My last column painted a picture of the dire state of the Canadian business and investment climate. Layering in consumer data makes the picture look downright depressing.
Canadian consumers are more indebted than ever. Household debt is the highest amongst the G7, about 175 per cent of disposable income. The U.S. has gone in an opposite direction. Since the Great Recession U.S. household debt has declined to about 100 per cent of disposable income. This gap is unprecedented.
Not surprisingly, with higher debt levels, consumer savings rates are only half that of the U.S., at four vs. eight per cent. Consumer savings provide funds for business investment. Lower consumer savings combined with higher consumer and government debt is partially responsible for lower business investment — these credit demands compete against businesses.
Residential “investment” is a big reason for excessive consumer debt. (I’ve used quotation marks as I don’t consider a house you live in to be an investment.) Previous housing booms topped out at about seven per cent of GDP. Today’s housing boom represents eight per cent of GDP, up from six per cent in 2010. That may not sound like a lot, but it’s 33 per cent larger than a decade ago. By comparison, the U.S. housing boom preceding the financial crisis also peaked at seven percent of U.S. GDP. U.S. housing then declined to 2.5 in 2010 and has rebounded to 3.5 per cent, less than half the current Canadian level.
Significantly faster public sector than private sector employment growth is another worrying trend. Since 2013 total hours worked in the public sector has increased 14 per cent. Hours worked in the financial and real estate sectors have increased nine per cent whereas other private business growth has grown a paltry three per cent.
The real Canadian economy is sickly, with tepid GDP growth being driven by residential “investment,” public sector employment and deficits and immigration at almost double the mid-decade level.
What does Canada’s awful picture mean for our investment strategy?
Let’s step back. Foreign content limits on RRSPs were dropped in 2005, coinciding with an almost decade-long era of strength in the Canadian economy and currency. During this time, I moved most of our RRSPs into U.S. stocks. I was well positioned to take advantage of re-emerging U.S. strength. I never believed our currency would hold its strength forever and I try to prop up the sky when it’s falling, as it was on the U.S.
The investment community knows how weak Canada truly is, which is why our stock valuations are now well below U.S. levels. I am attempting to prop up the sky falling on Canadian investments. When commodities collapsed along with the Canadian currency, I started looking back towards Canada, slowly at first but currently with more vigour.
That effort has cost me returns. Sometimes the investment world can change on a dime and other times it moves like an ocean freighter. It took a while for my U.S. efforts to pay off a decade ago. My current Canadian efforts will eventually bear fruit.
While a decade ago I was focused almost entirely on the U.S., I will never be that focused on Canada. Our economy is too small and too reliant on resources and financials. I don’t know if the freighter will turn a corner this year or next, or the year after that, but I have faith in Canada. Canadians are historically rational, and I think we will eventually toss fiscally irresponsible politicians, begin saving again and reduce our debt load. It might however take a true crisis to precipitate this change.
I predict that the next decade will be significantly less bad for Canada, and probably even good. Ten years from now I doubt that U.S. investments will have beaten Canadian by 255 to 95. I think it will be much closer to a dead heat.