All Things Considered: September 2011

Canada seems to have become the darling of big-time, big-money U.S. fixed income investment managers looking for a safer place for their cash. I drew this conclusion while watching a panel that was mostly focused on the current financial woes of southern Europe and the U.S. At one point the moderator asked one of the panel participants, a senior executive and adviser to a company that is one of the biggest bond and treasury bill buyers on the planet (China is bigger), where safer bonds can be found. The list he offered was short – Canada, Germany and Brazil.

A couple of weeks earlier I had watched a similar panel discuss the state of equity investments and where the best – in this case, companies that offered the lowest risk with the best potential returns – could be found. Without hesitation one of the panelists said Canada. He didn’t recommend any individual companies but instead suggested index funds or broadly based mutual funds. The reasoning was straightforward. Canada’s banks and financial institutions are sound, Canada has vast amounts of natural resources (gold, oil, other minerals and produces a lot of grains and oilseeds) and it avoided the worst of the recent worldwide recession.

The bond guy also said the Canadian economy, while not without potential perils because of close ties to the U.S., was sound and the country has a plan to deal with deficits and debt. That last point puts Canada in a different league than the U.S. where it’s all politics all the time. In the pursuit of a point or two in the opinion polls or ideological purity the U.S. seems incapable of dealing with debt, deficits, desperately high unemployment, slumping consumer demand, an unrelenting mortgage crisis, soaring corporate profits, stagnant average family incomes or a high-cost, underperforming health-care and health insurance system

Meanwhile parts of Europe are making the U.S. look like a bastion of fiscal sanity. Greece has become the poster boy. It has an inefficient, ineffectual tax system. It is loaded with debts that it may not be able to or want to repay. It has a generational divide between the baby boomers who ran up the debts and are unwilling to pay them and their children who are being stuck with the bills and a lower standard of living than their parents enjoyed.

The Greek calamity has at least provided one service – it has bumped Ireland, Iceland, Portugal and potentially Spain and Italy from the headlines. Not long ago Ireland was proclaimed the Celtic Tiger. It had lowered tax rates, adopted an unrestrained free enterprise ethos, loaded up on risk and debt and ridden high on a real estate boom. It all came to a bad end and the Celtic Tiger is now mounted on somebody’s wall.

Iceland went a similar way, freeing its banks from constraints, making regulation a bad word and, in effect, throwing a party. Unfortunately the party was paid for with other people’s money and a credit card. When it all came due the banks were bust, the government was bust and the people were left to clean up the mess and take a pledge not to throw any more parties.

The countries that are now on the better guy list for the fixed income investor are quite different but have a few things in common. Brazil, like Canada, has natural resources and agriculture. Like China, it is developing, has strong internal demand and is raising average incomes. It also has a focused government and regulations.

Germany doesn’t have much in the way of natural resources. But it does have a well-educated, highly innovative workforce that it combines with sound business leadership. It has regulations that many in the U.S. and some in Canada would brand as red tape but that serve to keep much of the folly, stupidity and unfettered greed out of its policies and practices.

Back in the 1970s greed was proclaimed as good. Maybe it is, in small doses. But unrestrained, uncontrolled, unaccountable greed is what has put Greece on the brink. It is what brought the Irish tiger to a bad end and it is what sent Icelanders back to their fishing boats.

The U.S. is obviously much bigger than Greece and the others. It has a better opportunity to turn itself around. And for Canada’s sake one hopes it will. But no deeply indebted country can withstand the willful blindness of politicians and the unrestrained greed of multimillionaires for long.

At some point one can only hope that some adults will take control of the U.S. debate and point to Canada, Brazil and Germany. The lessons are straightforward. Rational regulation is good. Education is good. An innovative workforce is good. Sound responsible business leadership is good. And, on important matters, political compromise is good.

Greed, however, is bad.