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Good morning. Capitalism took a big hit this week — as did Joe Biden‘s NCAA March Madness bracket — as the United States government rode to the rescue of depositors who unwittingly put their money into two riskier new-world financial institutions, Silicon Valley Bank (SVB) and Signature Bank. Investors, however, enjoyed no such reprieve. “Investors in the banks will not be protected,” the U.S president said on Monday in a White House speech. “They knowingly took a risk and when the risk didn’t pay off, the investors lose their money. That’s how capitalism works.” It sure is, but if you truly believe in capitalism, that should apply to depositors as well, no matter the painful fallout.
Conservative investors — and we’re not talking politics here — tend to be laughed at when the markets are all in on growth-at-all-cost, money-losing technology companies and dodgy made-up cryptocurrencies that have little value other than to allow organized crime — and Russia — to move money around. But they’re likely less worried today than their get-rich-quick counterparts, though they, too, have likely been hurt as the banking fallout continues —First Republic Bank and Credit Suisse Group AG being the latest to get hit — and the subsequent impact on oil prices and energy stocks. “There’s been a loss of financial discipline with the government bailing out depositors in full,” says Ken Griffin, founder of hedge fund Citadel LLC, which has US$57 billion in assets. As a result, he says American capitalism is “breaking down before our eyes.”
Biden promised to cover everyone’s deposits at the affected banks, even those who had more than the insurance ceiling of US$250,000, which is a lot more than is insured in Canada. Accounts at the 80 institutions covered by the Canada Deposit Insurance Corp. are only insured for up to $100,000 per category of deposit, per financial institution, which has some people upset. “This number needs a serious update,” says Amir Barnea, an associate professor of finance at HEC Montreal. “It should have been higher by 42 per cent, just to keep up with inflation … it doesn’t make any sense.”
A lot of things don’t make sense lately, including central-bankers’ lax attitude toward inflation in 2021 and their subsequent overreaction. But the U.S. Federal Reserve and others are now caught between a rock and a hard place. If they keep increasing rates, as the European Central Bank did on March 16, they risk pouring more oil on the latest financial fire, but if they start cutting rates, that signals something far riskier is at play than just inflation remaining higher for longer.
“Indeed, while equity markets may press for an immediate rate cut, that would probably materialize only if the current crisis in confidence around the banking sector spreads beyond regional players to the country’s larger banks — something we view as unlikely,” says Kevin McCreadie, chief executive of AGF Management Ltd. “Either way, markets will remain undoubtedly volatile for as long as there is uncertainty about the Fed’s next move(s) and the overall state of the economy and banking system.”
Decades of easy money led to SVB’s collapse, and other regional banks and investors who rely on leverage could also follow suit, BlackRock Inc. chief executive Larry Fink says in a letter to investors and executives. “We don’t know yet whether the consequences of easy money and regulatory changes will cascade throughout the U.S. regional banking sector (akin to the S&L Crisis) with more seizures and shutdowns coming,” he adds.
Invesco Ltd. chief global market strategist Kristina Hooper says the events of the past week reinforce the view that the “Fed put” — the idea that it will always come to the rescue — is alive. Although it may seem unlikely that the Fed can raise rates much more, it just might. “We have to recognize there is a possibility that inflation remains persistent in the U.S. despite the tightening in market conditions caused by this financial accident,” she says. “And there is also the risk that the Fed’s actions in containing the fallout from SVB and Silvergate will ease financial conditions, as markets reprice towards fewer rate hikes or an earlier pivot to rate cuts.”
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U.S. inflation figures for February came in at six per cent, which is still much higher than central banks like as they chase lagging indicators in an effort to cut inflation to two per cent. But economist David Rosenberg points out the month-over-month core consumer price index (excluding food, shelter and energy) rose 0.2 per cent (seasonally adjusted) and is now down to 3.7 per cent (unadjusted) year over year, less than half what it was in April 2022. “From my lens, that is key,” he says. “We have moved from rampant inflation to moderate disinflation and I still believe that in the next year, deflation will emerge as the primary theme.”
The focus now is switching to what the Fed might do next week at its policy meeting. “Here we are again, where bad news, in this case, the unexpected banking crisis, might be good news, by forcing the Fed’s hand to restrain their plans for further tightening to bring inflation down sooner rather than later,” says Louis Navellier, founder and chief investment officer of Navellier & Associates Inc. “That said, the very high volatility we’ve just experienced is uncomfortable for investors, especially when P/E multiples are relatively high.”
Perhaps the lesson here is that investors should not jump on every hot trend. Sometimes it’s better to just stay calm and play it safe, or perhaps even be contrarian. You might end up with less money, but you’ll have fewer headaches and panic attacks along the way.
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Andy Holloway, editor of the FPI and Financial Post Magazine, and senior features editor of the Financial Post. If you have any quips, queries or comments, get in touch at [email protected]
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Banks traded at low multiples with a howling wind at their backs, so what happens now?
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The Big Five banks have had everything go their way for decades. They’ve been allowed to expand and, in most cases, dominate in new business areas, they have strong balance sheets and pay healthy dividends. Yet they only trade for 10 to 12 times earnings. Veteran investor Tom Bradley breaks down why that is and what happens now that the tide is turning against them.
DON’T BANK ON IT
More on banks: How the fallout from the SVB collapse could complicate life for some of Canada’s big banks
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Investors need to centre themselves more than ever as interest rates stay sticky
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The you-only-live-once mindset that is causing some significant and persistent inflationary pressures has lasted well past its expiry date, but it’s still here and posing problems for investors. Portfolio manager Martin Pelletier says we should examine how much of our portfolio’s performance depends on interest rates falling back down again and adjust accordingly.
YOU ONLY LIVE TWICE
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RELPs and REITs gives investors commercial real estate exposure, but they are distinctly different vehicles
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The best-performing asset class in many portfolios last year was commercial real estate, even though real estate investment trusts don’t seem to have done all that well. Wealth adviser Chris Warner says this may seem like a paradox, but real estate limited partnerships held up nicely, which provides a lesson that investment vehicles can matter as much as the asset classes themselves.
A CLASSY DISTINCTION
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Oil giant Saudi Arabian Oil Co. in 2022 earned US$161 billion, the highest-ever annual profit recorded by a publicly listed company, topping previous highs by Apple Inc., Vodafone Group PLC and the U.S. Federal National Mortgage Association (Fannie Mae). The company says its crude production was around 11.5 million barrels a day in 2022 and it hopes to reach 13 million barrels a day by 2027.
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FP 500 — The most authoritative survey of corporate Canada: The 2022 FP 500 is the only national ranking of the country’s public, private and Crown corporations, making it an indispensable research tool with vital data on Canada’s top companies across all sectors. Order your copy here.
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ESG momentum is slowing for many investors, but not for women
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Women are innately the S and the G when it comes to environmental, social and governance (ESG) investing, says Lisa Langley, chief executive and founder at investment manager Emerge Canada Inc. That’s why even though interest in such investments may be waning or, at the very least, becoming more difficult to navigate because of greenwashing claims, women are nearly twice as likely as men to consider ESG factors when choosing where to put their money.
SHAPING THE FUTURE
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Need a bogeyman for why Silicon Valley Bank collapsed? Try Donald Trump. The bank’s business was fine, John Ruffolo, founder and managing partner at Maverix, tells the Financial Post’s Larysa Harapyn, but it was invested in interest-rate-sensitive securities that meant it no longer had the liquidity necessary to finance its operations as rates rose. But the Trump administration in 2018 allowed smaller banks to account for their financial instruments in a way that masked SVB’s investing mistake for a lot longer than would have been the case before.
WATCH THE VIDEO
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I’m 73 and newly widowed so how should I best organize my finances and investments?
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Losing your partner is stressful and often requires reorganizing your financial situation and expectations on top of everything else. Certified financial planner Allan Norman says the best place to start is with the big picture and then work toward the details. You can do this by preparing and analyzing your current and projected net-worth and cash-flow statements, and only then set up new investments as needed.
GET THE ANSWER
If you have an investing or personal finance question, hit us up at [email protected].
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Capital gains tax and other changes that could target higher-income Canadians in the next federal budget
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The next federal budget will be released on March 28, but tax expert Jamie Golombek says we can glean some insight on its potential impact on our pocketbooks from the 226-page pre-budget Report of the Standing Committee on Finance, which contained 230 separate recommendations for tax changes and spending. Here’s what he’s watching for.
WHAT THE FEDS HAVE IN STORE
More on capital gains: Opinion: It’s past time to reform capital gains tax. But how exactly?
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This retired Ontario man has been living on cash savings, but that’s a mistake, experts say
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A longtime telecom employee was offered and took a buyout package during the pandemic, but now wonders how he should use that money, his other savings and his government benefits to make sure he can live well into 80s. We asked financial planner Ed Rempel and investment adviser Allan Small to devise a drawdown strategy that will last.
FAMILY FINANCE REVIEW
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Good news if you believe in rate cuts: The yield on short-term Canada bonds is falling at the fastest rate in decades as investors bet the Bank of Canada will cut rates in the coming months to counter the fallout from the banking sector. The two-year benchmark yield tumbled 42 basis points on March 13 to 3.532 per cent, bringing its total decline since March 8 to about 77 basis points. The last time the benchmark dropped that much over three trading sessions was in May 1995.
Bad news if you like oil stocks: Crude oil prices plunged below US$70 on Wednesday, so energy stocks naturally took a beating. “We’re down US$12 in two-and-a-half days, which is obviously a very, very, very large move in crude oil,” says energy analyst Rory Johnston. “I think everyone’s panicking today. I think panic is the name of the game right now.”
Good news if you’re a Meta Platforms Inc. shareholder: Investors seemed to cheer the social-media giant’s plans to lay off another 10,000 employees and close about 5,000 additional open roles in its second major round of job cuts in the past six months. Shares in the Facebook parent rose as much as 7.3 per cent on March 14 following the announcement.
Bad news if you’re an Imperial Oil Ltd. shareholder: Federal inspectors have ruled a release of oilsands wastewater from the Calgary oil giant’s Kearl mine is harmful to wildlife and on March 10 ordered the company to take immediate action to stop seepage from a tailings pond. Shares of the Calgary-based company dropped 11 per cent over the next two trading days.
Good news if you’re a Canadian Pacific Railway Ltd. shareholder: The Surface Transportation Board in the United States on March 15 approved the Canadian railway’s US$31-billion takeover of Kansas City Southern. CP Rail shares rose as much as eight per cent following the announcement.
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Bad news if you owe money: Canadians are paying 45 per cent more interest than they were a year ago, the fastest increase in records going back to 1990, according to Statistics Canada. Interest payments totalling $33.2 billion were 14.1 per cent higher than in the third quarter, surpassing the record increase set in that quarter.
Good news if you’re a real estate fan in general: You are not alone in thinking that owning a home is a good decision in both the short and long term no matter what age group you’re in. Almost half of Canadians think a home purchase will produce a similar or better return than other investments over the next 12 months and 60 per cent think property will match or exceed other financial investments in the next 10 years.
Bad news if you want to buy a farm: Housing prices may be falling, but the average cost of farmland in Canada rose nearly 13 per cent in 2022, the biggest increase since 2014. “We’re not yet seeing the full impact of higher interest rates on the demand for farmland,” says J.P. Gervais, Farm Credit Canada’s chief economist, noting tight supplies are a big driver of the gains.
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