Why I think the CAD may not go down

I am losing money. And I couldn’t be more excited about it.

I say that tongue in cheek. But both statements are, in fact, true.

First, I am losing money. I have had a rough couple of months.

The culprit? That damn Canadian dollar.

The Canadian dollar has risen ~5% in the last month and a half. Depending on the account, I had between 1/3 to 2/3 of my cash in USDs. So I have taken a 3%+ hit on currency. In the tracking portfolio I use for the blog, I am over 80% USD. That puts me down over 4% on CAD!

Losing money sharpens the mind. On Monday I said enough. I sold all my large-cap USD stocks and moved the money back to Canadian dollars. I sold Amazon, Facebook, Eli Lilly, Bristol Myers, and Ford (which I had bought but never got a chance to talk about).

Why? If the CAD keeps going up, it is too big a headwind. If the Canadian dollar goes to 90c then these US listed stocks need a 10% gain just to break even. If it goes to par, they need 20%. That is a bad risk/reward.

But what if this is the top? I mean we have had a relentless move in the USD/CAD from 1.45 to 1.20c, including this blow-off 5c move over last 6 weeks. Maybe that is the end of it?

I am just not convinced this is going to end.

For the last couple of weeks I have been watching the Canadian dollar and thinking that something bigger was going on.

It does not want to go down. You can just feel it from the way it trades. It has had plenty of opportunities to correct. It has chosen not to. We had a bad employment number, we have had announcements of lockdowns, we had so-so economic numbers. The CAD kept saying – “I don’t care”. Even on days when oil is down big, usually these are days where the CAD follows with big down moves, but lately I’ve noticed a more lethargic response.

So I keep asking myself what is going on? And of course there is only one thing it could be. The only reason that the Canadian dollar ever goes on a sustained uptrend.

A commodity boom.

Yes I know what you are saying – well duh – corn is $6, copper is $4.50, steel is $1,500, iron ore is $200.

But those prices do not necessarily mean a boom. They could be transitory. Like the Fed (and Cathie Wood) say – a blip as we replenish inventory after the pandemic.

That is what I thought was happening. I didn’t really give much consideration to rising commodity prices in March and April. I was like “Sure, whatever. This is just another manifestation of the same speculative fever that is driving up Gamestop and ARK.”

But then Gamestop fell. ARK fell. All the high flyers fell. Commodities didn’t. Moreover, neither did the Canadian dollar.

So I started to capitulate to the idea that maybe there was something to this. I just didn’t know what. The charts were telling me that something was happening that was bigger than just speculation. I waded in a few weeks ago and bought the Ag stocks.

Last week I followed it up by buying into a few base metal stocks (copper and tin). Then this week I bought two steel stocks.

Steel stocks? I must be crazy right? Steel is forever a horrible business. These stocks are just off multi-year highs. I mean this is going to be a disaster right?

It could be. I have to admit that even though these stocks have moved significantly, we are only a few months into the move. The “signal is weak” as Hugh Hendry says. It could just be a blip.

But it feels like a signal. One which compelled me to get my foot in the door.

I think it could be telling us that significant changes are happening.

What changes might those be? Well… let’s use steel as an example.

China produces nearly 60% of the world’s steel. Much of it is dirty.

But the world is changing. Emissions are starting to matter. Plug Power didn’t go up 20x last year on smoke and mirrors. Sure, there were smoke and mirrors, but there was also a recognition that dirty is going away and clean is going to rule.

China recognizes this. Maybe it is because they honestly care about improving the environment. Could be. It could also just be that they don’t want to be left behind.

The EU is already talking about how they may restrict imports from “dirty” producers that have weaker carbon mandates. China sees the writing on the wall. Change or the world will change without you.

For the first time it looks like China is not just paying lip service. They shut-down 7 steel mills in Tangshan in April. I read that in Tangshan they are forcing the shutdown of 30-50% of steel production by year end. If they did that across China it would be over 500 million tonnes of steel.

To put that in perspective, Nucor produced a little over 20 million tonnes of steel last year.

I think this is just the beginning. The “greening” of commodities is one of those themes that just feels right to me. We already know that some commodities (like copper) are going to see big increases in demand from the greening of the world. And now we are beginning to see how others (like steel) are going to be greened themselves.

I mention steel but you can go through the list. Aluminum production (again over 50% coming from China) is very dirty. And what about nickel? Indonesian nickel in pig-iron, which has a horrible environmental footprint, has been the elephant in the room of western nickel producers since 2008. And rare earths – OMG I read an article last year about Chinese rare earth production – it is an environmental disaster. Yet its like 80% of worldwide production.

What if the world starts saying no way. What does that mean for commodity prices?

You can see how this could be a very big deal. And this is the sort of situation where price takes a back seat. It just doesn’t matter. If we have to accept $1,000+ steel or $10+ nickel in order to save the planet, do you really think that any country is going to balk?

So look, I may be buying close to a top. This last week has been a week of correction even as the market roared higher. I am trying to start small to get my foot in the door, and I plan to add if they strengthen to higher highs.

I just remember at the end of 2001, when I was a brand new, newbie investor right out of university reading my Dad’s Donald Coxe Basic Points publications. Coxe was showing all these charts of commodity producers like BHP and Rio Tinto and saying this was just the first movement of the symphony (he talked like that, which is great).

And so I bought Aur Resources. This was a copper stock. This was really my first, ever bet on a stock – like the first time I did the work, made a spreadsheet, and didn’t just act on a tip or something.

I bought Aur at over $3. I remember I was very worried. Because Aur had been like a $1-$2 stock not long before. And here I was buying it after a move to $3.

Sure enough, in the first few months Aur corrected back. I was distressed. But Donald Coxe kept saying, ignore the noise and buy more because we are about to have something big.

So I did. By 2003 Aur Resources was my largest position. The stock was $4. Then $5. Then $8. By 2007 it was bought out at $40.

I may be totally off base on this. It is still so early, it is hard to know if this is truly a tectonic move and not just a blip. But if I am right then we are at 2001 or 2002 in a game that didn’t end last time until 2008, and probably would have went straight up until 2012 if the US hadn’t imploded their housing market.

That’s why I am not staying on the wrong side of the Canadian dollar. And why I’m actually pretty excited even though my portfolio is not.

PS: He says this better than I do.