Perhaps it’s not about scoring goals in today’s environment, but acting defensively and protecting one’s lead
The Bank of Canada building in Ottawa. Photo by David Kawai/Bloomberg files Wayne Gretzky once famously said, “I skate to where the puck is going, not where it has been.”
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It has to be one of the most used sports quotes of all time and deservedly so. Accurately predicting the future is near impossible to do, but there are certainly clues as to its general direction. Gretzky didn’t always make the right call, but it had positive consequences when he did.
I’ve been writing for some time about the risks of inflation being ignored by both the Bank of Canada and our federal government, resulting in the potential for policy error mistakes being made. Where this gets especially concerning is when you compare our situation to our largest trading partner south of the border.
For example, it was reported on Friday that there was a large jump in the Canadian unemployment rate in January, rising to 6.5 per cent from six per cent, as the economy was hit hard by Omicron closures, which resulted in 200,000 lost jobs. And average hourly wages grew 2.4 per cent from January 2021, compared with year-over-year gains of 2.7 per cent in the previous two months, according to Statistics Canada.
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Compare this to the U.S., which recently added 467,000 jobs with just a slight increase in the unemployment rate to four per cent as more people entered the labour market. A record 50 per cent of small businesses there have recently raised wages to attract workers and average hourly earnings increased 0.7 per cent in the month and a whopping 5.7 per cent over the past year, according to Bloomberg.
The last time the U.S. unemployment rate dropped to four per cent, the U.S. Federal Reserve was already raising rates and the effective Fed funds rate was at 1.41 per cent versus 0.25 per cent today, according to Sven Henrich, a market strategist at NorthmanTrader.
Therefore, it isn’t surprising to see that U.S. rate futures now see a 34-per-cent chance of a 50-basis-point rate increase post-payrolls in March, up from 18 per cent prior to the latest employment data release, according to market pundit Walter Bloomberg. His analysis shows that Fed swaps are reflecting a 75-basis-point increase priced in by the end of June.
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Compare this to the latest Bank of Canada meeting where the central bank stood pat on rate hikes and, in my opinion, came out with a weak argument to backstop that decision. That said, it may soon not have a choice but to raise rates as it loses control over a falling currency that already appears to be delinking from the price of oil.
If the Bank of Canada allows this to continue, what happens to the cost of our imported goods? And what about the impact on our overall standard of living as we get economically lapped by the U.S. as well as other Organisation for Economic Co-operation and Development countries?
In the meantime, low interest rates are strongly encouraging us to continue to go all in on residential real estate, which is a non-producing asset.
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More On This Topic Bumpier markets call for a deeper portfolio risk assessment David Rosenberg: The outlook for Canada’s provinces? Head for the coasts Emerging ESG bond boom puts world on path to sell US$1.8 trillion Fortunately, there are pockets within Canada that we think will act as an excellent hedge against these risks.
In particular, while everyone is going mad crazy about real estate in Ontario and British Columbia, Alberta is chugging along and is among the most affordable places to live, thanks to housing prices half that of other provinces. The prospects for employment growth in the province are also quickly improving, and don’t forget the impact of oil, with WTI prices topping US$90 per barrel.
As a side note, with the Canadian dollar losing its relationship with oil, at Friday’s exchange rate, WTI oil prices are more than $117 (Canadian) a barrel.
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Article content It pays to look at some of your options, especially if you have the ability to lock in some huge gains on housing and protect yourself against rising inflationary pressures, a falling Canadian dollar and bad policy decisions out of Ottawa.
Perhaps it’s not about scoring goals in today’s environment, but acting defensively and protecting one’s lead, which still means trying to figure out where the puck is going rather than where it has been.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.
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