Inflation is coming down in Canada and the U.S. And one can argue that the rate hikes have had little effect. After all, Canadians and Americans are spending money, and employment is strong. The economy has been very resilient. Perhaps inflation was transitory after all, caused by the pandemic and the invasion of Ukraine. This is not the traditional inflation fight script. The economic soft landing argument is getting more support. Was inflation transitory?
Total inflation in Canada is back ‘on target’ in the 2% to 3% range.
That said, core inflation is still sticky.
From this MoneySense post …
According to Statistics Canada, the June slowdown was driven primarily by a year-over-year drop of 21.6% in gasoline prices. Meanwhile, the largest contributors to the rise in consumer prices are food costs—which rose 9.1% in June—and mortgage interest costs (up 30.1%).
It’s likely a very good guess that rates are staying higher for longer. The bond market is certainly suggesting that as well.
The 5-year remains elevated.
Fixed rate mortgage holders will likely be resetting at higher borrowing costs over the next 2 to 3 years – adding several hundred dollars a month to the typical mortgage payment. Of course that takes money out of the economy and money that would have been spend on goods and services.
Next year may be sunnier than forecast
In the Globe & Mail, Ian McGugen offered a very interesting post. Ian looks to one of the most optimistic economists, and that is a growing group.
Jan Hatzius, chief economist at investment banker Goldman Sachs, has set himself apart from the crowd in recent months by declaring that the United States will not sink into a recession.
Mr. Hatzius has won awards for his forecasting accuracy and argues that a downturn isn’t likely when jobs are plentiful and disposable income is growing. But keep in mind that most of Wall Street disagrees. A recession over the next 12 months remains the most likely scenario, according to a recent Wall Street Journal survey.
The crux, from that post …
This isn’t the way things usually work in an inflationary cycle. The classic pattern begins when demand for goods and services surges past what the economy can produce. The central bank then raises interest rates to crush activity, the economy slides into recession and inflation recedes.
This time, though, inflation is plunging while the economy continues to purr along. That suggests that much of the inflation that developed nations experienced wasn’t the result of excess demand, but rather of supply disruptions during the pandemic. Maybe inflation really was – to use a much-abused term – transitory.
Inflation and the economy and real estate has fooled most everyone over the last 3 years. It has not been a good time to be in the prediction business. And those who have invested based on predictions have likely paid the price. Too many are waiting for the recession that refuses to arrive.
Every week I work with readers and suggest (not advice) that they consider dollar cost averaging into the markets. Take out the guess work. Take out the emotion.
I’ll stick with my main theme that any dark economic forces are moving in slow motion. There is economic stress in play, but we don’t know what will be the extent of any economic damage. We could get a soft landing, we could get a meaningful recession.
The key is to be prepared for most anything.
Our U.S. stock portfolio continues to outperform
I was back on Seeking Alpha with a look at the performance of our U.S. stock portfolio.
Our dividend growth portfolio continues to outperform.
You should be able to read that post as one of 3 free reads on Seeking Alpha.
Those index skims were added to three stock picks in Apple, Berkshire Hathaway and BlackRock. It is a successful demonstration that we can build a simple and very successful stock portfolio.
I am working on a post by request – how would I build the U.S. stock portfolio in 2023?
More Sunday Reads
At My Own Advisor – stocks or real estate for returns, Mark asks. This week I also tweeted one of the charts in Mark’s post. This is more than surprising …
It shows that you don’t need home ownership to build incredible wealth. Keep your fees low by building an ETF portfolio or a sensible portfolio of individual stocks and add money on a regular schedule. You can own an all-in-one global portfolio by way of an asset allocation ETF.
With one ETF, one ticker, you can own the global markets with total fees in the range of 0.20%.
You can buy ETFs for free at Questrade.
On that same theme of simple and cheap, FiPhysician – Investing as simple as possible.
And of course, we always check in with Dividend Hawk who is getting busy as earnings season ramps up. I join Hawk in seeing the juicy BCE dividend roll in this past week.
In the mix of posts highlighted by Hawk is the highest quality dividend contenders from Ferdis on Seeking Alpha.
And Kyle Prevost made sense of the markets at MoneySense. The big U.S. banks were in focus.
Bank earning highlights
- JPMorgan (JPM/NYSE): Earnings per share of $4.37 (versus $4.00 predicted). Revenue of $42.40 billion (versus $38.96 billion estimate).
- Bank of America (BAC/NYSE): Earnings per share of $0.88 (versus $0.84 predicted). Revenue of $25.33 billion (versus $25.05 billion predicted).
- Wells Fargo (WFC/NYSE): Earnings per share of $1.25 (versus $1.16 predicted). Revenues of $20.53 billion (versus $20.12 billion predicted).
- Morgan Stanley (MS/NYSE): Earnings per share of $1.24 (versus $1.15 predicted). Revenues of $12.99 billion (versus $13.3 billion predicted).
- Citigroup (C/NYSE): Earnings per share of $1.33 (versus $1.30 predicted). Revenues of $19.44 billion (versus $19.29 billion predicted).
- Goldman Sachs (GS/NYSE): Earnings per share of $3.08 (versus $3.18 predicted). Revenue of $10.90 billion (versus $10.84 billion predicted).
At Findependence Hub – how to balance saving for a home and starting a family.
Banker on wheels
For a plethora of posts, videos and podcasts steer your cursor to banker’s Weekend Reads.
I’ll pick out one post from the mix. Why is the stock market (U.S.) up this year? It’s not because of earnings growth.
“With year-to-date returns driven nearly 100 percent by multiple expansion, the market either doesn’t appear to care about earnings, or it expects a major reacceleration in growth both later this year and next,” wrote Morgan Stanley’s stock market wags.
Yes, it’s hard to predict what stock markets will do, and why. Stock market gains are a product of real earnings growth and the prospects of future growth.
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I think inflation will return. Two reasons.
The Russians have taken out Odesa in the Ukraine. Count on grain and canola shortages again. Food inflation won’t go away soon.
Second, wages and wage expectations I think will drive wage increases well past CPI targets.
That is what I think. I am not making any bets as trying to predict inflation is like trying to predict what women want. It is very difficult to do.
I have long thought this period of inflation was almost entirely supply driven and not the result of excessive demand. I’m no economist, but from my neophyte perspective, what higher interest rates are doing is acting as a detriment to borrowing and investing to make the supply chain more robust. It seems backwards to me.