Canada's Curious Case

By Eric Jackson, Senior Contributor01/05/11 - 06:00 AM EST

Canada's economy has been the best performing of the G8 nations coming through 2008 with flying colors.

It has been heralded by many in the U.S. business media as being an example for the U.S. to follow. It's common now to hear pundits suggest Americans to seek the safe haven of the Canadian dollar from the risk of the US dollar's debasement. Recently, no less an authority than Bill Gross suggested savvy investors buy Canadian debt as a hedge to what's on offer here in this country.

Canada deserves pats on the back for its ability (and good fortune) to steer itself through the last few years. However, there are some ominous warning signs on the horizon for its economy and it's not entirely clear where it -- or its currency -- is headed next.

First, let's review what Canada's done right.

1. In housing, Canada kept strict oversight of income verification and documentation. You just never could walk in to the equivalent of a Countrywide in Canada and get approved for an obscene amount of money.

2. All mortgage loans in Canada are "full recourse," meaning that the borrower is fully responsible for the mortgage even if he or she defaults. Banks can keep coming after the individuals who took out the loans, long after the property has gone into foreclosure.

3. No tax deductibility of mortgage interest. Although some Canadians complained about this in 2005 when house prices were booming in the U.S. but flat in Canada, this conservatism looks very wise today. What's the point of goosing as asset-class with a tax break, when it contributes to the devastation we've had in America in housing for the last three years?

4. More conservative lending and fewer mortgage brokers. Canadians often like to say they don't/didn't have subprime mortgages in Canada. That's not correct. Subprime mortgages exist, but are far less common than in the U.S.

Part of the reason is that the five Canadian banks are the major way most Canadians originate their mortgages. Only 35% of Canadian mortgages are originated by mortgage brokers, whereas the equivalent number in the U.S. is 70%. Therefore, there were far fewer subprime mortgages made available in Canada over the last decade - another conservative point for the housing economy.

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Be Careful Dogging the Dollar

By Eric Jackson
RealMoney Contributor
10/8/2010 7:45 AM EDT
Click here for more stories by Eric Jackson

The negative chatter about the U.S. dollar's decline is overdone. As we've learned twice already in the past year, just because a crowd of people says something is inevitable does not make it so.

At the end of 2009, the level of pessimism around the U.S. dollar was very similar to that of today. There was no shortage of people saying we were on our way to debasing the currency. The Fed had rolled out its quantitative easing (QE) program, taxes were going to rise, there was no plan to rein in entitlements and the president's health care plans took up much of the headline space available in newspapers.

Back then, I suggested in these pages that the dollar's weakness would probably reverse course and that the currency would rally for most of 2010. I also argued that the dollar would always be a "safe haven" for investors to store value in. That turned out to be the case for the first four months of this year -- and that was when the stock market was also going up. Imagine that: it is possible for the U.S. dollar and equities (not to mention commodities) to rise at the same time. Who knew?

Of course, when the European sovereign debt crisis stole the headlines in late April and into May, we saw a knee-jerk response as investors fled out of equities and into the dollar. The U.S. Dollar Index Future (DXY) bounced from near $74 in early December last year to over $88 in early June.

However, the dollar has since slumped back down. The DXY is back to $77 at the moment and the Cassandras are echoing the same arguments we heard last year. This time, however, there's a slightly new spin. Instead of simply making the case that the U.S. dollar is doomed, we are hearing (with increasing regularity), that all world currencies are in a race to the bottom.

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