The Canadian Century

Last week, in A Supply-Siders Investment Thesis, I mentioned Dr. Canto thinks the US should pursue a similar fiscal strategy as that of Canada in the mid-nineties. More on that topic from David Hay of Evergreen Capital Management, via John Mauldin. After reading The Canadian Century: Moving Out of America’s Shadow David makes the following points:

1. Canada was in worse shape than the the US is currently. Interest expense, for example, was around 33% of government revenue versus approximately 10% for the US currently.
2. Canada’s success was not without sacrifice. Government spending and employment was cut, targeted tax increases were made, the welfare system was modified and the Canadian Pension Plan (their version of Social Security) was reformed.
3. As a result of these actions, the federal budget was balanced in three years and a surplus was run for 11 years thereafter allowing Canada to cut its federal debt nearly in half. Not only did they reduce debt but also saw GDP growth of 3.3% versus the developed-world average of 2.7%.

Canada, by most any measure, is better off for the changes they made. The question remains, is there enough political will and foresight to make similar changes here?

Source: http://www.investorsinsight.com

Sentiment Update: Pullback from Extreme Levels

The NAAIM (active money managers) and AAII (individual investors) sentiment surveys were released Wednesday and Thursday respectively. Bullish sentiment in both surveys declined from last week.

A Supply-Siders Investment Thesis

“If you put the federal government in charge of the Sahara Desert, in 5 years there would be a shortage of sand.” ~Milton Friedman

Last week, I had the opportunity to attend a presentation titled “Around the World in 90 Days” by Dr. Victor Canto. Dr. Canto is the founder of LaJolla Economics and earned his Ph.D. in economics from the University of Chicago. He is very much a proponent of supply-side economics and in 1983 wrote The Foundations of Supply Side Economics.
It is from this Chicago school of thought that he made his presentation.

The presentation was divided into two sections; the first half covered his macro-economic outlook while the second covered his investment thesis based on this outlook.

Sentiment Update: Feelin’ Good Again

The  NAAIM (active money managers) and AAII (individual investors) sentiment surveys were released Wednesday and Thursday respectively. Both showed a sizable increase in bullish sentiment.

Active managers continue to pile into equities as the NAAIM survey saw a jump in its weekly number from

QE: Prove It First

“Fed itself has admitted in the last couple days in speeches that they don’t know what they’re doing. They just hope what they’re doing works.”

~Kyle Bass of Hayman Capital 10/06/2010 via CNBC

With talk of QE2 in full swing, I found yesterday’s comments from Goldman’s Jan Hatzius regarding NY Fed President William Dudley’s speech very interesting (emphasis is mine):

These are legitimate concerns, but they do not mean QE2 will not have an effect. As President Dudley pointed out, those who are able to borrow will do so at lower rates, freeing up some of the income now being spent on debt service. Perhaps more importantly, QE2 works on other elements of financial conditions, including equity prices and the exchange rate. To the extent these moves bolster consumer confidence, reducing the drive to boost saving, and make US goods more competitive in world markets, QE2 can work through channels other than credit.

Q: What options besides renewed asset purchases does the Fed have?

The main alternatives are to modify its communication with the markets and to tinker with its inflation objectives. Recent speeches by Fed officials have offered some ideas for consideration on both fronts. On communication, he suggested that the FOMC could be more explicit in saying how it planned to respond to shortfalls in meeting its objectives for inflation and unemployment. On tinkering with its inflation objectives (this is our term—decidedly not his!), he suggested that the Fed could, in essence, target the price level over the medium term. Thus, if inflation continued to fall short, then the FOMC would explicitly try to offset that with higher inflation later.

A few things jumped out at me in particular; in addition to lowering borrowing rates the Fed hopes to accomplish via QE2 higher equity prices, a lower exchange rate and avoid deflation with the hope these measures will spur an improvement in the real economy.

Fortunately for us we have a country that has been attempting to spur its economy via these methods for nearly a decade. Let’s take a look at how it has worked.

The first two charts are pulled from a presentation by Mr Masaaki Shirakawa, Governor of the Bank of Japan, at the Second International Journal of Central Banking  Fall Conference on September 16th of this year.