Star Talks - Sherry cooper - January 31, 2013 - Appel salon - Part 1 - Full episode

[applause] Ellen Roseman: Welcome, Sherry. Congratulations, and I have to say that as somebody who follows Bay Street, I'll miss you, because it's such a sea of dark suits and white shirts, and men, and you're always very colourful. You never blended in, right? Y1ou never looked like the typical Bay Street Chief Economist. And you're also very good about giving your personal views as well as your economic views, and I was looking... I'd forgotten I'd written this, and you probably forgot it too, but back in 1999 when you printed out a book called "The Cooper Files", I interviewed you. And you'll notice, when Sherry starts to talk she has a... Still traces of an American accent, she grew up in Baltimore. And I said, "Despite growing up not far from the border, Cooper found Canada a foreign place, and took a while to adjust to our ways." She said, "It took me six weeks to figure out how to store the open milk bags in the refrigerator. [laughter] Even longer to realize, that "Not too bad", in response to "How are you?", means "just fine". [laughter] ER: And then she said, "When the Toronto Public Transit System went on strike, sending the city into gridlock, I was astounded at how calmly people coped, sitting quietly in their cars for hours. In Baltimore, there would've been riots." Maybe things have changed a bit in Toronto. [laughter] the big question I'm sure we wanna know is, you still look and act relatively young, why leave the bank when you're right at the top of your game? [laughter] Sherry Cooper: I think "Why not?" is the best answer. The reason is that... I have been going to First Canadian Place for literally, as of February 7th, 30 years. I started, of course, at Burns Fry, and then we were acquired by the Bank of Montreal in 1994. That's a very long time. And you could imagine that as an executive of the bank and chief economist, I have had to be fairly careful about what I would say, and I was certainly restricted from most outside activities. So, this is an opportunity for me to branch out and to do what I've written about in my book, "The New Retirement", which is to reinvent myself, to have a lot more flexibility and control over my own time, and also to follow my passions, my interests, and to have the opportunity to spend time with friends, to come to library functions, to see my brand new grandchild, who lives in New York City, and to just actually smell the roses, as they say. ER: Now, I was just talking about how Bay Street is still a male bastion. You have strong views about that, and I understand you're gonna take the director's course and hope to get on some corporate boards, right? SC: Yes. ER: What do you feel about women and the glass ceiling? SC: Well, I was asked by Anna Maria Tremonti on The Current, CBC just two weeks ago, the question, "When did you know you had broken through the glass ceiling?" And the question caught me completely off-guard, and I responded just without thinking, saying, "Well, I haven't." And big eyes, she said to me, "Well, what do you mean?" And the fact is that, I was typecast, pigeonholed as the economist. Now, I'm not suggesting that I'm not grateful and happy that I've been Chief Economist of a major Canadian institution, I'm Executive Vice President of the bank. However, I never had the opportunity that other economists in other institutions, as well as in our bank, have had. It was never seen that I would be anything other than an economist. SC: And I hearken back to quite a few years ago in the late '70s, when the Chief Economist of the Bank of Montreal, Grant Reuber, became President of the bank. Clearly, there was no glass ceiling for him. And so, that's what I mean by that. That women have certainly moved into senior positions in many, many different corporations, but thus far, the number of women in a CEO position of a public company, either in the United States or Canada or Europe, has been very, very small. ER: Now, you were quoted as saying that the 2008, 2009 financial crash might not have occurred, if much more women were running these financial institutions. [laughter] SC: Right. That's the kind of thing I can say now that I'm retired. [laughter] The fact is that a lot of work is being done now in the neurosciences that shows that men and women really are wired differently. I went to a fascinating presentation just yesterday morning by a woman named Barbara Annis, who is with the Kennedy School of Government at Harvard, and she has a new book coming out, and she's reviewing all the scientific information. And just as women experience heart disease and heart attack symptoms differently than men, women also, they have discovered, have different brain patterns, like physically different brains than men. And so, we behave differently, we think differently, on average. And women, although, of course... All women aren't the same just like all men aren't the same. There is a normal distribution of women and a normal distribution of men, in terms of many different characteristics. On the scale of factual versus intuitive, the average woman is much closer to intuitive than the average man who is much closer to factual. SC: In terms of other behaviours like risk taking, the average male is much closer to being a risk taker where the average woman is more risk-averse. And we've done a lot of work on that. We'd seen that in women's investment behaviour. There are many other characteristics that are importantly very different, and that's why I feel very strongly that we need to have diversity. We need, in order to succeed, in this ever changing volatile, uncertain and complex world, we need to have a good mix, diverse across gender, but also across cultures, across geography, across religious backgrounds, because it's the only way that we can get the best decision making going. In terms of the financial crisis, it is very obvious with hindsight that Wall Street and other major financial institutions everywhere in the world took far more risk than they'd realize, and the game that was being played was in fact extremely dangerous. Had there been more women on trading floors and more women CEOs, and more women in the mortgage origination business, not to mention at the top of the regulatory companies, this... I believe, this would have mitigated at least some of that risk taking. ER: It's the start of the year and everybody is looking ahead and I know you're officially retired, but what do think of Canada's prospects in terms of getting through the next year without a major recession, without the housing market collapsing. We've always been pretty optimistic about how Canada has been so separated from the US in the last few years. Do you think that will continue? SC: I'm so optimistic. I do not believe there's going to be a recession in the next 12 months. I don't think that our unemployment rate will rise. I think it will fall albeit gradually. Our stock market has recently done very well. I think that will continue and I think we will see growth. But the growth in Canada is very moderate. And the reason for that largely is because we're so close to full employment and because our energy and material sectors have slowed dramatically. The boom that we saw in Canada in the early 2000s was largely the result of the energy sector. There was tremendous growth of demand and energy prices were high. But as a result of the many factors that have contributed to the global economic slowdown, in fact today, the energy sector is under-performing and Canadian oil prices are below oil prices in the rest of the world, even below those in the United States. SC: And that's the direct result of inadequate pipeline capacity both between Canada and the US, and between Canada and the rest of the world. We all know that the fastest growing regions in the world are in Asia, particularly China and we have no way of exporting oil to China because there is no pipeline in the East-West direction only in the North-South, and that is a serious problem for our financial and economic prosperity in the future but it has become an extremely contentious political and environmental issue. ER: Another thing that we hear a lot about is the stability and the prosperity of Canadian banks and someone said, "Well, when you interview Sherry Cooper, you have to ask her what she invests in, and you'll be surprised to hear that it's banks." SC: I do. I invest in Canadian bank stocks and all the Canadian banks. Now why do I do that? It's because I've learnt the hard way that trying to trade my account, trying to time markets, trying to pick winners is a fool's game. Even with my access to the equity research in our company, I found that it was very difficult to beat the markets. I certainly couldn't time the markets and I like to sleep at night. And, I, like many women, I'm relatively risk-averse. So what I have found is buying bank stocks and reinvesting the dividends has been my road to financial security and retirement. It does, however, take a good deal of money to invest enough, if you don't have a good old fashioned, defined benefit pension plan, which I do not, to have the income flow through dividends that would be sufficient to maintain your lifestyle. And remember, dividends are treated preferentially in terms of taxation than interest. Dividend tax yields or tax rates in Canada are less than 30% whereas the interest income is taxed like ordinary income. SC: So, the main thing I've told people from a personal finance perspective and especially young people is the key to financial security is to spend less than you earn, [laughter] which is a concept. I mean, many baby boomers don't get that. Like it doesn't matter if you pick the new Microsoft or Apple, the fact is that if you only have a 100 dollars invested, you're not going to have a large enough nest egg to retire comfortably. So, you must live beneath your means, pile that money into what I consider to be blue chip dividend-paying companies with a long history of dividend payment and growth and continue to do that through most of your life, even in retirement. ER: And you invest only in bank stocks? No other types of dividend-paying stocks? SC: I do and that's only because I think I'm a bit like Warren Buffet, I feel most comfortable investing in a sector I know and understand, and I do know and understand this sector. And the evidence of this not being such a stupid idea was the financial crisis where, yes, the Canadian bank stocks did plummet, but not a single Canadian bank cut their dividend and not a single Canadian bank took a dollar of government money, and all of those bank stocks have recovered. But I could tell you in February of, I guess it was 2008 or '09, I guess sit was 2009, the bank of Montreal stock had gone from above $60 to about under $25 a share and I was plenty worried. And at that time the dividend yield was 10%, 10% when interest rates were like zero at the short end of the curve, and I managed to refrain from selling in a panic fashion because I believe that panic selling is always a mistake. SC: And fortunately, BMO stock is now back to like $64 a share and our dividend still is quite high at just under 5% and I do not believe that BMO will cut their dividend, I don't believe that any of the Canadian banks will be forced to do so because we have been far more strictly regulated than any of the other banks in the world, and Canadian banks have also increased their capital ratios very dramatically. So, if the Canadian banks were to go under, I would venture to say that it would be Armageddon. And I mean seriously, there'd be nothing that would hold its value. ER: One thing you didn't mention was that during the crisis, the Canadian government put a lot more money into the CDIC, the deposit insurance system, so that bank customers would be protected if anything happened. SC: And so that and they would feel more confident so that we wouldn't have a run on the banks. So yes, I mean it's all psychology because if every domestic depositor were for some reason or another, to believe that Canadian banks would fail, the line ups for withdrawals could lead to a major crash. There is, I mean, that's the whole idea of the reserve system, the partial reserve system. Banks do not hold every dollar that you deposit into your bank accounts in reserve. If they did, they wouldn't make any money, so they loan that money out and they lend it at rates that are higher than what they pay depositors, and they take the risk that those loans will indeed be good loans. If we saw everybody line up to take all their money out of the banks, the banks, in fact, would not be able to finance it, the government would have to come in and make good on those deposits up to whatever the insurance limit is. That's true for every bank in the world. ER: I must say I have seen a few of your presentations and you are the master of PowerPoint and I missed the PowerPoint because, it's interesting 'cause often, the bank would have Sherry and then they have Don ***, who is retired now as well. And Sherry would have maybe at least 50 or 60 slides in about half an hour, and go through... Most of them were charts and graphs, and go through them at a breakneck pace, you really had to keep up. And then Don would come with no slides at all and he'd talk really slowly, and it was such a contrast, but it was so much fun. So, tell us a little bit about what the workload was like as Chief Economist of the bank. SC: Well, the workload as Chief Economist of the bank or Burns Fry was really breakneck. I actually think it was harder at Burns Fry because I had a much smaller team, whereas at the bank, I have other senior economists, I had a deputy and other junior economists that could help share the load. But nevertheless, the load was intense. It was exciting. What I loved is no two days were the same. Most of the time, I wouldn't know when I went to work what I'd be in, what I'd really be thinking about that day because we were so markets driven. We're so event driven. An example was, I published my second book on the day that turned out to be 9/11. ER: That was your publication date? SC: That was the date of the release and the media blitz. I spent the early morning on Morning TV on CBC and then went right from the CBC building to First Canadian Place. And when I walked in, the TV sets were on and my team was like staring at the World Trade Centre. The first plane had hit and we all watched aghast as the building collapsed. And there was a reporter from a Canadian business magazine who was there that morning to follow me, "The Day in the Life of Sherry Cooper", as part of the book promo. And instead what he witnessed was a day in my life that, of course, I would never want to repeat and I will never forget. And we didn't do book promo, of course, at all, that day. SC: And that's an extreme case, but there were many others. I was in Tokyo on the day of October 17, 1987 which was then considered to be a massive stock market crash. And I was in Tokyo to talk about the wonders of the Canadian stock market. And on that Monday, there was an institutional investor conference, where we were speaking, and on that day, the Nikkei opened up, the Japanese stock market opened up down 1,200 points. The last thing they wanted to hear about was the Toronto Stock exchange. So I talked about this financial collapse and though not every day was as destabilizing as that, there were many. Everything from the Meech Lake Accord, the Charlottetown Agreement, the fear about Quebec separation, the fear that Canada would be, in fact, a Greece-like situation when we were threatened for an IMF takeover when our government debt was downgraded, and then many other days where there was tremendous success and prosperity. But that was what was exciting about my job. I am an adrenaline junkie. So I love that pace. I love the trading floor and the minute to minute. ER: Lots of budgets, too. We used to see you in the lockups. SC: Absolutely. When we'd have budgets, before all the ability to... Well, one thing was when the budget speech was at 8 PM instead of 4 PM, so we'd be up all night, analyzing, and before the days, we could email our commentary and work on computers in the lockup. But also, I travelled a huge amount and I travelled across Canada, of course, which is a very large country but also we did a tremendous amount of business in Asia in the days when Canadian interest rates were six percentage points above interest rates in the rest of the world. And Japanese investment in our bond market was enormous. So, I would go to Tokyo, probably quarterly and make presentations as well as in Europe and throughout the United States. So, I was constantly jet lagged and always on an airplane, and always in a different time zone. And that was back when air travel was fun. [laughter] After that day of 9/11, I did have a book tour through the United States and that's when the security line ups began and the anthrax scare. ER: Oh, yeah. SC: And that was the most horrible two weeks I think, from a business perspective, in my career. ER: Well, the audience may have noticed that we started this event earlier than usual because Sherry thought she was still working and had to go home early to go to sleep. So what kind of hours did you keep then? SC: Yeah. Again, I have slowed down... ER: Yeah. SC: In the last couple of years, but typically, up at five, 10 to five. We have to follow the markets, the overnight markets. We publish our first report at 7:30 AM and we have to include, in that report, what happened overnight in the Asian markets and thus far in the European markets, as well as what's going to happen or what's being released in Canada and the US. In addition, we hold morning meetings in our different trading operations, be it the equity markets, bond markets, the foreign exchange markets, as well as our retail investment traders. These meetings begin at 7 AM and we have to be on top of things. And then, I was often giving after-dinner presentations. And so, the days were very long, and the weekends were time to catch up on the reading I didn't get to do and also, to write reports, longer reports that I didn't have time to do in the office. ER: It is a burnout kind of situation. And what I was able to do, as the days got longer, because of technology and everything became global... When I started in 1983, we needed to be on top of everything that happened in the US and Canada, but that broadened. And of course, today, it's everything that happens everywhere, in every time zone. And it's impossible for any single person to do that. So now, the team is 16 people, and we take turns writing the morning commentary. Three people, instead of one, write the morning commentary, and they alternate. And similarly, we take turns with the evening. We spread to travel around. And I personally, as I told the library, no longer do after-dinner speeches, because I discovered that dinners are generally quite *** in our client base. And by the time you are the 8:30 speaker, the audience is not exactly into the minutiae of what's going on in financial markets. And instead of trying to sort of talk over what people would rather be doing, I just said, "I'm not doing this anymore." So I do before-dinner speeches and before-cocktail speeches. [laughter] And somehow saved myself that way. ER: I have one last question, and I'll open up to the audience. In that 1999 story, you said that you... Every year you would write a one-year list of goals and a five-year list of goals, and you'd carry it around with you, and you had them all on file. So what are your goals for your retirement or your semi-retirement? Or maybe you are not going to retire at all, just retire from the bank? SC: I've retired from the bank. And I'm not going to retire in terms of the traditional, I don't know, golf and play tennis or visit family perspective, though I will want to do a much more leisure activity, and family and friends activity than before. But I have written my bucket list. And I don't want it to sound like I think I'm gonna die in the next five years, I've gotta catch up on some things I've always wanted to do. But I call it my bucket list because it is a list that will, in my hope, will cover many, many years of activity. And it's six pages long, handwritten. [laughter] SC: It includes so many different things. It includes, certainly, business-related or career-related activities. I want to do something that makes a difference. I want to give back. I want to... I'm very passionate about equal rights and diversity on a global basis. I'm also wanting to touch people's lives with my knowledge and experience. So, if I can help people to understand their career future, their business future, their financial future, and that's people of all ages, I would love to do that. I like to mentor younger people. I also spend a good deal of time speaking to audiences of retirees. And if I can make people feel more confident and understanding better what's going on in the world that gives me great satisfaction. SC: And, as well, I want to be on corporate boards. I want to continue speaking engagements, and I want to continue to write. On other aspects of my life, I just became a grandma, for the first time, five months ago. And that's... I have one son who lives in New York City and he married two and-a-half years ago. He's a lawyer. And our grandson, little Alex, is absolutely like... I never... I knew grandmas to always say it was the greatest thing that ever happened, but now I understand. And, so that immediate unconditional love is very powerful and I know that contributed to my decision to retire. In addition, my mom lives in Sarasota, and we have a place like literally across the building from her, and I like spending time down there. We'd made lots of great friends, and I'm very, very close to my mother. So, we want to be down there more. And thanks goodness, the technology these days allows me to continue to stay up-to-date and to work as you, I'm sure do, using today's technology. ER: You'll still be on a lot of planes. SC: I'll still be on lots of planes. But also, I mean, I have travel, you know, travel... ER: Points. SC: Travel ideas... Yes, oh, another reason I retired... ER: All the points you have, yeah. SC: Another reason I retired is this year, Air Canada sent me this model airplane because I am now a Million Mile Flyer. [laughter] And what that means is, I get to continue to be elite status for the rest of my life. ER: Oh! [laughter] 31:18 SC: So, that's great, because it means you get more points and all that stuff. I did joke, though, that if I earn another million miles, they say, I can give lifetime elite status to anybody else I want. Now, they probably think I would give it to my husband, so that he could travel business class or something with me. I would give it to my grandson... ER: Yeah. [laughter] SC: And really stick it to another big business, right? He could take his parents on business class. Anyway... ER: That's assuming you're gonna have another million miles. SC: I don't think I'll have... In fact, I don't even want a million miles of travel. ER: That's great. So, we're opening it up to the floor. Please line up at the mics. And who's gonna start? SC: Don't be shy. You can ask me, by the way, about anything. I'm not suggesting I might answer anything, but... [laughter] ER: Sherry said she's already not following the minutiae of the economic world as closely as she once did. SC: Yes sir. S?: Okay, looking at when the stock market was 6,000, if you had a choice of selling all your stock holdings and investing in Toronto real estate... SC: Well... S?: Like I know some people had done that, and went down to Forest Hill and bought a house for two million, which is worth six million today. Is that something that makes any sense to you in terms of investing in the future? Go to some rental housing units and build up a portfolio in that, rather than in the stock market? SC: Well, it depends on real estate where... I mean, real estate is always about location. Buying real estate last year in places like Florida, or Phoenix, or Arizona as a Canadian made a lot of sense. Because our currency was strong, and the prices were unbelievably low. I mean, what you could buy for $200,000 compared to what you could buy for $200,000 in Toronto... ER: If anything... SC: If anything, I mean, basically nothing, it's monumental. And I had seen an improvement. I do have some real estate in Florida, and I have seen a significant improvement in the market, and the rental market there is pretty hot. However, like I said, I'm relatively risk-averse. I don't like flipping anything. I don't buy to sell. I buy for a longer term investment, and so we did buy a condo in Florida to use. It was a great deal compared to what the prices were five years ago, and I'm hoping to entice my son and his family to the beach to visit us at Christmas and New Year's, whereas it might have been a little harder to entice him to the freezing cold of Toronto. And as I say, my mother lives there, so I mean for lots of lifestyle reasons, we own real estate. Frankly, I don't think real estate in terms of your personal residence is an investment decision. I think it's a consumption and lifestyle decision. And I say that, because we did sell the family home a year and a bit ago. And we're moving into a condominium, if it ever gets finished, right in this neighbourhood. SC: But the condo, though it's smaller, cost more than the house that we sold because condos are more expensive. They're more expensive on a per square foot basis and especially, in terms of we are moving downtown. Like we lived out of the city, and of course, real estate down here costs a lot more. So, we weren't able to take money out of our residential real estate to live on in the future. Now we could have, if we had chosen to live in Barrie, or even more so if we went even further out of the city. But we both want to continue to be working and active, and I was sick to death of commuting, which is another reason why we sold the house. So, again, real estate... I mean, my grandparents were very comfortable in their retirement in Richmond, Virginia, many, many years ago, because they had built apartment buildings. SC: So, I'm not saying real estate is a bad investment. It's just that right now, in my view, there's a glut of condos. Yes, the vacancy rates and the rental markets are at rock bottom lows, so it's not difficult to rent. It's just that today's prices, it's difficult to get a high enough rent to cover your costs especially if you're borrowing the money. So, I don't think Toronto's gonna crash, but I do think that we're going to see a slow decline, moderate decline, in condo prices. The single family home market in Toronto will continue to be extraordinarily strong, and that's because there's a shortage. You nearly have to knock down a house in order to build a new one, thanks to man use restrictions. And so, there, in fact, it's a good investment, it's just that, again, that location factor and the lifestyle issues are not for everyone. S?: Thank you. S?: A lot of people suggested that all this borrowing by governments, and this increasing the money supply, and the buying of assets, is going to lead to some horrendous inflation in the next few years. What's your opinion on that? SC: Not so. For one thing, let's talk about the US where it's happening very dramatically, or the UK where it's happening even more so. There is such an enormous degree of slack in the economy in terms of unemployment, in terms of capacity utilization, and there is so much deflationary pressure on both prices and wages especially that you don't get the price wave spiralling. In the US real wages are falling, and have been for a decade. In the US, the median household income in real terms is falling because there has been a tremendous collapse in union power, and because, again, of layoffs. And those layoffs continue, not as much as before, but just recently, Best Buy announced 18... Yes, another huge amount, number of layoffs. Citigroup, a month ago, announced 11,000 more layoffs. Because of global competitive pressure, businesses everywhere are becoming more productive and they're downsizing. The financial services industry is downsizing right here in Canada, as well as in the rest of the world, because as the regulators make them hold more capital that is not earning income, they must, in fact, reduce their costs. Otherwise, their return on equity will plummet. And that's true in so many businesses. SC: Canada is much closer to full employment, but in Canada, we are not seeing a surge in the money supply through what is called "quantitative easing". The Bank of Canada is not buying Government of Canada bonds the way the Fed is, the European Central Bank is, the Bank of England, and the banks of Japan. Look at Japan. Japan has the highest debt-to-income ratio of the G7 countries, and yet, the lowest interest rates and outright deflation, because the Japanese economy has so much excess capacity. It's the oldest population and the most rapidly ageing population. What I think is going to happen is that in the US, they will finally come to some mishmash agreement, but an agreement, to cut spending and raise taxes. And they've already done that. The decline in the US budget deficit in the last 12 months relative to the size of the economy is the biggest decline since the demilitarization after World War II. And that's why US GDP growth, which was just announced yesterday, was negative in the fourth quarter. SC: Now, that doesn't get a lot of attention. What worries me about the future growth is if the government in the US were to tighten fiscal policy too aggressively. The austerity measures that we have seen taken in Europe, especially in places like Spain and Greece, have caused not just recession but outright depression. Now, the US is in nowhere near that bad a situation, but they have to be careful. It's a balancing act. The economy in the US needs some fiscal stimulus, and at the same time, it needs a longer term program to reduce the level of debt and deficit. And they're doing it. SC: But my opinion is that's why the stock market is doing so well. The US stock market now has recovered virtually all of its decline since the financial crisis. And if anything, I think we're going to see 2% to 3% growth in the US in the latter part of this year and into next year, whereas in Canada, the growth rates will probably be a little bit less, around 2% because here, we're getting very close to full employment, and at that point, the Bank of Canada will start to raise interest rates. The Bank of Canada will continue, Mark Carney or not, will continue to be very cautious about potential inflation. And so today's mortgage rates will one day seem like unbelievably low mortgage rates in the future. Not that I think we're going back to anything like the rates of the '80s, but the fact that you can get a fixed rate 30-year mortgage in Canada for under 5% is an amazing deal. S?: Thank you. SC: You're welcome. S?: Hi. You spoke earlier about the economic importance of pipelines, and we're seeing more and more incidents of extreme weather caused by global warming and climate change, so I'm wondering with you, now having a grandson, where you would stand on something like some sort of a carbon tax that would promote us moving away from fossil fuel consumption toward more cleaner energy sources? [applause] SC: I totally agree that climate change is a huge problem, and one that needs to be dealt with aggressively. There's no denying it. I know that in the last election campaign, the Republican Party, at least at the extreme end, right side of the Republican Party, still has non-believers, but it's a fact. We know it's happening and we know that we need to take actions. What I'm happy about is that the markets are, indeed, doing it for us, in a way, in the sense that the improvement in shale and technology has allowed us to increase the supply of energy, especially in the United States, so now, natural gas prices are at record lows and the US, therefore, is using natural gas to produce electricity. SC: Now, to be sure, that's still not clean, clean energy, but it's a lot cleaner than it was and with reduced costs, the United States is able to attract more manufacturing activity. What we need to see is alternative energy and of course, that's not something that you can just flip the switch. It takes years of research and development to make it happen. I would support a carbon tax of some sort. I've always supported gasoline taxation because... Now, you see, when you say that, you can't get elected. I'm not a politician, so it doesn't matter to me to say it, but when you say you wanna tax, increase the cost of gasoline? It is true, that's highly regressive. It means a lot more to poor people than to rich people, and there are many people that have to pay to get to work. They can't afford to live near their work and it means not just the cost of driving goes up, but the cost of all public transportation goes up. And so, it's a regressive tax, meaning it hurts people who are lower income more than, proportionately, than higher income. So, there have to be innovative ways of dealing with this, just like we did with the GST and rebates for lower income people. S?: What if it was revenue neutral where all the money collected were equally distributed back to the population? SC: Well, that's the thing. You have to have some sort of rebate system. The big issue is no politician would touch it because right now, it's politically unacceptable. S?: Stephen Dion tried. SC: And look what happened to him. So, I mean if there is... We are in a democracy. You know, in China they can do whatever they want, but here, we are in a democracy, which of course, is a good thing, and so we have to... Our politicians are concerned about being re-elected. We need to improve the public will to do these things and of course, we also need to improve public transportation and create ways of moving businesses to where people live. And what's happening downtown Toronto where many, many, many people now are living, not just working, is a huge plus to reduce the demands on energy. Because people now are walking to work or riding their bikes to work, and that's happening increasingly and especially younger people and older people. S?: Thank you. ER: We have time for two more questions. S?: Hi. SC: Hi. S?: I just had a question related to your discussion about your major investments being in the banks. And then you explained that right now, the banks are giving these low interest loans, as low as 1%, but they're still able to give dividends that are as big as 5%. So, to me, there's a discrepancy in... There's a bit of an imbalance. So, you did answer partially the question, but I'm imagining that the interest rates in the future are probably gonna go back up as they used to be in the '70s and '80s. But what is happening right now, why is it working? SC: I'll tell you what's happened. Bank loans rates are not 1%. Deposit rates are 1%, but you can't get a loan for 1%. You can get... Depending on the loan, you can get a loan for 5%. S?: Very low for... SC: They're very low and bank earnings have declined because the spread between short term... They borrow short term, they lend long term, those spreads are very narrow. And that's one of the reasons why all the Canadian banks stocks were downgraded by Moody's. The other reason is concern about the housing markets in the country and how stable house prices will be in the future and the fact that debt-to-income ratios for many households is quite high. The reason banks can afford or do pay such high dividends is two-fold. A dividend is just a dollar amount they pay per share each year. When the share prices are low, those dividend yields look very high. And the share prices of Canadian banks are lower than they have been historically, relative to their price earnings ratios, because people are concerned about banks in general. SC: So, what we call the "multiple" on banks stocks is relatively low. In other words, if the bank's stock price were to rise, the dividend doesn't change, that dividend yield would go down. See what I'm saying? So, that's one part of it. The other part of it is, banks don't have a lot of opportunities to invest their capital, so they pay it back to the shareholder. Many banks are buying back their own stock. You can use your excess capital to just sit there in retained earnings and earn nothing or you can use it to make loans, but you have to have good quality loans to make, and the demand for credit, in terms of quality demand, has been relatively low. And then, of course, you can use that capital to either buy back stock and/or pay out to the shareholder. SC: Canadian banks have always paid dividends. It's like utilities pay dividends, banks pay dividends. Banks dividends have always been a core component of pension fund and individual retirement investment. The banking system is highly regulated, and one of the reasons it's been so highly regulated, especially in Canada, is because their banking system is protected, they don't let foreign banks come in and buy a 100% of Canadian banks. They make it, therefore, less competitive, easier for Canadian banks to make money. But the quid pro quo for that is, the regulators say, "Banks, you can't invest in very risky investments, you can't have your leverage ratios above a certain level." So therefore, banks are safer and forced to pay out much more of their capital than say, an American bank or a Spanish bank. ER: And they wouldn't let them merge a few years ago and they didn't put all their debt on their books from the mergers. SC: Right. S?: Thank you very much. SC: You're welcome. S?: Just a couple of quick comments on your comments, let's get facts right. There are four classic examples, Scandinavian countries, their tax rate is 48% to 52%, so by every yardstick in the world, they are the best managed, very happy democracies in the world. West to East, Norway, South of it, Denmark, next one's Sweden and Finland. And the surprise of everybody is Finland because it's statistically, people start education there, the highest age of every democracy in the world. They don't start education there until age seven, not age four or age three, as the trend is. Anyway, just to comment to get your facts right, what I will ask you is if you've got any other comments on... Well, firstly I'll give you briefly my background as it goes back to the late of the '60s. ER: Can you ask a question please? We're almost at the end of our time. S?: I can be very, very brief on that. As I say, it goes back to the late '60s. And I was, by invitation, writing for all the newspapers, broadcasting a little on standard radio and so on and so on. But to make it easy for you, can you comment on three or four events or aspects of the business, the economy, interest rates, currencies, either now or in the past? I'd give you a pretty wide field to save time because I know I can't take up more time. I'd like to talk to you in detail, but I open the field to you if you got any comments on whatever you want in politics and business. [laughter] SC: Scandinavia is a great example. I will comment on that. I mean, if you want to hear my GDP forecast or interest rate forecast, I think I've given you a broad-brush view that we'll see moderate but positive growth. Unemployment rates will edge downward. The stock market will continue to do well. Interest rates will remain low, but they will edge upward. And the Canadian dollar, of course, is going to hover plus or minus parity for an extended period. Now, the one thing I will say about the models of Scandinavia, which is kind of the anathema democrat... On democracy perspective of the United States, it is the social welfare system. The super safety net where income distribution is probably as equal as pretty much anywhere in the world. Certainly, far more equal than in some of the lesser developed countries where the, it's called the "Gini coefficient." It's the measure of inequality. It's very high in China, it is very high in Brazil, in Columbia. And in Canada, it's sort of in the middle, a little bit closer to Scandinavia, the United States is a little bit more unequal, maybe a lot more unequal, because of the devastation of the financial crisis. SC: All of these factors. Greece, for example, had a huge social safety net. In fact, one unbelievable statistic is that just through mandatory retirement systems in Greece, you earned 125% of your pre-retirement income in retirement. And retirement age was like 50. So, of course, the country blew up. There's a trade-off between taxation and social safety systems. And Canada's choice along that spectrum has been to the left of the United States. So, if we're talking about Scandinavia, Canada has decided that it can tolerate, or will tolerate a more unequal income distribution with a much more progressive tax system than the United States. So if you are low income in Canada, if you are poor, you would much rather be in Canada than in the US. ER: However, if you are rich, you would much rather be in Canada than in Scandinavia 'cause they'll take 70% of your income. And so it's not an economic decision. It's a societal and a social decision. The argument is that there aren't a huge number of patents per capita in countries where there's little incentive to innovation. There's less entrepreneurial spirit. These Scandinavian countries, by the way, had enormously difficult social issues. There is... If anybody has read any of the Swedish spy novels, you know all about that. The foreign elements in these countries are not welcome and they are not assimilated because the Swedes pay so much for their own social safety system, they don't want immigrants to come in and drain the system, unlike Canada, where this city is pretty much as multicultural as you can get. So, it's a huge complex issue and again, it's a value system. Thank you. [applause]