What Could Go Wrong?

As the Canadian dollar freefalls — now at 78 cents — and oil hovers in the mid-40s, what should we expect for the rest of 2015?

Derek Holt provides his perspective in this Globe and Mail article:

Canada is more dependent on energy than ever before as one in five cap-ex dollars, one in four export dollars, and 13 per cent of GDP through direct and indirect effects are derived from the sector.

Will a depreciated [Canadian dollar] and U.S. growth be enough to pull non-energy exports higher going forward and offset the pain that is sweeping through the resources sector (and not just energy)? I”™m skeptical.

In the context of all of this is a very mature household sector including: About a 70 per cent record high home ownership rate; record high real per-capita consumer spending; record high renovation spending; record high house prices; and a household debt-to-after-tax income ratio that may have stabilized but that remains elevated around records.

There are many insulating safeguards in a strong financial system and a very different mortgage market but further growth off of record highs in such variables may not get a lift from rate cuts as employment growth has cooled over the past couple of years while the housing market is operating at saturated levels of activity.

Translation? We’re toast.



Sony issued a memo to all of its current and former employees and dependents:

Sony Pictures Entertainment (SPE) experienced a significant system disruption on Monday, November 24, 2014. SPE has determined that the cause of the disruption was a brazen cyber attack. After identifying the disruption, SPE took prompt action to contain the cyber attack, engaged recognized security consultants and contacted law enforcement.

SPE learned on December 1, 2014, that the security of certain personally identifiable information about its current and former employees, and their dependents that participated in SPE health plans and other benefits, may have been compromised. Also on December 1, 2014, SPE began the process of notifying employees that it would be providing identity theft protection services to them and to their dependents. SPE has continued to engage in an effort to reach out to potentially impacted individuals with notification about this situation, to offer identity protection services and to provide them with information about how to protect themselves from identity theft and other potential loss.

On the surface, it seemed to be another all too familiar security breach. And then it became evident that there is a far darker side to this story.

Kevin Mandria’s memo to Sony Pictures CEO, Michael Lynton, starts to paint that picture:

Dear Michael,

As our team continues to aid Sony Pictures”™ response to the recent cyber-attack against your employees and operations, I wanted to take a moment to provide you with some initial thoughts on the situation.

This attack is unprecedented in nature. The malware was undetectable by industry standard antivirus software and was damaging and unique enough to cause the FBI to release a flash alert to warn other organizations of this critical threat.

In fact, the scope of this attack differs from any we have responded to in the past, as its purpose was to both destroy property and release confidential information to the public. The bottom line is that this was an unparalleled and well planned crime, carried out by an organized group, for which neither SPE nor other companies could have been fully prepared.

We are aggressively responding to this incident and we will continue to coordinate closely with your staff as new facts emerge from our investigation.

Kevin Mandia

Kevin is the CEO of Mandiant, a cybersecurity firm.

The security incident suggests an unparalleled and well planned crime. And here is where things start to get dark.

A group calling itself the Guardians of Peace issued this “peaceful” email:


We will clearly show it to you at the very time and places “The Interview” be shown, including the premiere, how bitter fate those who seek fun in terror should be doomed to. Soon all the world will see what an awful movie Sony Pictures Entertainment has made. The world will be full of fear. Remember the 11th of September 2001. We recommend you to keep yourself distant from the places at that time. (If your house is nearby, you”™d better leave.) Whatever comes in the coming days is called by the greed of Sony Pictures Entertainment. All the world will denounce the SONY.

And, predictably, there has been a reaction. Although the Department of Homeland Security says it has not yet discovered evidence of an active plot against U.S. theaters planning to show The Interview, a number of cancellations took hold.

The New York premiere of The Interview was canceled although the The West Coast premiere of the movie took place without incident in Los Angeles on Dec. 11.

Seth Rogen and James Franco, the stars of the move, canceled all upcoming media appearances leading up to the release of the film.

Cineplex Canada removed showtimes from its website. And two chains in the States have removed the movie from their lineups.

FireEye maintains a Cyber Threat Map. These threats are a constant danger with an untold number taking place every single day. That said, few of them attain this level of profile: sufficient to create enough fear to stop showing a comedy film.

Cyber-terrorism or retaliation for making a movie about Kim Jong-un?

It Is A Small World After All


Hmmm. What photos?

Yes. I had been down to Walt Disney World. But I had not signed up for any Disney PhotoPass photos. Was this some sort of scam?

Well, I clicked through. And there were all sorts of photos of my family. Photos like this one:


Of course there were photos. We did most of the rides at the parks and many of the rides take your photo hoping that you will stop by the gift shop and buy one on the way out.

But how did Disney know that these were our photos?

Facial recognition.

And where did they get the matching photos to validate the facial recognition?

From our cruise. We were required to have our photos taken when we registered prior to embarkation.

And how did they find my email address?

Well, clearly they have a customer database with all sorts of information about me including my images and my email address. I did purchase the one image above so I suppose digital persistence does work.

Staggering to think that an amusement park is so well informed about its guests.

The Other Side


This is just really, really cool: the Other Side video.

Press the R key while the video rolls. And you will see the other side.

What Could Go Wrong?


A message from the Bank of Canada:

The Canadian system of housing finance proved to be resilient and efficient during the global financial crisis and its aftermath. The system”™s effectiveness is the result of a rigorous prudential regulatory and supervisory regime coupled with targeted government guarantees of mortgage insurance and securitization products. In the post-crisis period, household debt levels and house prices have risen, owing, in part, to accommodative monetary conditions necessary to support the economic recovery. These vulnerabilities were mitigated by tightening macroprudential policy, specifically mortgage insurance rules, and strengthening mortgage-underwriting standards. Looking ahead, the housing finance framework needs to be adjusted and strengthened by rebalancing the risk exposures away from the government toward the private sector participants in the housing finance market. Although some measures have already been taken for this purpose, more adjustments may be needed to create the right incentives and achieve a sustainable rebalancing in risk exposures. Measures should also be considered to promote a liquid private-label mortgage securitization market in Canada.

The Wall Street Journal translates the Bank of Canada message this way:

Canadian taxpayers have become too exposed to the dangers posed by the country”™s frothy housing market and authorities should get the private sector to take on more of the risk, a senior Canadian central banker said.

The Globe and Mail translates the Bank of Canada message this way:

The Canadian government is now too “exposed” to the country”™s hot housing market, warns a top central bank official who”™s calling for more private-sector involvement.

Garth Turner explains it this way:

Something is seriously out of whack.

Substance Over Status

0 and 1 sign

I am attending a conference and Peter Thiel was one of the featured speakers. Peter is one of the top global 100 investors. He co-founded PayPal and he was one of the early investors of Facebook.

He offered a few zingers. When asked about technology trends like cloud and big data, he responded this way:

My bet is always on things that are fact specific, not on buzzwords… as an investor, I am always skeptical of anything that can be described as a trend”¦ I am super skeptical of cloud and Big Data.

He dismissed companies like IBM saying that IBM is a bet that we will keep buying the same kludgy technology from the 70s.

Thiel looks for companies and technologies that deliver an order of magnitude improvement in their market. And he is drawn to companies that hold the promise of establishing a new monopoly.

We live in a financial and capitalist age. We do not live in a science and technology age. We live in an age when people generally dislike science and technology.

He urged people to choose substance over status. And to live today as if you were going to live forever.

I received a copy of his book Zero to One. It is a fairly quick read and definitely thought provoking.

Most people believe competition is a healthy spur to productivity, but I think it”™s mostly dangerous and distracting. In college I spent about half my time reading books; the other half I spent training to make Stanford”™s varsity basketball team. Ultimately, I didn”™t make it. I think I was probably good enough””but that”™s precisely the point: I was unthinkingly competing with better players just so I could get better and compete with them at a higher level. I was never going to be as good as the top guys, and my time would have been better invested elsewhere, but the competitive dynamics acted as blinders.

Something like this is true in business today: on the margin, people pay too much attention to what direct competitors are doing instead of focusing on unique and ambitious plans.


This from a Globe and Mail article today:

Hewlett-Packard Co., one of the leading technology suppliers to the Canadian government, is facing a possible 10-year ban on selling products and services to Ottawa in the wake of a high-profile U.S. bribery conviction.

The recent criminal conviction, involving bribes paid to Russian government officials, marks the first major test of strict new Canadian integrity rules quietly introduced in March by Public Works and Government Services.

The details were a bit sketchy in the Globe. The Foreign Corrupt Practices Act blog covered a lot more ground in their report:

Hewlett-Packard agreed Wednesday to pay more than $108 million to settle FCPA charges brought by the DOJ and SEC.

The Palo Alto, California technology company is paying fines of $74.2 million to resolve the DOJ’s criminal case.

It’s paying $29 million in disgorgement, including $26.47 million to the SEC and $2.53 million to satisfy an IRS forfeiture as part of the criminal matter.

The disgorgement to the SEC is the 10th biggest FCPA disgorgement of all time.

With prejudgment interest of $5 million to the SEC, the total payment is just over $108 million.

Clearly not a trivial case. And it seems to take a lot of money to secure a contract in Russia:

In Russia, an H-P subsidiary paid more than $2 million through agents and various shell companies to a government official to keep a multi-million dollar contract with the federal prosecutor”™s office, the SEC said.

HP’s behaviour was not new.

The offenses occurred from 2000 to 2007. “Despite the red flags, the [Russia] deal went forward without any meaningful due diligence on the agent or the subcontractors,” the SEC said.

Here is what happened in Poland and Mexico:

In Poland, Hewlett-Packard”™s subsidiary gave gifts and cash bribes worth more than $600,000 to a government official to obtain contracts with the national police agency.

To win a software sale to Mexico”™s state-owned oil and gas company, Pemex, Hewlett-Packard”™s subsidiary paid more than $1 million in inflated commissions to a consultant with close ties to company officials, and money was funneled to one of those officials, the SEC said. The contract was worth $6 million.

Certain geographies are clearly more challenging in terms of how to win business. Remarkable that certain individuals can secure so much money from influencing a deal.



The Fraser Institute issued a news release that was carried widely by the mainstream media yesterday. You can read the details here but basically their research finds that Canadians spend more on taxes then on the necessities of life (housing, food, clothing):

In 2013, 41.8 percent of the average family”™s income went to pay taxes while in 1961, only 33.5 percent of the family”™s income went to taxes.

I went through our expenses in 2013 and sure enough, we were above 41 per cent just on income and property taxes. The Fraser Institute includes all taxes such as income taxes, payroll taxes, health taxes, sales taxes, property taxes, fuel taxes, vehicle taxes, etc.

It certainly seems dark and gloomy, doesn’t it? All of those dollars going to a greedy, wasteful government.


In 1961, there was no medicare, no Canada Pension Plan, no Guaranteed Income Supplement or Old Age Security. Most Canadians did not finish high school never mind college and university. I suspect many Canadians consider education, health care, CPP and many other government services as necessities of life. Would the private sector be more efficient in providing those services and making them widely accessible to Canadians?

I have no wish to see my taxes go up from here but there is a cost to sustain the services we expect from our country. I know that I enjoy a wonderful standard of living in this country as do the vast majority of families living and working in Canada. And paying taxes is part of maintaining our Canadian society.

So why is the Fraser Institute publishing such data? To hold government to account:

With almost 42 per cent of income going to taxes, Canadians should ask whether they get the best value for their tax dollars.

Fair enough. But how do we assess whether we are getting the best value for our tax dollars? On this question, the Fraser Institute offers no perspective.

The Fraser Institute is a registered charity with the Canada Revenue Agency. They are a tax-exempt organization. They pay no taxes which seems a bit ironic given one of their stated mandates.

The Fraser Institute fills a significant gap in our education system by teaching kids about the power of free enterprise and the often negative impact of government intervention.

In 2013, they received in excess of $8 million in revenues with most of that coming from individual donors and foundations. Therein lies the power of free enterprise and the negative impact of government intervention for the Fraser Institute: tax-exempt revenue for itself and tax credits for its supporters.