Albert D. Friedberg, savvy investor and president and CEO of Bay Street-based Friedberg Mercantile Group (founded: 1971), first called his clients' attention to emergent economic catastrophe early in 2007. “Not since the days of the Great Depression,” he wrote in his firm's second-quarter report, “have we found conditions as ripe for a run on financial institutions as we do today.” He referred to a serious global credit crunch as inevitable and imminent. Corporate default rates would rise dramatically, he said, and corporations would shed workers. Unemployment would rise dramatically. The long economic expansion would come to an end.
By the end of June a year later, he was able to report that his firm had realized year-over-year gains of 60 per cent in his two Global Macro Hedge Funds (one by 57 per cent, the other by 62 per cent). Mr. Friedberg realized these gains, in part, by investing in short positions in such once-esteemed companies as Ambac Financial, MBIA Inc., Bear Stearns Cos. Inc., UBS AG, Merrill Lynch & Co. Inc., Fannie Mae and Bank of America – “and riding these issues,” Mr. Friedberg said in his second-quarter report, “into very low digits.” By year's end, all unprecedented volatility aside, Mr. Friedberg's funds posted further exceptional gains: up year over year by 37 per cent in one fund, by 41 per cent in the other.
Mr. Friedberg, in other words, understood what was happening – in evident contrast to other savvy investors, among them some of the most celebrated in the world, who didn't. In Mr. Friedberg's judgment, though, the world's governments and central banks understood even less. “The Fed should take immediate steps to correct its abysmal failure of policy,” he said in the second-quarter report, “one that guarantees instability by repeatedly generating financial bubbles.” He thinks that the Fed should allow interest rates to find their natural market level without interference. He believes that governments should restrict themselves to “minimalist intervention.”
Mr. Friedberg writes his quarterly reports himself in his own inimitable way. When he errs, he candidly explains why. You can access the Friedberg archival reports free: Go to friedberg.ca. These reports document Mr. Friedberg's assessment of the coming catastrophe – and trace his devastating critiques of government monetary and fiscal policy.
What should Finance Minister Jim Flaherty have done yesterday in his carefully crafted budget? In Mr. Friedberg's judgment, he should have delivered fewer short-term fixes and more long-term structural reform. Mr. Friedberg wrote a personal letter to Mr. Flaherty before the budget – so we know precisely what he recommended. This letter warrants widespread discussion. Here are selected excerpts:
“Governments around the globe did not understand, and still do not understand, the real nature of the economic problem. For example, they do not realize that it was too much debt that caused the problem – and so they try, where possible, to encourage people to take on more debt to help resolve the crisis.”
“Governments should encourage people to de-leverage – to save and to nurse back to health their overextended balance sheets.”
“Governments think that short-term quick fixes can help re-start the economy and so they dream up silly tax cuts and wasteful projects instead of concentrating on long-term issues.”
“Governments ought to use the present opportunity to implement policies that, under normal conditions, they could never get away with because of the fear of running a huge deficit. Well, huge deficits are now de rigueur. Use this opportunity to lift as much deadweight off the private sector as possible by implementing solid, coherent and rational long-term policies.”
“The U.S. and the rest of the world are taking enough reflationary measures to spare you the need to do anything too dramatic. If the global economy recovers, Canada recovers on its back. If it does not recover, whatever Canada proposes in the way of fiscal and monetary stimulus will go to waste. You will end up weakening your finances and damaging your long-term prospects for nought.”
“There is no need to propose heroic measures. If I were in your place, I would cut taxes. Flatten them. Simplify the code. These growth-promoting measures will almost certainly pay for themselves in coming years – so don't worry if the deficit increases beyond recent experience.”
“I would try to persuade the Bank of Canada to abandon its activist monetary policy. It can only bring grief to our citizens because the value of our money is set to plunge. Very soon, you will see the price of gold begin a long climb, soaring well into the thousands of dollars [per ounce], in response to the monetary debauchery of the world's central banks.”
“Don't let this [monetary collapse] happen to the Canadian dollar. Let it become the world's strongest currency.”
“You have been given an extraordinary opportunity to free-ride on the back of the U.S. and the rest of the world. Use it to promote balanced growth.”
Mr. Friedberg may be right on the coming currency collapse – or not. But his analysis vividly documents the significant risk of further economic calamities ahead that arise from quick-fix solutions to the calamities of the moment.
