Wednesday, May 4, 2011

Things look great in Canada

Things are looking much better in Canada than in the U.S., and it shows. Once again the Canadian dollar has reached its highest level ever against the U.S. dollar, both on a nominal and inflation-adjusted basis. This chart compares the Can$ exchange rate vs. the U.S. with my estimation of Purchasing Power Parity, which is the exchange rate at which prices would be roughly equivalent in both countries. The loonie is strong, with the result that Canadians' purchasing power when traveling in the U.S. has never been greater (i.e., the positive gap between the actual exchange rate and PPP has never been larger).

Canada has just voted decisively in favor of a conservative government that will continue to pursue a pro-growth fiscal policy consisting of tax cuts and curbs on government spending. Canada's stock market is outperforming ours, its housing market has largely avoided the collapse we have suffered, its banks are doing well, its natural-resource-based economy is flourishing, taxes are being cut, and its budget deficit as a percent of GDP is less than half of what ours is (34% vs. 78%). What's not to like?

Going long the loonie is a tough decision, however, since it is pushing the limits of its valuation vis a vis the dollar. The news is great, but lots of good news is priced in. This leaves the loonie vulnerable to even the hint of commodity price weakness, and those fears are already stirring as gold and silver suffer from a bout of selling panic. Caveat emptor.

Full disclosure: I have no direct exposure to Canada or its currency at the time of this writing.


Benjamin Cole said...

Now, if global warming turns out to be real, maybe it is time to move north.

Benjamin Cole said...

BTW, Treasury yields slumping. Real estate washy. If investors expect inflation, they sure don't manifest their sentiments in those two markets.

Bill said...

Didn't Canada's GDP go negative first quarter?

Benjamin Cole said...

TORONTO -(Dow Jones)- Canadian Bonds were higher Friday morning after Canada GDP for February fell the most since May 2009, after four straight months of growth, dragged lower by a sharp decline in manufacturing activity.

"This industry's decline is not surprising given that the unsustainable growth over the last two months showed unusual strength. This month's decline is not alarming and does not reflect the start of a downward trend," Matthieu Arseneau, economist at National Bank Financial Group, said in a note to clients.

Yield, which moves inversely to the price, for Canada's two-year bond fell to 1.689% Friday, from 1.713% late Thursday. The 10-year bond yielded 3.189%, down from 3.221%.

Canada's Gross domestic product, the sum total of goods and services produced in the country, fell 0.2% to C$1.26 trillion (US$1.32 trillion), official data released Friday showed."

I guess they calculate GDP monthly up north. Dang, those Canadians do everything better than us.

Benjamin Cole said...

Commercial real estate looks very squishy.

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Matt Busigin said...

Canada is a clear victory for counter-cyclical spending.

It bailed out its banks (same per-capita rate as the USA) months before the US did, and the Federal & provincial governments have all run large deficits.

Ontario's public debt, for instance, is now 9x larger per-capita than California.

At the same time, its borrowing costs are very low, confidence in its economy & dollar near multi-decade highs, employment close to full, and economy roaring.

I think there is considerable risk in the housing & banking sectors, but it's clear that the economy & global markets have embraced the strong Keynesian measures swiftly taken during the downturn.

Jean-Pierre Deslandes said...

Yes things look great here in Canada, but… The main reason the economy has help up (so far) is growing household debt. Instead of deleveraging like our US friends credit up here has held up and grown. Canadian household debt has now surpassed the US.

Mortgage credit is structured differently in Canada where it is supported directly by the taxpayer. The state run CMHC (Canada's Freddie & Fannie) insures mortgages with less than 20% upfront which therefore allows banks to lend without taking any risk. This policy was pushed further in recent years and combined with low rates has triggered a debt binge of epic proportion. This growth is artificial and unsustainable.

Meanwhile the economy is restructuring, the manufacturing sector is shrinking fast due to lack of investment (not enough savings…) and the high $CAN driven by the world wide commodity and oil boom (some call it a case of the Dutch syndrome). Study after study show structural problems with our productivity and ability to innovate.

In short while it may still look good from the outside the Canadian economy is being hollowed out and is now running on the fumes of a great household debt binge.

McKibbinUSA said...

Maybe commodities prices will collapse leaving only US Treasuries and dollars as the only remaining "safe havens" for storing value globally (??!!??!!). Maybe US manufacturing will resume its leadership in the global economy during the coming decade through some miracle advance in productivity (??!!??!!). Maybe the US Congress will repeal Social Security and Medicare (??!!??!!). Maybe world peace will finally come to be (??!!??!!).

The current reality is that none of these outcomes is likely any time soon (!!!!!!!!)...

McKibbinUSA said...

PS: And certainly not ALL of the above (my previous post) are likely to occur at once -- affirmation without discipline is the beginning of delusion...

McKibbinUSA said...

PPS: The best dividend and rent-paying equities are a bargain right now -- likewise, commodities are as well -- as for Treasuries, beware...

McKibbinUSA said...

PPPS: The coming fiscal disaster looming in California will likely be the trigger for the monetary horrors still to come in the US -- everyone should keep their eyes on California (even as Congress and the Federal Reserve remain in denial regarding the full extent of the fiscal crises now unfolding in at least several US states) -- the horror...

Frozen in the North said...

First, Canada's economy is very different from that of the U.S. We have 5 large banks - very conservative management that only "flirted" with Sub-prime mortgages. Nearly half of Canada's GDP is resource based. Universal health care dramatically reduces corporations costs (sorry America), and consumes only half of what is consumed in the U.S. Our army is minuscule compare to that of the U.S. (both absolute and relative terms). In the mid 90s Canada "hit the wall" with debt to GDP near 100% -- we had no choice but to reform.

Canada is a terrible "example" for America because our economy is so fundamentally different.

As Deslandes indicated Canadians today are more indebted than Americans! We also own more guns (per capita) than you do. Home ownership is also higher and rising, but house prices are clearly in the overheating zone.

Benjamin Cole said...

"Universal health care dramatically reduces corporations costs (sorry America), and consumes only half of what is consumed in the U.S."

I often tell people I believe in free markets, but even more I believe in what works.

Several modern nations have universal health care that consumes about one-half as much of GDP as the US system, and delivers roughly the same results.

I am sure there are those who say the Euro-Canadian systems do not work--but the life expectancy figs, baby death rates etc say they do work, about the same.

It is an interesting topic.

BTW. Obama is not going to the Canadian system. He is taking us to a system even more expensive than the one we have now.

Frozen in the North said...


That's why Canada is a terrible example for America. Americans deeply dislike Canada's healthcare system.

Canadian don't want to be pulled into America's health care debate. BTW, the same applies for prescription medication...

TradingStrategyLetter - Weekly Summary said...

Nice work Scott and good comments.
The Cdn financial system is a 4 bank oligopoly who effectively own the country. They wanted to participate in the 2006-07 credit fiasco but were not allowed.
Canada and US are the biggest trading partners of each other. 70%of Cdn exports go to the USA. It is an incredible partnership for both parties.
The US buys more oil from Canada than anybody else.
Both countries share the longest relatively unprotected border.
At least 3 times more professional hockey is played in the US than Canada.
In the short term Canada has outperformed but cannot do so in the long run.
Canada needs a strong, healthy, and vibrant USA.
A strong USA is good for the world!

TradingStrategyLetter - Weekly Summary said...

Canadian health care is no great deal. Lots of Canadians seek out American proceedures. US/Cdn mortality rates are almost exactly the same. The US spends over twice as much per capita vs Canada - before 'free' health care. The taxpayer is getting gassed big time!

A premium Cdn to US dollar effectively closes all Cdn manufacturing facilities. It's also great for US border retailers.

Canada will record a record deficit this year. Consumer debt is at unsustainable levels (Cd$100,000 + pp). California debt pales in comparison to Ontario debt per capita.

Cdn housing is at least 3-5X's over valued as compared to US levels. Schiller recently made comments and was shocked at the dispairity.

It the US tanks Canada will be very close behind!

William said...

Canada was running consistent budget surpluses a few years ago. What happened?

Let me guess: Harper's lower taxes just like Bush's lower taxes wiped out the budget surplus that he inherited from Clinton ;~)

Sorry Mr. Grannis, I couldn't let it pass without commenting.

Scott Grannis said...

William: Sorry, but that doesn't wash. The main cause of the decline in tax receipts in both countries was not lower tax rates, but lower tax receipts, which in turn are largely a function of the strength of the economy, how many people are working, and corporate profits.

You may have missed my numerous posts showing that federal tax revenues currently are rising at double-digit rates, despite no tax rate increases, mainly because the economy is recovering.

And the majority of the deficit reduction achieved under Clinton was due to a significant reduction in defense spending relative to GDP, which in turn was followed by 9/11, but of course that may have been just a coincidence.

William said...

Mr. Grannis thank you for responding to my comment - which was serious although I followed it with a smiley face. Perhaps we should continue this privately since I would like to better understand your point:

"The main cause of the decline in tax receipts in both countries was not lower tax rates, but lower tax receipts,..."

But doesn't history show that lower tax rates, in and of themselves, result in lower tax receipts. I know there is an "economic theory" that they don't (which I used to believe in) but the evidence in both countries prior to 2008 was that tax receipts went down. No?

Email: Thanks.