Yesterday Fed Chairman Bernanke is reported to have said something to the effect that the ‘economy probably is in recovery, but for those without jobs and at risk of losing jobs recovery will be long and slow in a period when unemployment rates are likely to go up somewhat from here before leveling out and then declining’.  Aside from the operative word being ‘probably’, as I have said previously on this blog to an economist recovery is a technical term that means GDP is increasing not decreasing.  Aside from the fact that Government reported numbers are constantly being readjusted over time people act on those numbers as they are first reported much like piranhas group and devour cattle crossing an Amazon river.

Think of it in absolute numbers.  Suppose GDP is 100 units, but a serious economic downturn takes it down to 75.  It then increases to 76, a 1.3% increase over 75, but still a 24% decrease from 100.  Economists say ‘hurrah’, economic recovery is upon us, and the media picks up this mantra.  It is hardly likely such ‘good news’ is seen as such by Main Streeters.  I recommend you not get confused by ‘the facts’, and think for yourself what the absolute numbers mean.  To me, they mean a long protacted period of economic times in the U.S. that may not approach the economic buoyance of the 2003 - 2007 period in that country (measured by consumer spending power) for many years, if it ever does.

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There have been a glut of articles on Barrick’s +U.S$$4 billion equity raise announced early in the week.  This post references two of them.

First, in separate Press Releases on September 8 Barrick and Silver Wheaton announced a transaction pursuant to which Silver Wheaton acquired 25% of ‘life of mine’ silver production from Barrick’s Pascua-Lama project for U.S.$625 million.  You can find the Press Release on the Silver Wheaton Company Page on StockResearchPortal.com, along with a 2nd Press Release issued by Silver Wheaton that same day announcing a U.S.$250 million bought deal financing.  An article dated September 8 titled ‘Barrick Gold sells mines to Silver Wheaton’ provides more detail on the transaction with Barrick.  For those of you interesting in researching Silver Wheaton its stock price increased by Sept 11’s close by about 6.5% from its mid-point price on Sept 8.  At the same time its average daily trading volume was approximately 4.6 million shares in the 4 day period ended Sept 11, when its average daily volume for the 3 months ended September 11 has been (rounded) 1.6 million.  That said, the focus this past week has been far more on Barrick than on Silver Wheaton.

An article Thursday titled ‘Why Barrick reversed its gold-hedging strategy’ says the Barrick equity offering will dilute existing Barrick shareholders by over 12%.  The article can be read to in part imply that investor (and perhaps investment banker) pressure played an important role in Barrick raising this money to eliminate a large part of its hedge book.  Based on my many experiences advising Multi-Nationals and major Public and Private companies on valuation matters, for what it is worth here is my take on at least some of the things that may have contributed to the Barrick Board approving the Barrick equity offering - as well as the transaction with Silver Wheaton.  When making the following observations I want it clearly understood that I have not discussed any of this with Barrick Board members or employees.  I have known one of the Barrick Board members for over 35 years, and know him to be very sophisticated and to have a clear understanding of fiduciary responsibility.  I would be surprised if all members of Barrick’s Board do not share those same two attributes.  Things I think may have contributed to the Barrick Board’s decisions on both the Silver Wheaton deal and Barrick’s equity raise include:

•    first and by way of background, it is trite law that Directors of a company have a fiduciary responsibility to the stakeholders of that company and the company itself.  The company’s shareholders viewed as a group and individually are stakeholder(s), but they are only one of a number of stakeholders.  For those of you who are not familiar with the term ‘fiduciary responsibility’, in a ‘Director context’ it simply means that each Director of a company has an obligation at law to make objective decisions he/she believes are in the best balanced interest of the company and its stakeholders;

•    second, while to me it follows that while the Barrick Board undoubtedly would have been cognizant of the views of investors and those representing investors as they made the decision they did, pressure from such individuals and groups by itself would be more a catalyst to the discussion than it would be a fulcrum factor in the Board’s decision making;

•    third, it seems to me the Barrick Board would have addressed all the factors, business risks and opportunities known to it that it thought related to what has ended up being a very large and dilutive equity issue.  I think it virtually certain that one of these factors would have been the Barrick current and prospective share price.  However, other factors almost certainly would have included (or so I think) the Board’s collective view:

-  on the prospective price of gold over both the near and long term,

-  on market timing in the context of new equity that may have been available last week may or may not be available on the same terms (if at all) in the coming months and years depending on how the current volatile economic condition unfolds,

-  whether the elimination of its hedge book might contribute at some future date to a change in Barrick’s dividend rate, thereby perhaps then contributing to an increase in its fully diluted share price,

-  whether in the current economic environment eliminating its hedge book might result in an increase in its fully diluted share price which in turn might result in an opportunity to raise even further capital for acquisitions where the Board thought it might need to augment Barrick’s prospective ‘free cash flow’ to balance future ‘acquisition opportunities’ with ‘acquisition risks’.  I think my reference to the ‘current economic environment’ is important here given what I think will be increasing opportunities for well-funded Resource Sector acquirers going forward, and

-  that under any circumstance a higher prospective share price in the current economic environment will result in greater flexibility to take advantages of possible near-term or longer-term opportunities.

All in all, I would put some weight on investor and investment bankers views being a contributing catalyst to the Barrick Board electing to consider the equity raise it did.  That said, I would be very surprised if the Barrick Board didn’t balance all the information it had at the time it made its decision on gold price forecasts, prospective business opportunities known and currently unknown to it, and other things it thought relevant to its decision prior to making it.  In the end the Barrick Board must have concluded the equity raise and resultant share dilution on balance must have been in the best interests of Barrick and all Barrick’s stakeholders – that’s what good Boards do.

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An article today titled ‘In Deeper U.S. Trade Deficit, Good News for World’s Economy’ says “The U.S. trade deficit hit its highest level in six months in July as a record rise in imports outpaced a third straight increase in foreign demand for American products, according to government data released Thursday. Both gains provided more evidence that the worst recession since the 1930s is losing its grip on the global economy”.  Yesterday the U.S. Commerce Department reported that in July the U.S. trade deficit was $32 billion, much larger than the $27.4 billion economists had projected.  The trade deficit is a ‘net number’ determined by subtracting U.S. exports from U.S. imports.

Aside from my view that ‘one swallow doesn’t make a summer’ and that in any event the July U.S. trade deficit number is a meaningful litmus test on world economic recovery is a ‘stretch’ readers of this post may find some historic data useful.  The U.S. had neither a cumulative net trade deficit or surplus in 1971 when then President Nixon’s administration took the U.S. off the gold standard and the U.S.$ became the world’s reserve fiat currency.  28 years later (by 1999) the U.S. had accumulated an aggregate net trade deficit of just under $2 trillion.  Here’s where I think it gets really interesting.  By December 31, 2008, only 9 years after 1999, the U.S. cumulative net trade deficit stood at just over $7 trillion (3.5X what it was in 1999) and has continued to grow by between $25 - $30 billion each month since then.  You can see the build-up of these numbers by visiting StockResearchPortal.com, clicking on Economic Research in the Main Navigation Bar, and clicking on U.S. Trade Deficits near the bottom of the left Navigation Bar of the webpage you are then on.

From my perspective the U.S. through loss of manufacturing jobs after the year 2000 has escalated its dependence on its trading partners and that dependence increases each month.  Without question the U.S. is the #1 military power in the world, and currently continues to be the world’s largest individual country economy.  That said, I don’t think one has to look beyond the U.S. trade deficit accumulation and current position to see that we are well on our way to a ‘new world order’ – and one in which not all countries share the U.S.’s ideology.  Where this ultimately leads is anyone’s guess, but my guess is that it leads over time to continued weakening of the U.S. through ever more dependence on its trading partners – and to a much reduced standard of living for U.S. residents from their current average standard of living.

There is a second article that I recommend readers of this post take the time to read carefully.  Titled ‘Americans are getting poorer, and it’s going to get worse’ it reports “The early impact of the worst recession since the 1930s pushed median incomes down, forced millions more people into poverty and left more Americans without health care in 2008, according to new annual survey data from the U.S. Census Bureau” and for reasons spelled out in the article “the worst is yet to come”.  I have never understood why people broadly don’t observe the simple things that surround them, think about those things, and act accordingly.  Ask any person on the street in the U.S., Canada or any other developed country about the behavior of squirrels, and my guess is to a person they would know and say that squirrels don’t eat all the nuts they find in the fall - rather they store nuts away to enable them to survive the winter.  The average U.S. resident (and to a lesser degree Canadian resident) has eaten all the nuts available to them as they have found them – retaining no nuts for bad times.  One shameful conclusion that could be drawn from this is that the average citizen knows how squirrels behave and knows why they behave that way, but just maybe squirrels are smarter than the average citizen – come on, that can’t be true.

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An September 8 article titled ‘Barrick raises billions to cut hedges’ reports that Barrick Gold Corp, the world’s largest gold miner (production about 8 million ounces/year) is planning to largely eliminate its ‘gold hedge book’ by raising U.S.$3.45 billion through an equity offering led by RBC Dominion Securities, Morgan Stanley, JPMorgan and Scotia Capital.  On September 9 Barrick announced this amount was being increased to U.S.$3.5 billion.  The article sets out details of Barrick’s hedge contracts, and how Barrick plans to allocate the proceeds.  I find this an interesting move on Barrick’s part.  One has to believe that before deciding to proceed with this equity offering the Barrick Board sought and received the best advice money can buy with respect to the balance between the share dilution resulting from the transaction, and the effect on Barrick’s share price that may result from forecasted gold prices.  The article states:  “Barrick is a gold company that has forged its reputation on clever financial engineering more than a belief in metal prices”.   This equity offering does not strike me as falling into the category of a ‘financial engineering transaction’.  What does strikes me is that I think it likely Barrick’s Board and Management have concluded that on the ‘balance of probabilities’ the price of gold is more likely to increase than decrease from its current +/-U.S.$1,000 level.

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An article yesterday titled ‘Manufacturing: Make or break?’ summarizes a lot of what I have been talking about with respect to the current and prospective importance of loss in manufacturing jobs in the developed countries.  As the article summary puts it “The shift of manufacturing to low-wage parts of the world was supposed to usher in an era of well-paid service sector jobs. But as the factories have gone dark, much of the work connected to R&D has also taken flight while the number of low-paid service jobs has mushroomed. Now post-industrial economies are reconsidering the importance of their manufacturing sectors”, and that “Many policy makers believe future growth once again lies in making things” – referencing the rush by governments to stress the importance of a vital manufacturing sector to future economic growth.  How can it be otherwise.  As I have said many times, manufacturing creates ‘things’ of at least some lasting value, service jobs in general do not do that - nor are the ‘products’ generated from service jobs typically as subsequently transferable as are products generated by manufacturing jobs.

The article reports President Obama’s new “Middle Class Task Force” sees the reinvigoration of the “flagging” U.S. manufacturing sector as critical if average Americans - whose after-inflation incomes have stagnated for years - are to achieve real wage gains in coming years.  Apparently Mr. Obama imagines the U.S. factories of tomorrow producing high-tech electric cars, silicon chips and solar panels.

In my view, the only way that the developed countries will retain a meaningful manufacturing base going forward is by generating manufactured products in capital-intensive, low labour requirement, manufacturing plants.  The labour rates in the developed countries simply are not, and will not be, competitive without a major reduction in the expectations and standards of living of residents of the developed countries.  Anyone who thinks that production workers – be they Chinese, Tiawanese, etc. – are not capable of producing high quality products needs to give their head a shake.  They can and they are doing that.  So think about it, is the worker who makes or made $60 - $70 per hour at a car assembly plant in Michigan going to be willing to work for (say) $10 - $15 per hour in order to compete with developing country labour rates plus the attendant incremental transportation costs related to making a car in China and selling it in Michigan?  It doesn’t take rocket science to answer that one!  Either the worker in Michigan will unhappily ride a bicycle to work and eat pork and beans instead of steak, or be unemployed and be even less happy with his/her lot in life.

I believe the developed countries by giving up their manufacturing jobs – particularly in the past 10 years – to maintain and even increase the standard of living for their residents have played the old ‘short-term gain for long-term pain’ game.  This seems obvious to me, and I can’t see how others don’t think and write extensively about this.  In prior posts I have invited readers who disagree with me on this and other topics - and to comment on my blog posts and tell me why I am wrong.  As a Canadian living in Southern Ontario I assure you I very much want to be wrong on this ‘loss of manufacturing jobs’ issue.  To date, no reader has taken me up on ‘straightening my thinking out’.  When I receive no comments when I invite them there are three obvious conclusions:  (1) no one reads my blog posts – and I know that is not true from by Blog visit statistics; (2) no one disagrees with me, which I seriously doubt; or (3) some readers do disagree with me but simply can’t be bothered to respond or are reluctant to say what they think in a Blog comment.  I encourage the latter group to come out of the woodwork.

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I think two unrelated articles, one by Paul Krugman (the Nobel Prize Winning American Economist) and one by Catherine Rampell (who I can’t otherwise identify) are worth talking about.

First, Krugman in a post on his Blog titled ‘A strange madness‘ comments on what he calls “a bit on the craziness sweeping America”.  Among other things he notes that his ‘hate mail’ has reached levels he hasn’t seen since 2004 and that he now gets “spitting, incoherent rage over articles on, um, health care economics or macro modeling” where he finds it “impossible to tell” what enrages people so much about those articles.  In the end, Krugman says:  “Something is going very wrong in the heads of a substantial number of Americans”.  Not having seen the specifics of either Dr. Krugman’s articles or the replies he alludes to, it doesn’t strike me as other than common sense that if enough people:

•    lose their jobs;

•    lose confidence in the notion of the ‘American Dream’ being theirs for the taking; and,

•    find their standard of living deteriorating or think it might

that one well might find themselves surrounded by vocally unhappy people.  My hope would be that the protests remain vocal and the baseball bats (or worse) are kept in the closets of America.  I can’t imagine Dr. Krugman at some level doesn’t see things this way as well.

Second, Rampell, in an article titled ‘Oh What a Time to Be Young!’ quotes statistics suggesting the U.S. unemployment rate among ‘unemployed teens’ currently is 25.5%, the highest level since the Bureau of Labor Statistics began keeping track of such data in 1948.  I have said in previous posts on this Blog that youth unemployment is in my view a large potential problem.  Happy people from my observation broadly have a few things in common.  First, they are busy doing whatever interests them, and don’t have excessive amounts of ‘time on their hands’.  Second, they feel they are productive members of society as they measure that – and as a result are reasonably ‘ego-satisfied’.  Third, as the old saying goes ‘Idle Hands Are The Devil’s Tools’ and ‘idle hands’ can lead to anti-social behavior – I suspect particularly among youth.  In my view that young people are having increased difficulty finding jobs in the current economic environment does not bode well.  As I have commented on previously I think this should be an issue that ranks high on the agenda of the current U.S. Administration, and on the agendas of all governments.

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A brief article today titled ‘Next bonanza eludes copper miners and strains supply’ reports research by the Copper Study Group, Brook Hunt, says the annual supply of copper may peak at around 20 million tonnes in 4 years and decline as demand rises, and that there is mounting evidence to suggest copper supply may be at greater risk unless copper prices extend their rally to record highs and beyond – thereby (I presume, as the article doesn’t say this) resulting in more copper exploration and mine development than currently is being undertaken.  The article does say that in 2008 year there was zero growth in world concentrates output, the lifeblood of the smelting and refining industry, and that London based GFMS sees a contraction of 1.6% or more this year - the first annual decline since 2002.

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An article titled ‘U.S. economy sheds 216,000 jobs in August’ says just that, and goes on to say the U.S. unemployment rate rose to 9.7% after dipping to 9.4% in July. If this number holds (jobs losses for June/July concurrently were adjusted upward by 49,000) the decline in U.S. job losses from the previous month was the smallest in absolute numbers experienced in 2009.  The U.S. Labor Department also said that since December 1, 2007 the 6.9 million jobs have been lost in the U.S.

This year, the following monthly numbers U.S. Job Losses have been reported, and then in several cases subsequently have been adjusted (usually upward):  January – 614,000, February – 697,000, March – 742,000, April – 539,999, May – 345,000, June – 467,000, July – 276,000, August – 216,000.  By any standard monthly U.S. job losses have been declining in since March, and at the current rate of monthly decline can be interpreted to say that U.S. Job Losses could bottom out by the end of 2009  or early 2010 - even setting aside what I would expect to be temporary job hires in October – December related to the Thanksgiving and Christmas retail season.  That said, in my view continuing U.S. jobs losses are a ‘There is no joy in Mudville’ story for the time being at least.

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An article yesterday titled ‘White House to Propose Big Reserves at Banks’ says the Obama administration is contemplating long-term measures aimed at having banks, particularly those deemed too big to fail, maintain larger capital cushions.  While I understand why the Obama administration well might want to do this, it strikes me as oxymoronic in the context of that same administration’s drive to bring the U.S. economy out of recession and on to economic recovery.  It seems to me that such measures could only result in the banks making less loans than they might otherwise make, which in turn would have the effect of dampening – not enhancing – the likelihood of recovery and solid, protracted, U.S. GDP growth.  I think the Obama Administration clearly is caught between a ‘rock and a hard place’ on this and most other things related to the U.S. economy.

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An article today titled ‘China’s move into oil sands irks the U.S.’ says PetroChina’s $1.9-billion investment in the oil sands announced yesterday is “raising alarms in Washington”, and that the head of a congressionally-appointed China watchdog said Tuesday that Ottawa should subject the proposed investment to a thorough review that would include sensitive national security issues but declined to say whether Ottawa should block the deal, saying that is a decision for the Canadian government to make.  The article quotes a former U.S. Ambassador to Canada, now a lawyer who now works with several Canadian energy firms, as saying “I think it’s good in the sense that it’s an event that should bring about some turning of attention by American energy thinkers to the value of the assets sitting in Alberta, and not enough thought is given in Washington to the strategic value of the assets that sit in Canada”.

In a post on this blog yesterday I raised what I see as an issue around the U.S. (at least publicly) not seeming to pay enough attention to the investments China and Chinese companies are increasingly making around the world.  I think the U.S. has every reason to be concerned where strategic investments by China or any other country may have a near or possible long-term negative effect on U.S. economic well-being.  It is interesting to me that within 24 hours of me writing that post the referenced article was published.

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