Obama thinks were close to a Great Depression II, apparently. According to the introduction, “Over the past two years we have faced the most severe financial crisis since the Great Depression.”

Some other selected quotes:

-“The roots of the crisis go back decades.”
-“Years without a serious economic recession bred complacency among financial intermediaries and investors.”
-“Rising asset prices, particularly in housing, hid weak credit underwriting standards and masked the growing leverage throughout the system.”
-“At some of sour most sophisticated financial firms, risk management systems did not keep pace with the complexity of new financial products.”
-“Market discipline broke down as investors relied exclusively on credit rating agencies.”
-“Households saw significant increase in access to credit, but those gains were overshadowed by pervasive failures in consumer protections, leaving many Americans with obligations that they did not understand and could not afford.”
-“While this crisis had many causes, it is clear now that the government could have done more to prevent many of these problems from growing out of control and threatening the stability of our financial system.”
-“Existing approaches to bank holding company regulation focused on protecting the subsidiary bank, not on comprehensive regulation of the whole firm.”
-“Investment banks were permitted to opt for a different regime under a different regulator, and in doing so, escaped adequate constraints on leverage.”

That about gets it right. The impressive performance of the U.S. economy over the last several years was actually a result of expanding consumer credit, not really any real economic activity. The credit bubble pushed up asset values across the system. The credit bubble expanded because regulators failed to step in. That credit bubble, the largest since the ’20s, is now collapsing like it did before the Great Depression.

Of course, this suggests the U.S. doesn’t really need a new regulatory system. U.S. regulators just need to apply regulatory pressure to maintain adequate capital levels, appropriate leverage and lending regulations. As one commentator said about the restructured regs contained in the bill (the Fed is going to get new powers to watch over banks), “I don’t see anything here other than a rearranging of the deck chairs. We don’t need anything on structure. We need to see something about the intention to apply regulations.”

What a helluva an idea. Let’s be honest for a minute. Business profs may teach that boards of directors are elected, and CEOs talk as if power runs from the board on down. But anyone who has a passing familiarity with the way the real world works knows that boards of directors–nominated by management using Soviet-style slates of accepted names—all end up beholden to the CEO.

That’s bad for the actual owners of the corporation (the shareholders). The CEO can pull all kinds of compensation out of the board and the owners have to pay that from their profits.

But if the real owners of a company were able to vote on candidates they put forward (rather than rubber stamping choices of management), we’d see a fundamental change in how corporate power works. We’d see arguments over compensation, and lower compensation overall. We’d see the quality of candidates  for board appointment improve. Merit would be involved. Most importantly corporate decision-making would be hashed out from the perspective of owner/shareholders, not the managers. That is, power would actually flow as it is supposed to, from the owners through the board to management.

Most importantly, we might end up with a governance model that would make the system more responsive and resilient. The Canadian banks get credit for moving toward a “Say For Pay” system where shareholders have the right to vote on the compensation of the top bankers. Let’s hope the reforms don’t end there.

The company has pioneered a business model that sees it operating in many of the world’s most volatile areas (much of its production comes from Nigeria), but it is attracting new attention for its Iraqi operations, which represents some of the first new oil to come out of the country in the wake of the U.S. invasion.

Addax entered the northern Kurdish area of Iraq through a joint venutre with Genel Enerji, a Turkish company that secured a drilling license from the Kurdistan Regional Government (KRG) earlier this decade. (The KRG is the governing body in the three northernmost provinces of Iraq that are home to the Iraqi Kurds, an ethnic group of mainly Sunni Muslims.)

The Genel/Addax JV, T.T. Op. Co, has been working a patch of highly fractured sandstone known as Taq Taq in Sulaimaniyah province, about 45 minutes outside of Erbil, the ancient city that is the nascent capital of what is now called Kurdistan by locals.

I traveled to Taq Taq late last year (and we will publish a feature on Addax in an upcoming issue of Canadian Business ).  At the time the company was sinking a series of test wells to see what was down there. The answer it turns out is “a lot.” All of the test wells the company sunk through the winter came back well above 10,000 barrels a day, while one, Taq Taq 10 came in at an amazing 40,000 barrels a day.

That is an amazing amount to come up from a standard conventional onshore oil well at this point in the history of the oil age, and when I was there one of the roughnecks with experience in the now depleting North Sea was telling the young guys on the crew to enjoy it. “You don’t see it like this anymore,” he said.

The company eventually expects to produce 180,000 barrels a day from Taq Taq. To put that number in perspective, the average oilsands mine gives up about 100,000 a day, but only by using many large trucks, expensive upgraders and lots of labour. Addax will produce that amount with a couple roughnecks, one drilling rig and a whole bunch of natural pressure from newly tapped rich reservoirs of high-quality crude.

But while it appears Addax is sitting on a goldmine, it is also sitting in limbo.

The company’s contract is with the KRG, not the central government in Baghdad, and that has been a bit of a gamble, one tied intimately to the nation’s complex politics.

The Kurds were lumped in with the Shia and Sunni Arabs of the south, back when Iraq was created by the western powers in the early ’20s. Since then they have been fighting for whatever bits of autonomy they can carve out in the north. (Here is a recently declassified U.S. State Department document describing an early meeting between U.S. representatives and legendary Kurd leader Mustafa Barzani).

Considering 95% of  Iraqi government revenue comes from oil, maintaining control over the development of the oil in the north is key to preserving Kurd’s autonomy, so it is no surprise they went ahead and signed their own oil deals.

But the KRG contracts angered the central Shia-based government of Nouri al-Maliki in Baghdad, which quickly declared them (and the Addax contract) illegal in 2008. The claim of the central (Shia)  government was that only contracts signed through the central Iraqi oil ministry could be considered legitimate.

The ensuing dispute held up progress on Taq Taq and another field, Tawke, that is being developed by Oslo-based DNO International ASA. But a couple of weeks ago some kind of deal was reached, and exports from Taq Taq and Tawke went ahead on June 1.

It wasn’t long after the oil began to flow that interest in the companies developing in these fields took off. Another player in northern Iraq, Heritage Oil (also registered in Canada), announced it was making a bid for Genel Enerji, the Turkish company that is in Taq Taq with Addax, while Sinopec, the big Chinese refiner and the Korea National Oil Company, are reportedly preparing bids for Addax.

Addax rose 6.2 per cent on the TSX yesterday as Kurdistan took a big step toward its future as a 21st century Islamic Texas.

Massoud Barzani, the leader of one of the two factions that make up the KRG, speaking at the ceremony marking the opening up of the spigots, was quoted by an Al-Jazeera correspondent as saying that, “It is a historic date, a giant step…We are proud of this success, and this achievement will serve the interests of all Iraqis, especially the Kurds.”

Why the decision by Baghdad to let the exports go ahead now (even though the exports will happen outside of Baghdad’s direct control)?  That’s hard to say from here in North America. But the Al-Jazeera correspondent suggested the central government has quietly given the go-ahead for the exports out of a need for cold hard cash.

The Kurds have always said they would forward whatever royalties are due Baghdad from any exports they make. Considering total Kurdish exports could eventually reach 250,000 barrels of oil a day, that’s a lot of money for Baghdad, which is struggling to get oil production in the south off the ground.

Douglas Porter and Robert Kavcic, two BMO economists, have just released a draft version of a report, O Canada: We See Thee Rise, which makes a good case that over the medium-term, things actually look pretty good for the economy.

The ongoing thaw in credit markets should help things get back to normal. Sure, we’ll see some more bad data over the next few months, but the TED spread—a measure of the spread between rates on three-month T-bills and the LIBOR rate that can indicate stock market downturns—has dropped back to 50 basis points, “not far from its long-term trend,” say Porter and Kavcic. As well, corporate bond spreads are closer to the levels they were at before September 2008 than they were at the height of the crisis. These are both very good, market-driven signals that better days are on the way.

Better yet, according to Porter and Kavcic, stock markets typically pick up four to six months before the economy does, and so the recent advances in stock indexes suggest a recovery sometime “between July and August.” Good news that. Commodity markets, which are up 30% from recessionary lows, are also starting to price in this recovery.

But what about the big jobless claims we’re seeing? Porter and Kavcic point out that unemployment claims typically peak close to the end of a recession. If you consider that the U.S. was still churning out negative employment numbers into 2003, “almost two years after the last recession had ended,” it might not be something to worry about.

Also good is a pick up in the ISM Manufacturing index. In a previous Canadian Business feature, Myles Zyblock, chief institutional strategist at RBC, explained the importance of  the ISM. In their report Porter and Kavcic point out that it’s now at 42.8, on the cusp of recovery.

So with car and home sales seemingly on the verge of a turn is it all-clear for the medium-term?

Perhaps. Fellow BMO economist Sherry Cooper, one Canadian economist to take a Roubiniesque-position through the downturn, is also brightening up.

According to a recent report she suggests the worst of the financial crisis is behind us and that U.S. and global economies are bottoming. She’s now predicting “moderate” growth by the end of the year, a dramatic turnaround from the big 6% contractions we saw last year.

Another positive sign she points too is the ability of troubled Bank of America to raise equity to bolster its capital base. The surgical, in-and-out of the Chrysler bankruptcy is another reason to cheer. Let’s hope GM goes as well.

Of course, we’re not all the way through this. It’s worth noting that all of the commentators offer “mid-term” outlooks. There are still some big issues outstanding—what happens when the boomers get really serious about pulling in consumer spending after 2010?—but that’s a worry for another day. Let’s enjoy this summer rally of 2009, a blessed break after a brutal winter of ‘08-’09.

The profits of American corporations suffered the largest two-year drop in profits in the 55-year history of the list last year.

From an all-time record of $785 billion in 2006, American corporate profits plunged to just $98.9 billion last year. That is, (according to the lead-in article to the list), for every dollar made by American companies in 2006 they made just 13 cents last year.

Talk about a haircut.  The financial sector, which had been generating the bulk of the profits, took the biggest dive. But also suffering were any companies in the consumer cyclical sector.

Big products/services that consumers could put off they did. Entertainment, vacations, gambling, and, of course, cars, were all delayed and those sectors suffered (the auto sector most severely).

Interestingly enough, health care and tech held in there. Health care’s resilience is obvious. That’s not something you can really put off. Tech also hung in there as the once high-growth companies that brought us networking and computer services increasingly become more like utilities, providing a necessary, steady service (now seemingly resistant to recession) .

The lead-in article on the list mentioned that the corporate profit boom of 2006 and 2007 is likely never going to be repeated. One of the key reasons profits were rising was that the money being used was coming out of home equity and related lines of credit. With the credit bubble deflating and home prices dropping, the profit bubble is done too.

But on a lighter note the article goes on to note that part of the profit slaughter came as a result of companies slashing prices on inventory in a desperate measure to move some of that inventory out. Now that things are firming up a bit and we see and end to initial interuption of spending, we might also expect a real jump in earnings in the quarters ahead. Earnings tend to bounce back in a big way once they stop falling, and considering they were so low, we may have some nice surprises through the rest of this year. Let’s hope that’s the case.

Pro:

1. Oil is rising because investors see a recovery.

2. Government bond yields in the U.S. are rising because people are moving money out of the bond to riskier assets to take advantage of said recovery.

Con:

1. Oil is rising not because times are good but because the U.S. dollar is falling and investors are looking for real, hard assets as a place to hedge that rise.

2. Bond yields are rising because bond buyers are worried about the future ability of the U.S. government to deal with rising government deficits.

What’s the correct interpretation? I’m going to go with Con on this one. Check out the U.S. dollar. It lost more than six percent of its value in May, the biggest monthly fall since 1985, while gold just hit $980 last week, a three-month high. That is, the price of other “worry” assets suggests oil and bond yields are moving for all the wrong reasons. If these were positive developments you’d think gold would be falling. It’s not.

The liabilities piling up on the U.S. government—stimulus spending, retiring boomers—are mounting and bond buyers are demanding a higher yield to hold government debt. The Wall Street Journal called this emerging dynamic the return of the bond vigilantes. The U.S. government has made a lot of promises, but whether it will be able to borrow enough money to fulfill all the promises is now being questioned a little more by the bond market. This sort of market discipline wasn’t a factor in the lower deficit boom years of the late ’90s. But as the macro situation shifts from the golden age to…whatever comes next…bond buyers are beginning to get a little nervous. Who can blame them? Now that we’re into an era of unsure energy supply, broke retirees and damaged consumer spending, private capital would be remiss not to apply a little vigilantism to its investing.

Expect a big welcome home celebration Monday as the team returns from Rimouski, Que., after a brilliant season and a nail-biter of a series. Much has been made of this team that has been a bright spot in a city dealing with the gutting of the North American auto industry. A new group of dynamic and passionate owner-coaches took a team that many thought too young to have a chance of winning the Memorial Cup, and overcame two deaths in the extended Spits family, to pull out an epic season that has proven to be one of those real and genuine great moments in sports.

It was only a couple years ago that the beloved Spits were at a low point in the history of the club, which dates back to the ’40s. The team was stuck playing in the Barn, the almost 90-year old hulk of an arena in the city’s core that had a reputation as being an intimidating place for fans of visiting teams. Outsiders could get egged, shouted down and intimidated, a problem made all the worse by previous owners too cheap to hire police or ushers to tame what was a pretty tough crowd.

But things really seemed to hit bottom for the Spits earlier this decade when a brutal hazing incident gone horribly wrong made national news and left a serious stain on the team. The old owners and coach were criticized for letting it all get out of hand, and the incident was a shame for the team and the city.

Since then things have only got worse in the City of Roses. As the Great Recession rolls across the globe Windsor has been hit harder than most. The city is typically the first Canadian region not a recession and this time was no different. Unemployment has spiked to double digits, dozens of small Tier Two auto parts plants have gone under along with a couple big Tier One plants.

As a result many in the city are downsizing their lives or working under a sort of permanent economic instability as the North American auto sector, such a pillar of the economy here, fundamentally restructures.

To say the city is in a doldrums is an understatement. Municipal workers are on strike and that has left garbage uncollected and the grass long in the parks, and the city is literally looking like crap these days (at least that’s according to one local resident). So the fact the hometown hockey heroes have pulled off a miracle season is the stuff that local history is made of.
Much of the credit for this team has to go to the new management who took over at the end of the 2005-’06 season. Made up of three locals (one businessman and a couple of former Leafs), these guys are getting all the credit in the city for providing one postive story among many current tales of woe.

The president, CEO and coach of the new Spits is Bob Boughner, a former Leaf and current vice-president0 with the National Hockey League Players Association. He, along with Warren Rychal, another former Leaf, and local businessman Bob Dobrich make up the new ownership group.

It looks like they’ve got a hit on their hands.  Each member of the ownership group has deep local connections and stays involved in charity work,  and they have come together to freshen up the organization and throw off the taint of recent years.  It was time to clean things up, and they did that, with their local pride and passion showing through.

Halfway through this season they moved into the new arena, a beautiful new $71-million operation featuring ushers in every section. Next door to the new arena the old General Motors trim plant has just been torn down, a symbol of all that’s gone on here, but the fans are flocking to the new arena, which is said to be sold out for every home game now. The crowd is still loud and acts tough but you don’t have to fear for your safety is the way one online London Knights fan put it.

Better yet, there is a new team of spirited young guys, many of them local, who turned in a season that will be remembered for years by the locals and former locals (of which I am one). It started off with a tragedy, however.

It was on Feb. 18, 2008 that city residents were shocked to hear that the then captain of the team, Mickey Renaud, had collapsed at the breakfast table and died of previously undetected genetic heart ailment. It was big news in this tight-knit city, and a bigger shock.

But the team ended up rallying around Renaud’s death. Since then Renaud’s jersey, No. 18 (a big seller in the city), has hung behind the bench for every game as the team set out on what has been a season of destiny.

As if that wasn’t enough drama, Rychel, suffered another tragedy two-and-a-half months ago when his brother died in a house fire in the area. According to local news reports, Andrew Rychel was found dead just inside the front door of his home. He had been trying to make his way out.

Nevertheless, Rychel and the team soldiered on. Stung by unexpected deaths, and with the city literally falling down around them (many locals on the team have relatives affected by the downturn), the team headed into the long regular season and began to rack up wins.

The team won every one of the last games they played at the Barn, and they lost lost 10 games over the season as Boughner coached the young and talented team to an amazing season that finished in the new building. When the final tally came in, it was the best regular season the Spits had ever played, with 57 wins, 10 losses and 1 shootout loss.

It was only fitting that they ended up winning the OHL crown in the new building, and they headed to the Memorial Cup to a play off with the best teams from the other Canadian leagues. The good work of the new management team has been recognized by the larger hockey community. Bob Boughner won the OHL Coach of the Year and the Canadian Hockey League Brian Kilrea Coach of the Year Award, while Warren Rychel took home OHL Executive of the Year.

You can’t replace a manufacturing sector with a service sector industry like hockey, but the success of the team has returned a sense of pride to the city, the team and created a strong business around the brand. It’s a great story of how local businessmen can have a real effect on their local economy by refinishing a local business and making it shine. So in that sense the team had already won.

But having taken the OHL crown it was off to Rimouski for this year’s Memorial Cup playoff. Many consider the Memorial Cup one of the hardest trophies to win in sports. The winning team not only has to battle to the top of its own league, but they have to beat out the winners from the rest of the Canadian junior hockey leagues. Few players ever make it to the Memorial Cup. Even fewer win it.

But here the Spits were in a tournament they had last visited in 1988. As the garbage piled up at home, and as the CAW went back into negotiations with GM, the Spits headed for the final showdown. But they also seemed to fall apart once they got to Quebec.

The team dropped its first two games, one game by a goal, the other in overtime, and quickly faced elimination. Was that it? Had the magical year come to naught? Not yet, though it would have been understood. They weren’t supposed to be here. You’re supposed to be an older team to make if through the OHL finals and then into the Memorial Cup. But the Spits were full of young players. They got here through sheer force of will, and they kept pouring that on.

In a big do-or-die game the Spits beat the Kelowna Rockets by a goal to get into a tie-breaker game, an almost heartbreaker that saw the Spits down 2-0 in the third. That’s when Dale Mitchell, 19-year-old from Mississauga, pulled off an inspired three goals in just a little over three minutes to pull the game, and the season of destiny, out of the fire. It was one of those magic moments in sports, and it was enough to get the Spits into the final game, which they handedly won yesterday after scoring on their first three shots. Sometimes you just can’t stand in the way of destiny.

As the game wound into its final moments, text messages and phone calls began flying around the country between the Windsor Diaspora. But nowhere was the victory savoured more than in the city itself as thousands of Spits fans jammed the downtown core, waving flags and dancing in the streets.

Considering everything that has gone on over the last couple of years, no wonder it looked like Rychel and Boughner were holding back tears as the teammates and coaches jumped onto the ice to celebrate the victory.  One of the assistants on the coaching staff carried Renaud’s No. 18 into the pileup.

“I think he’s definitely here in spirit,” said Windsor forward Eric Wellwood (younger brother of Kyle) to a Windsor Star reporter. “We dedicated this season to him and this was as much for him and his family as it was for us and the city of Windsor.”

It was an amazing win, the kind of uplifting and affirming moment that the the world of sports sometimes offers up. That it happened in Windsor, a city way down on its luck and in need of that win, was a wonderful story. Congratulations to the new owners, the guys who made it all happen. A big congratulations.

PRO

People really want stocks to go up.

According to rumour the U.S. government has been acting in stock markets, jumping in with its own money to provide buying support when things look most dire (this, goes the rumour, accounts for big end of day buying recently).

The price of oil may have gotten ahead of itself. With U.S. use down something like 7% there is a lot of extra crude sloshing around the system. If the price comes off in the short-term that will relieve pressure on the rest of the economy.

CONS

The recent U.S. bank stress tests suggest that if the economy worsens banks are sitting on losses of more than $500 billion.

U.K. sovereign debt has been downgraded. Recent auctions of U.K. and U.S. sovereign debt haven’t been well attended.

Public debt is already ramping up in a bid to provide stimulus, just a few years before western populations really start retiring, an event that will bring with it yet lower levels of consumer spending and more government outlays.

Consumer spending (based on a generation of rising consumer indebtedness) is falling, seemingly permanently. That means lower earnings for corporations.

If consumers aren’t going to drive this recovery, what will?

Oil is already back above US$60, hurting the average consumer (see above).

According to Houston-based brokerage Raymond James, real oil production peaked last quarter.

According to some reports, money is moving en masse to Asia right now, putting downward pressure on U.S. assets and the U.S. dollar. Investors are hedging that move in oil.

Current “growth” is really just a bit of a restocking of the shelves. This is not the beginning of a new growth cycle.

Trends over medium-term (retiring boomers) are brutal.

Boomers with devastated defined contribution plans are going to be in big trouble and may eventually have to sell stocks to pay other bills. The end of equity culture?

The Federal Reserve just increased its estimates for the total contraction in the economy this year. (What was going to be shrinkage of 0.5% or 1.3% is now 1.3 or 2%.)

Minutes of last Fed meeting are downbeat.

All in, it’s hard to think we’ve got a huge and sustainable rally here. Hopefully this sticks, and maybe it will for the summer. But there just don’t seem to be any compelling reasons to think corporate earnings are going to increase, which, at the end of the day is the one thing that can drive stock markets higher.

A rising price of gasoline couldn’t be worse for a struggling stock market. The TSX crashed more than 300 points yesterday on brutal retail sales in the U.S. Imagine how much worse those sales are going to be if the price of oil keeps on rising.

Bu then the U.S. economy is at a unique point these days. Domestic production of oil in the U.S. peaked in 1970 and has been in decline since. Yet it has ramped up its consumption to the point that it now uses one quarter of the oil pumped in the world each day, or some 20 million barrels out of a daily flow of 86 million.

Most of that oil comes from offshore now, not from the heartland, and that has left the American economy ever more susceptible to rises in the price of oil.

Think about it. Whereas in the ’60s and ’70s when the price of oil rose, the money would go to American corporations and American governments (through royalties); now when the price of gasoline rises the money goes offshore to oil producers like Venezuela, Iran, Saudi Arabia and Russia.

The effect of the current state of American energy is even worse. Nowadays when the price of oil rises consumer spending shifts from mortgages, malls and auto sales (all the things the Americans still make) to overseas oil producers.

Since American oil production peaked, the United States has seen a rise in a massive load of consumer debt. The personal savings rate has plunged, and the amount loaned to Americans rose as a result of securitization.

This papered over the hollowing out of America for a generation. But now that it looks like peak oil is here, America is now going through a massive adjustment, from an economy where consumers no longer produce what they consume, to something more balanced.

The collapse of the banks and the auto industry was the opening chapter in what is now coming. And considering the amazing dependence on oil (with just three percent of the world’s population the U.S. manages to suck up one quarter of daily oil production), we’re in for a hell of a ride.

I’ve been talking about the idea that western economies (And therefore stock markets) are hemmed in by the new ceiling on oil production. Now that supply can no longer grow, neither can economies that are heavily linked to oil. The only way out now is big change.

I had an interesting interview with Jeff Rubin last Friday for the purpose of a feature running in the next issue of Canadian Business.

Rubin, of course, has just quit his job as chief economist of CIBC World Markets to go on tour with his new book warning of the impending economic chaos around peaking oil. One of the things he said in the interview was that Peak Oil can mean Peak GDP if we don’t de-link our economies, a notion now finding confirmation in current events.

Rubin is warning of real increases in the price of gas in the years ahead, and let’s hope people listen to his warning. If there are these kinds of rises, we’re going to see lots more pain in the economy.

The U.S. Fed just subjected the U.S. banks to stress tests. And while most passed, you can’t overlook one of the conclusions of the test, which was that if the economy gets worse the banks are going to be sitting on more than $500 billion in further losses.

If the price of gasoline heads much higher, you have to think those losses are going to start registering. Yet, here we see mainstream brokerages like Raymond James out of Houston, issuing reports claiming that oil peaked in the last quarter of 2008 and that we’re now on the backside of Hubbert’s curve. That is, we’re at the end of expansion of oil and gas age and into the era of contraction, which suggests that the stock market recovery is not real.

It is amazing how fast peak oil has moved from the fringes of the oil industry and into more mainstream acceptance.

On a more worrying note, Norway, the world’s fourth largest crude exporter, announced Monday that its oil production fell 7% in the month of April. Production fell from 1.99 million barrels to 2.15 million, which is a substantial drop for one month.

Low prices would have something to do with that. It’s hard to pay for new development costs if there is no money around. But it is also the case that the North Sea, where much of Norway’s production is, is rapidly giving up the ghost.

As a major exporter, that means less oil going into the world market. Couple that with ongoing declines in Mexico, and you really have to wonder if the oil market isn’t now pricing in the emergence of peak oil as an accepted fact.

This will be good for oil companies like Canadian oilsands producers, but you have to wonder what it all means for investing in general. This could really mess things up in markets.

I keep thinking of a comment that appeared in the Globe and Mail months ago. If it was true that we are at peak, and that oil-based economic development (the deep source of modernity in that it brought us cars, air travel and plastic) is done. Peak oil means that “capitalism is broken,” suggested the commentator.

There is something to that notion. Rubin doesn’t think it has to be that way. “Markets will be the thing that will temper behaviour. Peak oil could mean peak GDP, but it doesn’t have to. We have to de-link our economies from oil.”

But that’s going to take a while. For now it’s about getting through the turbulence to come. And it looks like there is going to be lots of that yet.

Back then markets came back strongly after the initial crash of 1929 and rose through the spring of 1930. But that was only a false rally before the stock market cratered again and the Great Depression got off to its official start.

Some suggest we’re at a similar point now. Ongoing debt deflation has yet to run its course and the economy has further to readjust yet, all of which is going to take markets lower end leave this boom a good chance to sell out before the big crash. It is the ultimate bearish stance. But the bears seem to have some corporate insider data to back them up.

One of the best forward signals there is about corporate behaviour is the buying or selling patterns of corporate insiders. Insiders have access to privileged information at a company, and so when securities reports suggest they are selling it’s often taken as a signal the companies they work for are going to do worse in the years ahead. (And on the contrary. When insiders are buying it’s a signal corporate executives are optimistic).

So the fact that there was a massive spike in insider selling this past April (at a rate of 20-to-1), suggests that many in the corporate sector think things will get worse in the months ahead and were taking this rally as an opportunity to lock in some higher gains.

Sure, many economic indicators appear to have bottomed. And we may now be sailing into an economic recovery. But we’ve also seen an amazing amount of economic stimulus provided to markets, and so that has to have something to do with what’s going on right now. At the very least that stimulus has to represent the end of the collapse. But does that necessarily mean this is the beginning of a recovery? The SUV and McMansion sector of the economy has collapsed. But we may yet need to get through a disaster in the airlines and it looks like Citibank and Well Fargo have got to raise a lot of capital yet after their stress tests. And the price of oil is trebling at around $50, ready to run as soon as growth returns and flare out the economy again. Taken together, it’s not clear the burn-off of the old order is done, and that a base has been laid for long-term growth. At leat that’s what the insiders are saying.

Meredith Whitney, the securities analyst who was the first to call the severity of the banking crisis gave her take on what’s ahead for banks. Nouriel Roubini, the Stern School economist who has achieved a level of fame for both his dour economic predictions and his avant garde wall art, gave a general rundown on how down we’re going to get. And Ian Gordon, the Vancouver-based so-called Long Wave theorist, was there to put events into alarming order.

In a conversation backstage the genial and mannered Gordon mused about the speed of human cultural evolution and how particular human patterns can lead to predictable economic patterns.
A whole generation of Canadians suffered through the Depression and been exposed to the destructive role credit creation can play in an economy. But over the intervening years, the cultural attitudes shifted. Those with an immediate memory of that era died off. Lessons from that age were viewed as quaint. The culture moved on. Consumption moved back to the foreground. The dangers of unrestrained credit were downplayed. We rolled back the legislation that grew out of that era to avoid these events. And now we’re now back to where we were. We’ve increased the total amount of debt outstanding (measured as a percentage of GDP) to the point it was at just before the Great Depression.

The problem now, say the bears, is that this debt bubble (accumulating since the early ’80s) is imploding, and this is going to take down the global economy. Consumer spending, the biggest single driver of our economy, was pumped up as the personal savings rate dropped and central banks slashed interest rates lower and lower, which allowed all kinds of home refinancing. But that process is running in reverse now, and companies and individuals will have to readjust. People will lose their jobs. Consumer spending will fall further. Businesses will make less. The debt payments won’t be made. Stocks will suffer. People will feel poorer. More layoffs. Less spending. More declines in asset prices. According to Roubini, who was actually one of the optimistic voices this night, this debt deflation (not inflation) will be the dominant trend through to 2012. “The American consumer is tapped out,” he said.

Meredith Whitney, the bank analyst, agreed. She began her presentation by reminiscing about her early days as a bank analyst who bought into the good story around securitization. By slicing and dicing bundles of loans into Triple AAA tranches and toxic waste tranches, we were able to offer more credit to more people, as well as to people who didn’t qualify for credit before. And that was a good thing in the early days. It led to a cultural belief at the time in the “democratization of credit.” “I believed in that idea, the idea that an immigrant with no banking background could come to North America and buy a house,” says Whitney.

But as we let loose all kinds of new forms of debt (and therefore demand and liquidity) we created a whole new set of instabilities. The process of securitization, which allowed us to put off worries about “risk” and borrow lots more than we would have otherwise, is now the Achilles heel of the economy. The end of securitization will see less credit everywhere and at every level in the economy. We’ll see lower credit card balances and a net decrease in total lending in the years ahead. Bank lending will go back to something more local and “monogamous” (more one-on-one, rather than bundled) “My deposits will be used for your mortgage,” she says. But all of this will affect consumer spending in a negative way and will deepen the deflationary spiral.

The banks in the US have been dealing with this deflation by raising money in various ways. The first attempt to shore up what is effectively a bankrupt U.S. banking sector was through the big “vanity” buys by sovereign wealth funds, many of whom got burned by moving too quickly. Next it was the mergers. And then a bunch of preferred share issues. And then it was the governments stepping in to provide money to shore up the sector.

But that’s not going to be enough said Whitney. Next will be big asset sales on the part of U..S banks that will finally be forced to shed key assets they have so far been loath to part with. They won’t have a choice. Credit card losses will mount. They’ll have to  deal with all the bad commercial mortgage loans outstanding. This will be good for the Canadian banks that could pick up some deals. But the economy as a whole is likely to get worse yet as this debt and asset price deflation moves ahead.

To add one more layer of worry. In a Q&A with Canadian Business before the event, Eric Sprott was asked about the connection to energy issues in all of this. His shop is a believer in peak oil—the idea that we’re in for some large spikes in the price of energy in the years ahead as the rate of ongoing natural depletion of existing fields begins to run ahead of the rate of new oil production. Sprott agreed there could be a cap on any growth in the years ahead as oil prices rise with any attempted recovery. And so whatever recovery we get will be checked by rising energy prices.

There just doesn’t seem to be many reasons for optimism. As Ian Gordon put it, we’re moving into a stage of the economy akin to the winter season. The bounty of the now fading post-war U.S. consumption-led economy (now in collapse) will fall away, and the ground will go fallow for a period. And while this will eventually make way for the new green shoots of spring, the new less consumer-dependent economy that is going to grow out of what is now collapsing is far off yet.

This grey, cold no-growth season with be with us until 2020 says Gordon. It’ll take that long for the old order to break down, and for the new shoots lying underneath to come up. “That’s what I see as a financial historian,” says Gordon. Sprott agreed, suggesting it could be more than 10 years before the debt bubble that began forming in the early ’80s is wrung out of the system. So plan accordingly. There was, of course, a pitch in all of this. Sprott’s new gold bullion fund was mentioned. As was the wisdom of shorting the market.

But if there was one thing to take away from the event it is the notion that the fraction of total debt to GDP climbed to 200% in late ’20s, just before the Great Depression. And we’re back at that point again. “It’s amazing how one era is like another” say Gordon. Is it ever. It may be worrying. But it is amazing.

Yes, the price of our most precious commodity,  the source of 32% of our total energy consumption,  has plunged. And that has caused mainstream opinion makers to assume that Peak Oil was just a flash in the pan as a concept. But many in the oil industry are actually moving to a new and higher level of concern around the issue of peaking oil through this period, especially now that we’re seeing a slowdown in investment in new oil projects as a result of lower prices.

Ongoing depletion in current oil production projects  continues to take production off line. But this is happening at the same time we’re failing to replace that production, and that’s going to lead to a plunge in total production in the years ahead.  This past Friday Cambridge Energy Research Associates (CERA), the energy stats organization that most mainstream fund managers follow, suggested the world might be facing a sharp decline in daily global production of seven million barrels a day over the next five years as a result of the current low prices.  That is, according to many in the industry we’re winding the system up for a huge price spike as soon as the economy recovers, or tries to.

Think about that for a moment. Seven million barrels a day in production coming out of a our current daily production of 86 mbpd? That will be a severe shock to the system and will virtually ensure a price spike if the economy recovers. Remember, it was only a slowing of the rate of growth that caused the Great Energy Spike of 2008. Real declines (which some suggest could begin next year) will take prices to a new level. For those who are assuming we’ll see a quick recovery from this recession, you might want to rethink those assumptions. Look at the price of oil right now. With every bit of good news the price trebles, seemingly ready to break out into a new oil bull market. That will be good for the speculators buying into the spike. But it also means that whatever recovery we get is going to run right into a huge wall of high oil prices, and that’s going to kill any recovery.

No doubt we’ll see another huge round of “shoot the speculator” if we see oil prices rise. But sit back for  a moment and think about the bigger picture here and what this all means. What is really happening is that free markets are working just as they are supposed to. Markets are registering the new ceiling on oil production (and the specter of possible declines). And in that they are sending the right message to us: There is no more room for growth in the total supply of oil. It will be constrained. After 150 years of constant expansion we’re near the upper limit of that expansion, and there is nothing we can do about. Heed the signal people, we need to change.

Hopefully higher prices will arrive soon enough to get enough new (and more expensive) unconventional oil supply online to avoid real chaos in oil supply. But what we should also take from this is the idea that the only way out of this mess is to move  to alternative energies and nuclear. These other sources of energy are all far less efficient than hydrocarbons (oil and natural gas). Hydrocarbons provide by far the highest “energy return on energy invested” and so any move away from them will require more of out total societal capital to be put toward energy production, which will take growth from every other sector of the economy. But we no longer have a choice. The path to growth can no longer go through oil. America is going to be in a permanent recession until it begins to grow (albeit more slowly) through other energy means.

This is all old hat to the peakists, of course. But it seems to be slowly dawning across the rest of the society. The CBC is interviewing Hirsch. That long-time cheerleader of Chimerica (read: more American consumption) Thomas Friedman is changing his tune (shamelessly so). And in Alberta and Texas they’re just watching everyone else catch up to this kind of thinking. (How many people know that the Greater Houston Partnership, and the Houston Chamber of Commerce has already put this stuff together and is now engaged in an effort to develop the city along more “alternative energy” lines? It’s true.)

I’m headed to Alberta this evening to attend a CFA-sponsored “Investing in Energy” conference, which will feature both the CEO of Suncor, Rick George, but also Kenneth Deffeyes, an emeritus professor of geology at Princeton University, and someone who worked with M. King Hubbert, the patron Saint of Peak Oil. I’m very interested in hearing what he has to say. His take is that we’re at peak, basically. Our current low prices will lock in this level of production since so much new production is going to be delayed. Once prices pick up again and flood oil companies with enough money to get the projects back online, depletion will have already moved ahead far enough to ensure that we never increase out total daily production that far above 90 or 100 mbpd. We’re there.

It is telling that Deffeyes has been invited to this conference. He has been warning about the dangers of peak for years, and he’s finally getting some attention. Tune in here over the next couple of days for some live blogging from the conference.

Also at the conference will be an analyst from Simmons & Co., the energy investment bank run by Mathew Simmons, another well-known voice among the peakists. Through this period of low oil prices he has also been busy. In a recent speech he gave in Australia, Simmons suggested that free markets in oil may really be, basically, screwing us over right now. What we need is a guaranteed price for oil (a carbon tax!) to guarantee the money in the energy sector necessary to get us through this period. That is an astonishing comment from someone who made a life out of working in free markets, and it’s a warning not to be taken lightly.

Free markets are great when the underlying commodity is expanding in its supply. But now that this is no longer the case for the most important base input into the economy, the volatility that is going to result from a shift from expansion to contraction of oil supply could crash our economies more seriously than we’ve experienced to this point. If we get a massive oil price spike—if we lose, say, 7 mbpd in total production in the next five years as CERA maintains—you will know exactly what I’m talking about.

The world is at a weird place right now. When America peaked in production of domestic oil production in 1970, the U.S., which in the early parts of last century had been the biggest net exporter of oil (and therefore the biggest recipient of the world’s energy dollars),  had to rely more and more on foreign imports of oil. And that reversed a basic flow. No longer was America selling oil to the rest of the world and collecting huge sums of private and tax money on that. It was now sending money offshore. And so now other countries are now collecting the rents on energy provision, not America.

Nevertheless, America went ahead consuming energy at the level it always had. To cover the gap that began to widen between the money coming in and that going out we saw the personal savings rate decline, and we saw a large bubble in paper assets created by over-leveraged banks. This worked through the late ’80s and ’90s when the price of oil was low. The country was able to literally paper over this financial hollowing out by de-regulating lending to increase the amount of debt outstanding. But the Day of Reckoning has arrived. The supply of oil stopped growing back in 2005 and that caused the price of this base commodity to rise to the point it pushed the banking industry over the edge.

Germany and Japan were already in recession as a result of the rise in the price of oil through this decade even before we heard of sub-prime mortgages (which are a symptom, not the cause of our current crisis). But the price spike in 2008 knocked the by then fragile U.S. banking system into the ditch as people put more money into their gas tank and less toward their mortgages. The banking industry fell over. The easy credit dried up and the auto industry went shortly after. And that gets us to where we are today.

Now America is printing money to keep it all going. But that can only work for so long. America can no longer pay for its energy consumption and its economy has hit the wall. Let’s hope the centre holds (the U.S. dollar doesn’t crash) before Obama’s new energy initiative works. Because that is the only way out of this thing. And while the shift away from oil to a more sustainable future will mean permanently lower growth and checked markets for years to come, we no longer have a choice. This is where we are.

As for the talks themselves the big issues will revolve around the nascent and emerging new global world order. This is something we’ve discussed before in Canadian Business. Whatever way you slice it, looks like the G8 is dead and the new challengers to U.S. economic supremacy, China and India, are set to spread their wings under this new G20 format.

The Middle Kingdom offered up a hint of where these talks may go in the years ahead when it mused a week ago about the need for a new global currency mechanism that would eventually replace the U.S. dollar as global currency of last resort. Timmy Gheitner, US Treasury Secretrary rejected that idea. But this is all very interesting. What we’re seeing here is the very budding of the future international order, and in that alone these meetings will be fascinating to watch.

But global macroeconomic trainspotters will also want to keep an eye on the side-dispute between the U.S. and Europe over the proper form that stimulus spending should take. To overly simplify the differences it looks like the Euros are skeptical about the need for more stimulus; the Americans would like to see more.

Which side is getting the response to this economic crisis most right? That’s impossible to say. We’ll see in the year ahead. But it’s worth noting how these two regions came to their respective positions.  Paul Martin, the former Prime Minister of Canada, recently spoke at a Canadian Business magazine economic outlook event, and in his address suggested that the differences between Europe and the U.S. can be traced back  to their differing experiences in the 1930s.

In the U.S., the most damaging outcome of the Great Depression was the debt deflation that destroyed paper wealth and dumped the industrial sector into the tank. American officials have never forgotten that and so their natural impulse is to err on the side of more stimulus. Stopping Great Depression-like debt deflation from taking hold is public-policy aim number one and so no wonder the Americans want to apply as much stimulus as possible.

Over on the other side of the Atlantic, however, the Euro-mindset was scarred by the experiences of hyper-inflation, which wiped out the German middle class and led to the rise of Hitler, and eventually the Second World War. The painful lessons of that time, inflation, still lingers in the “national mind” and manifests itself as a more hawkish stance on inflation. And so naturally the deep impulse of the European politician is to be extremely careful about anything that might lead to inflation.

Who should we listen too? That’s hard to say. Both sides address different angles of the same problem. Not providing enough stimulus now could see deflation take hold and that would hurt. But too much stimulus could be setting us up for a big round of inflation once we get through the near-term mess. And so both sides have good points. The stakes are equally dire at either end of this spectrum. Let’s hope the differences can lead us to the right middle path.

Let’s hope as well that protesters don’t blow the whole thing up. That would seem to guarantee a tragic outcome no matter how much stimulus is applied (or not applied). We’re already seeing stock indexes sell off  in advance of the meeting (and, no doubt, as a result of the ongoing problems in the auto industry). One shudders to think what some kind of bomb would do to markets.

Whatever the case, it’s clear the stakes around this meeting are higher than they’ve ever been. As the world gets ready to gather in London it is fascinating to see these deeply embedded impulses rise to the surface. But as for who will eventually be proven correct, that’s impossible to say. History repeats itself, sure, but it’s never quite the same is it. And so we don’t really know what the perfect answer is. We’ll just have to hope it all works out. In a way, it almost makes one pine for those old G8 meetings of yore, you know the ones back in the late ’90s when the world economy was flying, the economic ducks were in order, and it was a challenge to get anyone to pay attention. Leaders then seemed almost desperate to come up with something interesting to talk about. Ah, the golden years. Those were the days weren’t they.

He also mentioned the need for investment in the mining sector (“We can hardly think of mining in Mexico without thinking of Canada,” he says) and tourism. “For the first time more than one million Canadians visited last year,” he says. “For us, that’s an important number.”

In response to a question about the spate of violence in his home state of Chihuahua, he made it clear the government is taking new and more forceful action in the drug war currently being waged there.  “The decision President Calderón has made to fight a real war against the drug lords is the right one. This should have been done long ago. We could have avoided many problems,” said Barrio. But he suggests things are likely to get worse before they get better, “I think we are going to have to pay some costs. There is difficult time ahead. But finally the state will prevail.”

He went on to say that he was surprised to see anti-gang demonstrations taking place in Vancouver. Noting he didn’t think he’d encounter that kind of thing here, he suggested the drug trade is a continental phenomenon. “It seems criminal gangs in our three countries are going to be more connected,” he says.

When it comes to the state of the Mexican government’s finances Canadians might be surprised to learn that Mexican fiscal health is in better shape than the United States these days, a reversal from the mid-’90s when Bill Clinton led an initiative to bail out the Mexican peso. That era is past, says Barrio. “We survived and reorganized.

And now the Mexican banks are very stable. We are in a very good position,” he says. In fact, public finances in Mexico are doing pretty well. The leverage ratios at Mexican banks are lower than those at Canadian ones. As well, the government depends to a great extent on revenues from the national oil company, PEMEX for its revenues. And in a great example of successful hedging, the Mexican government had the foresight to lock in 2009 oil revenue through futures contracts at $71 a barrel. With oil headed to $30 that decision was a smart one as it has preserved state finances. “We are in a good position with respect to stimulus,” says Barrio.

When asked about some of the worries around the flow of seasonal workers between Mexico and southern Ontario (where Mexican labour is a big part of the greenhouse industry), he was circumspect. Some workers have complained that they are heavily taxed, yet cannot draw on government services.

Others have complained they are badly treated and have been forced to live in dismal conditions. “We have found some problems with seasonal workers. But I think that the problem is very small,” says Barrio. “The benefits for workers and for employers far outweigh any of the problems.” He points out that 80% of workers in the Seasonal Worker Agricultural Program (SWAP) come back. “That level tells you about the level of satisfaction,” he says.

The workers come to Canada through SWAP have become a fixture in Essex County in southwestern Ontario, where Mexican stores and restaurants have popped up to serve the population. Leamington, Ont., a small municipality on the shores of Lake Erie. Better known as the tomato capital of Canada, Leamington even has its own Mexican consulate these days. It’s an example of the kind of continental integration between Canada and Mexico that Barrio hopes to foster.