Is the Canadian Situation Any Different?
Many Canadians, including the Canadian government and media, keep saying that the financial/economic situation in Canada is much better than in the US. It appears the Canadian financial system and banks (Bay Street) are weathering the storm better than the US, but the "real" economy (King/Queen Street) may not be. The Canadian stock market (TSX) has fallen at about the same rate as in the US and commodity prices (oil in particular) have plunged. The Canadian dollar is dropping rapidly, GDP is declining, housing starts and prices and falling, and the Canadian government is thinking about bailing out the auto sector in Ontario.
I would be interested in view of others on the situation in Canada and their forecast for the Canadian economy (and dollar) in the short and long term.
I am a Canadian who lives in the USA. In the past month I have moved all my investments into Canadian dollars as trades on the Toronto Stock Exchange. This is because I have no faith in the US dollar and the economy here will do much worst than Canada in the next 5 years. The only real issue with Canada right now is that 40% of it’s GDP is based on trade with the US. As US imports slow this will hurt Canada’s GDP. As for Canada’s weak dollar, this is because CDN dollar follows oil price and oil is now at $55us/brl (due to perceived weak oil demand and strong US dollar). Compared to last summers high of $140/brl and the dollar being 1.2 USD, the CDN dollar has fallen 30% but oil has lost 60%. Considering that, the CDN dollar has done quite well.
Why I like Canada:
1. Its banks maintained old-school policies where it didn’t securitize and sell its debts like US and European banks did. The banks therefore kept enough capital to cover the loans they made, making them stay solvent. Their lending policies have been conservative and the Canadian banks are now reported as the strongest in the world, as reported by TD bank.
2. Canada has not experienced a housing bubble as in the US and Europe. The bank of Canada has kept a modest interest rate and banks did not lend out risky loans to people that didn’t have jobs. People in Canada that buy houses can actually afford them. Also, Canadians are liable for their mortgage debt. In the US if you stop paying your mortgage the bank will give you a notice of default. If they can’t rework your loan they sell your house at current market price. If they get a price less than your mortgage then you aren’t liable for the debt difference. Due to a bill passed by G.Bush last Dec you are forgiven on all that debt that wasn’t paid back by the sale. This promotes people under water on their houses to just stop paying. In Canada you are not forgiven on any debt. THerefore I don’t think the housing market will crash. THe market has softened though. This is mainly in places like Edmonton where house prices were high due to Oil money in Fort McMurry. Now with oil down 60% and new oil-sand projects/developments getting cancelled people in oil and oil related business are hurting. As a result you will see house prices come down due to their inflated prices during the inflated oil economy.
3. Canada has a balanced fiscal budget. When oil was at $100/brl they had a budget surplus. They do have some debt but that debt has been reduced by payments on it. With the current slump in oil prices the gov’t may have a fiscal deficit in the next year, but that will change when oil goes back to $80-90/brl. I expect higher oil prices next year.
4. Canada has a trade surplus. This means it sells more than it imports. This means the country makes money and is able to build a cash reserve for investment or stimulus packages.
5. Canada doesn’t have a mountain of debt for its social security (aka Canada Pension Plan) or Medicare. The US owes its citizens on the order of $45,000,000,000,000 for these entitlement programs. Canada won’t be defaulting on any of its debt as the US will be doing in the coming years. When the US devalues its dollar I am hoping the CDN dollar is not simultaneously devalued. Word is that all countries may devalue their currencies simultaneously in order to discount the world’s debt burden. I would still buy some gold if I were you.
The GDP in Canada right now appears they may avoid a recession. I still think recession may occur, but it could be short lived and not deep. In contrast, the US recession may become a depression and last several years. When I say depression I mean people taking their earnings to pay down their debts rather than spend it on crap imported from China. This will depress the economy here. THis is what the US gov’t is trying to avoid right now, by trying to push more credit on the over-debt-burdened consumers. It’s not going to work.
Because Canadian gov’t does not rely on debt (selling gov’t treasuries) for day-to-day and annual operations it doesn’t have to worry about interest rates as much. The US must sell ten’s of billions in US t-bills to fund its operations. China is now the biggest consumer of US debt. Now that China has a 500 Billion bailout package on its table it, like all the other countries, now have stimulus packages to fund. They will likely use their US cash reserves (accumulated due to trade imbalance with USA) to fund their stimulus packages. That means fewer US dollars to recycle in buying US treasuries. This will force the interest rates up on US t-bills. This is more financial burden on US gov’t. To keep interest rates low the US gov’t will print dollars to buy its own t-bills and this is like a snake eating it’s tail. This will destroy the US dollar. If the gov’t doesn’t do this then the US will have to deal with high interest rates while trying to climb out of the worst recession/depression since the great depression.
For the above reasons, most of my savings are now in CDN dollars and due to future interest rate problems and potential for higher taxes in the US I have my investments in Canadian companies.
(Edit:) It wouldn’t be too worried about a weak CDN dollar. This is very good for companies in Canada that need to export. It makes the goods cheaper to other countries. Conversely, a very strong US dollar is bad for the USA right now. It makes American exports expensive for everyone else.
Also, the US dollar is only strong now because everyone has to convert their assets to dollars to pay off their US denominated debts. When all this deleveraging is over the US dollar will fall like a stone.
In light of your take on Canada’s economic situation, what would you recommend an average American, like myself, without vast sums to invest or shelter, do to either protect his asset value or invest in Canadian enterprises?
Right now the banks aren’t paying enough interest to cover inflation. There is a risk of the US loosing its high credit rating and the dollar becoming hyperinflated once this credit crunch is over. Saudi-Arabia and Iran have recently purchased billions of dollars in gold. I believe we could be on the eve of US dollar collapse. Maybe… maybe not. If you want to go the least-risk path then I suggest taking at least 1/3 of your savings and buying gold. Not jewlery. But physical gold bullion. If you have a brokerage account and do stock trading I have bought some Canada Central Fund (ticker = CEF) which is ownership of a fund that is 90% gold and silver bullion that is stored in an underground vauld in the Canadian Imperial Bank of Commerce. I like it because you can get it at around $9 per share and it is in canada. It also qualifies as a mutual fund investment for tax purposes. I also own some of SPDR Gold Trust (ticker = GLD) which is American. Both of these are not as good as posessing physical bullion because these are someone else’s liability to pay you. I have more faith in the Canadian one though.
My focus is to own valuable assets rather than hold US dollars. My focus has been buying shares in Oil companies with low debt and a long history that are profitable with $50 oil. I also own mining and agriculture stocks. As prices tank I am buying more. However, don’t spend all your money yet. Take small bites during the down days.
I recommend you read both books by Peter Schiff. You can get them on Amazon with free shipping.
The "bull moves in a bear market" is basically an update to the first one "Crash Proof" If you want a quick read then get the bull moves one. If you want more depth of today’s economic problems then get both and read Crash Proof. This will help inform you on what to do with your money. Basically the message is get out of the US dollar and buy foreign stocks on foreign stock exchanges. Low risk Conservative stocks that give good dividens. That way you get paid to hold the stock (more than the 1% you get at the bank) while the stock market trades sideways for the next couple years. For this reason I too like Canadian energy income trusts or Utility income trusts that pay a healthy 7% to 15% annual dividen.
As for some good Canadian stocks traded on the NYSE you can investigate:
Barrick Gold (ABX)
Silver Wheaton (SLW)
and for the energy trusts you’ll have to go to the TSX for that. Some of the ones I own that I would suggest you look at are:
SIF.UN (utility for nat-gas distribution to peoples houses. No one’s turning off the heat anytime soon)
YLO.UN (yellow pages, not an energy trust.. but should be recession proof)
Another I plan on buying in the future are:
VET.UN <this one is quite conservative and the dividen it pays out is a lower fraction of its overall cash flow. Therefore I believe there isn’t risk to the dividen being cut.
Ones I am investigating are:
To get these income trusts (*.UN) you’ll have to trade on the TSX. You’ll need a brokerage account that allows global trading / to convert US dollars to CDN and then trade on the TSX.
Husky Energy is also a good integrated oil company I own with many deposits across Canada. You’ll have to go to the TSX for it. It’s HSE (or HSE.TO on yahoo.)
I am glad that the Canadian topic is generating some interest on the CM site, very hard to find this kind of info on Canada. I live in Calgary, Alberta and used to work (up until last year) in the oil & gas sector working on a variety of projects and have some views that from the inside that some may find helpful.
I agree that bearing01 is correct in saying that Canada is better positioned than our neighbour (certainly in terms of our government debt and financial institutions) but I think there are still some serious concerns up here and I am personally bracing for some challenging times at least for the next couple years. Here are the following reasons I people still need to be choosy when looking to invest in Canada.
First, as we do export mainly to the US, demand for the canadian products from the US are going to fall off a cliff, we of course will not be sheltered from the consequences. Ontario, our most populous province is going to receive for the first time ever, equalization payments from the federal government due to a crash in the manufacturing sector. I do expect that in due time, those raw materials and products will be sucked up by the rest of the world as we do live on a finite planet and the demand for resources will remain and grow but is going to hurt for a while.
Next, we have had a housing boom in Canada, although maybe not as great in the US, but here in western Canada we have seen an explosion in housing volume and prices. Our house in Calgary doubled in value in less than 2 years, prices are coming back down substantially (about 10-15%) but I think they have much further to fall. Even in small towns in BC that have no connection to the oil market have seen there property values increase over 100% in 2 to 3 years. And we do have the same consumer mentality here where people have refinanced their homes many times sucking out all of their home equity to buy cars and vacations. Many people I know have more than one house, (some rent one out others have a vacation house or condo) because everyone wanted to cash in on the increase in property values, not so great now that property values are decreasing. The home builders have thousands of houses vacant and can’t sell so we are hearing "no money down and pay less than your rent" all over the radio just to get people in the door. I don’t think people can commit mortgage fraud easily but a lot of people will be hurting if the property prices drop much more.
The biggest thing I see though is the oil and gas boom that has fueled our surpluses and prosperity. I worked on many of these project and I don’t see how most of these new projects have positive net energy. The crash course demonstrated this beautifully, the quality of the resources are diminishing greatly and the oil and tar sands of Western Canada is the perfect picture of this. They have to remove 2 tonnes of oil sands in order to get 1 barrel of oil. They are pumping 2 to 5 barrels of water into the ground never to be recovered again in order to get 1 barrel of oil out of the ground. It doesn’t stop there either, then they have to upgrade and refine the product numerous times before it can be used. People often quote old stats saying that the oil sands become profitable around $60-70 mark but I don’t think the quality of the resources is getting better (we always go for the best and easiest first) and the costs to recover the resources are mounting. If we ever get real environmental controls (water, emissions, land reclamation) implemented these vast resources will be bust. The only hope I see is if they can find a real sustainable technology to get the oil out without destroying everything in its path…it is a complete mess up north and there is a major resistance to more development from locals and Aboriginals. I worked on a high pressure sour gas pipeline project that ran through some small towns and we did a lethality study on it and if there was a significant leak people 30kilometers on either side of the pipeline would need to evacuate and over 500 people would die…would you want that in your backyard? that is the kind of resource is being pulled out of the ground and what much of Canada’s prosperity is built upon, something to think about.
Well that is my take on things up here…I have a degree in risk management in finance, good to see it coming to use, albeit not in the way I thought it would.
There is another Cdn fund for those interested in bullion. It’s called the Millenium Bullion Group and offers a RSP eligible mutual fund that holds fully allocated (real) bullion (equal portions of gold, silver, platinum). The bars are kept by the Scotiabank. They also have a new program for bigger investors to buy whole bars and they store it. If you want to "own" the actual metal, it’s a good plan.
My wife is Canadian and we are currently living in California. We’ve been talking about moving to Canada since we learned about PO, so this is something I’ve thought a lot about. Thanks to bearing01 for the excellent summary of the differences between the US and Canadian economies. That was more or less my "sense" of it but it is very helpful to have it laid out so clearly.
Thanks for the info. You’ve given me a lot to look into. I was already looking into Schiff’s books.
I’m Canadian, been in USA for 11 years, Wife is American, we have two young boys. I’ve always had a sentimental desire to return to Canada, before marrying an American I assumed I’d be down here five years, max.
Have the unfortunate double-whammy of hitting my midlife career crisis at the same time this other stuff is hitting the fan; weary of my 20 year career in software, but know I can’t possibly change my career without cutting my (ridiculous) six-figure salary in half (at least). I see people doing "real, significant work" making a fraction of what I make and feel like crap.
Anyway, that’s my personal albatross :-).
Anyway, I also wonder if getting my family to Canada would be a good move at this time. Closer to family, somewhat healthier economy, though ultimately still most of the same flaws and inexorably tied to the fate of the USA, I fear.
"There is another Cdn fund for those interested in bullion. It’s called
the Millenium Bullion Group and offers a RSP eligible mutual fund that
holds fully allocated (real) bullion (equal portions of gold, silver,
platinum). The bars are kept by the Scotiabank. They also have a new
program for bigger investors to buy whole bars and they store it. If
you want to "own" the actual metal, it’s a good plan."
I work for the above company Bullion Management Group. We are having a webinar December 10th with Chris Martenson as the speaker.
For the Americans on here you need to get money into physical bullion and have it stored outside the country. We can do this. Close to spot prices, stored and insured. The USD is going to collapse, if you have interest in 32 oz bars 100 oz, 400 oz bars respond and I can get in touch with you. The company is A-rated, out fund has been around 6 years. But the big bars are new and an excellent way for you to protect your wealth outside the country and outside the governments ability to confiscate the bullion.