â€œIt is a serious question. We are no longer talking about a single country having a big Depression but the entire world.â€ Â Â Â Â Â Paul Volcker
Where to turn? Each day we are bombarded by stories of bombings, plagues, genocide, civil war, famine and hardship. On the economic front the available information is increasingly evoking memories of the disaster that is now known as the Great Depression.
Countries that were once regarded as the bulwark of the Postwar Monetary System now seem to be engaging in a high stakes game of chicken: the Fed is actively debasing the dollar; the Bank of England is talking sterling down; the European Central Bank is buying the bonds of Zombie EMU Sovereigns to stave off the collapse of European Banks and destruction of the Euro; and on September 15th the BoJ carried out oneÂ trillion yen worth of FX sales and has threatened a follow on operation. Russia, Brazil, China and other South East Asian Nations are also actively playing the debasement game; even staid old Switzerland has been accumulating FX reserves at a torrid pace.Â Â Â Â Â Â
There is little confusion over the reasons for this tilt into head-over-heels competitive devaluation. Global demand has shrunk, and all countries are now vying for a slice of a shrinking export pie in order to maintain domestic income, employment and taxation levels. Hence, this outbreak of currency exchange conflicts is bound up with mounting signs that the global economic crisis is systemic, rather than merely cyclical, and aÂ growing pessimism that a genuine recovery is not in the offing.
In addition to general economic malaise many developed countries are experiencing a demographic crisis. Coupled with the fact that of many of these countries have been simply living beyond their means and are now facing debt crises, an adjustment to reality seems inevitable.
In today`s market environment the key question for investorsÂ may beÂ rapidly becoming one of capital preservation rather than return maximization. WhereÂ do youÂ go when everything seems to becoming apart at the seams?
The Great White North Beckons
Private Investors and risk aware investing institutions could do worse than consider Canada as a destination for their portfolio assets.
Canadaâ€™s Financial Institutions are well-capitalized, well managed and well regulated. The economic management being delivered out of Ottawa is very responsible with Mark Carney at the helm of the Bank of Canada and Jim Flaherty as Minister of Finance. Indeed, the Bank of Canada stands out in recent monetary history as one of the few central banks that did not succumb to the blandishments of Helicopter Ben and engage in Quantitative Easing, thus it has avoided the inevitable pollution of its balance sheet with non-traditional assets, and the loss of policy flexibility that the Fed and many other central banks are now facing.Â
Canada did experience a form of sub-prime mortgage crisis in 2007 and all of the sub-prime lenders and securitizers went bust and investors lost about $20 billion. But this has alreadyÂ blown over, and at the time it barely registered in terms of impact on GDP.
Public Finances are in great shape. Despite CAD 55 billion of stimulus measures implemented to kick-start the economy, Ottawa’s budget deficit is temporaryÂ and thereforeÂ the country has no structural deficit. From a government debt management standpointÂ the only trouble spots are the finances of Ontario and Quebec, but these are issues of a manageable dimension.
We have the most energy resources of any country in the world, a hugely productive agricultural sector; mining; humungous fresh water resources, leading edge high tech industries, low crime rates and we score very low on the corruption index. We have all the wood, concrete, copper and steel that we could ever possibly needÂ to build homes, factories and skyscrapers. All of the 2008-2009 job losses have been recovered up here. Thus our unemployment rate at just a shade over 7.0% compares most favourably with that of our southern neighbour which on the kindest basis is brushing close to 10%.
Politically we punch above our weight on the international scene, being a long time member of the G-8; the G-20 and about to take up a seat on the UN Security Council. Our men and women of the Armed Forces are extremely highly regarded asÂ probably the best Peacekeeping Forces in the world by both friend and foe alike.
Certainly there are some clouds on the horizon.Â Household finances are somewhat stretched in sense that theÂ private sector has accumulated a large debt load that will need to be reduced in relation to income. Health care costs continue to weigh on public finances and some reform or user pay option will likely need to be introduced in order to restore sustainability. Another medium term challenge is to re-direct our trade relationships away from the US becauseÂ that economyÂ is going to be in slow growth mode for the foreseeable future and we donâ€™t want our wagon tied to a sputtering locomotive.
At present the economic numbers are starting to soften in Canada and it looks like the housing market is going for a dump in the near term. No matter, a downbeat economic pictureÂ describes theÂ outlook Â for pretty much most developed economies at present. On a relative basis, as noted above Canada can be expected to outperform because ofÂ our strong fundamentals, robust finances and exemplary economic stewardship. All countries will have to weather the coming economic challenges and uncertainties, including having to cope with the consequences of the monetary policy experiment being run by Helicopter Ben. Some countries will fail to manage their affiars and possibly lose a measure of independance as a result,Â most countriesÂ Â will suffer additional great hardships and privations. Canada, for its part promises to continue as an island of relative stability in an increasingly hostile and uncertain global economy.