Friday, October 17, 2008
The Contra Guys
“It wasn’t raining when Noah built the ark. Which is why when the rain came Noah didn’t need to panic and he didn’t switch boats.” – Stephen Harper
This pithy allusion to the biblical boat builder was used by our Prime Minister to assure the folks down at the Canadian Club that due to his government’s stewardship, the Canadian economy was well prepared to ride out the storm emanating from the financial crisis in the United States. A few days later he told the CBC’s Peter Mansbridge that the severe drop in stock prices represented a “buying opportunity”. What’s next, Stephen Harper, on BNN’s Market Call, taking your queries about large-cap investing?
We’re not religious types, but we get the gist of the ark story and can see that it is a handy metaphor for the idea that precautionary measures can be taken to prepare for the extremes of the business cycle. But as pleasant as this notion might be, a glance at the record tells a different story than Mr. Harper’s.
For starters, the architect and general contractor of the ark was Paul Martin. In the mid-1990s Canada was in the grips of a severe financial crisis. Not the kind that shakes the world and hogs the global headlines, but one of the pernicious, slowly strangling variety, which threatened to bankrupt our country and send us cap in hand to the International Monetary Fund, as is now happening to Iceland and Hungary. By 1995 the accumulated national debt had risen to the point where 36 per cent of all federal revenue was devoured by interest alone. And buying a Starbuck’s coffee and sandwich in the United States with our beleaguered loonie meant unloading a bucket of Canadian dollars.
When we buy troubled companies we look for management that can make the tough decisions to comprehensively restructure the corporation and set it on the path to profitability. Mr. Martin took such a tack with the public purse, cutting expenses, increasing revenue, and changing the prevailing culture of “hope for the best” budget planning to a vigilant approach that featured a large “contingency reserve.”
Those were unkind years and many Canadians suffered, not to mention provincial governments that were left holding the bag for chopped services. But a $42-billion annual deficit was replaced with surpluses that knocked $36-billion off the national debt by 2004.
With the Liberals mortally wounded by the sponsorship scandal, a new political party was minding the store and tax cuts were high on the agenda. But what kind? There was nearly unanimous advice from such varied economic think tanks as the Fraser and C.D Howe institutes, not to mention everyone from the IMF and OECD to the Canadian Auto Workers, that reducing taxes on consumption was a bad idea. Nonetheless, Mr. Harper chose political expediency over fiscal prudence and reduced the GST by a percentage point in July 2006.
That was tantamount to firing Torpedo One into the ark. A year and half later, Torpedo Two was sent on its way as the GST was further reduced to 5 per cent. To date, this action has resulted in about a $19-billion drop in revenues to the federal coffer. Worse, it further stimulated consumer spending at the very time when the economy was cresting the economic cycle. More imports flowed into Canada while consumers went deeper into debt. Rather than letting the air out of the bubble slowly, it inflated it more.
If the mantra of real estate is “location, location, location,” then surely for fiscal policy, it is “timing, timing, timing.” We at Contra the Heard advocated higher taxes on gasoline and diesel in 1998 when oil was at $11 (U.S.) a barrel and everybody wanted to run out and buy a SUV. There’s nothing wrong with government cutting sales taxes – if it happens to be in the midst of a stubborn recession and consumers need to be coaxed out of their bunkers to release pent up demand. Government can’t repeal the business cycle, but with good timing and a little finesse, it can help put the brakes on an economy that is in bubble territory, or mitigate the misery when times are tough.
As for Mr. Harper’s advice to buy stocks now, we agree that prices are much more attractive but we do not see the point of rushing in. The problem is that the recession is just getting started, or to put it in biblical terms, we’re probably around day six with another 34 days of rain to go. Even if you happen to be fortunate enough to be sitting in an ark full of cash, smugly looking out the window at those nasty drowning sinners, doesn’t it seem a little early to open the wallet? Granted, if you wait until the floodwaters recede and a new sparkly day has dawned, some deep bargain prices will probably be missed. But many will remain even as the weather starts to clear.
Given that the Conservative government squandered the opportunity to fill the granary during a time of plenty, we can expect the recession to be deeper and longer than necessary. To us, that argues for patience to convert precious cash into beat up stocks. Perhaps Mr. Harper will kindly suggest exactly which corporations we should buy. While waiting, many Canadians are tabulating an unnecessary election cost of about $300-million (Canadian) to look at a government that appears to be very much, the same old leaky boat.
The Contra Guys
“It wasn’t raining when Noah built the ark. Which is why when the rain came Noah didn’t need to panic and he didn’t switch boats.” – Stephen Harper
This pithy allusion to the biblical boat builder was used by our Prime Minister to assure the folks down at the Canadian Club that due to his government’s stewardship, the Canadian economy was well prepared to ride out the storm emanating from the financial crisis in the United States. A few days later he told the CBC’s Peter Mansbridge that the severe drop in stock prices represented a “buying opportunity”. What’s next, Stephen Harper, on BNN’s Market Call, taking your queries about large-cap investing?
We’re not religious types, but we get the gist of the ark story and can see that it is a handy metaphor for the idea that precautionary measures can be taken to prepare for the extremes of the business cycle. But as pleasant as this notion might be, a glance at the record tells a different story than Mr. Harper’s.
For starters, the architect and general contractor of the ark was Paul Martin. In the mid-1990s Canada was in the grips of a severe financial crisis. Not the kind that shakes the world and hogs the global headlines, but one of the pernicious, slowly strangling variety, which threatened to bankrupt our country and send us cap in hand to the International Monetary Fund, as is now happening to Iceland and Hungary. By 1995 the accumulated national debt had risen to the point where 36 per cent of all federal revenue was devoured by interest alone. And buying a Starbuck’s coffee and sandwich in the United States with our beleaguered loonie meant unloading a bucket of Canadian dollars.
When we buy troubled companies we look for management that can make the tough decisions to comprehensively restructure the corporation and set it on the path to profitability. Mr. Martin took such a tack with the public purse, cutting expenses, increasing revenue, and changing the prevailing culture of “hope for the best” budget planning to a vigilant approach that featured a large “contingency reserve.”
Those were unkind years and many Canadians suffered, not to mention provincial governments that were left holding the bag for chopped services. But a $42-billion annual deficit was replaced with surpluses that knocked $36-billion off the national debt by 2004.
With the Liberals mortally wounded by the sponsorship scandal, a new political party was minding the store and tax cuts were high on the agenda. But what kind? There was nearly unanimous advice from such varied economic think tanks as the Fraser and C.D Howe institutes, not to mention everyone from the IMF and OECD to the Canadian Auto Workers, that reducing taxes on consumption was a bad idea. Nonetheless, Mr. Harper chose political expediency over fiscal prudence and reduced the GST by a percentage point in July 2006.
That was tantamount to firing Torpedo One into the ark. A year and half later, Torpedo Two was sent on its way as the GST was further reduced to 5 per cent. To date, this action has resulted in about a $19-billion drop in revenues to the federal coffer. Worse, it further stimulated consumer spending at the very time when the economy was cresting the economic cycle. More imports flowed into Canada while consumers went deeper into debt. Rather than letting the air out of the bubble slowly, it inflated it more.
If the mantra of real estate is “location, location, location,” then surely for fiscal policy, it is “timing, timing, timing.” We at Contra the Heard advocated higher taxes on gasoline and diesel in 1998 when oil was at $11 (U.S.) a barrel and everybody wanted to run out and buy a SUV. There’s nothing wrong with government cutting sales taxes – if it happens to be in the midst of a stubborn recession and consumers need to be coaxed out of their bunkers to release pent up demand. Government can’t repeal the business cycle, but with good timing and a little finesse, it can help put the brakes on an economy that is in bubble territory, or mitigate the misery when times are tough.
As for Mr. Harper’s advice to buy stocks now, we agree that prices are much more attractive but we do not see the point of rushing in. The problem is that the recession is just getting started, or to put it in biblical terms, we’re probably around day six with another 34 days of rain to go. Even if you happen to be fortunate enough to be sitting in an ark full of cash, smugly looking out the window at those nasty drowning sinners, doesn’t it seem a little early to open the wallet? Granted, if you wait until the floodwaters recede and a new sparkly day has dawned, some deep bargain prices will probably be missed. But many will remain even as the weather starts to clear.
Given that the Conservative government squandered the opportunity to fill the granary during a time of plenty, we can expect the recession to be deeper and longer than necessary. To us, that argues for patience to convert precious cash into beat up stocks. Perhaps Mr. Harper will kindly suggest exactly which corporations we should buy. While waiting, many Canadians are tabulating an unnecessary election cost of about $300-million (Canadian) to look at a government that appears to be very much, the same old leaky boat.
and have expressed nothing new or insightful.
