It's Only Money

I am always appalled to see people in positions of responsibility cutting corners, avoiding regulations, and employing any number of methods of cheating in order to fill their own pockets at the expense of those they were meant to protect. So, if you think I am talking about some third world country, or the past earthquake in China where many innocent children were killed in unsafe school buildings, you would be wrong. No, I can only watch what is happening to the U.S. financial system with a growing sense of horror.

I learned a long time ago through exercises in loss protection that systems are designed in such a way that it takes a minimum of two parties in collusion with each other to defeat the security measures. One, or the other, by themselves is not enough - it takes two. So, the more I see how close the regulators and big money in Wall Street, and everywhere else, have grown, the less I feel I can trust them.

I understand that lady justice is blind, and that things within those circles turn very, very slowly. The result is most of the people who got the world into this mess are still making it worse. The same people who demand exorbitant salaries because they have to spend long hours at the helm navigating the ship, now tell us that despite having received their compensation, and their bonuses, they didn’t actually know what was going on. It wasn’t their fault - nobody knew! Since when is incompetence any real excuse? I can just see me trying that one on my employer! Meanwhile, the regulators are busy running around plugging little holes in the dyke as the water rises higher, and higher.

The real problem is people will want to see some accountability within the system, or else it will only be a matter of time before they start to take matters into their own hands. Many may be lying low hoping to eventually invoke the statute of limitations, but I don’t know if you have ever noticed, but if you really, really anger someone, they can take a very long time to forget, if ever! Now I am not inciting riots, or even believe that violence is ever the proper solution, but how much, how far, do they think people are willing to go?

Do the cheaters actually believe they are all that much smarter than everyone else? The crisis is past. Next year will be better. Apparently time in the market is the financial services solution for anything and everything. Given enough of it, all manner of problems can be solved. It sure as hell removes any and all responsibility!

What actually got me on this rant was the notion that it is not where a company is domiciled that is important.  Instead, it is a matter of from whence the income streams originate. By that logic, almost any U.S. company that does business with growing third world countries is a huge investment opportunity. I am even told stock valuations for U.S. companies are favourable these days. The problem as I see it, is, to invest in those companies listed on the U.S. stock exchanges (since they are domiciled there), I have to buy shares in U.S. dollars. Given the time it is going to take for the return of any real confidence in the U.S. dollar (and not just panic buying), why do I want to forfeit much better opportunities? I know there is no shortage of snake-oil salesmen who want us to believe in their product, but me, I’m not buying.

Given the fact I can buy Exchange Traded Funds (another hugely untold story within the traditional financial services industry) in Canadian dollars which provide investment opportunities from all over the world, why would I participate in the current madness involving the currency of the place which was once the greatest exercise in capitalism on the planet? Surely I am not alone when I say, without accountability, I'm not willingly going to hand over any of my hard earned money.  Sorry. Nothing personal - it’s just business. It’s how business used to be, and still should be conducted. After all, the rest of us less-than-powerful people are held accountable for how we spend our, and most especially, other people’s money.

Up, Up, and Away?

To believe that Qualitative Easing will heal the U.S. economy is to fail to comprehend the magnitude of the demographic shift that is taking place.  Qualitative Easing makes it easier for financial institutions to borrow money.  The lack of borrowing is the symptom, rather than the cause of the issue.  The real underlying cause is the shift in the habits of the Baby Boomers from being spenders to becoming savers.  The savings rate in the U.S. took a jump with the drop in stock markets, and more importantly, the price of homes.  The Baby Boomers are a group who are running out of time to prepare for retirement, whatever form that may take. 

I have read much about the maturing of the "me" generation resulting in a surrendering of the need for stuff in favour of basic values.  I don't believe the change is coming from the inside, but rather the outside.  Demographic research shows the peak spending years in a person's life is around the age of fifty.  One half of Baby Boomers reached that point in 2007.  Every passing day results in even more Baby Boomers leaving behind the age of peak spending than those who have not yet done so.

Check out this definition of a Ponzi scheme I lifted from the U.S. Securities and Exchange Commission website. "A Ponzi scheme is an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. Ponzi scheme organizers often solicit new investors by promising to invest funds in opportunities claimed to generate high returns with little or no risk. In many Ponzi schemes, the fraudsters focus on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses, instead of engaging in any legitimate investment activity."

Now, I am not saying what the Federal Reserve is doing is engaging in non-legitimate investment activity, but I think one can begin to see the similarities between the actions of the Fed and those of people engaged in a Ponzi scheme.  I fail to understand how more borrowing is going to solve the current debt crisis.  To me it is not a coincidence that the problems in Japan can be linked to the same demographic shift.  Sure, they made some serious errors in handling their situation, but any resolution can only come when we address the cause rather than attempting to treat the symptoms.

Being raised in the country, I have long been familiar with the saying, "You can lead a horse to water, but you can't make 'em drink".  Flooding financial institutions with cheaper money helps the financial institutions, but says nothing about people's need to borrow.  Still, it will probably take the experts a few months to discern the tea leaves and make any determination as to the effectiveness of QE2, this second round of Qualitative Easing. 

Bottom line for me is I am not participating in this stock market "rally".  The big reaction in the markets smells to me of a short squeeze.  After that, there is no telling how long before the denial turns into disbelief.  When it does, I will be betting against the markets, at least in the shorter term.  My prediction is the markets are going to end up lower than where they are presently.

Going To Pot?

"Stupid is as stupid does", says Forrest Gump.  First, the government blind-sided investors with the reversal of their position on income trusts.  Then, the Alberta provincial government drove energy companies out of the province with punitive increases in royalties. After that the government blocked the sale of MacDonald Dettwiler for (seemingly valid) reasons of national security.  Now our government has stepped in to block the sale of Potash Corporation.  This, while extolling the virtues of a "business friendly" environment.  Do they not understand that foreign investors, like kids, listen to nothing we say and notice everything we do.  After all, the way to tell when all too many politicians are lying is when their lips are moving.

While we can argue whether, or not, we are business friendly, we cannot say we are investment friendly.

Personally, I did not want the BHP Billiton deal to be accepted.  I thought the bid was too low.  I felt BHP was trying to take advantage of the situation and steal a valuable resource at a rock bottom price.  But, it doesn't matter what I think, or necessarily what some government minister thinks.  The only people with a say in the matter should be the share holders.  If, collectively, they didn't think the deal was fair, then it is up to them to say so.

It was abundantly clear that public sentiment was not in favour of this deal.  What bothers me, though, is any government that would make choices that further their own political agenda, regardless of the impact on shareholders and Canada's reputation at large.  I know people will say it doesn't make any difference in the long run, and perhaps it won't.  It isn't this one incident that concerns me, however.  It is the growing trend of saying one thing while actually doing another.

I even appreciate the patriotism that compels people to want to hold onto this valuable Canadian resource.  Whoops, did I say Canadian?  Did anyone point out the fact it is already an American company, with a head office in the U.S.?  Different politicians and labour leaders were quick to point out that other jurisdictions would never allow such an important national resource to be taken over.  My question to them is, "How is that working for their economies?"  Would you rather adopt the Russian economy?  How about the U.S.?  Perhaps any of the European economies, most especially Portugal, Italy, Ireland, Greece, Spain, or the U.K.?  I have to believe one of the most important catalysts to growth in this country has been, and is, foreign investment.

We should all demand governments with vision, one's not afraid to deviate from the herd and stand for real principles and not just follow public opinion of the day.  Not that I believe Canada is the only country to blame.  If the world economy is currently on a downswing, as anybody but those trying to hawk debt would believe, protectionism is surely alive, well, and on the spread.  Do we really want to repeat the mistakes of the past?  As Forrest would say, that would just be stupid!