Saturday, September 29, 2018

Canada’s tendency to self destruct is as bad as Trump’s Isolationism

I am increasingly disenchanted with the North American markets.  I think the U.S. economy long term is not driven by the Trump Aberration and that its current strong economic growth results more from a combination of demographics (millennials), better saving habits – a much less indebted U.S. consumer than the Canadian consumer - and the effects of U.S. central bank management over the last decade. I also think that the previous administrations of Obama and Bush are more to be credited for current economic performance than Trump. And… let’s not forget that the U.S. oil boom contributed considerably to U.S. prosperity and made it much less dependent on oil imports from the Middle East.  Finally, the U.S. does typically better during times of low commodity pricing.

But a lot of that is now coming to an end. There is the worrisome yield spread or ‘inverted yield curve’ situation. We’re at or nearly at such a situation. An inverted yield curve has been one of the most reliable predictors of recession. So, don’t be surprised if there is an economic and stock market downturn within 12 to 18 months. Especially when you include the fallouts of the trade wars and a collapsed NAFTA that neither Canada’s Liberals nor the Trump Administration seem willing to sign.

If a failed NAFTA doesn’t result in a subdued Canadian economy, then Trudeau’s Bill 69 will. The latter is as bad if not worse than his Dad’s NEP which nearly destroyed Canada’s oil and gas industry. It seems the Liberals are intent on destroying the resource industry and making Canada into an economic back water. A Venezuela of the North. I would like to be positive on Canada’s prospects over the coming decade, but instead, I turn increasingly more negative about its economic outlook. I see a very East Canada centric economic wreck with a severely disgruntled Western part of this once great country. The West experimented over the last five or so years with NDP governments. In the previous decadedSaskatchewan learned how disastrous the NDP was for its economic and population growth. That reversed with Brad Wall and Saskatchewan experienced significant growth until recently. There is a good chance that Ontario, Alberta, Saskatchewan and British Columbia will have conservative governments over the coming 5 to 10 years. But will that be enough to keep Canada together? Alberta is very disgruntled, and I don’t think Saskatchewan is that happy either.  The interior of BC and NE B.C. are conservative and disgruntled but the masses in the densely populated Fraser Valley dominate that province politically. That is what makes B.C. so politically unpredictable. In the end, I can see an alliance of Western Canadian provinces deciding to sever ties with Canada. It depends all on the east and its love affair with Liberals that see the West as some kind of colony instead of an area of tremendous growth potential.

I love living in Western Canada, but I can do without Canada’s politics which reminds me so much of the socialist governments in Europe during the 70s. That was one of the big reasons that as a young man I emigrated to Canada. My homeland, the Netherlands experienced a lot of dreariness and it is, in terms of the wealth gap nearly as extreme as the U.S. while having a bureaucracy so tortuous, it would make the left salivate. Is this what lays ahead for Canada? Is this what lies ahead in a post-Trumpian U.S.? Not a pretty picture.  

I am more and more tempted to look at economies with potential for high economic growth. But many emerging countries are currently paralyzed by U.S. dollar denominated debt. Yet, I believe more and more that the next four or five decades are of an expanding Asia like what the U.S. used to be in the post war years, With an economic down here on North America’s horizon and potentially with decades of stagnating politics ahead, combined with rising interest and the self-entitlement mentality that seems to permeate this continent, I start to wonder whether it is even worth investing in North American stocks.  I like living in Western Canada, but I am less and less inclined to invest in its stock markets. 

Europe in spite of Brexit and its even less appetizing emigration politics, seems to pick up steam. Europeans realize that they need change in order to be economically prosperous. Maybe I am too pro-European, but I suspect its economic and stock market performance may pleasantly surprise us over the coming decade. Do I trust Canada enough to invest in bonds and GICs or do I have to look outside the continent?  I am bullish on a Millennial generation and Europe’s demographics are as strong as North America’s if not stronger in that regard.  

I am a believer in the Commodities boom, but Canada is not the place to do so any longer. Especially since the conservatives with Scheer and Bernier are likely to lose the next election thanks to vote splitting. If it wasn’t for the vote splitting, I would be a lot more optimistic about the future of Canada. As of now, it seems to be a lost cause. I think it is time to invest more in the Asian (India, China) stock markets and consider German or Dutch Bonds for fixed income investing. Since many of these countries still have negative interest rates, the time is not quite there to move. Yet, I should better look for some way to get into European currencies as Canada’s is likely to go through the floor.

I will hold on to my Canadian resource stocks and remain severely underweighted. I will invest more in U.S. energy companies. Also, companies like Enbridge and TransCanada seem to move further and further away from Canada to enable growth. So have already most Canadian banks. TD has more branches in the U.S. than here. So there maybe opportunity to hold on to such investments. Power Corp and SunLife are different beasts that never seem to move – good dividends though as a possible tax-advantaged alternative to GICs. Manulife has international exposure, but that company has been stagnant for years. So, there is an opportunity to reduce my Canadian exposure. C69 is really the crowning achievement to ensure Canada’s economic oblivion. I will move gradually out of my Canadian investments only when I can find better opportunities elsewhere. I have mentioned this strategy earlier on this blog but now even more so than before, I feel the need to implement this strategy. Canada has a self-destructive tendency and right now, its self-destructive tendency is as destructive as Trump’s America First.

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