Inflation

Inflation

Fed Pivot turned into a Divot

Posted By |

 

By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

It was a more than interesting week. Not much mattered until Jerome Powell (the U.S. Federal Reserve Chair) delivered comments on Friday. He came clean. Or at least he helped to reverse the delusion created by stock market enthusiasts that the Fed would ‘pivot’ and reverse course on the market-unfriendly series of rate hikes. Rates are going higher and they will stay higher. There will be some pain for consumers and business. Inflation must be crushed. They will do what it takes. The Fed pivot turned into a divot. The markets were not happy with the reality check.

In a Seeking Alpha article published just days before the Powell presser, Michael J Kramer of Cott Capital Management offered …

The futures, bond, and currency markets are already telling the world that there is no dovish pivot, and quite frankly, there probably never was a dovish pivot. The only market out there that hasn’t gotten the message appears to be the equity market.

If Powell can deliver a message that even a golden retriever (I own two goldens) can understand, then the equity markets’ day of reckoning will arrive in short order.

Also from Michael …

The futures knew it, bonds knew it, and the dollar knew it. Once again, the only market living on an alternate planet was equities …

Powell finally delivered a direct message

In his Jackson Hole speech, in the opening paragraph, he made it clear that his remarks would be shorter and the message would be more direct. That it was.

Very simply, rates still have further to rise, and once there, they will stay there for some time. In the following paragraphs, I have borrowed from Michael and others, I will avoid quotes for readability. My own commentary is in the mix.

Powell offered that reaching an estimate of the longer-run neutral rate is not a place to pause or stop. He said the June FOMC projections suggest rates would rise to just below 4% through the end of 2023 and that history warned against loosening policy too soon.

It’s evident that the Fed is aware of the mistakes made in the 1970s and 1980s with the stop-and-go monetary policy approach that led to even higher rates, and the Fed appears determined not to repeat those mistakes. There can be no 70’s show rerun.

Fed Chair Jay Powell said:

Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.

Powell noted that fighting inflation will take a sustained period of below-trend growth and a softening labor market, which could bring pain to households, and are the costs of reducing inflation. In the third paragraph of his speech, it’s right there. The Fed is willing to sacrifice growth and face rising unemployment to bring inflation down. He is telling the market there will be no “pivot” anytime soon.

Inflation is driving the bus

The Fed chair said central banks need to move quickly, warning historical episodes of inflation have shown that delayed reactions from central banks tend to come with steeper job losses.

“Our aim is to avoid that outcome by acting with resolve now,” Powell said.

The following image is not a live video, but an example of the headlines that ‘spooked’ the markets.

Federal Reserve Chairman Jerome Powell on Friday said the central bank’s job on lowering inflation is not done, suggesting that the Fed will continue to aggressively raise interest rates to cool the economy.

Get the inflation-killing job done

“We will keep at it until we are confident the job is done,” Powell said in remarks delivered at the Fed’s annual conference in Jackson Hole, Wyoming.

“While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down,” Powell said Friday.

The central bank has delivered four consecutive interest rate hikes over the last six months, moving in June and July to raise rates by 0.75%, the Fed’s largest moves since 1994. By raising borrowing costs, the Fed hopes to dampen demand by making home buying, business loans, and other types of credit more expensive. Continue Reading…

Building the All-Stock Retirement portfolio

Posted By |

By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

How do you build a suitable retirement portfolio, made of stocks? I gave that a go recently on Seeking Alpha. That may lead to a greater debate about ‘can you really build a suitable retirement stock portfolio?’ I’d say that yes you can, but we have to cover off all of the bases (economic conditions). And we have to have a portfolio that takes a defensive stance. Also, the Canadian investor might be in a very fortunate position thanks to defensive wide-moat stocks that pay generous dividends. They can work as bond replacements. We’re building the retirement stock portfolio.

I will give you the juicy bits, but if you are able to access Seeking Alpha here is the original retirement post on Seeking Alpha.

The concept of the retirement all-stock portfolio is to take an all-weather portfolio approach. But instead of using bonds, cash, gold and commodities, we’re going to put stocks in the right place. And we’re going to use the appropriate amount of stocks to cover off the risks.

A good starting point for the all-weather portfolio is the venerable Permanent Portfolio. That model includes only one asset for each economic quadrant.

Stocks. Bonds. Cash. Gold.

Here is an outline of a study from Man Institute that details the types of stocks and sectors that worked in various economic conditions. Keep in mind that REITs have worked for inflation and stagflation from the 1970s. I’ve given REITs a pass for inflation.

Defense wins championships

At its core, the retirement stock portfolio is quite defensive. Certain types of stocks will do the job of bonds. They will help in times of bear markets and recessions. They can also deliver ample income: much more than bonds these days.

The Canadian retirement stock portfolio will take full advantage of the wide moat stocks.

I’ll cut to the chase. Here are the assets to cover off the economic quadrants:

Defensive bond substitute stocks – 60%

Utilities / Pipelines / Telecom / Consumer Staples / Healthcare / Canadian banks

Growth assets – 20%

Consumer discretionary, retailers, technology, healthcare, financials, industrials and energy stocks

Inflation protectors – 20%

REITs 10%

Oil and gas stocks 10%

Not listed in this inflation-protection section is consumer staples, healthcare, utilities and pipeline stocks. Those stocks can do double duty. They work during times of market stress (corrections/recessions) and they can often deliver modest inflation protection as well.

Maybe consider gold and commodities?

While you may opt for a stock/cash portfolio, it may be wise to consider gold and commodities, even if in very modest amounts.

Nothing is as reliable and explosive for inflation as commodities. The most optimal balanced portfolios do include gold.

A 5% allocation to each of gold and commodities may go a long way to protecting your wealth.

An inflation bucket might then look like:

  • Gold 5%
  • Commodities 5%
  • Energy stocks 5%
  • REITs 5%

A cash wedge is not a bad idea

Cash helps your cause during stock market declines, stagflation and deflation. Mark Seed at My Own Advisor plans to use a stock and cash approach for retirement funding.

Given all of the above considerations, a retiree might go off the stock-only-script modestly with 5% weighting to each: gold, commodities and cash. It’s quite likely that the 15% allocation will come in very handy one day. Continue Reading…

How to take advantage of rising interest rates

Posted By |

By Bob Lai, Tawcan

Special to the Findependence Hub

Lately, the talk of the town seems to be rising interest rates. In April, the Bank of Canada raised the benchmark interest rate by a whopping 0.5% to 1%, making it the biggest rate hike since 2000. Given the high inflation rate, it is almost a given that these rate hikes will continue throughout 2022 and beyond. [On July 13, 2022, the BOC hiked a further 1%: editor.]

But before you freak out, let’s step back and look at the big picture. At 1%, the benchmark interest rate is still relatively low compared to the past interest rates.

I still remember years ago before the financial crisis, being able to get GIC rates at around 5%. And some people may remember +10% interest rates in the 80s or early 90s. Back then, interest rates were much much higher than measly below 1% rates we’ve been seeing the last decade.

Historical BoC overnight rates
What’s going to happen to the stock market? Well the general rule is that when Bank of Canada or the Federal Reserve cuts interest rates, the stock market goes up. When Bank of Canada or the Federal Reserve raises interest rates, the stock market goes down.

Continue Reading…

Time to go on a Financial Media Diet

Posted By |
LowrieFinancial.com: Canva custom creation

By Steve Lowrie, CFA

Special to the Financial Independence Hub

In my recent mid-year letter to clients, I decided we’d best just call a spade a spade, so I began as follows:

“Let’s not sugarcoat this: 2022 has challenged investors on nearly every financial front imaginable so far this year.”

Stock and bond markets plummeting in tandem, the war in the Ukraine, rises in interest rates, threats of a looming recession … You’re probably already well aware of the volume of news wearing us down. As I wrote to my clients:

“the financial press has gone on a feeding frenzy in response, serving up heaping helpings of negativity upon negativity.”

Everyone loves a Perma-Bear

Whether by traditional channels or social media streams, amplifying extreme news is in large part what the popular financial press does.

They’re not entirely to blame; we consumers tend to gobble it up with a spoon. That’s thanks to a behavioural bias known as loss aversion, which causes the average investor to dislike losing money approximately twice as much as they enjoy gaining it. Our “fight or flight” instincts basically prime us remain on constant high-alert when it comes to protecting our life’s savings.

Media outlets know that, and routinely round up a stable of talking heads to scratch that behavioural itch. Their “regulars” even earn catchy nicknames:

Perma-bear

Back in 2012, economist David Rosenberg put together a presentation called 51 Signs the Economy Is a Total Disaster. (What, only 51?) We know that reality begged to differ. He tried again in 2019, when he declared: “We’re going into a recession … I think it will be this coming year.” It didn’t happen.

Dr. Doom

Whenever the press needs a fresh Armageddon forecast, they know they can call on “Dr. Doom” economist Nouriel Roubini. It doesn’t seem to matter that he’s been mostly wrong far more often than not. As recently as early July, Roubini was predicting a 50% freefall in the stock market. So far, not so much (thankfully).

Recession Man

As reported in ‘Recession Man’: Burry’s Tweets Resonate With Traders Worried About A Downturn, hedge fund manager Michael Burry built his fame from correctly calling the 2007 U.S. subprime mortgage crash. Lately, he’s been posting cryptic tweets to his nearly 1 million followers that “reflect increasing fears of an economic downturn.” As academic Peter Atwater explains of Burry’s popularity:

“The tweets that get shared and liked the most are the ones that fit with how we feel the most … Twitter is an enormous mirror.”

If you look closer, you might spot a card hiding up these soothsayers’ sleeves: with a large, random group of “experts” loudly predicting doom and gloom nearly all the time, basic statistics informs us: a few of them are going to be right every so often, with seemingly uncanny accuracy. Their fortuitous timing makes them look super smart, which earns them even more fame. The cycle continues.

Going on a Financial Media Diet

On many fronts, times are indeed disheartening, and we’re as worn out as you are by the weight of the world. That said, there are already way too many outlets cramming worst-case scenarios down our throats and crushing investment resolve. To offset a bitter pill overdose, following are a few more nutritious news sources to reinforce why we remain confident that capital markets will continue to prevail over time, and that long-term investors should just stick to their plan.

Stock Markets Grow

The following chart is one of our favorites, as it shows at a glance that which the bad news bears routinely disregard: Stock markets have gone up nicely, and far more frequently than they’ve gone down. We have no reason to believe current trends are going to alter this uplifting, nearly century-long reality.¹ Continue Reading…

Canadians fret about meeting day-to-day expenses and inflation’s impact on Saving

Posted By |

With rising inflation driving up the costs of goods and services, a Scotiabank survey released Monday reveals over half [53%] of Canadians are worried about their ability to pay for day-to-day expenses. The majority (78%)of expect to be spending more on basic necessities like groceries and food, or gas (71%), and 53% expect to spend more on utilities (53%). 47% say these issues are impacting their ability to save for longer-term financial goals and 37% feel it’s impacting their current standard of living. Scotia Economics expects inflation to peak later this summer before starting a slow descent to 3.6% in 2023 and back to target by 2024.

“Canadians are feeling heightened levels of anxiety as a result of inflation: especially younger people and women who were also hardest hit by the pandemic,” said D’Arcy McDonald, Senior Vice President of Retail Payments and Unsecured Lending at Scotiabank via a press release. “The cost of everything is on the rise and Canadians are worried about their ability to afford the essentials such as food and gas. At the same time, there have never been so many jobs in the Canadian economy, wages are picking up, and inflation will come down over time.”

Financial stress hits differently across the country

Where Canadians live dictates how much they believe rising costs will impact their finances and ability to pay their bills. 49% of residents in the Atlantic think inflation is having a major impact on their ability to set and stick to a budget, compared to 36% of residents of British Columbia and Quebec. 

When it comes to feeling financial anxiety, 57% of Quebecers are least likely to be concerned about their ability to pay for day-to-day expenses, compared to residents of Alberta (45%), Manitoba/Saskatchewan (44%), Ontario (43%), and the Atlantic (39%).

The young are most impacted and most concerned

Women, younger Canadians, and those with lower household incomes are significantly more concerned about their financial situation over the next few months. Women (44%) are more likely than men (35%) to say inflation and the rising costs of goods and services is having a major impact on their ability to set and stick to a budget.

Canadians between the ages of 18-34 (45%) and 35-54 (46%) say inflation and the rising costs of goods and services is having a major impact on their ability to set and stick to a budget, compared to Canadians 55+ (30%). Continue Reading…