AIA Forum: Economic Sweet Spot Just Around the Corner

“If the economy is going to turn sometime next year, the stock markets are going to turn six to 12 months ahead of time. That’s the time when, in a matter of days or weeks, you make huge gains.”

Right now, he says, Wall Street has one trillion dollars parked on the side in institutional cash, and Canada about 100 billion dollars. “One day next year, something will happen, and all of that will start heading for the market.

“Superior investing is a long-term proposition made up of surprises, but if you’re properly positioned and prepared, you can withstand that sort of thing. And then the trends–last year I emphasized that the trend is everyone’s friend–but right now the turning points are there, and (you have to be prepared) to catch the sweet spot that becomes the trend.

“That is the stage that I believe our whole world is at right now.”

In an economy where the U.S. dollar continues to be strong despite dropping interest rates–fueling a continued trade deficit–Graham gave the Canadian economy a resounding passing mark in his report card on our economy.

“The ‘Good Ship Canada’ is somewhat more fragile than ‘Supertanker U.S.A.’,” but in very good shape, the further the Quebec referendum fades into the past. “But not the old Canada, the Canada that ran up those horrific deficits. No one will ever be that stupid again to do what we did to ourselves.”

Debt to GDP is down to the mid-50 percentages–a very respectable global level–as a result of which we are “no longer taxed to death.”

Graham says he is stunned that Canada broke the trillion dollar market in GDP in 2000. Though next year estimated growth is at less than 1.0%, with 2003 projected at 3.0%, the confluence of factors–the value of the Canadian dollar, our low debt levels, our inflation rates, buoyant profits–make Canada a powerful investment combination not yet recognized by the world at large.

International currency traders still think of us as drawers of water and hewers of wood, but pure natural resources are much less a part of our economy than even 20 years ago, says Graham. “We are a much better diversified economy than we were. Watch the productivity gap (with the U.S.) narrow. Watch Canadian profits perform better than U.S. profits–real true profits. Ultimately profits drive stock markets and Canadian profits are much better than American profits.

“We have our fiscal side under control, and I don’t think that the world knows that yet. But you cannot judge (the Canadian economy) in isolation. The automotive industry is part of the fabric of consumer spending; you’re part of the fabric of every economy. We are coming off two great years, 1999 was a great year, 2000 was an even better year. There was a great run in the 1990s, so these vehicles will be coming in for repair.

“Yes I realize that we all had to slow down, consolidate and catch our breath. Little did any of us realize the hidden dangers. So rather than going right, as it should have, a whole lot started going wrong.”

A pivotal issue was the rise of oil prices to $35 U.S. a barrel when experts had expected no more than $25. This caused a cascade of problems, such as California’s electricity crisis. Then, when the high-tech bubble burst, it carried away the merger mania, too. The result was extreme market volatility.

“Share prices were just blowing in the wind. In volatility can also lie opportunity lost and found–Nortel was down at $7 but now at $11–that all of us choose to act on or pass by, but it requires a steady nerve.”

And then September 11 happened and the world was turned upside down, says Graham.

“All equity markets have been left facing their second down year in a row. We would last have to go back to 1973, 1974 when we last had two down years in a row.

“All of us, as a result of that fateful Tuesday, are left with question marks and challenges.”

The outcome has been a trading of places of sorts between the old and new economy companies. The formerly sought-after tech sector is now much less attractive than old economy companies like General Motors, which is now much more attractive to investors.

While recessionary economic levels continue to loom, the short-term prospects are strong, says Graham. “All the ingredients for a recovery are there, if not in 2002, certainly in 2003.”

The U.S. economy, a major driver of the world economy, while shocked into a recession, remains unstoppable.

“All that restructuring, defense spending, next year should see us looking a little bit better, but after that, a gangbusters recovery is coming that we should all believe in. The U.S. economy is still the eighth wonder of the world. They’ve left the whole world behind them.”

Their strength lies largely with the technology in which America leads the world. Consumer electronics, travel, Internet, and communications are all key sectors experiencing huge growth in terms of the percentage of American households that have them, and especially the prospects of converging of these technologies.

“Yes, we over-hyped and over-financed it, and we’ve now got to reevaluate it, but it’s not going away.”

He closed with the statement that it is not time to lay back and be complacent, but is a time to be prepared to take risks. “The rewards are there if you do.”