Submitted by FPWM Securities

Over the last number of weeks many of you know that I was away in France to participate in an annual cylesportif called La Marmotte.  La Marmotte is credited as one of the most difficult one day cycling events and after now completing this epic challenge I can certainly confirm that it was the most difficult physical feat I have completed to date in my life!  This year, in particular, was extremely difficult given the unprecedented heat wave that hit France and caused temperatures to reach 47 degrees Celsius right before my final climb up Alp d’Huez.   My understanding is that of the approximately 7,500 riders that ventured out at the start of this event, over 2000 did not make it across the finish line at the top of Alp d’Huez.

Aside from my intrepid need to share the stories, of which I have many, about the riding in France, it came to me that this event and the time leading up to it had many things in common with wealth management, business, and the economy in general.  This parallel came to me as two economic events unfolded during my stay in Europe and on my way back to Canada, which was the crisis in Greece and subsequent second rate cut in Canada by the Bank of Canada.  Through both of these events it came to me that same preparation that enabled to be ready for La Marmotte and the perseverance that carried across the finish are as crucial in sport as they are anywhere.  Furthermore these two attributes have helped us in the management of our client accounts and the lack thereof can explain why both of these events have occurred.

On the negative side first, so that we can end more on a positive note, let’s examine Greece. As a nation, Greece has just faced one of the direst circumstances of any Western country in current times.  The challenge that Greece faced, without going into the history of what lead to the crisis, is of their own undoing.  A number of years ago, when the crisis first came to light, the Greek tragedy took centre stage, causing markets and investors to head for the hills with the prospect of default and the Grexit, (Greek exit from the Euro Currency) a plan was put in place by the European Union (reluctantly) and agreed to in the Greek Parliament (also reluctantly) to avoid catastrophe.  This plan was built on the premises that the Greeks would have to severely cut their spending and increase taxes in order to access funds from Europe that would, in time, allow them to emerge as a stronger economy that would be better suited to be part of the Euro.  The pain that the citizens felt was sharp, severe, and there was no prospect for them emerging as stronger economy in the near future as GDP shrank considerably.  It was the old adage of short term pain for long term gain. That said, despite the initial plummet in the economy, growth did start to slowly emerge until election time, when Alexi Tsipras came along and offered alternative solutions built on candy dreams that would allow the Greeks to emerge from their economic slump without any more pain. 

Of course, the Greek population ate this up and voted in a populist government that attempted to end the austerity program in place – they had no desire to persevere.  Ultimately, though, the final ploy by Tsipras was to threaten Europe, hoping they would cave at the prospects of losing Greece, and maintain the funding that was desperately required just to keep money in the banks.  When I look at this from the prospective of my training and the race, I knew that any deviation from the program would be a step backwards and, as a result, I would have to work that much harder to regain any ground lost.  As it turns out, the same is true for Greece. As a result of the lack of perseverance, Tsipras ended up having to go back to Greece, with his tail between his legs after taking a worse deal than the initial offer from the EU. On top of that, given his election campaign that pledged to do the opposite, Tsipras also had to try to sell this awful deal to his people, using the excuse that it was his only course of action to avoid the prospects of utter economic collapse! Suffice it to say, Greece’s impatience did them no good in this case.  

When it comes to Canada, the Bank of Canada has recently issued its second rate cut announcement of the year, bringing the overnight rate to half a percent.  This rate cut is indicative of where the Bank of Canada sees the current economic environment in Canada and the prospects of growth going forward – in short, it’s not good.  Given the cut, it would be fair to assume that they see the economy as weaker than expected with a need of something to stimulate growth.  More particularly, based on the press release, the following was partially credited to the decision, “The downward revision reflects further downgrades of business investment plans in the energy sector, as well as weaker-than-expected exports of non-energy commodities and non-commodities” (Source: Bank of Canada July 15th, 2015 press release).  Basically, in my opinion, Stephen Poloz is effectively saying that the previous rate cut has not yet stimulated the manufacturing sector such that investment looks favourable in Canada versus other areas, despite the weakened Canadian Dollar.

The fact that the two cuts have not stimulated export growth should not come as a surprise to readers of our blog.  For far too long Canada has failed to prepare for the bust part of the commodity cycle that we have now come face to face with, resulting from decreased marginal demand and a significant increase in supply (with Iran now looking to double its output as well).  Further to that many government bodies in Canada still fail to acknowledge the issue or are reluctant to face it, which is in stark contrast to how I feel they should.  Different levels of government are reducing spending when they should be considering especially on infrastructure or at the very least, not cutting.  In Ontario, the manufacturing engine of Canada, they are even looking to apply further costs to employers which will surely drive any prospect of new manufacturing jobs away like the plague, in a sense countering the Bank of Canada’s rate cut.  This failure to properly prepare would be akin to me racing in La Marmotte without any training; surely my result would have been failure, regardless of the perseverance I might have mustered.

Now, on to the good news... Preparation and perseverance are two things that we as a firm seemingly have ingrained in the fabric of our constitution.  Sometimes, at least for me, it takes individual acts that we complete to make us realize what we are.  After the collapse of the markets in 2008, we realized three things relatively quickly:

- Based on the planning and implementation of US monetary and fiscal policy they would recover out of their crisis and re-inflate their economy
- Based on new sources of oil being exploited and the flattening out of developing economies, oils marginal demand would decrease and supply would increase causing prices to fall
- If any economic uncertainty arose, of which there was still plenty to go around, the USD would increase in value relative to all major currencies (including the Canadian dollar), given that it had proven its reserve currency status during the 2008 collapse. 

Because of our planning and preparation to identify these key premises we were able to avoid much of the volatility in global markets, while at the same time yielding what I feel have been great results for our clients.  More importantly, we have had the perseverance to stick to the plan, especially at the outset of this investment allocation decision when it may have seemed like a questionable course of action.