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Warren Buffett recently made positive comments about investing in Canada.
Buffett's blessing: Praise of Canada sparks economic hope. Should it?
Comedian Jim Gaffigan recalls seeing the ubiquitous Canadian Tim Hortons coffee and donuts shops in America. “I always have the same thought: ‘Don’t force your culture on us’,” he quipped.
The joke gets a big laugh with Canadian audiences, wary about American influence seeping into their country. Lately, though, a bigger concern is that Canada is in danger of being ignored, particularly by US investors.
That is why comments made by Warren Buffett last weekend were welcomed so enthusiastically by Justin Trudeau’s unpopular Liberal government.
At the annual meeting of Berkshire Hathaway, the Oracle of Omaha said he was looking at new investments in Canada, adding that he has no hesitation about “putting big money” in the country.
“We do not feel uncomfortable in any way, shape or form, putting our money into Canada,” Buffett said, “... it’s terrific when you’ve got a major economy – not the size of the US, but a major economy that you absolutely, you feel confident about operating there.”
Greg Abel, CEO of Berkshire Hathaway Energy and vice-chair of the company’s non-insurance operations, is a Canadian and widely viewed as Buffett’s successor. He said the company is always looking to make incremental investments in Canada “because it’s an environment we’re very comfortable with.”
François-Philippe Champagne, Trudeau's industry minister, tweeted Buffett’s statement, calling it a “vote of confidence” – and the Liberals sure could use that.
Critics have accused Trudeau of lax fiscal and tight environmental policies, and of presiding over “the slow bleeding of Canada.” The worry is that jobs, capital, and head office functions have leaked south of the border for lower corporate and personal tax rates.
In recent years, investors have complained that Trudeau is more interested in taxing than generating wealth – that he’s a leader who believes the private sector is a golden goose that cannot be killed.
The chorus of criticism reached a crescendo in the aftermath of last month’s federal budget that increased spending and raised the capital gains tax on corporations and the wealthy.
David Dodge, a highly respected former Bank of Canada governor, said the tax rise would make Canada a less attractive place to invest, particularly for start-ups that rely on paying people in shares.
Another former Bank governor, Mark Carney (also an ex-Bank of England governor), said the budget did not focus enough on economic growth. “Governments that spend too much and invest too little will eventually pay a heavy price. The countries that nurture, welcome, and celebrate risk-takers will thrive,” said Carney, widely viewed as a potential and more centrist successor to the left-of-center Trudeau.
The prime minister reinforced his social activist credentials, telling VOX that when everything is going well “the wealthy will find lots of ways to make money off a prosperous and successful middle class.”
“I’m not worried about innovation and creativity. I’m worried about people being able to pay their rent and eventually buy a home,” Trudeau said.
Americans often don’t pay much attention to Canada. But if there is an impression after Trudeau’s eight and half years in charge, it is probably that the Great White North has veered toward quasi-socialism – or that its citizenry is even more reliant than ever on welfare.
That might be a bigger disincentive to investment were the Biden administration not even more addicted to taxing and spending. Canada has a slightly higher corporate tax rate at 26.21%, compared to America’s 25.77%, but President Joe Biden’s State of the Union address proposed to raise the US level to 28% and to increase the top individual income and capital gains tax rates. The Trudeau government has been criticized for a budgetary deficit that is 1.4% of GDP – small potatoes compared to the US’s 6.3% shortfall.
So, despite criticisms and the perception that it is antagonistic toward business, the Canadian government has been remarkably successful at luring inward investment in recent years. Foreign direct investment is at healthy levels, and Canada has established itself as a key player in the global electric vehicle end-to-end battery supply chain, announcing multi-billion-dollar manufacturing and assembly plants by Honda, Stellantis/LG, and Volkswagen, among others, in recent months.
Thanks to Biden’s Inflation Reduction Act, the effort has cost Canada dearly in terms of subsidies – the terms of the Stellantis and Volkswagen deals stipulated that Ottawa match incentives offered to battery makers in the US under the IRA.
Canada’s Parliamentary Budget Office has estimated that the federal government will take 20 years to break even.
But as Tyler Meredith, a former economic adviser to Trudeau, said, Canada’s auto industry is “an amazing story of industrial renaissance.”
During the financial crisis of 2009, it looked like Canada’s auto sector might go the way of Australia and lose domestic production altogether. It has not only maintained production, but it is building the next generation of electric vehicles. “It is super attractive because it has the natural resources, talent, and subsidies,” Meredith said.
The area that even the government’s strongest supporters like Meredith concede there is work to do is the decline in the capital investment base in the resource sector. In 2014, the year before Trudeau became prime minister, it was around $73 billion; today it is around half of that.
The collapse of commodity prices is largely responsible, but the price crash was
compounded by the new government introducing a more rigorous environmental assessment process that increased political risk and lengthened timelines for project reviews. Since then, the oil and gas sector has seen a 43% drop in investment value (in 2015 dollars). Critics contend that a Liberal government hostile to fossil fuels put hurdles in the way of future development and hoped the US shale revolution would price Canada out of the oil market.
But it is not only the oil and gas sector that has seen investment dip. The clean tech industry has also seen a 27% drop since 2017, and even the critical minerals sector, on which so many of the government’s EV hopes are resting, has atrophied, with nickel, cobalt, lithium, uranium, zinc, lead, and platinum all recording double-digit declines, according to a new report by the Macdonald Laurier Institute think-tank.
Contrary to the claims of the opposition Conservative leader, Pierre Poilievre, Canada is not “broken.” It continues to rank highly (though not as highly as it used to) in the World Competitive Index in the 15th spot. It has a well-educated workforce, modern infrastructure, an abundance of energy, and a strong banking sector – and it is relatively easy to start a business.
Meredith says that while people associate Trudeau with poverty and emissions reduction, “he also has an enviable economic investment record” – including the newly completed Trans Mountain pipeline expansion, EV plants, and AI clusters in Toronto, Montreal, and Vancouver. “All those things happened because of intentional government decisions and will serve Canada well over the long term,” he said.
But if the business environment is not as bad as the opposition claims, neither is it an investment Babylon.
Finance Minister Chrystia Freeland admitted as much when she hired another former Bank of Canada governor, Stephen Poloz, to figure out ways to convince Canada’s pension funds to invest more locally, rather than transferring four-fifths of their wealth overseas.
But, as David Dodge pointed out, the job of a pension fund is to raise money to pay pensioners so they invest where they get the highest returns. They are making long-term bets in places privatizing airports and ports, and building toll roads, which suggests that Canada is not as attractive as an investment destination as the government, or even Warren Buffett, thinks.
Mark Carney sees more problems than solutions emerge from Davos
Davos is a good place to recognize problems but not such a good place to solve them, according to Lord Mark Malloch Brown, a British politician and diplomat who was in the Swiss Alps this month. “A new generation of modest, listening and empathetic leaders is needed – the antithesis of Davos Man,” he tweeted.
The World Economic Forum has steered so far to the north of public opinion that it is now being used as a punchline – the New York Times noted that “the Davos Consensus” is now a counter-indicator of what is likely to happen. “Trump is already the president at Davos — which is a good thing because the Davos consensus is usually wrong,” said Alex Soros, son of George and chair of the Open Society Foundation, on a panel at this year’s forum.
Yet, there is a reason why 3,000 of the world’s most powerful people make the mid-winter trek to Switzerland every year and line up in the cold to pass through security outside the Grandhotel Belvédere: It’s valuable to understand what the global elite is thinking and to recognize the many problems the world is facing.
GZERO Media caught up with Mark Carney, former governor of the Bank of England and Bank of Canada, who now serves as chair of Brookfield Asset Management and Bloomberg Inc. (as well as acting as a UN special envoy on climate change), to hear what he picked up in Davos.
Economic optimism
On the global economy, the general feeling was of a resilient US economy contrasting with a stagnant Europe, particularly as Germany goes through a historical industrial restructuring moving away from a model built on cheap gas from Russia and exports to China.
The general outlook for China was bearish, with the downside of its ongoing real estate adjustment outweighing the boost from China’s growing competitiveness in electric vehicles and clean energy and its efforts to rebuild exports at a time when supply chains are being “de-risked.”
Premier Li Qiang told Davos that China’s economy is open for business, but Reuters reported that investors who attended a closed-door lunch with him remained skeptical about China’s charm offensive.
This points to more stimulus, Carney said. Indeed, Bloomberg reported last week that the Chinese government is considering a rescue package for slumping stock markets (the CSI 300 was down 11.4% last year, its third year of negative growth, while Hong Kong’s Hang Sen was down 14% in 2023).
On monetary policy, Carney said the expectation among many attendees was that interest rates have peaked but that there was only limited appreciation that the pace of reductions may be slower than the market has been pricing. During Davos, market expectations were that the Fed would begin cutting in March and then cut again another four or five times this year. But Carney believes the Fed will probably wait until June to begin cutting, followed by another one or two cuts this year. “However, if that’s because the US economy is stronger than expected, it would be net positive,” he said.
Global crises
Geopolitics weighed heavily in the Swiss Alps. While US-China relations appear to have stabilized in the short term, the Middle East conflict was widening alarmingly. Reuters reported that there were no practical advances on a Palestinian state, or even a cease-fire, at Davos.
The head of the Palestinian Investment Fund estimated that $15 billion would be needed just to rebuild houses in Gaza. Arab states said they would not fund reconstruction until there was a lasting peace, by which they meant a Palestinian state.
Yemeni and Iranian officials told Davos audiences the attacks in the Red Sea would not stop until Israel ended the war in Gaza. The CEO of oil giant Saudi Aramco warned that the world might see a shortage of oil tankers if the attacks continue, forcing shippers to choose longer alternative routes.
Bankers warned that increased shipping costs and the possibility of an oil price rise could prove inflationary. And attendees took note of the comments of Saudi Arabia’s Prince Turki al Faisal that “the present leadership of Hamas, the PLO, and of Israel should be excluded from any participation in any future political role.”
Good AI vs. Bad AI
AI was everywhere, with businesses focused on how to implement it, first in basic administration and more profoundly in re-engineering the production, sales, and marketing. The core question of whether workers will benefit — and when — was more hotly debated. Some, including the IMF, saw widespread disruption to jobs (up to 40% according to the Fund). The techno-optimists pointed to the ability of AI to re-skill workers rapidly and past experiences with major technological changes that belied the ‘lump of labor fallacy.”
Carney felt that AI would begin to have major impacts on productivity and growth by the end of the decade and that, history teaches, it would take a comprehensive response of business, government, and academia to ensure that workers share in the benefits.
Climate change
Coming less than two months after what was regarded as a business-heavy, successful COP28 in Dubai and with AI dominating much of the discussion, the climate change debate was relatively muted. But Carney said it would be a mistake to consider that the transition has been relegated down the agenda.
He said that it is now so core to the fundamental business model of most companies that it has become embedded as a driver of competitiveness.
Carney noted that five years ago, $500 billion was invested in the transition; last year, that number was $1.8 trillion, nearly double what was invested in oil and gas. The challenge is that this number needs to more than double again to about $4 trillion by the end of the decade.
He said that the transitions toward clean energy and AI actually work in tandem since, while AI is relatively capital-light, it requires a lot of data and computing power, which in turn requires clean energy. And AI solutions will help with optimizing grids, heating and cooling systems, and even supply chains.
It was noticeable that the backlash against Environmental, Social, and Corporate Governance, or ESG, meant it was rarely mentioned in Davos. Attendees like Canadian Deputy Prime Minister Chrystia Freeland were more focused on the new buzzwords – “supply chain resilience” – trying to convince investors that Canada has the critical minerals and clean energy they need, as businesses try to diversify sources away from China.
Sustainability is now about “resiliency building” that contributes to profitability, not just altruism.
Milei’s message
Javier Milei, the new Argentinian president, burst onto the main stage at Davos like an arsonist with a blowtorch, lambasting the proponents of state intervention and concluding with the rallying cry: “Long live freedom, damn it.” He said the Western world is facing a significant threat because its leaders have been co-opted by a worldview that leads to socialism and economic deprivation.
“We are here to tell you that collectivist experiments are never solutions to the problems that affect citizens. Trust me, no one is better than Argentina to provide testimony on this,” Milei said.
At the time of Milei’s inauguration, annual inflation stood at 143%, the currency had plunged, and four out of 10 Argentines were living in poverty. He has promised radical reforms, including deregulation and devaluation of the currency, and there was no evidence that he was prepared to dilute his agenda in his speech.
He was scathing about “neo-Marxists” who have “co-opted the common sense of the Western world” when it comes to the climate change agenda and said he considered all talk of “market failure” to be an oxymoron.
Carney has considerable experience in navigating market failures, having been in the Cash Room meeting in the US Treasury as Bank of Canada governor during the financial crisis, alongside other G7 finance ministers and central bankers, when the decision was reached to backstop the banking system with liquidity to prevent a repeat of the Great Depression.
“All ideologies are prone to extremism, and capitalism loses its sense of moderation when the belief in the power of the market enters the realm of faith,” he wrote in his book, “Values.” “There are no libertarians in a financial crisis.”
But he said he found Milei’s speech to be entertainingly provocative. “It was good theatre and raised some important issues,” he said, particularly his praise for entrepreneurs and his assertion that state control does not depend solely on owning the means of production but can include regulation. Carney noted, however, that Milei appeared oblivious that he was speaking to some of the world’s most successful entrepreneurs (such as Bill Gates), few of whose actions echo the “Atlas Shrugged” school of poverty elimination.
Carney concluded that, “where you stand depends on where you sit,” and that Milei’s vehemence was undoubtedly influenced by a long history of high levels of state intervention and indebtedness in Argentina.
After his speech, Milei sat down with International Monetary Fund Managing Director Kristalina Georgieva to discuss Argentina’s debt problems. He remained defiant: “Free enterprise capitalism is the only tool we have to end hunger and poverty,” he said.
Milei will have to face down entrenched opposition from those who rely upon rents from the state apparatus if he is to rid his country of the unwanted tag of the “Argentina paradox,” the world’s most glaring example of a developed economy that went backward.