Sound bites: What is next for central bankers and markets?

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In light of post Brexit global growth concerns, as we wrote in our June 27th Canadian market commentary, we are just not sure what exactly central bankers could do that is not "more of the same." So what is more of the same?

  • zero or near zero rates
  • negative rates
  • asset purchases (QE)

Investors now seem to be dismissing the ability of "more of the same" to work. Consequently, it raises the ante for further central bank action. If they do decide to act, they will try something even more dramatic than more of the same. Two of the most talked about weapons in the arsenal that could be used as a "final assault" on low inflation would be

  • Helicopter money which is essentially putting money directly into everyone's bank account
  • Funding for credit, or, as we would call it, "targeted lending" where a central bank would identify sectors that need loan injections.

There are major risks with both approaches to say the least. Helicopter money or, as we term it, Helicopter Easing (HE) risks hyper-inflation and a run in confidence in the first country that tries it. Meanwhile, targeted lending leaves the central bank in charge of picking who gets the free money and who does not. That sounds like trouble in a democracy.

Meanwhile in Canada, the Bank of Canada 5-year mandate ends this year, and as Stephen Gordon in the National Post has written, it is not clear who is actually going to decide what is next. Given the powers that the central bank has for picking winners and losers in society, Canadians should be concerned about the lack of consultation with the public in this process.

What's next for markets

Bond yields have been tumbling which is not a positive sign for growth. Canada's 10-year has traded below 1% this week. As for stocks, at this point it appears the US market is best suited for technical traders. For value investors committing cash to American stocks, they should probably be doing so on a company-by-company basis where opportunities are compelling enough to outweigh the currently elevated market risk.

In Canada, our INK July Top 40 stock report has mining stocks taking a whopping 29 slots. While insiders are still pointing to gold and precious metals stocks as offering the best opportunity, we have to keep in mind that we are in a traditionally weak period for bullion. A meaningful pullback has not happened yet, but it could still occur (maybe around Friday's job report?). If so, that may present a buying opportunity.

Listen to Ted Dixon on Roundhouse Radio FM 98.3 every Thursday for his weekly financial markets commentary at 7:30 am Pacific Time.

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