Thursday, September 25, 2008

An ABC Voting Strategy for Canadians

25 September 2008, 5 April 2011

In 2008 in Canada, "ABC" stands for "Anything But Conservative."

What is wrong with the Conservative Party of Canada?

Let me start on the other side of that question....

Stephen Harper, the leader of the Conservatives, is a charismatic and articulate leader who has a knack for reading the public mind and saying just the right thing. Overall, I would judge him right in more areas than he is wrong. I admire his stands on Afghanistan, Canadian sovereignty, conventional energy development (still needed) and rebuilding our underfunded military. Mr. Harper understands that 14-year-olds are capable of heinous crimes, and recognizes that the public requires long-term protection from such individuals, who are no less dangerous than adults who behave in a similar manner. He also got the Aboriginal residential school apology right, and has done a pretty good job of not interfering with Canada's social, educational and health services infrastructure.Unlike his American conservative compatriots, he has demonstrated his ability to stay out of the bedrooms of the nation as well.

Mr. Harper is willing to act less conservatively than he believes in recognition of he fact that mainstream Canadians are also in most respects less conservative than he.

But the Conservatives have gone drastically wrong in two areas. In my judgement, despite Mr. Harper's considerable virtues, these two areas give evidence of a party that is seriously off-base, and therefore not yet ready to function as Canada's governing party.

Most importantly, the Conservative Party of Canada (unlike the predecessor Progressive Conservative Party exemplified by Mr. Joe Clark) has mounted an American-style negative advertising campaign featuring "attack ads" directed against the Liberal Party, in an effort to make the Liberal Party candidate, Stephane Dion, "the issue."

Mr. Harper, please allow me to remind you that Mr. Dion is not the issue. The issues are the issue. I will not cast my vote for any party that mounts a negative campaign. It demonstrates a lack of imagination and, more fundamentally, a lack of willingness to engage with the real issues due to a preference for demagoguery.

The Conservative Party will not get my vote so long as it persists in pushing forward with its negative campaign.

Issue number two: Mr. Harper has just reiterated that he will not back down from his party's reprehensible and socialistic tax grab of 31% on the Canadian Income Trusts. I have written extensively in previous blogs about what is wrong with this policy. In essence, the primary concern is that the Income Trusts were originally designed as an alternative funding vehicle for Canadian resource development, enabling Canadian resource companies to acquire capital through the small-scale unit purchases of (fiscally conservative) Canadian citizen investors (in return for generous tax-sheltered dividend payments) to promote resource development at home. The income trust program was a huge success, and it contributed immensely to the promotion of domestic Canadian savings and investment (which was also in dramatic and welcome contrast to the excesses of financial leverage and speculation that have dominated the investment scene south of the border).

The freeze on the income trusts creates three fundamental problems.

(1) The pool of small investor capital for resource development is drying up, and this is hurting resource companies across the board. Canada registers more energy and mining resource development companies on its exchanges than all the remaining countries of the world combined. The so-called "new" Conservative government is freezing out Canada's strongest economic resource in deference to assembling bail-out packages for sunset industries such as automobiles and forestry, which, though always an important part of Canada's infrastructure, will contribute far fewer future jobs to the economy than will energy and mining ventures.

(2) The regressive taxes on the resource income trusts have already begun to drive out small-scale Canadian Citizen investors, as cash-rich international holding companies buy out our resource assets at fire sale prices.

(3) The potential of the trusts to fund Canada's cash-strapped mining and resource development sector - certainly our primary source of new Canadian jobs for the next two decades or more - will now never be explored. As a result, far less development of our mineral resources, and with it the creation of far fewer jobs, will now be Canada's reality.

Personally, I have significant reservations about Mr. Dion's green Shift. It was certainly the wrong platform on which to base his campaign from a strategic perspective. The Green Shift over-emphasizes tax sanctions, and under-emphasizes incentives for behavioural change. However, Mr. Dion is campaigning with dignity, intelligence and patience on an issue-based platform against the misdirected personality-based Conservative campaign. Therefore, I hold Mr. Dion in far higher regard than Mr. Harper, as Mr. Dion is following the high road while Mr. Harper follows the low road. Additionally, Mr. Dion has pledged to hold taxation on income trusts at 10%, in contrast to Mr. Harper's punitive 31.5%. I had already decided to vote for the Liberals prior to their income trust announcement, but this stated policy certainly clinches my Liberal vote in 2008.

As for Jack Layton, the man is a weak leader of the NDP, Tommy Douglas' legacy party. Based on Mr. Layton's public statements, I must conclude that he is a populist rabble rouser, and not the man of ideas that Mr. Douglas was. He seems to be primarily concerned with punishing "big oil" (which in my view has been punished and exploited enough without acknowledgement that this sector has create hundreds of thousands of Canadian jobs and through taxes lavishly funded our government infrastructure, with which Mr. Layton is certainly deeply allied). Mr. Layton has no positive program that I can detect. He is focused on gouging the business sector, without insight that a healthy business sector offers an increased tax stream for the promotion of Canadian educational, cultural, social and health initiatives. Mr. Layton is lost, wandering in the darkness.

Now Elizabeth May of the Green party seems to be campaigning on principles, though I have not yet been convinced that the Green Party is in any way ready to govern at this time. But I credit Miss May, along with Mr. Dion, for steering her campaign on a principled and issue-governed course.

Given my reservations regarding all of the candidates and parties, I will not fault you, the reader, for any vote you may choose to make - even for Mr. Layton - so long as you adhere to the single most critical principle in the present campaign.


Vote Anything But Conservative in the October 2008 Canadian Federal Election!

April 5, 2011: Anything but Conservative again in May 2011? You betcha. The same problems apply. Honestly, I would bring back Paul Martin if I could. He has certainly so far been our most effective leader of the new millennium. But I'm willing to give Michael Ignatieff a chance. I believe Mr. Ignatieff listens to and thinks about what others say to him. A thinking leader would be to our advantage in an ever more complex world!

Monday, September 15, 2008

Gold Tsunami II: Anthropomorphizing Gold

15 September 2008

I wrote recently that there is a tsunami coming in gold.

As a long-term gold investor, it never crossed my mind that gold would retreat to the levels it has recently. Think $739.80 on September 11, 2008 - down almost $300 from its (modestly valued) March 17, 2008 peak of $1033.90. And... as Marc Faber and the Adens have done, let's not discount the possibility that gold could decline further in a global liquidity freeze-up, say to the $600 level (though not in a straight line down).

If this occurs, it will constitute a primary correction - a critical concept that all gold investors need to understand, though this idea is rarely discussed, even in the gold community. I credit Ed Bugos (now the gold small cap advisor with Agora Financial) with defining the concept of the primary correction, and giving it the attention it deserves.

Mr. Bugos has suggested that such a correction would be likely to occur in response to a blow-out top in gold combined with a meaningful bottom in the stock market - as took place in 1975. This pattern has not so far recurred in the present gold bull market.

Gold's recent gains and pullbacks - until the current one, have been modest events, with corrections in the 20% range or less. When gold corrected in 1975, it fell from 6 times its previous level to 3 times its bull market entry level. Today, we would need gold values in excess of $1500 to re-create such a scenario. Also, the 1975 pullback was much more gradual than the current one. So it is difficult at many levels to liken the current events to 1975.

In 1975, 6 years into its 1969-1980 bull market, gold fell below its long-term supportive 65-week moving average and retrenched at levels as low as 50% of its peak value for 1-1/2 years. At present, we have seen a price fall of almost 30% over a 6-month timeframe. If this is a primary correction, it could certainly persist another 6 to 12 months, and a fall of another $200 in gold's market price would be imaginable.

But that would make this a highly atypical primary correction!

By Mr. Bugos' very sophisticated criteria (I hope I am interpreting him correctly), the recent sudden collapse in the gold price constitutes an over-reaction moreso than a probable primary correction. If he is right, then we will see recovery in the gold price when it becomes clear that the Fed is holding the course on its now long-term super-inflationary policies, and the primary correction will lie somewhere further down the road - following an excess of favourable popular sentiment towards gold - and gold mining stocks!

Take it from someone who has been invested in the gold market since mid-2003, the idea of gold investing has not so far come even close to capturing the broad public imagination, as would be required in the case of the primary corrections of the past. The halls of the gold investor conferences are again deserted. The exhibitors can't even afford to fly out representatives to man the information booths. The current gold bull has had periods of exuberance, but has not so far begun to show excessive froth in its 7 to 8 years to date!

If you'd like to know more about the concept of the primary correction, and gain access to Mr. Bugos' incisive gold market investment advice, click here to register for his advisory service.

Fundamentally, the continuing collapse in gold's market price makes no sense at all at this moment in time - though technically, we all know that investments need to test and retest price support levels of all kinds, including those that reside at lower levels than make us comfortable. The problem is that all asset classes are at risk - even gold - when investors have falling amounts of cash to deploy.

As I post this blog, Wall Street has now lost three of its five leading independent brokerages. Lehman Brothers (once an Alabama-based cotton brokerage, and now in Chapter 11) is being broken up to feed the vultures, and Merrill Lynch is being acquired by Bank of America. Bear Stearns is already long gone. Fannie Mae and Freddie Mac have just been nationalized at a cost of $5.2 trillion to the US government's debt ledger. AIG's fundamentals look worse than Lehman's. And the FDIC is on a rapid path to implosion.

News events such as the above are the fundamental factors which drive the value of gold. It's supposed to go up when events such as these occur!

In fact, if investments didn't test and retest in this way, they would rapidly form into bubbles, and then, just as rapidly, pop. Investments just do this. It is a fact of the market.

Technically, gold has broken down from its almost 8-year bull market support levels.

The price of gold may now be in a bearish tailspin towards $600 which could persist for one to two years - or it may not be....

However, one fundamental fact must be considered. Gold is in a long-term bull market because global currencies are devaluing at a rapid rate.

Over a space of days, weeks, months, even several years, no investment price has to be rational (that is, driven by fundamentals).

Investment prices are driven by emotion-based and strategic human decision-making and by financial liquidity (the amount of cash investors have on hand), not by rationality.

In the present case, a liquidity squeeze has simply given investors less cash to deploy, even to purchase high quality investments, such as gold, precious metals, gold and precious metal mining stocks, etc. The demand for physical gold and silver
is at all-time highs. In fact, some physical gold and silver products are no longer even available at current prices, but global commodity prices are set in "paper" markets, where buying in almost all asset classes is declining. Real gold and silver are hard to find, but "paper" contracts in gold and silver are cheap, and perhaps getting cheaper!

Despite recurring departures from rational pricing, as is presently occurring, over the span of many years and decades, rationality has a tendency to assert and reassert itself. That is part of what the testing and retesting of prices is all about. Rational pricing exists between market extremes which are attributable to the vagaries of sentiment, liquidity flows and herd behaviour.

I find it helpful to anthropomorphize gold, which of course is the height of irrationality.

Gold is an inert physical substance without will and motive. It just is. Its value is in what it means to the humans who hold it as a form of savings.

However, it is simply too complex and counter-intuitive to interpret gold's behaviour in terms of the motives of all those who buy and sell it - "black box" computer programs, naive buyers and holders, and savvy traders included.

Adam Hamilton
has made a good case that commodities have recently been pulled down to irrational levels by their linkage to oil in the reformulated CRB index. His argument is coherent. Oil and its products now constitute 1/3 of the CRB, so when oil falls, all the indexed commodities come down with it.

But I'd rather think of it this way....

Gold has a personality, it is humble and unself-assuming, but supremely, flawlessly self-confident. Gold knows where it is going, but it doesn't care how it gets there. Further, gold doesn't like "easy-riders," those who are holding it for predictable (or "minimum") annual gains. Gold doesn't like those who hold it to place demands on it or who have very particular expectations of it.

Gold shrugs off all of that "relationship" stuff.

History tells us that gold is willing to take away 50% in one year, but to give back 100% in another. When it wants to....

And gold stocks can give and take away more!

In short, gold does what it wants to do on its way to standing still - as the only ultimately secure financial investment in the world!

When individuals, institutions and governments behave responsibly in matters of finance, gold doesn't have to do very much at all.

Gold is also willing to be forgotten while we are caught up in illusions of value in things that have no value (think of the US internet and credit bubbles as recent examples only).

Gold doesn't care what we do.

But it knows what it must do, and it does it effortlessly.

Gold stores value in all times and at all places.

It's that simple.

When we value gold at a price that is too low - as is now occurring - gold does not complain. In fact, it richly rewards those who buy it at such prices.

Gold is also willing, however, to disappoint us for extended periods of time. I have often made reference to the SPTGD (S&P TSX Global Gold Index), which has now provided no gains at all to its holders over the past 6-1/2 year period in which gold has tripled (and at one point, quadrupled) in market price.

Ha! Ha! Ha!

Gold doesn't care.

I do feel confident that when the gold price pulls back irrationally, particularly as powerfully as has recently occurred, this signals something entirely unrelated to failure.

The present reversion in the gold price is a signal of quiet, deep power. Gold is gathering its energies for its next surge. Given the sharpest pullback in the bull market to date, I think the next surge will also be the strongest in the bull market to date.

When will gold surge again?

Maybe today.

Maybe in two years.

Maybe... when it wants to.

Gold in fact stands still - it does literally nothing at all - while all the world dances around it.

All of the drama - the surges, the consolidations, the crashes, are phenomena that result from our human reactions to what gold is - which never changes.

We change.

Gold stands still.

This is relativity, more or less as Einstein understood it.

Gold will surge when we comprehend that the value of our currencies has receded. It is our own motion that gives perceived motion to gold.

I know that our human actions will cause gold to surge in market price - almost certainly in the form of a financial tsunami..

I just don't know when.

And I don't need to.

All I need to do is to hold gold, or to hold shares in mining and exploration companies that own the right to hold gold in the ground, or to extract it at their will.

Nothing more.

The golden tsunami will take care of itself.

Appendix: Mark J. Lundeen has published a 70-year analysis of bull and bear markets in all major market sectors. His finding - the present drawdown in gold and gold stocks is within 70-year norms, and they are well outperforming financial stocks, which of course are presently in "crash" mode. Click here for Mr. Lundeen's helpful article.

17 September 2008: Another landmark day in the markets. My present call is that today's $85.00 (11%) move in gold may have been the first ripple of the golden tsunami. The chart reveals that from its low to its high, gold actually moved an unprecedented $100.00 today in response to Ben Bernanke's "gassing up the helicopters" (a phrase I have borrowed from Bill Fleckenstein). Bear in mind that somewhere not too many years down the road, gold will trade up or down $85.00 in a day and we'll think nothing of it. It will be perhaps a one or two percent move. But in 2008, the $85.00 one-day appreciation sits on the ledger at 11%, and the trough to peak $100.00 shift at 13%. What a difference a day makes. Today offered a small taste of what the tsunami will look like, and again, today's action in gold represents only a ripple transmitted to shore from the mid-Pacific, where tectonic plates are shifting (as it were).

My gold tsunami posts are as follows:

There Is a Tsunami Coming in Gold

Gold Tsunami II: Anthropomorphizing Gold

Gold: Safe Haven in the Approaching Perfect Storm

Gold Tsunami III: James Kunstler's Use of the Analogy

Bond Prices: The Seismic Shift That Triggers the Gold Tsunami (IV)

Gold Tsunami V: The $23 Trillion Bailout... and Counting

Gold Tsunami VI: Looking for Patterns in Gold Price Advances

Gold Tsunami VII: This Is It

Gold Tsunami VIII: Gold Mining Stocks Now Participating

Friday, September 12, 2008

Did Musharraf Place a Losing Bet?

11 September 2008

I recall that shortly following September 11, 2001, President and Retired General Pervez Musharraf of Pakistan nominally threw his weight with the United States in the War on Terror.

It is no secret that few decisions in third world countries are driven by moral principles. Rather, third world politics is pragmatic.


Those who make decisions based on principles don't survive long enough to make principled decisions the next day.

Pragmatics rules the third world, and this is a very different political climate than we are accustomed to in the West. In fact, the primacy of principle has been a historically short-lived and localized development in the nations of the West (though of course our actions based on principle are not necessarily more right or correct than actions taking place in the third world).

Pragmatic strategic decisions often await an assessment of which social group has momentum and which social group is most likely to dominate the flow of events in the short to intermediate term.

In developing nations, very few long-term decisions are placed pragmatically, and for practical purposes, essentially none are based on principal.

These are the parameters of political survival that drive the third world.

My point in entering into this discussion is to consider the rise and fall of Pervez Musharraf.

Of course, President Musharraf was an inconsistent ally of the United States at best. He did little to rein in extremism in the tribal regions of Pakistan bordering Afghanistan. Essentially, Musharraf permitted extremism to thrive on the margins of Pakistani society, but he threw the weight of policy and official military deployment behind the United States, and, by extension, the West.

The point of my discussion is that we know full well that Mr. Musharraf's decision was based on pragmatics, not principle. He threw at least some weight of policy support behind the Western nations because he though we would emerge as the longer-term winners of the battles and, most likely ultimately, the war. He respected our ability to dominate in a conflict that deeply divides his State of Pakistan.

On August 18, 2008, President Musharraf resigned.

Following his resignation, the United States has increased cross-border incursions into Pakistan.

I'm not sure what this means.

But if Mr. Musharraf tied his fortunes to the expected success of the United States and its allies in his region of the world, the current developments raise the prospect that his view has not prevailed in his home country, and that another view is rising to prominence.

Of course, the insurgents in Afghanistan retreat across Pakistan's borders in order to plan, organize, staff and equip their missions.

If we do not pursue them there, our military effectiveness will be deeply compromised.

The new government of Pakistan is vigorously protesting the recent military actions of the United States.

On what pragmatic analysis is this present response founded?

My take is that the locals are now casting their bets differently than did Mr. Musharraf.

What will it take to cause Pakistan's leaders to believe that the West will prevail in its defenses against the excesses of the Islamic extremist movement?

I do not know the answer, but I think that this is the question that most requires our strategic consideration.