Financial Post - Diane Francis

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.

China shops dictators and bosses America

Diane Francis — Wed, 14 Oct 2009 13:04:00 GMT

The Sleeping Giant of Asia is not only on its feet and rubbing its eyes, it's starting to stomp around the world making its substantial presence felt. Napoleon warned us there would be days -- or millennia -- like this.

China's acquisitions are growing in number daily in more ways than one. With money from its foreign reserves, or "money it has forced its banks to lend to its corporations, the Chinese are snapping up everything from resource companies in easygoing democracies such as Australia and Canada to resource assets in nasty military dictatorships such as Guinea, Nigeria, Darfur and other unenlightened places.

The regimes are given to peddling their wares, and leaders' bank accounts, to the highest bidders. China, with its gigantic pool of U.S. T-bills, is not buying many more with its U.S. dollar export profits. It is bailing from the flagging U.S. dollar reserve currency by acquiring real assets such as resources or corporations that will keep paying dividends forever. This would appear to be a substantially more credible strategy than piling up American IOUs just to keep the Chinese currency lower than it should be to help exports.

Most noticeably last week, however, China pushed around the United States, who is in hock to the tune of trillions to Beijing. The Dalai Lama was not invited last week to make his annual or semi-annual trek to the White House to discuss the plight of his Tibetan people who are oppressed by the Chinese military dictatorship.

This diplomatic snub of a monk who fills football stadiums represents the new reality of a China who may not carry a big stick but wields one psychologically already. It's also a geopolitical version of that old saw: he who pays the piper calls the tune. When you owe China a couple of trillion, and need their cooperation on many files, you forgo photo ops in the Rose Garden as well as sanctimonious statements from afar about human rights abuses.

This is a more powerful weapon than any army. Soft power and a softening US dollar.

Economic concentration not capitalism the enemy

Diane Francis — Tue, 13 Oct 2009 13:13:00 GMT

Hank Paulson, main player in the Wall Street Treasury Complex that wrecked economy

This is the third from a seven-part series called SmartShift where the important challenges of the day are commented upon by some of the world's smartest people.

Sustaining economic prosperity depends on good global governance and there are few more qualified commentators than Jagdish Bhagwati, Columbia University professor, author and special advisor to the World Trade Organization, UN and other global organizations. In a wide-ranging conversation with me , Dr. Bhagwati examined the causes, to find solutions, and came up with some reforms to prevent catastrophic bubbles from being created then burst.

Q. What allowed the derivatives to sink the system?
A. “They suspended capital requirements so the financial sector could be opened up. This was the result of successful lobbying. Goldman Sachs and Henry Paulson were involved. They went to the SEC and said `we don’t need any reserves requirements’. This led to over-leverage and when the going gets rough, disaster.”

Q. Why did the SEC agree?
A. “The power of their lobby. They represented trillions of dollars. Then Greenspan joined in on that on ideological grounds…because he read Ayn Rand. He’s a libertarian. He played a supportive role and was ideologically driven. But the main thing was that there were five guys lobbying who wanted to make more money.”
“The SEC Chairman was probably intimidated by the wealth of the lobby. Treasury was equally sympathetic and then Greenspan came in – it was a tsunami too big to resist. Also [New York] Senator Chuck Schumer also supported these guys. He’s a arrogant guy. He said `if we don’t do this the business will go to London’. So they entered into a race to the bottom.”

Q. What will prevent this in future?
A. “An international board with credibility and independence. When Bernanke retires, he would be a good person. Ken Rogoff [at Harvard] would be. The job would be to review all financial instruments that are turning up all the time. It could be called the World risk Assessment Board.”

For the rest of the interview please read the entire text here.

US dollar is only game in town

Diane Francis — Thu, 08 Oct 2009 16:17:00 GMT

Whining about the U.S. dollar is just more of the same knee-jerk media follow-ups that always happen, and have for years, as the currency bounces around as usual.
And speculation that its days as a reserve currency are numbered, are not just exaggerated but totally ridiculous.
Currencies are, like countries or families, dysfunctional in proportion to the craziness or laziness of those who guide its value somewhat. But there are some fundamentals involving a reserve currency such as the U.S. dollar which are beyond the control of the spendthrift Congress, the manipulative Chinese or the envious Russians.

There are a handful of alternatives to replacing the U.S. as the world's reserve currency:
1. Return to a gold standard to back the U.S. dollar. There's not enough gold supply around, other materials don't cut it psychologically and politicians don't want that discipline. These are the reasons why it was scrapped in the first place.
2. The Yen. The Japanese economy isn't a pretty picture and the Chinese, soon to replace Japan in second place in terms of size, won't have any part of that. Remember Nanking.
3. The Euro. Remember that half the countries who have adopted this currency are not meeting the requirements to do so namely what's been dubbed the PIGS -- Portugal, Italy, Greece and Spain. Plus others.
4. A basket of currencies. This may be the answer but it will take years to get there.
5. SDRs which are IMF units. Here's what Columbia University economics guru, Jagdish Bhagwati, said to me in a recent interview on these units. "SDRs have increased marginally. There's not alot of them. As one economist said `I'll believe in SDRs when my wife asks for a bracelet made out of SDRs."

Another economist Peter Morici of the University of Maryland has still another take on the U.S. dollar.
"Since the end of World War II, the dollar has largely replaced gold as the reserve asset central banks hold to back up national currencies. The supply of mineable gold is too limited, and efforts to back up currency with gold would result in chronic shortages of liquidity and global deflation," he wrote this week. "Over the years, governments and traders gravitated to the dollar, because the U.S. has the largest and most diversified economy. Virtually anything made or grown around the world is made or traded in the U.S. and money invested in dollars is secure from political upheaval and state confiscation."

The one bleating the most about the dollar's fall -- China -- is part of the problem and has itself to blame for the current mess the U.S. budget finds itself in. China, like most Asian nations, manipulated their trade by not converting their U.S. export earnings into their own currencies in order to artificially keep theirs cheap in order to sell more goods into the U.S. This trade imbalance has weakened the U.S. economy, its currency and now the value of the U.S. dollar reserves held by these export manipulators.
Tough.

Bank crisis part II?

Diane Francis — Tue, 06 Oct 2009 18:21:00 GMT

The new mantra is about to migrate from “too big to fail” to “too many to fail” as another banking tsunami, involving commercial real estate, heads toward the global economy.
"Commercial real estate is the next shoe to drop,” according to James Helsel, Treasurer of the U.S. National Association of Realtors in recent testimony before Congress.

This is another delayed result of the meltdown as non-residential property values have collapsed more than have residential properties and their loans need to be rolled over.

Commercial properties are usually mortgaged for five or more years, in tandem with the leases they have signed. But renewing or increasing mortgages will be difficult to impossible given the economic and banking climates.

Moody’s Investors Service says the value of U.S. commercial real estate has fallen from the 2007 peak by an average of 35%, more than the residential property average. At the same time, these landlords’ tenants are in trouble and so are their lenders.

This means they must sell in a lousy market, put in more equity or find themselves foreclosed because they are unable to finance.

Next shoe
This stalled ripple effect is starting to accelerate: Tenants are going bust; some move out in the middle of the night; existing tenants demand concessions and others pay lower rent and also consolidate into smaller space. This is the logical outcome when consumer spending disappears and retailers and manufacturers are hurt or disappear.

The Obama White House is preparing for the next round of banking/real estate crises by trying to shore up liquidity so that landlords can refinance. Reports are that Tarp 2 is being designed to backstop the smaller, regional banks that are more commonly in commercial property lending.

Here is the landscape:

America’s four largest banks have been successfully bailed out. Their exposure to commercial real estate is only 2% of assets. And their commercial exposure is mostly the trophy properties because they skimmed off the best risks.
The banks that are 30 to 100^th in size in the U.S. have a 12% average exposure to commercial property, Deutsche Bank real estate analyst Richard Parkus told Congress.
There are US$3.7 trillion in outstanding commercial real estate backed loans. Some US$400 billion will reach maturity by the end of 2009 and accelerate to US$2 trillion in 2010 and 2011.

The good news is that many of the entrepreneurs in this sector were blown out as owners in the last real estate collapse, early 1990s, and replaced with deep-pocketed pension funds or other institutions with greater staying power. But they are also being badly impacted, signing sweetheart leases to keep tenants or taking massive write-downs like Canada’s Caisse de Depot et Placements which took a C$5.7 billion hit last quarter.

The worst case scenario will be if the jobless recovery lasts more than two years, consumer spending remains lackluster and bank losses on these properties trigger another financial crisis worldwide.

"Commercial real estate is the next shoe to drop,” according to James Helsel, Treasurer of the U.S. National Association of Realtors in recent testimony before Congress.

This is another delayed result of the meltdown as non-residential property values have collapsed more than have residential properties and their loans need to be rolled over.

This means they must sell in a lousy market, put in more equity or find themselves foreclosed because they are unable to finance.

This stalled ripple effect is starting to accelerate: Tenants are going bust; some move out in the middle of the night; existing tenants demand concessions and others pay lower rent and also consolidate into smaller space. This is the logical outcome when consumer spending disappears and retailers and manufacturers are hurt or disappear.

Here is the landscape:

America’s four largest banks have been successfully bailed out. Their exposure to commercial real estate is only 2% of assets. And their commercial exposure is mostly the trophy properties because they skimmed off the best risks.
The banks that are 30 to 100^th in size in the U.S. have a 12% average exposure to commercial property, Deutsche Bank real estate analyst Richard Parkus told Congress.
There are US$3.7 trillion in outstanding commercial real estate backed loans. Some US$400 billion will reach maturity by the end of 2009 and accelerate to US$2 trillion in 2010 and 2011.

The worst case scenario will be if the jobless recovery lasts more than two years, consumer spending remains lackluster and bank losses on these properties trigger another financial crisis worldwide.

World needs super tax on obscene bank profits

Diane Francis — Fri, 02 Oct 2009 20:30:00 GMT

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The Wall Street Treasury Complex quartet who nearly sank the world.

Free trade advocate Jagdish Bhagwati believes that windfall profits taxes on the financial sector and creation of an independent global risk management board are necessary reforms to shore up capitalism and globalization. In a wide-ranging interview in Toronto yesterday, Dr. Bhagwati fleshed out his prescriptions for the world economy and also provided his take on what he calls the “Wall Street Treasury Complex” as the cause of the latest catastrophe. He is the kickoff keynote speaker at the annual conference in Waterloo of The Centre for International Governance Innovation, founded by Jim Balsillie, co-CEO of Research in Motion.

Smart talk finally
Dr. Bhagwati, a jolly genius, has been special advisor to the UN on globalization issues and an external adviser to the World Trade Organization.

He believes the issue about excessive profits and bonuses in the financial sector is a valid concern but feels it’s best dealt with by taxation, to help governments pay for the damage caused to the world’s economy and workers.

“The incentive system is a good thing to worry about. The whole sector earns so much. Goldman, for instance, is a brand name which people are willing to pay huge fees for and which are tax deductible,” he said. “Curbing bonuses will help but it won’t make a big difference. Progressive taxation should come into play. There should be a windfall profits tax on abnormal profits.”

“Greed, avarice, self interest, self love are everywhere in descending orders of moral turpitude. There’s a little bit in everyone. Here it went a bit too far.”

(In 2007, the worldwide bonuses paid by Goldman Sachs were equivalent to the GDP of Vietnam with 84 million people. Its New York bonuses alone were the size of Manitoba’s GDP.)

Power elite nearly wrecked the world
Dr. Bhagwati coined the term “Wall Street Treasury Complex” which, like military-industrial complex, refers the collection of powerful and wealthy lobbyists acting in their own self-interest, from the financial community, who also, from time to time, populate the U.S. government by serving in important positions such as Secretaries of the Treasury. It’s an incestuous elite who created the crisis.

“We now know there were five guys from these investment banks, Goldman Sachs and Hank Paulson [former Treasury Secretary and former CEO of Goldman] involved, who went to Christopher Cox, Chairman of the Securities and Exchange Commission, and said `we don’t need any reserves requirements [on derivatives]’. This led to over-leveraging and disaster,” he said.

The policy pile on
“Cox was probably intimidated by the wealth of the lobby. Treasury was equally sympathetic and then Alan Greenspan came in – it was a policy tsunami too big to resist,” he said. “Greenspan came in on ideological grounds. He read Ayn Rand.”

“Senator [Charles] Schumer [of New York] also supported these guys. He’s an arrogant kind of guy. He said `if we don’t do this the investment business will go to London’. So they entered into a race to the bottom.”

Unbacked derivatives and over-leveraging sank the system, and most of the players, which is why Dr. Bhagwati believes that an astute international body must review all the new financial products that hit markets: The World Risk Assessment Board or something similar.

“The world needs a board with credibility and independence. When Bernanke retires, he would be a good person to be on that board. So would an academic like Ken Rogoff [at Harvard Business School]. The job would be to review all the financial instruments that are turning up all the time,” he said.

AllianceBernstein's Peter Kraus on markets

Diane Francis — Wed, 30 Sep 2009 16:30:00 GMT

This is part of the FP and CBC series Smart Shift:

In December, Peter S. Kraus became Chair and CEO of Alliance/Bernstein of New York, one of the world’s largest asset management firms, at the height of the market turmoil. His predecessor had bet heavily on financial stocks and Kraus was brought in because of his 30-year track record on both sides of the street, buy and sell, mostly recently with Goldman Sachs and Merrill Lynch. As of July 30, Alliance/Bernstein managed for institutions and individuals US$467 billion, or nearly twice as much as the combined total assets invested by Canada's five biggest pension funds.

About 65% owned by AXA, AllianceBernstein has seen its assets shrink dramatically in the past year as a result of the market meltdown and investor redemptions that have swept the industry. Assets are growing now. He spoke with SmartShift about the future, architects of change and business models.

Q. You were brought in to effect change at Alliance/Bernstein in the midst of a crisis, how did it feel?

A. “The world was definitely in a difficult spot in December of 2008, but I didn’t face any greater problems than other people faced. In fact, I did not have a balance sheet at risk, I did not face funding problems, we were not at risk of failure like some large financial institutions were. Alliance/Bernstein’s portfolios had, through 2008, a significant weighting in financial stocks and that caused some under-performance but was not 100% of the under-performance.”

Q. How is the situation now nine months later?

A.”Happily, I can report that the majority of the investment services are outperforming, in the value space and fixed income space; more strongly outperforming in growth but not as strong as in the other two areas. We have experienced a significant turnaround.”

Q. You have gone from the buy to the sell to the buy side, why and what are the differences?

“Since the start of 2001, I’ve been on the buy side and there is definitely a difference. The sell side is more transactionally-based, revenues are generated that way. The buy side is an investing process. The basic business models are quite different, transactional versus investing longer term. The sell side has a buy side often or merchant banking.”

Q. Are these business models changing?

A. “One thing we might see over the next five-plus years is a de-acceleration of the conglomeration of business models under the financial supermarket world. From the mid-90s to the 2000s we saw transactionally-based sell side with buy and lending and deposit capabilities. A conglomeration of skills.

“We’re likely to see a de-acceleration of that. Some organizations will simplify themselves. There will be a reversal of the trend. Within the business models themselves, the sell side will also bifurcate into those selling organizations willing to be risk takers and liquidity providers and those seeing themselves as more advisory focused and less risk taking focused. There will be more specialization.”

Read the rest of the interview here.