I can’t help but think that the Canadian dollar is an accident waiting to happen.
The currency has managed to rally all the way to about 76 US cents and change, which seems surreal, but really all that has happened is that the loonie has moved in lockstep with all other currencies in the recent broadly based downdraft in the U.S. dollar. A 20-per-cent pop in commodity prices off their lows has also helped, but it’s mostly on the back of a supply squeeze than any durable recovery on the demand front.
I marvel at the legions of Bay Street economists laying claim to how great things are in Canada. I think they are somewhat delusional. Global investors surely see what’s going on. Non-residents have been net sellers of Canadian equities for nine months in a row, a cumulative run-down in their exposure of some $37-billion. Only during the 2008-09 Great Recession have we seen foreign investors dump Canadian equities to this extent and for so long.
As for “bricks-and-mortar” foreign direct investment, well, that is drying up as well – the flows here have shrunk more than 10 per cent in the past four quarters to the lowest level in five years. Not very encouraging for a country that has been running current account deficits for 11 years running, meaning that Canada is reliant on foreign capital and foreign confidence.
Now it appears the Prime Minister is set to embark on a massive fiscal expedition (climate change, pharmacare, universal basic income – all financed off the central bank balance sheet) at a time when the federal debt-to-GDP ratio has already soared, in short order, to nearly 50 per cent from 30 per cent. When one recalls Canada’s history of running structurally high “twin” current account and budget deficits through the 1980s, being long the Canadian dollar right now is probably the most dangerous thing anyone can do.
Then we go to the futures and options pits on the Chicago Mercantile Exchange, and what do we see? That the non-commercial accounts are piling up on their bearish bets on the loonie even during this most recent round of Canadian dollar appreciation. The net speculative short position has doubled since July 28 – from 12,818 net short contracts to 23,139 as of Aug. 4, and then to a two-month high of 28,676 contracts in the week to Aug. 11. At the same time, these forex players are neutral on the other commodity currencies such as the Australian dollar and the New Zealand kiwi – and even positively positioned on the Mexican peso.
The legacy of the past five to 10 years of Canadian economic and financial performance is hardly worth boasting about. Canada went into this recession with a five-year trailing GDP growth rate of 1.2 per cent annually, about the weakest ever. Considering that population growth, courtesy of record-breaking international immigration of more than 300,000, averaged 1.25 per cent a year, that means that real per capital GDP actually contracted fractionally over a full five-year period. The country’s economic leadership has been cannabis (average annual growth of 10 per cent), condo construction (3 per cent) and government (2 per cent). Meanwhile, business capital formation has declined at an average annual rate of 1.2 per cent, industrial production has barely expanded, at a pace of a little more than 1 per cent, and export volumes have practically stagnated.
With there being no capital deepening this cycle, and with employment and output growth matching each other at these dismal 1-per-cent-plus growth rates, productivity in Canada has not expanded one iota in the past half-decade. All that has expanded are top marginal tax rates, the fiscal deficit and the Bank of Canada’s balance sheet. Somehow coinciding with the current government that replaced the prior Stephen Harper era.
Meanwhile, the expansion of debt at all levels of society has left the country extremely vulnerable – not to interest rates so much as the prospect of an economic relapse. The principal has to be repaid too, not just the interest. Canada’s total debt-to-GDP ratio has soared to a record 364 per cent – up 20 percentage points in the past five years and 70 percentage points higher than it was a decade ago. There is a household credit bubble of historic proportions where aggregate debt in this sector is now 102 per cent of GDP – it was 90 per cent a decade ago. And much of this credit used for Canada’s prized asset – residential real estate, where the ratio of total outstanding value to personal disposable income has soared to an unheard-of 436 per cent. It has shot up 100 percentage points just this past decade in what is arguably the biggest housing bubble of all time.
Do the pundits out there realize what the “wealth effect” on spending would be if we ever did go through a major correction in Canadian home prices, let alone a bear market? The corporate sector is in a debt bubble of its own – outstanding liabilities are at 75 per cent relative to GDP compared with 68 per cent five years ago and 56 per cent 10 years back. Instead of this money going into business investment to bolster productivity, the proceeds went to buy back stock and provide the illusion of an earnings cycle (earnings and earnings per share aren’t quite the same thing).
Imagine that. An economy built on credit, cannabis and condos. No capital formation. No export growth. No productivity. You still want to invest in this currency? Why? Especially given the tectonic shift in the nation’s capital: a new and untested central bank Governor and a new and inexperienced Minister of Finance.
And then there’s the Prime Minister’s move to prorogue Parliament, and the prospect of a confidence vote when the House returns – what if his minority government loses? Is Canada ready to have a federal election amid a pandemic? The confusion and uncertainty from that alone is reason enough to shy away from the loonie, though it should be acknowledged that the odds of a contested election result stateside this November shouldn’t make anyone too enamoured of the greenback, either.
The obvious answer is to own the currency that is a perfect hedge against political uncertainty – gold.
David Rosenberg is founder of Rosenberg Research, and author of the daily economic report, Breakfast with Dave.
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