By Scott Blair
We have reached new heights recently in each of the world’s equity markets. It seems that people are out and spending again so that demand has now exceeded supply. Manufacturers are choking on orders and can’t get delivery on inventory. Try to buy anything right now and there is a lineup. Have a look at your local Winners outlet. The “transitory” inflation bubble is in full swing but what does it mean for the dollar and cost of borrowing.
Let’s start with Inflation
Pent up demand through the course of the pandemic has increased as people have curtailed spending and saved money. Now as vaccinations have increased, weather improved and we are returning to some sense of normalcy, people are spending. With intent! Name pretty much anything; clothes, housewares, appliances, dining out, travel. It’s all happening. With increased demand and limited supply, it creates inflation. Look at it this way: The kid with the lemonade stand only has one glass left at ten cents. Two customers walk up and one offers fifteen cents. Voila, inflation.
This only lasts until the demand has been satisfied, supply catches up and the world normalizes. That will happen in the short term which is why this period has been called transitory.
We’re not talking about the dollar with a capital D (read USD). We’re talking about the dollar with a small d (read Loonie). It’s not a bad time for holding Loonies. Keep in mind we are a petro dollar and so our dollar and inflation and interest rates are linked closely with the price of a barrel of oil. Now it’s about $70 per barrel. Just over a year ago it was only about $35. That’s a double in terms of price. When oil is at $35, the oil companies are losing money to pump it out of the ground. At $70 it makes more sense and so they need to increase production. Spark up old rigs, build new ones and hire people to work them. This means that the energy producers go to the banks to borrow money to increase production. Hence, there is a very large correlation between the price of oil, bank stocks and as a consequence $CAD. Think of it this way, if you are going to buy a Canadian commodity, you’re going to need Canadian dollars and so the demand thing comes into play again.
What does this mean for us? It’s all good. Think about that next trip you take to the Bahamas or car you buy from Ford or clothes made in the US. All that stuff just got cheaper. The same US$45.00 pair of shoes just went from CAD$62.50 in March of last year to CAD$54.85 today. Sweet, get two pairs.
For those contemplating purchases in US$ it may not be a bad idea to buy and park US$ in a US$ account. Is there more upside in CAD$? Maybe but keep in mind the last 5 cents is always the trickiest to call and often leads to a loss. I you anticipate US$ purchases in the near to mid term, now may not be a bad time to accumulate.
What about the equity markets?
It is a Goldilocks story so far. The markets, inflation, the dollar and the VIX are not too hot, not too cold but just right. Until and unless we see different signals, as we’ve said to many investors, if it ain’t broke, don’t fix it. For now, let’s just enjoy the ride. Oh, and by the way, a “normal” yield curve is most often a good sign for the markets. Meaning, if short term rates are low and long term rates high, people are more inclined to spend now to avoid excess costs later. If you finance a car for example you don’t want to pay higher rates down the road. If long term rates are predicted to be lower (inverted yield curve) you might be inclined to wait which is not good for the car makers, or anyone else for that matter. The yield curve as shown below is a good thing.
* Source of chart: Statistica - for Illustration purposes only.
As per usual, if you want to know how any of this specifically affects you, give us a call, or try our new website link.
Photo by Ardi Evans on Unsplash