Why investors should care about monetary policy, even if Trudeau doesn't

Prime Minister Justin Trudeau shrugged off a recent question asking if he believed the Bank of Canada’s mandate was in need of a change. PHOTO BY ANDREJ IVANOV/REUTERS FILES

 

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In the meantime, our consumer price index gained 3.7 per cent in July compared to a year earlier, the highest level in a decade. But don’t you worry, as it’s all transitory, according to our existing government and the Bank of Canada. In particular, we really don’t know how a middle- or lower-income family can make a go of it in cities such as Vancouver or Toronto where housing prices are as high as 15 times average income levels. We recently read that there are now bidding wars for rental units in those two cities.

Fiscal policy is currently filling in this gap, but the Bank of Canada may be limited in its ability to raise rates to tackle this inflation given the amount of debt in this country. In its latest quarterly update, Fidelity Institutional Asset Management highlighted recent data released by the Bank for International Settlements that showed Canada borrowed more money last year relative to its economy’s size than any other G20 country. Many are left scratching their heads wondering what to do with markets trading at new highs and overdue for a bull market correction. Interestingly, the Bank of Montreal put out a report showing that the S&P 500 performs better when rates rise, especially from low levels, than when they fall, with an average 15.3 per cent gain versus an average 6.5 per cent, respectively.

Keep in mind, though, that’s just the S&P 500, and the market you’re in and the local currency play a huge role. For example, according to Charlie Bilello, founder and chief executive of Compound Capital Advisors, the Canadian equity market gained a shockingly low annualized 3.7 per cent over the past decade. recently put out some very interesting insight that showed that every one per cent increase in unexpected inflation would produce a seven-to-nine-per-cent rise in commodities. As a side note, this is something to consider for those thinking of relocating to cities such as Calgary, which already has a significantly lower cost of living than, say, Toronto or Vancouver, and should be more protected from inflation risks going forward.

The first step in protecting your family’s wellbeing is to understand the economic environment we’re in, including both the role and impact of fiscal and monetary policy.

Source: Martin Pelletier | Financial Post