Investing Daily

President Barack Obama has four years to deal with the global economic crisis. Prime Minister Stephen Harper has four days until he tables a budget that could make or break his minority government.

The specifics of Mr. Harper’s and Finance Minister Jim Flaherty’s budget proposal are not inconsequential, but the most important factor in a recovery for Canada, as well as the world, is the US response. President Obama will, presumably sometime in mid-February, sign a stimulus package with a price tag in the neighborhood of USD1 billion.

It will include increased benefits for the unemployed and for those receiving public assistance, a tax cut focused on the middle class, and significant spending on infrastructure, which could include incentives for “green” and smart grid technology as well as funding for more traditional projects such as roads, bridges and schools.

Mr. Obama is now buoyed by impressive levels of public support in the wake of his historic inauguration; right now it seems that Americans simply want action, and that desire will certainly be met. It is an enormous burden: Will the amount of the stimulus be sufficient to compensate for the deleveraging that’s taking place across the economy in the US, Canada and worldwide? The answer will come over the course of his (first?) term.

Two-thirds of Canada’s exports go to the US, and the deterioration of consumer demand south of the border has infected its most important trading partner--and the world, for that matter. The financial crisis that’s now crippled the global economy started in the US, and the solution must come from the US.

The urgency for Harper is more political than economic. When Canada’s House of Commons reconvenes Jan. 26 following a seven-week timeout--Mr. Harper prorogued Parliament in early December rather than face a vote of confidence on the minority government’s interim economic and fiscal update--the first order of business will be consideration of the federal budget. Opposition parties struck an agreement last November to bring down the Harper government based on its inadequate response to Canada’s deteriorating economy and replace it with a Liberal/New Democratic Party coalition supported by the Bloc Quebecois.

The Bank of Canada (BoC) slashed another 50 basis points (bps) off its benchmark interest rate Tuesday morning, taking the target for overnight loans between commercial banks to 1 percent. It’s a move widely anticipated by market observers, but it’s still the lowest level for the key rate since the central bank was established in 1934.

In its statement announcing the cut, the BoC said, “The outlook for the global economy has deteriorated since the Bank’s December interest rate announcement, with the intensifying financial crisis spilling over into real economic activity. Heightened uncertainty is undermining business and household confidence worldwide and further eroding domestic demand. Major advanced economies, including Canada’s, are now in recession and emerging-market economies are increasingly affected.” The BoC has cut its target rate by 3.5 percent over the last 13 months.

The central bank indicated it would continue to monitor developments to judge “what extent further monetary stimulus” would be required. Such efforts could include another 50 bps cut in March, and it could mean what’s known as quantitative easing--buying securities and creating money to pay for them.

The BoC’s move is consistent with actions taken by other central banks: The US Federal Reserve cut its main interest rate to as low as zero on Dec. 16 and pledged to buy unlimited quantities of securities. The Bank of England on Jan. 8 cut its main rate to 1.5 percent Jan. 8, the lowest since its founding in 1694, and last week the European Central Bank cut its benchmark rate to the lowest recorded level.

The BoC followed up Thursday with its January Monetary Policy Report Update, the substance of which was largely revealed with the rate cut announcement; the central bank sees gross domestic product falling by 1.9 percent this year on an average annual basis, a downward revision from the 0.6 percent growth it forecast as recently as October.

But despite the historic rate cut, the hints of further, extraordinary monetary measures and the GDP revision, the BoC is generally aligned with the consensus view that the economy will begin to recover in the second half of 2009. The BoC also forecast Tuesday that Canada would rebound in 2010, expanding a robust 3.8 percent.

That clearly assumes a change in people’s--American, Canadians, etc.--psychology on spending.

Consumer confidence in Canada is waning, and Harper’s minority government is on shaky ground. Mr. Flaherty will certainly table a budget that mirrors BoC assessments of the current economic situation and provides similar reason to believe Canada will handle the recession well. The psychological impact of having the rate cut and the budget so close together could be significant and helpful if handled well.

Economists and properly briefed politicians will talk about “timely, targeted and temporary,” but the goal is much simpler--to boost confidence, to say, “It’s big and it will get us out of recession.”

Canada has its own course to chart, but its best hopes for recovery probably lie in the actions taken in Washington. Until the US economy bottoms out and starts to climb back, Canada’s troubles, though it’s still better positioned than any other G-7 nation, will remain.

Pipe Dream

A recent compilation by Reuters of cancelled exploration and production projects suggests we’ll soon move away from demand destruction for oil and gas and into supply constraint.

Counter to that trend, the Canadian government has said it will pick up costs on the estimated CAD16.2 billion Mackenzie gas pipeline that will connect the Beaufort Sea with Alberta and an infrastructure that will bring vast reserves from Canada’s remote northern territories to market. The commitment is another signal the Harper government will be far more aggressive with its budget than the November economic update suggested.

Backers of the Mackenzie pipeline include Imperial Oil (TSX: IMO, NYSE: IMO), Royal Dutch Shell (NYSE: RDS), ExxonMobil (NYSE: XOM), ConocoPhillips (NYSE: COP) and MGM Energy Corp (TSX: MGX).

Canadian federal assistance is likely to include money for infrastructure, such as roads and airstrips, as well as pre-construction expenses. The government set no specific dollar figure, but recognizes the hydrocarbon resources as a national interest and will therefore include sharing in returns as well as risks. It’s also a matter of sovereignty--Canada will aggressively assert its claims to Arctic resources, as did outgoing President George W. Bush, as has Russia.

Backers of the pipeline initially asked for help from Ottawa more than a year ago, but the government at that time had no interest in owning any part of the project or in subsidizing oil companies. Now it’s a question of moving the project forward, providing an economic boost by keeping Canada’s northern population employed.

The 760-mile pipeline would ship up to 1.9 billion cubic feet of gas a day to the Alberta border from the Mackenzie Delta on the Beaufort Sea coast. There the gas could be routed on existing lines to Canadian and US markets.

Speaking Engagements

Join Roger Conrad, Elliott Gue, Gregg Early and Benjamin Shepherd at the 18th Atlanta Investment Conference. Sponsored by Friends for Autism, the conference is held in a mountain setting north of Atlanta from Thursday, April 23 to Saturday, April 25.

Roger, a steady hand through many market events such as the one we’re dealing with now, will talk about Canadian income and royalty trusts as well as his new service focused on exploiting the greatest spending boom in history, New World 3.0.

Elliott will detail the new direction for Personal Finance and provide insight into his approach to stock selection and portfolio management. What’s required now amid these difficult times are clarity and focus, qualities Elliott has demonstrated in these pages and through The Energy Strategist for years.

Gregg, a constant at PF for nearly two decades, will be there to address recent developments with the publication. He’ll also discuss the Smart Grid, an endeavor he’s exploring as part of his role with New World 3.0.

Ben, editor of Louis Rukeyser’s Mutual Funds and Louis Rukeyser’s Wall Street, the in-house mutual fund expert, will discuss efficient, cost effective ways to simplify the investing process.

Be sure to bring your questions. These guys love to talk markets and everything that impacts them.

Attendance is limited to 175 of the most enlightened, savvy individual investors. Go to http://www.aicatchota.com/ for more information. Meals are included for the Canadian Edge discounted price of $459 for a single and $599 for couples. Call 770-952-7861 or e-mail altinvestconf@mindspring.com to register.