A growing chorus of economists and academics believe that because of central bank monetary stimulus, asset prices – real estate, equities and bonds – are where inflation pressure lies, not the Consumer Price Index. This means there's a sense in which inflation fighting for the Bank of Canada and Federal Reserve is temporarily a battle against homeowner and investor wealth, or at least its growth rate.
There are hints this process is already underway on both sides of the border.
When the monetary spigot opened after the financial crisis, central bankers knew very well that asset prices would be the first beneficiary. The intention was that higher housing and equity prices would eventually feed through to business investment and then higher wages. But for reasons economists still struggle to understand, the wage growth never occurred despite gains in employment. The benefits of the money printing by central banks remained trapped in asset markets, and drove market prices ever higher.
Victor Xing, portfolio manager and founder of investing consulting firm Kekselias Inc., brilliantly described the phenomenon in a free to read column for the Financial Times. But a letter to the editor at the same paper described it more succinctly:
"I recall a very crude definition of inflation from my time as an economics undergraduate: 'Inflation is too much money chasing too few goods.' There is clearly liquidity in abundance today, but with a serious and growing concentration of wealth into the hands of the few, that liquidity is much more likely to be used 'chasing' assets rather than goods and services."
The U.S. Federal Reserve and the Bank of Canada are steadfast in their intentions to raise interest rates despite stubbornly low traditional measures of inflation (like the Consumer Price Index). Bank of Canada Governor Stephen Poloz can point to recent strength in domestic economic data to explain that rate hikes are primarily designed to prevent growing inflation pressure in wages and goods.
It's also the case, however, that the Bank's most recent Financial System Review report warned specifically about mortgage-related household debt and growing 'imbalances' in the residential real estate market. The recent rate hikes are likely, at least in part, also intended to limit the rise of debt and housing prices in Greater Toronto and Vancouver.
Members of the Federal Reserve have been more explicit about their concerns regarding asset prices, as Reuters reported in August. "We do have relatively easy financial conditions. That is another reason you want to continue on this gradual retraction of accommodation," through higher short-term interest rates and a shrinking balance sheet, Cleveland Fed President Loretta Mester said. "If we don't we could be engendering some imbalances in the financial markets."
To be clear, the Bank of Canada did not raise interest rates solely, or even mainly, to prick the housing bubble, nor is Fed Chair Janet Yellen about to enact policy to push the S&P 500 lower. But it's also clear that central bankers are aware that while post-crisis monetary stimulus did restore confidence in the global financial system, it did not fully work as intended. The end result is bloated, all-time high housing and investment values in combination with an economically stagnant middle class (although it should be noted that wealth inequality is a much bigger problem south of the border).
The limitations of traditional models prevented economists from seeing the pre-financial crisis dangers and also led to confident post-crisis predictions of U.S. wage growth and consumer inflation when none occurred. If new modelling discovers that fighting inflation means fighting asset values, we are really in an entirely new economic world.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Andrew Peller Ltd. This consumer stock appears on the positive breakouts list. The company has delivered steady sales growth and has been a strong performer for long-term investors. Grimsby, Ont.-based Andrew Peller's core focus is wine production with operations spanning from Canada's west coast to the east coast. The company has wineries in B.C., Ontario, and Nova Scotia. In addition, the company also produces wine based liqueurs, cider, and whisky, amongst other products. APL owns over 100 retail stores in Ontario under the banners: The Wine Shop, Wine Country Vintners and Wine Country Merchants. Jennifer Dowty takes a closer look at the company.
Equifax Inc. A huge data breach, swirling questions about executives' suspiciously well-timed stock sales, and looming class-action lawsuits have conspired to knock more than 30 per cent off the price of Equifax Inc. stock in just two weeks. How can you not love a bargain like that? All right, all right, this stock might not be anyone's idea of an ideal purchase for widows and orphans. But, at today's price, it is a tempting proposition for risk-tolerant investors who are willing to bet on the ability of strategically positioned companies to endure just about any disgrace. Ian McGugan outlines his reasoning.
Royal Bank of Canada. The S&P/TSX composite index is approximately 3.5 per cent away from its all-time high set back in February. Financials, which represents approximately one-third of the Index, may help lift the TSX Index back up to record levels. This bank stock is gaining traction with room to rally further. Jennifer Dowty explains.
Cara Operations Ltd. This stock recently appeared on the negative breakouts list. The stock has been in a downtrend since early 2016. Jennifer Dowty says she tends not to profile stocks from the negative breakouts list as these stocks typically decline in value for a fundamental reason. While these stocks may see their share prices stabilize, in order to see a recovery, buyers have to come into the market. This won't happen unless sentiment changes, typically resulting from improving company fundamentals or industry conditions – which takes time. Year-to-date, the share price is down 8 per cent. However, over the past week, the share price has rallied 8 per cent, bouncing off its 2017 low of $21.21, set last week on Sept. 14. Jennifer Dowty takes a closer look at this stock.
I made a tidy profit off this trade this year - and there may still be time for you to do the same
The most recent edition of Merrill Lynch's Research Investment Committee (RIC) report reiterates an investment idea Scott Barlow has already used to generate a significant short-term paper profit. The Sept. 12 RIC report entitled Finding Value When Valuations Are High underscored the health-care-related bullishness of the company's chief quantitative strategist Savita Subramanian. Scott Barlow explains what investment has led to gains.
Five dividend stocks with a growth catalyst
For dividend investors, it's a brave new world. After several years of sluggish growth and falling interest rates, the investing environment has been turned on its head: Growth is picking up and interest rates are once again on the rise. The reversal has been especially dramatic in Canada, where the economy has been growing so quickly – it expanded at a scorching annual pace of 4.5 per cent in the second quarter – that the Bank of Canada has raised its benchmark interest rate twice in the past few months, with more hikes possible. John Heinzl outlines five stocks that Darren Sissons, a partner with Campbell Lee & Ross Investment Management, likes right now.
Evolve Funds seeks approval to launch Canada's first bitcoin ETF
Evolve Funds Group Inc. has filed a preliminary prospectus in hopes of launching Canada's first cryptocurrency exchange-traded fund. The ETF would give Canadian retail investors a way to tap into the bitcoin market, the world's first decentralized currency, through an actively managed TSX-listed fund, said Evolve's CEO and president Raj Lala. The ticker would be, appropriately enough, BITS. Clare O'Hara explains the move.
These dividend funds are kings of consistency
Investors have had so much success with dividend funds in recent years that it's easy to become complacent about these products. But times are getting tougher for dividend stalwarts in sectors such as utilities, pipelines, telecoms and real estate. Interest rates have been on the rise in recent months, and this in turn has put downward pressure on these rate-sensitive sectors. Looking for dividend funds that can manage this change in the investing landscape? Rob Carrick takes a look at a few candidates that turned up in a screen of the Globeinvestor.com fund database.
Gordon Pape: Higher rates have hurt my high-yield portfolio
At his Toronto Money Show workshop two weeks ago, Gordon Pape was asked what income investors should do in the face of rising interest rates. His answer was to stick with your plan. It's no secret that when rates rise, income-sensitive stocks tend to decline in value. All things being equal, the ones that fare best are those companies with a long history of dividend increases and a strong commitment to future hikes. But even they can see a price retreat. The important thing to remember is that you invested in these securities for cash flow. As long as the dividend/distribution appears to be secure, don't worry about the day-to-day or even month-to-month movement in the share price. Gordon Pape explains.
The 12-penny divide: An extreme range of views on the Canadian dollar
The range of views on the Canadian dollar is growing extreme. Indeed, there's a 12-penny divide among the most recent forecasts, from 75 cents (U.S.) to 87 cents. Starting at the top, JPMorgan Chase sees the loonie at 87 cents by early 2018 as the Bank of Canada raises its benchmark interest rate from where it sits now, at 1 per cent, after two recent hikes. At the bottom is Capital Economics, which, based on its long-held-but-yet-to-happen belief that Canada is headed for a housing meltdown, suggests the central bank could reverse course and cut rates in 2018, driving the loonie to its low by the end of the year. Michael Babad explains.
Larry Berman: Here's where I think the loonie will be trading at over the next year
The combination of the U.S. Federal Reserve being a bit more hawkish and the Bank of Canada concerned about the rising loonie is leading to a bit of currency weakness. For the snowbirds, you just missed the best buying U.S. dollar opportunity, when the exchange rate hit 83 cents a few weeks back, though he would not look for it to weaken too much below 80 cents through the winter months. Here's Larry Berman's take on where the dollar is going.
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Compiled by Gillian Livingston