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Canada’s Election Result: Still No Vaccine Against Big Government Spending

September 21, 2021

Key Takeaways:

  • Every political party in Canada, including the Conservatives, has abandoned fiscal conservatism.

  • However, this is hardly a Canadian trend. Deficit-phobic governments around the world are in well-charted decline.

  • The world has darkened over the summer and sentiment has soured. But investors should stay with a reflationary bias in portfolios. Chronic deficit spending will keep the global risk cycle on.

“It takes a lot to get Canadians to intensely hate something,” former Prime Minister Stephen Harper once said. “And it usually involves hockey”. Yet, judging by the national mood in this country, politics are now the leading arena of contempt, complete with bench-clearing brawls and bare-knuckled fist fights. How utterly un-Canadian.

Yet, on some levels, this shift is intuitive. Every nation should emerge from a world-historical event with a heightened awareness of humanity’s big issues. And we always do. It is natural, even soothing, to believe that we can come out the other side with more insight about the best way to manage our economies and societies. A crisis without a corresponding reform agenda is too difficult to contemplate. But whenever civilization has confronted a major shock, the conversation has always taken on a more contentious tone.

This time is no different. And yesterday’s disappointing result for the Liberals, where Prime Minister Justin Trudeau won a third term but fell short of securing the majority he had been seeking, will provide no relief in national tensions.

The End Of Fiscal Conservatism

On the surface, this election seemed to be a referendum of sorts on the Trudeau administration’s handling of the pandemic. With Canada’s per capita vaccination among the highest in the world and the economy soaked with stimulus, the Liberals clearly felt they had a historic opening — a clear breakaway even — that would propel them to a parliamentary majority. Evidently, that was a wrong-footed assumption (admittedly not as off the mark as projections for the Leafs last spring, where they had a 3-1 series lead only to lose in the first round of the playoffs!).

But for those labouring in the world of money, this election should have a clear takeaway: every political party in this country, including the Conservatives, has abandoned fiscal conservatism. The policy convergence is hard to miss. Sure there are differences in policy substance. O’Toole’s approach to oil pipelines is more Conservative mainstream, while Trudeau wants to raise taxes on banks and insurance companies (from 15% to 18% on earnings over $1 billion).

But, almost immediately after the election was announced, the Conservative Party quickly released a detailed policy platform that included billions in new stimulus spending, effectively inoculating themselves against any accusations of austerity. In fact, the numbers are scarcely different: Trudeau now plans to introduce $78 billion in new government spending over the next five years, compared to O’Toole’s proposals for $51 billion over the same period, while balancing the budget “over the next decade”.

To be sure, this is a long way from the budget-conscious and hard-edged conservatism of the Harper administration during the years 2006 until 2015. But it is hardly uniquely Canadian. Many more data points show deficit-phobic governments around the world in well-charted decline. In fact, it would take a cocooned existence not to spot the trend. Never mind Washington, where in the coming weeks, a $550 billion infrastructure bill should easily pass through the Senate. Berlin, long the world’s leading holdout of fiscal austerity, has concluded that with Brexit, more combative US trade policy and rising competition from China, more spending is needed to secure their economic position. This Sunday’s German election shows Olaf Scholz, of the more fiscally proactive Social Democrats, as Merkel’s likely successor.

It should now be clear that the above trend is not an aberration. Rather, it is the start of a profound ideological shift in fiscal policy across the world (See Super Trend “You Say You Want A Fiscal Revolution”). If all of this sounds like unstable government policy, trust your instincts. But those are worries for another day. Over the medium term, chronic deficit spending will keep the global risk cycle on.

Investment Implications

The world has darkened over the summer. Economic expectations have fallen as the delta variant surged. The retail trading frenzy peaked this spring. Even the professionals are now a grim bunch. The latest global fund manager survey from Bank of America shows macroeconomic optimism “tanking”, with just a net 13% expecting improving economic conditions (down from 91% in March). Sentiment in Canada has been no exception. The election has only added to the ambient anxiety.

But investors should position for continuing reflation. This is clearly a different recovery than the one after 2008. Austerity is out. Central bankers are explicitly targeting higher inflation. Global consumers have far more robust balance sheets, with more savings to be spent earlier in the cycle. And, China, backed by a chronically strong currency and no longer a deflationary force on the world, is now reflating again.

Enough data points support a robust global recovery. Yet most investors end up anchoring on the prior regime, assuming that the low growth era of 2009 – 2020 and the associated investment leadership (US growth stocks, technology disruptors, bonds, etc.), will remain in place. But the pain trade (if you will allow us to extend the hockey analogies way beyond their breaking points) is to stay with a pro-cyclical bias in portfolios, accepting that we are still only in the first period of a longer running upturn. The reflationary game is still on.


Chief Executive Officer & Chief Investment Officer

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