A Republican will sit in Ted Kennedy’s Seat. President Obama is floating a “spending freeze” that has left-leaning pundits either a. comparing him to Herbert Hoover, or b. invoking “1937!” but still comparing him to the Republican who preceded FDR.
Meanwhile, in Alberta, provincial liberals have proposed an industry-friendly reduction in oil and gas royalty rates at a time when Premier Ed Stelmach--leader of Alberta’s Tories--is plunging in the polls because of his mishandling of the province’s most important economic issue. Stelmach’s political difficulties--he’s getting squeezed from left and right on a position that was flawed from the start--are likely to result in a royalty-rate reduction that could be announced by the end of January.
OK, Stelmach’s Tories are losing ground not to the liberals but to a newer, younger, dazzlingly named conservative rival, the Wildrose Alliance, so it’s not quite as topsy-turvy as what’s going on stateside. But the potential consequences for potential natural gas producers in Alberta are much clearer.
A provincial energy ministry “competitive review” instigated by the premier is said to be on the way to his desk; Stelmach ordered the study last summer when the reality of the economic downturn and the potential for unconventional natural gas production essentially forced a reevaluation of Alberta’s energy industry. Companies that left Alberta for British Columbia and Saskatchewan may have cause to return.
A January 12 report by Energy Navigator found that an energy company drilling an unconventional shale gas well in Alberta must pay the province CAD165 in royalties before it shows CAD100 in profit. On the other hand, in British Columbia, which revised its royalty structure to attract producers and encourage natural gas production, a company drilling the same unconventional well must pay the government only CAD36 in royalties before it shows a profit of CAD100.
That Alberta oil and gas producers could be looking at more favorable royalty structures is, obviously, a positive; every little bit that helps the bottom line counts. However, at this point the folks who have to manage these companies would settle for predictability. The current Alberta regime’s handling of the royalty structure has sowed mistrust among industry players and among investors.
As one industry executive put it to the National Post, “The industry and the investment community feel there's a substantial lack of credibility with regards to past measures that have been put in place that are short-term in nature and don’t really address a solution for Alberta to remain competitive.”
Under Stelmach’s watch Alberta raised royalty rates just as signs of recession were popping up in 2007. This initial mistake was followed by five adjustments. The market’s been confused by his government’s inconsistency and would welcome a definitive resolution.
This is one clear time when the policy’s been wrong from the start, efforts to mitigate the initial error have been insufficient, and the people who made the decisions should and probably would lose their jobs but for the fact that the next provincial election is two years off.
Central Banker Speaks
It’s a rather bland statement on its face. But Bank of Canada (BoC) Governor Mark Carney’s observation that changes in the way governments manage foreign currency reserves will lead to increased demand for and purchases of Canadian assets would certainly be bullish if it comes to fruition.
In a recent interview with the Financial Times Carney said, “There’s no question that reserves continue to grow, that reserve management strategies are becoming a little more broad in their asset classes and some of that will be reflected in purchases of Canadian assets.”
Canada’s top central banker discussed several issues with the FT, among them President Obama’s approach to bank regulation, US debt, Paul Volcker, and a double-dip recession.
Here are excerpts compiled by the FT from the videotaped interview (italics ours to distinguish questions from answers):
President Obama seems to be embracing the notion that too big to fail is a real concern, and that they need to be able to break banks up. Is that the right approach?
Certainly we need to build a system that's robust to failure and it's important to have the ultimate sanction of the market for financial institutions. All of us found ourselves in a position over the past couple of years where firms had to be saved in order to ensure some measure of function in the system. That has to be rectified.
How worried are you about the US deficit and debt right now?
The fiscal response of G20 nations as a whole has been extraordinary, and it is entirely reasonable that debt-to-GDP in the G20 will go from about 70 per cent, as it is right now, to about 120 per cent or more over the course of the next four or five years. That is a major move, and it will require consolidation of fiscal positions in the US and other major economies. Those decisions need to start to be taken in the near future.
Paul Volcker, who seems to be having a lot of influence on the White House's financial reform at the moment, has been very outspoken in his view that banks should not be engaged in proprietary trading. Is he right?
Mr Volcker has an important point, but where do you draw the line between proprietary businesses and market-making businesses?
How much of a restriction would you put on proprietary trading in banks that we know pose a real systemic risk if they fail?
The devil is in the detail. I’ve had discussions with Mr Volcker on this issue. But it's got to be an engaged debate, so I'm not going to give you a blanket answer.
Which side are you on?
Well, we start from two principles. One is you have to have a system that's robust to failure, so we have to move to a system where institutions can fail in an orderly fashion. Secondly, as a central bank, what we care deeply about is that markets function and that we can enlarge the number of markets that are continuously open. We might not have liked what equity prices were during 2008-09, but at least we always knew what they were and you always could transact. You couldn't transact in a host of derivative markets and you had challenges in repo markets for anything other than the most liquid government securities. That's totally unacceptable. So we have to work to make these markets open. That means we're going to need firms that are market-makers.
Is double-dip recession a fear?
It’s certainly not our base case expectation. It always sounds odd, but central bankers talk in terms of positive risk. There is a possibility of more momentum in emerging markets for longer, and a faster return to growth in major economies. That’s not our base case, but things could go more right than expected.
Volcker’s Rise and Financial Reform
A little more than a month ago we took an uncharacteristically aggressive swipe at President Obama and his administration’s approach to the longer-term issues exposed by the global financial crisis and recession.
Well, Paul Volcker is indeed ascendant, but this could be as much for show as for substance--particularly as his sudden prominence (he stood at the president’s shoulder when the announcement of the “Volcker Rule” was made while Treasury Secretary Timothy Geithner was off in the wings) occurs so soon following Senator-elect Scott Brown’s stunning win in Massachusetts.
Reuters’ Felix Salmon identifies four Democratic proposals for financial regulatory reform and paints a gloomy picture of prospects for eventual passage of a bill that does anything other than preserve the status quo.
At the bottom of his post he directs us to a more nuanced version by Tim Fernholz of the The American Prospect. This is a little “inside baseball” with a leftward spin for sure, but it’s no less illustrative of the fact that a system of checks and balances conceived in the late 18th century doesn’t easily bend to the vicissitudes of a general public riled up by information churned out of a 24-hour, seven-days-a-week news cycle.
And Fernholz says there are really only two Democratic proposals--so only one too many instead of three.
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Roger Conrad is editor of Canadian Edge, Utility forecaster, Chief Strategist of Portfolio 2020, Co-editor of MLP profits.
Disclosure: "no positions"