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David Dodge speaks.

Recent remarks from former Bank of Canada Governor, David Dodge (2001 – 2008) can be summed up as: Bumpy Road Ahead, Low for Long and Slow for Long. Translation: More pain for Pension Plan’s and Savers.


Last week, former Bank of Canada Governor, David Dodge addressed the CFA Vancouver crowd with where we’ve been and where we’re going remarks. The messages were consistent with what investors have been hearing, reading and experiencing for some time. Bond investors need not fear increased interest rates until 2015. Pension Plans and Savers will have to wait for higher rates. Equity investors should expect a bumpy ride with a slow and slowing growth backdrop complicated by so many opportunities for government policy mis-steps.

Here are my notes.

Bank of Canada

Expect low interest rates and slow growth for a long time.

Investment markets are in a “later-stage deleveraging cycle” that can be expected to last into 2014. There could be policy mis-steps from the US or Europe. And a slowing China will make things worse.

The Corporate sector, in previous crisis was overleveraged. Not this time. Therefore this post-war cycle is not the same. While the massive liquidity injections by government reversed a lot of the 2008 – 2009 collapse, the nature of the collapse is so different this time that liquidity is not working. Policy uncertainty undermines Corporate strength.

China must transition from an export to consumer demand taking responsibility for the economy. This will not be without mis-steps.

More deleveraging

European banks need to substantially de-lever and that will impact credit availability to Emerging markets. New bank credit and liquidity rules and regulations will reduce bank credit creation.

ABCP and MBS markets are still not functional. Commercial paper marketplace is causing stability issues.

Housing markets

The US housing market is beginning a recovery.

Euro households will continue de-leveraging until well into 2013 at least. Normally, housing is about 4% of GDP. Spain got up to 15% and is now at 0%. Expect housing to have a strong negative impact on growth will thru 2013.

Canada housing market is just starting to de-lever. Canadian housing will contribute negative GDP growth well in to 2013.

Government sector

Expect more austerity and negative growth. While fiscal austerity is a problem, it, along with slower growth, causes weaker revenue growth. Expect World growth to be ~ 3 ½% through 2013 – 2014. There is lots of excess capacity and therefore no inflationary pressures. In the absence of mid-East Oil supply disruptions or food price adjustments due to drought, there are few inflationary risks to 2015.

US fiscal cliff could drag on GDP growth to the tune of 3 ½% to start 2013 and well in to Q2, 2013.

India and Brazil are also experiencing fiscal constraints.

Monetary Policy

Expect low rate for a long time … everywhere. This will ensure Pension Plans and Savers continue to be challenged but it will help allow time for governments to dig themselves out of their fiscal messes.

Downside Risks

US could fail to resolve their fiscal cliff dispute.

The Euro may disintegrate.

The China transition to a more balanced economy may not go well (with the new leadership).

Mid-East Oil supply disruption leading to an Oil price spike.


Resource prices are well behaved (stable).

Strong financial sector.

Federal fiscal constraints are minor and having little impact.

Provinces are not as well off. Fiscally, Provinces are a mess. Provinces are where the problems are. Weak Provincial finances will lead to labour relations problems.

A strong loonie is challenging to exporters.

High household debt is constraining consumer consumption.

Financial Institution regulatory changes will constrain growth as resources are spent on compliance.

In sum

Low interest rates for a long time.

Slow growth for a long time.

Think 2015.

The yield curve will be flat until then. But will steepen fairly quickly with inflation in 2015 / 2016.


Next time? More Risk Management.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan
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