Canada: A Safe Haven for Foreign Investment

If Davinci had kept making copies of the Mona Lisa, would they have increased in value or decreased? My preteen kids can answer this one, yet highly sophisticated currency traders seem to have trouble with the concept. Somehow, the USD has enjoyed the privilege of making my kids – and common sense – wrong, at least since it became the world's reserve currency. But all good things must come to an end...and our perceptions of “safe” investments are certain to change when it does.

The US has benefited greatly from its unprecedented run as the primary global reserve currency, but with the amount of printing their massive deficit now requires, alternatives are inevitable. The Chinese have slowed their printing and continue to refuse to float their currency. Europe is in the same boat as the US and will continue to print the EURO to bail out the floundering PIIGS (Portugal, Ireland, Italy, Greece and Spain). The Japanese are worried about deflation and so they are in the same predicament.

Canada has also been printing frantically in an effort to keep pace, but it will come woefully short of maintaining parity with our neighbors. Although the policy here has been to print in hopes of maintaining some order in the currency markets, it is impossible to avoid the long-term, upward pressure of our dollar. We may have mostly avoided the carnage our “big brother” to the south has been enduring, but with inflation looming the printing is set to slow.

That being said, Canada has the strongest banking system in the world, among many other advantages. Canada avoided all of the follies of over-lending, is strongly resource-backed and based, and is politically secure with a convenient proximity to the largest market in the world. Russia, for one, has recently realized the long-term stability inherent in a developed Western country boasting the lowest debt to GDP ratio in the G7. In an unprecedented move, the Russians recently declared that they would be holding some of their national reserves in Canadian Dollars. Movements such as these are significant when taken in the context of Canada’s relative economic size.

As this article from the CBC illustrates, many other nationalities have begun pouring money into Canada:

Foreign investors flock to Canada

With inflation fears looming – particularly in the United States – investors are once again seeking the insulation offered by hard assets. Gold tends to be the default commodity for circumstances such as these, but its commonly-held derivatives are still denominated in USD, thus retaining the risks posed by currency fluctuations. Owning US real estate, another hard asset alternative, leaves the investor open to both risks of the devaluation of the dollar and the still-uncertain American real estate market. The dollar correction alone will significantly outpace any interest income on savings or reserve cash with the inherent protection of a hard asset, if you realize that Canadian commercial real estate may well be the safest long term investment going for US investors familiar with the field.

Commercial Real Estate in Canada has weathered the global financial storm more than admirably with only scant evidence of any Power of Sales (foreclosures) and is now set to begin rising. The sector did not experience the boom in anything other than slow moderate growth from the mid nineties through the early part of the 2000’s and is now set to get its’ moment in the sun. Banks in Canada, which avoided the sector with anything other than lower leverage, are now dipping their toes into the market and with coffers brimming (RBC, Canada’s largest Bank, has a tier 1 capital reserve of app. 14%) the market is set to take off.

If you are in the sector or have clients sitting on cash making peanuts, I can think of no better way to unlock that cash into a higher and safer return with excellent up side!

Greece's Debt - But Europe's Problem

My beloved Greece is burning.

Well, not quite yet - but watch out. This is a proud nation of intelligent philosophers and closet politicians who are acutely aware of the political winds and what it could mean for them.

In North America, changes in our lifestyle have come far more gradually than they did in Greece. Real wages have remained flat since 1980 (in truth they are down, had CPI had been accurately reported). Furthermore, we all know that our grandfather - who had a then-good job in middle management or on the shop floor - was able to have a house, a car, family vacations and perhaps a cottage while our grandmother stayed home taking care of the household.

Today, with both spouses working, they can only hope to have a fraction of what Grandma and Grandpa had. But for us, that lifestyle is a relic of a bygone era and rarely front and centre in the national psyche. In Greece, however, those changes didn't take 50 or more years - they swept the country in the span of half a generation.

When I first went to Greece 17 years ago, I recall asking my aunt how big a mortgage she had. She asked me what that was. Thinking I had made an error in Greek, I translated it to the more descriptive "a loan on your house". She responded in shock and horror, "Christos kai panagia, pios kani tetio pragma!" The loose translation is "Jesus, Mary and Joseph, who would do such an awful thing!".

Also noteworthy was that while most of my relatives worked, they still were able to take time off work to entertain us at the local bars and restaurants every night. Well, 6 years later I went back and things had begun to change. People had begun sinking into credit card debt and mortgages were becoming more of a household word, although we could still go out. In fact, I recall going to dinner at a restaurant by the seaside on one of the islands. Six adults stuffed themselves and drank copiously. I decided to play some shooter and picked up the tab...all $65 CND of it (tip included).

Fast forward 5 years later: we went back to the same restaurant with essentially the same crew and the tab came to 300 dollars! I split that one. With all the scheduling and work commitments it was hard to get that one night out and "I would love to see you this week but work is hectic and finances are tight" was the answer from cousins and friends to requests to get together. From almost the day the EURO was introduced, they experienced 200 to 300 percent inflation on everything but wages, which had been locked in at par. They were beginning to really feel the debt squeeze.

My aunt, who had been mortgage-free, was forced to take one so that she could afford to buy groceries and help her kids a little bit. Her savings, which had been ample prior to the "merger", were now woefully inadequate under the new regime. Unless you scratched the surface, the changes looked for the better. They drove newer cars, had better TVs, and less young adults lived at home. But it was all financed by debt. In the end, they had given up their enviable lifestyle and their inheritance for a newer car, a new tv and a few less years under Mom and Dad's roof...and a few pairs of designer jeans.

As a "poor" nation, pre-Eurozone, Greece had virtually no national debt. Since then, the debt has swelled to 300 billion dollars - 50 billion of which is rolling this year - and is now critical. They have been overwhelmed by immigration, and many Germans, French and Brits have bought up prime real estate at cents on the dollar, not to mention the binging on the likes of Olympic Airways. The investment capital came, but the jobs never showed up. In fact the youth of Greece is now known as the generation of 600 - named for the prevalent monthly salary. Mere peanuts that they see no hope of exceeding...ever.

The new austerity measures, that I had the privilege of previewing, are a model that any progressed Western economy would be happy with. In a Greek context, they are laughable. Unfortunately, the Germans couldn't see that. Their attempts to impose such measures on people who know better - and are well aware of their crumbling lifestyle - will end with Greece telling them ENOUGH. There will be some changes to the public sector and a few new rules, but the rest of Europe will soon see that Greece's inevitable unrest will threaten to spill over to their neighbourhoods - and that they'd be better off dropping the strict loan conditions.

I see this as a growing pain for Europe, but they will have to understand that there is no middle ground. They will have to come to grips with the fact that Greece is akin to California - an essentially bankrupt state that is fine as long as the Fed will take care of it - or as Canada sees has-nots like Newfoundland. If the understanding that unity requires balance doesn't come shortly then not only will my beloved Greece burn, but the nascent Eurozone is doomed too.

A German politician recently said that the debt-ridden Greeks should sell their islands and the Acropolis to raise funds. He will soon have the collective finger raised by the Greek people facing squarely at Berlin...and Merkel will just cut the cheque.

OXI

A Lifeless Remission?

The latest US jobs report is out, and again, the phrase "jobless recovery" is being thrown around by politicians and journalists alike. This time, however, the talking heads are in rush to claim that the latest stats show that the recovery won't be jobless for long...or so they hope.

The American economy lost 36,000 jobs in February, but this is significantly less than had been predicted. Expectations were low in part due to the recent US snowstorms, although negative effects from the harsh weather didn't materialize. In a country whose health depends heavily consumer spending, more employment means more growth...so is it time to get optimistic?

Good News That Employment is Down

"It's good news. Everybody was doubting the sustainability of the U.S. recovery without more jobs. That's why this report is so important," said Stéfane Marion, chief economist at the National Bank.

Once we see the numbers for March, said Gault, the job gain could be over 100,000. Private payrolls should be growing in a sustained way from now on, he predicted."

Predicting more job growth in March? Sounds great...however, where will these jobs come from, is the question. There is speculation that when the all of the snow melts from the recent blizzards, there will be a surge in employment. A little odd considering that the report refuted that the snow had any impact on job loss, so why would its absence cause a boost? If anything, there are going to be a lot of unemployed maintenance and snow-removal specialists out there. So here's the real answer:

Snow Didn't Skew the Unemployment Rate, But the Census Will

Around half a million temporary census workers will begin being added to the American payroll. Similar to that mysterious service-sector employment boost that happens each year around November and December, these jobs are part-time, transient, and pay low wages (for the Census worker, a base hourly is around $11). As the above article discusses, these jobs will do virtually nothing to aid the economic recovery or add to the average income of the American worker. Nothing, that is, aside from masking true unemployment figures.

The recession has been declared over. The fact that 70 percent of the American GDP is based on consumer spending - and the fact that 16 percent of Americans are unemployed or underemployed - seems to be inconvenient to the desired message that we are out of the woods. And so the the term "jobless recovery" was coined. I wish I was as talented as the US spindocters. It's like using "lifeless remission" to describe a cancer patient wasting away on life support.

Just Good Sportsmanship

Like many Canadians, my Olympic "hangover" is finally starting to fade. I've stopped aimlessly flicking around TV channels wondering what to watch now that the Games are done, and I no longer feel the urge to wear a toga made out of the Canadian flag...for the most part.

We couldn't have asked for a more thrilling, heart-stopping finale as we battled the American hockey team into overtime, ending with one brilliant goal that not only won us the game, but the record for Winter Olympic medals. However, it made me wonder...what would that game have looked like without a rule book?

Throw out all of the regulations, and I expect there would have been few players left standing by the final minutes. In a free-for-all, no doubt Sidney Crosby would have been crushed into the ice long before the first period was up. In fact, without any rules at all, maybe he'd have been mortally wounded by American gunfire in a mid-ice shootout.

Of course, no one suggests that hockey would be improved by anarchy. It's entertaining enough with penalties and referees, and sans gunfire and baseball bats to the head. But many who support rulebooks in sports want them burned in business. We've all seen how well that worked out. So is Obama going to bring back the penalty box?

Obama Proposes New Bank Regulations

I've long been critical of Obama for humiliating himself and the American public by giving away trillions to the financial sector under TARP without conditions, only to have to beg the banks the people saved to pretty please start doing their part to aid the recovery. Namely, quit hoarding capital and start lending it out to the very Americans who saved your asses. TARP was missing a rulebook.

Now, it appears he's starting to see the need to push harder for reform and regulation...

"Under the Obama proposal, banks that take federally insured deposits or have the right to borrow from the Fed would be prohibited from owning, investing in or sponsoring hedge funds or private-equity firms. "You can choose to engage in proprietary trading, or you can own a bank, but you can't do both," an administration official said.

The president also called for expanding the reach of a 1994 law that forbids banks from acquiring another bank if the deal would give it more than 10% of the nation's insured deposits. He would expand that limit to cover other types of funding—such as banks' short-term borrowing from financial markets—and perhaps put a cap on the share of assets any one firm could hold."

Will it be enough to prevent another crisis?

I'm not an uncritical supporter of regulations. As a Canadian, I've suffered through their inefficiencies: the Kafka-esque bureacracy, the wasted time, the sometimes unthinking and unfair application of the rules. However, they also proved to be the savior of the Canadian economy.

Our Chartered Banks fought for years to merge, saying "bigger is better". They also fought to be able to “compete” by eroding away their Tier 1 Capital requirements as their European and American counterparts had. It was those rules that they fought tooth and nail, that not only saved them and the general economy, but that allowed them to achieve the title of the world’s best banking system according to the World Bank.

Even considering the Obama proposals, American financial leaders are still bringing pistols onto the ice and using a two-foot wide net, and another crisis will happen. We've shown how to prevent catastrophe through judicious regulations, but unfortunately, Canada does not dictate what happens on the world stage. The U.S. does.

For now.

Is Inflation Looming for Canada?

All signs point to yes.

"The Bank of Canada is on heightened alert for inflation and a stronger recovery than it had bargained for.

The central bank continues to hold interest rates at historic lows but is signalling to markets that inflation is running slightly higher and the economy, driven by "vigorous domestic spending" and a gradual recovery in exports, is expanding somewhat faster than it had projected, a juggling act for Governor Mark Carney.

Mr. Carney and his fellow policy makers at the Bank of Canada are now under more pressure in terms of how they time the first interest-rate hike after a lengthy run at near zero, economists say, and the next reading of inflation, due March 19, could be crucial to their thinking."

Inflation Set to Rise Faster than Expected

There are many other contributing factors to this impending problem. The virtual moratorium on personal lending over the last year allowed the banks to build up vast capital reserves and report record profits...until the government stepped in (late is better than never) to push for increased lending under the stimulus plan. Now Canada's financial sector has too much money without enough places to put it - and that spells inflation.

Major Bank Acquisitions Just Got Harder

I recently wrote a post (view) about how Canada's OSFI, the governing branch for our financial institutions, has been quietly introducing new rules that will have dramatic repercussions for how our banks do business.

Yesterday, a very interesting new change was reported by the Globe and Mail...

"Canada's financial regulator has told banks and insurance companies they must finance any big takeovers by issuing new shares, making major acquisitions more difficult just as the country's banks are at the height of their international prowess.

Issuing equity in a big deal would risk angering shareholders because their stock would be so diluted. At the same time, the banks find themselves in a state of limbo as they await the outcome of negotiations among global regulators on standard minimum capital requirements."

Takeovers Grow Difficult for Banks

It's another example of the OSFI's obsession with bank capital, despite it being at record levels:

"UBS analyst Peter Rozenberg has estimated Canadian banks would have about $40-billion in excess capital in 2012 over and above a Tier 1 ratio of 10 per cent.

'The Canadian banks overall are well positioned for the expected changes in regulatory capital requirements that are being discussed on a worldwide basis,' CIBC's Mr. McCaughey said."

Even if global minimums for bank capital are increased by the Basel Accords as anticipated, Canada is extremely well-positioned and likely to exceed any new requirements already. Which raises the question - are our banks being overly cautious to the detriment of Canadian economic growth?