Thursday, January 28, 2010

J. D. Salinger died

He is one of those authors whose work is both inspirational and weak, because it speaks to a very specific segments of the population. I was discussing Salinger yesterday with a colleague, he a bit younger than me, and he read the book two years ago – he was singularly unimpressed by the prose, topic and pace of the story.

I read Catcher in the Rye at university, and I then wholly agreed that the story is trivial, and generally boring, but I forgot to whom this story was speaking too: teenagers in general and teenage boys in particular. I read Salinger as part of a course I took a McGill University on the 20th Century Novel. The teacher was Hugh MacLennan, a writer in his own right and by then a raconteur long past retirement age (he was by then in his late 70s), he died a few years after I graduated, I believe that mine was the last class he thought at McGill. I was a young French Canadian kid, switching from the French school system to English so that I could eventually attend a top American or English university (it was also 3 blocks away from the paternal home). In discussions with my parents they suggested that exposure to 20th century literature would help me get a feel for the language, its pace and format. Until then my exposure to literature was very different: Zola, Gide, Prouste, Camue Celine (I guy buy the way), Malraux, were my anchor points. I knew nothing of English language literature. I had never heard of Foster, Maugham, Yeats, Joyce or Eliot (never mind Shakespeare or Donner).

I was a perfect specimen of Montreal’s famous Two Solitudes, as described in Hugh MacLennan’s 1945 book of the same name. More difficult now to have such barriers with the internet…then again one is always surprised! Looking back today, I would love to sit in Professor MacLennan’s class. I was too young and inexperienced in any kind of English literature to fully benefit or appreciate the privilege of listening to one of the 20th Canadian literature giants. Born in 1907 he knew most of the authors personally, which made for very entertaining classes. I guess that’s what education is all about – I suspect now that his was the equivalent of the Master Classes you can sometime catch on PBS (e.g. Domingo does Opera, McKellen does Shakespeare).

This class led me to discover several things: first I never had heard of J.D. Salinger’s Catcher in the Rye, second never volunteer! Introducing himself to the class Professor Maclennan asked the assembled class if anybody in the class hadn’t read Catcher. I raised my hand, the only one to do so, in a class of more than 100 kids – there was general laughter, and marked me to professor MacLennan for the rest of the year (several classmate later admitted that they too hadn’t read to book…). I also discovered that Montreal is really a divided city along language lines (also to a certain extent religious lines – most French speakers are Catholic most Anglophones are protestants – but that less important today as Eastern Canada is largely agnostic/atheists). The cultural division between the two segments of Montreal had never read struck home until about 4 years ago, when discussing the stupidity of a salesman in a shop to a colleagues (and mentioned that it was like being in the dead parrot sketch). Blank looks all around, my colleagues were very well read but their education had bypassed Month Python completely – they had never heard of these guys, and their impact on comedy (even here)..

Going back to our story (sometimes I think I ramble like the Two Ronnies) Some of my French Literature heritage has been ruined forever, especially Zola’s Germinal – it was used for a whole year in French class for semantics (I still get chills). Others, I just didn’t get, very much like Salinger, many French writers were writing for very specific age groups. The most famous is/was Marcel Prouste a 19th century French writer who wrote the epic 6 volume series; In Search of Lost Time. I’ve read maybe a 100 page out of 5,000 he wrote, and I kept putting the first volume down. My father told me that he faced the same problems, having bought the entire works in his 20s. He finally read the series cover to cover in his 60s. .

So this is my remembrance of the life of J.D. Salinger

Wednesday, January 27, 2010

Level 3 Assets: What’s up with that and other Bugbear!

Level 3 assets have been bugging me big time. Basically, US FASB establishes how each bank “marketable” assets are valued.. For example Level 1 assets because there is a widely known market price; as an example you own shares of Research in Motion (RIM). Valuing the shares for balance sheet purpose should be simple, but its not; balance sheets are a “snapshot in time”, and have by definition several limitations; don’t even get me started on the tax implications. Assuming that the bank owns RIM shares; what’s the value of the shares, the average price paid, the price at the end of the year, or the average stock price during the year? The difficulty is easy to see, and each “value” can be justified. In fact, what is generally used in the US is the value of the shares at the end of the year…no better than either other methods but as long as everybody uses the same methodology.

Level 2 assets are more complicated, the best example are interest rate swaps, where two parties exchange the form of interest they pay (e.g. fixed rate Vs. floating rate). As an example a company borrows money based on a short term floating rate – because that’s what investors want, but the company wants some level of certainty, hence it wants a fixed rate. The valuation of a swap is based on a model; insofar as the are observations of interest rates (these can and do change), but at anyone point a bank can determine the value of the assets based on these curves. The bank didn’t ask for a price for the swap from other market participants, it used interest rate curves and futures price to determine the “value of the swap”.

Level 3 assets are the complicated ones; these are assets such as mortgage backed securities (MBS) where there is no real market for the assets, each security is different and complex, and historically the assets “value” of these assets have been determined purely by models. Part of the problem is that these models make some rather fundamental assumptions (which have proved very wrong) that can have a dramatic impact on the value of the assets, as an example in the past if the MBS was rated AAA by a credit agency the likelihood of loss was determined to be zero or close to zero (turns out these suckers were much riskier than . Part of the dilemma is that the real estate market has changed dramatically over the past few years…

In 2008, the U.S. authorities declared (via the FASB 157) that Level 3 assets were whatever the banks wanted them to be. So in August 2009 the Congressional Oversight Panel was told that the total amount of Level 3 assets held by the major US banks was USD 658 billion. Representing on average 5% of the banks’ total assets. Part of the problem is that for many of those banks these level 3 assets represented more than 80% of their market capitalization. As an example as of the end January 2010 JP Morgan’s total market capitalization is USD 158 billion, as of March 31st, 2009 JPM’s total level 3 assets was USD 144 billion. JPM is today considered one of the US’s best financial institutions, moreover, it is widely know that in the case of JPM, their exposure to the MBS market was “minimal”. …

On the other hand Goldman Sachs was a major player in the market. As of March 31, 2009, as reported in its 8-K, Goldman Sachs’s level 3 assets amounted to USD 54 billion (at that time equal to 65% of it market cap), in the second quarter these level 3 assets apparently rose to USD 94 billion to fall back (as per the 8-k) to USD 46 billion. What is truly amazing is that in the space of 6 months USD 50 billion in GS assets moved from Level 3 to level 2 or were sold. This is a truly spectacular number, and it equal to 6% of GS’s total assets. On the bright side GS never tried to spin those numbers, in fact they go largely unmentioned, but it is truly amazing that over a period of 6 months GS saw a USD50 billion rise and fall of its level 3 assets. By the way, between march 31st and September 30th GS’ balance sheet shrank by USD 43 billion…

I’ve been looking for the notes regarding the “rise and fall” of Level 3 assets in other banks on the list, but so far no luck. I’ve not found any other bank mentioning a massive change in their asset clarification – in fact over the past 6 months GS’s balance sheet has remained relatively static (overall).

This morning I was enjoying my morning coffee and grapefruit with Ms. FitN when I can across the following article in the local French language paper

« Haïti: les orthopédistes veulent être payés »

Which translates to: Orthopedist surgeons who volunteered to go to Haiti want the Quebec Government to pay them their salary. My first reaction is: Are you fu%&ing kidding me! Now I grant these guys that out of the goodness of their own heart they volunteered their time to go and help the Haitians suffering from broken bones. It appears that their union (the doctors’) asked the government for the daily payment – because the payment in no way reduces the value of the volunteering efforts. Their comparison: Fireman – yep the guys who earn (by their own admission) CAN$ 6,000 per week (CAN$300,000 per annum) are comparing their situation to guys who earns CAN$ 70,000.

On second thoughts, I still think that “What the Fu$k applies”, its clear that getting paid $800 a day to work in Haiti is probably enough to cover their expenses, but so what. The whole point of volunteerism is just that you give of your time, not you give your time for partial pay.

Friday, January 22, 2010

Canada's 2010 Economic outlook

Where is Canada’s economy going in 2010 and 2011, this is not only idle curiosity on my part but also part of my day job. At heart I am agnostic, I believe raw data, but I’m not married to any one indicator, because it is easy for indicators to morph from leading to following, usually when an indicator becomes a policy tool…

My favorite data point is credit creation

(12% per annum – at no time has credit creation in Canada become negative), and number of hours worked (growing in Canada after a dip in 2009), in a deep recession I disregard unemployment numbers as too much can be hidden to make the information useful as a barometer of economic activity (especially since a large percentage of new jobs are created in small and medium size companies – not the large caps). Personal experience/history is also important (history doesn’t repeat itself, but it usually rhymes).

My take: OECD economies are facing two or maybe three contraction drivers: deleveraging by consumers (not by choice), aging baby boomers moving from capital appreciation to capital preservation in their investment strategies, and government deficit as far as the eye can see. Canada is one of two exceptions (the other being Australia). Although Canada’s government debt has risen dramatically during the current recession, 2/3 of the additional debt was backed by marketable assets (Quantitative Easing), which will be sold once the crisis has abated. In fact, the appetite by investors for high quality bond products is almost certain to make this process seamless. In Canada, for every dollar being invested into the stock market, nine are being invested in bond and synthetic bond products.

At a macro level and despite the economic conditions that prevail in the rest of developed economies, Canada has a number of attractive features: low wage inequality, a relatively homogenous population, fair education system and a low cost single payer health care system. As a net energy exporter (Oil, gas, electricity, uranium) and rich in many natural resources: Iron, zinc, copper, wood etc. Canada’s governmental debt is lower than all other OECD countries, around 76% of GDP, against 85% for USA, 80% for Germany, 100% for italy.

Problem arise when you assume that everything else is equal, already Canada’s manufacturing base is being affected by our strong currency – the Canadian dollar is trading about 10% higher than it should, and parity with the US dollar within the next few months is almost a certainty. Consumption accounts for about 50% of Canada’s GDP, exports another 20% and the balance 30% is manufacturing. This segment of the economy could be badly affected.

Our economy is closely tied to that of our southern neighbors. Earlier this week the Bank of Canada’s Monetary Policy Report hedged its bets when it came to the view on the global economic outlook:

“It is possible that the recovery in global demand could be more vigorous than projected, resulting in stronger external demand for Canadian exports.”

Another important downside risk is that the global recovery could be even more protracted than projected.”

In a nutshell the Bank of Canada is has no firm idea what will happen to the global economy over the near term.

So my predictions:

(1) Nominal GDP growth of less than 3% for 2010 & 2011 – which results in a lot of excess capacity. Most of the “pain” in the economy has been felt by the manufacturing sector, a shrinking part of Canada’s GDP (down from 33% in 1990 to 27% today)

(2) Muted inflation, if natural resources prices rise, the Canadian dollar will also rise, creating a natural inflation hedge

(3) Interest rates remain accommodative for the next 12 months, until the early part of 2011. Historically, the BoC has raised interest rates only after the Feds.

(4) Unemployment remaining high, but slowly falling back from the 8.4% to 8% over the course of the year.

Finally, I hope that I am wrong and that the economy grows more quickly, but the impediments are substantial for such an open economy. Our destiny is out of our hands.

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Friday, January 8, 2010

Airport Security

Two days ago, Ms. FinN and I flew back to Montreal from Cancun. We had spent two weeks in the sun, away from the cold and the snow. There was some level of trepidation as to the security we would encounter at the airport, so we arrived very early (way too early it turns out).

First thing first, the highway between Merida and Cancun just begs for a Porche Carrera, you could easily hit 250 Kph on that road... its a very straight an quiet highway in the Yucatan. Anyway we arrived at the airport far earlier than I had anticipated, returned the rental car at Hertz, and walked across to the terminal -- there really is something to be said for small airports.

We quickly found the Air Canada check-in counter, we had already printed our boarding passes, so it was rather fast, our entire trip has been that way. On arriving in Cancun in December we cut across the terminal (we've been there a few times already) and skipped a long line (don't know why it was there) to walk down to the customs area. As we arrived int he customs zone, a security agent opened a new lane, result: total time in Cancun airport (including bag retrieval) was 20 minutes. Anyway, we arrive at the Air Canada counter and there is nobody waiting, just a family shifting cloths between bags to get the maximum 25kg per bag allowance. Again, we arrived at the airport at 11:45, and at 12:15 we are already checked in.

We were lucky, first car to arrive at hertz, about a dozen arrived just after we did, and returning cars in Mexico is bit more complicated than just about anywhere else in the world.. and check-in at Air Canada, were promptly after we check-in about 15 passengers were suddenly waiting to check-in after us.

I then got really nervous, because I've got a certain rule on travelling; if too many good things occur something really bad will follow; e.g. the airline will lose our bags, accrued security etc etc. Anyway, we walk to the security counter and there is no appreciable wait time, so we sit down for our last Mexican meal, at an airport restaurant for about 2 hours (they had Wifi so we went to town).

Eventually we made it trough security (about 5 minutes total) and went to wait for our flight. We arrived at the gate, where they announced that our flight would be boarding soon (as was a JetBlue flight a few gates further), this was 45 minutes before our flight was scheduled to leave! Anyway giving the first class passengers, parents with kids and anxious travels a chance to get on board, we finally walked to the gate (still about 30 minutes prior to departure) when the gate attendent made its "last Call" announcement, we were just about the last people to board, we sat down (emergency exit row -- how lucky can you get) and the pilot announced that we were leaving early (20 minutes early in fact).

Security at the gate we the usual, show us a picture ID and your boarding pass, now this is the interesting part, the JetBlue flight I mentioned earlier that was off to NY, they had the whole nine yard security screening, with pat down of each passenger and each piece of carry on luggage being completely emptied, and checked for... I don't know what they are looking for! Anyway, sitting smugly in our "non-prison" like flight, we taxied by another terminal where most of the US carriers seem to be located, and I could keep from thinking that these passengers flying to the US in the dedicated terminal probably didn't have as much of a pleasant experience that I did flying back to Canada.

It sure makes me happy not to be a super power