Don't Underestimate Canadian Economic Growth

The Dow Jones Industrial Average tumbled 149 points yesterday. CNBC blamed the selloff on a poor home sales report. Seems as good an explanation as any to explain the inexplicable.

Most financial journalists assume that a certain logic and rationality operates minute-by-minute in the financial markets. Stocks go up when they should…and fall when they should – continuously responding to the macro-economic data of the moment.

Maybe that’s true…or maybe the stock markets behave as logically and rationally as a teenager. Maybe stocks go up just because they feel like it, even if it makes no sense whatsoever. And maybe stocks sometimes fall, even when they possess every imaginable reason to go up.

Your California editor has no idea what causes the minute-by-minute price action in the stock market, but he’s pretty sure it isn’t logic or reason. Over the short-term, the stock market is not a laboratory. It is one part casino; one part cage fighting arena. Greed and fear dictate behavior. Not logic and reason.

Fortunately for us investors, logic and reason are the primary influences over long-term price trends. So let’s consider yesterday’s housing number in the context of the stock market’s long-term prospects.

“Sales of previously occupied homes dipped in May,” the Associate Press reported, “even though buyers could receive government tax credits. And nearly a third of sales in May were from foreclosures or other distressed properties…

“Last month’s sales fell 2.2 percent from the previous month to a seasonally adjusted annual rate of 5.66 million,” the AP continued. “Analysts who had expected sales to rise expressed concern that the real estate market could tumble once the benefit of the federal tax incentives is gone entirely, starting next month.”

That’s not good news. This statistic suggests that the US recovery is less robust than many optimistic investors had believed. Furthermore, the sluggish home sales report is not an outlier. It is, instead, an “inlier” that corroborates the recent wave of disappointing economic reports. The US recovery is beginning to look like an impostor.

Up north, meanwhile, our Canadian neighbors are producing some impressive economic results. Perhaps that’s why so many Canadian readers of The Daily Reckoning are crowing about their good fortune.

A few days ago, when we, the editors of The Daily Reckoning, solicited first-hand accounts from our dear readers about the quality of their lives in America, we also solicited accounts – good or bad – from other nations around the globe. Even though this second part of our request seemed like a throwaway line, many readers took it to heart…many Canadian readers, that is.

We received a very large number of pro-Canada emails, and not a single one that contained an unkind word about the friendly nation up north.

“Hey, it ain’t so bad,” one reader writes. “Life is still pretty darn good…here in Canada. Totally self-sufficient!”

Another proud Canadian writes:

“I can only hope that the hard-working American citizen would consider moving to Canada. We could use about 5-10 million hard working Americans.

“Here are few very good reasons:

“1) Top personal tax bracket 46% (combined federal and provincial). For that we get free schools, free health care, and a social safety net that works.

“2) Top corporate tax rate of 38% and a small business tax rate of 16.5%. The top corporate rate is scheduled to drop to 26% in five years.

“3) Live in one of the safest places on earth. The crime rate is very low.

“4) Freedom to travel abroad where all countries welcome you and like you.

“5) A banking system that works. Sorry, no easy way to buy a home without 10% down at least.

“6) Most populated cities do not have the risk of forest fires, floods, tornadoes, hurricanes, mudslides or earthquakes.

“7) A rich resource base in oil, gas, gold, copper, iron ore, lumber, potash, wheat and uranium.

“8) A small 35 million population.

“9) Real estate prices are very affordable.

“10) A government system that works (most of the time). We are the Saudi Arabia of water resources.

“11) We produce the best comedians in Hollywood, (Jim Carey, Mike Myers, Martin Short, Howie Mandel, Dan Aykroyd), some great actors (Michael J. Fox, William Shatner, Pamela Anderson, Donald and Kiefer Sutherland, Keanu Reeves, Matthew Perry), some great musicians (Celine Dion, Brian Adams, Bare Naked Ladies, Neil Young, Alanis Morissette, Gordon Lightfoot, Paul Anka, Rush.)

“12) If you believe global warming is coming, then Canada will have the best climate over the next 100 years!!!”

Canadians were not the only Daily Reckoning readers to sing Canada’s praises. Several American readers also chimed in. “I just want to take this opportunity to say how glad I am to own a house in Canada at this time,” one Canada-loving American writes. “The house not only places a large portion of our net worth in Canadian dollars – a resource-based currency that seems to be in increasing demand – but it also represents a nearby refuge should the times and circumstances warrant…

“The Canadians having successfully fended off US attempts at conquest/annexation on at least two previous occasions (pre-Revolution and War of 1812). The question in my mind is, ‘Can they “threepeat”?’ Or, in Canadian parlance, ‘Can they pull off a hat trick?’ Time will tell. I hope the occasion for that attempt doesn’t arise, but it’s comforting to know the Canucks have done it before, since they’re otherwise so precariously near to what I’m more and more feeling may be ground zero.

“Forgive my tone,” the American reader concludes, “but I’m getting a rather ominous feeling when I observe the day’s events. I hope this isn’t classified as America-bashing, because I really would like to see us succeed.”

Another American reader, who also refrained from America-bashing, did not hesitate to do a little Washington-bashing. “Belgium has been in the news of late, as they move to a weaker central government,” he writes. “The path is being cleared for them to easily split the country and give the Dutch speakers freedom from their French speakers. It’s a possible path for the USA also. Move powers from the federal government back to the states.

“As a resident of Montana,” the reader continues, “we often consider that we could get a much better deal from Canada than the group in Washington DC. Like the Dakotas, we’ve avoided many of the federal government’s disastrous and expensive social experiments. We just need to build some bigger walls to keep out Potomac toxic wastes.

“Don’t flee Dodge,” the reader concludes. “Come to the northern Great Plains and help build a wall to keep out the left and right coastal elites’ ideas.”

The self-satisfied accounts from and about Canada should be no surprise, given the pleasing economic data issuing from Ottawa.

“Canada thinks it can teach the world a thing or two about dodging financial meltdowns,” the Associate Press reports. “When the G-20 world leaders [arrive] in Toronto next weekend [for an economic summit, they] will find themselves in a country that has avoided a banking crisis where others have floundered, and whose economy grew at a 6.1 percent annual rate in the first three months of this year. The housing market is hot and three-quarters of the 400,000 jobs lost during the recession have been recovered…

“The banks are stable,” the AP continues, “because they’re more regulated. As the US and Europe loosened regulations on their financial industries over the last 15 years, Canada refused to do so. The banks also aren’t as leveraged as their US or European peers. There was no mortgage meltdown or subprime crisis in Canada. Banks don’t package mortgages and sell them to the private market, so they need to be sure their borrowers can pay back the loans.

“‘Our banks were just better managed and we had better regulation,’ says former Prime Minister Paul Martin, the man credited with killing off a massive government deficit in the 1990s when he was finance minister, leading to 12 straight years of budget surpluses.”

Although Canada is back to running deficits, the International Monetary Fund expects the country to be the only one out of seven major industrialized democracies to return to surplus by 2015.

Canada’s economic successes stand in stark contrast to the travails of her large neighbor to the south. The American economy is struggling. But that’s not all. The American way of life is also struggling. At least that’s what many Daily Reckoning readers assert.

Eric Fry
for The Daily Reckoning