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A hedge-fund legend warns of a decade of risk for Canada

berman@globeandmail.com

One of the world's biggest and most respected hedge funds predicts that Canada's economy has a tough decade ahead of it.

Ray Dalio's Bridgewater Associates says the country's economy is just beginning a tough period of rebalancing.

The call is notable for who is making it. It's a fairly common belief that this country, after a long boom, is likely to go through a retrenchment as consumers cut spending to pay debt, and that there are also risks posed by the long surge in housing prices. But when Mr. Dalio's firm says it, such predictions take on new weight.

Bridgewater, based in Connecticut, runs about $150-billion (U.S.) and specializes in macro strategies - calling major trends such as countries' ups and downs. The firm has made more money for clients than any firm in the history of hedge funds, according to Institutional Investor's Alpha publication.

Mr. Dalio, the firm's founder, was named one of the globe's 100 most influential people by Time Magazine in 2012. The entry on him was written by former Federal Reserve chairman Paul Volcker, who said, "I have seen the respect Ray commands and the influence of Bridgewater research."

The firm made the call on Canada on Tuesday in its Daily Observations note, which is often cited as required reading for other large money managers and policy makers. It could not be immediately contacted for further comment.

Bridgewater says that "for more than a decade major global macro pressures have benefited Canada on an absolute basis and relative to the U.S.," but those conditions "have now left the Canadian economy unbalanced and at significant risk for the next decade."

The hedge fund firm says Canada's commodity-dependent economy is in trouble because it is "one of the highest cost producers" meaning that capital investment by energy producers will go to lower cost countries.

"The rest of the Canadian manufacturing economy has been hollowed out to a significant degree due to years of underinvestment, as the commodity-driven surge in the currency made other industries unprofitable," the note says.

In addition, there is the continuing concern about Canadian households' high debt levels, and the box that puts the central bank in.

The economy might require further stimulus in the form of interest rate cuts, but lower rates would feed the housing market and borrowing by overburdened consumers.

"Therefore, our likely outlook for Canada is a lagging economy that is just beginning a needed de-leveraging in order to re-balance," the note says.

That stance may have significant implications for Canadian investment flows because Bridgewater and Mr. Dalio are carefully watched for their takes on global trends. Many macro hedge funds are already positioned to take advantage of a decline in Canada's fortunes. That's reflected in the pressure on the Canadian dollar, which is likely to remain a focus as hedge funds have bet hard that it is going to fall in 2014.

"Ray Dalio holds respected views and the size of the fund is significant, especially in a small market like Canada, so it matters," said Camilla Sutton, chief foreign exchange strategist at Bank of Nova Scotia.

However, the fact that the Bridgewater view is largely in line with the widely held take on Canada should dampen the effect.

"It might matter more if this was an off-consensus view."

Bridgewater is correct that the economy is likely to trail growth in the U.S. over the next couple of years, Ms. Sutton said. Housing prices and household debt are also risks.

However, Ms. Sutton points out that there are reasons to be more optimistic than Bridgewater, including the potential for the U.S. recovery to pull Canada along with it by driving exports.

"A decade is a long time when Canada is rich in natural resources and attached to a U.S. recovery," she said.

Streetwise, ReportonBusiness.com's home for news and analysis from the world of finance, is available online to subscribers of Globe Unlimited.

© 2007 The Globe and Mail. All rights reserved.

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