To say that Canada’s economy has been doing better than it’s neighbour to the south would be a slight understatement. Where as the US budget has been overspent time and time again, the government in Ottawa has continued to bring in surpluses for balanced budgets with clock like precision. Where the US has started seeing creeping increases in the unemployment rate, Canada continues to add jobs to their economy.

Where Bernanke and Paulson bring comments like “uncertain times” and “unsettled markets”, Finance Minister Jim Flaherty can be found promoting the resilience of the Canadian economy and reminding Canadians that “Canada is not in near the shape, housing wise, nor spending wise as it’s cousins to the south” [paraphrase].

While it’s true that the largest trading partner Canada has is the US, the fact remains that there is a consistent increase in trading opportunities for the country beyond the confines of the Western hemisphere. It is estimated that a mere ten years ago, the US represented 80% of the trading Canada engaged in, now that figure is edging lower due to a 10-15% growth in trades with China, India, and Russia.

Also true, is the economy’s dual engines of manufacturing (Ontario and Quebec) and commodities have proven strong enough to push it into the head winds originating from the south. The common phrase “when America sneezes, Canada catches the cold” seems inaccurate now, due to the massive increase in commodities across the board. The downturn in manufacturing jobs has been offset by the oil revenues in Alberta and New Foundland as well as the potash valuations for the central provinces like Saskatchewan.

Turning Point

Yesterday’s Globe and Mail had an interesting article that doesn’t seem to have been picked up by anyone yet titled “Commodity prices too pumped, TD Warns” and I’ll give you the highlights:

Anyone lending money in Western Canada should do so under the assumption that commodity prices are too high, he told a financial services conference in New York Tuesday, after being asked whether the prices are worrying him.

Mr. Clark, whose bank managed to avoid being whacked by the global liquidity crisis, said TD’s lending standards in the West assume “dramatically lower” prices than now exist.

OK, so Someone else is calling for the “Top” so what?

For me the real phrase that made me sit up and take notice was this comment from a critic of Ed Clark:

Mr. Kinsey said he disagrees with Mr. Clark’s stand on commodity prices. “We’re in a new era that we haven’t seen before,” Mr. Kinsey said. “I really believe that the benchmark prices have been raised dramatically,” he said, citing new demand from countries such as India and China.

Update This morning’s bloomberg.com has an article on how China’s Industrial growth is slowing. Which is an obvious counter to Mr. Kinsey’s “new era” of increased commodity need from India and China.

To anyone who’s read Irrational Exuberance, the use of the phrases “new era” or “raised benchmarks” harken back to most every bubble market he studied going back to the 1600’s and definitely augur the need for closer attention to be paid to the current commodities market.

For those unfamiliar with Ed Clark, his banking philosophy is probably the primary reason TD was literally unscathed by the subprime investment fiascos that plagued competitors like CIBC, Bank of Montreal, and Royal Bank.

Mr. Clark said TD has proven its strategy in Canada, and will prove it to people in the United States, as he talked about how the bank managed to avoid the complicated investment products at the heart of the current banking crisis by doing its homework.

“I don’t want to hold myself up that I’m some genius … ,” he said. “I actually think that all the risks that brought the financial services [sector] down were well-known risks, much debated, and that anyone that sat down and studied these products could see it was pretty obvious. I think the history of banking – that’s what’s so frustrating – is that these are all fairly obvious things.”

The Takeaway

It’s said that pragmatism is one of the essential differences between the North American worldview and something that seems to be in abundant supply in Ed Clark’s assessment of the current commodities market. Rather than chasing after prices because “things will never be this cheap again”, it is the focus on being on the opposite side of a trade (i.e. trading into strength) as well as making sure that capital is maintained which makes me think that this bank, is the exception to the rule.

Ed Clark has the best final word:

“Banking is a wonderful business to be in if you just don’t blow yourself up every five to seven years”