As Pierre Trudeau is famously quoted: “Living next to [America] is in some ways like sleeping with an elephant. No matter how friendly and even-tempered is the beast, if I can call it that, one is affected by every twitch and grunt.” (Source: Wikiquote) Well, these days our bunkmate has night terrors, and no one is sleeping very well.
It is with no small measure of pride that we see our banking system ranked as “…the soundest in the world” by the World Economic Forum (the US came in at number 40). Our banks are solvent, profitable, well regulated, and were not permitted to put themselves in the high-risk situations that are taking their tolls on the institutions of the rest of the developed world. Why, then, did our government feel it necessary to extend such dramatic fiscal support to companies that don’t seem to need it?
So why did Ottawa agree to insure the money they routinely borrow from other banks, a practice that keeps their credit operations liquid? Ironically, the troubled non-Canadian institutions that received capital injections and loan guarantees in other countries now carry a government seal of approval that tilts the playing field in their favor when it comes to borrowing. That leaves Canada’s big banks, including Scotiabank, TD Bank Financial Group, RBC Royal Bank and CIBC, at a competitive disadvantage. So the government acted to level the field, not to aid troubled banks.
What does this mean for us? The market will recover. Probably not tomorrow, maybe not even in a year, but it will recover. The real question is what to do with our money now, and in the near future. We have an industry whose stock prices have been punished just as hard as the rest of the world, but they’re still in good shape, with healthy balance sheets and capital reserves; this suggests that the Canadian economy is very well positioned to lead the way in the recovery.
Mr. Buffett is widely considered one of the world’s most successful investors, and has long held to his philosophies of value and frugality. He recently contributed an Op-Ed to The New York Times explaining his decision to use some of his personal assets, previously owning nothing but US Government Bonds, to purchase American stocks (The New York Times: Opinion – Buy American. I Am.).
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
Like it or not, the fortunes of our country are closely tied to those of the US, and the new administration is inheriting one of the greatest economic challenges any has ever faced. I hope these comments from Mr. Buffett are indicitive of the discipline and fiscal conservatism that world economy sorely needs.