The consensus view is that the Bank of Canada will raise interest rates by 25 basis points on Wednesday. The move represents the opening salvo in a strategy to cobble together what prominent U.S. hedge fund manager Ray Dalio called a 'Beautiful Deleveraging.'
In a 2014 interview with Barrons regarding the U.S. economy, Mr. Dalio said, "A beautiful deleveraging balances the three options… there is a certain amount of austerity, there is a certain amount of debt restructuring, and there is a certain amount of printing of money. When done in the right mix, it isn't dramatic… There is slow growth, but it is positive slow growth. At the same time, ratios of debt-to-incomes go down."
There is a lot of stickhandling ahead for Governor Stephen Poloz to successfully implement a beautiful deleveraging plan. The end goal, in co-ordination with federal fiscal spending initiatives, is to slowly deflate Canada's household debt bubble (and by extension, real estate asset bubbles in Toronto and Vancouver) without allowing the economy to slip into a deep recession.
The process is not without considerable risks as Mr. Dalio highlights in his interview by mentioning 1937. The U.S. economy endured a sharp economic downturn in 1937 when the U.S. Federal Reserve, thinking the economy was out of the woods and had recovered from the Great Depression, tightened monetary policy to prevent an 'injurious credit expansion. Real gross domestic product fell 10 per cent as a result – the economy was not out of the woods at all.
Many Canadians view the real estate market as a potentially injurious credit expansion and Mr. Poloz is set to tighten monetary policy. Modern central bankers, however, have learned the lessons of 1937 and the Bank of Canada will do everything in its power to limit the extent of a rate-inspired economic downturn.
I've used deep water sailing before as an analogy for long-term investors and the metaphor is also applicable to the Bank of Canada for the years ahead. Depending on the economic winds, Mr. Poloz will reduce sail (raise interest rates) when the speed is too high and may be forced to add sail (lower rates) again if the economy slows dramatically. Federal fiscal spending plans are comparable to an onboard motor that kicks in when the boat stops completely, but has limited fuel.
All of this calibration will attempt to keep the domestic economy on an even keel, allowing for the beautiful deleveraging.
-- Scott Barlow is The Globe's in-house market strategist.
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Stocks to ponder
Kinaxis Inc. This company's share price has plunged 14 per cent over the past six weeks. The recent price weakness may represent a buying opportunity for growth investors to consider. The stock has 11 buy recommendations with a return of over 20 per cent forecast over the next year. Jennifer Dowty explains.
Alpha Pro Tech. This is a stock that the Contra Guys refuse to give up on, which they call "one special stock." It is a Canadian corporation with a head office just outside of Toronto that trades solely on an American exchange. And it has seen some noteworthy price spikes. "Effectively, the enterprise is divided into two main parts, building supplies and disposable protective apparel. The latter is the key to the short-term stock trajectory. When there is a scare such as H1N1, SARS or Ebola, the stock price typically leaps," they write.
Titan Logix. Robert Tattersall calls this a neglected, cash-rich micro-cap that could be a takeover target. The company markets a line of fluid-level gauges and controllers for mobile tanker trucks. His meetings with the company alerted him to he new oil-patch environment where data capture is critical for companies to prove that they deliver on schedule and to specification. He explains why this stock is a good pick.
National Bank of Canada. This is a bank stock that Globe Investor last featured in March, 2016, and since then, the share price has increased 24 per cent. A rising interest rate environment, solid financial results, dividend growth, and future share buyback activity provides a potentially positive backdrop for this stock that may lift the company onto the positive breakouts list in the future, writes Jennifer Dowty. The stock has tailwinds that could support steady price appreciation.
Troubling trends to emerge from upcoming Canadian earnings season
There are weaknesses lurking within the rebound in Canadian profits. The coming reporting season promises to deliver another huge jump in quarterly corporate earnings, at least set against last year. But easy comparisons may be obscuring otherwise-deteriorating profit patterns, as the latest flare-up in the global oil glut keeps crude prices low, writes Tim Shufelt.
Here's why you shouldn't fret over highly priced Canadian telecom stocks
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David Rosenberg: Why it may be time to start buying commodity stocks
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What management isn't saying: A potential blind spot for Canadian stock investors
Late last year, Artis Real Estate Investment Trust told its investors it had made an accounting mistake and announced it would correct its financials – a "restatement" – saying it had understated its profits by a factor of three. Earlier in 2016, Northview Apartment Real Estate Investment Trust said it would restate its financials for the third time in less than five years. Two of the errors related to the accounting for its financing costs. However, when it came time to tell investors whether there were any weaknesses in their "internal controls" – the systems that are supposed to help produce robust, accurate financial statements and prevent such accounting errors – the companies said no, there were no weaknesses to report. David Milstead reports what a new study found about what such restatements can mean to investors.
How a money manager is producing phenomenal results using 'the Acquirer's Multiple'
Tobias Carlisle recently spoke about value investing at a microcap conference in Toronto. Fans will know the money manager as the author of a series of books on the discipline. The accessible Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations is suitable for a wide audience of interested investors and represents a personal favourite. Mr. Carlisle loves to look for bargains using what he calls "the Acquirer's Multiple." Norman Rothery explains what this is and three Canadian stocks that are buys using the strategy.
Six ETFs that could get smacked by rising interest rates
We've seen so little of rising interest rates in the past few years that it's worth a review of how they affect various types of investments. Rob Carrick outlines a six-pack of exchange-traded funds that could come under pressure when rates rise.
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What's up in the days ahead
The Globe and Mail will provide extensive coverage Wednesday of the Bank of Canada interest rate decision, including analysis of which Canadian banks are likely to benefit the most from a rate hike, and the potential impact on savings products such as GICs and high interest savings accounts.
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Compiled by Gillian Livingston