Private equity investor Herb Pinder offers a country-by-country investor review. Third in a series of three..Much of the enjoyment of writing these commentaries is the feedback and observations of smart and informed people. Yesterday I was reminded of the remarks by famous Canadian economist John Kenneth Galbraith: “There are only two kinds of forecasters, those who know they are wrong and those who don’t.”.In the US, forecasts for 2022 make the point — the Fed characterized inflation as “transitory”; the S&P fell 19%, its biggest loss since the 2008 financial crisis, against Wall Street expectations of at least a so-so year..According to a recent Wall Street Journal column by Akane Otani “almost everyone on Wall Street and in Washington got it wrong. Wall Street did accurately predict earnings but missed the downward direction of company valuations.” Shy about forecasting, our approach is to quote others or resort to the word “expectations.”.So worldwide, what can we expect? From a November 27 Wall Street Journal article, “the International Monetary Fund expects the global economic growth rate to slow to 2.7% in 2023, down from 3.2% projected for this year.”.The small percentage decrease is a surprise given the range of problems, but still represents a significant absolute reduction given that global GDP that will exceed $100 trillion in 2022..More pessimistic, no less than Oxford Economics, with 300 economists on staff, predicts global growth below 2%. Significant further impacts considered include the collapse of economic growth in China, similar outcomes in the European Union resulting from war and energy policies overlooking security of supply, and central bank increases in interest rates that by design will reduce growth in Great Britain, the United States, and Canada..In Part II of this series, we reviewed leading economic countries or regions that seemed to show our global problems are self-imposed. COVID led to a broad collapse in economic activity, addressed by unprecedented government spending leaving most countries with broken balance sheets, lack of financial flexibility, and dramatic inflationary pressures. According to another WSJ article, US national debt now exceeds $31 trillion!.In addition, the obsession with fossil fuels and a failing forced energy transition contributed to economic problems and inflation in Canada..Also significant is the continuing loss of freedom from unfortunate increases in “must and must not dos” such as wearing masks, limits to social and economic interaction, inefficient energy sources, and much more. Military weakness and illusory trust of a dictator led to the most significant war since 1945. The advanced world is so prosperous that “progressive issues” now trump prosperity. The sad irony is this dynamic will damage our economic splendour..Looking particularly at Canada, this country has more than its share of economic challenges. A paper by respected CIBC Chief Economist Avery Shenfeld and a colleague, advises the OECD forecasts Canada's anticipated average growth rate per capita in the next 40 years as last out of 40 countries. Canada’s productivity has been near the OECD average, but below the US, our major competitor. As immigration will keep Canada's population growth above those of other developed economies, other problems of housing and employment emerge. The CIBC paper points out “Real gross fixed capital formation has been slower on this side of the border for decades ... widening recently as energy sector capital spending has fallen.”.Spending on R&D and innovation compares unfavourably with other countries. Once Canada’s economic driver, Ontario has become a laggard, now receiving equalization payments. According to a study earlier this year by the Fraser Institute, GDP per capita is now more than $19,000 less than the average of the neighbouring US states in the Great Lakes region — worse, the gap has been growing steadily over the years..There has been an incredible flight of capital as most of the major global energy players sold their Canadian assets. Since this government was elected in 2015, a $500 billion annual negative gap in capital investment has grown as Canadians are investing more capital outside of our country than the world invests in our country. As cash flow valuation multiples in the energy sector in the US are almost double similar measures in Canada, it is obvious that global investors have lost interest in our country. We are blessed with exceptional resources and a well educated population. The difference is an ideological government obsessed with climate and non-economic issues..Overt and articulated objectives to eliminate Canada's upstream oil and gas sector, have resulted in exploration and production companies limiting investment in the industry, despite record cash flow. Formerly a petrocurrency with cause and effect of higher oil prices on our dollar, notwithstanding the rebound in oil and extraordinary natural gas prices, our currency continues to be soft. The energy bull market rages, but not so much in Canada..In July the Bank of Canada forecast a 3.5% increase in GDP this year, falling to 1.8% in 2023 and 2.4 percent in 2024. Likewise, projections for inflation of 7.2% this year, falling to 4.6% in 2023 and 2.3% in 2024. A return to the 1-3% range in the next two years would be a great accomplishment for the Bank..A deteriorating economy, forecast at the bottom of a 40-country grouping, is the unfortunate, but eventual outcome of federal government policies that play away from our competitive advantages, pile on debt, and divide our country..As we turn to Oil and Natural Gas Commentaries next week, a sneak peek is relevant to the dismal prospects of our country..Well respected veteran Randy Ollenberger, managing director of oil and gas research at BMO, provided his analysis for 2023 of cash flow of the top 35 energy companies. Free cash flow will be an incredible $54 billion, 16% lower than 2022. As most large and mid-size producers expect to become debt-free by mid-year, the infusion of capital into the economy by way of share buybacks and dividends is significant and positive..We would improve our country’s economic prospects by respecting the industry and encouraging more activity — drilling and other services, royalties, taxes, foreign exchange, charitable donations, and so forth..TD Bank released a report predicting Alberta, followed by Saskatchewan, will lead growth in Canada in 2023, largely driven by energy and agribusiness, industries under attack by Ottawa. Where is common sense?.As 2023 approaches, we will need some good fortune, or better yet, sensible public policy.
Private equity investor Herb Pinder offers a country-by-country investor review. Third in a series of three..Much of the enjoyment of writing these commentaries is the feedback and observations of smart and informed people. Yesterday I was reminded of the remarks by famous Canadian economist John Kenneth Galbraith: “There are only two kinds of forecasters, those who know they are wrong and those who don’t.”.In the US, forecasts for 2022 make the point — the Fed characterized inflation as “transitory”; the S&P fell 19%, its biggest loss since the 2008 financial crisis, against Wall Street expectations of at least a so-so year..According to a recent Wall Street Journal column by Akane Otani “almost everyone on Wall Street and in Washington got it wrong. Wall Street did accurately predict earnings but missed the downward direction of company valuations.” Shy about forecasting, our approach is to quote others or resort to the word “expectations.”.So worldwide, what can we expect? From a November 27 Wall Street Journal article, “the International Monetary Fund expects the global economic growth rate to slow to 2.7% in 2023, down from 3.2% projected for this year.”.The small percentage decrease is a surprise given the range of problems, but still represents a significant absolute reduction given that global GDP that will exceed $100 trillion in 2022..More pessimistic, no less than Oxford Economics, with 300 economists on staff, predicts global growth below 2%. Significant further impacts considered include the collapse of economic growth in China, similar outcomes in the European Union resulting from war and energy policies overlooking security of supply, and central bank increases in interest rates that by design will reduce growth in Great Britain, the United States, and Canada..In Part II of this series, we reviewed leading economic countries or regions that seemed to show our global problems are self-imposed. COVID led to a broad collapse in economic activity, addressed by unprecedented government spending leaving most countries with broken balance sheets, lack of financial flexibility, and dramatic inflationary pressures. According to another WSJ article, US national debt now exceeds $31 trillion!.In addition, the obsession with fossil fuels and a failing forced energy transition contributed to economic problems and inflation in Canada..Also significant is the continuing loss of freedom from unfortunate increases in “must and must not dos” such as wearing masks, limits to social and economic interaction, inefficient energy sources, and much more. Military weakness and illusory trust of a dictator led to the most significant war since 1945. The advanced world is so prosperous that “progressive issues” now trump prosperity. The sad irony is this dynamic will damage our economic splendour..Looking particularly at Canada, this country has more than its share of economic challenges. A paper by respected CIBC Chief Economist Avery Shenfeld and a colleague, advises the OECD forecasts Canada's anticipated average growth rate per capita in the next 40 years as last out of 40 countries. Canada’s productivity has been near the OECD average, but below the US, our major competitor. As immigration will keep Canada's population growth above those of other developed economies, other problems of housing and employment emerge. The CIBC paper points out “Real gross fixed capital formation has been slower on this side of the border for decades ... widening recently as energy sector capital spending has fallen.”.Spending on R&D and innovation compares unfavourably with other countries. Once Canada’s economic driver, Ontario has become a laggard, now receiving equalization payments. According to a study earlier this year by the Fraser Institute, GDP per capita is now more than $19,000 less than the average of the neighbouring US states in the Great Lakes region — worse, the gap has been growing steadily over the years..There has been an incredible flight of capital as most of the major global energy players sold their Canadian assets. Since this government was elected in 2015, a $500 billion annual negative gap in capital investment has grown as Canadians are investing more capital outside of our country than the world invests in our country. As cash flow valuation multiples in the energy sector in the US are almost double similar measures in Canada, it is obvious that global investors have lost interest in our country. We are blessed with exceptional resources and a well educated population. The difference is an ideological government obsessed with climate and non-economic issues..Overt and articulated objectives to eliminate Canada's upstream oil and gas sector, have resulted in exploration and production companies limiting investment in the industry, despite record cash flow. Formerly a petrocurrency with cause and effect of higher oil prices on our dollar, notwithstanding the rebound in oil and extraordinary natural gas prices, our currency continues to be soft. The energy bull market rages, but not so much in Canada..In July the Bank of Canada forecast a 3.5% increase in GDP this year, falling to 1.8% in 2023 and 2.4 percent in 2024. Likewise, projections for inflation of 7.2% this year, falling to 4.6% in 2023 and 2.3% in 2024. A return to the 1-3% range in the next two years would be a great accomplishment for the Bank..A deteriorating economy, forecast at the bottom of a 40-country grouping, is the unfortunate, but eventual outcome of federal government policies that play away from our competitive advantages, pile on debt, and divide our country..As we turn to Oil and Natural Gas Commentaries next week, a sneak peek is relevant to the dismal prospects of our country..Well respected veteran Randy Ollenberger, managing director of oil and gas research at BMO, provided his analysis for 2023 of cash flow of the top 35 energy companies. Free cash flow will be an incredible $54 billion, 16% lower than 2022. As most large and mid-size producers expect to become debt-free by mid-year, the infusion of capital into the economy by way of share buybacks and dividends is significant and positive..We would improve our country’s economic prospects by respecting the industry and encouraging more activity — drilling and other services, royalties, taxes, foreign exchange, charitable donations, and so forth..TD Bank released a report predicting Alberta, followed by Saskatchewan, will lead growth in Canada in 2023, largely driven by energy and agribusiness, industries under attack by Ottawa. Where is common sense?.As 2023 approaches, we will need some good fortune, or better yet, sensible public policy.
