What’s so nutty about the loonie’s value?

Benj Gallander and Ben Stadelmann
Thursday, November 6, 2003

Many economists across the nation are assailing the high value of the Canadian dollar and the damage it will cause the economy. Oh, please, you harbingers of pessimistic dross. Not so long ago, most of you were wetting your pants because the dollar was tumbling like a novice skydiver fumbling with his parachute release. Danger, danger, free fall in progress! Ground beware!

First, the Canadian dollar is not “strong.” A patient recently taken off life support who is leaving the hospital is anything but strong, but is hopefully improving en route to complete recovery.

Our dollar is enjoying a major upswing, and if we play our cards correctly, Canadians can benefit handily. Time to pack those bags and take a trip to a foreign land, perhaps? Rare is the nation with a piddling currency and a high standard of living.

What is the goal for the dollar and economy? The optimum is a high dollar, with a highly productive economy accompanied by low unemployment. This is hard to achieve, but at various times over the last 20 years a number of nations have realized this lofty goal. A few include Germany, Japan and our neighbours to the immediate south. It can be done.

All of these economies have fallen from their lofty perch and are struggling to regain their balance, but that is the nature of economic cycles and government policies.

A robust currency, in conjunction with the other two conditions cited above, will ultimately lead our society to a much better standard of living. The focus should not only be on our natural-resource advantage, but on producing more products and investing in technological advancement.

One way to do this is to concentrate major research-and-development funding in a specific area, thereby gaining us a global competitive advantage. For example, if Canada were to become the acknowledged world leader in protecting the integrity of the Internet, enterprises would be forced to buy Canadian. Easy to do? Certainly not. But if we do, we Canadians can have our cake and eat it too.

This is not to say that the rise in the Canadian dollar will not hurt some companies — that’s already happening, and the effects have been amplified by the unprecedented swiftness of the advance, and by the fact it was completely unforeseen by any economists we know of. If they wish to remain competitive, many enterprises will have to make cutbacks and other operational adjustments.

Some of us remember the 1970s, when there were concerns that the American dollar was descending to banana currency status. Then it bolted upwards like a juggernaut, and confidence in the greenback reached silly levels. Now the pendulum, as they are wont to do, is swinging back.

As mentioned in this space last May, the drop in the US dollar is hurting our portfolio’s returns. Our stated goal was to systematically cull American positions, and our mission has been accomplished.

In the past six months we have ejected Bombay Company at USD $8.44 and $9.84, having bought it at $4.13; OfficeMax at $8.94, a country mile from our purchase price of $2.81; 70 percent of Worldwide Restaurant Concepts and 75 percent of Network Equipment Technologies, after watching them nearly triple from their purchase prices. Hartmarx was also sold at $2.69, a slight discount to our buy-in price of $2.81.

As a result, our portfolio’s Stateside content has dropped from about 75 percent to approximately 45 percent. And in December, our focus will remain on buying Canadian.