Portfolio Manager’s Weekly Commentary

Daryl Cooper

September 23, 2016

Markets blaze higher with fuel from Fed
September 23, 2016

Well that was no real surprise now, was it?  The much awaited announcement: the Federal Reserve in the US will not raise interest rates but might in the near future.  Where have we heard that before?  If someone would have told you two years ago that the stock market would go up or down based on, not only Fed policy, but what some Fed governor says throughout the month, you would have told them they were crazy. This past week the Bank of Japan and the US Federal Reserve both held interest rates the same while the Bank of Japan promised more stimulus by fiddling with bond purchases.

One of the Fed’s projection tools (that is hilarious I might add) is a gauge that the media and some investment committees use to predict the path of US interest rates referred to as the “dot plot”. The dot plot, which is published after each Fed meeting, shows the projections of the 16 members of the Federal Open Market Committee (the rate-setting body within the Fed). A dot plot!  Seriously! And they take this stuff to heart.  My goodness, it’s as if they’ve all gone back to kindergarten and are using crayons to draw nice pictures.

Analysts and economists will try their best to sift through all the noise and come up with some complex interpretation of the future of the economic world but in the end it’s just more of the same. Having actually watched a few hours of BNN and CNBC over the past few weeks, I see I haven’t missed much. The guessing keeps going on and on and heads keep spinning. Watching these people argue and debate makes me so grateful for having a process in place that doesn’t depend on guessing.

The broadcasters were all smiles these past few mornings as the stock markets roared upward signalling their approval for the Fed’s passive approach.  This latest run is being called by some as “Rational Exuberance”, stealing from Alan Greenspan’s “Irrational Exuberance” speech right before the Dotcom bubble burst. This current run is the second longest run only exceeded by the Dotcom run and there are many similarities. Both were/are fuelled by lower interest rates and not economic fundamentals.

But look folks, I am not hear to spew fear and loathing; I am only stating the facts. The reason the US keeps saying they are going to “probably” raise interest rates is because they want to try and normalize interest rates. However, they do so at the risk of creating a massive stock and bond market correction which they want to avoid that at all costs. This was proven in February 2016 when they rode in and saved the day.

Raising US interest rates would drive the US dollar way up creating huge headaches for borrowing nations. It would also run the risk of derailing not only the stock market, but also the price of oil and other commodities.  With a full third of all rates in the world negative the Central Banks have painted

themselves into a corner that they can’t seem to escape. There is no inflation but there is growth, albeit about the pace of a plough horse but it is still growth. This leads one to believe that rates in the US, Europe and Japan will likely stay low for a long time unless they decide to pull the rug out from under the stock markets.  With both Europe and Japan at negative rates and the US at 0.25%, Canada has extremely high interest rates by comparison at 0.5%. I know we don’t manage money based on predictions but I have to think that our Bank of Canada Governor is going to have to lower our rates soon.

With the US not raising rates the US dollar drops and, as mentioned above, is welcomed by all concerned, all except for Canada exports. And as for recessions, well, the US has its Clydesdale pace growth going on so we don’t see that yet, but Canada is close to a recession and if the US Feds aren’t going to do Poloz’s job for him, he will have to do it himself and devalue the Loonie. That is just common sense, but it doesn’t mean it has to happen.

So what to do?  Well, we ride this Fed fuelled run as long as it keeps going and as proved in the late 1990’s, it can go on for a long, long time. Dig out the crayons, turn on BNN and draw us your best “dot plot” and send it in for a prize, we might as well have some fun with this latest tool of financial wizardry.  Keep your wits about you and don’t let emotions or even logic get in the way of a bull market. Much can happen in a short time but for now it appears the markets have signalled it all safe. Enjoy it for what it is, a good old fashioned bonfire fuelled by Central Bankers that are running out of options.

To piggyback on my thoughts, I am attaching a link to a 6 minute CNBC interview with Bill Fleckstein of Fleckstein Capital. Bill discusses Central Bank influence and monetary policy, all the while tip toeing around some particularly striking comments from host Tim Seymour. Enjoy.

Have a great weekend.

Daryl Cooper
Portfolio Manager
Director, Wealth Management

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