Market Perspectives

2009 CFA Institute European Investment Conference – Day 1: The Way We Thought About The World Was Profoundly Flawed

“The Way We Thought About The World Was Profoundly Flawed” – That was the key theme of distinguished key note speaker Noreena Hertz as she presented her thoughts on what had sparked the global economic crisis and how we as investment professionals must take a holistic view of globalization and free-market capitalism to ensure we learn from the pitfalls and events that lead to the current crisis and can move forward with a new way of thinking that promotes stable and productive global economic growth, prosperity, while working to provide clients with measurable wealth appreciation.

Ms. Hertz discussed that in essence much of what we should value as a society became obscured with a false sense of security and euphoria during the last boom. A key example is that the investors based forecasts and predictions on economic models vs. main street reality and failed to realized that even complex financial and quantitative models need to consider human emotion and behavior and the irrational herd mentality of society. An example of this, which my fellow industry colleagues will appreciate, is that dogma has sometimes superseded reason, such as the Philips Curve which states that the relationship between unemployment and inflation is such that when the latter is rising, unemployment decreases – well the 1970′s stagflation pops that theory doesn’t it? And one only needs to look at how flawed models predicated steady yields on MBS products, that didn’t end up very rosy either for investors since they didn’t factor in those pesky defaults.

Perhaps the biggest take-away is that the investors and investment professionals need to view the world holistically, actively engage and question their motives and purpose. Investors became laissez-faire and neglected to question the “experts” such as Bernie Madoff, rating agencies and even the US Fed under Alan Greenspan, allowing the “experts” to play on human nature and let dogma rule over reason.

Whether you love him or hate him, in 2007 Peter Schiff may not have being following the herd in predicting a continued rise in U.S house prices, but he did offer that rare dose of intelligent debate that if heeded could perhaps avoided certain pit falls of the slump.

Ms. Hertz’s key point that perhaps more then anything else it was the establishment of what she refers to as the narrative of the “Gucci Economy” of the West that manifested to greed, self-importance and ultimately the unraveling of the seemingly mighty and unstoppable consumer in the U.S., EU and other developed Western economies.

More to come tomorrow from Day 2 here in Frankfurt.

Greetings from the 2009 CFA Institute European Investment Conference

Guten Tag and Willkommen. Over the next 3 days Postro Wealth will be providing you, our readers, with exclusive insights and commentary as we attend the 2009 CFA Institute European Investment Conference which brings together some of the brightest economic and financial leaders in Europe here in Frankfurt, Germany’s financial heart.

The economic and market downturn has affected the global economy across the spectrum. Key areas such as banking and credit availability, global consumption and international trade and government intervention are all crucial topics that will be explored here in Frankfurt and provide our readers with further insight on where the globally is today after the height of the downturn and where it is likely headed in the future.

We’ll hear from industry veterans such as Martin Wolf of the Financial Times, Marc Faber Editor, Gloom, Boom & Doom Report and from leaders at Barclays Capital, University of Cambridge, EDHEC Risk and Asset Management Research Centre, Morgan Stanley and Credit Suisse as they present their views on the global economic crisis, the current situation and provide their wealth of knowledge on how to navigate the new global economy as we move forward.

We’ll keep you in the loop with our daily conference blog updates starting tomorrow and present our final thoughts, key learnings and take aways next week.

Global Stimulus – U.S. vs. China

This time last year the very framework of economic globalization was threatened. An asteroid had indeed smashed into the backyard of planet finance and the drug of cheap money kept that the good times rolling had finally rolled over and caused the patient to overdose. The global economy was on the brink and central banks around the world enacted unprecedented measures to ensure that liquidity kept flowing preventing the system from flat lining.

Massive liquidity injections by the world’s leading central banks ensured that any remaining confidence was kept alive – indeed a year later things are looking up and the LIBOR rate is back under 20 basis points from a high 464 basis points on October 10, 2008. Of course the government stimulus, the medicine ,and the global economy, the patient, is still in the hospital and although the life support may now have been turned off it remains to be seen what happens what the patient leaves the building back into reality of the everyday.

Government Stimulus – it has been the saving grace of this economic downturn. Without it, we may very well have witnessed a far different outcome then the rising in stock markets and rebounding GDP figures over the two last quarters.

It’s hard to argue against the success of the China’s 4 trillion Yuan ($585 billion) stimulus package announced last November. It has single handedly saved not only the Chinese economy but the global economy from a more painful plunge and kept GDP growth on pace in the world’s most dynamic emerging economy.

Take for example China’s investment in railways. Its rail system, the busiest in the world according to the World Bank, has been allocated $90 billion in expanding the countries high-speed rail network; the largest of these projects will connect Beijing and Shanghai in a mere 4 hours from the current 10. This $90 billion represents a total spending of 1.5 trillion Yuan on transport infrastructure alone. Yet the government is only contributing 30% of the stimulus funds with the remainder being financed by Chinese banks which have embarked on a massive lending spree – some 7.3 trillion Yuan in loans have been issued since the start of 2009.

The U.S. Government enacted a $787 billion package – this figure accounts for very little in terms of direct investment in infrastructure; a point that many economist now argue is one of the key the reasons for the continued rise in unemployment and lack of job creation. For those who are curious, the U.S. stimulus packaged allocated a tiny $8 billion to high speed rail in comparison to the Chinese.

China’s approach to stimulus has been markedly different to that of many OECD economies. In the EU, U.S. and Canada, stimulus has supported tax-cuts and unemployment benefits and while these government stabilizers are crucial to those in need, they do not address the real problem of creating long-term sustainable job creation and economic growth.

Perhaps the U.S could take a card out of the Chinese Stimulus play book, after all it is the Chinese that are the true ratings agency to the Americans. As China funds the U.S. Stimulus and indeed their economic recovery, the Chinese should be wary of increasing debt levels without ensuring and measurable economic recovery. Inflationary threats will make Beijing question it’s future support, but for now we watch and wait whether the patient will sprint forward or experience another relapse requiring more medicine.

Canada To Outperform U.S. On Commodities

The theme of the “Asian Century” is something we’ll discuss much more over the next few months. It’s a theme that is supported by the continued resilience and growth in Asia, particularity China and India.

One only has to look at the rather positive data out of Australia over the last quarter to understand that Canada will also benefit from the “Asian Century”.

Despite diving off a cliff earlier this year, along with most other commodities, copper prices have rallied some 60% from their lows in March. In fact commodities never stopped their secular bull run, they merely hit a a rather rough bump in the road.

The Canadian market is set to shine and outperform the Untied States. Consider this fact, 45% of the TSX composite index is in resources; that is nearly three times the share in the U.S. Almost 60% of Canada’s exports are linked to the commodity sector, roughly double the U.S. exposure. How else does one explain that the Canadian equity market has managed to outperform the S&P 500 this year by a cool 2,000 basis points!

The Shanghai composite index can be fickle; so rather then being dealt a “Shanghai Surprise”, Canada offers investors a direct, established and basically low-beta way to be a part of the emerging markets bull via commodity exposure. A bull that we believe is is just getting started as the “Asian Century” unfolds.