An Act of God?

Those who know me personally will conclude (I hope!) that I am not the type prone to throwing shoes at the television, at least not as early as seven in the morning. So I must confess that, on more than one occasion in recent weeks, I have come perilously close to doing so. The object of my un-desire? The normally level-headed crew that run the Squawk Box morning show on CNBC Europe. Mea culpa; a day hardly passes when I have not been tempted to bung a brogue at the US CNBC crew who – with a few honourable exceptions such as Bob Pisani – are so smug, they cannot see an empty space let alone an empty glass without imagining an overflowing swimming pool. And, for the record, I only watch Bloomberg when I cannot get CNBC; Bloomberg’s Stars and Stripes cheerleading makes CNBC look sober, even sombre!
What is it that so gets my ire up? It is the idea, so widely peddled in the Western media and even sadly in the venerable Financial Times, that we are experiencing a GLOBAL financial crisis. NO! NO! NO! What is happening is first and foremost a WESTERN WORLD financial crisis, a world where Japan is arguably not merely a but the founding member. More people live in countries that will see their nation’s GDP grow this year than live in those that will see it contract. As John Stopford so eloquently put it: “It is the Developed World that is experiencing an Emerging Market crisis.” Yes, of course there have been repercussions for most of the rest of the world, not least in (why am I not surprised?!) that “wagon-still-hitched-to-the-wrong-ox”, South Africa. But in Asia – where the world’s newest economic locomotives are stationed – and Latin America, Russia, the Middle East and much of the rest of Africa – home to the world’s main ‘coal trucks’ – these repercussions are much more akin to the buffetings one might feel when a hurricane passes five hundred miles away: the effects wear off quite quickly.
For completeness however, note that some emerging markets – the passenger cars of Eastern Europe, the Baltic States and Mexico – are marooned in a siding by virtue of being hitched to the ‘out-of-steam’ Puffing Billys of Europe and the US respectively. Unable to be lower cost than Asia, no longer able to sell their migrant workforce into their bigger, richer next-door-neighbours, these emerging markets have found their place in the world’s value adding hierarchy undermined from all sides. In Eastern Europe and the Baltic States in particular, chronically high cross-border, cross-currency debt burdens owed to Western European banking houses mostly in the form of house mortgages are threatening to precipitate maxi-devaluations and sovereign defaults. If Latvia goes, which Eastern European and Baltic houses of cards might tumble down in its wake?
Most other emerging markets however are still moving forward precisely because their houses – be they financial or residential – have not come tumbling down. Of course, as is now well known, in the West, the houses of Lehman’s, AIG, Northern Rock, Fannie Mae and Freddie Mac have been razed to the ground whilst the houses built by the likes of Pulte, Lennar, Horton, Beazer and Taylor Woodrow have crumbled in value. Given the interconnectedness between the financial health of the typical Western banking house with the typical Western residential house, and the fact that the failure of the one has hastened the fall of the other and vice versa, was it any wonder we witnessed a plague on both these Western houses? By contrast, the banks of emerging market locomotives and coal trucks may well be boring but at least in their world, one can still say they are as safe as are their houses (though I fear this simile may have outlived its usefulness! As safe as the Bank of China, perhaps?!)
So why do so many blinkered financial commentators in the West make the mistake of assuming that their current financial crisis is everyone’s financial crisis, that it is truly global?
The first answer is that many hardly recognise that there is a bigger world out there beyond the end of their own national noses – to borrow the title of a Michael Jackson song, they seem to assume “We are the World”! Wrong; they are not, never were and never will be. Indeed, as much as it may gall those who sit in their home-biased business Western TV studios to admit it, there is a whole New World out there beyond the West, a world wherein arguably the greenest pastures open to mobile global capital now lie.
Secondly, these commentators assume that because they are the centre of global finance (which for now they are but, given recent events, this status is now living on borrowed money and so on borrowed time), they jump to the conclusion that what is rotten in the core must by definition be rotten everywhere. Wrong again; yes, the periphery has inevitably been bruised but it is by no means bowed; indeed, much of it is already showing signs of restoring its much higher growth trajectory when compared to the now “Turning Japanese” West. Perhaps their misconception is wrapped up in a naïve and indeed even patronising belief that what afflicts the risk-free (except that it is no longer risk-free!) rate at the centre could not but hurt the higher beta periphery even more. (As a friend in London harrumphed, admittedly in a good-natured jest: “Good God, man, are you trying to tell me that our former colonies are now doing better than we are? What is the world coming to?” What, indeed.).
Thirdly – and Western politicians use this ‘logic’ even more than do its financial commentators – there is a “get-out-of-jail-free” card that suggests if the Browns, Sarkozys and even the late-lamented Bushes can cast their domestic crisis as truly global, they can claim that its causes are largely “beyond us” so, they hope, absolving them of any blame. Like a real tsunami, they must have hoped that if the financial tsunami could be cast as “an act of God”, Western voters would not take out their anger on their Governments. So far, Anglo-Saxon voters are having none of it: “Chuck the incumbents out” has become their rallying call.
As US Republicans have learned and the UK Labour Party has already experienced in local polls and is sure to experience in national polls next year, democracy hath no fury like a house-owner scorned.
But of course, this crisis was not an act of God; it was wholly an act of man and Western politicians of all political persuasions as much as those who elected them in the first place were and are still deeply implicated in this tsunami’s formation.

Our guest blogger is Dr. Michael Power. Dr. Power may be reached at:
email address: Michael.Power (at) investecmail.com

Trading Places

Speaking to the recent International Economic Forum of the Americas held in Montreal, World Bank President Robert Zoellick commented on how lots of countries around the world would like to trade places with Canada, even though we did not escape the effects of the global economic downturn (our higher resource–driven “beta”.) He added: “Canada has had a fiscal policy managed in its budget pretty soundly over the years”.
The continuing test of this fiscal soundness lies ahead. In the meanwhile, Goldman Sachs singles out Canada as among the first of the advanced economies to emerge from recession. Respected David Rosenberg, now returned home to be the chief economist and strategist at Gluskin Sheff & Associates, sees us not having the structural fiscal deficit problems of the U.S. and being well positioned as the economic power shifts towards Asia and China. Reflecting its confidence, the Fidelity mutual fund group has set up an on-site research Team Canada. Expressions of confidence like these keep on growing.
Inflation and its possibly devastating consequences may seem a distant problem at a time of still-serious recession and economic slack. Federal Reserve Chairman Ben Bernanke and Bank of Canada Governor Mark Carney do not seem unduly worried shorter-term. At latest count the annual Canadian inflation rate had dropped to a 14-year low of just 0.4%, and four of the provinces, among them even Alberta, had sunk into deflationary territory. Nevertheless, while it may not be an immediate problem, no serious investor should ignore the elephantine inflation risk. Even if months or years early, it seems none to soon to begin taking precautionary action, adjusting investment strategies and re-examining asset mixes in this probability.
On the fixed income side, the renowned Bill Gross of PIMCO, the world’s largest bond fund, strongly recommends a shortening of term to maturity. For my part, I now prefer not going much beyond bonds (and bond ladders) of a five-year maturity – and always A-rated. For taxable Canadian investors in need of income there are now attractive resettable (5 year) preferred shares issued mostly by the banks, but also by others. And most definitely not to forget the inflation defence offered by companies that pay and continuously increase their annual dividend payouts.
Our guest blogger is Michael Graham. You can reach him at:
Michael Graham Investment Services Inc.
Tel: 416 360-7530 Fax: 416 360-5566
E: Michael@grahamis.ca
Website at www.grahamis.ca

You can't grow your economy if you can't grow the revenues

Here is a great summary from Lynn Lewis at Scotia McLeod. You can reach Lynn at: [lynn_lewis "at" scotiamcleod.com]

North American markets have continued to trade in a very tight range this week as we have heard good news and bad news stories. Following some proclamations last week that the recessions for Canada and the U.S. are supposedly over, markets rocketed higher on the expectation that economic growth is going to be strong and sustainable for the rest of 2009.

The TSX Index is getting closer to its recent high from June 10, while U.S. indices have broken through their recent highs since the market downturn last fall. The calls for the end of the recession are based on the technical definition of a recession in that some economists are predicting marginal if not breakeven growth for Canada and the U.S. in Q3; but those economists are also adding the caveat that while growth may return, the recovery will be difficult as unemployment is expected to rise further, home prices may continue to struggle in the U.S. and you'll still have a financial system that is on government assisted life support for some time.

Lynn says, "I add these caveats as they are a warning to us as investors not to get too carried away with how high we take the markets since this is not just an economic downturn we've witnessed, but a financially structural problem that is going to take years to fix."

This does not mean that markets can't appreciate over the next year or so, but it does mean that we should not see the magnitude of appreciation we've witnessed in previous recoveries when the economy expanded but the financial system was in much better condition.

We also saw the U.S. Case-Shiller Home Price Index report for May where a year over year decline of 17.06% was registered. This was better than the 17.9% decline that economists were forecasting, but let me be clear while this number is improving, it is still awful. All in all we are still cautiously optimistic.
General Commentary from Gareth Watson, CFA
An almost US$4.00 per barrel decline in the price of crude oil on Wednesday sent the TSX lower by 115 points or about 1%. The weakness was not contained just to energy but to other commodity prices as rumours continue to come out of China indicating that the Chinese government may be changing loan policy in an attempt to slow the pace of economic growth in an attempt to avoid any type of asset pricing bubbles in the near term.

Since China has basically been the place where everyone is pointing to for growth, any indication of lending restrictions or signs of reduced lending is definitely going to make investors think twice about piling into economically sensitive areas of the market such as oil, gas and base metals. The Energy subsector was easily the weakest on Wednesday followed by Materials and then Financials (even though some Canadian banks finished higher).

In fact only three sectors managed to post gains including Industrials, Consumer Discretionary and Consumer Staples. Wednesday was the second day of triple digit losses for the TSX as investors are realizing that valuations may be too optimistic at this stage of the economic cycle. Today is an exceptionally busy day for corporate earnings in both Canada and the U.S. We've had some companies already report in the U.S. this morning and we continue to see the recent trend of beating on the earnings line but missing on the revenue line which means we can't be too excited about these results as it would appear as though the earnings are being driven more by cost cutting than by revenue growth.

There definitely have been some companies that have beaten expectations on both lines, but there are others do exist where cost cutting appears to have been the theme for the quarter. You can't grow your economy if you can't grow the revenues.

Selling your business

If gaining access to funding is the biggest initial stumbling block for small businesses, managing growth is certainly the most significant second-stage challenge.
Countless businesses, in spite of showing early promise have failed for one of many growth-related reasons, from lack of cash flow and skills to poor management expertise or insufficient infrastructure. But perhaps the biggest culprit is an unwillingness or inability on the part of the business owner to relinquish the iron-fist control that they grew used to exercising (and which was essential) when the business was growing.
Unable to spread themselves across all areas of the business but unwilling to delegate tasks to others, such entrepreneurs doom their businesses to failure. Either that, or they end up selling to someone who can run a growing operation.

Bay Street Broads Club

I admire the CEO of 85 Broads, Janet Hanson and was delighted when one of my brilliant team members, Winnie Chou, sent me this article on Janet.
Her comments on putting family and relationships at the same level as their career would have been chum to the sharks backin the Ninties. I am so glad to see someone being honest about how family and love are important. As Janet puts it, "She did not want to be someone's rich aunt." It shows that the choices for women can be managed because Janet is her daughter's rich mum! Shows that it can be OK to seek happiness.
Janet's a Columbia MBA, the first woman in Goldman Sachs' history promoted to sales management, founder of a $3B asset management fund, a published author, philanthropist, mother and more.
You can also read Janet's Q&A in full on The Doostang Blog.
Here's a quick summary:

Tell us about 85 Broads and why you started it. I set out to solve a problem.
When I left Goldman Sachs in 1993, I was leaving the world I had known and loved for 14 years to stay at home with my two young children. I wanted to know what the markets were doing, I wanted to be “in the game” but instead I was at home wishing I wasn’t. I founded 85 Broads (which is a humorous play on Goldman’s street address in Manhattan) to re-establish a connection between women who were “alumnae” of the firm with women who were still in the building. You have had a very successful career in finance.

Can you elaborate on your decision to go into that field, and give us perspective on that choice?
I won the career lottery after I graduated from Columbia Business School at the age of 24 – I became an associate in the Fixed Income Division at Goldman Sachs. It was just an amazing time to be at the firm. Being in Fixed Income Sales played to my competitive strengths – I thrived because I was challenged every single day to push myself. It was incredibly hard work but it was also incredibly rewarding. The 2-year investment banking stint as we know it isn't a pervasive option for top grads today. What advice do you have for members who are facing this tumultuous job market early in their careers? My best advice: be willing to really push yourself – whether you’re doing a 2-year stint with Teach For America or 2 years as a banking analyst, this is how young people can truly differentiate themselves. If you can figure out how to live and breathe the company’s “mission,” you will earn the respect of the people who hired you and invested in you. And lastly, when you’re young, if you do nothing else, figure out how to leverage your college alumni network. That is the single best resource you have and it’s free. Like you, many of our members have elected to further their education with an MBA.

Women have made strides in business thanks to trailblazers like you. What advice would you give to the high-achieving women on Doostang who hold career success as a core value?
We have a favorite expression: “read the ending first.” Being driven in your career is great as long as you have your eye on what else will be critical to your happiness 5 or 10 years down the road. I left Goldman Sachs when I was 35 because I had no social life whatsoever. I was on track to be made a partner within a year or two. I left the firm just as my career was going into high gear so that I could concentrate on how to be in a successful relationship as well as have a successful career. Five months after I left, I came back to Goldman in a part-time job in Personnel. My friends thought I was absolutely insane. But less than a year later, I married Jeff Hanson, who I worked with in Personnel. Even though he wasn’t a “big hitter” by Goldman standards, he was brilliant and fun and we built an amazing life together. I left Goldman Sachs because I didn’t want to just be someone’s rich aunt,! I wanted to have a family AND a successful career. My approach was a bit unconventional but it worked – Meredith and Chris Hanson are the loves of my life. They are the reason I’m still happily “in the game.” Bottom line, I had the guts to know that to be happy I needed a successful career AND a great family. That is not work/life balance. That is work/life optimization.

What are some common mistakes you've observed in interacting with top grads just starting out, as well as the hiring managers who recruit them?
It is critical to figure out how to relate to young people – the smartest thing a hiring manager can do is solicit candid feedback from the young people they hire. These kids are absolutely whip smart. They are the best educated, best traveled generation ever. And they learn fast so it’s imperative for managers to keep them intellectually engaged and motivated. That is their single biggest challenge.

In a recent interview for the Huffington Post, you talk about "reading the ending first" in job search. What does this mean for our members who are actively looking for new opportunities?
It means acquire real skills which will make you eminently more qualified. If I was a young person today I would want to have killer computer skills so that I could analyze data and information better and faster. That doesn’t mean you have to be a programmer. It means knowing how to use technology to your greatest advantage. Anyone over 40 years old is probably not that familiar with how to use SEO or the newest social media tools which could give their companies or organizations a real competitive advantage. Young people, if they’re smart, will use this “edge” to make themselves invaluable in any career path. Older people are at a severe disadvantage which young people can exploit (in a nice way). That is a co-mentoring opportunity if there ever was one.

What does career management mean to you?
I will always be grateful to Nancy Reagan. When she was First Lady, she was asked by the press how she would tell young people to steer clear of drugs. Her answer: “just say no.” She was derided in the press for that rather simplistic response but guess what – saying “no” is actually one of the most important skills you need to master in order to have any semblance of happiness – particularly as you get older and are likely juggling career and family responsibilities. Jeff and I launched Milestone Capital so we could spend more time with our kids and have complete control of our own destiny. We worked like absolute dogs but we never looked back. In 2004, I left Milestone and went to work for Lehman Brothers to hedge our downside risk if our business started to falter. But as everyone knows, stuff happens. That and there are no guarantees in life. If I had to do it all over again, I would have banked! a lot more of my income from Goldman which would have given me many more options down the road.

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