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Hedge fund manager Mark Dow is a former Department of Treasury economist so in light of the close ties between the Federal Reserve and Treasury, his opinions on the market effects of central bank monetary policy carry extra weight. This is important context here because Mr. Dow's views – first presented in this report in 2013 but also circulating widely again in recent days -- are both blunt and, for many investors, counterintuitive.
"There is zero correlation between the Fed [money] printing and the money supply. If you don't believe this, you owe it to yourself to study up on monetary policy until you do… From 1981 to 2006 total credit assets held by U.S. financial institutions grew by $32.3-trillion (744 per cent). How much do you think bank reserves at the Federal Reserve grew by over that same period? They fell by $6.5-billion…
The Federal Reserve only provides liquidity. The amount of liquidity it puts in the reserve system has no direct impact on the issuance of credit by banks or shadow banks. Only banks and shadow banks can create credit."
The column includes charts and other analysis showing a lack of clear relationship between base money supply – the province of central banks – and inflation.
In this framework, banks and other lenders are the main culprits where inflation is concerned. Central banks are not, however, blameless. Low central bank policy rates create demand for mortgages and loans that lenders can either fulfill or deny.
For investors, the root causes of inflation are important on two fronts. One, a big part of the investment case for cryptocurrencies (and the entire investment case for gold) is founded on the premise that they will be a store of value that protects wealth against the inflation-driven depreciation of government currencies.
Monetary stimulus and bloated central bank balance sheets are often cited as the precursor to major developed world currency devaluations. But if it's the health of major bank balance sheets that really matters, that risk is likely overstated.
Secondly, Mr. Dow's template also denies claims that central banks are driving asset markets higher. He writes,
"It is the indirect psychological effects from Fed support and the low cost of capital -- not the popularly imagined injection of Fed liquidity into stock markets -- that have gotten investors to mobilize their idle cash from money market accounts. .. It is our money, not the Fed's, that's driving this rally [and] If the Fed money is not directly propping up the stock market and the economy underneath.. [the rally] is less artificial."
This also means that the ongoing withdrawal of global monetary stimulus should not have significant negative effects on markets.
All of this, admittedly, is a different way of thinking about markets and monetary policy. There are investors who will no doubt recoil at the rejection of the 'central bank activism = runaway inflation' heuristic. But with central banks, including the Bank of Canada, currently taking away the monetary punchbowl, "There is zero correlation between the Fed printing and the money supply. Deal with it" is an important read, whether investors accept the theory in the end or not.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Corus Entertainment Inc. (CJR.B-T). When a yield climbs to a number that you can't even count on both hands, it's a sign that something is seriously wrong, reports John Heinzl. Case in point: Corus Entertainment Inc. Shares of the TV and radio broadcaster, specialty-channel operator and children's-content creator plunged last week after it announced disappointing fiscal first-quarter results, hurt by a 4-per-cent downturn in TV ad revenue. The results underlined the challenges facing the TV industry in the age of Netflix, YouTube and Facebook and prompted analysts to slash their earnings estimates and ratings on Corus's shares. Even before the sell-off, Corus was yielding more than 10 per cent, a level that should have given investors a bad case of sweaty palms. Now, the yield has climbed to more than 13 per cent, which screams "danger." If you think you can earn 13 per cent without the risk of further share price declines, a dividend cut, or both, he has some oceanfront property in Saskatchewan to sell you.
Andrew Peller Ltd. (ADW.A-T, ADW.B-T). Everyone loves Canadian wine. Should you? We're not talking about preferring a bottle of Niagara Peninsula sauvignon blanc over, say, a Bordeaux, but, rather, the rising enthusiasm for shares of Andrew Peller Ltd., the wine producer based in Grimsby, Ont. Since the start of September, the share price has rallied 46 per cent, breaking successive record highs as investors embrace two particularly attractive aspects of the company's wines: They are exceptionally profitable and this profitability hadn't been fully reflected in the share price. But with Andrew Peller's stock now reflecting a very bright future, how much upside is left? David Berman reports.
Colliers International Group Inc. (CIGI-T). This stock may resurface on the positive breakouts list in the weeks ahead as the share price is just 2 per cent away from closing at a record high. Over the past four quarters, after the company has reported its earnings, the share price has rallied between 3 per cent and 8 per cent that day. If history repeats itself, the share price could rally to a record high in February, when the company is expected to report its fourth-quarter financial results. Toronto-based Colliers International Group is a global commercial real estate services company with operations in 68 countries. The company provides services such as real estate advisory services, property management, and property appraisals and taxation consulting. Jennifer Dowty reports.
General Electric (GE-N). General Electric shares tumbled for a fifth straight session on Friday, sending the stock to its biggest weekly percentage drop since the financial crisis, after the company flagged a possible breakup and more than $11-billion in charges earlier in the week. Shares in the U.S. industrial conglomerate fell 3 per cent to $16.26 (U.S.) on Friday. That resulted in a 13.3-per-cent drop for the week, the largest such weekly decline since March, 2009. The stock fell as low as $16.02 on Friday, threatening to fall below $16 only a day after the stock breached $17 for the first time since December, 2011. Reuters reports.
Twitter Inc. (TWTR-N). Twitter Inc. is accumulating likes from some of its most important followers: Wall Street analysts. The social media company, in the third year of Chief Executive Officer Jack Dorsey's turnaround effort, has been upgraded by at least six analysts since reporting better-than-expected third-quarter results in late October. That's helped fuel a more than 40-per-cent rally in the stock. Bloomberg News reports.
The Rundown
Why Canadian investors are being left out of one of history's great bull market runs
U.S. stocks are off to one of the best starts to a year in the past three decades. Canadian equity performance in 2018, meanwhile, is having its strongest start since, well, 2017. Coming off what was a banner year for American stocks, share prices have since gathered even more speed, taking indexes deeper into record territory and stoking fears of a valuation bubble. Canadian stocks can't seem to catch that same fire, as the early results in 2018 closely resemble the year just past, with domestic performance badly lagging state-side counterparts. Tim Shufelt reports.
How Wealthsimple's chief investment officer is preparing investors for a sudden turn in the markets
Dave Nugent may oversee investments at a cutting-edge Canadian robo-adviser, but his investment strategy, by his own admission, is downright "boring." Mr. Nugent, the chief investment officer at Wealthsimple, sees a big part of his job as promoting a steady investment approach and tempering investors' expectations in good times and bad. The Globe and Mail spoke with Mr. Nugent recently about Wealthsimple's market strategy amid the recent market frenzy, and how it's preparing for the next major market downturn – something the robo-adviser has yet to experience since its launch in September, 2014. Brenda Bouw reports.
A reality check on the surging U.S. stock market
Investors now face a stark dilemma: Should they run toward a brightening global economy? Or run away from the market's towering valuations? The pessimists' case is simple: Nobody in their right mind sticks around an aging bull market that is pricing stocks at some of the most extravagant levels in history. These things always end badly. The optimists' response is equally strong: Why leave the party when it's just getting going? The global economy is enjoying its first concerted upswing in years. Add in the stimulus of U.S. tax reform and we're more likely to see stocks "melt up" than melt down. Ian McGugan reports.
Top Links
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Compiled by Gillian Livingston