Inflation beaters - Canada rocks

A reality is that politicians are seldom courageous enough to run on a platform of raising taxes to reduce deficits and pay down debt ─ and almost certainly not now.
Much easier to pay lip service to debt and deficit reduction at a price of inflated money supplies and tolerable inflation; in other words, to monetize the debt. However, the risk in this approach is of inflation getting out of hand, and in the extreme becoming hyper-inflation.
In historical terms the catastrophic collapse of Weimar Germany wasn’t all that long ago. Earlier this year, Zimbabwe, another hyper-inflated country, got to printing bank notes in denominations of up to one hundred trillion dollars, worth about US $30 at the time.

(As a side note, when I left Zimbabwe thirty years ago, I got two US dollars for every Zim dollar - Jacoline Loewen).

Imagine how China would feel if it’s estimated $2 trillion worth of U.S. Treasury bonds (purchased to help the U.S. fund its massive trade deficits) were redeemed in a currency debased anything like this. If there is one thing we should have come to realize it is that the Chinese are no pushovers.
Of course, something this extreme couldn’t conceivably happen. Nor should it, given the U.S. economy’s famed entrepreneurial drive and its enviable record of adjusting to new economic circumstances and growing afresh. Warren Buffett is one who believes America’s best days could yet lie ahead now that it is confronting its challenges “with knowledge”. I especially liked his latter reference, also having long learned never to sell an irrepressible America too short.
A much more palatable, middle-of-the-road option for debt and deficit-strapped governments would be to boost the productive capability of their economies. If inflation is defined as too much money chasing too few goods and services, and economies everywhere are awash with stimulus and deficit money, why not raise the output of goods and services to balance the two better. This way there would also be a cap on prices – and on inflation. The way to achieve this better balance? Encourage cost-saving, productivity-enhancing investment in new plant, equipment, systems, infrastructure – in everything!
In his admirable work, John Aitkens, investment strategist at TD Newcrest, sees a half-speed economic recovery accompanied by a full-speed boost in productivity. He reminds that when this happens the bottom-line impact on corporate profits can be tremendous.
Clearly, the greater the debt and deficit burdens, the greater the inflation threat. The IMF debt-to-GDP danger benchmark is 60%. In Britain and Japan this ratio is already at or close to 100%, in the US approaching 80%. In Canada by comparison it should remain in the low 30% range even allowing for the increased deficit-funding debt issues to come.
Unlike most other G8 and OECD members, Canada did save for a rainy day by using that string of past budget surpluses to pay our national debt a long way down. Not too many years ago we too had exceeded that dangerous 60% high water marker, but no longer.

Thank you, Paul Martin!
Canada’s continuing relative fiscal strength cannot be over-emphasized. Where a U.S. budget deficit of $ 2 trillion would be 13% of GDP, Canada’s at $50 billion will be closer to 3%. The same with the respective national debt burdens - theirs 80%, ours 35%. For this reason alone a resurgent Canadian dollar represents a problem of strength (not of weakness), despite the shorter-term pressures it is putting on our manufacturers and exporters.

Ivey gets entrepreneurs beyond the classroom

Running a company takes a wide lense view of a business. Some business owners get a company passed down to them from their parents through succession planning while others start one themselves. "One in three dreams becomes a reality," says Karen Mazurkewich in the Financial Post.
Ricky Zhang, an MBA student at University of Western Ontario's Richard Ivey School of Business, has not yet graduated but he has already launched a financial-services company, Trans-Asia Investment Partners, with a plan to broker deals between Chinese investors and real-estate funds in Canada. Mr. Zhang, a former associate for AIG Global Real Estate Investment Corp., formulated a plan before starting classes in London, Ont., but he said school contacts were necessary to get it off the ground.
"The most difficult thing for me was in Canada, no one trusted me. I have no relatives here, so the school alumni is the only assets I could rely on initially," he said.
Mr. Zhang spent months in the classroom honing the plan. He and his team have identified two sources of revenue: Chinese investors who will pay his company a consulting fee and developers and fund managers in Canada who will pay referral fees and have lined up contacts with immigration agencies and foreign-study consultants.
Ricky had Ron Close to help him at Ivey:
"A couple of team leaders get religion about their idea and are excited enough to go out and try to raise financing," said Ron Close, a professor of entrepreneurship at Ivey, who helps students find mentors and money. The advantage of incubating a project inside school is that you have the time to work through the angles whereas "most entrepreneurs are winging it," he said. The downside is that some team members view it as an exercise and not a calling.

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.