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Canada’s Real Gold Medal

By David Dittman on March 9, 2010

Canada stands on the highest plateau these days, casting an impressive glow in the aftermath of the Winter Olympics. Equally impressive is the string of reports coming out of think-tanks, NGO research shops and global investment houses touting the story of the Great White North.

That commentators’ emphasis is on “the fervor and ebullience” and the “enthusiasm of Canadians…young and old alike” rather than the tragic death of Georgian luger Nodar Kumaritashvili or the lack of snow at one of the main alpine venues is testament to the fact that organizers carried off a fine show. Even those whose job it is to know how these things work inside and out came away most impressed with the Canadian people.

“Not since Sydney have I seen a city embrace the games the way they’ve been embraced here,” Coe told the Associated Press. “My gut instinct is that is what these games will be remembered for. I haven’t been anywhere where there’s been an empty seat in the house. And the people look like they want to be there.” By preparing well, innovating in some areas, going with what works in others, Canada was able to impress the world despite serious challenges. In other words, the fundamentals were in place, which allowed the people who had to the energy and the resources to adjust to unpredictable events.

The recently concluded Vancouver Games demonstrate a lesson that seems to have become a way of doing things in Canada in recent years–that is, our neighbors to the north are now reputed to be among the most prudent people on the planet. But this prudence obscures what could, too, be a potentially explosive upside in coming years–particularly for US-based investors who will get the added benefit of putting greenbacks to work in loonie terms.

Canada came into the Great Recession with a decade’s worth of balanced federal budgets. Canadian banking regulators wouldn’t allow subprime mortgages to infest the country’s housing market. Although Canada’s major financial institutions had exposure to exotic and toxic securities via foreign operations, the foundations of their businesses are in Canadian retail banking.

One proponent of the Canadian investment story, ScotiaCapital, perhaps betraying a little bit of pride in the homeland, is calling it the “Northern Tiger,” invoking a comparison we made exactly nine months ago that suggests Canada, as developed as it is and as much as it shares with the US, for example, and the UK, has many key factors in common with the economies that are now driving global growth.

Only if you prepare yourself to be in position can you benefit from good luck; similarly only if you prepare will you have the resources to adjust to adversity. Canada–compared to most similarly endowed countries around the world–has managed its abundant natural resources extremely well. At the same time, sound lending practices in the years prior to the global financial economic meltdown leave Canada in excellent position to extend its global influence, attract increasing amounts of foreign capital, and grow at a more durable rate than its developed-economy peers over the next 10 years. Canada is an example for the world and has a great deal of credibility on the global stage. One of the pillars of its new standing is its record of sound fiscal management, which left the government in better position than most to respond with public spending measures when private demand virtually evaporated in late 2008 and early 2009.

These efforts, however, left Canada with its first budget deficit in 10 years. The Harper government will follow through with another CAD19 billion in stimulus spending in fiscal 1010-11. Canada will still have the strongest balance sheet of any G-7 country. Some observers have questioned whether the government put forth a credible plan to balance Canada’s federal budget by 2014-15; Finance Minister Jim Flaherty’s numbers suggest the use of some rather rosy assumptions about rising federal revenue tied to growth that, at least as far as the rest of the world’s contribution to Canada’s is concerned, seems hard to imagine at this point.

And Flaherty has consistently fallen on the optimistic side of things during this recession; as late as November 2008, in fact, Flaherty forecast continued budget surpluses–not until the following winter’s budget season did he concede the necessity of picking up the slack for the private sector and providing a cushion for out-of-work Canadians. Nevertheless, the question of whether the balanced budget train arrives exactly on time does not obviate the fact that the car is on the rails, moving forward at a reasonable clip–which is a lot more than can be said about Canada’s developed-market peers.

More-rapid-than-forecast fourth-quarter growth and the broad-based nature of this expansion suggest the Bank of Canada (BoC) will begin to raise interest rates after June. This is more good news for US-based investors in Canadian-dollar assets. As the loonie appreciates against the buck–higher interest rates will boost demand for and strengthen Canadian assets–so too will the value of your units and shares in income trusts and high-yielding corporations. The Canadian dollar’s profile as a commodity currency may also rise and therefore become more attractive to international investors than the Australian because the Reserve Bank of Australia is widely felt to be nearing the end of its tightening cycle, while the BoC is yet to embark on its own.

What we’ve learned over the last six months is that a strong loonie doesn’t necessary spell the end of the Canadian economy; although manufacturing has been hurt, other parts of the economy have responded to new demand sources, from the US as well as other parts of the world. Not only have certain well-run Canadian businesses proven to be resilient in the face of historic challenges. So, too, has Canada’s entire economy. This is evidence of a strong labor base, with a highly educated populous feeding it.

One of the often-overlooked facts of the global economy–and this is easy to miss given the experience of Halloween Night 2006 and its aftermath–is that Canada, once its course of cuts is complete in a couple years, will have the best corporate tax system in the world.

What separates Canada is that no other developed country has the store of natural resources in relation to the size of the domestic economy that it does. But its leaders are doing things in a manner that will allow the Great White North to derive great benefits from those inherent gifts now and well into the future.

High Road to China

Andrew Willis of the Toronto Globe and Mail brings word that a couple of Canadian oil sands players–Athatbasca Oil Sands, which is in the planning stages of an initial public offering (IPO), and OPTI Canada (TSX: OPC, OTC: OPCDF), which holds minority stakes in projects run by Nexen Energy (TSX: NXY, NYSE: NXY)–are venturing to China to find capital.

Act Now

Are you serious about investing in the Canadian story? Join Roger Conrad in sunny San Diego, California, April 23-24 for the 2010 Wealth Society Member Summit. You’ll have a chance to sit down with Roger one-on-one to talk about where to find the best ideas to generate total returns as Canadian income trusts convert to high-yielding corporations and how to position your portfolio for the year ahead.

Join Roger and his colleagues GS Early, Elliott Gue, Yiannis Mostrous, and Benjamin Shepherd at the historic Hotel del Coronado–one of the top 10 resorts in the world according to USA Today, one of the top 20 hotel/spas in the world according to Travel + Leisure, and the No. 2 place in the world to get married, according to the Travel Channel.

And on April 23-24, Coronado Island will also be the best place in the world for relaxation and profit. We’re expecting 72 degrees, sun and fun. You may find all details at

Call 1-800-832-2330 (between 9:00 a.m. and 5:00 p.m. EST Monday through Friday) or go online now to reserve your seat at the table. Space is limited.

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