Canadian Prime Minister Stephen Harper launched an early election campaign with dreams of a majority government dancing in his head. He also wanted to blunt the impact of a Democratic victory in November’s US election that would potentially boost liberal-leaning politicians across North America.  

Recent polls suggest the state of the global economy is weighing as heavily on voters’ minds up north as it is in the US. Democratic presidential nominee Barack Obama has risen to statistically significant leads over Republican rival John McCain in recent national horserace polling as well as in important battleground states. McCain notoriously described the fundamentals of the American economy as “strong” a couple weeks ago, even as the US government was announcing new bank failures and Treasury Secretary Henry Paulson was racing to get sweeping bailout legislation before the US Congress. Harper’s rhetoric on the campaign trail has been heavy with similar language about the state of Canada’s economy.

Harper’s message on the economy is butting up against the evidence in a manner similar to McCain’s. Harper insisted Canadians have little to worry about, that the “fundamentals” of the Canadian economy are “solid” before and during debates featuring the major parties’ candidates for prime minister.

A daily tracking poll conducted by Nanos Research revealed that Stephane Dion’s Liberals closed to within five points of the Conservatives, narrowing what was an 11-point gap on Oct. 2. The Liberals registered a two-week high 29 percent support level, while the Conservatives came in at 34 percent, a two-week low. Another poll, from Harris/Decima Research poll for the Canadian Press, showed the Liberals moving up to 24 percent from 22 percent support and the Conservatives falling to 34 percent.

With only a week to go before Canadians vote, Harper’s dream of a majority government appears to be slipping away. The Conservatives were 27 seats short of a majority when Harper called the election; it’s a rule of thumb that a party needs about 40 percent national support to grab a majority of the seats in parliament.

Former Liberal Prime Minister Jean Chretien, who led Canada’s last three majority governments, got 38 percent of the popular vote in 1997 and 40 percent or higher in 1993 and 2000.

The Conservatives will release their party platform today, and the policy paper is likely to reflect the realities borne out by a couple 800-point declines on the S&P/Toronto Stock Exchange Composite Index.

Important Numbers

Action on major equity indexes tends to draw breathless reactions and screaming headlines, and it’s certainly the source of legitimate concern for concerned retirement account holders, retirees and even casual observers.

But the immediate goal of the rescue plan passed by the US Congress and signed by President Bush is to loosen the interbank lending market. The best place to look for signs the plan is having the intended affect is the London Interbank Offered Rate (LIBOR) and the TED spread.

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Donald MacKenzie, who teaches in the School of Social and Political Studies at Edinburgh University, writing in the London Review of Books, describes LIBOR thusly:

Judged by the amount of money directly dependent on it, the British Bankers’ Association’s London Interbank Offered Rate matters more than any other set of numbers in the world. Libor anchors contracts amounting to some $300 trillion, the equivalent of $45,000 for every human being on the planet. It’s a critical part of the infrastructure of financial markets but, like plumbing, doesn’t usually get noticed.

Financial institutions are hoarding cash to meet future funding needs amid deepening concern that more banks will collapse. LIBOR, set by 16 banks in a daily survey by the British Bankers’ Association, is used to set rates on financial products worldwide, including home and auto loans, loans to small businesses as well as derivatives.

The TED spread is an expression of the difference between the three-month LIBOR and the three-month US Treasury.

 
Source: Bloomberg

The September spike essentially measures the reluctance of banks to lend to one another, represented by a rising three-month LIBOR, as well as an ongoing flight to quality, or demand for the safety of US Treasuries. That flight eased somewhat Tuesday morning following the announcement by the Federal Reserve of its plan, backed by the Treasury, to buy commercial paper directly from issuers.

We’re unlikely to see spreads decline before confidence has been restored.

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Kashkari and Covered Bonds

Neel Kashkari is Treasury Secretary Paulson’s choice to lead the execution of the troubled asset relief program (TARP) enacted by the US government.

Kashkari earned bachelor’s and master’s degrees in engineering at the University of Illinois at Urbana-Champaign, then worked for TRW, where he developed technology for NASA space science missions such as the James Webb Space Telescope. After his aerospace career, the 35-year old earned an MBA from the University of Pennsylvania’s Wharton School and worked as a banker at Goldman Sachs. He joined the Treasury in July 2006 as a senior advisor to Paulson.

Kashkari will oversee key decisions on how the mortgage buyback program will work. He’ll also manage the appointment of staff and the selection of asset management firms that will implement the program.

Kashkari provided significant insight into what the structural solution to the US mortgage finance problem could look like in a Sept. 19 presentation at the American Enterprise Institute (AEI), a discussion of a covered bond market for the US. Click the following link to go to AEI’s Web site, which includes video of Kashkari’s talk about the US Treasury’s Best Practices for Residential Covered Bonds, a July 2008 paper on the topic, as well as a panel discussion that followed.

Speaking Engagements

Fall is the perfect time to enjoy Washington, DC’s outdoor treasures and catch a glimpse of nature’s splendor. And this year you can enjoy the immediate aftermath of the Presidential election in the seat of the federal government.

Join me and my colleagues Neil George and Elliott Gue for the DC Money Show, Nov. 6-8, 2008, at The Wardman Park Marriott.

Go to www.moneyshow.com or call 800-970-4355 and refer to priority code 011362 to register as our guest.

We also have a special invitation for our readers. KCI Communications, Inc., is organizing an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal. Participants will have the opportunity to meet and chat with my colleagues Gregg Early, Neil George and Elliott Gue.

This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.

It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.

For more information, please click here or call 877-238-1270.