TRUE, NORTH, STRONG . ..

 (By David Rosenberg)

And free. Free of the dramatic fiscal retrenchment and tax rate increases that are going to be plaguing much of the rest of the industrial world. Shortly after reading Miners Agree to Higher Royalties in yesterday’s WSJ on a story out of Australia, we saw Canada Seeks to capitalize on Australia’s Resources Super-Tax in the FT. Canada is one of the few countries with a low primary budget deficit and as such is in the process of lowering corporate tax rates, which will be below 25% for the combined federal-provincial levy in most parts of the country by 2012. The one thing we know about capital is that it flows to the jurisdictions that treat it the best.

We are still reeling over that article in the Economist that showed how more market- and business-friendly Canada has become, especially in relation to what is happening south of the border. Canada has a Finance Minister who delivered a credible plan that balances the books and cut taxes in the next five years, and is resisting calls for a special levy on the banks. Meanwhile, the White House only has a plan that involves higher taxation and no intent on eliminating the deficit even for the longer-term, and the U.S. Budget Director (Orszag) just resigned (see After Orszag, Red Ink and Hard Choices on page A4 of the WSJ).

Two-years ago, the Canadian dollar approached par as oil was about to hit $140 a barrel. In the latest go-around, the loonie approached par with oil nearing $80 dollars. In other words, the Canadian dollar was behaving strictly as a commodity currency back in 2007 and 2008 (in both directions). But this rally in the Canadian dollar has a different feel to it; it’s much more than just a commodity story this time around. Canada has basically been re-rated coming out of the credit crisis as a bastion of stability in an increasingly unstable world, and for a variety of reasons:•

The federal government actually deserves the AAA credit rating that it receives on its debt.

• No Canadian bank failed.
• No Canadian bank even cut its dividend. Canadian banks spin off a dividend yield of just under 4%, compared to a little less than 1% in the USA.
• he Bank of Canada is now raising rates in the face of a solid domestic economy, while the Fed is on hold for a long time. So, global investors who are looking for a place to park money in liquid short-term securities get a yield premium over U.S. alternatives.
• Top marginal tax rates are already higher in New York City than they are in Toronto.
• On a global scale, real estate in Toronto, Montreal and Vancouver is cheap as borscht (as my Bobba used to put it). This may be why property prices have been heating up. It may come as a surprise to many Torontonians that when American high net worth investors visit the city, they can’t believe how inexpensive the Bridle Path is -- especially considering its proximity to downtown (New Yorkers can’t get anything like that south of White Plains).
• It’s not just about oil any more, but also natural gas – whose price has carved out a bottom – and precious metals, which command a 13% share of the TSX’s market cap versus less than 1% for the S&P 500.
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It was fascinating to see the Canadian dollar only correct down to 92 cents during this most recent round of global financial turbulence and flight-to-safety. That is a far cry from the correction down to 78 cents following the Lehman aftershock, not to mention the move down to 62 cents after the tech wreck a decade ago.

At the current time, the Canadian dollar is moderately overpriced but the fair-value line is moving up two to three cents a year, which means that within the next half-decade, it could easily be worth 15% more than it is today. This is something for global investors in general and Americans in particular to contemplate for in any given year, half of the total return differential between Canada and the U.S., whether it be in stocks or bonds, is derived by the direction of the exchange rate.

For the birdwatchers among us, this may well be the time when the loon beats up on the eagle.