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Gal^Stad
Investments Inc.

spacer October 2003
Commentary

It's time we 'fessed up. One of the reasons that Contra was founded was to give us a place to rant to a broader audience. In the days before Contra, we Benjamins had been jawboning in one another's direction for almost 20 years.

Let's face it, that's one long partnership, be it marriage or business, same-sex or otherwise. Not that either of us had reached the point of casting about for someone who would say more than "Yeah, whatever" while flipping to the next page of People.

Oops, did we say People? We meant The Economist, of course.

Speaking of The Economist, Ben was recently leafing through an ancient copy, dated November 1986, when he came upon an article about us. It made our little hearts go pit-a-pat just a tad faster.

"The best investors are like professional socialites. They always know where the next party is going to be held. They arrive early and make sure that they depart well before the end, leaving the mob to swill the last tasteless dregs. Good money managers understand that. Investment is all about change and anticipating it."

Okay, so maybe the quote wasn't exactly about us, but it does describe the kind of folks we like to think we are. For proof, we point to a few examples from the portfolio. Japan Equity Fund, KLM and Corriente were all bought a bit early -- we had to set a spell for the musicians to arrive and the affair to get rocking.

Now we're gearing up for our Christmas gambits and, unfortunately, something strange -- or at least different from the prevailing pattern so far in this millennium -- has happened: there is currently a dearth of stocks at the markdown prices we favour. Oh, there are a few, but the patch is thinner than usual. Oh, well; time to reposition our noses to the research grindstone as in more difficult days.

Given that we are in party-prep mode, let's go over a few of the things that have happened, haven't happened, and might happen.

What to make, for instance, of the recent parlour chat about deflation? The U.S. Federal Reserve is spitting out currency faster than a ballplayer who has bitten off an oversized chaw. Meanwhile, the greenback has been flopping like the J.Lo/Ben Affleck flick Gigli, driving up the cost of foreign goods.

With an election in the air, Dubya will be desperate to revive an economy drowning in its own self-righteousness; expect him to prop, prop, prop, print, print, print, and spend, spend, spend to make sure deflation does not manifest itself.

Gee, no one ever seems to say anything nice about deflation, but is it really the evil hobgoblin everyone makes it out to be? We know about the horror show that was the Great Depression, but the dips in the U.S. consumer price index in 1949 and 1954 seem to be remembered by no one but analysts.

And has Japanese deflation been so wicked? The knee-jerk retort would be, "Of course it was: just look at their stock market. Evil deflation." However, Japanese assets were ripe for a fall. In fact, the minor deflation has helped keep the economy competitive by restoring some sanity to formerly ludicrous prices. And unlike the aforementioned Depression of the '30s, the falling prices did not bring immense unemployment -- Japan's rate stayed well below Canada's during this deflationary cycle. You get our drift.

Therefore, a distinction must be made between degrees of deflation, in the same way that an inflation rate of one percent is not considered dangerous, while a 10 percent rate can be viewed as unhealthy and 100 percent is positively hazardous.

If anything, Canada is more likely to experience deflation than its southern neighbour. The Canadian economy has been percolating quite nicely for some time, but signs suggest there will be a spillover effect from the lacklustre U.S. economy. The rising dollar lowers the price of imports, while the manufacturing sector continues to lose jobs.

Fortunately, Mr. Dodge had the gumption to reverse his interest rate increases of earlier this year (some of you might have heard Benj severely criticize them on ROB-TV). Lower rates will help keep the economy in order, likely spiriting deflation away from the Canadian doorstep. The possibility exists of a tiny drop in prices, but inflation -- at a rate unworthy of note -- will more likely be the flavour of upcoming days.

Now let's talk productivity, shall we? Increasing productivity is a good thing, but unfortunately the drive to survive has blinded corporations and governments to the consequences. Certain "inefficiencies" in a system can be productive.

Let's say the Bank of Montreal and Bank of Nova Scotia are finally allowed to merge. As much as they will pledge beforehand that there will be no layoffs, that is exceedingly unlikely. If output drops, but at a slower rate than workforce attrition, the new corporation will realize a net gain in productivity.

However, the loss suffered by the Canadian economy will be dramatic as thousands of people are moved onto the dole; many will never leave that flytrap, while others will see their spending power tail off significantly.

Many economists believe that productivity is the be-all and end-all; in fact, it is simply one yardstick, and one that demands deeper contemplation, especially in a humanitarian society where the final arbiter of success is not simply dollars, but quality of life.

Of course, the very nature of what constitutes productivity is open to question. A portion of what gets measured is mostly waste, much of it spurred by marketing, which in and of itself is often not truly productive. However, that's a long discussion, and one best saved for another day.

On to other thoughts as we gaze at the tea leaves of investing. The woebegone U.S. dollar could easily have a further precipitous drop lying in wait. In fact, we thought we heard Sherry Cooper carping the other day about the sad state of the greenback and suggesting that Americans should adopt the looney. A product of our overactive imaginations, perhaps, but not a bad idea. Paul Martin setting fiscal policy for Washington? We think it would be a better world.

Investment trusts: for some time we've been cautious about them, and while the brokerage houses have gathered bushels of money from a public starved for income-generating assets, the cracks in the teapot are now showing. A trust bust? We don't expect anything that bad, but the emergency room is starting to treat more casualties.

Being the resourceful chaps that they are, we expect many brokers will start looking to mine healthy deposits. Who wouldn't buy XYZ Resources at $1.25? After all, the properties next door are owned by Alreadybeenchewed and Diamonds 'R' Us, and they've quintupled!

Mineral prices -- including the shiny metal -- could easily move higher; the recent recovery in this sector doesn't appear to be the end of the road. Numerous mines were closed in recent years, and others placed on the back burner, in an effort to rebalance supply and demand. The fall of the USD will also play a role, and we observe that investors are currently spending a fortune in the mining arena. In all likelihood, the pendulum will swing too far; why should this cycle be different than any other?

As much as we yak about there being more upside in store, you'll be aware that we've already placed our bets and cashed in most of our chips. Once again, it's that need to depart the party before the last canape is inhaled by Mr. Greedyguts.

At this point we're searching for obvious discontinuities, but they are less evident and farther between. Hmm, wonder if we can bet on the Leafs not winning the Cup? Rumour has it that Father Time is laughing at this team that seems to serve double duty as a senior citizen's home.

Anyhow, enough ranting. Thank you, dear readers, for giving us a larger audience. Time to call the kids inside. We told them not to play in the street! Darned contrarians never listen.

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