• It's Here!

    Etf Pro

    Get the big financial market moves right, bullish or bearish with Hedgeye’s ETF Pro.

Although we haven’t bought the Canadian stock market yet, from a purely capitalistic perspective, we have had a more positive view on Canada recently based on the political shift to the right of center driven by current Prime Minister Stephen Harper. As we have previously noted, Harper solidified his minority government just seven weeks ago. We took this as a sign that Canadians, on the margin, were more predisposed to the conservative economic policies espoused by Harper and his Conservative Party.

Unfortunately, in the last couple of days, the political outlook in Canada has clouded over dramatically. Late yesterday, Reuters called recent events “one of the worst political crises in the country’s (Canada) 141-year history.” As a Canadian, it is an assessment I have a hard time denying.

A coalition has formed between the Liberal Party, the National Democratic Party (the NDPs), and the Parti Quebecois. In combination, the coalition has 163 seats (Liberals 77, NDP 37, and Bloc Quebecois 49) versus 143 seats for the Conservatives. On December 1st, the three opposition leaders signed an accord in which they agreed to form a coalition to pursue a non-confidence vote in Parliament. Under the accord, the Liberal leader will become Prime Minister and the cabinet will be split between the Liberals (75%) and the NDP (25%). Collectively, the three parties have agreed to vote together for the next 18 months on all matters of confidence.

As a result, Prime Minister Harper faces a non-confidence vote on December 8th. Given that the coalition has 163 seats, he will almost certainly lose the confidence vote and have to resign and/or call a new election. In order for the new election to proceed, the Governor General has to approve the plan for a new election. Harper’s only option to circumvent the non-confidence vote, and either a new election or handing the government over to this Liberal led coalition, is to get the Governor General Michaelle Jean, a Liberal appointee, to end the current session of parliament, which would then reconvene in January.

The coalition is taking advantage of the current economic turmoil to gain power under the guise that the Conservatives do not have an economic plan. Ironically, the coalition has not put together a new economic plan of substance, nor do they have a history of working effectively together. In fact, in the most recent election the Liberals and NDP were much at odds over economic policy. The largest disagreement was over $50 billion in corporate tax reductions that the Liberals supported and that the NDP wanted to invest into social programs.

As David Frum wrote on December 1st in the National Post, Canada’s major newspaper:
“Imagine Canada 6 months on. There’s a Liberal prime minister. He will head an unstable coalition of Liberals and socialists aligned with separatists. To appease the socialists, he will have to raise taxes. To appease the separatists, he will have to direct disproportionate money and attention to the province of Quebec.”

Frum’s point is adroit. A Canada in six months from now, under this leadership team, could well be an unmitigated economic disaster. We can debate whether Prime Minister Harper has the qualifications and wherewithal to develop an economic plan that will soften the current economic crisis, but undoubtedly a coalition led by the Liberals and backed by a self proclaimed socialist and a leader of a party whose primary goal is the separation of Quebec, leaves much to be desired.

Keith and I, reluctantly, may have to short the homeland in the coming weeks.

Daryl Jones
Managing Director