Expect a slow recovery, says Goodman

“A bird in the hand is worth two in the bush,” says Ned Goodman, quoting from one of Aesop’s fables, at Monday’s luncheon conference at Toronto’s National Club. “It’s my valuation tool for almost anything,” he says. In other words, better to have a sure thing than take a major gamble.

Goodman, benefactor of the Goodman Institute and chair of DundeeWealth Inc., shared his well-honed perspective of how to navigate the uncharted territory of this recession in his talk, Ned Goodman: Light at the End of the Recession?

“I don’t know what’s ahead,” admits Goodman. “I’m a contrarian; I challenge conventional wisdom all the time.”

So is there light at the end of the recession? “Recessions do not end when we can see the light; they end when all continues to look black,” he says, stressing the subtle, incremental process of recovery. His preferred strategy is to “hope for the best and be prepared for the worst.”

One of the leading architects of Canada’s investment management industry, he touts the beginning of a new world order led by China, Latin America and India, noting, “I’m with the crowd that expects a slow recovery….The government debt that is building up, both on and off the balance sheet in the U.S., and the geopolitics of the Middle East, those are two concerns.”

Goodman warned that U.S. Federal Reserve Chair Ben Bernanke’s printing press will create a period of inflation in the U.S. “If treasuries are overvalued, then the bank’s assets are likewise overvalued. In addition, banks will have many new regulations that will erode profit margins.” He cautions that the U.S. will soon run out of foreign creditors, which will, in turn, generate “scary inflation” and “devaluation of the dollar, both with higher interest rates.”

He commented on the first year of Barack Obama’s administration: “The landscape of the U.S. economy seems to be undergoing a radical reshaping. The process appears to be an ad hoc policy to take advantage of the financial crisis — and it is happening quickly,” he says. “The Obama quest to move wealth from the rich to the poor,” he continues, “will eventually mean there will be fewer opportunities for Americans to get rich.”

Moreover, Goodman cautions that President Obama and House of Representatives Chair Nancy Pelosi are making promises they will not be able to keep. As he points out, important remedial steps are not being taken to offset quantitative easing. Based on the fragile psychology of the U.S. consumer, Goodman argues, “In short, any action by the Fed to stop inflation would mean that the Obama administration, as it exists, might end in the November 2010 election.” Banks have money, but they’re not lending, they’re buying treasury bills, he says.

A general shortage of resources — including energy, metals, agricultural products and arable land — also threatens to choke off a recovery. “We are almost running out of everything at a furious rate,” says Goodman.

In light of scarce resources and a growing population that will place demand on agricultural production, Goodman recommends investing in resource commodities. Three billion people in the developing world are reaching for a better quality of life, which strains even Canada’s ability to supply resources at cheaper prices.

“The combination of global inflation and global economic growth should help to reduce fiscal debt,” says Goodman. By 2011, with the help of inflation and a lower U.S. dollar, Goodman predicts, resource and agricultural commodities and companies that produce them will be where to invest.

On an optimistic note, he predicts that unemployment rates will drop in two to three years and that China will remain a market stronghold due to its successful export drive coupled with a stronger domestic economy.

He is especially optimistic about gold. The bull market for the precious metal has been running for 10 years and still has legs, making it “the ultimate currency” in Goodman’s book.

“The world of finance, business and investment is recovering from a binge of easy money and too much debt. Even if we did not join the party, we are all suffering a monster hangover…[one] that can be cured only by time and complete rest. The negative memory of 2009 will persist for years, not weeks or months,” he warns.

Technology and globalization are facts of life, says Goodman, citing the beginning of a new middle-class population and economic growth over the next five to 15 years rivalling North America after the Second World War.

As far as the financial crisis goes, Goodman says, economic crises come about for different reasons but have only one thing in common: they end.

(11/03/09)