Cullen Roche, founder, CEO and portfolio manager for California-based Discipline Funds, began his column Is Hyperinflation Coming? by chiding Twitter Inc. CEO Jack Dorsey for predicting what is essentially a 50 per cent increase in consumer prices. Not only does Mr. Roche dismiss hyperinflation as a plausible threat, he expects deflationary forces to reassert themselves in 2022.
Mr. Roche does not underestimate the risks of runaway inflation, noting that “A financial panic ruins the economy for a decade, but hyperinflation ruins an economy for an entire generation.” In writing a paper on the phenomenon in 2011, he discovered that hyperinflation occurs around three types of socioeconomic upheaval, and none of these are present in the developed world now.
The three catalysts for hyperinflation are: losing a major military conflict while printing money to fund the effort, an untenable buildup of debt in foreign currencies, and violent political regime changes like civil wars.
Mr. Roche argued that the current surge in price pressure was caused not by central bank monetary policy but by fiscal spending. As such, it is no surprise that inflation remained low in the aftermath of the financial crisis when monetary policy was ultra-loose, and is now present after governments spent hundreds of billions of dollars supporting displaced workers during the pandemic.
Fiscal support is now ending, and estimates point to a 2.5 per cent hit to 2022 U.S. GDP as a result. The author is concerned about elevated inflation levels near 4 per cent in the near term, but over time he expects the deflationary forces that held inflation in check will begin to dominate again. The four big deflationary trends are aging population demographics that are shrinking the work force and consumption, technology, economic inequality and globalization.
In terms of portfolio strategy, investors should brace themselves for more inflationary data in the immediate term. But, as 2022 begins, it won’t be too early to look for a peak in upward price pressures and the outperformance of economically sensitive market sectors.
-- Scott Barlow, Globe and Mail market strategist
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The Rundown
Where to find stocks with growing dividends
The nirvana for income investors is a stock that not only offers a decent dividend now but is likely to continue to raise its payout in future years. Where do you find them? Gordon Pape looks at three sectors to explore.
Some bond ETFs are thriving in today’s inflationary world, but not the ones you’d expect
Exchange-traded funds holding real return bonds seem like the no-brainer choice in inflationary times, given that they hold bonds that adjust the principal amount of your investment in line with increases in the cost of living. But what an epic disappointment these ETFs have been in 2021. The iShares Canadian Real Return Bond Index ETF (XRB) was down 4.6 per cent on a total return basis for the year through Sept. 30, while the BMO Real Return Bond Index ETF (ZRR) was down a tick less than 5 per cent. Inflation’s running at nearly a two-decade high and these ETFs are losing money? Rob Carrick explains why, and has some advice on where you can turn for inflation-protected bond ETFs that have actually been making money.
Top ETF picks for the environmentally conscious
When it comes to global warming, individual investors are increasingly trying to do their part by putting money into environmental, social and governance (ESG) funds. But it’s become a challenge, given that there are so many ESG choices now available in the Canadian ETF universe. Gordon Pape looks at some that investors should be focusing on.
Pay attention to the bond market’s tantrum
The bond market is having a hissy fit. Investors – even those who don’t own any bonds – should pay attention. The abrupt rise in recent days in short-term bond yields signals the belief in some quarters that central banks are suddenly waking up to inflationary dangers and trying to walk back a policy mistake. If so, interest rates could be headed up faster than thought, with dismal consequences for stock prices and real estate speculators. To be sure, this is far from a done deal. But as Ian McGugan explains, it is easy to see why people are worried.
How should Canada’s investors play the possible boom in share buybacks?
Amid the robust earnings recovery, some companies are deciding to return cash to shareholders by reviving or initiating a share buyback scheme. By shrinking the number of shares outstanding, earnings per share growth is boosted, which in turn should enhance the stock price. If a buyback boom is also on the horizon, should the presence of a buyback program be one of the criteria used in selecting companies for additional research? Robert Tattersall has some answers.
Also see: U.S. stock buybacks head for record in third quarter
Banking regulator expected to lift pandemic restrictions on dividend increases, analysts say
Canada’s banking regulator plans to make an announcement Thursday about “capital distributions” for federal financial institutions, raising investors’ hopes that it is poised to lift or relax a temporary ban on banks and insurers increasing dividends or buying back shares. James Bradshaw reports.
Others (for subscribers)
Wednesday’s analyst upgrades and downgrades
Tuesday’s analyst upgrades and downgrades
Number Cruncher: Why these 11 strongly profitable U.S. stocks may be easy to miss
Canadian dollar forecasts turn stronger as BoC signals earlier hikes
Globe Advisor
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Ask Globe Investor
Question: My broker provides the “average cost” for stocks and exchange-traded funds I own. How reliable are these numbers? Can I use them when I calculate capital gains?
Answer: In my experience, brokers usually get these numbers right, especially when the holdings are straightforward. In more complex situations, however, mistakes do happen. Brokers don’t want to be on the hook for any errors, which is why they typically publish a disclaimer stating that the average cost – also known as “book value” or “cost basis” – is for information purposes only and that calculating the average cost for capital gains tax purposes is the responsibility of the client.
There are several reasons that your broker’s numbers could be incorrect. For example, if you own real estate investment trusts or exchange-traded funds, your broker might not account for return of capital (which reduces your adjusted cost base) or “phantom” non-cash distributions (which increase your ACB).
Problems can also arise if shares of a stock you own are held at multiple brokers. For tax purposes, your average cost is supposed to reflect shares held in all non-registered accounts, but your broker has no way of knowing the cost of shares held at different institutions.
Similarly, transactions by a spouse can also make it problematic to rely on your broker’s ACB. If you sell a stock for what appears to be a capital loss based on your broker’s average cost, but your spouse then purchases the same stock within 30 days, the capital loss becomes a “superficial loss” that is not allowed for tax purposes.
What’s more, mergers, spinoffs and other corporate transactions can lead to mistakes in brokers’ ACB calculations, many readers have told me.
“Relying on your brokerage’s potentially erroneous ACB figures can be problematic, no matter which direction the error occurs,” says a blog post on adjustedcostbase.ca, a website that helps investors track their ACB.
“If the reported ACB value is too low (resulting in a higher capital gain) you’ll end up paying more tax than necessary. If the ACB is too high (resulting in a lower capital gain) you’ll risk getting chased by the CRA. It’s therefore strongly advisable to calculate these values on your own to ensure correctness.”
Where to start? Well, proper record keeping is a must. Because online transaction histories provided by brokers only go back so far, I recommend printing out and filing all trading slips. Brokers can dig up older records, but they may charge a fee.
If you hold securities that distribute return of capital, be sure to hang on to your year-end T3 statements that show the ROC paid by each security. To determine whether any of your ETFs had a reinvested distribution, check the ETF company’s website.
Keeping a spreadsheet can also minimize last-minute tax headaches. Services such as adjustedcostbase.ca and acbtracking.ca can also help.
Finally – and this is something I do myself – consider holding securities with complex tax reporting in a registered account to eliminate the need to track the ACB altogether.
--John Heinzl
What’s up in the days ahead
Rob Carrick conducts a survey of how bond ETFs of all types are holding up in the current bond market tantrum.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff