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Even I Sensed Bubble Must Pop

But then, I trusted my gut, not a broker.

Rafe Mair 29 Sep 2008TheTyee.ca

Rafe Mair's column for The Tyee appears every Monday.

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Millions take a bath.

I find I'm a proved expert in matters of high finance. This will come as much as a shock to you as it does to me and would, I'm sure, be to my old Econ 200 prof. Once I got to the part where the demand and supply curves met, setting the price, I was lost. Bewildered and dealing with esoterica I simply could not handle, I dropped out.

Over the years I've had to deal with public issues involving the economy and I must now confess, I often faked it. I would get the words right -- because they belonged to someone else -- but I hadn't the faintest idea what they meant.

Come to think of it, this isn't entirely true because as a cabinet minister in the Bill Bennett government, I dealt with, amongst many things, the Vancouver Stock Exchange and I recognized organized theft when I saw it. And I could recognize when the big boys got antsy. Prospectuses are the bullshit unscrupulous stock promoters use to lure, Lorelei like, the lambs to slaughter. The big boys got antsy when I proclaimed legislation that required new or altered prospectuses to pass through the securities department of my ministry as well as the VSE board of governors. The fact that the players went mad at the thought that someone other than themselves would look at these prospectuses demonstrated to me that truth in prospectuses was not a priority item on Howe Street.

I also learned, in a matter involving a real estate bubble called Abacus, that when a company couldn't make my deputy, Tex Enemark, and me understand what the hell they wanted to flog, that the public (who greedily often don't want to understand) wouldn't either. We refused the application and a few months later Abacus went broke leaving a lot of people, not British Columbians though, holding worthless paper.

Tending our fragile nest egg

Now back to Rafe, the economic genius.

Wendy and I are far from rich but we have a nest egg. It was invested with a salesman who, over the years, did very well for us. Then in early 2005 I got a tummy feeling -- Dad always told me to trust my tummy -- and I told my broker to sell everything and put it in treasury bills. He was aghast and, after pleading with us to come to our senses, reluctantly did what he was told. His superiors couldn't understand why this nest egg was in TBs and put heat on our broker. To shorten the story, he talked us back into the market -- the folly was ours not his. Shortly thereafter we took a heavy loss and I told him to sell again and that this was final. The result was that Wendy and I haven't lost a moment's sleep over the market from then until now.

What made me such an expert?

I explained it to my ex-broker whose eyes glazed over in disbelief as I enumerated my concerns.

  1. This was the longest bull market in history and as Isaac Newton discovered, what goes up must come down.
  2. When told that all would be well in the "long run," it cut no ice with me because then and more so now, I don't have a "long" run left.
  3. When advised that we would make very little, if any, profit out of secure investments, it was beyond the scope of our ex-broker's belief that we put preserving capital above all else, even making money.
  4. The president of the United States was and is a moron who had, amongst other things, got the U.S. into a war which had cost billions and would continue to do so.
  5. The United States was carrying a trade deficit over $700 billion, with no end in sight, the largest part of that deficit being with China, not necessarily a friendly country.
  6. The U.S. national debt was about $11 trillion. Using the usual one in 10 formula, this would give Canada a trillion dollar debt and no Canadian would stand for that.
  7. Enron demonstrated that no company was safe from gross mismanagement and there was a lot of that going around. The savings and loans scandal showed the same thing.
  8. Corporate executives were creaming the companies' income (not necessarily their profits), which amounted to three-piece-suit theft. This was world wide -- in Britain it was becoming common to see companies with substantial losses paying out huge bonuses to management and sales people.
  9. The president of the United States was and remains an idiot -- or did I mention that already?

A father's legacy

Taken all together, it seemed clear to me that there were no rules to speak of and those that existed didn't get enforced. The United States -- the elephant we, the mouse, live next to -- was in serious trouble. NAFTA had the unintended consequence of sending huge numbers of jobs to Asia and in particular to China whose naked ambition is to replace the United States as the number one economy in the world.

With a crash coming -- I thought so then and was proved right this month -- we wouldn't have time to get our money back.

Finally, Wendy and I asked this question: If we had our savings in cash, would we invest it in this market? If the answer to that was no -- and it emphatically was -- what the hell were we doing in it now?

I flunked Econ 200. I read balance sheets and learned analyses of the world of commerce with about as much ease and comprehension I would summon if asked to read the hieroglyphics in the tomb of an ancient pharaoh.

All I have to bring to understanding economic matters is a tummy.

Thanks, Dad.

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