Rudi's View | May 30 2012
By Rudi Filapek-Vandyck, Editor FNArena
A recent business trip allowed for a two week visit to Canada's Vancouver, with spring weather and a little bit of rain colouring my first ever experiences inside the "other" commodities country. At face value, Canada and Australia have a lot in common. Both currencies enjoy much higher values on the back of the Commodities Super Cycle and domestic banks are considered la creme de la creme by international peers. Canadian banks appear to be in better shape than the Big Four here in Australia. Canadians enjoy faster internet at cheaper prices too. There's a lot of talk and debate in the Canadian public arena about non-resources sectors suffering from "Dutch disease" with concerns about too highly inflated house prices common too.
While the political landscape over there seems less dull than here in Australia, politicians in Canada have had to cope with voter's backlash, though nothing too revolutionary (thus far). Below are some key observations I brought with me to share with subscribers and readers here at FNArena and elsewhere.
1. Climate Change
The Australian government under leadership of PM Julia Gillard might pride itself for having taken the lead in the combat of international climate change by following the Europeans and introducing a market based pricing system for carbon. It is far from certain that governments in North-America will ever follow her lead.
As observed by Australian palaeoclimatologist Bob Carter, who also happens to be a chief science advisor for the International Climate Science Coalition, there is a growing understanding among politicians and decision makers that the two sides that have been dominating the public debate on this matter -the doom-preachers and the deniers- do not represent the broader community of scientists researching our climate. Most of these scientists have far more modest and cautious opinions about what is happening and what might transpire in years to come.
There is one broad consensus across all stakeholders and experts and that is that climate change is real and it is very tangible. But is it caused by human actions?
Take out the two loudest participants in the debate and it appears most scientists believe there are too many question marks to support a "guilty as charged" verdict for today's human society. Of course, a cynic can easily point out there are plenty of vested interests at play here to direct the core debate towards less dramatic approaches and measures as have been adopted here in Australia, with the US economy still struggling to find solid footing and with Canada's economic future very much tied to the vast, highly energy intensive oil sands in the Alberta province, but the conclusion nevertheless stands: Australia may not become the vanguard of new carbon dioxide policies, as North-America is more likely to bend the other way.
What then is the American/Canadian way, you might wonder? It appears this will be a combination of targeting milder reductions in the carbon footprint with more focus on how to cope with the consequences of a warming climate. In other words: if human actions are not key in preventing climate change from happening, it's probably best to focus on what the consequences will be and spend money on softening the blows, where possible.
Carter was touring the country while I temporarily resided on the Canadian West Coast.
2. Miners and the environment
Ever so colourful mining billionaire Clive Palmer might have jinxed the issue in Australia with his infamous press conference about how CIA financed environmental activists are targeting mining projects across the country, but in the US and in Canada the threat of organised green activist groups and lobbyists putting a spanner in the works of large mining and energy projects has become a real worry for the industry over there. The recent decision by US President Obama to not approve an important pipeline that would secure cheap oil from Canada and create lots of jobs along the way, but at the same time alienate green voters is only regarded as the tip of the iceberg.
This green activist movement has secured backing from powerful and cash-rich support and is to be taken seriously as court cases multiply and so are delays and cancelations of projects. At least one Super Cycle analyst, Don Coxe at BMO Financial Group in Canada, believes this renaissance of well-funded green activism can be partially blamed for the de-rating for international resources companies over the past year or two. There are stories swirling around of funds managers who sold out of mining and energy stocks because of concerns for a public backlash.
3. Fukushima and uranium
The West Coast, both in the US as well as in Canada, is rife with speculation and rumourtrage about the true fall-out from the Fukushima nuclear reactor in Japan last year. This is where debris from Japan ends up on the shores and there seems to be plenty to be concerned about, although not according to official declarations on the matter. Both Canada and US governments have declared Japanese imports safe, overstepping reports from independent researchers and scientists who find both coastlines contain elevated levels of radioactivity.
There seems to be some justification to the non-governmental reporting on this matter, with a French nuclear safety institute this week reporting the radioactive cesium that flowed into the sea from the Fukushima Dai-Ichi nuclear plant was estimated no less than 20 times the amount estimated by the Japanese owner of the plant.
The issue here is not who is right or wrong, but the potential for further fall-out and public aversion towards nuclear plants at any time in the future. Fukushima is the Sword of Damocles that will hang over the global nuclear industry for many years to come and investors will have to incorporate the threat for sudden public backlash in their investment strategies if nuclear exposure is part of the portfolio.
On the other hand, Canada's Cameco, one of the giants in the yellow cake industry, indicated the intention to raise an extra C$1bn in funds and this announcement from left-field has fueled speculation the company is looking to use current depressed share prices for producers worldwide as an opportunity. Australia's Paladin Energy ((PDN)) seems but a logical target. Now you know why Paladin's share price has risen from $1.165 to $1.34 over the past two weeks.
4. Oil and Economic Growth
There is one obvious difference between Canada and Australia as major producers of natural resources: Canada has its tar sands (alternative name "oil sands") and its economy, share market and currency are thus more skewed towards the price of energy. Note that depressed prices for West Texas Intermediate have had a negative impact on Canadian regions, as oil producers deliver into Cushing and have thus been missing out in comparison with higher Brent prices in Europe and elsewhere.
Out of this closer relationship with oil and gas has come Jeff Rubin, former economist at CIBC and nowadays successful author and corporate speaker on the subject of energy and future limits to growth. Unfortunately, while in Vancouver I missed his presentation (new book is out), which I regret, though I doubt whether protocol would have allowed me asking some naughty questions.
To provide a little bit of background: back in 2008 Rubin was firmly on the side of the US$200 per barrel by year-end forecasters. As we all know, and as instead correctly predicted by myself at that time, crude oil did not go anywhere near US$200 but fell to US$32/bbl instead as the global economy crumbled under such a heavy oil price burden. I do remember Rubin being on the wrong side of history at that particular point in time (I do read a lot and not just research from Australia).
Since then, however, Rubin left CIBC and started writing books and it seems his lessons from 2008 have been translated into a future vision that sees crude oil place a permanent and irreversible limit on economic growth. Simplisticly put, supply limitations mean that whenever global growth threatens to take off, the price of oil will spike, this then pushes economies into recession, which then pulls the price of oil to lower levels, after which we can look forward going through the same process again.
Rubin's advice: get ready for a world without growth. He seems to be highly successful in selling the message.
While I can see the merits of Rubin's call/future vision -it was for this very same reason that I stood up and issued my anti-market consensus warnings in 2008- I believe these limitations imposed by crude oil on the world will prove temporary in years to come. If you happen to be amongst those who agree with the Rubin vision, which leads to oil price predictions of US$250/bbl and more, I think you'll be surprised (just like in 2008) how quickly oil can be priced at lower levels. In fact we have all been experiencing a mini-version of it in 2012.
I predict in five years from now Rubin's growth constraints will look misplaced and out-of-time, not only because Canada will develop the tar sands, but also because of the natural gas revolution that is currently taking place around the world. China will become much more energy efficient than anyone thinks is possible today.
5. The Cancer in the Food Industry
In case anyone wondered: I stopped using butter and sugar when I was sixteen. Not that I won't touch anything with butter or sugar, but if I can I choose the alternative option.
The global food manufacturing industry uses too much butter, sugar and salt, we (should) all know this, and that's not to mention all the other ingredients that at various stages are discovered being carcinogenic or otherwise not the most healthy alternative around. The West Coast in Canada and the US, with hippy-infused cities like Vancouver and Seattle, is not necessarily representative for the rest of these countries, but I do think that current trends towards organic and less produced food is one of the next mega-trends that will have a profound impact on today's global industry.
It's early stages, so no need to panic if you own shares in PepsiCo or Coca-Cola Amatil ((CCL)), but what great food I had at my disposal over there! (Not to mention all the boutique beers, Belgian-style or otherwise). Independent, healthy, organic food is now big business in parts of the US and Canada.
6. Disenfranchised Populace
Global media have been busy reporting about the growing gaps between governments and their citizens in debt-and-austerity-driven countries such as Greece, Ireland and Spain, but we better not underestimate the same gap that is building in countries such as Canada and the US. This gap is not simply a natural reflex from blue collar workers who lose their jobs and income, this is a widespread rejection of "dumb" politicians and their actions, widely being perceived as bailing out the rich (bankers, Wall Street) while committing to a big mortgage on a country's financial future.
Use your imagination. That's all I am going to say about this for now.
7. Good news for ResMed ((RMD)): sleep apnea is indeed attracting a lot of attention in Canada and in the US these days. Where are the days that hardly anyone had heard about it and ResMed had to do all the hard work by itself?
8. Dividend investing is the new black. You heard it from me before my trip to commodities Valhalla Canada, I can now report Canadian investors share the belief that the world has punished their metals and energy stocks with a vengeance seldom witnessed in recent history. Is there a cure available against losing money while the world sorts out its debt problems? Yes, say Canadian experts and newspapers; buy solid dividend stocks backed by copious amounts of free flowing cash.
9. I assume we are all old enough to remember Donna Summer, nee Ladonna Adrian Gaines. Donna Summer was the creation of German musicians. Don't believe me? Do some research. Look for "Giorgio Moroder".
I know, Donna Summer, the once "Queen of Disco", has little to do with financial strategies and investing, but I thought I'd share this piece of information regardless. Or wait, maybe this is about being conscious that you don't always know everything, even when you think you do?
10. There is no Ten. The team at FNArena is working on an update on "All-Weather Performers". This e-booklet is likely to be finished next month and will be made available exclusively to paying subscribers (6 and 12 months). A paid subscription already comes with two e-booklets. Haven't received your copies as yet? Send an email to info@fnarena.com
(Do note that, in line with all my analyses, appearances and presentations, all of the above names and calculations are provided for educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions.)
P.S. I – All paying members at FNArena are being reminded they can set an email alert for my Rudi's View stories. Go to Portfolio and Alerts in the Cockpit and tick the box in front of 'Rudi's View'. You will receive an email alert every time a new Rudi's View story has been published on the website.
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