This week a CIBC economist posits the unthinkable for the Bank of Canada, economic professors argue informatively about the real causes of 1970s inflation, why Wegovy might be an even bigger wonder drug and a look ahead to major data releases.
Basis points
CIBC economist sees the need for 75 bp cut to rates
The S&P/TSX Composite is having a strong year, up 23 per cent so far, but the economy stinks to the point that one economist thinks a 75 basis point cut is more likely on Wednesday than 25 basis points.
Most Canadians are aware that the U.S. economy is much healthier than domestic growth but the extent of their disparate paths can still be surprising. In BMO’s weekly economics report, Robert Kavcic noted that U.S. retail sales less gasoline were up 2.7 per cent year over year in September. This is two full percentage points higher than Canadian retail sales ex-gasoline.
Indebted domestic households are clearly struggling with higher borrowing costs more than U.S. consumers who delevered after the financial crisis.
Growth is sluggish enough that CIBC economist Avery Shenfeld believes that it’s easier to argue for a 75 basis point rate cut next week than against it. Mr. Shenfeld is a member of the CD Howe Institute’s shadow central bank committee, modeled on the Bank of Canada. He reports that all but two of the Bay Street and academic economists on the committee believe 75 basis points in cuts are necessary before year end. He adds, “it’s hard to see why it wouldn’t be even better to get there sooner, in order to shorten the wait for its impacts to kick in”.
Bank of Canada cuts may be limited by the Federal Reserve and loonie weakness as I discussed earlier this month. But whatever happens it is useful for investors to know that current rates are strangling Canadian economic growth to a significant extent, and rate cuts are very much required.
REIT, utilities and pipeline investors would be overjoyed with a 75 bp cut as the yields would look a lot more attractive after bond yields follow the policy rate lower. Bank stocks would also benefit as net interest margins – the difference between the short-term borrowing costs for banks and the longer term yields they charge customers – would improve.
Economics
The real causes of 1970s inflation
I have a (loose) pet theory that the post-financial crisis economy is somewhat the inverse of the 1970s.
Inflation characterized the 1970s while the opposite, deflation, was the policy problem of the 2010s through to early pandemic years. Labour power, thanks to unions, resulted in meagre corporate profits in the 1970s whereas the inverse, capital dominating labour to produce high profit margins, was the trend of the 2010s.
With this in mind, it’s not surprising that my favourite recent podcast is 1970s Inflation: The Economic Fever That Changed America. The podcast is co-hosted by George Mason University economics professors Tyler Cowen and Alex Tabarrok.
I learned a lot. For one, the theory that wage demands were a central cause of 1970s inflation are now widely disparaged. The two economists agree that the abandonment of Bretton Woods - which partially pegged the U.S. dollar to gold until 1971 - was a major factor (although they disagree on whether it was a good thing). The end of balanced budgets also played a role.
The oil price shocks of 1973 and 1979 were viewed as very unfortunate coincidences but the professors provided excellent context for the commodity price volatility and its effects on the economy. The entire 35 minutes is worth a listen if only because the thinking on what caused the 1970s inflation has changed a lot since I was at school.
Diversions
New data implies weight loss drugs could also treat addiction
New data with more than 1.2 million subjects provide further evidence that Ozempic and Wegovy - drug treatments originally designed for diabetics that later found a near-panacea for obesity - is also effective at reducing opioid and alcohol addiction.
The drugs work by mimicking the naturally occurring hormone GLP-1, which is released while we eat as a signal to the pancreas to produce insulin. Unbeknownst to the original developers, there are also GLP-1 receptors in the heart and brain that tell the body it’s taken on enough food. It now appears that these receptors tell the brain to shut down, or at least reduce, a lot of different cravings - and not just for food if the patient takes a big enough dose.
The new data was reported at Addiction, and I got the heads up from Gizmodo.
The essentials
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Globe Investor highlights
A number of stocks tied to North America’s nuclear power arsenal rallied last week after Amazon announced a major investment in power projects. David Berman weighs in on whether this trend will stick.
Financial firms are busy these days putting the tools of professional investors into the hands of the middle class. This trend is often accompanied by a marketing pitch inviting the masses to “invest like a pro.” You shouldn’t want to do that, writes Tim Shufelt.
Rob Carrick has a couple book recommendations on turning your retirement savings into a reliable income stream.
Larry MacDonald profiles an investor who used big tech to turn his family’s TFSAs into $2.9-million.
Billionaire investor Ken Fisher warns never to fall for the impossibly dreamy market myth of ‘capital preservation’
What’s up next
The Bank of Canada decision on interest rates Wednesday looms large on the economic calendar. Forecasts lean towards a 50 basis point cut.
Retail sales, my pick as the most important indicator of household’s ability to handle high debt levels, will be out on the 25th.
The U.S. leading index of economic indicators was out Monday morning, showing a -0.3 per cent result for September. I mention this only to point out that this index has been terrible at its job lately, predicting a slowdown when none occurs. U.S. existing home sales is reported Wednesday and September durable goods orders will be released Friday. In the latter case, consensus predicts a 0.1 per cent month over month decline.
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