Stephen Poloz

In our most recent market update to clients and my regular interview with Kirk Lapointe on Monday, I explained that the Bank of Canada needs to start talking about normalizing interest rates, because the economy is now growing and the rationale for having ultra low rates is evaporating. Indeed, we saw insiders anticipate the recovery in Western Canada during last fall's rebalancing of the INK Canadian Insider Index when the index make-up tilted towards Energy and Canadian retail names.

Bank of Canada Governor Stephen Poloz admits in testimony before the Senate Committee on Banking, Trade, and Commerce that it is the Bank of Canada's low rates, and not China, that is primarily responsible for inflated housing prices. In refreshing and remarkably direct questioning on October 19, 2016, Committee Chairman David Tkachuk asks, "aren't we at fault for the ease of people getting into a house, and it's driving the prices up?" The central bank chief's answer surprised me. He says it is indeed true.

When we started our weekly Roundhouse Radio commentary on January 14th, I suggested that with Federal Reserve Bank policy and related outcomes more uncertain, the case for investors to hold some gold stocks in their portfolios had strengthened. Since that broadcast, the iShares S&P/TSX Global Gold Index ETF (XGD) is up a whopping 64%, while the junior Venture Exchange Index is up 32% (as of Wednesday). In the weeks following the first commentary, I told listeners to keep an eye on the U.S. Dollar Index.

As we put together our weekly Monday market comments for INK subscribers, we are focusing on the Financials which have been ripping higher over the past month. The S&P/TSX Financials Index is up 6.5% over the past 30 days. It is often said that a sustainable market rally is not possible without the participation of the Financials, so seeing the group leading the overall market is an encourage sign. The positive price action is supported by our INK Financials Indicator which is signalling that the stocks in the sector put in a significant low in August.

Stephen Poloz, the Harper-appointed chief of our central bank, was in Calgary Monday to talk about resources and "policy lessons." I am not going to quote from the speech as I prefer to focus on what was missing from his remarks. The contents of the speech were the usual mix of Bank of Canada rhetoric such as "the Bank has built up credibility" and confidence in the institution's ability to assess the workings of the economy.

Almost immediately after starting the job as Bank of Canada Governor, Mr. Poloz began talking down the currency in an attempt to remake the industrial landscape, but if he has learned any lessons about his policy's role in what ensued, his speech failed to acknowledge it. Specifically, the refusal of the central bank governor to acknowledge the role his institution played in exacerbating the downturn in the oil patch via the premature loosening of monetary conditions was a telling omission.

One of the most important decisions a government makes is the appointment of the CEO in charge of the cost of living, the governor of the Bank of Canada. The Harper conservatives abandoned the principles of sound monetary policy in the home stretch of the last mandate with the appointment of Stephen Poloz to that role on May 2, 2013. It was a decision that likely helped tip Canada into recession. Worryingly, the Bank of Canada and Harper conservative policy mix has also resulted in shifting the relative debt burden away from the Federal government's official balance sheet and dramatically onto Canadian families and CMHC.

Bank of Canada rate cuts may well have been the most popular item at global convenience store operator Alimentation Couche-Tard (INK Edge outlook: sunny; ATD.B) Wednesday, if not with their customers certainly with shareholders. The stock was the best performing name (+4.2%) in the INK Canadian Insider (CIN) Index as insider stocks rallied on the back of a quarter point drop in the central bank's overnight rate. However, the Poloz cut did not lift all boats. While both the INK CIN Index (+0.14%) and the S&P/TSX Composite Index (+0.43%) rallied on the rate news, both the S&P/TSX Completion (-0.37%) and Small Cap (-0.44%) indices dropped. Perhaps most surprising was a drop in the Dividend Aristocrats Index which suffered a -0.47% loss.

Last week, we summarized the case made by Richmond Fed President Jeffrey Lacker for a June rate rise. His key assumption was that inflation was heading back to 2% which is widely viewed as the Fed's objective. Yesterday, we heard what amounted to a counter argument from newbie Federal Reserve Governor Lael Brainard. According to a Reuters article, the governor indicated that headwinds still confront the economy. Those headwinds include the recent rally in the U.S. dollar.
 
The Fed governor's comments are noteworthy because she is a permanent member of the Fed's Open Market Committee which decides the direction of monetary policy.