August 2011 e-letter

Kerry Knudsen

Kerry Knudsen

Canada’s building permits were $6.6 billion in June, up 2.1 percent from May, when growth was 20.9 percent. We also added 7,000 jobs in July. I am guessing nobody heard that news this week.

My first economics teacher was Professor Schwartz. For my purposes, he was notable for two things: 1) his voice was so low you thought it would hit bottom and drag to a stop, and 2) he said economics is neither an art nor a science. He could not have been more correct. I waited all year for him to say what economics is, but he only said what it is not.

Schwartz’s words have followed me through the years as we have moved from one economic disaster to the next, always thinking the current one is Armageddon, and I marvel at the talking heads on news shows and in government that have duped the population with the title Economist.

Economists would have you believe they are scientists and artists, capable of looking at social trends and seeing great truths for the future. Yet, everybody knows there has never been a man or woman capable of charting the economic future. Not even for a day. I used to think economics was a discipline. Now I’m back where Schwartz left me.

I have my own economic theory. Let’s call it the Polar Exigency. In every market, in every minute, for every buyer there is a seller. For every bull there is a bear. For every talking head that says the market is going up, there is a talking head that says the market it going down. For every conglomerate that goes bankrupt, a group of small businesses wants to take over that business. The only variable is the price.

Unbelievably, men and women bet their lives and fortunes based solely on the loudest pole in the exigency. The Dow plunged over 500 points last Thursday. Armageddon. The U.S. lost its AAA rating with one (for-profit) credit rating system. Armageddon. The Democrats don’t agree with the Republicans. Armageddon. That’s three Armageddons in one week. This week the Dow lost over 600 on Monday. I’m surprised the economy did not hit bottom and drag to a stop.

Here’s a fact. We in Canada, Western Europe, the U.S. and elsewhere have bought into the belief that “economy” means the wealth of the nation. It does not. Economy, if it means anything, is the flow of goods and services, and is measured in terms of the Gross Domestic Product (GDP) as it relates to trade, consumption, labour, etc. Oh, yes. And debt.

The dirty little secret about GDP is that it is the output of a nation, not its wealth. For example, we in Canada have a GDP for 2010, but it is not the potential output we could achieve if we actually had to. The 2010 GDP is really a measure of what we felt like doing last year, based on the Polar Exigency. The loudest pole was the fear-and-media pole in the U.S. last year, so they got scared and produced little. GDP, therefore, is a measure. It is not wealth.

Wealth is something else. In fact, is has always been the same thing. Here is the equation: wealth=everything you have+everything you can take. That’s what it meant to Caesar, that’s what it meant to Mehmet the Conqueror and that’s what it means to Obama, Harper or Sarkozy.

This point is important, because such detractors from democracy as Vladimir Putin, Kim Jong Il and Hugo Chavez use the Polar Exigency to pull wealth nations that have it. Call it politics, call it economics or call it magic, the fact is, wealth can move with the GDP away from those that have it to those that want it.

Standard and Poor’s downgraded the U.S. credit rating last week from AAA to AA+, but what was this based on? S&P says it’s based on the “ability to service debt,” but that measures GDP (revenue) against liabilities. I don’t know how economists figure, but I think accountants prefer to measure resources against liabilities and save revenue to measure against bills.

If the wealth of the U.S. or Canada is everything we have, and NOT the GDP, then S&P needs to find a new Kool-Aid stand. It is not a credit bureau; it is a Tarot parlour. And its economists are some of the most economist-minded on earth. That is: not scientists, not artists, not disciplined and uncomfortably close to being politicians. In fact, S&P even said it doesn’t like the way politics is played in America. I suppose they are more comfortable lending to a country with more central control. In any event, I don’t think credit agencies should play too much with the job of elected representatives.

Note that above I did not include for the U.S. and Canada the second half of the Wealth Equation — everything we can take. If the two countries married everything they had, and then decided to unite and go forward in the old English tradition of colonialism, their wealth would increase exponentially, and it is unlikely the Russians, North Koreans or Venezuelans could do anything about it. I should make it a point to look up how S&P rates North Korea.

Now, don’t put words in my mouth, I am not advocating a return to colonialism. I am simply saying the real world of national wealth is being fantasized by a bunch of geeks with phony credentials. In other words, nothing has changed since Adam. In fact, the U.S. debt is somewhere north of $14 trillion. How far would that go toward buying Manhattan, complete with Standard and Poor’s?

Actually, what is Standard and Poor’s? I understand it’s a kind of super credit bureau, but what is a credit bureau but an intangible construction created by Ivy League economists to skim percentages off the cash flow of the world’s financial institutions. They neither have nor lend money; they give advice. Possibly the people of the United States have some advice to give in return.

Unfortunately, the jitters caused by the S&P downgrade, the dive of the Dow and the U.S. insistence on listening to the most negative and counterproductive voices in the universe will likely put a further drag on Canada, the world markets and small businesses in general. As I said, nothing has changed since Adam.

On a more positive note, the AWFS in Las Vegas was a big success, with Thursday’s Canada Night party hosted by Wood Industry as, I think, the universally accepted “big event.” Over 185 Canadian readers of Wood Industry, not including staff of the sponsors, mingled for three hours over free beer, and hors d’œuvre. One of the best comments I heard the next day was from an American supplier who said he is coming to our Toronto-based WMS show in October, and he is going to have a party only for America.

The universal comment on the show was, “better than I expected.” While that may be “damning with faint praise,” it was also clear the fear and uncertainty of the last two years had been replaced by a cautious sense of moving forward, much as was in evidence at the German shows this spring.

On the home front, there has been a breakthrough in communications between the WMS show company and a number of machinery suppliers, and the floor space is finally beginning to fill up. Given the positive overall economic outlook for Canada, the boost listed above in building permits and the generally more positive business outlook at the other shows this year, I am looking for a very positive WMS show.

Granted, there are some complaints about the change in venue from the International Centre. However, folks complained about the International Centre when the show was there, and I am not hearing more serious complaints about costs, rules and logistics. No doubt, those will come later.

I think Canada is ready for a positive show in October. The buzz in the U.S. is that Canada is little and would do well just to sit pretty in the north and come to the party in the U.S. It’s just not that easy. Americans still hold to the face-frame cabinet style, while Canada has gone mostly frameless. This affects the CNC machinery, software and tooling one buys, and it affects choices of hardware and coatings. European suppliers can ship direct to Canada or direct to the U.S., and bypass the Canadian:American dollar exchange rates and taxes that would be paid on shipments from Europe to the U.S. and then to Canada. I think the Europeans still need to be educated that we are not the 51st state. So far, America only has 50.

We are culturally closer to Europe than to the States, as well. Without going into a big discussion on what that all means, let’s just say Canada needs its own show, since the products and processes may be the same, slightly different or greatly different, and it is up to the individual manufacturer to decide. After all, if Canadians thought all they need is an American show, they would go there.

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