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History 101.

“We learn from history that we learn nothing from history.” – George Bernard Shaw.

Recall late 1999. Technology infrastructure was being upgraded as companies prepared for Y2K. Tech companies were selling gear as fast as it could be manufactured. Early in 2000, as tech companies reported sales from late 1999, the numbers were huge and tech stocks continued to surge.

Then, on April 1st, 2000 a funny thing happened.

Because companies had loaded up on technology late in 1999, there was little need for additional gear in the New Year. Everything that had to be bought (or could be sold) had been. Tech company sales vapourized. As the numbers were reported, starting in April 2000, tech stocks began a nose dive.

In the US, the Nasdaq, which tracks mainly tech companies, peaked in March, 2000. From there, it dropped 78% before hitting bottom in October, 2002. It has not yet recovered. The Canadian story was different but similar as Nortel dropped from $124 to less than $1.

Today oil is nearly $100, the mining industry is operating at capacity, emerging market economic activity is robust and resource supply is tight. The baltic dry index, which monitors bulk shipping of raw materials by sea, is at an all time high. (Dry bulk goods – cement, coal, iron ore – are precursors to production and future economic growth). Much of what Canada sells is in demand and at high prices. Can it get any better than this? What if it can’t?

A slower US economy could cause a global growth pause and history to repeat itself.

As the world’s largest energy buyer, the US consumes 2½ times the oil as China and India combined. A slower US will need less oil.

China and India together consume 2½ times the amount of metal as the US. A slower US means, however, less US demand for imports from Asia, slower Asian growth and less Asian demand for raw materials as input.

Guess what Canada sells? Oil, metals, raw materials – all sorts of commodities.

Canada sells 65% of its oil to the US. Export Development Canada expects exports to emerging markets will grow 11% in 2008 – down from 24% in 2007. EDC also says that as global demand slows in 2008 and commodities prices weaken and oil drops back to about $65, the Loonie can be expected to fall back to about 85-90.

The US slowdown will have a ripple effect globally and this will create opportunities in 2008. The most obvious opportunity is to use high Loonies to diversify globally.

Originally published in the Business Thompson Okanagan news, December 2007.

Doug Cronk CFA is Manager, Investments for a Canadian Pension Fund.

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