Financial Update

· TSX 1.36pts (Reuters) on Christmas Eve-closed Thurs and Fri
· DOW +47.07pts
· Dollar +.67cto $.82.70US. on Christmas Eve-closed Thurs/Fri
· Oil +$2.36 to $37.711US per barrel.
· Gold +$23.30 to $870.40US per ounce
www.bankofcanada.ca/en/rates/bond-look.html Canadian bond prices


The Financial Post has been running “The Wisdom Series” in which it asks prominent Canadian business men the same series of questions about today’s economy. I found the responses of Anthony Boetckh worth sharing. Quoting from article attached “(Authorities) have plans in case of nuclear attack but there was no disaster plan for a meltdown in the financial system.”

Wisdom series: Long, slow recovery ahead for Canada, says BoeckhPresident of Boeckh Investments Inc., Anthony Boeckh,

Jacqueline Thorpe, Financial Post Published: Monday, December 22, 2008
From 1968 to 2002, he was chairman, chief executive and editor-in-chief of Montreal-based BCA Publications, publisher of, among others, the highly regarded Bank Credit Analyst, a monthly big-picture analysis of the U.S. economy and financial markets. BCA is now owned by Euromoney.

He was also chairman of Greydanus, Boeckh and Associates from 1985-99, a fixed-income investment firm which managed $2-billion in assets when it was sold to Toronto-Dominion Bank in December, 1999.

With a PhD in finance and economics from The Wharton School, University of Pennsylvania, Mr. Boeckh has taught economics at McGill University and is a founding trustee of the Fraser Institute.

He recently spoke to Financial Post economics writer Jacqueline Thorpe about what he sees as the key challenges ahead.

QWhat stage are you at now, both in life and work?

A I work with my son and his brother-in-law and my former CFO and a few others essentially managing family assets. They do all the investing. I spend all my time looking at the big picture.

QHave you ever seen the global economy in worse shape?

A No. It sounds trite but it's a very complex and very dangerous situation. I think the thing that is so frightening about it is the speed of the collapse. Nobody's had time to adjust to it. The whole system is frozen up -- it's completely paralyzed -- and people are panicking. The people in authority don't know what's happening, didn't know what was happening before we went into it.

They had no idea of the risks. They had no game plan. They have plans in case of nuclear attack but there was no disaster plan for a meltdown in the financial system. They're making up the rules as they go along and crossing their fingers and hoping it works.

QWhat is the reason for how we got here?

A The fundamental cause of this thing is the deeply flawed international monetary system. You really have to go back to Nixon and Aug. 15, 1971, when he took the U.S. off gold. At the time, it really was as clear as a bell what that signified and it really meant the U.S. was not going to submit themselves to international monetary discipline....That began the whole process of inflation. [Former U.S. Federal Reserve Governor Paul] Volcker put an end to that in the early '80s but after that the inflation really showed up in the form of credit and asset inflation. We've really been in a credit in asset inflation for 20 years.... The rise in private debt relative to GDP was a very stable relationship for a long time, they moved up very close together. Then the growth in debt just started to take off relative to GDP. Every time you'd have a recession, you'd get a little correction and then it would take off again. Then after the last recession in 2000-02 there was no correction in the debt at all. It just kept going straight up. The big flaw in the system was there was no discipline on the United States to live within their means.

QDo you think we should be back on the gold standard then?

A The gold standard was denigrated and has been for decades. People say it was a really rigid system and there were all these crises in the 19th century, but one way of looking at it is it imposed a discipline on the system and nobody's figured out a better way to impose discipline.

Even though you had crises every 10 years or so, they were never catastrophic. You took off the discipline in 1971 and we've had a debt bubble, an asset bubble building for 35 years and we're facing a crisis now much bigger than in the 19th century. The only way of preventing it from becoming a disaster is to print a whole bunch of money and have massive fiscal deficits, which nobody would argue isn't going to cause problems in the future.

QHow does this compare to other economic crises in the past, like the stagflation of the 1970s?
A That was also a pretty scary time as well. It was a totally different type of situation. It was an inflationary drama and there [were] the two oil price shocks and an actual shortage of oil because of the OPEC embargo. I was living in the U.K. at the time ... and it was really a first-hand look into the depth of this thing because the coal miners were on strike and there wasn't enough oil and the government put the economy onto a three-day work week and the stock market dropped in half and then it dropped in half again. So things just fell apart and you just had this feeling of being out of control, and I think that's the same sort of feeling now for different reasons. Nobody really has anything solid to base a view on ... [People] are just terrified their assets are going to go to zero, they can't retire, they won't have any money, they won't have a job.

QIn terms of the policy response, are we on our way to getting things fixed?

A I don't think "fixed" is the right word because it's not a question of fixing it. The whole issue is trying to contain the downside. The concern has been that ever since this started the authorities are lagging behind, they are always playing catch-up ... [Now] the Treasury and the Fed are so deep in this thing in terms of bailouts, there's no way they're going to stop. Eventually I think it's going to work. That's why I don't think we're looking at a 1930s scenario.

QIf you were running the country, what would you do?

A I think in Canada the government has been much more complacent, in part for good reason because the banking system is in much better condition. We have been big beneficiaries of commodities and a lot of companies have made a lot of money so there is a bigger cushion here but at the end of the day, Canada is extremely vulnerable if deflation gets prolonged because we're very dependent on commodity exports and, of course, they get slaughtered in an extended deflation. But also because we're a small and open economy, there's a limit to what we do and how we do it.

QAre we facing a long-haul recovery for the market now or do you see some conditions in place for a rebound?

A I think it's going to be a very long time before we really think of getting back to "normal," whatever that means, because I don't think things have been normal for a long time. It's just that it was all disguised under a bunch of debt. It's going to be a very long and slow recovery in the economy -- assuming we don't go into a disaster scenario, which is possible but not likely. The markets are very anticipatory. The cliché is they anticipate the recovery six to nine months ahead. If we are going to have a recovery ... after another year, then the markets could easily hit bottom in the next three, four or five, six months. My sense is it has come down so fast and so far, that we're probably not all that far from a bottom.

QWhat is your longer-term outlook for the global economy?

A Basically we're going through a transformation of transferring private debt into public debt. That will go on probably for years. It will allow the private sector to deleverage but will eventually lead to a fiscal crisis. We won't be aware of it until we get the next recovery. Then there will be a real problem because there will be too much government debt out there, and interest rates are going to start going up early in the cycle, and everybody's going to be afraid of that and with all the stimulus they've put in the system, there's a real risk of inflation taking off again. The really big concern is on energy because you look around the world and all the energy companies are slashing their capital budget, which means in the next recovery there is going to be an even bigger shortage of oil and gas, and you can't print oil. I think we're going to have a series of crises, and a lot of volatility, and we're not going to get back to anything we recognize as normal for a very long time. I think in the next recovery oil is going to up dramatically. Unless we have an extended depression, energy will come back for sure.

QYou are a founding trustee of the Fraser Institute, which is dedicated to free markets. Is capitalism under threat?

A Capitalism needs to be judged over very long periods of time, and if you do that and look back in history, in countries where it has taken root, it has generated sustained massive improvements in living standards everywhere. But capitalism is fraught with recurring crises because of its competitive nature [which leads to] creative destruction. Nobody has figured out how to stop that nor should they. The trouble is, it's not so great for the people in the short term which are part of the destruction. Like the domestic car industries. They are in the process of being destroyed, they will probably get bailed out but eventually they will be destroyed as they have been in the U.K. and a lot of places. It's not so great if you're one of those guys but a lot of industries are rising up all the time and it's part of the capitalist process, that innovation is constantly taking place. You've entrepreneurs out there trying to find to ways to use new technologies, to create profits, and that's what creates rising living standards.