Could the U.S. go bankrupt (literally)?

By Duncan Hood - Tuesday, November 11, 2008 at 5:41 PM - 6 Comments

The U.S. economy is still by far the world’s biggest, and as a borrower, the U.S. government is still rated as one of the world’s safest. But something weird is happening in the U.S. government bond market, and Randall Forsyth at Barron’s, for one, is concerned. 

I was taught that you should worry when what’s called the ‘yield curve’ on the bond market inverts, or goes negative. That means the yields on longer term bonds are lower than the yields on short term bonds, which means that people expect yields to fall. But that’s not happening — in fact the yield curve has almost never been steeper. 

Some economists say that means a recovery is coming, but Forsyth isn’t so sure. He’s concerned because as the news gets worse and worse, the curve is getting steeper and steeper.

At the same time, the cost of insurance against the possibility that the U.S. Treasury could default is getting more and more expensive. That seems to indicate that the market believes that the Treasury could indeed fail to meet its debt obligations. 

So could the U.S. actually go bankrupt? You never know. As Forsyth notes, you start borrowing a trillion here, and a trillion there, and pretty soon you’re talking about real money.

Attention America: don't vote

By Colin Campbell - Monday, November 3, 2008 at 12:03 PM - 12 Comments

In this PBS video, a U.S. economist argues why you shouldn’t vote.  The argument here is terribly flawed (if everyone thought this way, democracy would fail). But it’s a nice break from those obnoxious, celebrity ‘your vote counts’ videos.

Read Her Lips (AKA never say never)

By Martin Patriquin - Thursday, October 30, 2008 at 3:11 PM - 22 Comments

From a story in today’s Post about the federal government’s push for a federal regulator: 

“The political opening was created in the past two weeks following urgent appeals for federal relief from provincial ministers and financial institutions, including Desjardins, the biggest lender in Quebec.

“A breakthrough came this week after face-to-face negotiations between Finance Minister Jim Flaherty and Monique Jerome-Forget, the Finance Minister of Quebec, the biggest stumbling block to a single regulator.

“The federal Finance Minister agreed to belatedly include Desjardins in a national plan to backstop banks, but attached conditions, according to people familiar with the dialogue.

“As part of the deal to guarantee new borrowing in international markets by Desjardins, Quebec softened its opposition to moves toward a federal regulator that would include a seat for each province on its governing board, people close to the process said.”

Drive less, live longer

By Jason Kirby - Monday, October 27, 2008 at 11:58 AM - 2 Comments

Part of our story on the Joy of Frugality in the latest issue of the magazine looks at the question of whether economic downturns can actually be good for your health. Several researchers, including Christopher Ruhm at the University of North Carolina-Greensboro, have dug into the numbers. And they’ve found that yes, recessions (in the short term at least) can make you live longer. Continue…

Selling to the frugal

By Jason Kirby - Friday, October 24, 2008 at 5:45 PM - 2 Comments

Consumers are clearly developing a taste for frugality, as we discovered while researching our story in this week’s issue of Maclean’s. That much is known. What companies and marketers have yet to figure is how to navigate the new era of thrift.

As the economy continues to sour, marketers are rethinking the best offers and incentives to dangle in front of a newly budget-conscious public. But figuring out what offers will resonate is a tough task, with the media landscape already littered with companies crowing about discounts and good values.

As the WSJ story points out, companies that opt for price-based promotions run the risk of training customers to expect more for less. That’s exactly what happened to General Motors. With Japanese competitors stealing market share a few years ago, the company responded by offering rebates and huge discounts, until customers refused to pay full price for a Pontiac. GM has tried to ween customers off the deals, but it’s been a tough slog, and the looming recession is only making that task harder.

Still, don’t be surprised to see plenty of sales geared to belt-tighteners.

Well, Whadayaknow.

So a banker walks into a bar… II

By Jason Kirby - Friday, October 24, 2008 at 4:54 PM - 1 Comment

There seems to be quite a bit of demand for levity these days, judging by the interest in my previous post about humour amidst the financial crisis. So here are some more jokes and cartoons to help ease the pain.

Continue…

Dig out your old calendars, we're going back, waaaay back

By Jason Kirby - Friday, October 24, 2008 at 3:20 PM - 1 Comment

As markets continue to fall, analysts have simply started using historical dates to forecast how low we could go. Today Montreal-based BCA Research warned that U.S. equities could fall to levels not seen since 2002. As it is, the last time the S&P 500 was this low was in April 2003:

Panic has returned in full force: equity and commodity prices are gaping lower, while the dollar and yen continue to surge. Investor sentiment has been crushed and despite extremely oversold conditions and appealing valuations, the bleak growth outlook provides little reason to be upbeat.

…

Bottom line: Stay defensively positioned; a retest of the equity market 2002 lows (at least in U.S. equity prices) seems probable.

That’s gloomy enough. But it gets worse. Continue…

Shoot them in the head(ge fund) to kill them

By Jason Kirby - Thursday, October 23, 2008 at 2:39 PM - 0 Comments

Last night I thought I’d come up with the perfect original Halloween costume for 2008: Zombie investment banker. What’s more blood-curdling than the walking Wall Street dead? As I’ve learned from talking to others, this is shaping up to be one of the the hottest costumes for this year’s scaring set.

Here are some tell-tale signs you’re a pin-striped brain eater:

“Scary Halloween character No. 4:

• You enjoy the smell of blood.
• You prefer staying indoors to avoid the glare of disclosure.
• The words “Come out into light” make you quiver with dread.
• You have the means to travel, and are frequently seen flying.
• You have a strong predator instinct.
• If people hang around you too long, they’ll get it in the neck.
• That’s right: You are a Wall Street investment banker.”

So a banker walks into a bar…

By Jason Kirby - Tuesday, October 21, 2008 at 11:19 AM - 20 Comments

Financial reporters (including this one) have tortured countless metaphors in their quest to explain what the heck is going on in the economy. But sometimes funny does a better job. And at a time of falling markets and uncertainty, it helps to hold on to a sense of humour. So without further ado, here are some of the best financial crisis jokes, sketches and comic strips that have hit our inbox or been scavenged from the Interweb. (Note to viewers: a couple contain profanity.)

Continue…

Bailouts now, damn the consequences

By Jason Kirby - Monday, October 20, 2008 at 2:57 PM - 8 Comments

When you’re standing in the midst of an economic storm, it’s hard to see more than a few feet in front of you. The actions officials take to stem a crisis can have deep and profound consequences in the long run, but at the time, they may seem absolutely necessary. Following the Dot-Com crash and the 2001 terrorist attacks, the Federal Reserve under Alan Greenspan slashed interest rates to keep the economy from slipping into a long and painful recession. By 2004, the short-term rate was hacked to just 1 per cent. As we all know now, the move inflated the massive debt bubble that triggered the current economic crisis. It’s a common refrain to say Greenspan kept rates “too low, too long.”

Well, today Greenspan’s successor, Ben Bernanke, threw his support behind a second massive bailout package. That would be on top of $3 trillion in other stimulus measures the U.S. alone has enacted over the last month. So are these prudent measures to stave off a grave financial calamity? Or too much, too fast?

I'm a Mac and I show no mercy

By Colin Campbell - Monday, October 20, 2008 at 2:17 PM - 11 Comments

Apple isn’t going to let this Vista advertising debacle drop.  Its latest ad:

How to save banks and start trade wars

By Jason Kirby - Tuesday, October 14, 2008 at 1:37 PM - 8 Comments

Does anyone else find the following argument scary?

Canada’s banks are supremely healthy, best in the world even, and if we don’t throw them a massive taxpayer-funded lifeline right now, they’re going to be in serious trouble.

That, in a nutshell, sums up the sentiment being voiced by Finance Minister Jim Flaherty, Canadian bank executives and analysts at the moment. All over the world governments are injecting billions, nay trillions, of dollars to prop up their country’s biggest financial firms. The U.S. is buying $250 billion worth of shares in the likes of Citigroup, J.P. Morgan and Bank of America. Britain is shelling out $65 billion to help Royal Bank of Scotland and Lloyds. France is doing it. Germany is doing it. Even educated Swedes are doing it. The fear now is banks in those countries will be able to borrow funds at lower rates than Canadian banks, and that, in turn, will lead to higher borrowing costs and put Canadian businesses at a competitive disadvantage.

Continue…

Harper and the oddsmakers

By Colin Campbell - Wednesday, October 8, 2008 at 11:35 AM - 2 Comments

Over at the always interesting Intrade predictions market (where people can buy contracts to bet on the outcomes of things like political races), Stephen Harper and the Conservatives’ stock has been sinking over the past week. The site once put Harper’s chances of winning at almost 98 per cent. Yesterday, it was down to 85 percent. Still, a very healthy lead over the Liberals, who have a 15 per cent chance of winning, according to the site. 

More interesting, perhaps, is the value of contracts being bet on the likelihood of a minority government. They’re soaring.  A week ago, the odds were under 60 per cent. Today, they’re at 80 per cent. 

Jobs: I'm not dead already

By Jason Kirby - Friday, October 3, 2008 at 1:56 PM - 9 Comments

It’s gotta wear a guy down constantly having to convince everyone you’re not dead. Steve Jobs had to reassert his worldly existence once again today. It’s becoming an almost weekly event. This time someone posted an item on ireport.com, CNN’s website for so-called citizen journalists, saying Jobs had suffered a heart attack. The stock tanked 5 per cent before Apple said the claim was false. The ireport website advertises itself as “unedited. unfiltered.” How about adding: untrue.

Potash under attack from short sellers. Yeah, right

By Jason Kirby - Thursday, October 2, 2008 at 11:35 PM - 7 Comments

I was wondering how long it would take for the accusations to fly that Potash Corp. is a victim of short sellers. Not long, apparently. On Thursday a Merrill Lynch analyst downgraded the stock from a buy to underperform (that’s wishy-washy for sell, by the way) because of fears of a slowdown. When the fertilizer maker’s shares lost 35 per cent of their value—wiping billions from its market cap and helping to drive down the TSX by a whopping 800 points—money managers and investors quickly pointed the finger at those scourges of the investment world. In one Globe story a money manager said short selling was the only possible explanation for the rout. “Is there any reason to take $30 off Potash Corp.?” he asked. “I don’t think so.”

Really? I can think of a one or two off the top of my head.  I laid some of them out in this story a couple months ago if you want to get the full run down. Continue…

"Capitalism as we know it will be wiped out"

By Jason Kirby - Tuesday, September 30, 2008 at 11:16 AM - 8 Comments

Since the economic crisis kicked into high gear this month, many pundits have tried to convey how serious it is by describing it as the worst crisis they’ve ever seen.

Somehow it just means more coming from Stephen Jarislowsky…

“I’ve never lived through something like that,” Stephen Jarislowsky, the 83-year-old chairman of Montreal-based money manager Jarislowsky Fraser Ltd., said yesterday after Wachovia Corp. joined Fannie Mae, American International Group Inc. and Washington Mutual Inc. on the list of financial companies to fail in the past month.

…

“I’m more than worried,” said Jarislowsky, who co-founded his firm in 1955 and oversees C$51 billion ($49 billion). “In a market like this, I’m not looking at opportunity. I am looking at preservation of capital. If governments aren’t careful and this mess isn’t solved fast, capitalism as we know it will be wiped out.”

Read the Bloomberg story here.

Damned if you bailout, damned if you don’t

By Colin Campbell - Tuesday, September 30, 2008 at 11:15 AM - 2 Comments

Last week, the $700 billion Wall Street bailout plan was universally panned as a horribly-bad, no-good idea. This morning, with that safety net yanked out from under the economy, criticism has swung to the U.S. Congress for its failure to approve the awful deal.  This is a no-win situation if there ever was one. 

One thing is painfully clear now: there really is no easy way out of this mess. The bailout may be a bad idea, but the alternative isn’t pretty either (if yesterday’s market free-fall was any indication). So here’s a question: what is the best case scenario? I tend to agree with this one, from the economists’ blog Marginal Revolution: “The American economy is in recession for two years and unemployment does not rise above eight or nine percent.”

Bursting the dot-corn bubble

By Jason Kirby - Tuesday, September 30, 2008 at 10:18 AM - 2 Comments

Back in August I wrote a piece for the magazine on the inflated value of Potash Corp., the Saskatchewan fertilizer producer that briefly became Canada’s largest company by market cap. A quick recap: Those bullish on the stock pointed to the fast growing middle classes of Asia, and their desire to eat more meat and vegetables, as a sign that demand for potash (which is used to make fertilizer) could only go up. The stock’s promoters pointed to soaring food prices as evidence this was the case.

The bears, on the other hand, warned a “dot corn” bubble had formed in agriculture stocks.

Well, POP.

Corn Heads for Worst Quarterly Loss as Slow Growth Cuts Demand

RBC will show some guts…maybe

By Steve Maich - Friday, September 26, 2008 at 9:32 AM - 11 Comments

I am delighted to see that Gord Nixon is prepared for a little prudent treasure hunting amid the wreckage of the U.S. financial system. This is encouraging in the wake of JP Morgan’s shotgun takeover of Washington mutual last night.  JPM takes on an estimated $31 billion in troubled loans, but also gets a hold of America’s biggest savings and loan, reaching almost half of the country’s population, for a mere $1.9 billion. TD was one of several banks that had expressed interest in WaMu, but this big fish goes to the same bank that swallowed Bear Stearns las March at government behest.

When the smoke finally clears from this disaster, and it will, JP Morgan and Bank of America are going to be in a very powerfu position in the US financial market. Surely there are going to be some nice meals for Canadian banks too, if only we have the will to elbow our way to the table.

Does Stéphane Dion's promise to cancel the tax on income trusts make sense?

By Colin Campbell - Tuesday, September 23, 2008 at 3:37 PM - 28 Comments

As politicians’ broken promises go, the Conservative government’s decision in October 2006 to reverse course and put a new tax on income trusts was a doozy. The move was so surprising and so punishing for hundreds of thousands of Canadian investors, that it became known simply as the Halloween Massacre. Today, Liberal leader Stéphane Dion announced that, if elected, he would scrap the tax—replacing it with a lesser, 10 per cent levy, which would be refundable for Canadian residents, but not foreign investors. The government would still generate some revenue ($1 billion over four years) while also helping to restore some of the billions of dollars in value the trusts lost when the Conservatives announced the tax, the party says. But while it’s sure to appeal to those still invested in income trusts (particularly retirees who rely on them as a source of monthly income), most observers say the Liberal plan is more political pandering than sound economic policy.

When the Conservatives created the 31.5 per cent tax, which is slated to come into effect in 2011, a number of large corporations, including Telus and BCE, had indicated they would convert to the income trust structure, threatening to take away a massive chunk of government tax revenue. (Income trusts don’t pay corporate taxes, but distribute all their taxable income to unit holders.) It was an unpopular move, but also an entirely necessary one, according to most observers. “There was a significant risk of revenue loss to the Canadian government,” says Lisa Philipps, a professor at York’s Osgoode Hall Law School. “It was a difficult promise for the Conservatives to break but they did the right thing.” Continue…

Chrysler's bold leap, and questionable colour scheme

By Colin Campbell - Tuesday, September 23, 2008 at 2:56 PM - 8 Comments

Chrysler is going electric. It announced today three new plug-in cars, the first of which will roll off production lines in 2010. Yes, the same date Chevy set for its electric Volt. Let the games begin. There’ll be plenty to say about this in the coming weeks and months. But for now, let’s just enjoy this picture of one of the new cars, the Lotus-inspired Dodge ev (there will also be a Jeep and minivan).  Not sure about that bumblebee paint job, but here’s hoping it doesn’t undergo the kind of design dumbing-down the Volt did.

Google calling

By Colin Campbell - Tuesday, September 23, 2008 at 2:19 PM - 1 Comment

We’ve been waiting a long time for this one: the arrival of the Google-powered cell phone.  For now, it’s only being carried by  T-Mobile in the U.S. and comes wrapped in a touch-screen phone made by HTC.  More details here. Why is this a big deal? This is Google’s first big step beyond the confines of the PC and into the world of mobile Internet technology. It’s a vast, untapped new market that Google seems well positioned to take advantage of through things like Google Maps, Gmail, and its well-oiled advertising system.  The first GPhone doesn’t have the polish of the Apple iPhone, but no doubt Google is hoping its phone software will have mass-market appeal. The big question now is, is it too late to this game to catch up to a dominant Apple?

When the next domino falls, look out Canada

By Jason Kirby - Monday, September 22, 2008 at 2:46 PM - 3 Comments

Via Paul Kedrosky’s blog, I came across this column by Nouriel Roubini, whose predictions about this financial crisis so far have come true with astonishing precision. He address where he sees the contagion spreading next. In short, first the hedge funds will fall, then private equity firms will crumble:

Even private equity firms and their reckless, highly leveraged buy-outs will not be spared. The private equity bubble led to more than $1,000bn of LBOs that should never have occurred. The run on these LBOs is slowed by the existence of “convenant-lite” clauses, which do not include traditional default triggers, and “payment-in-kind toggles”, which allow borrowers to defer cash interest payments and accrue more debt, but these only delay the eventual refinancing crisis and will make uglier the bankruptcy that will follow. Even the largest LBOs, such as GMAC and Chrysler, are now at risk.

Roubini doesn’t mention that other gargantuan private equity buyout of the last year, BCE, at $50 billion. Wait a minute, you say, the buyer wasn’t a shodily-run Wall Street firm, but the highly-respected investment arm of the Ontario Teachers’ Pension Plan. Doesn’t matter. To do the deal Teachers’ teamed up with U.S. firms Providence Equity Partners and Madison Dearborn Partners. In fact, a large number of Canadian companies were gobbled up by, or received huge investments from, U.S. private equity players (CanWest, Masonite, Hudson’s Bay Co., the list goes on… ) The obvious question is, what happens if Roubini is proven right yet again, and those PE firms controlling a vast swath of the Canadian corporate landscape go the way of Bear Stearns and Lehman Brothers?

Paulson's power grab

By Steve Maich - Monday, September 22, 2008 at 2:11 PM - 14 Comments

My favourite line from the proposed US$700 billion lifeline to Wall Street:

“Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”

Hands up if you think suspension of the rule of law is a good idea…anyone?…anyone?

FOR MORE: Paulson’s folly