How not to waste your time

I wince every time I think of Peter Lynch’s put-down that if you spent five minutes with an economist you’d be wasting three. But in the summer of 2009, the truth is that no one, no matter how expert (and not even the World Bank), can forecast the future with any real conviction. The stock markets may be forward-looking barometers, but the economic data which they interpret with varying degrees of accuracy at the best of times are of happenings measured weeks or months previously. At this time there is just too much thin ice around for anyone to be foolish enough to stick their neck out too far.
Adding to the unease is a questionable economic recovery to date due solely to government stimulus spending and pump-priming on a pedal-to-the-metal scale as never before.
In other words, a recovery that is heavily induced rather than organic. When and by how much economies will grow of their own volition once they are taken off government life support remains very much open to question.
In turn, this begs the question as to how governments are going to exit their rescue strategies and face up to the twin challenges of the exploding budget deficits and soaring national debts they will have left them with. At some point central banks, too, must start tightening the system by raising interest rates, but then what?
Going into deficit is one thing, even when well-intentioned and necessary. Getting out of the extra deep holes that have been dug this time around will be another. It will be all the more difficult if self-supporting economic recovery is as anaemic as it looks like being in most of the OECD countries.
The BRIC block (Brazil, Russian, India, China) is another matter, as also should be Developing Asia in general. China’s infrastructure stimulus seems to be working well as growth forecasts for the world’s new economic powerhouse are hiked above 7%. The pattern is similar in India, but alas not in our artificially-supported world.
On his recent trip to China, U.S. Treasury Secretary Timothy Geithner was grilled by sceptical audiences on his government’s exit plan. He didn’t elaborate other than to answer there would be a plan , but the time wasn’t yet right. The subject of exit strategies was also raised at the latest G8 finance ministers meeting. After heated discussion, the International Monetary Fund was asked to research strategies to slim budget deficits and reduce government presence in the financial sector in a way that wouldn’t re-ignite a contagious made-in-America crisis that had spread worldwide.
Here in Canada, Prime Minister Harper says tax increases or reductions in program spending won’t be necessary to return to fiscal balance by 2013-14. In which case there would need to be strong and protracted GDP growth. However, many are openly questioning the rosiness of predictions that have been badly discredited since the assurances of last November’s Economic Statement morphed into a projected budget deficit of $34 billion, now further raised to a record $50 billion. Toronto Dominion Bank economists, in particular, maintain that the government’s forecasts are so far off that its cumulative five-year budget deficit projection could in fact turn out to be double the $85 billion forecast.
THEN AND NOW
Given the staggering levels of a U.S. deficit that could climb to the $2 trillion level, or 13% of GDP, it is probably best to assume the U.S. will remain in the red as far as the eye can see. Assuming he remains in office until 2017, Barack Obama could retire as a president who has only known deficits – and massive deficits at that! Similarly in Canada, a safe assumption would be that the red ink continues to flow at both the national and provincial levels until at least the Harper government’s 2013-14 cross-over target date, but probably well beyond that.
What a change in the fiscal “weather” over the past year, and in Canada in a matter of months!
What a far cry, too, from Ronald Reagan’s inaugural declaration that “Government is not the solution to the problem, government is the problem”, and his purported belief that the nine most terrifying words in the English language are: “I’m from the government and I’ve come to help”. This time a government that has come to help is also wielding a big stick, as banks, financial institutions and the automotive industry can feelingly attest to. Just ask AIG, Citigroup and General Motors, who are now also heavily government owned and controlled.
Obamanomics vs. Reaganomics?
Big government is a new fact of life investors will also have no choice but to adapt to. Jeffrey Immelt, the Chief Executive of hard-pressed General Electric, couldn’t have put it more expressively: “The government has moved in next door and it ain’t leaving”.
Our guest blogger is Michael Graham
You can reach Michael at:
Michael Graham Investment Services Inc.
Tel: 416 360-7530 Fax: 416 360-5566
E: Michael@grahamis.ca
www.grahamis.ca

A different approach to succession planning in a family business

This week on the BusinessCast, listen to Thomas Deans, a family business owner who sold his multi-million dollar company to a strategic buyer.
Tom is a good friend who I turn to for marketing advice and anything to do with family owned business issues. He has experienced all the fun and craziness of family business that is not always obvious to trusted advisers.
This is why his amusing but also practical book is a must for every lawyer, accountant and or finance expert. It's called 'Every Family's Business'.
If you're in a family firm and thinking of succession matters, this episode is for you. Robert Gold is the interviewer and he is an accountant asking the questions that most advisers do not ask at their peril.
Listen...

The Future is Tiny

The future is tiny, says Colin Campbell in MacLean's magazine. Colin tells us that it's not just cars that are getting smaller, it's the companies too.

If you think everyone in the auto sector is feeling grim these days, then you haven’t talked to John Vernile. The vice-president of sales at Hyundai Auto Canada says the recent turmoil has been nothing but good news.

Sales for the South Korean automaker are up “in every segment,” he says—amounting to an overall surge in sales of 20 per cent during the first half of this year. “When this downturn hit, it just dialled things up for us,” he says.

Thanks in part to the demand for Hyundai’s smaller cars, the company has suddenly emerged as one of the dominant players, not just in North America but globally. It’s now the fifth-largest carmaker in the world. In quality surveys, it ranks ahead of Toyota and Honda. Market share is up, sales are up, and opportunity abounds. Despite the tough economic times, “we quietly celebrate here,” says Vernile.

In the meantime, I read that GM has put out a Cadillac perfume - tell me that it's not true! Got to keep up to date with the consumers, I suppose. I can just hear marketing: Well, if you can't afford a car, you might as well smell like one...

Jacoline Loewen, author of Money Magnet, Attracting investors to your business.

Private Equity Deal Activity Remains Slow

Although US private equity (PE) mergers and acquisitions (M&A) activity is still quiet, PE firms, armed with cash, continue to look for opportunities to invest, according to Ernst & Young LLP's 2009 U.S. PE report (available at: ey.com/us/privateequity). PE participation in minority stake deals is returning after taking a back seat in 2005 through 2007 a period during when mega-deals were in full swing. In addition, government reform in healthcare and financial services may present investment opportunities.
"PE firms are sitting on a large amount of available cash. However, leverage is still almost nonexistent which is hampering deal flow and cash deployment," said Gregg Slager, America's Private Equity Leader at Ernst & Young LLP.
Announced US PE deal volume fell 42% in 2008 compared to 2007. This downward trend has continued into 2009 with 314 transactions announced through May of this year, the lowest five-month volume since 2002 (see data charts at: http://www.ey.com/US/en/Services/Specialty-Services/Private-Equity/Announced-US-PE-Activity).
"The bid-ask spread -- the price buyers are willing to pay and the price sellers are willing to sell -- hasn't narrowed. Until it does, activity will be slow," Slager added.
According to Ernst & Young LLP's 2009 US PE report, although PE firms have historically experienced the best returns from investments made during a down market, PE will be slow in returning to the M&A arena until the credit and capital markets recover.
Read the full article herehttp://news.prnewswire.com/DisplayReleaseContent.aspx?ACCT=104&STORY=/www/story/07-23-2009/0005065044&EDATE=
NEW YORK, July 23 /PRNewswire/ --

The economy matters for private equity

I have been following Arnold on Twitter. You know, Arnold, ex-Terminator and now governor of California. He has been sharing his budget pain and what he is trying to negotiate.
California accounts for 10% of the U.S. economy. It's state budget is about $125 billion and the deficit is about $25 billion. By law, California must balance its budget each year and the fiscal year ends June 30. Back in February, the Democrat-controlled legislature could not agree with Republican Governor Arnold Schwarzenegger on spending cuts, but it did agree to put a series of tax increases and borrowing schemes before the voters in a referendum. On May 19, all were defeated. California treasurer Bill Lockyer appealed to Washington for access to bank bailout funds, but he was turned down. He has since warned that the state only has enough cash to meet payrolls until mid-summer. We are all watching.
California matters because of its sheer size on the U.S. economy, and because 49 other governors are watching to see how Washington reacts to its budget crises. State governments are contemplating layoffs, program cuts, tax hikes, facility closures and other such measures all of which will cut in U.S. employment and consumer spending in the third quarter. Over the summer we will learn how these issues play out.