Canada's balance sheet is deteriorating and consequences could be big for investors.

Serious consequences for investors

There is a clear and present financial danger mounting in Canada that few outside of the investment community appear to be concerned about.

The problem involves the country's deteriorating balance sheet, which, if we continue to ignore it, could leave us in a very precarious place, with loads of debt and an economy that has not recovered enough to support it.

Such a situation would have all kinds of consequences, from the value of our currency to the cost of borrowing going forward.

As we see it, the prime culprit is the federal government, which appears to be putting considerable effort toward things that have completely nothing to do with the virus, such as tackling climate change.

Canada is leading the G7 in deficit spending but in our opinion it is not about how much you spend but where it goes and what kind of an impact it will have.

And Canada is spending in places that may not directly repair the damage that has been done by the virus. Why not get our country back on solid economic footing first before introducing policies that could impede the pace of the recovery, such as the five-fold increase in the carbon tax and the new clean-fuel standard?

Interestingly, other nations are so far delivering better results in tackling this virus despite facing more challenging conditions. Despite an election and chaos in the White House, the U.S. has been able to vaccinate its citizens at nearly three times the pace as Canada and even while dealing with Brexit, the U.K. is at more than four times. And don't point your fingers to the provinces; the data show that they are about to run out of federally supplied vaccines even at their slow pace of vaccination.

To make matters worse, in the midst of the lockdowns, it appears Canadians could soon face the potential for an election, something for which the PMO appears to be readying itself via its recent cabinet shuffle. It's important to note that this isn't the end of a four-year term, therefore an election is not a necessity — waiting until more citizens are vaccinated and the economy is in a stronger position would be the more prudent thing to do.

All of this leaves the Bank of Canada in a very uncomfortable position. The irony is it can only hope that the rebound in oil prices will continue, in order to provide a much-needed economic boost as well as supporting the Canadian dollar. Meanwhile, they will have little choice but to keep the printing presses in overdrive in order to backstop the tidal wave of Trudeau debt.

If the Liberals were to win a majority in a snap election, we do worry that they could impose material tax hikes in order to relieve some of the burden on our central bank. Unfortunately, such a move could further impede the recovery, especially if the billions of dollars in climate-change spending don't yield the kind of immediate results the government might be hoping for. One has only to look at the meagre returns from their infrastructure program for an indication of what may lie ahead.

So, what can Canadians do to protect themselves?

Holding some U.S. dollars is probably a good place to start. It's not only the world's reserve currency but has also proven to be a good store of value. Fortunately, the Canadian dollar has rocketed back from the depths of the March 2020 meltdown and we think this represents a good opportunity to hedge. Another way would be to diversify one's holdings of government debt away from Canada to other international jurisdictions including EAFE, or even emerging markets. We're already seeing some the smartest institutional investment managers we follow pursue these kinds of strategies.

To conclude, don't let the political intrigue south of the border distract you from what is happening closer to home, and the potential consequences for your finances. We all need the vaccine, but a dose of financial reality wouldn't hurt, either.

Martin Pelletier, CFA, is a portfolio manager at WellingtonAltus Private Counsel Inc. (formerly TriVest Wealth Counsel Ltd.), a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax and estate planning.

SHANNON VANRAES / BLOOMBERG FILES The Canadian loonie has rocketed back from the depths of the March 2020 meltdown and Martin Pelletier writes that makes this a good opportunity for those who want to hedge and hold some U.S. dollars.