Dear member,

The Bank of Canada's policies are failing. And disinflation is ensuring low interest rates for the foreseeable future.

The ongoing global currency war (when central banks attempt to devalue currency to spur competitive advantage against key trading partners) appears to be entering a final phase while victimizing the Canadian economy. Even extremely dovish monetary policy from Canada's Central Bank has failed to spur inflation.

Exceptionally weak economic data throughout the months of December and January gave the Bank of Canada all the evidence it needed to maintain its key interest rate at 1% this past week. The Canadian dollar has experienced a rapid decline in value over the past two weeks and now trades near a 6-year low, falling below 90 cents against the US Dollar on Thursday.

The key interest rate set by the Bank of Canada represents the cost of money for Canadians. The rate, which has been fixed at 1% since September of 2010, has, evidently, not been low enough to get the economy going or hit inflation targets.

A slew of negative economic data has recently crossed the tape and is painting a dreary picture for the Canadian economy in the short-term. The Ivey PMI figure, which monitors month to month changes in economic activity, as indicated by a panel of purchasing managers from across Canada, recently collapsed to 46.3. This reflects a contraction in the all-important manufacturing industry.




More Bearish Data

Building permits declined by 6.7% after economists estimated a modest 2.3% dip. The Canadian economy lost roughly 45,000 jobs in December, pushing the unemployment rate from 6.9 to 7.2%. Considering that December typically witnesses a surge in seasonal hiring, this statistic is quite concerning. And, for the first time in many years, the United States has a lower unemployment rate than Canada.


The Canadian economy is in a fragile state. The idea of raising rates has become so unimaginable that, since the start of 2014, the Loonie has been hammered lowered by global traders. The Bank of Canada hasn't seemed to mind, however. Weak economic data has allowed it to continue to keep everyone happy, from large corporations who trade with the US to homeowners counting on continued low mortgage rates. And, for the first time in several years, the Canadian dollar is clouded in bearish sentiment.


Where will the growth or inflation come from?

The Canadian consumer is tapped out. The ratio of Canadian household debt, relative to disposable income, has been rising for years and recently hit a record in Q4 2013.

Disinflation, or decreased inflation, is a sign the consumer is putting away his wallet (and in Canada's case, his credit card) and forgoing purchases. In Canada this has been evident in the durable goods and services industry.

It's not all bad news, however. Statistics Canada reported that the Household Savings Rate is currently 5.4%, up roughly 0.5% from 2012. A less surprising statistic, despite the high levels of debt, is that on a per capita basis, Canadian net worth increased to $212,200, an all-time high, from $208,300 in Q2 of 2013. This is one of the highest levels in the world and is due to stable and rising real estate prices - fueled by low interest rates - for the last decade.


Rates Must Stay Low

Bank of Canada Governor, Stephen Poloz, warned that unusually low inflation pressures will likely persist into 2016.

In a quote taken from Reuters, the Governor commented that,

"We are more concerned about low inflation today than we were three months ago. There's a lot of risk in that analysis. That balance of risk has tilted just a little to the downside, within a zone we would call the neutral zone."

Plain and simple: The BOC clearly views a weak Canadian dollar as the most viable option out of this economic funk. Expect more downward pressure on the Loonie for some time.

In a quote derived from the Financial Post, Poloz commented that,

"The timing and direction of the next change to the policy rate will depend on how new information influences this balance of risks." He added that, "the downside risks to inflation have grown in importance."

Douglas Porter, chief economist at BMO Capital Markets, commented that,

"Suffice it to say that the bank is welcoming the weakening Canadian dollar with open arms, partly because it in turn reduces the pressure to consider trimming interest rates since the lower currency will begin to pump some life into inflation."

The Bank of Canada, much like the Federal Reserve in the US, has its work cut out for itself. Debt expansion has historically been relied upon to trigger growth, but with the baby boomer hitting retirement and birth rates at historic lows in North America, significant and predictable growth is hard to come by these days.

Similar to the US, the Canadian economy has become dependent on the consumer to spend its way to 'healthy' inflation levels. With the consumer tapping out, and wages struggling to match price increases, the economy is experiencing another steady bout of disinflation.

The hard truth is that higher interest rates, which would force a period of deflation, are needed to reset an economy that has become too immersed in debt. A period of higher interest rates would spur a sustained increase in the savings rate and a cleansing of the system, which would ultimately fuel the next secular bull market. However, raising interest rates substantially would also lead to a recession.


Not all Doom and Gloom...

As the secular bear market in US equities resumes later this year, it will give way to renewed optimism in commodities and the many Canadian companies which operate in the resource industry.

After the 5 year run US equities have had, it won't take long for skittish investors to begin pouring into bonds and commodities if the S&P continues to slide as it did this past week. Such a scenario would help revive the Canadian economy.

All the best with your investments,

PINNACLEDIGEST.COM

Another Past Pinnacle Featured Company's Share Price Hits New High

It was Q4 of 2012 when we introduced Canada Zinc Metals (CZX:TSXV) as our client and Featured Company in an exclusive report. Its stock price, as of the day we introduced it to our members, was $0.36. At the time, the TSXV was in a year and a half long bear market, and junior mining stocks were being sold-off left and right.

An excerpt from our introductory report on Canada Zinc Metals is below (released on October 28, 2012):

"In addition to a large treasury balance, in this market particularly, an experienced management team with a proven and lucrative track record is paramount. This type of management team comes from having connections at an institutional level, global relationships with some of the largest mining organizations in the world and the ability to retain some of the most proven technical geologists in the business.

Our new Featured Company is Canada Zinc Metals (CZX:TSXV) and its management has all of these attributes..."

Canada Zinc controls an advanced zinc project with several million in development capital spent on it. At the time of our introduction, the zinc market was headed for a supply deficit (According to Teck's CEO, Don Lindsay, zinc supply is now in a deficit), and the company had roughly $13 million in its treasury. Given its treasury balance at the time, one would assume the company could weather a prolonged downturn without significantly diluting its structure. And what a downturn we have seen in the Venture exchange since that introduction.

Since introducing Canada Zinc Metals as a client and Featured Company, the TSX Venture has lost approximately 20%. However, this past Tuesday, Canada Zinc Metals' share price hit a new 52 week high of $0.60 - an approximate increase of 65% from its share price at the time of our introduction. The company now has a market cap of roughly $78.6 million.

Congratulations to Canada Zinc Metals' shareholders as well as the company's management team. It has been a tough market for many juniors, and although the road certainly wasn't easy, Canada Zinc has managed to deliver thus far.

The Zinc Market

In a BNN interview which aired on January 15, 2014, Don Lindsay, Teck's CEO, stated:

"In our case, zinc is looking pretty exciting. At some time during the year of 2014 we think we're going to see a real move because inventories have been declining and it's now in deficit..."

Click on the image below to watch BNN's full interview with Don Lindsay:

Don Lindsay on BNN - click to watch