CEO's Blog

Good morning!

Bill Pimco, co-founder of Pacific Investment Management (PIMCO), is one of the world’s largest mutual fund managers. In his February newsletter to investors, he had this to say about Canada: “…given enough liquidity and current yields I would prefer to invest money in Canada. Its conservative banks never did participate in the housing crisis and it moved toward and stayed closer to fiscal balance than any other country.”

He presents a very interesting chart to illustrate his concern, entitled “Ring of Fire”.

The chart depicts country risk as a function of both public sector deficit and public sector debt. On his chart, the dot representing Canada is coloured yellow, whereas the red-dotted U.S. is planted firmly within the “Ring of Fire”, alongside big debtor countries like Japan, Italy and Greece. Although Canada’s (public) debt-to-GDP is only slightly lower than that of the U.S., Canada has a much more favourable deficit-to-GDP ratio.

But recent research by McKinsey Global Institute and others reveals that a better determinant of country risk is total debt (public + private). And on this score, it’s not even close. While the total debt of the U.S. peaked at 375% and currently stands at a daunting 370% of GDP, the same measure in Canada is (only?) 245%.

So what other advice does Bill Gross share with investors in his letter? Again, in his own words, “the UK is a must to avoid. Its Gilts are resting on a bed of nitroglycerine. High debt with the potential to devalue its currency present high risks for bond investors.” (In case you’re wondering, the total debt-to-GDP figure for the U.K. is a staggering 470%.)

While it would be foolish (and uncharacteristic) for Canadians to brag, we can nevertheless breathe a collective sigh of relief, because the worst of the economic storm is likely to bypass us.

Yours truly,
John