Dr. Michael Graham: Wisdoms from the Street

Guest columnist Dr. Michael Graham, two-time guest lecturer at Knowledge Bureau’s Distinguished Advisor Conference, muses about the economic and political volatility of the day and what Canadian investors can expect as March gathers steam, post-federal budget.  Early registration for this year’s outstanding 15th Anniversary DAC is March 15 – RSVP now.

March came in like a lion in the stock markets too, with a latest human blizzard out of the White House to add to the furore.  This time it was Donald Trump's impromptu proposal to impose steep tariffs on steel and aluminum that caused widespread investor alarm, with Canada America’s largest supplier of both. Numerous U.S. companies (e.g. GM and Boeing) would also be impacted and he could likely be in WTO violation - a latest example of the President's notorious thinness on facts.

Is extreme volatility here to stay? At our annual Third Thursday Group luncheon in mid-December, a 10 percent correction was felt to be all the more inevitable after a multi-year bull run. We nonetheless reminded ourselves that 10-15 percent corrections are not only commonplace but healthy, whereas a 20 percent pullback can signal a return to bear market territory.

But there are issues in Canada to pay attention to:

The Kinder Morgan pipeline issue between Alberta and British Columbia, which Prime Minister Trudeau urgently needs to resolve, having reaffirmed his government’s authorization of the twinning of this key link from the oilsands to the Pacific Ocean. The boost to morale in a “trapped” Alberta, and indeed all of Canada, would be immense; and our reputation among international investors would doubtless be lifted too, as I believe would be the entire Canadian equity market.

There’s also the 369-page federal budget and its hundreds of line-item proposals on which Finance Minister Morneau and the investment community need to discourse better. I read that not until page 288 was there much, if any, mention of the vital economy-building and job-creating importance of investment. How I wish this voluminous epic had reflected more awareness of the critical role of private investment as the true engine of lasting economic growth. I’d also hoped the budget might have followed the U.S. example of introducing accelerated write-offs on new investment, particularly to encourage Canadian small business.

But, alas, nothing along these lines that I could see; instead, only the comfort that Mr. Morneau had got the message in backing away from last year’s punitive tax-increase proposals on small business, and that he was studying the potential impact of the sweeping U.S. tax reforms on Canada.

In our favour, an $18 billion deficit in a $2 trillion economy, an equivalent of 0.9 percent of GDP, is neither here nor there. Furthermore, a sustainable 31 percent debt-to-GDP ratio ranks among the lowest in the G-7 and G-20. Finance Minister Morneau took further comfort in how well the Canadian economy is faring, within the G-7 and nationwide. I even recall him mentioning the word “booming.”

In addition, first-quarter profits, led by our banks, are coming in strongly; in the metal markets “Dr. Copper” is acting well, as are zinc and others. And in the oil markets, a $60/bbl. (WTI) base price is helping an impressively lower-cost Canadian oil patch, despite the big export discounts exacted by the dearth of pipeline capacity. All of this provides more than passing comfort, even if big, bold budget measures remain singularly lacking.

I’m reassured, too, by the global and U.S. content in my Canadian Equity 6-Pak and other Canadian recommendations. In particular, I’m reminded what a world leader Canada has in Brookfield and its group–commercial real estate, property development, infrastructure, investment banking, et al.

Increasingly, I see Brookfield as Canada’s Berkshire Hathaway. The fact that Warren Buffett has appointed Greg Abel, hailing from Edmonton and the University of Alberta, as director and vice-chairman in charge of all of Berkshire’s extensive non-insurance operations only adds to this pro-Canadian sentiment—even allowing for the “Berkshire blood” that Mr. Buffett reminds flows through his veins!

On my return from a trip overseas this month, I’m also looking forward to a presentation to a Toronto roundtable group on why Donald Trump might just turn out to be the best president for Canada and Canadian investors since Ronald Reagan!

Dr. Graham heads up M G I S, 141 Adelaide St. W. Suite 1001, Toronto, ON M5H 3L5, Tel: 416 360-7538, Email: michael@graham

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