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Financial Freedom Is Merely Organized Common Sense
What is the story FOREX tells us?
What can Foreign Exchange (FOREX) tells us about the state of the economy?
Over long periods the potential of an economy can be assessed by how people invest in it. Local investment matters but foreign investment tells its own tale. Why? Because foreign investors have to buy Canadian dollars to invest here. That transaction tells us how they feel about the economic future here.
If they are very optimistic, the price of the dollar rises against foreign currencies. Much like the price of copper or corn. If more people want it, the price goes up.
To some extent at least, the value of a local currency in foreign exchange transactions is an indicator of the perceived economic consequences of decisions being made within the country.
Is FOREX telling Canada to “Smarten Up!”
To be objective, the price of a C$ depends on two things.
- The strength or weakness of the expected Canadian economy.
- The relative strength of the purchaser’s currency.
It is possible that Canada is doing very well but every other country’s currency is doing better. That will never happen but it is worth noticing that the C$ to US$ exchange rate will not tell the whole story. It is the one you most often see, though and given the US$ position as the reserve currency for the world it is likely instructive.
Where has it been over the past twenty years?
Foreign exchange price trends reflect how outside investors estimate the future. There are many day-to-day transactions but in most cases, the people involved are price takers. Investors are different, their placement of money will be committed for a long time. So you must look at long periods and think about how the changes came to be.
C$ versus US$ September 2003 to September 2022
What’s obvious?
If we take the 85-cent position and assume above it, foreign investors are optimistic about Canada and below it, they are not, we can see that 2006 to 2015 is an optimistic period and 2015 to the present is not.
What does it mean?
Much of Canada’s economy relies on capital investment. The oil industry, mining, forestry, and farming are all capital-intensive. If the capital is unavailable or priced higher to induce investment, the growth slows.
Canada is a geographical monster and so needs far more infrastructure for transportation. Capital intensive.
Canada has few people relative to its size. That tends to produce cities that are proportionally very large. The Greater Toronto Area has a population of about six million people. Roughly 16% of Canada’s population is there. By comparison, the Greater New York area is three times bigger at twenty million people but is only 6% of the American population. The Los Angeles metropolitan area is smaller still at less than 4%. Cities are capital intensive.
Canada is a young country, and like a tall, uncoordinated 15-year-old, it needs to grow into its body. Canada requires more people to achieve its potential. People need opportunities and many of those rely on fresh capital.
Why is Canada relatively less attractive?
Investment optimism is a tricky thing to improve, but very easy to destroy. People are emotional and an uncertain future is at least mildly frightening. So less investment.
Governments and banks provide much of the incentive to invest. You might think the price of money, the interest rate, is determinative but no. The Bank of Canada and in lockstep, the Canadian Bbnaks offered very low rates in 2015 to the present and much higher rates from 2005 to 2015. To assume interest rates affect long term investment decisions misses the point. If an investment is good enough a change in interest cost of 2 or 3% won’t have much effect.
Government policy that destroys the industry’s ability to compete will change attitudes from interesting, to maybe, to a hard no. Money is very mobile and you must always consider that every investment is the one that meets the investor’s needs with an acceptable range of risk. If risk is high, the projected yield must be nearly infinite to make it interesting. Highest possible yield given a specific risk parameter is the goal. Expecting12% with little risk of the economic environment changing adversely is better than a projected yield of 50%, but you might be out of business in a year. Return on capital matters but so does return of capital.
Canada is not presently offering high predictability.
What can we do?
Recognition of reality matters. One reality is if you have problems that have a meaningful need for capital, like climate change, you cannot move ahead faster than your ability to generate the capital. You do the same in your household. You acquire what you must have as you can afford it, and you do not limit your future ability by borrowing excessively.
Our best move is to discourage governments from spending money they don’t have on projects that cannot pay their own way.
The defence of their spending is the long-run effect of the various catastrophes cannot be ignored. How valid are the damage assessments if we do little? The evidence is unclear and what we see seems to be aimed at political objectives. Certainly in Canada, reducing the 1.5% of Global CO2 we emit to zero would have no appreciable effect and predictably would make Canada near uninhabitable. A curious policy indeed.
The bit to take away
Governments cannot do economically destructive things within their country and have FOREX not notice. Governments can manipulate your thinking if you have no objective indicator. Just now people outside Canada are avoiding investment here. Pay attention.
All investment is a matter of selecting from an array of comparative advantage. Like a foreign investor, you should bend your investment decisions toward what is likely to work for you. That’s what meaning is about.
I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software startup, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Federal Business Development Bank.
Be in touch at 705-927-4770 or by email at don.shaughnessy@gmail.com.
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