Making sense of the markets this week: June 28

Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors.

Are the markets throwing a taper tantrum?

The term “taper” and the possibility of a “taper tantrum” jumped into business news and headlines this past week. What is all of this taper talk? And what does it mean for our stocks and bonds, and other investments? 

Here’s the background. To help keep rates low, central banks buy their own government bonds. That link to the Bank of Canada site explains the bond-buying process (termed QE, or quantitative easing). And here’s the rationale from that BOC page… 

“QE sends a signal that we intend to keep our policy interest rate low for a long time—as long as inflation stays under control. By giving more certainty that our policy interest rate will remain low, QE can help reduce longer-term borrowing costs for businesses and households.”

And in chart form… 

Source: Bank of Canada

Central banks are working to stimulate growth as part of their goal to achieve a 2% inflation target. Other government forces are involved as well; in what is called “fiscal policy,” some programs send monies directly to citizens to stimulate spending and growth. A recent example of fiscal policy is the CERB program that cut cheques to Canadians out of work due to the pandemic. We also saw government payouts and loans for Canadian businesses. 

The central bank will factor in all of the stimulus as they keep an eye on the economy and the consumer. When they’ve achieved their growth and inflation targets, they can ease off on those bond-buying programs; that is, they will taper their bond-buying

And when we experience tapering or hear talk of tapering, the markets may not like it. They might get a little skittish. Heck, they might even throw a taper “tantrum.” 

From that Investopedia link… 

“As a result of their dependence on sustained monetary stimulus under QE, the financial markets may experience a downturn in response to tapering; this is known as a ‘taper tantrum’.”

And, right now, a taper tantrum is the talk of the town (OK, the talk of Wall Street and Bay Street) as market watchers wonder how investors will react. Also at play is the level of rate increases introduced by these central bankers. In last week’s post, we looked at some Canadian inflation stats and pondered whether U.S. Federal Reserve Chair Jerome Powell might start to increase rates sooner than expected. 

In 2013, we experienced the original taper tantrum. Bond yields spiked considerably at the mere mention of tapering. As always, that spike will sent the value of the bond plummeting. The stock markets took a bit of a spill as well, but recovered as the Fed backed off of its threat to taper, and went back to more bond buying (QE). 

Here’s some recent Fed speak, as reported on Seeking Alpha. They are being very cautious in tone, suggesting the U.S. Federal Reserve will not hike rates prematurely. Powell continues with the suggestion that inflation is transitory and manageable. 

But the markets on both sides of the border are addicted to the various forms of stimulus. What happens when the central banks even suggest that they’ll take away the punch bowl? 

It’s a tricky dance. This week, U.S., Canadian and international stock markets are answering the Fed speak with market highs, or near-highs. 

On my site last week, I attempted to interpret what the bond markets are trying to say; it sounds like they are perhaps not buying the long-term growth story. They might be saying after the initial inflation burst, we’re back to disinflation, or perhaps even deflation is a possibility. 

The stock and bond markets are talking. Are they on the same page? 

What the heck is going on with bitcoin?

Readers of this column know that I am a fan of investing in bitcoin. While I’m curious about other cryptocurrencies and their various value propositions, I am currently invested only in bitcoin. I see it as digital gold. I am also invested in “real” gold and other commodities or commodity-related stocks. 

Over the last year, bitcoin is up by more than 250%. However, year-to-date, it’s up “only” 16%. Of course, this could all change in a hurry by the time you read post—with prices changing in either direction. As I’ve often mentioned (the obvious), bitcoin is an incredibly volatile asset. While it can be explosive to the upside, it can fall in quick order as well. 

On the Moolala podcast in May, I suggested to the wonderful and always entertaining host, Bruce Sellery, that bitcoin investors should certainly be prepared for massive corrections—even the frightening 80% variety that we’ve seen in the past. In that podcast I also offered that bitcoin is “just another asset” for me. I will hold and rebalance. 

Well, be careful what you ask for. From the highs of April, the price of bitcoin has been cut in half. This week it’s in the $32,000US to $35,000US range. 

So, what happened? 

Elon Musk (CEO of electric vehicle-maker Tesla) originally gave bitcoin a boost by accepting bitcoin as payment for vehicles. He then reversed his call on that payment option due to the environmental concerns of bitcoin mining. 

As a result, the price took a major hit that began a quick and continued decline. 

Chinese governments also piled on, banning bitcoin mining in many regions. 

But bitcoin is fighting back. In this “Making sense of the markets” post, we looked at the bitcoin energy council and how the bitcoin community would help bitcoin “go green.” They want to manage the PR problem for bitcoin as well. 

And as Greg Foss of Validus Power Corp offered in that MoneySense link, many of these miners are packing up and heading to greener pastures, such as Canada. 

Can green up its production and image? This Seeking Alpha post, ”Bitcoin goes green in major reversal,” laid out the potential for a positive being made out of serious challenges to bitcoin legitimacy. From that post and quoting Nic Carter, CEO of Castle Island Ventures… 

“In the short term, writes Carter, there are many questions to be answered, but long-term, this is a good thing. ‘Whether it’s the U.S. or other locales that grow their market share at the expense of China, it will be a significant win for bitcoin’s decentralization, the stability of mining and bitcoin’s climate impact. At long last, bitcoin’s vulnerability to China and the CCP is melting away’.”

Short-term pain might bring positive change. In the end, if you like the asset, this is rebalancing time. Take from your assets that are performing well and add to your underperformers, such as bitcoin. 

Don’t let emotion rule the day. 

Of course, do your own research, and know your comfort level for volatility and risk. 

The risks are real and bitcoin will make many enemies along the way. But in a world where many governments embrace modern monetary theory and suggest that government debt no longer matters, I’m happy to HODL bitcoin, and add on. 

Canadian stocks are the cheapest compared to U.S. stocks since the tech bubble

Here’s a tweet that offers incredible insight into the discrepancy in valuation between U.S. and Canadian stock markets. 


Those stats and info are courtesy of a Bank of America report. 

I often point out that U.S. stock markets are ridiculously expensive. And there are certainly much more current earnings and perhaps value in Canadian stocks due to our generous weights to financials and energy and resources. The Canadian markets are showing they are built for the times. 

It might be an easy decision for an American investor. On my Seeking Alpha blog I suggested U.S. investors might have a look at Canadian stocks

The Canadian and U.S. markets can make a nice tag team given the differences in sector allocation and valuation. From that post… 

historic performance of canadian and u.s. stocks
Source: Seeking Alpha

We often think of how much Canadian stocks lag the growth-oriented U.S. market, but that chart changes the perspective when we go back to the dot-com crash or the early 2000s. 

You’ll find a table in that post that shows the outperformance of Canadian stocks over U.S. stocks in the period of stagflation in the 1970s and early 80s. In that case, the inflation-friendly makeup of Canadian markets came to the rescue, and mostly the contribution of the energy sectors. Gold, gold stocks and other commodity-related offerings also performed more than well in the period. 

Perhaps it’s not yet time to fix that Canadian home bias, if you have one. If you’re underweight, of course, you could search for U.S. value stocks, look to International markets, or use any rebalancing efforts to boost your bond or REITs or commodities holdings. 

You don’t have to buy the U.S. market if you agree with the charts. 

Canadians saved, but not for retirement

In this space, we’ve had a few looks at the savings rates of Canadians through the pandemic. While many Canadians needed the CERB monies to keep their head above water, many others had payments above needs. Many other Canadians were not economically affected by the pandemic (at all) and were able to increase their savings rates. In the stay-at-home economy there was less opportunity to spend. 

This post points to a study that shows that while the savings rates of many Canadians were boosted, their retirement savings were not the beneficiary of that fiscal glut. 

“According to a survey from the Healthcare of Ontario Pension Plan (HOPP) and Abacus Data, 46% of Canadians said they saved more money during Covid-19 than they otherwise would have. But more than half (52%) of those people said they’d saved nothing for retirement.

“Overall, 63% of Canadians said they’d saved nothing for retirement last year — up from 58% in the previous year’s survey.”

That study points to the importance of creating a personal or family cash-flow statement. Know how much you have coming in and where it’s going. Yes, that’s basic personal financial planning. And given that most Canadians will face a retirement shortfall, most should consider making retirement savings a priority. Make retirement hay when the sun shines. 

That was certainly my strategy. I saved and invested like crazy in the big-earnings years of my late 30s and early 40s. Then I coasted, moving to various forms of freelancing and consulting; in those years, the retirement portfolio got little attention other than asset selection and rebalancing. 

At the other extreme, the attitudes towards retirement funding and priority take centre stage in this post on the Tawcan blog. A reader of the blog has amassed a sizeable portfolio in the $8-million range that throws off $30,000 in monthly income. He shared his story with the blog’s owner and creator. 

In covering that post, I offered some commentary on building the $8-million portfolio. Investing in an aggressive all-equity portfolio, one might have got to that value by contributing about $2,300 a month over an extended period. That might be doable for a couple with very good but not outrageous salaries; it takes a very high savings rate. 

While most of us will not be looking to build the $8-million portfolio, there are some great lessons within that example. It started with the investor dumping his high-fee mutual funds. Fees are a wealth destroyer, as Larry Bates often reminds us. 

My take on the $8-million investor example is that while he and his wife did many things “wrong,” they more than reached their goals. They moved to stock investing where fees can be minimal, especially if you pick the right discount brokerage and manage costs. 

That successful investor would be criticized for investing only in Canadian dividend stocks. There are concentration risks by geography, asset class and style. 

They very likely could have made more (amassed a larger portfolio) by also investing in U.S. stocks and even more growth-oriented Canadian stocks. They did not take the most tax-efficient route. 

But the investor did enough of the big things right. They have the $8-million portfolio, and I don’t. 🙂 

They succeeded because they had a plan, embraced that plan and executed that plan. We don’t have to be perfect. We just have to get enough of the big things right. 

Manage debt. Spend much less than you make. Invest in a low-fee manner on a regular schedule. And you don’t have to build the stock portfolio. The most popular route these days to break away from high fees is to switch from mutual funds to ETFs

Dale Roberts is a proponent of low-fee investing who blogs at Find him on Twitter @67Dodge.

The post Making sense of the markets this week: June 28 appeared first on MoneySense.

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