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 


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.
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  1. Robert M commented on Oct 20

    “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.”

    One how large is the US’s? Two, when does Bernie Saunders start really connecting the dots of infrastructure and the tax reform he is touting?

    I personally am not buying the college debt issue as it doesn’t benefit the whole country. The biggest mistake liberals made was not finding policies that would benefit the white working class and letting the extremists play on racism to keep them in their fold.


    ADMIN $4 trillion

  2. rd commented on Oct 20

    Good God. David Rosenberg is a Communist. He actually believes that spending on infrastructure will increase real GDP when it is obvious that this is incorrect and only deficit spending on wars with tax cuts for the wealthy will accomplish that.

  3. VennData commented on Oct 20

    ..and legalizing it.

  4. rd commented on Oct 20

    BTW – one of the benefits of a parliamentary system is that the opposition parties have “shadow cabinets” where the opposition parties have members assigned to a parallel role to each of the Cabinet Ministers (equivalent to the Secretaries for the various Departments in the US). So once a change of government occurs, most of the Cabinet positions are filled by their former “shadows” who are familiar with the specific issues of that agency. They don’t have to go through the US equivalent of Senate approval, so an entire new government can be formed literally in hours once all the votes are counted and the Governor General has asked the winner to form a government. Usually that process is complete within a few days as it gets sorted out who was actually elected to be in Parliament and the normal internal wrangling plays out within the party, as sometimes the party may win but a shadow cabinet member may not be re-elected in his/her riding or a new better-qualified member is elected elsewhere.

    So typically the new government is actually governing within a few days of the votes being counted. The new Prime Minister generally takes over within a day or two after the voting stops. The process is very fast when the winning party has the majority of seats like this election. It is slower when they have to negotiate a coalition minority government with another party.

  5. A commented on Oct 20

    Dave forgot to mention one item: our hope that Trudeau will not choose to mismanage the country’s finances like his surrogate mother, the Liberal premier of Ontario.

  6. TheTruth commented on Oct 20

    Lots of people are pleased that perhaps the insane Canadian push to build unsafe tar sands pipelines through the USA will lose its intensity.
    Here are a few examples of TransCanada’s shoddy construction techniques to illustrate why Americans don’t want Keystone-XL of any other pipeline operated by TransCanada.
    Bad welds, dents and damaged coatings were discovered at the southern leg of the Keystone XL pipeline. From the start of welding, TransCanada experienced a high weld rejection rate, with over 72 percent of welds required repairs during one week. In addition, dents in pipelines and damaged coatings resulted in the pipeline being excavated in 98 places to make repairs.
    Over 125 potential defects were discovered along 250 miles of pipeline. According to a Public Citizen report, TransCanada, repaired 125 potential “anomalies” along 250 miles of the complete 485-mile pipeline, including dents, welds, field coating problems, improper backfilling, unintentional sags, insufficient pipe support and poor soil management. While TransCanada says it’s excavated areas of the pipeline out of an “abundance of caution,” the report warns that the damages, along with what appear to be shoddy repairs, “raise the specter of history repeating itself, with toxic crude leaking or even gushing from damaged pipe.”
    Public Citizen took pictures of green patches that appeared to be peeling off some sections of pipe, warning that the substandard repairs could expose the underlying material to corrosion or leaks. In other instances, they found dents “as deep as that of a brick.”
    Public Citizen also took pictures of instances where the welding of two sections of pipe was tested by radiography, rather than by a technique known as “automatic ultrasonic testing,” or AUT. Radiography basically takes an X-ray of the pipe to look for problems, but the resulting images are fuzzy, according to the report, because they are taken through many layers of steel. In contrast, AUT uses high-frequency sound waves for what some pipeline experts say is a more accurate assessment of the line’s integrity.
    TransCanada knows their pipelines are defective but they choose to maximize short term profit and pass the risks to others. Watch what their former pipeline inspector said after he was fired –

    • rd commented on Oct 21

      Similar to all booms, energy bull markets suck in lots of capital and workers just because it is there. Quality inevitably suffers because the focus turns to quick production with no slowdowns permitted, similar to the financial markets pre-2008.

      More short-term thinking. It is especially dangerous with infrastructure items like pipelines etc. because they are expected to remain in place and functional for decades.

      As an engineer, I know these things can be done properly. Usually the cost to do it right the first time is actually just a state of mind instead of an actual cost. Well planned and executed projects usually get done on time and on budget while the “cowboyed” ones often run into “unexpected problems” simply because nobody stopped for a second to think. However, it requires a laser-like focus on execution, quality, and ethics from the top-down in corporations. If the message is “just make it happen”, then we get VW diesel cars. Our corporations don’t have to live in a Dilbert world if they choose not to.

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