An investor’s guide to the G8 and G20 summits
This analyst isn’t a fan of the summits, but sees huge financial issues facing its leaders — and looks at what that means for Canada’s market.
Those who live in Toronto and Huntsville, Ontario are discovering the joys of international diplomacy.
The G8 and G20 leaders have landed, to be greeted by giant fences and a gaggle of protesters.
It may be big news in Ontario’s cottage country and downtown Toronto, but what does it really add up to?
As far as one observer is concerned, the summits themselves don’t amount to much, but the massive financial issues its leaders face will continue to weigh on the markets.
Mr. Ian McAvity lives in Toronto, which gives him a first-hand view of the summit. His publication, Ian McAvity’s Deliberations on World Markets, reaches an audience that includes many Americans.
He is worried that we have entered stage two of the financial crisis — and that world leaders aren’t yet facing up to it.
What’s more, the order in the G20 has been reversed. It’s the bottom dozen that have the wealth today, while the great powers that founded the original Group of 7 are on shakier ground.
Mr. McAvity also takes time to ponder why the markets in Toronto continue to outpace their New York counterparts.
He’s not convinced this will continue, but he does see some hope for energy. And perhaps, he adds, gold mining stocks may finally come to life.
The world upside down
Mr. McAvity is frankly dismissive of the idea of the summit.
This is simply an event at which “the heads of 20 nations and their bureaucratic hangers-on gather for a major photo-op for pictures with each other to boost their domestic political standing, and at the end they’ll put out a statement largely negotiated prior to their arrival.”
He’s no happier about the estimated $1 billion cost, due largely to the many precautions that have been taken “in the unlikely event any major leader escapes through the 8-foot fence and security ring to go shopping!”
Sarcasm aside, Mr. McAvity looks at debt and sees the world turned upside down. The original G7 — the U.S., Canada, France, Germany, Great Britain, Italy and Japan — became the G8 when Russia was added.
The name that is conspicuously missing is China’s. China and the rest of the bottom 11 countries in the G20 “are major holders of foreign reserves, largely U.S. dollars,” says this analyst. “They mostly have low GDP per capita and are underway in traditional growth that will resume on the other side of the valley we’re double dipping into. The top 7 face reduced standards of living and growth for years to come.”
The “double dipping” he refers to is stage two of the credit crisis, which is now in its fourth year. “The old G7 mature economies have been living beyond their means for years.”
They are trying to print their way out of a deflationary collapse, he adds. The major holders of the greenback and the euro are at the table now, and they’re not going to tolerate any more “lectures” from the west.
Shock treatment
The sovereign debt crisis may have begun with the euro in Greece, then Spain, but it will shift to Italy, Great Britain and even the United States, says Mr. McAvity.
Stern measures will be needed, much like the 1944 Bretton Woods conference that established an international banking and monetary structure for the post-war world.
Or even a shock treatment, such as President Richard Nixon’s “closing the gold window in 1971.” This effectively ended the Bretton Woods agreement, taking the U.S. dollar off the gold standard in order to inflate the currency and cover the growing deficit caused by higher domestic spending and the costs of the war in Vietnam.
This, says Mr. McAvity, is what the summit leaders must deal with sooner or later. And the rules have changed. Washington and Wall Street will no longer dominate this process.
We will all feel the effects, he states. “Global trade may be badly hurt by the adoption of deficit reduction austerity programs just as the ‘recovery’ loses steam.”
Two rays of hope
How much steam are the stock markets liable to lose as the financial crisis gets up a new head of steam?
The strength of the Toronto stock exchange against New York’s S7P 500 “continues to amaze” this analyst. But it may not last. He believes the liquidity injections used to arrest the global meltdown have had their effect and are past their peak.
Global markets are already coming down from this “sugar high,” he says. And with political events heating up from Europe to Israel to Iran, “markets could be vulnerable to scary headlines this summer.”
Canadian equities are typically trend followers, says Mr. McAvity, and he sees them eventually sliding with the rest of the global markets. Still, there are two possible rays of hope.
The BP disaster in the Gulf of Mexico and the flurry of regulations that have followed it are liable to add value to Canada’s oil sands. More value could be added if events in the Middle East come to a broil again.
Meanwhile, “gold miners might finally come to life if the gold price rushes up,” concludes Mr. McAvity. Only IAMGold (TSX-IMG; NYSE-IAG) has made “new higher highs” since gold last passed the US$1,000 barrier in 2008. It trades at $19.87 and yields 0.3 per cent on its $0.06 dividend.
But this analyst doesn’t believe investors can take much hope from this weekend’s summit meeting. Come Monday, he reckons, there will still be difficult decisions waiting to be made.
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