Monthly Commentaries

Is the glory of the Canadian consumer warranted? – July, 2010

"For over a thousand years, Roman conquerors returning from the wars enjoyed the honor of triumph, a tumultuous parade. The conqueror rode in a triumphal chariot, the dazed prisoners walking in chains before him. And a slave stood behind the conqueror holding a golden crown and whispered in his ear a warning: All glory is fleeting." A Narrative of the Time of Nero - Henryk Sienkiewicz The summer months are an opportunity to spend time with clients, friends and family. This year has been particularly interesting in that most Canadians seem to be quite proud of how Canada has weathered the economic crisis. It seems that not a barbeque passes without someone commenting (more often laughing) at the mess of the U.S. housing market and the state of the U.S. consumer. This hubris worries us because it is often at moments of great certainty that we often have the greatest risk. Should we be worried? Yes. These past two years, the Canadian consumer, as measured by global debt-to-income, has moved to the top of the list. Canadian consumer debt now outpaces even the widely derided Greek consumer. We attained this rank by continuing to pile on debt while others (particularly American consumers) paid off theirs. It seems there is no sign this trend is about to stop.

The increase in debt-load is nowhere more apparent today than in mortgages. As one real estate agent told me, "When I started in the business, everyone was cautious with the amount of mortgage they took on, leaving some cushion. Now, everyone takes on the maximum that they get approved for." Compared to an average of 55% from 1990 to 2007, the average mortgage is currently 66% of the value of residential assets. Although the ratio might not seem high, the average includes all those retirees who own their homes outright. Personal savings rates in Canada have been on the decline for the past 25 years with the consumer now only saving 2.8%. This is a slight increase from the record lows seen a couple of years ago. By contrast, American consumers are now saving 6.4% of their income - the trends are now in opposite directions. And, according to a recent study by the Chartered General Accountants Association, Canadian households are using larger amounts of credit to buy durable goods. By the end of 2009, 75 cents was borrowed for car purchases compared to an average of 39 cents in previous years. The same trend is evident in furniture and home appliances.

The myth of the frugal Canadian consumer is alive and well. However, the statistics indicate there is a wide gap between the myth and the reality. It is this gap that investors should be concerned about. Any misstep and we could find ourselves with a much weaker economy. It is for this reason that we continue to recommend diversifying your investments outside Canada. Just when things look best in Canada, it may be time to re-examine your investment portfolio. Arthur Heinmaa, CFA Managing Partner