Ottawa’s Fiscal Snapshot
Canadian Finance Minister Bill Morneau’s “Economic and Fiscal Snapshot” was released Wednesday afternoon and was about as exciting as a fiscal and economic update could be. In the 168-page snapshot, the federal government announced that they project the deficit to reach C$343.2bn this fiscal year, far surpassing official estimates. The projection is even more significant than the “more than 300bn” amount that the Globe and Mail “suggested” in an article released late Tuesday night.
In total, the federal government has spent more than $231bn in health and safety measures as well as on direct aid to Canadians and businesses since the Covid-19 pandemic began. This stimulus isn’t the only thing driving government finances deeper into negative territory. With unemployment rates expected to remain elevated into next year, we can attribute a large amount of the deficit to the C$71.1bn decline in tax revenue that the government has penciled in over the projection horizon.
Federal debt as a percentage of GDP now expected to rise to 49.1% this year from 30.9% last estimated.
Source: Department of Finance
Our view on the matter
We have addressed the government debt situation in a prior letter. We would remind readers that while these numbers are very large and potentially worrisome at first glance, it is important to remember what matters. In this situation, what matters is not the absolute level of debt but instead, the government’s ability to manage the debt burden with the prevailing interest rates. Fortunately, the Federal government can borrow at a rate of 0.6% per year over the next ten years, as an example.
Additionally, we expect that today’s current debt problem will be one time in nature driven by actions needed to keep households and businesses afloat until the economy can fully reopen. As a result, many of these spending initiatives have a definite end game. As such, it is unlikely that there will be a need to meaningfully cut program spending or raise taxes to rein it in. Today’s situation is in contrast to the swollen deficits of the late 1980s, which were a function of persistent overspending on the part of the government.
Finally, even at a revised higher debt-to-GDP figure of 50%, Canada would have the second strongest fiscal position in the G7, modestly behind Germany. Fortunately, our country entered this crisis in a very strong fiscal position.
The Canadian Housing Boom?
Board-level Canadian housing statistics were released this week and showed a material increase in home resale activity from May to June, with activity in some markets exceeding year-ago levels. Some pent-up demand and an influx of new listings saw both the demand and supply sides rise, leaving pricing trends mostly intact. Prices rose marginally in Vancouver, decelerated slightly in Toronto and were still down relative to year-ago levels in Calgary according to their respective data releases.
Significant fiscal and monetary efforts continue to underpin the strong recovery in Canadian housing activity with mortgage payment deferrals, government support programs (notably CERB) and all-time low-interest rates (BoC has slashed rates by 150bps since March) providing immense support
In Canada, the expiry of mortgage payment deferrals and the potential phasing out of programs such as CERB later this year poses a risk to the supply side of the housing market as this pullback in support could prompt several financially strained homeowners to sell. Meanwhile, our Economics team view is that we expect high unemployment to restrain demand as we look past what could be another month or two of pent-up buying post-lockdown. Ultimately, the recovery in May and June looks promising, but Canada’s housing markets aren’t out of the woods yet.
Fun with numbers - Berkshire Hathaway & Apple
In May 2016, two of Warren Buffett’s lieutenants began building a “small” position in Apple, buying 10 million shares. The purchase of Apple by the company gained a lot of attention from investors because Warren has always been on the record about avoiding technology investments simply because he does not understand them. Which, by the way, is a great “investing 101” tip – thou shalt not invest in things we do not understand.
Currently, Berkshire owns 245 million shares of Apple.
These 245 million shares multiplied by Apple’s current share price at the time of writing this ($382 per share) equates to over $93 billion. The value of Berkshire Hathaway is currently $436 billion. Therefore the Apple position alone represents over 21% of Berkshire Hathaway’s value.
What about the cash you say? Well, I’m glad you asked! Berkshire Hathaway is renowned for its large cash hoard, which presently sits at $137 billion as of the last quarterly filing, or 31% of the company’s value.
In total, Apple + cash accounts for over half the value of Berkshire Hathaway.
In light of these findings, it makes sense to hear Warren Buffett comment that “I don’t think of Apple as a stock. I think of it as our third business.”
