It’s pointing to where the jobs will be. And then there’s investing.

DONALD COXE November 18 2002


It’s pointing to where the jobs will be. And then there’s investing.

DONALD COXE November 18 2002


It’s pointing to where the jobs will be. And then there’s investing.



THERE WAS A TIME when many—if not most—university students couldn’t have cared less about a bear market. It’s different this time. The spectacular collapse of technology and telecom stocks that pulled global equities into their second-worst bear market since the Great Crash of 1929 is an event students have a hard time ignoring. From my discussions with kids at campuses in Canada and the U.S., I’ve gleaned reasons why they think this bear market has meaning for them.

First, it’s because so many of them bought into the idea that the new technology was the revolution that would change everything. It would offer them their pick of cool jobs with flex hours, and a great chance to make lots of money while still young, without having to wait for those baby boomers to retire. That money could come in pay, and it could come in stock options.

Second, many of them knew young people who had those cool jobs who’ve recently been laid off or fired. Third, many followed the stock market, particularly the high-flying tech stocks. Finally, there was growing fear that this bear market was so severe that it meant a long-term recession. What job opportunities of any kind would graduates have if the economy did an imitation of Japan?

Prior to the fall of the Berlin Wall, if students knew the names of business leaders, it was usually because they were the objects of some campaign or demonstration. The Left was fashionable on campuses, so businessmen were, at best, boring.

That changed during the 1990s. Tech leaders such as Bill Gates became glamour figures. This is the first bear market since the stock market became a key component of popular culture. That alone would mean that students would assume the stock market’s plunge has significance.

What’s most alarming is that the worsthit shares are of the previously most-admired companies, such as Nortel Networks and JDS Uniphase. If John Roth and Jozef Straus can’t find a way to make money, then what

future is there for the economy?

So how do I reply?

I have been arguing since 1999 that the Nasdaq boom was not some neat evolutionary advance in capitalism, but a mania that would end in disaster. That was a hard case to make on campuses in ’99 and 2000, but it gets easier with each passing month.

Deifying Bill Gates and his ilk made the whole thing worse. Any time some billionaire businessman puts his name on a book predicting the future with a title like The Road Ahead, you should (1) assume his best days are behind him, and (2) sell his company’s stock short. By the time George Soros had published his explanation of the stock market, his great days as a fund manager were over.

It’s not that these men aren’t smart. It’s just that they are succumbing to a temptation that’s been around since Plato’s time: to be philosopher kings. Dionysius of Syracuse was the first to try it (under Plato’s auspices), and he proved to be the first in a 24-century line of disappointments. Business people should stick to their socially useful function of running their companies profitably. When

they get bored with doing that, they are of no productive use to society.

The Nasdaq folly has left those man-made gods rich from their stock options, but has had a terrible impact on society at large: shrunken retirement savings, blasted dreams, and an unnecessary recession in which people who couldn’t tell a DRAM from a serving of Scotch are dumped on the dole.

What does this mean for the futures of today’s students?

It means they should no longer believe they have great chances of being so rich by age 35 that they can retire to a beach and swig tequila. Yes, some people will still manage to do that through inventing a gizmo, but more will achieve it by winning a lottery.

Even Michael Lewis, the immensely readable defender of Nasdaq culture, doesn’t try to argue that you should expect tech companies (other than monopolist Microsoft) to be profitable. In a recent New York Times Magazine article, he defends the bosses of the collapsed companies of Silicon Valley by noting that airlines go bust, too, and we need airlines. (Yes, but that doesn’t

make this frequent flyer feel any more secure on the struggling airlines.)

So the least likely thing that today’s undergrads can expect is that if they hang around for a couple of years of grad school there’ll be another tech boom and they can pick up as if it were still 1999. No way.

On the other hand, the broad bear market is, in ursine terms, long in the tooth, and should be over by the time this year’s senior class is listening to some non-business person giving the address at the convocation. (I suspect it will be a while before business persons are back on the dais.)

Once we get that unpleasantness out of the way, what will the world be like?

It will need university-trained people more than ever, particularly for military and intelligence services. Even Canada will find it can’t pretend to be taken seriously as a sovereign nation when its defence budget is on the scale of the cost of the Ohio State University Marching Band.

The next bull market will mean that the investment business—a traditional favourite for new graduates—will come back strong. Canada is blessed with some strong dealers, investment managers and life insurers, and thousands of experienced brokers and financial planners, and there will be room for additions to their ranks when the stock market recovers.

Even then, we won’t see a return to rising inflation and rising interest rates. That means servicing those debts accumulated to get through university needn’t be too onerous.

There is also a good chance that the Canadian economy will continue to outperform the U.S.—good news for job-seekers. The long-term effects of the wise policies of the Mulroney era—free trade and the GST—are paying off now under the wise policies of the Martin era—budget surpluses and tax cuts. If the Liberals don’t blow this unique opportunity by trying to shoehorn Canada into an Ottawa-drawn pattem of compliance with the Kyoto treaty, the country should continue to prosper.

Canada is now, from a tax standpoint, a far, far better place for investors than the U.S.

You laugh? As long as you’re prepared to approach the subject gravely, you’ll see that Canada is the better place for investors on a combined living and dead basis. From the standpoint of the living investor, consider that combined federal and provincial maximum tax rates in most of Canada are now within

Canada is now, from a tax standpoint, a far, far better place for investors than the United States. Don’t laugh.

five percentage points of combined federal and state income tax rates in the U.S. Then subtract the Dividend Tax Credit, which addresses the unfairness of double taxation of dividends. (The effective tax rate on dividends to American stockholders is roughly 76 per cent.) Then add in the costs to a U.S. taxpayer of health insurance—anywhere from US$4,000 to $20,000 a year for a family, depending on age and health. Yes, you get faster—and possibly better—health services for those payments, but they aren’t covered out of your income tax, as in Canada.

From the standpoint of the dead investor, it’s the Maple Leaf forever. Canada has no death taxes, whereas the U.S. has what some tax observers call the highest death taxes in the G7. Rates are in the 50-per-cent range, and exemptions are quite modest. That may be one reason Americans give so generously to charities, but it’s certainly tough on the offspring.

What is the possible relevance of this discussion for students? Well, for one thing, if your parents are even moderately well off, you can expect to get an inheritance at some point. More importantly, now that Canada has virtually closed the tax gap with the U.S., you can expect that the Canadian economy should routinely outperform the U.S., based on Canada’s strong export situation. By the time you complete your studies, stock markets should be substantially healthier than today, and so should the job market.

If you have started on an RRSP, you should have it at least 80 per cent in stocks, emphasizing Canadian dividend income funds. For your foreign content, go with emerging markets funds. During your working life, today’s emerging economies will collectively become the global main events.

Hit the books and don’t spend much time worrying about the future. It’s going to be OK. U]

Donald Coxe is chairman of Harris Investment Management in Chicago and of Toronto-based Jones Heward Investments. His column appears every week.