Wusses & cowboys

Evil trolls, bots and IA notwithstanding, GICs are hot. The wusses love them. The cowboys mock ‘em. Deposit rates have zipped over 4% for one-year locks, and more if you’re willing to bury funds away for longer. Of course, inflation is still around 8%, so everybody’s losing money – especially if the GIC sits in a taxable non-registered account.

But wait. Financial markets are scary, right? Stocks plopped again Monday as central bankers gather for their annual Jackson Hope gabfest.

The fear is simple: (a) the big rally we saw in the last six weeks was but a headfake inside a bear market fueled by investors high on hopium that CBs are turning dovish, yet (b) those bankers are undeterred. Interest rates will continue to rise aggressively and quantitative tightening (dumping bonds to remove stimulus, goosing yields) has yet to begin. So, (c) you need to hide under a rock. Or a GIC. At least you can make four per cent.

All that’s perfectly understandable. If you can’t hack seeing short-term declines in your portfolio, go hide. But the reality is markets have recovered from dips 100% of the time, the biggest gains happen when they abruptly turn. Missing those days really hurts long-term performance. Finally, if you don’t need the money immediately – to buy a house, finance a wedding, pay your kid’s tuition or buy a Porsche – why worry about a paper loss? You’re just being jerked around by headlines. Ignore it all. Look at your accounts in, oh, May.

But some people obsess about such things. So let’s indulge them for a few paragraphs.

First, what about this interest rate thing? The Fed makes its next announcement in the third week of September. Our guys go on the 7th. The latest inflation numbers in both countries may have been lower, but expect no rate pause, slowing or reversal.

Fed officials have been crystal recently that the hammer will come down two, maybe three, more times in 2022. In Ottawa it’s an identical expectation, with the CB forcing the chartered bank prime well over 5% right after Labour Day. Also consequential, as mentioned, is the QT the American bank is about to launch, reducing its balance sheet and rolling off billions and billions in debt taken on during Covid.

Second, why did we get a huge rally in the financial markets if these dangers persist? Because corporate profits were better than expected. The job market is on fire. Consumers are spending up a storm. Inflation numbers peaked. People got bored with the Ukraine war. And it sounded – a teensy bit – like the CBs were getting dovish. So uppa she went.

Then there are the technical analysts to blame. (Yes, my esteemed suspender-snapping colleague Ryan is a technical devotee). The charts are bullish. Short-term price momentum (often heavy on human emotion) is suggesting a new bull market has started. The June/.July rally was boffo. Ninety per cent of stocks passed their 200-day moving average. Meme stocks shot higher. Party time, bro.

But the macro guys scoff. This kind of analysis looks at the economic fundamentals, monetary and fiscal policy, and seeks basic reasons why markets would rise. They don’t see them. Yup, interest rates will plateau and likely fall at some point. Earnings will blossom as economic growth swells. But we’re not there yet, they say. Markets gained on the backs of just four big stocks, they remind. Real interest rates are still hugely negative. Stay bearish.

Here are analyst Cam Hui’s two potential scenarios:

The benign outcome will see the market undergo some choppiness for several months in the manner of the 2010 and 2011 bottom. The more bearish scenario calls for a second leg down in the manner of the post-9/11 rally as the full effects of the recession reach culmination.

Nobody should ever hector you into investment decisions. The online equity cowboys, your stock-flipping crazy BIL or a financial advisor who makes money on every transaction. Feeling worry is a legitimate emotion, and if that leads you into the arms of the GIC-flogging bank lady or the kid at the CU, so be it. We all gotta sleep.

But just recall what we say here so damn often: the big risk for the vast majority of people in Canada (given their current level of financial assets) is not losing money in a correction that lasts three months or even a year. It’s running out of money before you croak.

Retirement is shockingly long. Twenty to forty years. Seven in ten of us have no dependable corporate pension. CPP is basically lunch and gas money. And the final chapters of a long life could surprise with some big LTC bills. The longer you hide money in an asset paying less than inflation with no tax-efficiency and zero capital growth, the higher the odds you may fall short at age 76. That would suck.

Unless you already have a million or three, growth is needed. Fearing the present, squirreling away your nuts, makes the future harder. Be conservative. Don’t be fearful. Not worth it.

About the picture: “Meet Luna,” says Lynn. “My elderly parents have owned dogs for most of their lives but had been dogless since the start of the pandemic. Now this little nine-week-old gem has come into their lives. It’s a calico chihuahua. I never knew that such a mythical beast existed.”