assets and about US$7.5 million of shareholders’ capital. Today, coincidentally, we have US$30 billion in assets and US$7.5 billion in shareholders’ equity. That’s up 1,000 times. Our per share book value has grown from US$1.50 to US$372. Our stock price has gone from C$3.25 to between C$375 and $390 a share. These are all long-term results.”

“We are thankful for our track record. More recently our book value in 2006 was US$150 a share and now, as of end of September, it is US$372 a share, more than double and the stock price has naturally followed suit. Over time the book value and the stock price tend to go together.”

Q: There is talk of TARP2 or another bailout for the 100 regional American banks whose industrial/commercial mortgages are seriously under water? Will this affect Fairfax’s underlying property and casualty businesses?

A: “We don’t think it has much of an impact on our business but it might have an impact on the economy, on bank lending. It might mean economic slowing and, with interest rates low, and a US$1.5 trillion deficit, you and I might say `I wonder how much more ammunition governments have? Government cannot revive economic recovery on its own. Private sector spending is required and we are not seeing it yet.’”

“Bailouts like TARP and stimulus programs are what Japan did in the 1990s and the net takeaway is that the nominal GNP of Japan over 20 years has remained flat…which is not the end of the world. Japan built bridges to nowhere, as you know, and spent a lot of money but the economy didn’t respond. If the current administrations continue to stimulate dramatically we might have the Japanese experience for a period of ten years. You have to worry about that.”

Q: What is your view of commodity, Canadian dollar and TSX outlook?

A: “I don’t think a lot of our industries can survive the Canadian dollar being close to par. And with commodities, if history teaches us anything it’s to be careful, oil has gone to US$33 a barrel, US$80 now and US$145 at peak. Commodities are highly volatile and unpredictable.”

Q: You are in India today, and were born there, how is it doing?

A: “The Indian economy has come back up in spades. This country has recently built the interstate road system which took forever because of their bureaucracies. Now, however,economic development is spreading out of the biggest cities like it did in the United States one hundred years ago. India is looking at growth of 8% - potentially even 10% - next year. Our Indian company, ICICI Lombard, was started from nothing less than ten years agowe have 26% ownership of it, and today it is underwriting almost US$1 billion. It is the largest property and casualty insurer in India and the potential is huge. Only 1% of all homes are insured.”

Q: Bubbles are developing in a lot of asset classes, so what do you continue to bet long-term on?

A: “We like the stocks that we have such as Johnson & Johnson, Wells Fargo. Our thinking is that the stronger get stronger and good management will prevail. Look at the commercial/industrial mortgage problem. There are 100 regional banks in this and say they all go bankrupt. That means there’s opportunities for strong banks like Wells Fargo who can buy regional or smaller banks for cheap.”

Q: You have raised equity capital and privatized two insurers are there more acquisitions in the future?

A: “On the M&A front, we have options available to us but our first priority is to always keep our financial condition strong. That also means keeping capital available for a hard market. We can buy stock, make some acquisitions, if, as and when it makes sense.

We have no plans to make any but we could and we could hold significant amounts of cash if we decide to pay some dividends out of our insurance operations. We had a nominal dividend last year of $8 a share. We will look closer at our dividend strategy at the end of the year.”

Chindia will benefit the world

Diane Francis — Thu, 29 Oct 2009 12:47:00 GMT

Within a generation, China and India, or “Chindia”, will be more influential and bigger economically than the U.S. or Western Europe. They will also spearhead a regional free trade agreement that will help develop all of Asia.
“The United States will continue to lead, but it will have to learn to listen and cooperate as an equal, not only with China, its major creditor, but also with India,” concludes prominent Canadian economist Wendy Dobson.
Her latest book, “Gravity Shift”, contains some surprises about fast-growing Chindia, including the fact that China’s growth will begin to slow in a generation due to an aging population.
She forecasts that the key Asian players will remain committed to globalization and the peaceful development of Asia.
“Second, they will be seeking a common purpose and a shared strategy,” she writes. “The U.S. economy will be down, but not out. It will be slower growing, as taxpayers foot the bill for rescuing the economy from financial collapse. But the U.S. dollar will still be the reserve currency. The United States will still be the global policeman.”
Washington's super-security role will provide the U.S. will enormous trade and diplomatic leverage in Asia and elsewhere but the world will become multi-polar.

Challenges remain
Chindia both face huge challenges in surmounting the problems created by their two “lopsided economies.”
China’s growth to date has been based on exports, investments, little consumption and extensive environmental damage. India’s labor market rigidities are its main challenge.
While China is dramatically larger than India, however, she says that current enlightened Indian strategies may almost close that gap in a generation.
Naturally, all bets would be off in the event of rampant protectionism, another meltdown or social unrest in either country, she says.

New world order
She describes how the financial meltdown, and creation of the G20, has set a new course for development of the world economy and trading system. Her research outlines the creation of this new international economic architecture that will steer both political and policy agendas for the future.
Traditional institutions, such as the IMF and World Bank, will be handed new roles and there is total agreement on the part of nations that collaboration and cooperation are the only viable path forward politically.
Ms. Dobson is currently the director of the Institute for International Business at the Rotman School of Management, University of Toronto. She ran the C.D. Howe Institute for a number of years, has served as a top-ranked civil servant and devoted much of her most recent research to emerging markets, notably China.
Her conclusion that the gravity will shift to Chindia within one generation is, based on extrapolation, but also marks a return to their places in history.
In 1300, China had 100 million, or one-third, of the world’s population and remained the largest economy and India the second largest until 1820 when Western Europe overtook them. By 2030, according to a forecast she publishes by British economist Angus Maddison, China will be largest followed by the U.S., Western Europe, India and Japan. The rest of the world will grow in size to roughly 70% of total global output.
Her book is a well-written analysis of Chindia’s path thus far, its projected growth and potential pitfalls. It’s a refreshing read as to where the world is headed without the usual ideological, paranoic or pessimistic filters that many western analysts rely on when looking at Asia's development.

(Photos: India and China teem with humanity)

Tax cheats amnesty needed for Canada

Diane Francis — Tue, 27 Oct 2009 12:31:00 GMT

Zurich: Where the gnomes facilitate money laundering and tax evasion

Canada give chase!
There could be as much as C$100 billion in hidden offshore accounts owned by Canadian tax cheats and Ottawa must crack down on evasion as Washington, France and other countries are doing.
Last week, a one-time U.S. amnesty program ended with considerable success. Some 7,500 applicants applied for amnesty, up from the annual average of only 100 per year. Their penalties will be 20% of the highest value of their offshore accounts since 2003 plus back taxes (20% penalty on those) and interest. In return, they will avoid criminal prosecution.
Italy, the UK and others have made similar offers to recoup untaxed assets as a result of the meltdown, revelations of rampant criminality and the need to finance soaring government deficits.

Give to get
Canada has extended no special amnesty plan and should, says Montreal tax lawyer David Sohmer.
“My guess is that a temporary partial amnesty at about 35% would result in $15 billion being disclosed, $5 billion of which will be recovered as tax and $10 billion of which will be spent or invested in Canada, all within a relatively short time frame and at little cost to the fiscal authorities,” he wrote.
Canada has an ongoing Voluntary Disclosure Program but it is not effective and appears to be ad hoc. In 2008, former Prime Minister Brian Mulroney disclosed that he declared receipt of C$225,000 in cash payments from a sleazy German arms dealer six years after the fact and paid taxes on only 50% of the amount. There were no penalties nor interest.

Tale of two tax men
Instructive is the case of UBS, the Swiss bank, which has been forced to hand over American tax evaders (under a tougher US-Switzerland tax treaty than Canada has) following revelations last year of its tax evasion and money laundering misdeeds.
But UBS has not been forced to make such a deal with Ottawa even though there was an active UBS “Canada Desk” in three cities which facilitated the movement of money offshore. This is because, Mr. Sohmer said, Canada does not have the clout to get tougher treaties unless it helps convince the G20 to impose international requirements.
UBS was caught red-handed advising North American clients how to hide income from tax authorities. This sparked a Congressional investigation, criminal charges, US$780 million in fines against the U.S. bank and a deal which gave the IRS access to thousands of secret bank account holders in Switzerland. Simultaneously, the US tax authorities offered its one-time tax amnesty for offshore cheating which just ended.
So far, 7,500 American account holders in Switzerland have come forward while fewer than 100 Canadians have, said Sohmer.

G20 initiative needed
Mr. Sohmer has been waging a personal battle to get Canada to offer an amnesty program similar to the one the United States just ended. The current Canadian Voluntary Disclosure Program only permits relief for penalties and interest and not for tax so that the cost of disclosing can exceed 50% of the amount in the account. It is also administered on a case-by-case basis so that the result cannot be predicted before the process commences. All of this makes guilty parties reluctant to come forward.
“I have no doubt however that neither the Conservatives nor the Liberals ( and perhaps the NDP as well) would object to a US-type amnesty which would help reduce the deficit by a material amount,” wrote Sohmer.
The Americans are opening offices around the world to hunt for their evaders. Canada and the rest of the G20 must coordinate their efforts with them, but at the very least a good start is for Ottawa to offer a one-time Canadian amnesty program.

Glass Steagall on steroids now

Diane Francis — Fri, 23 Oct 2009 21:25:00 GMT

The world's banking giants are too powerful for other player or referees

SOS
The world desperately needs Glass Steagall on Steroids.
Banking must be atomized – a la America’s 1933 legislation called Glass Steagall – in order to separate high-risk investment banking from taxpayer-insured deposits. Canada does a reasonably good job of sequestering these businesses, but the facts are that excessively big banks like ours contributed mightily to the current global catastrophe.

Concentration of power's damage
Busting up the banking trusts is essential for the following reasons:
-- It eliminates the too-big-to-fail issue which puts entire economies at risk.
-- Excessively large banks destroy democracies, like the United States, through inordinate influence on policy, politicians and regulators.
-- Oligopolies and monopolies are economically inefficient and charge excessive fees, earn excessive profits and pay excessive salaries and bonuses.
-- Oligopolies and monopolies don’t innovate because they don’t have to.
-- Oligopolies and monopolies are risky because they indulge in group-think mistakes that are too large for economies and the business community to bear.
-- Oligopolies and monopolies fossilize markets by dealing with big entities, cronies, politically-connected clients and nepotism.
-- Oligopolies and monopolies hurt economies because of overcharging and gouging.

Banks overpowering the world
The world’s concentrated financial sector has been grabbing more than its fair share of wealth because it has been able to and this must stop.
Between 1989 and 1999, financial fees increased ten-fold. Since the 1960s, the financial sector in the U.S. more than doubled in size from 3% of GDP to 7.5% currently.
“This is like looting,” said outspoken Boston money manager Jeremy Grantham whose firm invests US$89 billion in funds. “That 7.5%, that goes to financial fees, is on its way to 10%. This industry can grow to gobble up all the benefits of the real economy if allowed to. It is trying to grab our cash. It’s obscene.”

Banks too darn big
Despite the obvious benefits of busting up the bank trusts, the U.S. and other governments resist a Glass Steagall restructuring.
Washington’s intransigence flies in the face of the anti-trust tradition in the United States. Americans invented a strong economy by keeping banks smaller and competitive, by blowing up Rockefeller’s abusive Standard Oil of New Jersey into pieces to prevent it from owning the world and by curbing other Robber Barons through laws.
More recently, AT&T’s break-up created innovation and competition, as did the prolonged (even if unsuccessful) attempt to break up software bully Microsoft. Even though the bust-up didn’t happen, the firm was cosseted and the possible stultification of the high tech world was prevented.
Glass Steagall is the only reform that will work which is why Bank of England Governor Mervyn King and former Federal Reserve chairman Paul Volcker came out last week in support of a global Glass Steagall.
But Washington, London, Ottawa and others are counting on regulation instead even though that didn’t work.
Their position is even less justifiable given the fact that the meltdown has increased concentration of banking power with even more accompanying problems. For instance, monopoly profits are why months after Goldman Sachs was given US$10 billion taxpayer bailout funds it has amassed US$23 billion for bonuses this year – an amount equivalent in size to the economies of Trinidad and Tobago, Estonia, Lebanon or Congo and Mongolia combined.

First let's kill off Wall Street bad boy
Goldman Sachs should be the first to be broken up. The firm would have disappeared without its US$10-billion bailout (which it paid back) and is still at the taxpayer trough, thanks to its conversion of part of its business into a deposit-taking institution to get US$26 billion taxpayer deposit insurance.
Likewise, oligopoly profits are why a handful of America’s other rescued banks also planned on handing out obscene salaries, forcing Washington this week to chop some salaries by 90% to appease an outraged public.
But slashing salaries is a one-time event that won’t work as bankers learn how to get around such salary restrictions by paying themselves through consulting contracts, by outsourcing to partners or by simply fooling regulators or co-opting politicians like they have done for years.
Governments must bust up the banking giants or risk ruination again.

CMHC: Canada's Freddie and Fannie?

Diane Francis — Wed, 21 Oct 2009 19:00:00 GMT

Canada's risky real estate business where residential may take a big fall

Ottawa has been creating a housing bubble in Canada with taxpayer money which is why residential real estate prices rise in defiance of high unemployment and recession.
Ottawa's low interest rate policy and crown agency Canada Mortgage and Housing Corporation's dramatic increase in mortgage backstopping, for people who put only 5% down, have pushed upward activity and prices.
Some, such as Post reader and accountant, Derek Bruce, worry that the Tories are allowing CMHC to become like Freddie and Fannie south of the border, a rogue financial institution the size of one of our big five commercial banks.
In March, CMHC was allowed to insure up to C$600 billion in mortgages, up from C$450 billion the year before, said a CMHC spokesman today.
“Last year alone, CHMC did 919,780 deals worth a staggering C$148 billion, or about twice what it had planned. To accommodate that, the feds have raised its allowable insured mortgage limit to C$600 billion, or about double what it was two years ago,” wrote author, former MP Garth Turner.

Uh oh
This is a looming problem which flies in the face of Ottawa’s smugness about its superior regulatory regime and Canadian banking conservatism.
For starters, CMHC is as big as a bank and not regulated.
It's a mortgage slush fund which distorts the market. It allows banks to lend recklessly without consequences and pushes up the price of housing for everyone. It rewards those willing to speculate with leverage and discriminates against those who are prudent. It's unfair because the Canadian banks charge the same mortgage interest rates to those who put only 5% down with CMHC backing as those with skin in the game and large down payments.
Thus Canada's real estate markets are hitting highs in the middle of the worst recession since the Great Depression.
“Since CMHC is insuring so many mortgages, the banks have no incentive to test the credit worthiness of home purchasers. Then the mortgages can be neatly packed into MBS securities and have a CMHC 100% Canadian guarantee on the back of the investments thus insuring end-investors these papers are insured from loss,” wrote Bruce.

Distortions
Some may argue this is simply another stimulus strategy, but this is canceled out by the fact that it encourages bad and unfair behavior and banking practices. It also has serious monetary/currency implications because air will eventually have to be let out of the bubble by imposing higher interest rates. This will mean a higher Canadian dollar.
The question is why should taxpayers be involved in this when it shoots them collectively in the foot? Why shouldn’t banks have skin in the game? And home buyers? If not, why shouldn’t they share the upside with taxpayers?
This amounts to a subsidy to our highly profitable commercial banks, real estate developers and speculators.
The greater good would be served if housing prices fell to where a fair and unfettered market dictate, thus squeezing out real estate inflation and creating sound ownership opportunities.

Aussie medicine
A similar bubble was attacked by Australia where interest rates jumped to 3.25% (from 0.5%) and damage to exporters, as a result of a higher than otherwise currency value, has resulted.
Clearly, CMHC must be reined in and regulated properly.

Canada's trifecta win: dollar, stocks, commodities

Diane Francis — Tue, 20 Oct 2009 16:23:00 GMT

World: step aside for Canada
Commodities, the Canadian dollar and Toronto Stock Exchange are headed onward and upward despite the world economy appearing to be only halfway through this Great Recession.
The U.S. is undertaking a managed devaluation of its currency to overcome the damage caused by the decades of managed devaluations undertaken by China and other Asian export nations.
But also important to note is a little known fact which was highlighted yesterday at a prestigious luncheon gathering on behalf of the Israel Cancer Research Fund in Toronto.
“Commodity prices have bottomed at their peak prices,” pointed out David Rosenberg, Chief Economist and Strategist at money manager Gluskin Sheff Associates Inc.

Commodities didn't fall in price, they overshot and returned to earth
This is very significant. The fact that commodity prices have never retreated, except from a short period of excessive heights during part of 2008, means a higher Canadian dollar because two-thirds of the upside in the Canuck Buck is pegged to commodity prices.
Many headline writers and the public remember the rise in summer 2008 to US$140-plus a barrel for oil and other commodities followed by calamitous falls in value after the meltdown. There have also been a few high-flying commodity companies whose stock prices, and results, have hit some heavy weather because they were borrowing heavily and may have overpaid to make takeovers during the height of the commodity bubble.
But the facts are that commodities are doing just fine, price-wise, and current levels – although half those heights – are still record highs. So are Canadian banks, thanks to conservative management practices and smart regulation.
(The speculative run-up in the summer of 2008 was a bubble created by hot money fleeing credit markets after they collapsed in August 2007. That bubble too collapsed when the meltdown of September 2008 struck and Lehman Brothers went bust. Canadian banks and the dollar tanked after Lehman's demise too.)

Canada's trifecta
Now we have good news for commodities, the Canadian dollar and the Toronto Stock Exchange.
Why the exchange? Because, as Rosenberg colorfully described, the Toronto Stock Market is not diversified but is a “bar bell with banks on one side and commodities on the other.”
So between banking and commodities of all kinds Canada’s in the best position of all. I believe that Canada is in a dramatically better position than second-best, Australia, because it has no oil and is suffering from a debilitating drought which some feel may be permanent.
“The Canadian dollar fell when Lehman Brothers tanked and resources fell when prices collapsed,” he said. “Both recovered since so what’s the bear case for the Canadian dollar? And what’s the bear case for commodities?”

Enter Chindia
There’s little question that the commodity supply-demand situation points to higher prices. There is increasing competition for the existing supplies of commodities on the part of Chinese corporations, China’s government, the Indians, other governments and sovereign funds as well as and major resource corporations. They are buying concessions, corporations and dictatorships.
This is because discoveries have not replenished supplies worldwide and “Chindia” (China and India) continues to post enviable economic growth rates despite the worst recession since the Dirty Thirties. They need commodities to grow.
“American investors are realizing that the low risk way to play emerging markets is through commodities and the Canadian dollar,” he said.

(The luncheon raised C$400,000 for Israeli research and honored as "Men of Distinction" cancer researcher Dr. John Pick of the University of Toronto and successful Toronto retailer and philanthropist Leonard Simpson, a friend of mine.)

U.S. dollar drop: managed devaluation

Diane Francis — Fri, 16 Oct 2009 13:02:00 GMT

China's cargo trains and unrelenting exports: Walmart Thyself

The recent U.S. dollar drop is a managed devaluation.
This despite the fact that White House economic chief, Larry Summers, has been quoted recently about his preference for a strong currency based on strong fundamentals.
Many mistake this as support for the current pricing level but it's a Motherhood statement designed to slow the dollar’s slide.
With that as a backdrop, it’s amusing to note the comments teased out by the usual suspects as a result of this week’s drop.

Debate: Same old Elephants versus Donkeys
For instance, the Republican Wall Street Journal -- “conservative” sibling to the strident and reckless Fox News – has seized on the falling dollar as more “proof “ that the Democrats and Obama and banking bailouts and Detroit rescues and all that government intervention is ruinous, if not un-American.
Less ideological, and market-oriented, was Barron’s grudging insight this week that the drop in value wasn’t accompanied by a drop in stock markets because a lower currency is beneficial for business. It also noted the decline wasn’t new.
The Wall Street Journal missed both points.
“In case anybody checked, the dollar's path has been steadily downward since the early years of the administration of George W. Bush. And, notwithstanding the bleating you hear about the battered buck, that's just fine with Wall Street,” wrote Barron’s this week.
A lower dollar has historically sparked equity rallies, it added, citing a Barclays Capital report that more than 30% of revenues for S&P’s 500 companies come from abroad. So devaluation will enhance their earnings on conversion, notably the technology, energy, materials and industrial sectors.

View beyond Karl Rove
The Wall Street Journal’s British counterpart, the Financial Times, supported the lower dollar from a policy viewpoint in an editorial. It said depreciation must occur in order to grow the world economy and to prevent future catastrophes.
(This despite the reality that a lower dollar for Britain and the European Union is not good news because it will make American exports more competitive and make their exports less so.)
“A strong U.S. needs a weakened dollar,” wrote the FT on Oct. 12. “Currency depreciation is helping the American economy.”
What’s interesting to note, and missing from the Republican rants, is that the U.S. dollar has not only been going down for years, but the latest drop is merely a 13.3% drop compared to its August 2007 level reversing a strange jump of 13.6% from August 2007 to March 2009.

A bogus issue
The global dollar conversation consists of Republicans whining inside the U.S. and Asians whining without. Eastern economies have been based on artificially cheap exports thanks to their own version of managed devaluation of currencies. They don't like it when it's done to them.
Canada, usually middling in everything, is completely ambivalent about the whole thing. And should be: it hurts some exporters but makes everything cheaper from imports to U.S. corporate assets, U.S. condos and vacations south of the border.
Also cheering and jeering from the sidelines are the goldbugs, whose commodity has jumped four-fold since the early 2000s. They are hoping for a return to the gold standard or hyperinflation or both. While gold has been tracking upwardly, it is no longer the only commodity that represents a refuge for the fearful.
In the end, this dollar drop will result in a needed foreign exchange correction. Rebalancing fans say that a relatively controlled devaluation could help encourage more consumer spending in Asia and a resurgence of exports in the “west”.
This is utopian but likely is what’s really going on. The U.S. consumer is tapped out so that global economic model will no longer work. I suspect all the squawking is politics. Americans want a lower dollar but cannot admit it. Asians want it too in the long term but cannot admit it. And markets will do what they deem makes sense.