Insights: The case for higher US stock and Canadian home prices

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April 10th, 2021

Is it different this time? That is the question we have had to ask over-and-over again as central bankers find new ways to distort economic activity and asset prices. Raoul Pal appears to have concluded that it is different time. A year ago, he was warning of an insolvency crisis, but the Federal Reserve and Trump Administration were not about to let that happen in the run-up to an election year.

Looking at things differently

Last year as COVID-19 hit, the Fed intervened with massive monetary expansion, supported by the Treasury. The result was a record blow-out of the Fed's assets on its balance sheet. In the Friday Real Vision Daily Briefing. Pal suggests that he has been looking at things incorrectly and that what matters are asset prices in relation to that balance sheet. He suggests that when you divide S&P 500 stock prices by the Fed's assets, it does not look all that expensive.

Are stocks nominally cheap when divided by the Federal Reserve Assets?

 

What stocks are to Americans, homes are to Canadians. So, that had us wondering how Canadian home prices looked when divided by the Bank of Canada's assets. Low and behold, on a central bank total assets adjusted basis, the Bank of Canada's new housing price index has been falling.

Canadian new housing price series divided by central bank total assets (click for larger)

Now, we would not recommend calling up your mortgage broker to begin the financing hunt for a second, third, fourth or fifth home. As Wolf Richter points out, Bank of Canada assets have levelled off recently, However, the central bank continues to purchase government of Canada bonds at a stellar clip, and it shows no signs of stopping. Indeed, based on the trajectory they are on, central bank governor Tiff Macklem appears to be on a trip to the moon via a QE spaceship.

Will Tiff Macklem land on the moon with his QE spaceship?

We have no idea if there is enough QE fuel left to push Canadian home prices all the way to the moon. While we would not bet on home or stock prices falling any time soon, some voices warn asset prices could head down as they revert to the mean. Danny Moses of Big Short fame continues to believe in mean reversion and explains his thinking in our video of the week below.

US insider sentiment seems to be leaning in Danny's favour, as we explained in our Wednesday US market update. Insiders are relatively more upbeat in Canada. At the stock level in Canada, we continue to see cryptocurrency-related names doing well on our screens. Decentralized finance stocks appeared in our Wednesday and Friday morning reports. Gold miners have had a hard time climbing up our rankings over the past few months, but insiders are starting to show more conviction. Our Monday morning report featured a Red Lake, Ontario junior miner which is positioned at the early stage along the mining life cycle curve. On Tuesday, we featured an oil & gas stock that may get a boost from the paving and building envisioned in the Biden administration's infrastructure plan.

Generally, our core investment themes remain intact. As America gets on top of COVID-19 and begins to rebuild it is economy, we expect Canadian small- and mid-cap stocks to shine. For an audio recap of our thinking and a bit of a rant on Canada's unimpressive performance in handling COVID-19, listen to our April 7th interview on HoweStreet.com Radio.


Top 3 Gainers Last Week

Company NameStock Symbol1 Week %
Ivanhoe MinesIVN12.4
Turquoise Hill ResourcesTRQ12.2
CanforCFP11.7

Top 3 Losers Last Week

Company NameStock Symbol1 Week %
CascadesCAS-10.3
Crescent Point EnergyCPG-9.9
Enthusiast GamingEGLX-5.7

Returns are as of the last trading day of the previous week.

Featured Broadcast

Insider of the Week

Hamed Shahbazi

Hamed Shahbazi appeared in the INK morning report this week, not in his role as CEO of Well Health Technologies (WELL), but as a director of BBTV Holdings (BBTV) where he has been buying shares in the public market. We will have to see if has as much success with his BBTV holdings as he has had at WELL which is up about 370% over the past year.https://www.canadianinsider.com/node/7?menu_tickersearch=well

 

INK Canadian Insider Index

1 Year Total Return Performance


Historical Performance

Annualized Total Return as of April 9, 2021 04:49 pm
1 Year 87.06%
3 Years 9.59%
5 Years 11.59%
10 Years 8.26%


To learn more about the Index please visit
https://index.inkresearch.com

5 Year Total Return Performance


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