We’re off to a wild start in the financials markets again in 2015;  an initial sell-off across global markets followed by more ‘rescue operations’ from central bankers in Europe, China and even Canada.  A shocker from the Swiss Central Bank which lifted the ceiling on the Swiss Franc.  A ‘left wing’ win in Greek elections for a party that wants to roll back austerity measures that could result in a renegotiation of all the ‘rescue funds’ lent by their European neighbours.  Now we’re into the heart of ‘earnings season’ and there have been many surprises, mostly to the downside due to weak overseas sales.  But investors have continued to ‘whistle past the graveyard’ and push stocks close to new highs, emboldened by the belief that central bankers will keep buying debt to keep interest rates at all-time lows.   Our outlook continues to be extremely cautious but the volatility of financial markets is constantly creating new opportunities; just look at the performance of gold stocks over the past two months!  Our full views are contained in the attached file and summarized  below:

The European Central Bank (ECB) finally delivered on Mario Draghi’s promise to do ‘whatever it takes’ to get European economic growth back on track by pledging a QE (Quantitative Easing) program in the Euro-zone that is very reminiscent of the QE program that just finished in the U.S.  The specific details are that the ECB pledged to buy Euro60 billion of sovereign debt in the open market every month right through to September of 2016 (at the earliest) in order to push inflation back towards 2% and help lift growth in the Euro-zone.   While the program in the U.S. could be credited for the fact that U.S. growth is now keeping the world out of sinking into recession, the enthusiasm should be muted to some degree for the fact that, after 5 years of this excessive monetary stimulus, U.S. growth is only in the 2.5-3.0% range, well below the typical numbers we have seen coming out of any recession.  Taking it a step further, the QE programs effectively have central banks taking on debt to  buy existing debt when that debt is trading at the its highest-ever historical level.  The goal is to get investors to follow suit and also invest in ‘risk assets’ and, in the process, drive economic growth higher.

But the program has not been working according to the blueprint.  While record low interest rates have made stocks look cheap by comparison, the goal of having this ‘risk-taking’ turn into higher economic growth is just not happening.  Companies, loaded with cash, are pushing those funds into stock buybacks rather than increasing their spending on growth initiatives such as capital spending, expansion and increased employment.  Why take the risk of such spending when you can channel the money into your own stock and create higher earnings per share?  This has then also lead to higher valuations for stocks in general.  By almost all measures we look at, stocks are trading at their highest valuations since the ‘tech bubble’ of the late 1990’s.  Meanwhile, the continued push down on interest rates has only succeeded in weakening all other currencies around the globe, including the Canadian dollar, which has fallen to just over 80 cents against the U.S. dollar, the worst level for the Loonie since the financial crisis in 2008.

In fact, ever since the financial crisis first erupted six years ago, Western economies have leaned heavily on their central banks to dig them out of the mess they are in. They have become the world’s de-facto growth strategy.  Interest rates have been slashed to zero and the system has been flooded with newly printed money. There is nothing wrong with some reliance on monetary activism, but to believe it is the ultimate strategy to rescue moribund economic growth is simply ‘putting all your eggs in one basket.’  The policies have been taken to their limits and they have almost certainly reached the limits of their usefulness.  Real interest rates are already deep in negative territory, and still they don’t seem to have solved the demand problem.  Short of “helicopter drops” of free money, there is little more monetary policy can do.

The Bank of Canada got back into that game by making a ‘surprise’ announcement at their last regular meeting that they would be cutting short-term interest rates by a ¼ point, from 1.00% to 0.75%!   This was done as ‘insurance’ against possible further weakness in the Canadian economy due to the sharp fall in oil prices and our economic dependence on that industry for growth.  But the immediate impact was just another fall in the value of the Canadian dollar, in much the same way that the ECB announcement lead to new multi-year lows in the value of the Euro versus the U.S. dollar.   While this also drove stock prices higher, it remains our view (and many others) that these programs are only creating an ‘asset bubble’ in financial assets that can only end the way all asset bubbles end; badly!  Stock markets need to feed on earnings growth and strong domestic currencies, not valuation increases based on negative real lending rates and financial engineering.

In terms of the out look for economic growth, the news continues to get worse; World Bank Lowers Outlook for Global Economic Growth.  The World Bank cut its outlook for global growth, saying a strengthening U.S. economy and plummeting oil prices won’t be enough to offset deepening trouble in the Eurozone and emerging markets. The Washington-based development institution expects the global economy to expand 3% this year, up from 2.6% in 2014, but still slower than its earlier 2015 forecast of 3.4%. The bank’s economists see oil prices, which have lost more than half their value in the last six months, providing uneven benefits to major oil importers.

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