The Lehman Bros. bust, one year ago this week, was a watershed moment and event that many would like to erase from memory, given that the consequences were disastrous, wiping out trillions of dollars in wealth and destroying the financial plans of so many in the Western World. But, there is a silver lining, in particular, for Canadians. While we were not spared the pain, Canada is now uniquely positioned against the rest of the struggling western world, and it is Canadians who should grab the advantage.
First, we have no inflation - interest rates will remain low for some time - perhaps one to two years.
Canada has experienced the steepest fall in consumer prices in more than 50 years. That is remarkable.
Canada prices fall, recovery signals brighten, Reuters, September 17, 2009
Consumer prices overall fell by 0.8 percent in August from a year earlier, the second-largest 12-month drop since 1953, Statscan said. In July, consumer prices slid 0.9 percent at an annual rate, which was the sharpest drop since 1953 when the CPI fell 1.4 percent.
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Statistics Canada also said on Thursday that the composite leading indicator rose by a sharper-than-expected 1.1 percent in August, the latest sign the economy is pulling out of deep recession.
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"We haven't seen the end to the downsides on core consumer prices going forward," said Derek Holt, vice-president at Scotia Capital Economics.
"If we are right and the Canadian dollar goes to parity (with the U.S. dollar) then inflation is going to be parked as a side issue for a good couple of years," he said.
Yesterday we wrote that the US dollar had fallen to its lowest levels in a year, this due to investors ditching risk-free assets such as cash and cash instruments in favour of higher yielding assets and ... gold. Hence, the price of gold doubly has been fueled by the exit from cash and the bidding up of gold itself.
Price deflation, however, in Canada has been due to the rising value of the loonie. Thankfully, Canadian consumers', banks' and the country's balance sheets are not overlevered. And that has placed Canada in an advantageous position, vis-a-vis our neighbours to the south.
Second, Canadian banks are strong and in an enviable financial position
Canadian banks are eyeing opportunties to expand south further into the US banking sector - prices are depressed and the Canadian dollar is strong ...
Canadian Banks See Takeover ‘Opportunities' in U.S., Bloomberg, September 16, 2009
Canadian banks may step up acquisitions and investments in the U.S. as troubled lenders falter amid the economic slump.
“Significant opportunities” exist outside Canada in the next two to five years as banks restructure, Royal Bank of Canada President and Chief Executive Officer Gordon Nixon said today during a conference in Toronto sponsored by Scotia Capital. Other Canadian bank executives agreed, and Bank of Montreal President and CEO William Downe called this a “once in decades growth opportunity”.
It's reminiscent of the days when Canadian moguls snapped up cheap Manhattan real estate in the mid 70s crisis. This period of opportunity for Canadian banks rhymes with those partaken by firms like historic components of Brookfield Asset Management (Edper, Brascan, Trizec) and the once great Olympia and York, in the period following economic crises in 1973-74 and during the 90s. Brookfield is today the largest single landlord in Manhattan.
In Canada: There's No Place Like Home we discussed the idea that Canada was in a uniquely advantageous position on three fronts - fiscal soundness, healthy and strong banking sector, and a resilient consumer. Let's discuss investing in Canada - its time Canadian investors realize the grass is greener on our side of the fence, and if so, to act on that belief and position ahead of interested foreign acquirers of our key resource and commodities companies. I say this, because although many Canadians would say "duh!," how do we explain that for years we have been letting our companies be acquired by dragons in return for adequate levels of capital funding for our expansions. Why aren't we sponsoring our own businesses to the degree that they can remain in Canadian hands.
We are taking our advantage for granted - Foreign investors see greater value in our key assets than we do.
"If you've been in the [poker] game for 30 minutes and you don't know who the patsy is," said Warren Buffett, "you're the patsy".
Why, for instance, was Research in Motion denied the opportunity to acquire some Nortel's key telecom patents and assets, and in essence, keep them Canadian. Instead, they were awarded to Ericsson, and a subsequent sale of additional key intellectual properties and technologies were sold to Avaya. Why? It's madness that one of our own homegrown, and financially willing and able corporate darlings lost this chance, and subsequently, that Siemens bid to re-invigorate Nortel into Canadian-headquartered $5-billion-a-year tech giant failed because of a lack of support for it from Ottawa.
How a Made-in-Canada Nortel solution died, Andrew Willis, The Globe and Mail, Sept. 17, 2009
A year-long drive by a German company to create a Canadian-headquartered, $5-billion-a-year telecom equipment maker from the remnants of Nortel Networks Corp. ended in failure because of a lack of support from Ottawa, according to people close to the situation.
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But the landscape in Ottawa changed in late July, after RIM co-CEO Jim Balsillie publicly attacked the planned sale of Nortel's wireless unit, claiming RIM had been shut out of the process. EDC arranged a $300-million loan to one of the bidders, Nokia Siemens Networks, and the business was eventually bought by Sweden's Ericsson.
While RIM did not take part in the auction, Mr. Balsillie framed the issue as one of foreigners being favoured over a home-grown tech play.
Now it also appears Chinese interests are visiting Canada in order to investigate Canadian financing options for what would be the acquisition of Canadian companies in the resource sector. The Chinese want to secure as much of their future natural resource requirements as they can - but they want to see if we can help them to finance their acquisition of Canadian companies. If we are selling our companies to the Chinese and other foreign investors now, in return for making sure our projects are adequately funded and viable in the long run, like the oil sands, then how do we justify this when some parties are willing to discuss funding the acquisitions for them, as in the example of Macquarie. Is this an extension of our risk aversion - we would rather fund the obligations and collect the interest, than take the developmental risks ourselves on resource projects and maintain Canadian interests?
Sinopec, China Firms Seek Canadian Financing, Resource, Bloomberg, September 15, 2009
China Petroleum & Chemical Corp.’s finance subsidiary said it held talks with Macquarie Group Ltd.’s Canadian unit as part of efforts to raise funds for the refiner’s operations.
“We’ve had discussions over what kind of cooperation we can have in the area of financial services,” said Song Guoming, a Sinopec Finance Co. Ltd. manager who held talks with Australia’s biggest investment bank yesterday in Toronto. “We’re studying their methods of raising funds.”
Canada has universal appeal as an investment destination, finally
As Canadians we should take a larger interest in maintaining and making financially viable what we already have, rather than helping foreigners help themselves to it. This is quite possibly the time to do it, given that Canada now has what appears to be real global and universal appeal as a destination for investment.
“In our opinion, Canadian assets (bonds and equities) punch well above their weight and, as we believe Canadian equities remain underweight in global portfolios, global investors should heighten their focus north of the U.S. border,” he said. “We would also point out that Canadian domestic investors should temper their international endeavours and stick to a higher domestic bias in their portfolios.” - Vincent Delisle, Scotia Capital
Sources: Reuters | Bloomberg | Globe and Mail | Scotia Capital (via G&M Market Blog)
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