Searching for Safe Havens

Investors these days have plenty to fear. The snowball that created the economic avalanche might have originated from an obscure market segment (the U.S. subprime lending market), but it has managed to wreak havoc. First it hit the entire credit market, then it spilled over into the North American stock markets, shaking economies on both sides of the border, as well as worldwide.

How could something like this happen in the first place? Haven’t we learned anything from great financial crises of the past? What about all the breaks and “safeties” that market regulators have established over the years? What about our governments, what are they going to do about the current state of our collective financial affairs?

Answering these questions is likely to take most of the space of this article, but let me try anyway. The reason why the subprime lending market has managed to cut us off nearly at the knees is the fact that any kind of crisis in the credit market immediately brings the overall supply of capital under the dark cloud of suspicion. It is as if you are trying to drive a car on an empty tank. Without an abundant supply of capital, the smooth engines of our economies simply cannot run.

As for learning from past mistakes, it is a tough one. Circumstances always seem to be different and the culture of ‘fessing up to one’s blunders is still poorly developed, if at all. The day we see a man of Greenspan’s stature admit, “I made a mistake,” should be declared a national holiday.


As for the regulators and their role in the fine mess we find ourselves in, as we entered into the new millennium, the world of financial instruments grew more and more complex. Creating complex asset-backed derivative instruments is how bad decisions and non-existent risk management of subprime lenders managed to become exponentially worse, potentially even disastrous.

And, finally, let me offer a word or two on the role of the government. The way I see it, the governments on both sides of the border have reduced themselves simply to putting out fires in the short term, without providing a real long-term solution. But, how could governments provide long-term solutions in the first place, considering how everyone has gotten used to the bailouts and how these tie into political and other agendas.

So, what are investors to do in the increasingly scary world of the financial markets? For one thing, at the face value of things, Canadian economy is still in much better shape than the U.S. economy for a number of reasons. We have managed to retain our status as net exporters of resources, we are a nation much less in debt, and our exposure to the subprime lending market south of the border has been limited, which is why we are “feeling the pain” mostly due to proximity, but not due to fundamental problems.

That doesn’t mean that Canada is a problem-free economy and that everything here is just peachy. Still, there is one investment vehicle I haven’t considered thus far, which could be a viable and conservative investment option for both Americans and Canadians — our Maple bonds.

Maple bonds are offered and settled in Canadian dollars, but are issued by foreign issuers. Since two years ago, when Canada’s government eased a few restrictions, the Maple bonds market literally exploded. Today “Maples” are considered the foremost issue in bond markets worldwide. Their growing popularity is attributed to the strength of our dollar, as well as to the favorable interest-rate environment existing in Canada.

To give you an idea of their popularity, the World Bank recently issued a 5-year, triple A rated Maple bonds offering, priced at eight hundred and fifty million dollars. The World Bank itself is a high- quality borrower, which is in short supply these days. So, when an issuer such as the World Bank opts for our Maples, the rest of the market takes notice, and so should individual investors.