The Return of “Trudeau-mania”

The following electoral analysis is from David Rosenberg, lifelong resident of Toronto, former Chief Economist for Merrill Lynch North America, now Chief Strategist at Gluskin Sheff. You can reach Dave at Drosennberg-at-gluskinsheff.com 

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The Liberals won 184 seats in the Canadian Federal election, a massive improvement over their 34 seat showing in 2011 — the gains came at the expense of both the Conservatives (99 seats from 166 in 2011) and New Democratic Party (44 seats from 103).

Call it the return of “Trudeau-mania”.

In the weeks leading up to the vote, the Liberals’ momentum started to look like the post-trade deadline Blue Jays.

Never mind the Tories’ loss, the collapse of the NDP was epic considering that the party led in the polls for most of the campaign.

The Liberals were able to offer change when it unveiled its official economic plank, with deficit-financed infrastructure spending the lynchpin and the only party to abandon the thought that we need to run balanced budgets across the continuum of the business cycle irrespective of the economic conditions of the day.

Folks in the upper-end of the income echelons (though $200,000 of annual income in high-cost Ontario hardly sounds like the high-flyers during the King Louis XVI era, even that stipend probably doesn’t buy you the best house in the best neighborhood in Medicine Hat) may not be too thrilled about having the tax bill go up, but insofar as the proceeds are moving towards some long-term benefits with a productivity payoff, this likely is a cost worth bearing.

Canada, after all, according to many estimates, has a national infrastructure deficiency exceeding $700 billion — closing that gap and thereby bolstering potential GDP growth is a worthy goal.

The polls showed that more than 70% of the public was seeking change, and for the Progressive Conservatives, it is tough to win an election after nearly a decade in power and merely offer up the status quo.

Justin Trudeau had the support of the legendary (former long-serving Mississauga mayor) Hazel McCallion while Stephen Harper was seeking the support of the Ford boys as the campaign wound down — so anyone surprised by last night’s results was not paying attention.

This is perhaps why the loonie has not sold of that much as it did following that prior post-wilderness electoral victory back in 1993 (the Canadian dollar is just above the C$1.30 mark).

And the outlook for the currency has actually turned more positive. Why?

Because of all three parties, weighing in all the tax effects and spending initiatives, and accounting for all the fiscal multipliers, the Liberal plan looks to add the most to real GDP growth for the next four years by our analysis (mostly via the proposed infrastructure package).

The Conservative stimulus provided a comparably smaller boost (income splitting, expanded child care benefits, payroll and business tax relief), while the NDP’s proposals were dead last in our analysis, only adding marginally to growth on an average annual basis.

If Canadians voted with the economy in mind, you can see why the results were what they were.

So this pro-growth Liberal spending plan, and Robin Hood-style tax policy (actually a net add to growth since the recipients have higher spending propensities than the well-heeled among us), will take pressure off the Bank of Canada from having to pursue any further policy accommodation.

This as a stand-alone development — fiscal policy joining in on the stimulus front to a significant degree is Canadian dollar bullish, once the early “uncertainty” effects subside.

We also are going to see incremental net new Government of Canada bond issuance of roughly $30 billion from the Liberal plan versus the Conservative’s Budget projections over the next four years, which is a far cry from the balanced budgets that the Tories and NDP were planning.

This was the critical plank for the Grits — deficit-financed infrastructure outlays. The fiscal gridlock stateside will ensure that Uncle Sam’s debt financing needs will remain on a downward path at a time when Canadian requirements will be moving in the opposite direction.

For the markets, the front-end of the Canadian yield curve has already been repriced as the two-year Government of Canada note yields 0.53%, and it is fast approaching 0.6% south of the border.

But the anomaly that has yet to be resolved is at the longer-end of the curve where Canada-U.S. yield spreads are still deeply negative (-57 basis points for 10-year notes and -60 basis points for 30-year bonds).

So the “trade” here is a move towards less negative Canada-U.S. bond differentials and a steeper domestic yield curve.

And it goes without saying that better growth prospects and rising long-dated yields is bullish for “spread” product, including the Provincials.

As for equities, well, insofar as growth matters, and insofar as the Liberal plan, even with rising deficits over the intermediate term, has a more pro-cyclical bend, it is tough to draw a negative conclusion from the election results.

Yes, “change” could cause a near-term assessment of the fair-value price-to-earnings multiple, but keep in mind that in the past, stock market performance during Liberal regimes were decent.

Low- and middle-end retailing should benefit from the tax shifts (although at the expense of luxury goods and services) while capital goods sectors should benefit from the pledged infrastructure outlays.

The Liberal plan also seems to support pipeline expansion, though carbon policies are still up in the air.

The fact that we have a majority on our hands means this will not be a repeat of that other Trudeau era from 1972 to 1974 where Pierre had to curry favor from the left-leaning NDP to get legislation through.

So there is an element of stability here.

And a likely choice for the new Finance Minister is going to be the former critic when the Grits were sitting as the third party, Scott Brison, a former Conservative by the way, with previous cabinet experience to boot. A slouch he is not.

Having a steady hand at the till on the fiscal front imparts a certain degree of confidence.

So to put things into perspective:

• The Liberal economic plan offers up the greatest growth prospects.

o   This is actually keeping with the historical record of the past 50 years, as real GDP growth has averaged 3.3% under Liberal governments and 2.1% when the Tories have run the show.

• Majority governments serve up stability and the Liberals will not have to get into bed with the NDP.
• This is not the 1988 anti-free trade Turner-led Liberal Party — the rhetoric has been supportive of the Trans-Pacific Partnership.
• In the post-WWII era, the Liberals have been in power 64% of the time — for anyone 30 or older, this is old hat.
• Change is tough, but necessary; imagine life without it.
• Scott Brison, a likely choice for Finance Minister, has a Bachelor’s of Commerce degree from Dalhousie (nice to have in a finance role), has Bay Street experience (formerly Yorkton Securities); was a Conservative Member of Parliament from 1997 to 2003 (pro-business bent); was Parliamentary Secretary in charge of Canada-U.S. affairs.