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For many investors, it’s obvious that global central banks are boosting asset values by “printing money” through quantitative easing and open market purchases. In practical terms, however, U.S. hedge fund manager Cullen Roche sees no evidence that this is the case.

The manager points out that the Federal Reserve’s buying of market assets is merely an exchange of similar assets and does nothing to increase the size of the monetary pool,

“When the Fed engages in QE they expand their balance sheet and buy a bond from the private sector. In a low inflation environment bonds become increasingly similar to cash so these sellers of bonds are selling one cash-like instrument for another. As a result, the private sector ends up holding more low interest bearing cash-like instruments and the Fed holds higher interest bearing cash-like instruments.”

So when an investment firm owns US$10-million worth of five-year Treasury bonds, and the Fed buys them, the company is no wealthier, they’ve merely exchanged $10-million in bonds for $10-million in cash, which is just an ultra-short duration version of the same thing.

Former Treasury Department economist Mark Dow has pointed out that when the Fed buys assets from banks, the proceeds are held as reserves which can’t be loaned out or used as collateral for extra lending to bank clients. In his words, “A bank can draw on its reserves to meet payments to other banks in the system, or, when necessary, get physical cash, but it can’t ‘lend them out’ to clients. Nor can it flood the equity or currency markets with them.”

Investors will point out that central bank purchases increase the value of equities automatically through discounted cash flow calculations by lowering bond yields (risk-free bond yields are the denominator in the formula which means that lower bond yields translate into higher values for equity’s future cash flows).

But, as the St. Louis Federal Reserve pointed out with a chart in an August paper called “Did Bond Purchases and Forward Guidance Affect Bond Yields?", ten-year bond yields have climbed during periods of quantitative easing.

There are analysts, like Citi’s Matt King, who believe that central bank bond (and mortgage backed securities) purchases create asset bubbles by crowding large investors out of government bonds and into riskier securities like high yield debt. More investors in junk debt leads to cheap borrowing costs for companies, who use the easier money to buy back shares and increase stock values.

Mr. King has also pointed out that, until very recently, the performance of the MSCI World Index has closely tracked the combined balance sheet expansions of all major global central banks.

Economists are already arguing non-stop about the effects of post-crisis central bank policy and will continue to do so for decades. There’s no way for me to provide a clear answer as to who’s right and wrong at this point. The takeaway for investors is that the issue is very, very complicated, and it’s a good idea to avoid making portfolio decisions based on easy, dismissive explanations like “central banks are creating asset bubbles and it will all blow up soon.”

-- Scott Barlow, Globe and Mail market strategist

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Stocks to ponder

Atrium Mortgage Investment Corp. Strong industry fundamentals provide a solid foundation for the company to continue to deliver solid revenues and maintain its attractive dividend. The company pays its shareholders a monthly dividend with a current annualized yield of 6.45 per cent. Year-to-date, the share price is up 11 per cent. But further share price gains may be slow given the security’s high valuation. Jennifer Dowty profiles the stock.

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Pot stocks are suddenly surging. Here’s why they’re now worth considering

Bottom feeders are moving into Canada’s marijuana sector, buying beaten-up stocks after a brutal six-month sell-off. Who can blame them? For investors who ignored the sector when the stocks were rallying to record highs on frothy expectations, perhaps now is the time to give pot stocks another look. David Berman looks at the investment case for the cannabis sector.

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Ask Globe Investor

Question: I hold Dream Global REIT (DRG.UN) in a TFSA and have been very happy with its yield and capital appreciation. I am debating selling before the sale to Blackstone goes through but am looking for ideas to reinvest the proceeds in something somewhat equivalent in terms of yield. My current yield is about 4.6 per cent but as I’ve held it for 2+ years and reinvested the dividends, my yield based on purchase price is higher. Appreciate any thoughts you might have.

Answer: Two years ago at this time, Dream Global was trading at $11.24 and yielding 7.1 per cent. There are a few Canadian REITs that yield more today – you can check the list. However, exercise caution with higher-yield entries – the market is telling us something.

One that you might want to look at is True North Commercial REIT (TNT.UN). I recommended it in my Income Investor newsletter on Oct. 13, 2016 at $6.34. It was trading at $6.93 at the time of writing, with a current yield of 8.3 per cent. Keep in mind that I rate this as higher risk.

If you want something less risky, but with a lower yield, look at Northview Apartment REIT (NVU.UN). It is trading at $28.91 to yield 5.65 per cent. It has been one of my recommendations since 2004 so obviously I have a lot of confidence in it.

Disclosure: I own units of Northview.

--Gordon Pape

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