Cyprus Hurts, But Eurozone Stocks Are A Bargain

Reprinted from: The Montreal Gazette
By, Jay Bryan

Image A part from the titillating presence of Russians with possibly shady wealth, there’s not a lot of difference between today’s banking crisis in Cyprus and the crises that we saw a few years ago in places like Iceland and Ireland. As with the preceding events, the outcome seems certain to be painful, this time not only for Cypriots but also for the credibility of the eurozone’s political leaders. But disaster is unlikely…

As of Friday, it appeared likely that a new plan would impose heavier levies on big depositors and leave the smaller ones alone. That pretty much guarantees that the days of easy Russian money and a large financial industry are over. On the other hand, not all is lost for Cyprus.

Chief Strategist Peter Berezin at Montreal’s Bank Credit Analyst points out that since the easy money is gone anyway, it would be wise to impose a very big levy, maybe 50 per cent, on big bank accounts. At least this way, the country would raise enough funds to make its downsized banks financially solid.

And despite the recent nervousness about Europe, Berezin continues to rate its stocks as one of the best values around — if you’re willing to hang on through the turmoil that might last for a few more years. It’s hard to find another place where you can buy so many good companies so cheaply.

[Read the full article at:]

The Wealth Of Nations

Reprinted from: Property Week
By, Claer Barrett

A new generation of resource-rich developing nations are challenging the world’s more established sovereign wealth funds for prime assets in London, Europe and beyond. “What’s behind this trend is the curse of natural resources,” explains Tony McGough, Chief Global Real Estate Strategist at BCA Research.

Property Week He says booming commodities prices are generating huge cash reserves for oil-rich states, but, “if you spend that capital at home, you either stoke up economic demand and cause inflation, and/or boost the exchange rate and ruin other domestic industry by making exports uncompetitive”.

More recently – stable nations, such as Nigeria and Angola, are following established oil producers, such as the Gulf states and Norway, by investing in foreign real estate to drive long-term, stable returns that supplement often volatile commodity markets, and bolster their emerging economies. Many are doing so in partnership with a UK-based fund manager or investment adviser.

“It is much easier to pay the fees to a partner than build up a company of hundreds of specialists,” adds McGough. “It’s very good for the fund management and development community, who have the infrastructure, history and talent. All they need is money — so it’s a good marriage.” 

McGough predicts: “The next phase will be funding development, and then buying the debt, which some funds are already working on.”

Registered users of can read the full article here:  The Wealth Of Nations

Strides In A.I. Create Smart Investment Opportunities

Reprinted from: The Montreal Gazette
By, Jay Bryan


I t’s been two years since an IBM computer named Watson humbled humankind, or at least the part of it that takes quiz shows seriously, by beating two carbon-based Jeopardy champions at their own game. Now a prominent investment analyst suggests that episodes like this are something we’d better get used to.

This is more than an observation about the sweep of technological progress. It has immediate investment implications, believes economist Peter Berezin, a Managing Editor at Montreal’s BCA Research Inc.

More than a decade after the tech wreck of the early 2000s left a generation of investors chary of such stocks, it’s time to rethink, Berezin said on February 28, 2013. A major resurgence of high-tech companies could well be a key investment theme of the next decade or two.

Laying out his thesis in the current issue of The Bank Credit Analyst, Berezin notes that for the first time in history, we are able to create technologies that quickly boost human intellectual powers.

Although that’s of remarkable importance in itself, it also has specific economic implications, Berezin notes. He believes most of humankind’s long-term economic progress – from bare subsistence a few hundred years ago – stems from technological gains triggered by a gradual rise in intelligence. If this rise can be greatly accelerated by new technologies like artificial intelligence, biotechnology, nanotechnology and robotics, the implications are breathtaking, not least for the companies that make this possible.

Over the longer term, perhaps in 20 years or more, we could even be talking about something called the “technological singularity,” a point when human history ends, to be replaced by whatever happens in a world run by computers or other devices whose intelligence exceeds our own.

But for every wise person who believes this singularity is on its way – and this speculation about self-improving machines goes back to the middle of the 19th century, when the first mechanical calculators were invented – there’s another who thinks it’s unlikely.

Intel co-founder Gordon Moore has stated that “I am a skeptic.” Ironically, his accurate 1965 prediction that the power of computer chips would tend to double every two years is a key support for the idea that machine intelligence might surpass that of humans. But “I don’t think this kind of thing is likely to happen, at least for a long time,” he told a 2008 computing conference.

In any event, a more immediate question for investors is whether the tech sector is headed for a very big upturn as a result of the same trends that excite singularity theorists.

Berezin thinks it is. For the first time in history there are ways to boost intelligence much more rapidly than by improving nutrition and health.

An obvious one is the steadily rising power and smaller size of our computers, particularly now that some devices are being linked directly to the human nervous system, for example to provide sight to the blind.

And we should also think about the power of biotechnology. The cost to sequence the human genome has fallen even faster than that of computer power, notes Berezin.

On the outskirts of Shenzhen, China, he points out, a biotech company known as BGI-Shenzen has 4,000 scientists at work. Some are studying the entire genomes of 1,000 brilliant individuals in order to isolate the genetic characteristics that contribute to high intelligence.

“They will probably succeed,” Berezin says, based on what is already known about links between genetic variation and intelligence.

Some of these advances can raise serious ethical questions, but once these are sorted out, there’s not much question that technologies this powerful will be able to generate enormous revenues.

Since tech-wary investors continue to shy away from this sector, tech stocks look now like a bargain to Berezin, trading at price-to-earnings ratios about seven per cent below those of industrial stocks in general. A more typical valuation over the past three decades has been around 40 per cent above the industrial average, he notes, reflecting profit growth over this period that’s been nearly twice as strong as for industrial stocks in general.

Here’s one example of tech’s growing capabilities. Since his Jeopardy triumph, Watson has tripled his processing speed and shrunk from the size of a room to that of a pizza box. And he’s matured, moving from quiz-show showboating to diagnosing lung-cancer X-rays – with nearly double the accuracy of the best-trained doctors.

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Austerity: Is Opinion Shifting?

Reprinted from: The Economist
By, Buttonwood

Is Opinion Shifting I f one had to tie together the Italian election with Moody’s downgrade of Britain, the theme might be that the tide is turning against austerity. Indeed, Thursday’s by-election in Eastleigh (a seat in southern England) showed the UK might have its own Beppe Grillo-style disrupting force in the form of the UK Independence Party. But the British downgrade showed that, for all its attempts to please the markets, slow growth in the UK is preventing the government from making a dent in its debt, while Italy showed that voters will eventually reject an austerity policy.

Indeed, this rather damning graph from Dhaval Joshi of BCA Research seems to indicate quite definitively that austerity is damaging economies. The vertical axis shows the growth in GDP per capita since the 2009 low; the horizontal axis, the cut in the structural fiscal deficit (ie the impact of deliberate government policy). There is a very strong and negative relationship which will delight Keynesians everywhere (or rather cause them to shake their heads in disgust).

EIS_Feb28_2013That said, I think the graph is more relevant to policy decisions in the US and the UK than to, say, Greece. The latter could not continue to run big deficits because it could find no-one to buy its bonds; it has had to rely on official help from the rest of Europe. (The same applies to Portugal, which is the also in the south-west corner of the scatter chart). Non-eurozone members are quick to lecture the creditor nations that they should supply more aid (in the form of cheap loans) to southern Europe with fewer conditions. But it does make a difference when the debtors are not in your country; try asking Congress to fund the Mexican deficit on a long-term basis. The British government has been particularly sanctimonious in this regard…

[Read the full article at:  The Economist]

U.S. Fiscal Mess Could Be Tidied With Taxation Changes

Reprinted from: The Montreal Gazette
By, Peter Hadekel

US Fiscal Cliff | Taxes

N ot long ago, the world was fretting about the European debt crisis and the possible breakup of the continent’s monetary union.

Now, the biggest source of anxiety for investors around the world is the continuing failure to address the U.S. fiscal crisis in any meaningful way.

According to a poll of international investors this week by Bloomberg Business News, the U.S. fiscal mess has become the biggest risk to the global economy. Thirty-six per cent of respondents said it was their top concern.

The Jan. 2 deal between the White House and Congress to avoid “the fiscal cliff” was a temporary solution that didn’t address fundamental tax and spending issues.

The poisonous political atmosphere in Washington has delayed the necessary reforms and put the country on a grim trajectory.

“Absent major policy changes it is a question of when, not if, a major financial crisis will occur,” warned Montreal-based BCA Research this week in a report to clients.

With annual federal deficits exceeding $1 trillion and the government debt-to-GDP ratio tracking toward 150 per cent, “the scale of the U.S. fiscal deterioration is too large for it to be sustained.”

For investors, there won’t be any obvious alarm bells. “It is a gradual and insidious process” until a tipping point is reached that requires a drastic policy shift or, in the extreme case, default.

But as BCA Chief Economist Martin Barnes points out, the U.S. does not lack options here, especially if early action is taken. One obvious front is taxation — the most politically charged area, but one with the most scope for change.

Absent major policy changes it is a question of when, not if, a major financial crisis will occur. (tweet this!)

The reality is that the U.S. is a low-tax country by global standards and that the current tax burden is low relative to other periods in U.S. history.

The tax system is riddled with distortions, so that looking simply at marginal income tax rates gives the wrong picture.

The U.S. is the only advanced country that does not have a national sales tax, which means the government has to rely much more on income taxes than other countries.

About 47 per cent of revenue comes from income taxes compared with an average of 30 per cent among OECD countries. Because many families have low incomes, the burden falls disproportionately on the middle class.

On the flip side, only 18 per cent of tax receipts are derived from consumption taxes, compared with an OECD average of 33 per cent.

Taxing consumption through a national sales tax would take the pressure off income tax as a revenue source and might encourage more savings and investment.

It’s true that such a tax would hit the poor harder but the regressive nature of the levy “could be tackled by exempting food and other essentials and by providing tax credits to the poor,” Barnes says.

A case can also be made for higher excise taxes on gasoline, alcohol and tobacco. “Gasoline taxes average around 40 cents a gallon in the U.S. compared to $4 or $5 a gallon in Western Europe.”

Even tripling the current gas tax rate would leave it low by international standards and help promote conservation and new technologies, Barnes argues.

Eliminating some of the juicy tax deductions in the U.S. system could also go a long way toward restoring fiscal sanity.

One that really jumps out is the mortgage interest deduction, one of the biggest sacred cows in the U.S. tax code. Canada survives fine without mortgage deductibility, although it’s true that, unlike the U.S., we exempt the sale of a principal residence from capital-gains tax.

The problem is that attempts to eliminate deductions and raise specific taxes always run into well-organized opposition by special interests.

The Republicans, as the anti-tax party, also stand in the way. They would rather see action to cut spending on entitlements.

Still, says Barnes, there is plenty of room to change the tax system, improve efficiency and raise revenues.

[Read the full article at:  The Montreal Gazette]