In May 2007, we wrote an article in the HS Dent Forecast titled “What About Canada.” We suggested that, despite the country’s abundant natural resources, Canada would “go down with the ship” when the United States sank into recession. This would be due to Canada’s reliance on exports to the United States, which accounted for more than 84% of total Canadian exports at time of writing — not to mention 27% of Canadian GDP!

Our words proved to be prophetic. We read this week in a New York Times press release that,

“Falling exports to the United States caused Canada’s current-account deficit to swell in the second quarter to a record high of 11.2 billion Canadian dollars ($10.4 billion), cementing expectations that the economy contracted in the quarter… In a striking sign of the impact of recession and a strong Canadian dollar, the quarter was the first time since 1976 that Canada imported more goods than it exported, resulting in a deficit in goods trade of 1.71 billion Canadian dollars.”

Canada’s trade surplus with the United States has declined by 17.6 billion Canadian dollars in the last three quarters as a result of America’s plummeting consumer spending, investment, and construction. And given that Canada’s Spending Wave is in the process of peaking, the country cannot expect its domestic consumer to come to the rescue. We estimate that Canada has many years of slow growth in front of her.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

We try to keep this blog focused on economics and away from politics, but alas, sometimes you can’t separate the two.  Political decisions — be they good or bad — can have a real impact on the economy.   And unfortunately, many of the decisions made by our leaders have been poor and — sadly — driven by a crude, cynical populism that preys on voter fear and restlessness.  How else can you describe some of the recent moves taken by the Obama Administration and the Democrat-led Congress, such as the “Buy American” provisions — viewed by many to be in violation of our trade treaty commitments — and the gross violation of contract rights and the rule of law, such as in the case of the unfortunate GM and Chrysler bondholders.  (To be fair, George W. Bush and the Republicans did much of the same during the prior recession, giving us steel tariffs and farm subsidies that were shameless attempts at attracting Rust Belt votes.  These shortsighted moves crippled Bush’s attempts at promoting free trade later in his presidency as he was then viewed by many as a hypocrite.)

With other world leaders taking similar actions,  many economist fear that protectionism will get out of control — as it did during the Great Depression.  It took a world war and five decades of hard negotiating to give us the free markets we have today; it would be sad to see these gains reversed.

Though it’s difficult to be optimistic about the future of free trade, we are glad to see at least one world leaders vigorously defending it.  As the New York Times writes, “Australia Resists ‘Buy Australian’ Union Pressure.”

Prime Minister Kevin Rudd said Australia’s wealth depended on its access to export markets, which would be compromised by protectionism.

”We need to avoid any form of protectionist measure, which invites retaliatory protectionist measures from economies around the world, and that’s what would happen,” Rudd told reporters.

”The mistake of the Great Depression in the early 1930s was this: economies believed that the way to get themselves through was to shut their economies down and close their borders to imports from abroad,” he said. ”The entire global economy shrinks.”

We find Mr. Rudd’s comments encouraging.   Here is a leader — and one from a left-of-center labour party at that — who is strong enough to resist the siren song of populist protectionism.  He will lose votes for his stance here; he might even lose the next election.  But he is doing the right thing.  Let us hope that other world leaders follow suit.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

 We have an ongoing commentary on India, a country with almost unlimited potential but also with a LOT of problems that have to be resolved first.  Among emerging markets, we are attracted to India primarily for:

1. Its sheer size
2. Its orientation towards domestic consumption vs. exports (this makes the country less susceptible to contagion from global economic crises and weak demand from Western importing countries)
3. The country’s youth — with such a young population, Indian aggregate demand will only grow.

But, as we said, India is not without its problems, which include vast rural poverty and illiteracy, an antiquated caste system that still seems to linger on into the modern age, stifling governmental bureaucracy, a vast educational and wealth divide between the “haves” and “have nots,” and — the focus of this post — truly horrid infrastructure.  

The odd thing is, most of these complaints, including that of poor infrastructure, have been heard since the early days of the British colonial period! Read the rest of this entry »

It’s always interesting to get an international perspective on the state of American economic affairs.  Germany’s Der Spiegel published a rather scathing article on the United States’ fiscal management (”Chancellor Merkel Visits the Debt President“), outlining the Obama Administration’s “Five Errors.”   We’ve condensed Spiegel’s criticisms below (though we recommend you read the whole article):

#1.  ”The US amassed much more debt during World War II, it is often said. That, though, is not true. According to conservative forecasts, Obama’s policies could end up being three times as expensive as US expenditures during World War II.” Read the rest of this entry »

The FT had a small headline that we might have easily missed had we been scanning the newspaper quickly: “Gulf rift exposed as UAE quits monetary union.” The monetary policy of the United Arab Emirates is not something that would normally catch our attention.  But viewed within the larger context of globalization and economic integration, the UAE’s decision is quite a bit more significant. Read the rest of this entry »

In early 2007, HS Dent published the special report Changing Global Demographics.  One of the central themes of the report was the gradual decline of the West relative to some of the younger emerging market countries with more favorable demographic trends.  In some ways, our views are similar to those of Fareed Zakaria, CNN host and author of the insightful 2008 book The Post American World, which we quote extensively in the July 2008 HS Dent Forecast.   Zakaria believes that the era of overwhelming economic dominance by the West–and particularly the United States–is waning, not necessarily because the United States is in decline but because the rest of the world is catching up.   We have a lot of respect for Zakaria’s work, and we highly recommend his book.  But if anything, we thing he may be a bit too optimistic.  Read the rest of this entry »

A picture can be worth 1,000 words.  The Economist has managed to summarize everything we’ve written about the antiglobalization movement, the rise of protectionism, and the punitive assault on the rich all in one cover: 

 Notice the Blackberry on top of the dead guy in the front?  And the skyline of London’s Canary Warf financial district in the background?  Absolutely classic.  

We wrote in a prior post about the assault on highly-skilled foreign workers, specifically the restriction on the hiring of HB1 visa holders for companies receiving federal bailout money under the TARP.  Bank of America had to actually rescind existing job offers to foreign students who had received their MBA degrees in the United States.  Today, we see the trend continuing, this time to seasonal workers.  

The Wall Street Journal reported today:  

As more Americans lose their jobs, the U.S. government is actively discouraging the recruitment of foreign workers, from dude ranchers and fruit pickers to lifeguards and computer programmers.

At least three avenues of legal immigration have seen roadblocks erected. In the most visible and controversial move, companies receiving federal bailout money now face extra hurdles before they can hire highly skilled guest workers on an H-1B visa. On Friday, the Labor Department will close a public-comment period for a proposal to suspend an agricultural guest-worker program, known as the H-2A.

The State Department is asking some sponsors of the J-1 visa–seasonal employers such as hotels, golf resorts and summer camps–to reduce dependence on foreign labor.

  Read the rest of this entry »

In the early stages of the housing bust, the myth of “decoupling” could be found on the pages of virutally every financial magazine and newspaper.  There was a genuine belief that somehow the economies of East Asia–which depend heavily on exports to the West–could somehow continue to thrive with the West mired in recession.This has, of course, been proven to be patently false.   Not only have the East Asian nations failed to avoid a slowdown of their own, but in some cases–such as in Japan and South Korea–the East Asian economies have gotten hit even harder than those of the West, where the crisis began.   Read the rest of this entry »

As we wrote last week in “The Assault on Free Trade Continues,” we continue to see signs of increasing protectionism and economic nationalism.  There is nothing new under the sun.  We saw the same thing happen during the Great Depression (making it considerably “greater” for many formerly prosperous countries) and we saw a lesser version in the wake of the deep recession of the 1990s when the Nafta agreement was being crafted. 

Of course, anti-free-trade sentiment goes back much further.  The Industrial Revolution in Britain was almost killed in its infancy by the protectionist Corn Laws, which were designed to protect the landed agricultural interests.  Had the free traders not won the debate in Parliament, the world might have taken a very different path.

Read the rest of this entry »