From 2000 to 2023, the Canadian M2 money supply, a broad measure of money, increased by 7.29% annualized, while nominal GDP increased by 4.27% annualized. Over the long run, the growth of the money supply in excess of economic output provides an implied level of inflation, since it shows excess money chasing goods and services. Implied inflation was 3.02% annualized (computed as 7.29% minus 4.27%). Reported inflation was 2.22% annualized (measured by the Consumer Price Index). Long-term investors might reasonably assume that they lost purchasing power at the higher of these two rates of inflation — in this case, implied inflation at 3.02% annualized.
Canadian money supply, M2 (gross, unadjusted) Opens a new window.
Canadian nominal GDP Opens a new window.
Canadian inflation (Consumer Price Index) Opens a new window.
2 Many large dividend payers seek to maintain a consistent dividend payment, not necessarily as a dollar amount but as a percentage of earnings.
3 Some of the trading and currency risks of investing in foreign stocks can reduced by holding North American-listed funds, American Depositary Receipts (ADRs) or Canadian Depositary Receipts (CDRs), although investors may still face the risk of limited knowledge of foreign markets and companies.
4 When a U.S. investor places 60% of their equity portfolio in U.S. stocks, for example, this is a non-issue, since the U.S. is about 60% of world stock market capitalization. But when a Canadian investor places 60% of their equity portfolio in Canadian stocks, this is a major departure from the global market portfolio, since Canada is about 3% of world stock market capitalization. Thus "home bias" can be a more important consideration for Canadian investors than for U.S. investors.
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