yes, i have heard they are the best, or one of the best. my wife has flown them, and still raves about the service. singapore air is supposed to be one of the best too.
Hi rossi, I think you'll agree that this coincides with with our recent 'conversations.' <g>
With many thanks to TheSlowLane from SI's "The Woodshed" board for the transcription. (Link below)
(Link to audio version of CC available below text transcript )
Don Coxe November 5, 2004 Chicago
Chart: Canadian Dollar Comment: “How High the Loon?”
Thank you and thank you all for tuning in to the call which comes to you from Chicago. Lots to talk about obviously. The topic sent out in the chart was “How High the Loon?” And I chose that because in a funny kind of way it encapsulates the story of what I think is the real market meaning of the outcome of the US election, because George Bush’s victory is a major, major victory in the sense that it establishes now for the first time since the Roosevelt Era, that the Republicans are the majority party.
And even Reagan couldn’t do that because although he was a majority party in terms of the White House and briefly in Congress, now the Republicans are the majority party in the House, the Senate, the White House, governorships, state legislatures, I mean this is a really an amazing landmark. And although the media are trying to portray it that it was a bunch of anti-abortion religious fundamentalists that carried the day, if you believe that there are more than 50 million of those in the United States you’ve got a somewhat distorted view of US reality.
What’s clear though is that it’s the Silent Majority that won and it also gives Bush a mandate to proceed and as you know from my last issue of Basic Points, I believe that part of the policy is going to be the devaluation of the Dollar. Although it’s not the White House that primarily orchestrates it, it simply helps.
And the Canadian Dollar is actually going to be the prime beneficiary or victim depending on your view of all of this.
As you know in Basic Points, I’ve called for the Canadian Dollar to go to par in the next year and a half and we got a breakout on the Loon the last few days and we’re trading at 83.33 now. And this despite a huge Canadian employment number. Despite a huge US employment number. And I say despite a huge Canadian employment number because a huge Canadian employment number guarantees a rise in interest rates which might be considered a negative for a stock market and an economy that are very much commodity-oriented.
But the market understands that commodity prices are set globally and primarily by China. And so what we have here is that despite an employment number in this country which is more than double the forecast and despite upwardly restating by a big amount the previous two months so much for the theory that the government manipulates those numbers because Bush went into the election with terrible numbers for the last two months employment and it turned out they were stronger than that.
By the way that’s what happened to his father. When they restated the job numbers for the last six months of his regime going into the election, they found more than a million jobs that they hadn’t counted before. That might have been enough to save him from Bill Clinton.
So what you can say is there’s honest incompetence in government which is better than what most of the governments of the world are which is dishonest incompetence.
Having said that, what we have is a really fascinating situation for investors. Because the Canadian Dollar is really a momentum currency and it signals the call as to how investors can play the North American free trade zone without owning US stocks or bonds. And I think those attractions will become more and more important as we go along.
Now, we also got the breakout on gold, which as I said in Basic Points, these things would be correlated. We would go through the 430 level on gold and we got the breakout on the currencies and we did not get the breakout upwards on the Euro although we’re trading at 1.2909…1.2933, I believe, gives us a breakout on the Euro if it’s sustained on the Euro and it’s still doable.
The Euro of course is being held back by first of all the strong employment numbers in the US which indicate that the Fed will still be able to keep raising interest rates but also by a series of bad numbers in Europe and also the perception that one of the reasons people were shorting the Dollar earlier – and I can tell you this from my trip in Europe – a huge amount of the election coverage in Europe was the likelihood that the US was going to be tied up by those 10,000 lawyers.
And I was amazed there was actually more coverage of the legal problems of the US in the European press than there was in our press. So this is something that sophisticated Europeans were prepared for. So one of the reasons, of course, for selling the Dollar and buying gold last week was because of the feeling that this election was going to last until February or March or be tied up in the House of Representatives.
There was even talk and it was realistic at one stage if you put together the states as they stood at about 11 p.m. where you could have a tie of the electoral vote and under the law then it was under the House of Representatives but if by some fluke the Democrats had won the Senate and in early returns they had been doing better or at least in those doggone polls, you could have had a situation where the House of Representatives would have chosen the President and it’s makeup would mean they would have chosen President Bush, but the Senate would have chosen the Vice-President and they could have chosen John Edwards, the Democrats having their majority.
So those were the kind of things that were good for gold, bad for the Dollar and yet the amazing thing is that despite a blowout win and stability up and down the line in the country, no lawyer problems, what we have is the breakout is occurring against that backdrop. And we’ve got the sixteen year high on gold and a multi, multi year high on the Canadian Dollar, the US Dollar index breaking down anew and breaking down quite sharply.
So, all of this against some other things. We got copper up again big at 1.3665, CRB index 282 and a half, so we’ve got signals still of a commodities-led strong global economy but the move on gold indicates there are still people who are prepared to use this commodity as the bet against the Dollar, believing that we’re not going to be able to support the Dollar.
So if this sounds sort of stream of consciousness it’s because it’s crucial to me to tie all these factors together in coming up with an investment forecast.
You may say “Why focus on a currency that’s as small globally as the Canadian Dollar?”. Well, because what it shows you is that the Canadian Dollar is the currency that, although it’s a small one, has the best fundamentals. It’s part of the Canada – US Free Trade Zone, NAFTA, and they’ve got budget surpluses and they’ve got trade surplus.
The budget surplus is of course primarily due to the fact that the defense budget in Canada such as it is is devoted mostly to gun control and buying used equipment that doesn’t work from other countries. And so they don’t have to spend the percentage of GDP that Americans do. If Canadians spent on defense what Americans do there wouldn’t be any budget surplus in Canada.
But the fact remains that it is a budget surplus. And the thesis I have in Basic Points is the US, the only way they can address their fiscal deficit is by cutting the trade deficit by creating good paying jobs. See the jobs that don’t get hurt by this terrible trade deficit are working at Wal-Mart or working in fast food joints or service jobs or working as hospital orderly and those kinds of things.
But in the upper Midwest where I work, the factory jobs and those jobs that are related to the factories are the jobs that have disappeared. And they disappeared for the reasons I set out in Basic Points. Three factors driven mostly by the overvalued currency which has to be hauled down.
Now, the question is, what does a strong Dollar policy mean? Because once again, Treasury Secretary Snow said we’re committed to a strong Dollar policy. And everybody harks back, we heard during the election campaign that Bill Clinton and Bob Rubin strong Dollar policy. How do you have a strong Dollar policy when you have a trade deficit over $2 billion a day? Well the answer is first of all you talk up the currency.
But as we heard from the Secretary of the Treasury last year, the strong Dollar policy is focused on having currency that’s hard to counterfeit. So that if you have a Dollar at least you know that it is a Dollar. Which, given how easy it was to counterfeit currencies before, that was not the case, that the new ones that they have are tougher for counterfeiters. Although I respect human ingenuity in this respect and whatever the Washington bureaucrats can devise I’m sure some counterfeiters will defeat. Having had personal experience with counterfeiting the British pound where I ended up in a police station in London for trying to pass a counterfeit British pound that I’d gotten at the Harris Bank in Chicago I can attest to the fact that counterfeit currencies are plenteous and they can be embarrassing.
So, the strong Dollar policy then is first of all rhetoric. Secondly, in other words you talk a strong hand. This is the ultimate in a Texas holding game where you bet heavily even though you haven’t got aces back to back you’ve got a two and a three. Yes, you prevent the currency from being counterfeited but that seems like a pretty basic administrative thing. And the third thing that you do is you indicate that you have policies in place which are designed to reduce your trade deficit. Let me explain.
See, when the US runs a trade deficit over two billion a day in effect it creates Dollar liabilities out there through the Eurocurrency market primarily which are overhangs on the Dollar and therefore contribute to Dollar weakness. So, to the extent that the US improves its trade deficit, that will ultimately strengthen the Dollar. But until that happens, we’re a long way off from that, you’re looking at 5.7% of GDP, the Dollar is inherently weak and everything that Bush has proposed about dealing with it are trivial or banal or purely political or irrelevant.
Imposing a quota on imports of socks from China which he did just prior to the election, that was his only protectionist act, better I guess than talking about Benedict Arnold CEO’s, but talk about a small thing which is designed just to influence the election. Because after all, one of the things you associate with China starting to become a powerhouse globally was socks and sweatshirts and shoes. So to go back to that at a time that what’s really driving the trade deficit is gigantic fully manufactured goods…this was heh, heh, almost laughable. But it didn’t do anything for the trade deficit. Didn’t do anything for the Dollar.
So we have then, that the dynamics of the Canadian Dollar continue to be very strong. And if par for the Canadian Dollar sounds remote, we’ve been there before, we were there the last time we had a full blown boom in base metals at a time that global inflation was not strong, which was the 1950’s. And so it can be done. I think it will be done again, because of the areas of the Canadian economy which are strong and can resist a strong US Dollar. I’m not talking about the auto parts industry, I’m not talking about tourism. I’m talking about the commodity industry.
So I think that we’ve got a situation where the bull market in the Loon will continue. There still is disbelief in Canada about it I can attest to that from e-mails and phone calls. And meanwhile, the fact that we have a bull market in the Euro given the flaccid economy of Europe is a sign of the inherent problems of the Dollar. Because to have people moving out of the Dollar with the employment gains the US is having and the GDP the US has now, into the Euro, given how…I mean the only fast thing I saw in the Continent was riding in the TGV train from Paris to take the tunnel over to Britain. And that’s a wonderful thing. But other than that, forget it. There’s not much going on.
And I’m sitting looking at my screen at 1.2930 on the Euro, that is the all-time high if we later on today go through that and we’re at 1.31 and we stay there than that is a new breakdown on the Dollar. And people are moving out of the Dollar at a time of the best employment numbers for months in the US, overall unemployment at about 5 ½% which is about half of the Continental numbers, what it is is that the basic problems are there and they can only be addressed by a devaluation.
And of course as I pointed out to you, gold is the best way to play this. Now, for those with interest income, you buy Canadian Dollars and provincial Canadian bonds, in other words sovereign credits or semi-soverign if you’re an American. But within the commodity group of the three classifications, we’ve got these three types of commodities now. We’ve separated out the commodity bull market now becomes something of which do you want to emphasize.
If you own base metals, you’ve got a bet on China and that bet still remains a good one. If you own oil stocks you’ve got a bet on the global economy with China at the margin being the price setter, but oil demand’s still strong and we’re coming into the winter heating season so there’s no reason to sell the oil stocks.
Gold is a pure play in the sense that you’re betting on a devaluation of the Dollar. And that is a good bet to make but you must understand that when you buy gold mining stocks – which I’ve been strongly recommending now as that what they should be, your primary investment medium for new money investment into commodities, that’s what you’re buying. You’re not going to be buying it on the basis you’re going to be bailed out by 8% global inflation. That’s not going to happen.
We have this amazing situation of the most severe commodity inflation in decades while overall inflation remains benign. And I’m not going to go through all the reasons for that but what it is is a situation that those who buy gold mining stocks should know what they’re buying. It’s simply a bet against the buck. A good bet to make. And because of the fact that the gold bugs overdid their story earlier, what we still have is a situation where the XAU, which is the gold stock index here in the US, is still nowhere near its high levels, which it had back last year.
So we do not have the kind of speculation even in these. So if you’re looking at the big, high quality gold stocks, the Newmonts, the Placers, the Glamis’ of this world, what you’re going to see is what you’re not doing is paying a big premium for the bullion as you were at this time last year when there was all this talk about gold and there was this talk of inflation coming back and so forth.
What we had was a really speculative and frothy gold market back then and gold mining stock market. This is very different and I can attest to that again as I cite in Basic Points by the very unscientific thing that I’m not getting deluged with e-mail from gold bugs.
And I think that there’s a surprise factor here in what’s unfolding because of the fact that CPI continues to be benign even when we’ve got fifty buck oil. It is a different kind of global economy.
So, it’s far beyond me to explain the complexities of how all this works, I’m just saying that the observer of reality is as follows: that for now the US economy is continuing to be reasonably strong, but I’m worried about it because I think that coming into this winter, if we have a cold winter, we’re going to have a real squeeze on consumer income because they’re still paying high amounts for gasoline and they’re going to be paying huge amounts for heating. And I think the US consumer really is stretched.
And the US is not getting any contribution in its economy from the export side. Exports remain flat and you cannot build a great manufacturing base without some strength in exports. So we’ve got to make the US exports competitive to make the US economy a truly well-balanced major industrial economy. And that can’t be done without devaluation.
Now we had the good news that in Bush’s victory, that means that John Edwards is not Vice President so we don’t have a multimillionaire malpractice lawyer there to prevent any kind of progress on tort reform which was on the list as the third factor on US competitiveness. So, that’s great news but it still means that although Republicans picked up seats in the Senate, they’re still subject perhaps to a Democrat filibuster against any attempts at tort reform.
And in a funny kind of way it’s bad news that Arlan Specter has taken over from Orrin Hatch as Chairman of the Senate Finance Committee because Arlan Specter is a liberal Republican who has a background as a court lawyer and he has not shown much interest in tort reform in the past. On the other hand, if he doesn’t do something about it on an administration-lead bill, he could get purged by his own party.
Still, from the standpoint of the healthcare system, this is really good news, because as we’ve set out, a huge part of the cost of the system in the United States is the litigation problem. So the failure to endorse John Edwards, who by the way apparently I’m told in his own county in North Carolina got less than a third of the vote, what we don’t have then is the problem where the tort lawyers were the real victors in this election. They were among the biggest losers.
On a minor note though, it means that since John Edwards did not run again for Senate, he will be able to go back to his business of getting rich from the healthcare system. And remember, he’s never lost a jury trial. So, they’ll have to build that somewhat into the cost system but it’s better than having him in Washington preventing any overall changes in the tort system.
So, the election was good, it should have produced…if there was going to be a Dollar rally, this should have been it. Because of the surprise factor, it was a surprise that there was stability, it was a surprise that Bush won, by the way, people are actually suggesting that one of the reasons for the sell-off in the Dollar is that Arafat is sick.
Now that’s really reaching for it, because you know I’ve heard about a hundred different kinds of arguments for being for and against the Dollar from various people particularly from those who can’t believe the Dollar should go down, but to suggest that the Dollar depends on the health of Yasser Arafat, boy oh boy, and that that’s the reason why gold is going up and the Dollar’s going down (sigh), I despair.
So, we’re looking at what is a potentially momentous moment. Which is the Dollar, the next stage of the Dollar bear market will be confirmed and I have a feeling it’s going to build momentum. You say “Well if US economic news is good, we’ve got political stability, why should the Dollar go down now?” Two billion a day is the reason. And at some point, at some point we do get the operation of Stein’s Law, which is that if something cannot go on forever it will stop.
You know, China’s foreign exchange reserves are up to a half a trillion, but they can’t keep on buying Treasuries to support the Dollar because their own net cash flows aren’t increasing and besides which, they’ve already taken 27 billion out of their foreign exchange reserves to help bail out some of their bad banks and there’s going to be more money drawing. When they do that, they put Dollars back into the system, globally. Yes, you may say, that’s paying into a local bank, how does that work? It’s the supply of Dollars then, out in the system, because they find their way out into the world. And it means they’re not buying more.
So, at the margin, what we’re not getting is The Great Symbiosis working to buy, you know, quintillions of Treasuries to support the Dollar. And the dynamics still remain negative. So if we close through 1.29 tonight on the Euro and if we close tonight with the Canadian Dollar well above eighty-three cents, and with gold above 432, all of which would seem probable given current prices, then you can say that this is a major week. People will be looking back on this week and saying this is when we realized the US Dollar bear market was the real thing, because it was a good news bear market. It was a time when people should have been attracted to Dollar assets but the basic fundamentals were negative and the only way out for the US to get the kind of balanced dynamic economy that it needs and that it’s really entitled to, is to get the currency down to a fairer level.
A strong Dollar policy which is built on expanding the trade deficit was a snare and a delusion. The strong Dollar policy will be forward looking on reducing the trade deficit by getting the currency down to levels where US goods and services trade with some real chance of being able to trade abroad.
So that’s the message for today and in the meantime, what it means is Canadians should…Canadian companies who are exporters, who aren’t hedging the Dollar, you got to really question the credibility of managements. This is such a powerful force and so you also gotta look in looking at other Canadian stocks – those Canadians on the phone – about industries that stand to be in trouble from this. And those people who said “Oh well any rise in the Canadian Dollar was going to be brief and it’s going to resume its bearish tone” Take a look at the chart now and see what this indicates with this kind of move. What you gotta realize is there are going to be some Canadian companies that are going to lose big if they don’t hedge.
That’s my final note here, let’s put it open to questions.
Doug Webber: Hi Don, my question is, is there a likelihood that the Bank of Canada wants to arrest this appreciation of the Dollar and if so, to what extent can they do it?
Don Coxe: Well, you see the Bank of Canada is conflicted on this because David Dodge has made it clear that he’s been very upset about the unwillingness of Canadian manufacturers and particularly US branch plants to put in productivity enhancing equipment. And they’ve been relying on the subsidy that’s come from a) Canadian taxpayers paying health care and b) from the cheap Canadian Dollar. So for some extent he can regard this as appropriate discipline.
It’s going to be such a shocker to companies…that they’re competing against US companies who continue to spend great amounts of money on productivity enhancing equipment to stay alive. And it’s like a sporting event where if you’ve been used to the fact that the people you’re competing against have to wear lead weights and you keep beating them and so you don’t train because it’s so easy to win. And then you suddenly find out that they’re no longer going to be wearing lead weights, so now it becomes who is in better shape and all of that.
So to that extent I think David Dodge is pleased. Furthermore, his primary mandate is suppressing inflation and there’s three ways you do it. One is by raising interest rates, two is by reducing monetary growth and three is by having your currency strong. And so, he’s doing the first, he’s doing the second, the currency markets are doing the third for him, which means that Canadian inflation will continue to moderate. So that’s the mark of a strong central bank. And to the extent, if he were to call back on his interest rate policy in order to try to drive the Dollar down, he’d be defeated, the markets would beat him.
What we’re seeing here in the behavior of the markets, that it’s not short term interest rate factors that are driving them, it’s an overall perception of the situation of the American Dollar itself. And because Canada has 37% of its GDP in exports to the US, Canada is most at risk or to gain depending on your viewpoint, from the depreciation of the American Dollar.
So, Governor Dodge couldn’t prevent the Canadian Dollar from going up even if he lowered interest rates and if he did, he’d be risking putting the Canadian economy into trouble by accelerating inflation. And he’d be looking at Vancouver housing prices going up 30 or 40% and creating real problems further out.
So, I think he’s got to stick to his knitting. I still think he’s the best central bank governor that we have in North America and I think in a funny kind of way, he may be enjoying having this problem because he has been lecturing Canadian businesspeople for the last two years about this. So now what it’s shown is how right he was. Thank you. ===============================================================
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