In an effort to measure the effects of the credit market crisis in the U.S. versus Canada, the media are making all kinds of comparisons, be it weather comparisons or sports comparisons or theater comparisons. Yet, it matters little who uses what comparison, the fact remains that, in spite of geographical and historical proximity, Canada and the U.S. are no longer performing in tandem.
In the U.S., there are more and more voices calling for a recession. The housing market south of the border is becoming progressively and fundamentally a royal mess. The Federal Reserve is about to slash interest rates next week, a move expected to become one of many. All the while, people are getting fired and providers of high- risk mortgages are filing for bankruptcies. What started as a brush fire in an obscure market segment — high-risk mortgage lending — has managed to spread across the board like an elaborate pyrotechnics show.
In contrast, the Canadian economy appears as if it couldn’t be better. The fallout from the credit crunch in the U.S. seems to be contained in Canada to the asset-backed commercial paper. At least for the time being, the rest of the Canadian economy seems to be plugging along just fine.
So far, other than sell-offs on the Canadian markets sparked by the yo-yo performance of our trading counterparts south of the border and the expected sluggish sales in the lumber market, there seem to be no other short-run casualties. Canada’s performance on international trade stages is excellent, and our housing sector is still just as animated, as are the commodity sectors. There were never more jobs up for grabs and, heck, even car sales are improving.
As far as Canadian financial institutions and their exposure to asset-backed securities are concerned, it appears that the sector is not in trouble yet, at least not within similar scope of what is going on in the U.S. Although there are signs that a few lenders have dabbled in the U.S. high-risk mortgages sector, so far there is no indication anyone is drastically changing their investment strategies.
Keeping with my usual contrarian nature, I cannot help but wonder whether everything is really as rosy as the financial media suggests. It is true that Canada’s real estate market never succumbed to exorbitant prices and ridiculously easy borrowing terms. As far as our supply of capital is concerned, both from savings and credit, it lies on a solid foundation. We are strong performers on international markets and our currency is surging. In addition, we save more and carry less debt than our neighbors. Our jobs market is healthy; our incomes are steady, which keeps our real GDP more or less in equilibrium with the potential GDP. Canada certainly no longer appears to be the “younger sibling” simply following in the Big Brother’s footsteps. Rather, it seems we have found our own way.
However, we don’t live in a bubble and what goes on in the U.S. affects us more than we would like to admit. I am surprised that economists are mentioning specifically only lumber sales heading for the rough patch. Considering that approximately 80% of Canada’s international trade is conducted with the U.S., I’d say much more than lumber sales are might suffer.
Granted, the Canadian and U.S. economies are structured fundamentally differently. Our “weapon of choice” is natural resources, while the U.S. leads in the technology sectors. The two main components of bilateral trade are cars and lumber, although in the current context of skyrocketing energy and natural resources, neither of the two sectors are bringing too much to the table.
In my opinion, the credit crisis in the U.S. may very well end in a full-blown recession and it would be naïve to believe that Canada will not be adversely impacted by it. Whether the hole we may have to jump in is smaller than the one currently being dug in the U.S. will matter little to investors on the losing streak.
So, consider this an advance warning of a rough ride ahead. Conservative investing would require switching your portfolio to defensive mode. Meaning, increase cash liquidity in your portfolio; get rid of any high-yield bonds you might have; pile up on preferred shares and select but “tried, tested and true” blue-chips; keep a minimal portion of the portfolio in speculative stocks, but only what you can afford to lose; and analyze the “big guns” that Canada has to offer — resource stocks — thoroughly. Remember, even the most defensive among portfolios will need something to fuel their “growth engines” as we buy time until recovery.