|Canada — Canada is well-situated to benefit from the inflation that is going to be emerging in the developed world in coming years.
Canada has been Wise on Taxes & Wise on Banking Policies
When 2008 rolled around and the U.S. had a major banking crisis, Canada did not suffer from the problem to the same degree — despite its proximity to the U.S. In 2010 to 2011, when Europe had a major banking crisis, Canada avoided that problem as well.
Canada’s banking regulators did not permit the wild leverage and speculation that took hold in the U.S. banking industry. In fact, the banking regulators and politicians in Canada did a much better job than the bank regulators and politicians in the U.S.
In the U.S., the politicians repealed the Glass-Steagall Act, which had been implemented during the Great Depression of the 1930s to separate investment banking from commercial banking. The purpose of Glass-Steagall was to remove risk-taking from the banking system. The repeal of the law allowed — some would say encouraged — more risk-taking. Simultaneously, U.S. politicians pressured U.S. banks to lend to financially unqualified home buyers. Finally, U.S. regulators, led by Alan Greenspan (then Chairman of the U.S. Federal Reserve) did a bad job regulating banks and did not seem to be aware that banks were taking on too much risk.
Canada never had a law to diminish risk-taking by banks; the regulators have long had that job and they have done it reasonably well. Further, the Canadian politicians did not pressure banks to lend to unqualified borrowers.
Corporate Tax Rates
Before we begin on Canada’s corporate taxes, let us note that four of seven members of the G7 (Group of seven major industrialized nations) have lowered corporate tax rates in the last six years. They are: Britain, Canada, Germany, and Italy. The U.S., Japan, and France have not. Why would these nations lower their corporate tax rates — and possibly incur the wrath of the public? The reason for lower corporate tax rates is to incentivize the development of more employment in their nations — especially manufacturing employment. Increased manufacturing serves two purposes: first, it employs an increasing number of non-college educated people at jobs with decent wages; and second, it increases national tax receipts.
Recently, other nations have been getting on the corporate-tax-cut bandwagon — in addition to the four mentioned above. The experience of most is that a lower corporate tax rate increases government tax intake and stimulates economic growth.
Toronto City Hall
Canada has been decreasing corporate taxes since 2000, and a recent study authored by the large accounting and consulting firm KPMG pointed out that Canada’s overall business taxation rate (this includes income taxes, corporate capital taxes, sales taxes, property taxes, and required labor costs) is the second-lowest of the 14 nations that they recently studied. Canada’s corporate overall tax rate is lower than the rates in China, Russia, Mexico, the U.S., and major European nations. Only India’s is lower.
This lower tax rate is, of course, beneficial — according to the Canadian Manufacturers and Exporters association (Canada’s largest trade and industry association). Tax savings increase Canadian after-tax profits, and each 1 percent increase in corporate after-tax profits creates a 0.3 percent rise in Canadian GDP. According to KPMG, between 2000 and 2010 the gradually-lowering Canadian corporate tax rates caused Canadian after-tax profits to be over 16 percent higher than they would have been without the tax decreases. This would therefore be responsible for an increase of 4.9 percent in Canada’s GDP in 2010, and added over $75 billion to the Canadian economy.
While Canada has prospered, many have noticed and have bought Canadian dollars. A higher Canadian dollar raises the price of Canadian exports. Canada is a smaller country, and does not have the desire to spend national assets to force the price of the Canadian dollar down. Thus, the rising value of the Canadian dollar has removed some of the advantage that its low-tax policy has created. However, you will not hear complaints from the Canadian public, especially the investors and savers — because the higher Canadian dollar has increased their net worth and the buying power of their savings.
This is exactly the opposite of what has happened to U.S. investors, who have seen the buying power of their currency and the value of their savings decline. It is not hard to see that Canada has treated its citizens well financially while steadily growing its GDP in a sustainable manner. Canada has succeeded in this area while the U.S. has, to put it politely, failed to help savers and investors over the last 10 years.
Canadian Debt Compared to the U.S.
Canadian national debt at the end of 2012 is expected to be at $586 billion Canadian, or about 598 billion USD. Canada has a population of about 35 million, according to the World Bank (about 11 percent of the U.S. population), so per capita Canadian debt would be about 17,000 USD. This compares to a U.S. debt of about 53,000 USD per capita. (For our analysis we assume 311 million U.S. population, and a national debt at the end of 2012 equal to 16.5 trillion USD). Thus, the Canadian resident is on the hook for less than 1/3 of the amount hooking the average U.S. resident. In addition, Canada is currently engaged in a program to do something to cut its deficits and go to surplus. While there has been talk of deficit-cutting in the U.S., none has materialized yet.
Canada is well-situated with many natural resources, a generally conservative mindset among its population, and a pro-business national mentality. We see Canada as a global bright spot for the coming decade. We believe that investors should take a good look at Canadian energy, farming, mining, fertilizer, and timber industries. Banking, insurance, and other sectors may also do well. The Canadian dollar is a good, well-managed currency. Canada avoids big commitments to creating a safer world, and while they do their part as a member of NATO and other groups, they do not overspend on defense.
We have long followed the Canadian oil and gas industry. GIM officers and staff analysts frequently travel to Canada to visit energy, fertilizer, mining, and other companies. We have met with many CEOs of Canadian companies. In our opinion, certain high-yielding companies in resource areas offer good opportunity, and we have been investing in them for decades.
We continue to monitor their progress closely. Additionally, we will be working on a special report for our investment management clients and gold subscribers that will discuss investment strategies and tactics for analyzing and investing in Canadian income-yielding shares. It has been an area of opportunity in the past, and will be in the future. Stay tuned.
Negative Real Interest Rates, Commodities, & Food
The global flood of liquidity is finding its way into all asset classes. With real interest rates (short-term interest rates minus the inflation rate) depressed into negative territory, central banks are accomplishing their goal of pushing money into assets that can appreciate, in the hope that this will spark the economic activity that political stalemates are thwarting.
This liquidity will drive inflation higher. With extremely low interest rates, cash will be invested speculatively to generate returns. This increases the likelihood of creating feedback loops. As speculation in commodities drives up food and fuel costs, producers horde resources and hold back production while they wait for prices to go up still further. This increases inflation expectations…which then act to increase actual inflation, and so on.
Although food and fuel prices are factored out of the government’s “core” inflation statistics, they will be painfully, and ever-more noticeably present when consumers go to the gas pump and when they buy bread. This is especially true if they live in the developing world, where necessities make up a larger portion of household spending. In last week’s letter we discussed the increased likelihood that global food inflation — driven by drought and global currency debasement — is quite likely to cause further instability in geopolitically sensitive regions.
This phenomenon is not just a developing world issue. In the U.S., you can see that the costs of basic needs: food, clothing, shelter, and energy are responding to easy money. Since the Consumer Price Index (CPI) tends to understate the rising cost of living, we are tracking the prices of basic needs in these letters using our Guild Basic Needs Index™ — and they have turned higher again. Why? As you know, the Guild Basic Needs Index is made up of the basic needs that every family needs, and these costs are rising. The Index is made up of food, clothing, shelter and energy (for transportation, cooking, and heating).
The Fed wants to create a little more inflation? The prices of basic, essential needs suggest that its policies are having an effect.
Guild Basic Needs Index
Track the price of your basic needs today, go to www.gbni.info
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