Welcome to Gold Investment Management’s Blog, Stock Market Musings. Since the Blog’s (and Firm’s) inception in April 2008, I have been posting articles which I thought would be of interest to our clients and visitors. A compendium of mostly financial and investment news, the Blog also has a few “Lighter Side” pages containing financial humour. Well, that’s about to change. I have decided that in addition to posting newsworthy aritcles, it is time to personally blog; to write and express my views on the stock market. It seems, after all, that everyone else has an opinion, theory or explanation as to the workings of Mr. Market.
HISTORICAL stock charts seem to show that it took more than 25 years for the market to recover from the 1929 crash — a dismal statistic that has been brought to investors’ attention many times in the current downturn.
But a careful analysis of the record shows that the picture is more complex and, ultimately, far less daunting: An investor who invested a lump sum in the average stock at the market’s 1929 high would have been back to a break-even by late 1936 — less than four and a half years after the mid-1932 market low.
How can this be? Three factors have obscured this truth from investors: deflation, dividends and the distinction between the Dow Jones industrial average and the overall stock market. Let’s consider them one by one:
DEFLATION The numbers show that from a peak, on a closing basis, of 381.17 on Sept. 3, 1929, the Dow needed until Nov. 23, 1954, to return to its old high. But that’s in “nominal” terms, without adjusting for the effects of inflation or its opposite, deflation.
The Great Depression was a deflationary period. And because the Consumer Price Index in late 1936 was more than 18 percent lower than it was in the fall of 1929, stating market returns without accounting for deflation exaggerates the decline.
DIVIDENDS These payouts played a big role in the 1930s. When the Dow hit a low of 41.22 on July 8, 1932, for example, the dividend yield of the overall stock market was close to 14 percent, according to data compiled by Robert J. Shiller, the Yale economics professor.
So ignoring dividends, especially when yields were so rich, also exaggerates the losses of a typical equity investor.
THE DOW VS. THE MARKET Many researchers consider the overall market — defined as the combined value of all publicly traded stocks — as the best gauge of a typical investor’s experience. The Dow is made up of just 30 stocks, which are weighted in the index according to their price rather than their relative market capitalization.
Perhaps the most celebrated illustration of the Dow’s failure to represent the overall market traces back to a 1939 decision to delete International Business Machines from the Dow 30 list. I.B.M. wasn’t restored to the index until 1979. Norman Fosback, editor of Fosback’s Fund Forecaster newsletter, has estimated that the Dow would have been more than twice as high in 1979 had I.B.M. stayed in the index continuously.
It’s unclear when the Dow would have returned to its 1929 pre-crash high had I.B.M. not been deleted in 1939. In response to a request, an analyst at the indexes division of Dow Jones said that it was unable to determine the answer. But because I.B.M.’s stock was one of the best performers during the 1940s, greatly outpacing the Dow itself, it’s certain that its inclusion would have markedly accelerated the index’s recovery.
So when did the overall stock market really make it back to its pre-crash peak? Just four years and five months after its mid-1932 low, according to data provided to Sunday Business by Ibbotson Associates, a division of Morningstar.
That seems remarkably fast, given that the stock market lost more than 80 percent of its value from its 1929 high to its mid-1932 low.
But the quick recovery of the 1930s is consistent with the typical experience after other bear markets in the United States.
DETERMINING the precise length of such recoveries is a problem, given the many definitions of a bear market. Whatever definition is used, however, the typical recovery time is quite quick.
In fact, according to a Hulbert Financial Digest study of down markets since 1900, the average recovery time is just over two years, when factors like inflation and dividends are taken into account. The longest was the recovery from the December 1974 low; it took more than eight years for the market to return to its previous peak, which was reached in late 1972.
None of this, of course, guarantees that stocks will have a quick recovery from the market decline that began in October 2007. But it suggests that the historical record isn’t as bleak as it looks.
Suncor’s vast reserves in the Canadian oil sands make the Calgary-based energy’s concern a smart bet on the likelihood that crude prices will rebound to $60 or $70 a barrel in the next year. Barron’s Andrew Bary reports.
To battle the worst U.S. housing, credit and financial crisis since the 1930s, U.S. central banker Ben Bernanke has slashed a key bank lending rate to a record low near zero and has rolled out a number of bold programs to spur lending.
WASHINGTON (AP) — Housing construction unexpectedly plunged, the number of people receiving jobless benefits grew and JPMorgan Chase & Co. said its first-quarter profit dropped compared with last year.
That was the bad news. But those same reports Thursday included some silver linings suggesting the recession may be easing.
The pace of new-home construction seems to be nearing a bottom. First-time jobless benefit claims fell more than expected for the second straight week. And JPMorgan’s profits were larger than analysts had expected. In the past week, two other banks, Wells Fargo & Co. and Goldman Sachs Group Inc., issued positive earnings reports, too.
All told, growing evidence indicates the economy may be stabilizing.
“The economy is still very weak, but there are some encouraging signs that support cautious optimism,” Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said in a speech Thursday.
The Commerce Department said construction of new homes and apartments fell 11 percent in March. But economists noted that the drop was driven by a steep fall in new apartment building. The construction of new single-family homes matched February’s level and remained above January’s record low.
The consistency in home construction, even as the economy shrank, signals that single-family home building “is now at or near a bottom,” Robert Dye, senior economist at PNC Financial Services Group, wrote in a note to clients.
Economists cautioned that the figures largely reflect a slowing of the pace of economic decline compared with even worse conditions earlier this year. Recovery is still at least months away, they said.
“What would have been bad news last September is good news today,” said Diane Swonk, chief economist at Chicago-based Mesirow Financial.
On Wall Street, stocks rose, partly in response to the economic news. The Dow Jones industrial average closed up 95 points, while broader indices also rose more than 1 percent.
Both President Barack Obama and Federal Reserve Chairman Ben Bernanke have mentioned some recent signs of progress this week, while adding that the recession is far from over.
The Commerce Department said construction of new homes and apartments fell to a seasonally adjusted annual rate of 510,000 units in March. It was the second lowest pace on records that go back 50 years.
Applications for building permits, considered a good barometer of future activity, also fell in March to an annual rate of 513,000 units. But that suggests housing starts will remain stable at around 500,000 in April, economists said, albeit near record low levels.
“Right now, stable looks good,” Dye said.
Low housing prices and record-low mortgage rates may finally be spurring sustained interest in home buying. The Federal Reserve reported Wednesday that the number of people shopping for homes is beginning to rise, leading to a scattered pickup in sales.
Separately, the Labor Department said its tally of initial unemployment claims dropped to a seasonally adjusted 610,000 from a revised 663,000 the previous week. That was far below analysts’ expectations of 655,000 and the lowest level since late January.
Initial unemployment claims reflect the pace of layoffs by companies and are considered a timely, if volatile, measure of the economy. While declining, they remain much higher than a year ago, when claims stood at 369,000.
Economists are watching the jobless claims figures for signs of recovery. Goldman Sachs said in a report this week that claims “normally peak six to ten weeks before the end of recession.”
The four week average of claims, which smooths out fluctuations, fell by 8,500 to 651,000, the department said. That’s still far short of the 30,000 to 40,000 drop that Goldman Sachs said would be needed before it would conclude that claims have peaked.
Finding a new job is increasingly difficult for those who have been laid off. Typically, hiring doesn’t pick up until well after an economic recovery is under way.
The total number of people remaining on the jobless benefit rolls rose 172,000, topping 6 million for the first time, the Labor Department said. That’s the highest on records dating from 1967. The figures for continuing claims lag behind initial claims by one week.
An additional 2.1 million people were receiving benefits under an extended unemployment compensation program enacted by Congress last year, the department said, as of March 28, the latest data available. That provides an additional 20 to 33 weeks, on top of the 26 weeks typically provided by the states.
The Labor Department said earlier this month that companies cut a net total of 663,000 jobs in March, sending the unemployment rate up to 8.5 percent, the highest in 25 years.
The Federal Reserve expects the unemployment rate will probably “rise more steeply into early next year before flattening out at a high level over the rest of the year,” according to minutes from the central bank’s March meeting released this month. Many private economists expect the rate to hit 10 percent by year’s end.
Separately, the International Monetary Fund said Thursday that the global downturn is likely to last longer than typical recessions, followed by a weaker-than-average recovery.
The IMF noted that economic recessions usually are short and recoveries strong. But recessions that are global and associated with financial crises have typically been severe and prolonged, with sluggish recoveries.
NEW YORK (Reuters) - Stocks climbed on Tuesday, sending the S&P 500 to its best month since October 2002, as investors snapped up top-performing bank and technology shares as the first quarter came to an end.
Upbeat news from Europe set the tone for financials, helping them to recover much of Monday’s losses and continue a recent robust rally after British bank Barclays (LSE:BARC.L - News) declined to take part in a government asset-protection plan.
Technology shares also added to a strong three-week rally after brokerage Davenport recommended investors buy Microsoft Corp (NasdaqGS:MSFT - News), pointing to increased demand for personal computers in China and the United States, and potential restocking of inventories in Europe.
Even as the broad S&P 500 rose 8.5 percent in March for its best one-month percentage gain since October 2002, uncertainty about the struggling economy left the benchmark U.S. stock index down 11.7 percent for the quarter.
“I don’t think this strong rally we’ve had in March guarantees we will continue this for the rest of the year,” said Brian Daley, sales trader at Conifer Securities in New York.
“I think there’s still a lot of question marks and a lot to be seen in terms of how the fundamentals play out in the second half, and that’s what I think investors are really going to focus on.”
In fact, data showed business activity in the U.S. Midwest shrank in March at the most severe rate since 1980 (nN31408630) while house prices sank a record 19 percent in January from a year earlier.
The Dow Jones industrial average (DJI:^DJI - News) gained 86.90 points, or 1.16 percent, to 7,608.92. The Standard & Poor’s 500 Index (^SPX - News) added 10.34 points, or 1.31 percent, to 797.87. The Nasdaq Composite Index (Nasdaq:^IXIC - News) climbed 26.79 points, or 1.78 percent, to 1,528.59.
After Monday’s sharp sell-off in banking shares on concerns over the sectors health, JPMorgan Chase (NYSE:JPM - News) rose 7 percent to $26.58 and Bank of America shares (NYSE:BAC - News) jumped 13.1 percent to $6.82, while the S&P financial index (^GSPF - News) gained 6.7 percent.
Microsoft shares added 5.1 percent to $18.37 and contributed the most to the Nasdaq’s advance.
Alcoa (NYSE:AA - News) jumped 9.7 percent to $7.34 after Deutsche Bank upgraded the aluminum company’s stock to “hold” from “sell” and raised its price target. Analysts gave little credence to a rumor that Australian rival BHP Billiton Ltd (ASX:BHP.AX - News) may be seeking to acquire Alcoa.
And on Nasdaq, shares of Autodesk (NasdaqGS:ADSK - News) shot up 10.4 percent to $16.81 after UBS upgraded the design software and services company’s stock.
On the economic front, the picture remained bleak but investors appeared to pay less attention to the data, with damage limited to the homebuilding sector.
In addition to January’s record drop in home prices, March U.S. consumer confidence came in barely above the record monthly low.
The Institute for Supply Management-Chicago index of business activity fell in March at a rate that was more severe than expected.
The Dow Jones homebuilders index(DJI:^DJUSHB - News) fell 3.2 percent.
Trading was active on the New York Stock Exchange, with about 1.64 billion shares changing hands, above last year’s estimated daily average of 1.49 billion, while on Nasdaq, about 2.13 billion shares traded, below last year’s daily average of 2.28 billion.
Advancing stocks outnumbered declining ones on the NYSE by a ratio of 3 to 1, while on the Nasdaq, two stocks rose for every one that fell.
NEW YORK — Wall Street has had its best day of the year, storming higher after some good news from Citigroup.
Citigroup Inc. says it operated at a profit during the first two months of the year. That energized financial stocks and in turn, the entire stock market.
However, many analysts are still cautious — noting that Wall Street has seen many blips higher since the credit crisis and recession began. And no one is confident this advance will hold.
According to preliminary calculations, the Dow Jones industrial average is up 379 at 6,926. The Standard & Poor’s 500 index is up 43 at 720. The Nasdaq composite index is up 90 at 1,358.
More than 15 stocks rose for every one that fell on the New York Stock Exchange. Volume came to 2.17 billion shares.
The TSX rose 313.5 points to close at 7,880.
Led by financial companies, the market made its first big move upward in weeks Tuesday after Citigroup Inc. said it had operated at a profit during the first two months of the year.
Word of Citi’s performance broke a months-long torrent of bad news from the banking industry but analysts weren’t ready to say the stock market was at a turning point and about to barrel higher after a slide that’s lasted more than 16 months.
“To have a sustained rally, we have to have a shift in sentiment,” said Kurt Karl, chief U.S. economist at Swiss Re. “One day isn’t going to make a trend.”
Still, the Citigroup news offered investors some hope that the first quarter will show signs of improvement.
In a letter to employees Monday, Citi Chief Executive Vikram Pandit said the performance this year has been the bank’s best since the third quarter of 2007 — the last time it booked a profit for a full quarter. Based on historical revenue and expense rates, Citi’s projected earnings before taxes and one-time charges would be about $8.3-billion (U.S.) for the full quarter.
Mr. Pandit declined to say how large credit losses and other one-time items have been that would at least partially offset profit.
Citi jumped more than 30 per cent while Bank of America Corp. rose more than 25 per cent. The stocks are among the 30 that make up the Dow and helped propel the average higher. Other banking stocks also jumped.
Financial stocks have been at the centre of the market collapse that has left the major indexes at their lowest point in more than a decade. Reports of losses on bad loans and writeoffs on shrinking assets have pounded banking stocks; Citi fell below $1 a share last week. Analysts have been worrying that hundreds of billions of dollars in government bailouts wouldn’t be enough to save the big banks.
Investors welcomed Tuesday’s rally as overdue after weeks of selling but analysts were quick to warn that it could be little more than a one-day pop. Ben Halliburton, chief investment officer of Tradition Capital Management in Summit, N.J., dismissed the surge as likely little more than a bear market rally that quickly evaporates.
A bear market is defined as a drop of 20 per cent from a market peak — and stocks passed that point last year and continued to plunge, leaving the Dow and Standard & Poor’s 500 at less than half the record highs they reached in October 2007. A bear market rally lifts stocks off their lows, but it quickly evaporates.
Wall Street has already seen a few false starts. From late November until the start of this year, the Dow and the S&P 500 jumped about 20 per cent before plumbing fresh lows this month. The slide has been punishing but it is still well short of the plunge seen in stocks from 1929-32.
“I would be surprised to see us trade back over 800 in the near term,” Mr. Halliburton said, referring to the S&P 500. “The news coming out on the economic front will continue to be rather gloomy.”
Analysts suggested that the market’s gains, especially among financial stocks, could be attributed in part to short covering, an investment strategy that tends to drive rallies in volatile markets. Short-sellers are traders who sell borrowed stock and then buy it back later on the hopes that the price will have fallen. If they believe a stock will be going up, they have to “cover” their positions, or buy shares to repay the loan and limit their losses.
Reports surfaced Tuesday that federal regulators are considering a proposal to reinstate the uptick rule, which backers say helps protect companies from excessive shorting. It was allowed to expire in 2007.
The day’s rally illustrates how concerns about banks have weighed on the overall market, analysts said.
Jon Merriman, chief executive of brokerage Merriman Curhan Ford in San Francisco, said the comments from Citi’s Mr. Pandit are an indication that the bank is lending.
“Maybe Citibank is not going to zero, that means it’s going to lend again and then the economy will turn,” he said. “People today in the stock market are connecting those dots. And the market is up broadly, it’s not just the banks.”
Investors were further encouraged by Federal Reserve Chairman Ben Bernanke who called for a revamp of the country’s financial regulatory system. Speaking before the Council of Foreign Relations, Mr. Bernanke said “too big to fail” companies must be subject to more rigorous supervision to prevent them from taking on excessive risk. Mr. Bernanke’s remarks come as the Obama administration and Congress begin to devise their overhaul strategies.
Citigroup’s announcement proved to be the dose of good news Wall Street had been waiting for to spark a rally, but there was still plenty of pessimism.
“There’s nothing that anybody can do to turn the market around,” said Harry Rady, chief executive of Rady Asset Management. “This is just a little bear market blip.”
Tradition Capital’s Halliburton was hesitant to put much stock in Citigroup’s announcement for fear of rising loan losses that could eat away at the operating profit. As long as housing prices are declining and loan defaults are increasing, “they are going to have to take asset write-downs,” he said. “I don’t think this is a game-changer.”
Government officials have been examining additional ways to stabilize the bank should further problems arise, according to a report in The Wall Street Journal Tuesday citing people familiar with the matter. Late last month, in its third attempt to rescue the bank from collapse, the Treasury Department moved to take up to a 36 per cent stake in Citi.
Citi surged 38 cents, or 36.2 per cent, to $1.43, while Bank of America jumped 98 cents, or 26.1 per cent, to $4.73. JPMorgan Chase & Co. rose $3.26, or 20.5 per cent, to $19.16.
Big gainers included tech and industrial stocks. Caterpillar Inc. rose $2.41, or 10 per cent, to $26.33. Among tech stocks, Intel Corp. rose $1.12, or 8.9 per cent, to $13.67. Cisco Systems Inc. rose $1.02, or 7.5 per cent, to $14.64.
Bond prices were mixed. The yield on the benchmark 10-year Treasury note, which moves opposite its price, jumped to 2.98 per cent from 2.88 per cent late Monday. The yield on the three-month T-bill, considered one of the safest investments, was unchanged at 0.23 per cent.
The U.S. dollar was mixed against other major currencies, while gold prices sank.
Light, sweet crude for April delivery fell $1.36 to settle at $45.71 a barrel on the New York Mercantile Exchange.
Buoyed by the gains in the U.S., European markets soared. Britain’s FTSE 100 rose 4.8 per cent, Germany’s DAX index jumped 5.3 per cent, and France’s CAC-40 gained 5.6 per cent. Earlier, Hong Kong’s Hang Seng index jumped 3.1 per cent, while Japan’s Nikkei stock average slipped 0.4 per cent.
Obama in Canada Finds World’s Best Financial System
By David Scanlan, Theophilos Argitis and Sean B. Pasternak
Feb. 25 (Bloomberg) — David Denison, who oversees investments for Canada’s pensions, says his country’s banks are the best in the world right now and Barack Obama, like so many money managers from Beijing to Paris, can’t disagree.
Before President Obama made Ottawa his first visit to a foreign capital earlier this month, he couldn’t resist telling the Canadian Broadcasting Corp.: “In the midst of the enormous economic crisis, I think Canada has shown itself to be a pretty good manager of the financial system and the economy in ways that we haven’t always been.”
The comment was something of an understatement, as no country among the so-called industrialized nations is showing as much confidence in its bankers as Canada. Not one government penny has been given to any of the 21 banks from British Columbia to Quebec since credit worldwide seized up in August 2007. Since then, American taxpayers have provided $300 billion to bail out more than 450 companies, led by Citigroup Inc. and Bank of America Corp., two of the three largest banks measured by assets.
Obama isn’t the only important person “looking at Canada” in a belated attempt to figure out how to fix a broken financial model, Denison said.
“Solid funding and conservative consumer lending criteria are key features” of Canadian banks, said John Haynes, senior U.S. equity strategist at Rensburg Sheppards Plc in London, which oversees the equivalent of $17 billion. “This has meant that they have had their hands caught in the cookie jar to a much more limited extent than their American and European counterparts.”
Brazil, China
Money managers from Brazil, China, France, Ireland and Australia scheduled visits to Denison’s Toronto office in the past two weeks to learn how Canada and its banks and pension funds are weathering the financial crisis. The visitors include the AustralianSuper Fund and the French National Reserve Fund, which together have assets of $53 billion, he said.
“They have assembled a high-quality team,” said Ian Silk, chief executive officer of AustralianSuper, who visited Denison in May along with three other executives from the Melbourne-based fund and remains in contact with the Canadian money manager.
Canada’s higher capital requirements and loan limits that European banks exceeded by 50 percent helped Canadian lenders avoid most of the writedowns and losses crippling competitors worldwide, even as the nation’s economy slipped into a recession and the jobless rate jumped to a four-year high.
Few Failures
Just two Canadian regional banks have failed since 1923. The only government support has been a pledge to buy as much as C$125 billion in mortgages, allowing the banks to increase lending to companies and consumers.
“The Canadian banking system is a very good story,” said Denison, chief executive officer of the Canada Pension Plan Investment Board, which manages C$108.9 billion ($86 billion) for retired Canadians. “People are looking at Canada” to determine how to fix their broken financial models, he said.
Canadian banks are more constrained than their international peers in the amount of loans they can extend. The nation’s lenders are required to set aside a minimum 7 percent for Tier 1 capital, compared with 6 percent for U.S. commercial banks. At the end of October, Canada’s eight publicly traded banks were above the minimum, at 9.6 percent, according to data compiled by Bloomberg.
Canada’s banking regulator says institutions can lend as much as 20 times their capital base. According to Bank of Canada data released in December, European bank non-risk weighted assets were more than 30 times capital, while that ratio for U.K. banks and U.S. investment banks was above 25.
European Writedowns
Europe’s largest financial companies have reported $321 billion in writedowns and credit-related losses since the collapse of the U.S. subprime mortgage market in 2007 spread to other continents. The market turmoil has forced European lenders to raise $370 billion in fresh capital and sparked government-led bailouts in countries including the U.K., Germany and Switzerland, according to Bloomberg data.
European deficits have ballooned as governments committed more than 1.2 trillion euros ($1.5 trillion) to save their banking systems from collapse.
“When the crisis started emerging on those fronts, Canada was less affected,” said Matthew Strauss, a senior currency strategist in Toronto at RBC Capital Markets, a unit of the country’s biggest bank. “Canada has always had a fairly conservative banking sector.”
Dividend Cuts
While Bank of America and Citigroup cut their dividends to 1 cent a share from as high as 64 cents, the payouts at Canada’s five biggest banks haven’t been reduced since the Great Depression. Toronto-based Royal Bank of Canada is now the third- biggest bank in North America by market value, almost three times the size of Citigroup, while Toronto-Dominion Bank ranks fifth. Royal Bank is almost three times bigger than European lenders Royal Bank of Scotland Group Plc and Deutsche Bank AG.
The Canadian banks, which begin reporting first-quarter results today, probably will say profit declined an average of 12 percent, the biggest drop in almost seven years, according to Scotia Capital analyst Kevin Choquette. By contrast, Bank of America reported its first quarterly loss since 1991 last month, and Citigroup posted a fifth straight loss.
The Canadian banks haven’t been in this position of global strength since between the two World Wars, said Charles Goodhart, a professor of finance at the London School of Economics, and a former Bank of England policy maker.
‘Very Diversified’
“They’re very diversified, didn’t get heavily involved in the international investment banking industry and they’ve benefited from good central banking,” Goodhart said.
Countries need more “boring” financial systems like Canada’s, Finance Minister Jim Flaherty said Feb. 14 in Rome, where he was attending a meeting of finance ministers and central bankers from the Group of Seven industrialized nations.
The federal government in October set up a C$218 billion program to guarantee bank debt to help Canadian lenders compete in international markets with government-backed U.S. banks. None of the country’s lenders has tapped the credit.
“The Canadian government has a lot of firepower these days, not just because this has been such a well-managed economy, but frankly, because the Canadian government has not been bailing out the Canadian banks,” Toronto-Dominion Chief Financial Officer Colleen Johnston told investors Jan. 28 in New York.
TD Profit Falls
Toronto-Dominion reported today that fiscal first-quarter profit fell 27 percent to C$712 million, or 82 cents a share, because of higher loan-loss provisions. Results topped analysts’ estimates.
Toronto-Dominion and Royal Bank are among just seven banks in the world with the top credit rating of Aaa from Moody’s Investors Service.
Canadian regulators resisted pushes from some bank executives to loosen lending restrictions when the economy was booming, says David Dodge, 65, who stepped down as Bank of Canada governor a year ago.
“The banks at the top of the cycle thought we were being too tight-assed,” Dodge said in a telephone interview.
Even the strength of Canada’s banks hasn’t kept the economy from being dragged down by the global crisis. The world’s eighth- biggest economy will shrink by 1.2 percent this year, in part due to falling exports of oil and other commodities, according to Bank of Canada projections. Employers cut a record 129,000 jobs in January.
‘Major Problems’
“We have major problems,” said Stephen Jarislowsky, the 83- year-old chairman and founder of Montreal-based money manager Jarislowsky Fraser Ltd., which manages about $31.8 billion. “Our commodity boom is over for a long time.”
Canada recorded its first monthly trade deficit in more than three decades in December, as exports plunged 9.7 percent. The country ships more than three-quarters of its goods to the U.S.
“We have some unique advantages, but we are being profoundly affected by the global crisis,” Bank of Canada Governor Mark Carney said in a Feb. 14 interview from Rome.
Canada’s housing market has also held up better than in the U.S., where prices declined a record 19 percent in December from a year earlier, according to the S&P/Case-Shiller index. Resale home prices dropped 9.9 percent in Canada during the same period, the Canadian Real Estate Association said. Last year, Finance Minister Flaherty scrapped 40-year mortgages when they started to gain popularity among homebuyers seeking to reduce their monthly mortgage payments.
Lending to Homebuyers
Canadian banks are less willing to lend to homebuyers with low credit scores: Subprime loans account for just 5 percent of the total. That compares with 20 percent in the U.S., where independent mortgage brokers and lenders competed with commercial banks to win business by attracting high-risk borrowers.
Another restraining factor is that Canadians, unlike their U.S. neighbors, can’t take mortgage interest as a tax deduction, removing an “inherent bias” to take on too much debt, Prime Minister Stephen Harper said in September.
Canada was the only Group of Seven nation to balance its budget for 11 consecutive years, before a stimulus package aimed at sparking growth pushed the country to a deficit for the fiscal year ending March 31, according to a government forecast.
The relative strength of the financial system may help Canada recover from the recession faster, Carney said. The Bank of Canada is forecasting growth of 3.8 percent for 2010, in anticipation of rising commodity and oil prices. Canada’s oil sands in Alberta contain more reserves than any region outside Saudi Arabia.
“Once this uncertainty is removed, and it will be removed ultimately,” Carney said in an interview, “these strengths will kick in and that will have a bigger impact in our opinion in terms of the recovery in Canada.”
