In percentage terms not one of the triple-digit days the Dow Jones Industrial Average (DJIA) posted in early August merited a place in the top 20 single-session gain or loss rankings. In simple point terms, however, we saw five of the 40 most significant days ever in a span of little more than a week. And we experienced four 400-point days back-to-back-to-back, noteworthy alone for the statistical anomaly let alone the emotional impact such swings exerted on investors.

This round of market volatility was triggered by the decisions by Standard & Poor’s to cut its rating on US government debt from AAA, the first time that’s ever happened. Later in the month a real earthquake–the strongest in to hit the region since World War II–rocked an already shaky Washington, DC. Just four days after the 5.9 tremor, Hurricane Isabel swept up from North Carolina, across Virginia and Maryland, up through Pennsylvania and on to New York and New England, knocking out electricity service for millions.

Downgraded, shaky, soggy, powerless: Events of the past month certainly provide ample metaphorical clay for epic dramatists or historians of empire to build on. It’s pretty clear now that the “great moderation”–presided over by the benevolent hegemon America–that defined the end of the 20th century has given way to something else, a transition period that’s beginning to impact the network of post-war institutions that grew up to support a Pax Americana.

The reordering of global economic and political power will not be smooth; that’s one lesson we can take from the human-scale events of August. For self-directed individual investors, however, there are solutions to the problems afflicting most of the developed world. It’s as clear that buying solid, dividend-paying businesses–no matter where in the world they’re located–is a good way to ride out volatility–even if that volatility is of an historic nature–and build wealth over time.

That’s what we do in Canadian Edge. And it’s what we’ll do in Australian Edge as well, beginning in October.

Canada, Australia and China

The chart below is perhaps the simplest illustration of the strength of Canada and Australia versus the rest of the developed world. It depicts net debt-to-GDP ratios for the Group of Seven (G7) economies as well as the Land Down Under. As you can see Canada (green) and Australia (lavender) make a pleasing combination down at the bottom, the countries with the two lowest levels of net debt as a percentage of gross domestic product among the sample group. This is one reason for both countries’ currency strength relative to the global reserve, the US dollar, over the past half-decade.

Source: Bloomberg

This chart compares the Canadian dollar, or the loonie, versus the US dollar (white); the Australian dollar, or the aussie, versus the US dollar (orange); and the US Dollar Index (yellow). The rising white and orange lines indicate a strengthening loonie and aussie, respectively, versus the buck. The yellow line is just to emphasize the point: The US dollar is weak and will remain so versus currencies backed by sound monetary and fiscal policy and solid resources.

Source: Bloomberg

The relative decline of the US does not mean the end of its reign as the leading global power; the fact remains that the US is still, at USD14.58 trillion in 2010, bigger than China, Japan and Germany combined in germs of GDP. China’s rapid growth will continue, and it will surpass the US in nominal GDP simply because its population is so huge. America’s ample wealth and its sophisticated use of its still considerable hard and soft power–not to mention the simple fact of China’s huge investment in US Treasuries–secure its position atop the geopolitical hierarchy. China is getting closer, rapidly, and will have a greater say in the great power game as the 21st century unfolds. Chinese experts are already showing up in critical roles at the International Monetary Fund and the World Bank.

China has more than USD3 trillion of foreign reserves, a lot of fuel for an economy in steady expansion. The Middle Kingdom is pressing on with plans to build more than 200 cities with more than a million residents and eight hypermodern megacities with populations of more than 10 million by 2025. Canada, with abundant natural resources such as coal, oil and potash that will prove critical to an emerging middle class population, will be an important trading partner as China evolves into a modern power.

After getting off to a rocky start, Prime Minister Stephen Harper has steadily worked to improve his and his country’s standing in Beijing. The Prime Minister, whose emphasis on human rights has, in one light, given way to the practicalities of leading a significant global player in the 21st century, will make his first visit to China since leading his Conservative Party to a majority in the House of Commons this fall. Mr. Harper already sent Foreign Minister John Baird to the Middle Kingdom in July.

China, now Canada’s second-largest trading partner, is, in Mr. Baird’s words, “incredibly important” to the Great White North’s economic future. Mr. Harper’s trip will include discussions of investment protections for Canadian companies operating in China, which will hopefully ensure those companies access to enormous potential markets. At the same time China wants more of Canada’s minerals, lumber and oil and gas. It wants to be able to deploy some more of its USD3 trillion in the Great White North. Trade between Canada and China grew by 30 percent in 2010 and is up 31.7 percent to date in 2011. Both sides, however, acknowledge that more will and must be done.

Australia, for its part, was able to avoid sliding into recession while the rest of the world contracted from 2007 to 2009, largely because of its robust trading relationship with China. Simply by proximity and the fact of its large store of coal and iron, Australia is benefitting from still-strong demand from emerging Asia. Unemployment in Oz is just 5.1 percent. There are already USD400 billion worth of resource projects planned over the next five years, which will continue to drive growth in mineral-rich regions such as Western Australia.

S&P’s historic downgrade of US credit got us off on a strange foot in what turned out to be an exciting August. It’s important to note that Canada and Australia both suffered and recovered from ratings downgrades in the recent past, the Great White North in 1992, the Land Down Under in 1986. Both managed to balance the books and regain AAA ratings, Canada by 2002, Australia by 2003. These are positive examples for Americans disheartened by the downgrade.

What’s also encouraging is that the steps both countries took have made them solid markets for US-based investors looking to diversify their holdings. Canada and Australia–rich in resources, fiscally stable, politically predictable–are home to abundant high-dividend-paying opportunities.

The Roundup

Reporting season never ends. Be it economic data or operating results, we’re subject to a constant stream of information. Managing the flow can make the difference between educated and inflamed decisions. We try to digest big-picture stuff in the space above; down here, it’s about company-level numbers.

In the case of Canada’s Big Six banks, the on-the-ground numbers also happen to help inform our understanding of the macro picture. All of them report according to a November-to-October fiscal year. The third-quarter numbers streaming in now are for the three months ended Jul. 31. That gives us operating results from an economically significant sector over an additional 30 days beyond the traditional calendar second quarter.

Bank of Montreal (TSX: BMO, NYSE: BMO) got things rolling last week with an expectations-beating bottom line that was fueled by a surprise jump in trading profit. Net income for BMO, which is expanding in the US Midwest, was up 19 percent. Adjusted net income, which excludes one-time items, was CAD843 million, up 24 percent from the third quarter of 2010. On a per-share basis BMO earned CAD1.36, up 19 percent. Provisions for credit losses were down CAD40 million to CAD174 million.

Low interest rates and competition for mortgages are squeezing the Big Six, but National Bank of Canada’s (TSX: NA, OTC: NTIOF) fiscal third-quarter new volume was sufficient to offset declining margins, as the bank reported double-digit loan growth for its Quebec-focused portfolio. That helped drive a 15 percent net income boost from the third quarter of fiscal 2010. Management reduced its quarterly provision for credit losses from CAD33 million to CAD11 million, which gave a little lift to the bottom line and is a questionable move in light of the fact that net charge-offs during the third quarter were CAD56 million.

Excluding the impact of reduced credit provisions, year-over-year net income growth was closer to the 6 percent reported for its retail segment; personal and commercial profit rose CAD168 million, which was up 12 percent on a sequential basis. Revenue rose 3 percent to CAD645 million on higher consumer and commercial loan volumes. Net interest margin dropped to 2.34 percent from 2.46 percent a year ago.

Net income from the financial markets division, which includes corporate financing and lending, trading, corporate brokerage and treasury operations, rose 7 percent to CAD101 million, mainly from higher equity trading revenue. Net interest income fell 26 percent to CAD164 million, while other income almost doubled to CAD157 million.

Excluding net interest generated by trading book investments, National Bank had a trading loss of CAD15 million; it posted a CAD28 million profit in the second quarter. Wealth management earnings grew 28 percent to CAD37 million on asset growth and an increase in fee-based and transaction revenues. Revenue rose 11 percent to CAD208 million, as higher asset levels led to growth from trust services and mutual funds.

Overall National Bank earned CAD312 million (CAD1.84 per share), up from CAD271 million (CAD1.56 per share) a year ago. Excluding one-time items the bank earned CAD1.72 a share, up from an adjusted CAD1.57 per share in fiscal third-quarter 2010.

National’s specific focus in Quebec, where consumers earn less but are less indebted, too, certainly helped third-quarter volume growth. Although it won’t follow its bigger peers in expanding beyond Canada’s borders, National Bank is expanding.

The bank closed a deal to buy the 82 percent of Winnipeg-based wealth manager Wellington West that it didn’t already own for about CAD273 million on Jul. 15. The move boosts National’s presence outside Quebec. National Bank could benefit from the situation outside Canada, as it’s been rumored as a possible buyer of London-based HSBC’s Canadian retail brokerage, which has a strong presence in the western provinces.

National Bank has raised its dividend twice since the end of the first phase of the current malaise; it was the first of the Big Six to raise its payout post-2009. National Bank of Canada is a hold at current levels.

Royal Bank of Canada (TSX: RY, NYSE: RY) was unable to follow BMO and National Bank and beat Bay Street expectations, as a tax loss related to its exit from US retail operations resulted in a fiscal third-quarter loss. Canada’s largest bank took a CAD1.66 billion hit on the planned CAD3.45 billion sale of its North Carolina-focused operations to PNC Financial Services Inc. The other quarterly loss RBC reported was in 2009, and it, too, was related to its US retail investment.

Operationally, RBC’s results looked a lot like BMO’s and National Bank’s: Slower volume growth for personal and commercial banking, shrinking margins, generally improving credit quality, cautious outlooks going forward. Profit from continuing operations of CAD1.57 billion (CAD1.04 per share) was up 13 percent from the three months ended Jul. 31, 2010.

Canadian banking net income rose 12 percent to CAD855 million on growth in home-equity products, personal deposits and loans as well as lower credit-loss provisions. Wealth-management earnings fell 3 percent to CAD179 million.

Capital markets unit rose 38 percent to CAD277 million, which included a payout from a legal settlement with insurer MBIA Inc. Excluding that payout and some other items earnings rose 6 percent, as strong fee-based growth from corporate and investment-banking activity was mostly offset by lower fixed-income trading results. Market conditions were “particularly bad” at the end of the quarter, said CEO Gord Nixon during RBC’s quarterly conference call. Transaction volumes fell as clients were spooked by sudden market volatility sparked by the European debt crisis and S&P’s downgrade of US debt. Royal Bank has the most global capital markets exposure among Canada’s Big Six. Given the uncertainty of the growth picture and the absence of a catalyst for a dividend increase, Royal Bank of Canada is a hold.

Almost the polar opposite of National Bank of Canada, Bank of Nova Scotia’s (TSX: BNS, NYSE: BNS) growth model is based on moving beyond the Great White North, into emerging Latin America and Asia. That strategy paid off during the three months ended Jul. 31, as Scotiabank earned CAD1.29 billion (CAD1.11 per share), up from CAD1.06 billion (CAD0.98 per share) a year ago. Cash earnings were CAD1.14 a share, up from CAD0.99 per share.

The Canadian banking division registered volume growth in residential mortgages, higher small business deposits and stronger commercial banking on the way to posting net income of CAD461 million. International banking made CAD350 million, while global wealth management earned CAD256 million and Scotia Capital had a profit of CAD289 million. Loan-loss provisions were CAD243 million, down from CAD276 million a year earlier. Bank of Nova Scotia, Canada’s third-largest lender by assets and the most international bank of its peers, is a buy up to USD60.

Each of the four big Canadian banks to report fiscal third-quarter results has posted generally solid volume growth in domestic retail banking, higher corporate and investment advisory fees and better wealth-management earnings. Royal Bank’s numbers were less than impressive because it chose to cut its losses in the US. Although it will share with its Big Six peers the headwinds on the domestic front, numbers for the three months ended Jul. 31, 2011, confirm that the Canadian economy is relatively healthy.