Philippe Daigle – Long and Slow Recovery ahead for Canada.

Wisdom series: Long, slow recovery ahead for Canada, says Boeckh President 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 Euro money.
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.

Q: What 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.

Q: Have 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.
Q What 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.

Q: Do 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.

Q: How 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.

Q: In 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.

Q: If 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.

Q: Are 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.

Q: What 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.

Q: You 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 is 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.

Philippe Daigle- Secret of a moist turkey

In my family I have taken full responsibility for the Christmas Turkey. I grew up in a home where the process of preparing the turkey was as important as the turkey itself. To me that is the essence of the holiday season and I wanted to pass that on to my kids. After many years of experimentation I have concluded the best way to get flavourful poultry, regardless of how it is prepared, is to start with a brine. Brining adds moisture and flavour to poultry and helps to keep it from drying out. A turkey can be a serious investment in time so you want to make sure it is perfect, especially if you’re entertaining. Whether you grill, smoke, fry, or roast your turkey, you should use a brined bird.

Supplies: To properly brine a turkey you need to start the night before you plan to cook. You will need at least 10 to 12 hours (plan on 1 hour per pound of turkey), a container large enough to hold your turkey and enough brine to cover it. You’ll also need salt, water, sugar, seasonings, and enough room to refrigerate it.. A large stainless steel stock pot or even a 5 gallon clean plastic bucket would make excellent containers. Whatever container you choose the turkey needs to have enough room to be turned so it should be big. Both Reynolds (Oven Roasting Bag for Turkeys) and Ziploc (XL Storage Bag) make very large food safe sealable bags that are great for brining.

Turkey: Now let’s get to the turkey, I prefer a fresh not frozen, free-range is even better. The turkey should be cleaned out, completely thawed if you must use frozen, and should not be a self-basting or Kosher turkey. Self-basting and Kosher turkeys have a salty stock added that will make your brined turkey too salty. A fresh turkey works best, but a completely thawed, previously frozen turkey will work just as well.

Brine Ingredients: To make the brine, mix 1 cup kosher salt in 1 gallon of water. You will need more than 1 gallon of water but that’s the ratio to aim for. One way of telling if you have enough salt in your brine is that a raw egg will float in it. Make sure that the salt is completely dissolved before adding the seasonings you like, making sure not to add anything that contains salt. Brines can be spicy hot with peppers and cayenne, savoury with herbs and garlic, or sweet with molasses, honey and brown sugar. Whatever your tastes are, you can find a large number of brine recipes on the web.
Sweetening the Brine: Sugar is optional to any brine; however it works to counteract the flavour of the salt. While you may choose a brine without sugar, I do recommend that you add sugar (any kind of “sweet” will do) to maintain the flavour of the turkey. Add up to 1 cup of sugar per gallon of brine. Like the salt you need to make sure that the sugar is completely dissolved.

Set-up: Place the turkey in a container and pour in enough brine to completely cover the turkey with an inch or two to spare. You do not want any part of the turkey above the surface of the brine. Now you put the whole thing in the refrigerator. If you are like me, making enough room in the fridge is the hardest part of this project. The turkey should sit in the brine for about 1 hour per pound of turkey. Brining too long is much worse than not brining enough so watch the time.

Keep it Cool: Don’t have room in the refrigerator? Try a cooler. A cooler big enough to hold your turkey makes a good container for your turkey and brine. The cooler will help keep it cool and allow you to brine your turkey without taking up precious refrigerator space. If the weather is cool, but not freezing you can put the whole thing outside until you need the turkey. I personally find that Christmas is usually cold enough to leave the turkey in the garage in a cooler. If the weather is warm fill a zip top bag with ice. Place this in the cooler with the turkey and brine and it will hold down the temperature during the brining process.

Rinsing: When you are ready to start cooking your turkey, remove it from the brine and rinse it off thoroughly in the sink with cold water until all traces of salt are off the surface inside and out. Safely discard the brine and cook your turkey as normal. I must stress that most people overcook their turkey; I consider mine ready when the internal temperature reaches 170 C ° and I let it rest for at least 30 minutes before carving. If you cut into it too soon, you will lose most of the moisture you worked so hard to increase. If you follow these step, you will notice the second you start to carve your turkey that the brining has helped it retain moisture. The first bite will sell you on brining turkeys forever, and after you’ve tried this you will want to brine all your poultry.

From my family to yours,
Merry Christmas,
Philippe Daigle

Philippe Daigle-Benjamin Tal Economic Update at CAAMP

Philippe Daigle – Canadian mortgage lenders in ‘good shape’

Andrew A. Duffy, Times Colonist

Published: Thursday, November 20, 2008

The only way this province and the country will face a U.S.-style housing crisis is if the employment situation takes a drastic turn for the worse, the head of the Mortgage Brokers Association of B.C. said yesterday.
Brian Peterson said Canada’s stronger loan underwriting practices didn’t leave Canadian lenders as exposed as their U.S. counterparts, who have watched hundreds of thousands of people default on their mortgages in the last year and a half.
“If we are going to see some problems going ahead they will likely be recessionary, related due to the decline in the overall economy rather than problems in the financial system,” he said, noting Canadian lenders have a very strong track record when it comes to mortgages in arrears.
Recent figures from the Canadian Bankers Association show the percentage of mortgages in arrears — 90 days past due — in this country is hovering between 0.25 and 0.27 per cent, while the U.S. reported 4.5 per cent of its mortgages were in arrears as of the second quarter of this year.
According to the Canadian Association of Accredited Mortgage Professionals’ most recent report — the Annual State of the Residential Mortgage Market in Canada, released this week — in recent months there has been a small rise in the arrears rate, to 0.28 per cent as of August 2008. That means about 20,000 to 25,000 of the eight million home owners in Canada are in arrears.
The report said the small rise in the national arrears rate was concentrated in Alberta, where the rate increased to 0.3 per cent from 0.15 per cent a year ago.
There has also been a slight increase in B.C., from 0.14 per cent to 0.18 per cent.
According to Will Dunning, chief economist for the CAAMP, the Canadian arrears numbers could be higher if all mortgages were taken into account. The ones making up the data come from the major mortgage lenders, and not from those who may dabble in the subprime market.
Of the $833 billion in residential mortgage credit outstanding in Canada, only five per cent is made up of the subprime market, compared with 20 per cent in the U.S.
Jim Murphy, president and CEO of the CAAMP, said that is due to the nature of the Canadian market.
“In Canada we have different products. One of the big problems in the U.S. was the teaser rates, where people qualified for the mortgage, but just barely, and when the mortgage was reset two or three years later — now and last year — there were all sorts of people that probably should never have been in a mortgage to begin with and that drove the U.S. default, arrears and foreclosure rates,” he said. Foreclosure, though a rarity in Canada does happen on occasion, he said, “but nowhere near the same degree as the U.S.
“Canadians are conservative and tend to pay down their mortgages,” he added, noting average Canadian homeowners have 70 per cent equity in their home. “And a lot of it is related to the overall economy and until recently the Canadian economy, and certainly in B.C., has been fairly positive in terms of employment levels and that really drives things like house purchases.”
The fact that Canadian lenders tend to have tougher guidelines than their American counterparts is being credited with keeping the market in this country stable, and Murphy expects that will continue.
“I would argue the underwriting principles were tougher to begin with, and in light of what’s happened in the U.S., people are going to be much more thorough than they were,” Murphy said.
Peterson, however, did warn the number of Canadian mortgages likely to go into arrears in the coming months could increase, but it’s unlikely to have anything to do with the kind of loans being written.
“I would expect if the employment situation changes those arrears will change, but not dramatically,” he said. “People in business for themselves now experiencing a slowdown may have some trouble, as will people being laid off in industries like forestry, which is in rough shape, or mining, which is slowing.”
He was bullish on B.C. as a whole, however, noting the economy and jobs are still being buoyed with preparations for the Olympics, while the province remains a desirable place for people to relocate to and vacancy rates in the major centres remain very low.
“It means if you have an unsold unit there is a rental market for it, and interest rates are low and going lower so it is cheaper to carry things,” he said. “All this will cushion us from a really bad downturn. We will have a bit of a slowdown, but it might be relatively short-lived.”

aduffy@tc.canwest.com