Thursday, December 5, 2013

Economic Reality vs Typical Media Driven Misleading Information

Now, don't let me bore you if you're not Canadian, since this first paragraph is really only for Canadians, but if you're American, go straight to the chart below and read on.  You may find this information refreshing, positive and contrary to popular media and public opinion on the state of the United States economy. For some time, I have been telling Canadians that investing in United States real estate is a prudent, and profitable approach, and with the near par level of the Canadian dollar vs the US dollar, that the time to take advantage of low market prices, and a high relative dollar value was now.  Well, "now" was best just about a year ago.  It's still a great investment opportunity in general for Canadians to invest in US real estate now, however we have seen prices on the rise, as well as the US dollar rising significantly against the Canadian dollar recently which will likely trend in the same direction towards long term historical norms.  The biggest additional factor that will influence the exchange rate is interest rates.  The US dollar is rising and interest rates have not begun to creep up yet.  They will definitely go higher, the only question is how soon, as the US Federal Government moves towards paying down the national debt with cheaper dollars with higher interest rates.  The exchange rate as of today is 0.938 US$/CAD$.  Just a few months ago it was above par on the flipside.  I believe what we are seeing is the beginning of a consistent and long term drop of the Canadian dollar vs the US dollar as we have seen in the past.  I recall working in Troy, Michigan from 1997-2000 and the exchange rate was as low as 0.6311.  Now, let's take a look at a very interesting chart and how it relates to what I mentioned above.

United States Federal Debt as a % of Gross Domestic Product (GDP)
1940 to 2012

The great recession took its toll, but it seems that we can safely say that the worst is behind us.  Regardless of what the naysayers and pundits are saying, we must look at facts rather than conjecture AND SELF-INTEREST, which is a predominant difficulty with listening to the media and the hoards of "experts" that they put on television and radio and print.  

Take a moment and look at the attached chart and make your own judgement...Real numbers do not lie.  Clearly the debt / GDP ratio was significantly higher at the end of the second world war in 1945-1947 than it is today.  It was significantly higher, so where the media tends to put "experts" on telling the world how bad the fiscal situation is in the United States, the real story is told by this simple chart.  The absolute value of debt is irrelevant.  What is relevant is the GDP compared to it as it shows the ability to repay this debt.  Since the United States paid down debt significantly after 1945, then it most certainly can do it again since the levels are significantly lower now in comparison when we look at GDP and not total dollars.  Now, don't misconstrue what I'm writing here.  The national debt of the United States is very high in a vacuum, however we do not live in a vacuum.  The fact remains that this chart tells the truth more than anything that I have seen anywhere else.  There are clearly economic complexities that will drive the general economy, however, when we look at how the situation is now compared to the past, it's much more positive than we have been led to believe.  As interest rates rise and the debt is paid down, and more foreign investment of "scared money" goes into the United States, look to have that impact the Canadian dollar in a negative way.  An additional factor that will certainly influence exodus of money from Canada into the United States at least in real estate is that prices are sky-high in Canada compared to the United States in a relative way.  Looking at all of these factors, we can certainly expect that the Canadian dollar valuation relative to the US dollar will tend to trend downwards.

I hope this information has been of help to clarify reality in a rather easy to understand manner.

Until next time.....