Ezra Levant

Today's moron award goes to Ezra Levant, who claimed during a CTV panel discussion with Garth Turner and Jeff Atkinson that the stock market this morning voted on the prospects of a coalition government, returning the largest net drop in the Canadian equity market ever.

I wondered how long it would take for the Conservative Party to trot someone out to pass on this canard, and I must say I'm not surprised it was Levant - someone no one in the Conservative party listens to any more - was the moron du jour.

The following chart illustrates the U.S. markets falling in unison with the Toronto index. You can bet that U.S. markets fell on renewed concerns over the economy, as did the Toronto 300 index. Oil and gold - both prices set internationally - were down precipitously and this always has an outsized effect on the Canadian market.

Ninety nine of one hundred U.S. investors don't even know we have a government let alone one about to fall.

Nice try Ezra.

I've been meaning to put together a comparison of past bear markets but the folks at dshort.com already have. Phew, ducked a pile of work!

If you have any interest at all in equity markets do spend the time to click through this set of charts arranged in a slide show. Its informative and fascinating.

Click on chart to view slides

At some point in the near future I'll weigh in on what it all means.

In the meantime, here's an interesting excerpt from a speech delivered yesterday by James Bullard, President of the Federal Reserve Bank of St. Louis:

Tonight I talked about three funerals and a wedding. The ongoing financial market turmoil may have caused the death of many cherished ideas about how the macroeconomy operates. One funeral was for the idea of the Great Moderation. Certainly financial markets have seen exceptional volatility recently, and some behavior in those markets has been unprecedented. Still, I am not ready to bury the Great Moderation yet-we will need a lot more very volatile data on the real side of the economy to truly depart from the experience of the past 25 years. A second funeral was for our financial system as we have known it. That transformation has occurred and continues, with repercussions for U.S. and global financial market regulation. A third funeral was for monetary policy defined as nominal interest rate targeting. At least over the near term, any additional influence through interest rate reductions will be limited, and the focus of monetary policy may turn to quantity measures. The wedding-the idea on the rise-is fiscal policy defined as more direct intervention in certain parts of the private sector. While the Fed will continue to be innovative in providing liquidity to markets through existing facilities and possibly some new programs, an important part of the response to ongoing financial market turmoil will come from fiscal policy intervention. This runs counter to much of the thinking in macroeconomic policy circles over the past two decades. It may be discomforting or rewarding or both, but stabilization policy in the coming months and quarters is likely to look very different from what we have been accustomed to seeing. St. Louis Fed President James Bullard

That Wall Street has gone down because of this is justice. They built a castle to rip people off. Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience. Steve Eisman

On a day when the Toronto Stock Exchange TSX Index hits a four year low, and the U.S. market's S&p 500 index hits a five year low, might I recommend this fascinating and approachable (if occasionally technical) article as one of the best insider stories on the root causes of the meltdown that I've come across to date - from Condé Nast's Portfolio.com:

The End, by Michael Lewis, November 11 2008

The outrageous bonuses, the slender returns to shareholders, the never-ending scandals, the bursting of the internet bubble, the crisis following the collapse of Long-Term Capital Management: Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?

At some point, I gave up waiting for the end. There was no scandal or reversal, I assumed, that could sink the system.

Then came Meredith Whitney with news.

FFF - Flaherty's Fiscal Fumbles - destined to become a regular feature. Today's instalment: Flaherty's moves have only enabled more corporate tax avoidance.

Recently a $13 billion dollar deal concluded, allowing Teck to buy the remaining shares of Fording Canadian Coal Trust. Despite all the talk of the on-going credit crunch, the overly generous moves by the Bank of Canada and Flaherty's Ministry of Finance have made it possible for banks to work with Teck to obtain the necessary financing and conclude the deal.

No new jobs will be created through this transaction. There is no net benefit to Canada.

Yet Canadian taxpayers are footing a big chunk of the bill, by providing a taxpayer-backed credit backstop, and through being shafted as Teck avoids paying a $4 billion dollar tax bill as a result of this transaction.

While this exercise in tax avoidance plays out under our very noses, lets think back to the last time tax avoidance was a subject in vogue in Conservative politics in Canada.

On October 31st, 2006 Jim Flaherty, then and now the Conservative Minister of Finance, announced that Income Trusts would in the future be subjected to new taxation. The move was particularly controversial as the Conservatives had campaigned only months earlier in part on a promise to leave the income trust sector alone.

The aftermath, dubbed the Halloween Massacre, saw the income trust market plummeting on the news, erasing billions in market value in the weeks to follow. Small and large investors alike, including many of Canada's pension plans, were significantly impacted by the on-going turmoil. Now more than two years later, many still feel betrayed.

Stephen Harper and Jim Flaherty's volte-face on trusts was defended as a sign their government was serious about fairness in taxation. Flaherty said trust conversion was "a growing trend to corporate tax avoidance". From a CBC News article:

By some estimates, the federal and provincial governments stand to lose as much as $1 billion annually in tax revenue to trusts. There are now more than 250 income trusts in Canada.

Trust conversions are increasing in popularity because trusts do not pay corporate tax. Instead, they pay out most of their income in distributions to unitholders, who then pay tax on those distributions.

Flaherty said that situation could not be allowed to continue. "This trend has caused me growing concern," he said. "It's not right and it's not fair."

Bringing both pieces of the puzzle together:

• In October 2006 Conservative Finance Minister Jim Flaherty closed what he called a "loophole" that companies could exploit to avoid paying their fair share of taxes, a loss to taxpayers controversially estimated at the time at $1 billion a year.
• In fall 2008 that same finance minister, backed by Stephen Harper appointed Mark Carney, governor of the Bank of Canada, enabled Teck Cominco to avoid paying $4 billion in corporate taxes.

Flaherty's Fiscal Fumble has cost Canadian taxpayers at least $4 billion in avoided corporate taxes plus we are even footing part of the bill which makes this deal possible in the first place.

The deal smells so bad that even those in financial circles are fuming about it.

As I've written about previously, Canada's economic picture hasn't been the rosy wonderland of strength Harper and Flaherty painted throughout the election. During the campaign Harper accused opposition leaders of using rhetoric to talk down the economy. This self-serving charge was nonsense on many levels, but primarily so because fundamental economic weakness was present long before the election was called.

Mr. Harper's degree in economics has often been touted as reason enough to entrust him with the leadership of our country during poor economic times. Its been my experience that few economists rise above the pack to see significant changes in business conditions or fundamental problems in the economic firmament. Everything I've seen from Mr. Harper tells me he's a middle of the road economist--nothing special there. Yet voters were willing to hand Harper the keys again without even having asked the pregnant question: Why are we entrusting the leadership of our country to an economist who presided over the ongoing economic decline?

My own belief is if we were going to have some sort of big crash or recession, we probably would have had it by now. Stephen Harper, September 15 2008

With the election now over, perhaps those suffering from partisanship-induced temporary blindness will recover from their affliction sufficiently so that we can take a more appropriately critical look at Canada's leadership.

First, lets put this whole "Canada won't see a recession" nonsense to rest. Even this week The Conference Board of Canada, a self-serving group of business people, have made the incredulous claim that Canada will skirt recession. Incroyable. Folks, the election's over - you can start talking plainly again.

It takes an agile and open mind to see and size up the nature and scope of economic weakness before hard reports and statistics, which always lag by weeks or months, later confirm our innate sense of conditions. The hard data coming out over the next few weeks will forever dash the "no recession" claims of Harper and the Conference Board. We are virtually there now, as you can see from today's sampling:

• U.S. travel by car to Canada continues to fall off a cliff, down %19.8 percent in August compared with the same period the year prior (impact: hundreds of millions of direct spending by U.S. travellers in Canada)
• A massive drop in sales by Canadian manufacturers in August, fell broadly across 18 of 21 different industry sectors, registering a %3.7 percent decline from July. Inventories are on the rise, sales are down, a troubling trend. (impact: a drop of more than 2 billion in sales)
• The U.S. recession is starting to assert itself more forcefully in reports coming out. Today's Philly Fed Manufacturing Index for October plummeted to a stunning -37.5, a drop roughly three times expectations. This barometer of the regional economy followed yesterday's NY Fed Empire State survey which fell to its lowest level ever at -24.6 (impact: impossible to fully quantify but represents a major downward shift in business confidence within the very large manufacturing sector, justifying the concern the recession will not be soft and shallow but hard, deep, and long).

The bottom line: Canadian businesses are already being significantly affected by the erosion of consumer and business confidence in the U.S., and by the parallel track affecting confidence and results here in Canada. The picture being painted now is off data accumulated in the periods before the election was called. Its only going to get worse from here, no matter where the stock market ends up going in the short term.

Stephen Harper will almost certainly preside over the worst recession to hit Canada in my adult life. Leading up to the recession he lived in la-la land, boasting to anyone who would listen (mostly outside Canada's borders) that Canada was an emerging energy superpower. Our dollar surged above parity with the U.S. dollar during this period, further imperilling manufacturing activity in Canada. While the Loonie has over the past few weeks since fallen off sharply (from parity to now near 1.2 CAD to 1 USD), it'll be cold comfort to Canadian manufacturers as their customers down south are no longer in a buying mood, no matter what the price.

What will Harper slash? At the same time economic conditions have been weakening, Harper was also steadily undermining Canada's finances, leaving no spare funds for contingencies. Harper's decision to savage the federal piggy bank was ideologically driven, not born of prudence, and we'll all pay the price because we get the government we deserve.

Unprecedented market plunge of more than 41% occurs on Harper's watch. Incredulously, Stephen Harper reacts to this historic global crisis by saying it's a terrific buying opportunity!

Even as Mr. Harper hungrily contemplates all the fantastic deep discount stock buying opportunities being presented, a historic market crash affecting Canada's retirees, want-to-be retirees, unions (the largest investment fund in Canada is the Ontario Teachers Pension Plan) and employers is wiping out trillions of dollars of value.

This is Stephen Harper's idea of the land is strong:

Stick with me over the next few articles as we look at politics from the perspective of financial markets and see how the Harper government's policies impact markets, and regular folk- like you and me-whether we have direct investments or not.

Are you and yours better off today than when Harper rode into town?

The answer is going to be no, for persons with union or private pensions, retirement savings, businesses depending on credit and equity markets, dependence on the Canada Pension Plan, requiring a mortgage, needing insurance, buying a home, seeking shelter, requiring government investment in social programs... living...

Timing says some of us won't notice the impact of the great Canadian market crash of 2008 until weeks and months have passed, but we'll all notice in time.

Harper has slashed government revenues while revenues were climbing. Now they are going to fall... dramatically so. Ask another question: what will Harper slash next, and will it impact you and yours?

Members of Congress getting avalanche of mail and deluge of phone calls urging them to reject the Bush-Paulson 700 billion dollar financial sector bailout

Unlikely comrades Paulson, Bernanke, Bush

Its heartening to see some ideological rigour coming out from an unlikely corner, as a splinter group of apparently free-market driven Republicans are leading the charge, with plenty of backing from the public, to quash Treasury Secretary Hank Paulson's huge 700 billion dollar bailout of the financial industry. I say this because supporting this unconscionable bill are most of the free-market crowd, plus an unseemly number of Democrats who, apparently eyeing the election, are deciding their course of action ought to be based on optics rather than principle.

In a more perfect world the few renegade Republicans would have the full backing of the Democrats and this bailout would already be deep-sixed in the Potomac.

Hank Paulson

Bush, Paulson (a former Goldman Sachs CEO), Treasury Secretary Ben Bernanke and others have been crying out for urgent action, claiming financial market panic may result if this unprecedented bailout package is not approved on an urgent basis.

Hundreds of economists including Nobel laureates and financial crisis experts have weighed in via a joint letter which calls upon the White House to reject the bailout and take a slower, conservative, free-market approach.

What seems to be holding the Democrats back from outright opposition is what might happen to financial markets really can't be predicted with certainty, and they don't want to wear the outcome. Markets will go down, to be sure. Lacking a conclusion of the plan, and with news of Washinton Mutual being forced out of business, market futures are off more than 1.5 percent. If the bailout package fails to go through (as U.S. taxpayers should hope) how far might markets go? Maybe 1000 Dow points in one or two sessions. Perhaps double that. Its possible we could see Dow 8,000 in short order (and serious pressure on Canadian markets too). No one can really tell.

But opposing the "solution" is the right thing to do.

Among the controversial elements of the Paulson plan is the clause which if enacted would give Paulson effectively dictatorial control over the funds with no recourse through Congress or the courts. Imagine!

Ultimately what everyone needs to know is that this is not needed. While there most certainly is a crisis of confidence, there are those who stand to make enormous sums of money exploiting the crisis and I am not talking about the convenient boogeyman of late, short sellers. No, its the remaining financial companies which take part in this bailout plan stand to gain billions and billions of profits off the backs of taxpayers. This last paragraph in this quotation sums up the gambit being played:

Erik Brynjolfsson, of the Massachusetts Institute of Technology's Sloan School, said his main objection "is the breathtaking amount of unchecked discretion it gives to the Secretary of the Treasury. It is unprecedented in a modern democracy.''

Advocates for a rescue plan this week point to a seizing up of credit markets, reflected in elevated inter-bank lending rates, as reason for action. Some economists are unconvinced.

"I suspect that part of what we're seeing in the freezing up of lending markets is strategic behavior on the part of big financial players who stand to benefit from the bailout,'' said David K. Levine, an economist at Washington University in St. Louis, who studies liquidity constraints and game theory.