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David Dittman is managing editor of Investing Daily (, overseeing a world-class team of editors and analysts who share a common goal: providing individual investors with sound advice and market intelligence across a wide range of sectors. Whether the focus is on... More
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Investing Daily
My blog:
Canadian Edge
My book:
The Rise of the State: Profitable Investing and Geopolitics in the 21st Century
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  • Canada's Real Gold Medal

    Canada stands on the highest plateau these days, casting an impressive glow in the aftermath of the Winter Olympics. Equally impressive is the string of reports coming out of think-tanks, NGO research shops and global investment houses touting the story of the Great White North.

    That commentators’ emphasis is on “the fervor and ebullience” and the “enthusiasm of Canadians…young and old alike” rather than the tragic death of Georgian luger Nodar Kumaritashvili or the lack of snow at one of the main alpine venues is testament to the fact that organizers carried off a fine show. Even those whose job it is to know how these things work inside and out came away most impressed with the Canadian people.

    “Not since Sydney have I seen a city embrace the games the way they’ve been embraced here,” Coe told the Associated Press. “My gut instinct is that is what these games will be remembered for. I haven’t been anywhere where there’s been an empty seat in the house. And the people look like they want to be there.” By preparing well, innovating in some areas, going with what works in others, Canada was able to impress the world despite serious challenges. In other words, the fundamentals were in place, which allowed the people who had to the energy and the resources to adjust to unpredictable events.

    The recently concluded Vancouver Games demonstrate a lesson that seems to have become a way of doing things in Canada in recent years--that is, our neighbors to the north are now reputed to be among the most prudent people on the planet. But this prudence obscures what could, too, be a potentially explosive upside in coming years--particularly for US-based investors who will get the added benefit of putting greenbacks to work in loonie terms.

    Canada came into the Great Recession with a decade’s worth of balanced federal budgets. Canadian banking regulators wouldn’t allow subprime mortgages to infest the country’s housing market. Although Canada’s major financial institutions had exposure to exotic and toxic securities via foreign operations, the foundations of their businesses are in Canadian retail banking.

    One proponent of the Canadian investment story, ScotiaCapital, perhaps betraying a little bit of pride in the homeland, is calling it the “Northern Tiger,” invoking a comparison we made exactly nine months ago that suggests Canada, as developed as it is and as much as it shares with the US, for example, and the UK, has many key factors in common with the economies that are now driving global growth.

    Only if you prepare yourself to be in position can you benefit from good luck; similarly only if you prepare will you have the resources to adjust to adversity. Canada--compared to most similarly endowed countries around the world--has managed its abundant natural resources extremely well. At the same time, sound lending practices in the years prior to the global financial economic meltdown leave Canada in excellent position to extend its global influence, attract increasing amounts of foreign capital, and grow at a more durable rate than its developed-economy peers over the next 10 years. Canada is an example for the world and has a great deal of credibility on the global stage. One of the pillars of its new standing is its record of sound fiscal management, which left the government in better position than most to respond with public spending measures when private demand virtually evaporated in late 2008 and early 2009.

    These efforts, however, left Canada with its first budget deficit in 10 years. The Harper government will follow through with another CAD19 billion in stimulus spending in fiscal 1010-11. Canada will still have the strongest balance sheet of any G-7 country. Some observers have questioned whether the government put forth a credible plan to balance Canada’s federal budget by 2014-15; Finance Minister Jim Flaherty’s numbers suggest the use of some rather rosy assumptions about rising federal revenue tied to growth that, at least as far as the rest of the world’s contribution to Canada’s is concerned, seems hard to imagine at this point.

    And Flaherty has consistently fallen on the optimistic side of things during this recession; as late as November 2008, in fact, Flaherty forecast continued budget surpluses--not until the following winter’s budget season did he concede the necessity of picking up the slack for the private sector and providing a cushion for out-of-work Canadians. Nevertheless, the question of whether the balanced budget train arrives exactly on time does not obviate the fact that the car is on the rails, moving forward at a reasonable clip--which is a lot more than can be said about Canada’s developed-market peers.

    More-rapid-than-forecast fourth-quarter growth and the broad-based nature of this expansion suggest the Bank of Canada (BoC) will begin to raise interest rates after June. This is more good news for US-based investors in Canadian-dollar assets. As the loonie appreciates against the buck--higher interest rates will boost demand for and strengthen Canadian assets--so too will the value of your units and shares in income trusts and high-yielding corporations. The Canadian dollar’s profile as a commodity currency may also rise and therefore become more attractive to international investors than the Australian because the Reserve Bank of Australia is widely felt to be nearing the end of its tightening cycle, while the BoC is yet to embark on its own.

    What we’ve learned over the last six months is that a strong loonie doesn’t necessary spell the end of the Canadian economy; although manufacturing has been hurt, other parts of the economy have responded to new demand sources, from the US as well as other parts of the world. Not only have certain well-run Canadian businesses proven to be resilient in the face of historic challenges. So, too, has Canada’s entire economy. This is evidence of a strong labor base, with a highly educated populous feeding it.

    One of the often-overlooked facts of the global economy--and this is easy to miss given the experience of Halloween Night 2006 and its aftermath--is that Canada, once its course of cuts is complete in a couple years, will have the best corporate tax system in the world.

    What separates Canada is that no other developed country has the store of natural resources in relation to the size of the domestic economy that it does. But its leaders are doing things in a manner that will allow the Great White North to derive great benefits from those inherent gifts now and well into the future.

    High Road to China

    Andrew Willis of the Toronto Globe and Mail brings word that a couple of Canadian oil sands players--Athatbasca Oil Sands, which is in the planning stages of an initial public offering (NYSEARCA:IPO), and OPTI Canada (TSX: OPC, OTC: OPCDF), which holds minority stakes in projects run by Nexen Energy (TSX: NXY, NYSE: NXY)--are venturing to China to find capital.

    Act Now

    Are you serious about investing in the Canadian story? Join Roger Conrad in sunny San Diego, California, April 23-24 for the 2010 Wealth Society Member Summit. You’ll have a chance to sit down with Roger one-on-one to talk about where to find the best ideas to generate total returns as Canadian income trusts convert to high-yielding corporations and how to position your portfolio for the year ahead.

    Join Roger and his colleagues GS Early, Elliott Gue, Yiannis Mostrous, and Benjamin Shepherd at the historic Hotel del Coronado--one of the top 10 resorts in the world according to USA Today, one of the top 20 hotel/spas in the world according to Travel + Leisure, and the No. 2 place in the world to get married, according to the Travel Channel.

    And on April 23-24, Coronado Island will also be the best place in the world for relaxation and profit. We’re expecting 72 degrees, sun and fun. You may find all details at

    Call 1-800-832-2330 (between 9:00 a.m. and 5:00 p.m. EST Monday through Friday) or go online now to reserve your seat at the table. Space is limited.

    David Dittman is Managing Editor of Personal Finance.

    Disclosure: "No Positions"
    Mar 10 10:51 AM | Link | Comment!
  • Independence Is Just a City in Missouri

    Editor’s Note: In March 2005 David Dittman, associate editor of Canadian Edge, reviewed Murray Rothbard’s The Case against The Fed. The book was published in 1994, a year before Rothbard’s death and is arguably fresher and more newsworthy than when it was written--a must read for investors interested in what could be in store for the US economy down the line.

    Both the book and Dittman’s review serve as a reminder that the long-term consequences of Alan Greenspan’s actions when he headed the Federal Reserve. Enchanted by the so-called maestro’s music, few listened to the critics and were surprised by the credit crisis. Don’t make the same mistake again.

    Independence Is Just A City in Missouri

    By David Dittman

    In fall 1910, six men set forth from New Jersey, bound for Georgia on what turned out to be arguably the most bountiful “hunting trip” in the history of mankind. Traveling under assumed names ostensibly in search of ducks, Senator Nelson Aldrich (R-RI), Henry Davison, Paul Warburg, Frank Vanderlip, Charles Norton and Professor A. Piatt Andrew emerged from their one-week jaunt with the draft legislation that would become the Federal Reserve Act of 1913.

    By the way, the sextet jammed out this foundation for a central bank at the plush Jekyll Island Club, owned by one J.P. Morgan.

    The Fed is now widely regarded--by professors, politicians and the public--as an “independent” institution. But the story of its founding and the conduct of its business, as recounted by Murray Rothbard in The Case against the Fed, published by The Ludwig von Mises Institute, explodes that common conception.

    Rothbard, who passed away in 1995, was dean of the Austrian school of economics. The Austrian school, founded by Ludwig von Mises, is anti-statist and pro-free market and advocates sound money. The establishment of the Federal Reserve and the consequences it spawned--an alliance of finance and government, fractional reserve banking, creation of money by fiat, debasement of the currency, ever-growing federal deficits, constant inflation--violate all three of these principles. 

    In the interest of establishing a more “elastic currency,” competing titans J.P. Morgan and John D. Rockefeller established a united front on the central bank question at the end of the 19th century. Coincidentally, in Rothbard’s history this marked the end of robust ideological competition between Republicans and Democrats and the onset of financier domination of equally statist political parties.

    What Morgan and Rockefeller, through their respective agents, angled for was the cartelization of banking with its foundation in a US central bank. While the first attempt failed (The Fowler Bill of 1902), the Morgan and Rockefeller forces had manufactured a “grass-roots” movement in their favor. Their lieutenants marshaled the support of key academics and non-financial businessmen to educate the public via carefully placed news articles, opinion pieces and speeches.

    The events at Jekyll Island--drafting the legislation and creating the structure--represented step one in a two-step process to establish the banking cartel. Step two involved controlling the personnel who would implement and manage it. Those who crafted the legislation, by their professional associations, fell neatly into either the Rockefeller or Morgan camps: Aldrich, Warburg and Vanderlip (Rockefeller) and Davison and Norton (Morgan). Piatt had a foot in each camp.

    The Federal Reserve Act, with only slight variation from the Jekyll Island draft, passed in December 1913 and took effect in November 1914. According to Rothbard,

    The new Federal Reserve System had finally brought a central bank to America: the push of the big bankers had at last succeeded…the Fed was given a monopoly of the issue of all bank notes; national banks, as well as state banks, could now issue only deposits, and the deposits had to be redeemable in Federal Reserve Notes as well as, at least nominally, in gold…with the prestige, power and resources of the US Treasury solidly behind it, it could inflate more consistently than the Wall Street banks under the National Banking System, and above all, it could and did, inflate even during recessions…and it could try to keep the inflation going indefinitely.

    The new rulers of this system came from the Morgan camp. Benjamin Strong, a protégé of Henry Davison, the number two partner of the Morgan Bank, filled the critical position of Governor of the New York Fed. Strong was the sole agent for all open market activity of the regional Federal Reserve Banks. When the US entered World War I, Strong further consolidated power as Secretary of the Treasury William Gibbs McAdoo (once a failing railroad man bailed out by Morgan) essentially appointed him the sole fiscal agent for the US Treasury by deviating from long-standing practice and depositing all US funds with the Fed.

    In an April 1978 article in the Journal of Monetary Economics the late Robert Weintraub showed how the Fed fundamentally shifted its monetary policy course in 1953, 1961, 1969, 1974, and 1977--all years in which the presidency changed hands. These varying rates of monetary growth all occurred under the same Fed Chairman, William McChesney Martin. 

    Once upon a time, the former jazzman now carrying out the work of the Jekyll Island sextet, Alan Greenspan, was a Misean (a “follower” of Ludwig von Mises). In 1966, Greenspan wrote:

    [G]overnment deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which--through a complex series of steps--the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold…In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.

    Oh what a difference a day makes.

    David Dittman is Managing Editor of KCI Investing, Associate Editor of Canadian Edge and Co-editor of Maple Leaf Memo.

    Disclosure: no positions
    Jan 20 1:22 PM | Link | Comment!
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