Very recently, my Gluskin Sheff partners and I were invited to co-host an event at the Consul General’s residence in New York last week to raise awareness of Canada’s relative advantages for U.S. investors and entrepreneurs. It was a memorable evening.http://business.financialpost.com/2012/ ... =5242-3d1d
I spoke for around 15 minutes. Before I began to pontificate, I could have sworn I heard someone say at the bar, “grab a drink, Rosenberg’s about to speak.” To which I responded “my talk is about Canada, you have no clue how bullish I’m going to be tonight.”
It’s such an easy story to tell, but what I said at the beginning set the tone. Americans have the most home bias of any group of investors on the planet. They love their greenbacks, and think that dollar bills have the words “in God we trust” printed on them. They are startled when they find out no such words are to be found. At the top, all you see is “Federal Reserve Notes.” In other words, Bernanke Bucks.
In the past decade, the Canadian stock market has outperformed the U.S. stock market by 100%. That’s a double. To be sure, it hasn’t been a straight line, as the U.S. market in risk-on periods receives this strange “prettiest girl in the ugly contest” status. I don’t find that particularly endearing. Or enduring. Now the response I get is “of course the Canadian market outperformed given the higher representation of stable and strong banks with high dividend yields and exposure to raw materials.” But the relative sector composition is only 40% of the story.
The other 60% is the currency. The Canadian dollar’s performance is how American investors generated the most alpha in their northern exposure over the past 10 years.
And the loonie continues to benefit from the “spread.” Which spread?
The productivity spread. The inflation spread. The monetary policy spread. The political spread. The fiscal spread. The unemployment rate spread.
I continue to marvel that on an apples-to-apples comparison, Canada has an unemployment rate that is two percentage points lower, and an industry operating rate (CAPU) that is two percentage points higher than is the case in the U.S., and yet inflation, both total and core, is about a full percentage point lower.
Maybe this is why the Canadian bond market has this unusual pivot — where the front end of the curve trades at a premium to Treasuries (reflecting the fact that while the U.S. is surpassing Canadian growth, the Canadian economy is actually operating at a higher level and without as much monetary stimulus too) and at a discount to Treasuries at the long end of the curve (reflecting Canada’s superior long-term fiscal and inflation fundamentals).
After decades of lagging, Canada’s potential GDP growth rate is in the infancy stages of outstripping the U.S. trend. This is also beginning to show through in a nascent upward trajectory in Canada’s multi-factor productivity.
After all, while the U.S. economy is being propelled by housing — which does not exactly enhance the country’s productive capital stock — the Canadian expansion is no longer dependent on real estate, but now hinges more deeply on business capital spending. That is a huge qualitative difference.
Canadian business spending today relative to GDP is running a full percentage above the long-run norm. In the U.S., it is actually now comprising a share of the economy that is about one percentage point lower than historical experience.
So yes, it’s nice to have mass consumerism and a housing recovery, but it is business spending that builds the private-sector capital stock, that in turn generates the two things an economy needs for sustainable growth without the heavy hand of government assistance: Job creation and productivity. Relative GDP growth rates take you only so far.
The configuration of that growth is more essential: Is it led by productivity-enhancing business spending that will perpetuate future growth, or is it conspicuous consumption and real estate, which actually have no meaningful productivity benefits and little in the way of implications for building the productive private sector capital stock?
As Ben Bernanke pointed out at a speech he gave a few weeks ago, there has been no capital deepening in the U.S. for many years and this is affecting in a negative way the trend in productivity and, in turn, the economy’s natural speed limit.
Yet in Canada, I am detecting growth in the private-sector capital stock and a revival in not just labour, but, more importantly, multi-factor productivity which is critical to living standards and stable economic growth in the future.
Much of this by the way reflects the strength in the Canadian dollar, which has forced cost discipline on the local business sector (unit labour costs are basically flat in the past year) and at the same time helped domestic industry to purchase American-made technology at ever-lower prices.
So while the strong loonie has caused a mass migration of Canadian shoppers to U.S. malls, the currency is the heart of a renaissance underway in business capital spending, which is actually contracting stateside but is one of the strongest components of GDP in Canada.
This is a hidden story, but recall that it was the strong U.S. dollar in the early and mid-1980s that blazed the trail for the surge in competitiveness and revitalization of the Appalachian region at that time.
And what about the political stability “spread”? Stephen Harper is the CEO for the next three years at the least. In the U.S., we have the same political configuration that has brought us the weakest recovery on record, endless rancour and divisiveness, and the same central bank that has constantly pursued a policy of financial repression for its citizenry.
At the end of the evening at the Consul General, I was inundated with questions on Canada from the crowd. The last time I received so many business cards was when Barack Obama was elected the first time around.