Vladimir Putin

C. Ross Healy, Nick Barisheff, Thomas S. Caldwell

Wednesday, July 8, 2009

The speeches are free of charge but please note that the Empire Club of Canada retains copyright. Neither the speeches themselves nor any part of their content may be used for any purpose other than personal interest or research without the explicit permission of the Empire Club of Canada.

Understanding the future by first understanding the present and the immediate past

January 8, 2009

Thomas S. Caldwell, Chairman and CEO, Caldwell Securities Ltd.

Nick Barisheff, President and CEO, Bullion Management Group Inc.

C. Ross Healy, Chairman and CEO, Strategic Analysis Corporation

Annual Investment Outlook 2009

Chairman: Jo-Ann McArthur, President, The Empire Club of Canada

Head Table Guests

William F. White: President, IBK Capital Corp., and Director, The Empire Club of Canada

Peter Gibson: Vice-Chairman, Desjardins Securities

Bob Barootes: Vice-President, Institutional Sales, Jennings Capital Inc.

Brian Prill: Associate, McLean & Kerr LLP

Tony Andrews: President, Prospectors & Developers Association of Canada

Robert Cook: President, CNSX

Christine Young: CFA, Vice-President, Institutional Sales, ICICI Wealth Management Inc.

Eugene C. McBurney: Chairman, GMP Securities LP

Jay Smith: First Vice-President and Portfolio Manager, CIBC Wood Gundy

Mike Miller: Executive Managing Director and Head of Equity Products, BMO Capital Markets

Peter Aceto: President and CEO, ING DIRECT Canada

Margaret M. Samuel: CFA, President, CEO and Portfolio Manager, Enriched Investing Incorporated, and Director, The Empire Club of Canada

W. David Wilson: Chair, Ontario Securities Commission Nick Thadaney: CEO, ITG Canada Corp.

David Brown: Partner, WeirFoulds LLP

Peter Jarvis: Executive Director, Toronto CFA Society

Terry Campbell: Vice-President, Policy, Canadian Bankers Association

Morley W. Salmon: Chairman, Limited Market Dealers Association of Canada

Reverend Ken Coffield: Chaplain, King-Bay

Chaplaincy Thomas Kloet: CEO, TMX Group.

Introduction by Jo-Ann McArthur

Welcome to our 15th Annual Investment Outlook lunch. Our first lunch was hosted by John Campion and he told the story of the Dutch tulip in 1630 that had a valuation of $70,000 in equivalent 1995 currency as a way of illustrating what John Kenneth Galbraith called “financial euphoria” or “speculation.”

Today we are selling no tulips! To guide us through these turbulent times we have three industry leaders. I will introduce them separately and they will give you a 10-minute overview. At the end, if time allows, we will open it up to questions from the floor and from our TV audience.

First up is Thomas Caldwell, Chair of Caldwell Financial, a diversified investment company with subsidiary organizations providing investment and insurance services to a broad spectrum of investors throughout North America and around the world. He is recognized as one of the world’s foremost investors in securities exchanges.

Thomas Caldwell

I think to understand the future you have to understand the present and the immediate past and I’ll tell you a story. I was in New York about a month ago. I was in the elevator at the University Club and an elderly lady pointed to me and said, “You should be ashamed of yourself.” Of course at my age I have a lot to be ashamed about, but I didn’t know what specifically she had in mind. She said, “You’re the ones who caused this problem,” because I had a New York Stock Exchange pin on. I said, “There are lots of villains. We are just one group. There is a whole array of them.”

What has been interesting is that we are living through history and really an interesting part of it. We are seeing the convergence of a whole array of human, corporate, governmental, regulatory failings all meeting at one point. Our reactions and our government’s reactions will define the future of the economy and the markets in which we live.

One of the great things about our American cousins is that they will dive in and deal with the problem. When Japan went through this 20 years ago, everybody sat around and pretended it didn’t exist. Americans want this over by the next commercial break. They are going to deal with this thing and that is a good thing.

Now, admittedly, there is no playbook. You have got to hand it to Paulson. He’s reacting and clearly he was spooked. There are going to be arrows, there are going to be unintended consequences, but the first task—stabilizing the financial system—was correct.

By the way, just so we have a qualifier, all of this is my best guess today, in case you think the Oracle of Delphi is speaking here. I was just joking when I said, “The best thing about humility is if you don’t seek it stick around. It will come.”

As far as the financial system goes, in my opinion I think they have more or less stabilized it. I think it’s done. The great irony about all of this is we are creating more credit to deal with the misuse of credit. It is like drinking yourself sober or spending yourself solvent. But again, leaving the irony aside, the one thing we knew when they baled out Bear Stearns was that they were going to deal with it.

The one ingredient still missing is the ingredient of trust or confidence, the key thing. We are pummelled day in and day out by the negativity, and, of course, we have this Bernie Madoff thing that has just blown up. We have India blowing up. The only good news I heard today about Bernie Madoff was that Eliot Spitzer and Marc Rich were invested with him. So there is always an upside. But clearly we have ethical concerns compounding stupidity. The good part of this is we are cleansing the financial system. Money is available but nobody wants to borrow any money. People don’t have the confidence and they are paying down loans. So that means, aside from this monetary flushing the system up, you now get into the fiscal thing. President-elect Obama gave a speech today. They are working at roughly $1.2 trillion in budget deficits in the United States. Just to give you a rough idea so you can understand the size of money, sixty-four billion is the number of seconds since the first Christmas. If you were counting one-dollar bills, you would be getting $64 billion right about now. 1.2 trillion in time is the number of seconds since we first discovered fire. That’s 20,000 years ago or thereabouts. There are some good parts to Obama’s plan and particularly write-offs. We can go back five years. This is going to result in massive write-downs right across corporate America. It is going to end up in clean balance sheets. The big problem is going to be the profit-and-loss statements going into next year.

I think this measure will add significantly to corporate cash positions. They are trying to get money into corporate hands. Consumers have already had a massive tax cut in gasoline prices. They don’t realize it. That’s added about $20 per week to the average American family in the United States. This is a massive tax cut and there are going to be more coming. The concern is monetary inflation. Demand inflation is excess demand from business but it doesn’t exist. Monetary inflation is a combination of the amount of money in circulation and its velocity or how fast it is changing hands. There is no velocity, but stick around. It will come just like humility.

The key thing in managing money is your asset mix. That’s why these wrap accounts are problematic because you don’t change asset mix. For example, if you were really, really smart, you would have had at the beginning of 2007 100 per cent of your portfolio in bonds. Now is the time to switch gears. Your asset mix now should have, in my opinion, some equities in it.

Let’s talk about the bond market first very quickly. In the past we under-priced risk. People bought these sub-prime packages. That’s where you put bits of garbage together into a big garbage bag and it becomes triple A. Anyway they paid 19 basis points; that’s a fifth of one per cent more to get the garbage bag versus U.S. treasuries. So we under-priced risk. Now we are overpricing safety. The yields on government bonds are minimal. There is going to be lots of financing required. One of my bond-trading friends, Jimmy Duncan, said, “The bond crop never fails.” So there are going to be lots around and rates will be going up sometime in 2009. So if you are going to park money you want to stay in the shorter end.

In the equity market I think there are some really exciting opportunities and there are some really exciting traps for you. Value investing, and that’s my bag, is really sifting through the ashes and trying to find stuff of value, but you cannot ignore market sentiment. I think one of the good things is investor confidence, the key ingredient that usually precedes events. The other thing I have observed during my years in the securities industry is that bull markets ignore bad news. Bear markets ignore good news. Looking at the tone of this market in the last little while with the exception of yesterday, I think markets are starting to accommodate, if not ignore, bad news. It is similar to when a friend calls and complains about his health and his family. After a while you stop listening to him. That’s what the markets have done. The markets have stopped listening to the grumblers and the complainers.

My point is the market has started to ignore the bad news. I think we are in a bottoming process. I think we are going through a period of very, very bad news and I think the market is accommodating this. I like to keep things simple. I look at yields. I look at dividend yields versus bond yields and the safety of those dividends.

One area that I think is of interest is the financial-services area. It is one of the most damaged sectors. The major Canadian banks are the least damaged of the world banks, so therefore have a relative advantage. You are looking at yields between 51/2 and 9 per cent and people say, “Oh what about the safety of the dividend yields?” It is really tacky to do a financing and cut your dividend. All the banks are essentially evil, but I mean even we wouldn’t do that. Banks make money from money, and there is going to be lots of it sloshing around. And there’s going to be bad news because everybody wants bad assets off their balance sheets. There are going to be write-offs and who knows, there may even be some merger opportunities coming with the Canadian banks here in Canada. I like the major Canadian bank sector. I think it’s a very interesting group to be involved in.

The other areas I like are exchanges obviously. The two exchanges I like by the way are the New York Stock Exchange and the Toronto Stock Exchange. All this junk we are going through speaks of a lack of transparency. Regulators want transparency. That speaks to capital markets, stock market environments. Yes they are going to be squeezed in terms of volumes and margins but the volumes will return. You make no mistake about that. You have declining cost structures. You have product development initiatives, a lot more products coming out. This is an agency business. They don’t have bad loans on the sheets, and they have really good dividend yields, which are well covered. These are pull loads linked to economic activity so it is a great way to play the financial services and to participate in the economy if, as, and when you think the economy is going to pick up. There’s a multiplicity of revenue sources, there’s listings, there’s data, there’s trading, all kinds of stuff, so if you feel the stock prices will eventually improve then owning an exchange in my opinion is better than owning an ETF because as trading volumes and listings and data increase, their revenues increase proportionately.

In the Canadian market I would look at the big Canadian banks, and I would look at exchanges. U.S. dollar inflation is coming back. Interest rates may support the U.S. dollar for a little while but there is going to be some downward pressure here and that speaks to gold. Nick Barisheff is the man on gold, so I’m not even going near his turf, but that’s one area that would be very much of interest. Health-care consumer products, the must-have goods such as toothpaste or whatever, are the ones that I think are going to be of interest in the U.S. market. Now if you combine some of this with emerging market recovery in later 2009, it would be wise to speak to somebody on commodity and energy stocks.

Short-term markets are a guess. Long-term markets are not a guess. One to two years from now we will look back on this as a time of great opportunity. My brother came into the securities business in 1979 and I came into the business in 1964 and he looked at the charts and he said, “Why wouldn’t you buy all these stocks in 1974?” I tried to get my hands around his chubby neck to explain that you had to be there.

I think we have to look past this current mess. The savings and loans precedent is the one I would use. There is only one thing you have to know about the savings and loans crisis back in the nineties—all the money that was made coming out of it.

My big concern as we go into this year is the potential of over-reaction by the U.S. regulators coming out with a hodgepodge. Remember Sarbanes-Oxley and all that nonsense. It was negative. In fact, it shifted the focus to governance as opposed to risk for boards of directors. My concern is we get a hodgepodge of regulations as opposed to a whole rewrite of a new, smoother, easier, better system that can be really productive for us. The bottom line. If I take it all into account, my view is that equity markets should increase somewhere between 10 to even 15 per cent in 2009. If you add that to dividend yields, I believe this will be a positive year.

Thank you.

Jo-Ann McArthur

Thank you Thomas. Next we have Nick Barisheff, President and CEO of Bullion Management Group, where for the past 10 years he has focused on the world of precious metals and the advantages of investing in gold, silver, and platinum bullion, building a reputation as one of Canada’s leading precious metals experts.

Nick Barisheff

Today’s topic at this 15th Annual Investment Outlook is “Making Money in Troubled Times.” This may be quite a challenge in 2009 if investors continue to do what they’ve always done. However, there is always a bull market somewhere and making money in troubled times is possible if you correctly identify the dominant trends and adjust your portfolios accordingly.

Right now, many investors can relate to Will Rogers, who famously said, “I’m not so much interested in the return on my money as I am the return of my capital.”

For most investors, 2008 was a painful year with many portfolios experiencing capital losses of 30–70 per cent. In 2009, precious metals will not only continue to preserve capital but increase in value, as more investors continue to seek a safe haven from the financial crisis that we experienced in 2008.

A review of 2008 is necessary in order to better understand what lies ahead in 2009.

The year 2008 was the year of:

• Massive government bailouts;

• Increasing money supply.

While I have written about the growing imbalances and vulnerabilities for a number of years, and last year’s annual report warned investors to “Batten Down the Hatches,” even I was surprised by the depth and the speed with which the global financial system unravelled.

Unfortunately, there is not likely to be much improvement in 2009.

Yet throughout the financial turmoil of the past year, gold preserved investor wealth and outperformed all other asset classes except bonds. Over the past five years, gold has been the best-performing asset.

To understand why this is the case, it is crucial to realize that gold is primarily a monetary asset, and not simply a commodity like copper or zinc. That’s why central banks hold over 29,000 tonnes as part of their currency reserves. That’s why the turnover of physical bullion in London is over $20 billion a day. That’s why precious metals trade on the currency desks of most banks rather than the commodity desks. That’s why gold should be compared to other currencies—not commodities.

At an increase of 5 per cent in U.S. dollars for 2008, gold performed extremely well, considering the Dow lost 38 per cent. Gold’s performance was somewhat muted in U.S. dollars, largely because of the extraordinary demand for dollars caused by deleveraging.

Gold’s performance against other major currencies was even more pronounced, as global equity markets lost between 30–70 per cent.

Gold rose:

• 9 per cent in euros;

• 45 per cent in British pounds;

• 25 per cent in Russian rubles; and

• 38 per cent in Brazilian reals.

Gold increased by 31 per cent in Canadian dollars, while the Toronto Stock Exchange lost 35 per cent of its value. Only the Japanese yen rose against gold, due to the exceptional demand for yen produced by the unwinding of the Yen Carry Trade.

Now let’s take a look at some of the other factors in 2008:

• The U.S. government and the Federal Reserve spent $3.2 trillion in 2008 bailing out institutions that were “too big to fail,” and committed another $5 trillion. Total amount: over $8 trillion.

• $8 trillion is nearly twice the combined cost of the space program, the Vietnam War, the invasion of Iraq, the Korean War and the savings and loan crisis.

• In contrast, the bailout of Long Term Capital Management in 1998 amounted to a “mere” $3.6 billion, and Worldcom’s bankruptcy was $103 billion.

The end result will be inflation, not just in the U.S. but in the U.K., Europe, China, Russia and Canada, all of which have adopted similar bailout programs.

We can only hope that these bailouts will work and not morph into stagflation or hyperinflation.

Rising inflation is already on the cards. In 1971, when the U.S. abandoned the gold standard, total M3 money supply stood at $800 billion. Since then, the Federal Reserve has increased the money supply well in excess of GDP growth.

In 1987, Alan Greenspan opened the floodgates and expanded the money supply from $3.5 trillion to $10 trillion—more than all of the previous Fed chairmen combined. Ben Bernanke surpassed Alan Greenspan’s record by adding another $4 trillion in the last three years. While there’s been much talk about deflation, the increases in the money supply we are witnessing clearly contradict this view. As Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon. As the government increases the rate at which it prints money, the result is too much money chasing too few goods and services.”

While the rate of M3 money supply increases has declined from 16 per cent at the beginning of 2008 to 9 per cent currently, money supply has still increased. For deflation to occur, money supply must actually decrease, not simply slow the rate of increase.

In addition to the fact that money supply data points toward inflation, we have Ben Bernanke as Fed chairman. Deflation is unlikely to occur under Bernanke’s watch. He made it clear in his PhD thesis, and in recent speeches, that he will avoid deflation by using every tool at the Fed’s disposal to create as much money as it takes. The resulting growth in money supply will ultimately lead to a declining U.S. dollar and higher inflation, resulting in higher gold prices.

Looking ahead to 2009, it seems many people believe the crash of 2008 was just a correction, and that real estate and equity markets will soon recover.

Current data does not support this argument.

While we all like to be optimistic, as investors it is critical to be realistic and adjust to changing circumstances.

We can hope that real estate prices and the stock market will recover.

We can hope that job losses will stop, and that consumers will start spending again and the economy will recover. Unfortunately, this is just wishful thinking. Until consumers feel confident about their jobs, the value of their houses and the safety of their savings, they will curtail spending and the economy cannot improve.

During the past 25 years we have experienced the longest equity bull market in history. However, markets move in long cycles, and the next 20 years are unlikely to be a continuation of the past. Warren Buffett noted that the stock market “went exactly nowhere” for 17 years from the end of 1964 to the end of 1981.

He forgot to mention that on an inflation-adjusted basis, 1964 investors who held for the long term didn’t break even until 1995!

During this same time period, however, precious metals soared:

• Gold rose 2,300 per cent;

• Silver rose 2,400 per cent; and

• Platinum rose 900 per cent.

For investors, the takeaway from all this is that while a “buy and hold” strategy may work during a bull market, it doesn’t work during a bear market.

The crash of 2008 is not a simple correction, as the financial imbalances that broke open last year have been building for decades and are unlikely to correct in a single year.

In 2009, the six-year upward trend for precious metals should continue, while real estate, equity markets and even bonds will likely decline. One factor is the massive imbalance between financial assets and above-ground bullion.

Today, annual gold production is about 2,500 tonnes, a decrease of 200 tonnes from its peak in 2006. This represents an annual increase in the global supply of above-ground gold of about $75 billion.

Contrast this with the estimated $10 trillion increase in global money supply expected to fund the bailout and stimulus programs. This disparity in growth cannot continue without a significant price adjustment in gold.

At the end of 2007, privately held gold bullion amounted to less than $650 billion, and the total amount of above-ground silver and platinum bullion was less than $5 billion. Put together, this is less than 1/2 per cent of the estimated $187 trillion of global financial assets.

Yet even after six years of gains, most portfolios have no allocation to precious metals whatsoever. As a result, most portfolios are neither balanced nor diversified. This means investors are not protected from inflation, or from currency or market declines. Equally important, most portfolios are not aligned with the current investment trend, which has been moving away from paper assets towards hard assets like precious metals for the past six years.

As more investors come to realize this, and adjust their portfolios accordingly, even a small shift away from the $187 trillion of financial assets to precious metals will result in dramatic price increases, and may ultimately lead to shortages of even the largest bullion bars. Last year investors experienced shortages of the smaller bullion wafers and coins, with premiums running as high as 10–40 per cent for gold and 30–100 per cent for silver.

In addition, China, Russia and the OPEC countries are considering substantial increases to their gold allocations in order to diversify their currency risk. Any reallocation by these countries will drive prices much higher.

Citibank predicts gold soaring to $2,000 an ounce sometime in 2009.

Ultimately, the exact number is very hard to determine—and it doesn’t really matter.

Over the next few years precious metals will continue to outperform real estate and equities, and probably bonds. Precious metals will continue to hold their purchasing power whether we experience deflation, inflation, stagflation or hyperinflation.

During these uncertain times, the question investors should be asking is, “What percentage of my portfolio should be in precious metals bullion?”

Ibbotson Associates recommends between 7–16 per cent just for proper diversification, while Wainwright Economics recommends between 18–47 per cent to protect portfolios against inflation.

To make money in 2009, you will likely need an even higher allocation than those recommended by Ibbotson and Wainwright. Furthermore, given our experience in 2008, it is critical that investors hold actual bullion and not a paper proxy or derivative. Physical bullion is the only asset that is not someone else’s liability. The single point to remember from these comments is that, no matter what your allocation to bullion turns out to be, it should certainly not be zero.

In order to adapt to current global changes, investors need to rethink their investment strategy and their portfolio allocations, because the next 20 years are going to be completely unlike the past 20.

Thank you.

Jo-Ann McArthur

Thank you Nick. Batting third is Ross Healy, Chair and CEO of Strategic Analysis Corporation, a capital markets research firm. Ross has just been named “3-Star Analyst of the Year” for 2008 for being the top stock picker by Business Edge in Calgary.

Ross Healy

My wife was in the local branch of our bank a little while ago when she noticed that the clock was missing from the wall. She asked the teller where it had gone and he told her that all the banks were taking their clocks out. Without a pause, she replied, “Oh, that’s just like the casinos.” Given what’s been going on in the global financial system, we’re wondering when they are going to start to cover the windows as well.

My company was originally called Solvency Analysis Corporation and we are first and foremost balance sheet analysts. We use the balance sheet extensively, as it provides us with “inside information” that most people ignore. I say that because U.S. consultant, Woody Brock, made a survey of research analysts and money managers to find out what company documents they use to make decisions. He found that only 5 per cent of the street analysts actually use the balance sheet, and fewer than 1 per cent of money managers refer to that document at all.

The methodology that we use describes and measures how the balance sheet becomes valued by the stock market. We begin with an overlay of credit analysis, or “solvency analysis,” a term which I prefer, as this offers strong inferences of probable future trends. We add our own determination of the Fair Market Value of a company, as well as what we term “structural pricing levels.” Many of our “forecasts” are not forecasts at all, but frequently tend to be straight-forward readings of developments already clearly in motion.

For example, in the documentation of the proposed BCE leveraged buyout, there was a clause that required that the resulting balance sheet pass a solvency test to protect the bond holders. Using BCE’s balance sheet, we ran our own solvency test and a huge red flag went up. We were concerned—and said so! Later, two of the major lenders, Citigroup and Royal Bank of Scotland, experienced difficulties and our unqualified recommendation was to sell. When KPMG issued their report, it came as no surprise to us.

But now the stock has collapsed to attractive valuation levels close to its book value. With the restored dividend, this should prove to be a solid, defensive holding. The huge decline of bank stock prices has shocked many people. Personally, I thought it was inevitable. We have balance sheet, credit analysis, and price data for the Canadian banks going back 58 years and there is a very clear valuation range. By late 2007, they were at extreme highs and had run out of any visible upside potential as we measure it.

In our experience, markets have a memory and large cap stock valuations tend to remain within their historic limits. In our analytical view, bank stock prices were likely to decline.

As the U.S. credit problems in 2007 spread, Canadian bank stocks were highly likely to suffer, as they always do in periods of credit stress, even though our solvency work shows that they are fundamentally sound. We warned our clients to avoid bank stocks and anyone else who would listen, including viewers of BNN and CBC Television. You all know what happened. Again, this insight was based on solid historical precedence and clearly visible trends.

For those who are wondering what the banks look like now, you will not be surprised when I tell you that they are becoming quite cheap again. The Commerce, the Bank of Montreal, and the National have come closest to their usual valuation lows, with the others slowly falling into line. The credit situation is still in a bad way out there but I think that investors may slowly accumulate the cheaper banks. Given our market outlook, however, I would not look at my monthly brokerage statement too closely for a while.

Speaking of the market having a memory, the Canadian Oil and Gas Index has fallen to its average lows of the past 28 years. Investors now fear this sector. Just as there were forecasts that oil was going to $200 a barrel earlier this year, now we see projections of $25 oil! Choosing a cheap oil stock or two makes increasingly good sense. Among others, we like PetroCan, as it is better value than most other oil stocks.

Turning to our market outlook, let me start by observing that the U.S. as a nation has reached what we at Strategic Analysis term a “second-order insolvency” condition as far as its GDP debt ratio is concerned. As price tends to follow solvency, so our “forecast” about the direction of the U.S. dollar has been down for some years. At US$1.09, however, we did think that things were overdone, and withdrew our dollar hedge recommendation.

Very recent developments suggest that the U.S. dollar has merely been in a rally in a general downtrend. When corporations reach that particular solvency ratio, their banks and creditors tend to put them out of business by withdrawing all new credit. You don’t want to be in those companies. We did not want to be in the U.S. stock market—and hence any stock market for that matter—when the overall U.S. solvency hit that key level.

What happened—and in the quarter that the U.S. reached that second-order insolvency condition—is that the entire credit system “suddenly” seized up. Right on time, as it were.

By then, our clients had sizeable cash holdings, and we had recommended a short position against the market using those wonderful new Horizon BetaPro bear exchange traded funds which permit you to be short without the attendant trouble that short selling has previously entailed. They are eligible for RRSPs, and when used prudently, make portfolio management in perilous times much less risky.

In 2008, our advisory portfolio actually enjoyed a modest double-digit rate of return, and in the process has exceeded the TSX Index return by a very substantial margin.

The real problem is, what now?

We do have one compelling guidepost, that of Japan, which became identically insolvent post-1995–6. We are just finishing a study of the Japanese and American national insolvencies and it clearly shows that if the U.S. does not take firm actions to resolve its financial issues, the American economy will also be highly prone to stagnation, or worse.

When the problem is debt, the solution is not more debt.

And what are the Americans doing, just as the Japanese did before them? They are trying to push the credit-generating machine as hard as possible. I can appreciate the political sentiment that underlies this effort, but the road to Hell is paved not only with good intentions, but also with too much debt, as Japan has discovered.

If the U.S. stays the course being pursued by Fed Chairman, Ben Bernanke, the U.S. stock market is likely to sink slowly downwards over time. Bernanke claims to understand what the Japanese did wrong, yet is dead set on following their example.

As the private sector is pressed down under the dead weight of ever-compounding debt, the U.S. federal government and the Federal Reserve Board may try to take over the financing of American activity, just as the Japanese government did—and is still doing. The definition of insanity is doing the same thing over and over in hopes of a different outcome.

What lies ahead in 2009? It is likely to be a difficult year. U.S. consumers have nothing left on their balance sheets to fall back on. Home prices and stock holdings have been badly mauled but all the debt is still there. Banks are still hesitant to lend, and rightly so. Corporate earnings are likely to decline not recover, but this is not reflected in the sanguine earnings forecast numbers today. According to U.S. economist Gary Shilling, earnings may be about half what they were in 2008. If so, the stock market today has a recession built into it, but not the recession that it is likely to have.

Against this background, we do like some gold exposure in portfolios. Personally, my own preference is Barrick Gold as it is one of the few gold miners that really knows how to conduct a business.

As for the overall market, we should have a decent rally in the early part of the year, as the market digests what has happened already, and what the authorities are doing to try to turn things around, but before we find out that the Fed actions aren’t working as expected.

The market is then likely to sink back into a pit of despondency. I suspect that there will be further opportunities for those BetaPro bear ETFs to come—and go—in your portfolios.

In the longer term, the overall growth rate of the U.S. will slow down from the debt-driven high-growth period from 1985 through 2007. U.S. household and bank balance sheets have to be rebuilt and that will take a lot of steam out of the U.S. economy unless it is done with determination and dispatch.

Unfortunately, President-elect Barak Obama and Ben Bernanke are desperately trying to forestall this event, even though common sense should tell them that escaping insolvency lifts the burden of the bondage of debt and frees the creative instincts again. There are several implications for portfolio management in the future.

We are likely to see the return of the normal business cycle, and market returns will therefore be lower as overall growth slows. Long-term “buy and hold” strategies will not tend to work particularly well. There will be growth stocks and even periods of growth, but not for the same long periods as we have enjoyed for many years. Dividend income will again be a large part of overall returns. The average mutual fund will lose its appeal over the next few years. Investors will look back and see that markets have not advanced very far over the course of a full cycle or two, but fund returns have been hampered by the high fees often being charged.

On the positive side, well-managed hedge funds that actually do hedge, will succeed, and good long/short funds will work if they are managed using sound valuation procedures.

Otherwise, trading among values and timing markets will be the way to “beat the index,” just as it was during the first 17 years of my own career, a period that saw a bear market—defined as a decline of 20 per cent or more—roughly every two years.

Those investors who adjust their tactics early will do well, and those that do not should probably run to GICs right now and get it over with.

The appreciation of the meeting was expressed by William F. White, President, IBK Capital Corp., and Director, The Empire Club of Canada.