Push Until Something Breaks

Key Takeaways:

• We are currently getting paid over 4.5 per cent in high interest accounts with no risk.
• There is more risk than reward in the markets right now.
• Go away in May?

In our last article, we talked about inflation and how the central banks are raising interest rates to slow things down. At that point (November 2022), the Bank of Canada’s (BoC) policy rate was 3.75 per cent. It is now at 4.50 per cent.

The prime rate is the rate that banks lend to their best customers. It sits 2.20 per cent higher than the policy or overnight rate and is currently at 6.70 per cent. The prime rate in March of last year was 2.70 per cent. That is a four per cent increase!

Is that high enough to quell inflation? Maybe. Is it high to break stuff? Maybe?

When we look at the markets now, there are many more indicators that cause us concern than those that entice us to allocate more funds to risk assets.

• Political instability
• The effects of higher interest rates on:
  • The banking industry
  • The real estate market (residential and commercial)
  • Corporate balance sheets
• Company earnings, as consumers digest less disposable income due to higher interest costs
• A possible recession

The list goes on. Yes, the market gets happy every time they hear someone whispering about interest rates going down. There also seems to be a strong labour market but there are holes in that argument. We are seeing many operations cut the fat in the form of layoffs.

We like to say that “everyone is great at doing stuff, until they aren’t”. This is no truer than in the investment world. This is very similar to the classic Buffett comments around swimming naked.

“Only when the tide goes out do you discover who's been swimming naked.”

Warren Buffett

Risk is something to respect, so we are currently building up cash, and getting rewarded nicely, with no risk. We are going to allocate this cash intelligently when everyone is telling us the sky is falling. We are not sure when that will be, but I urge you all to remember that the time to buy is when the blood is knee deep in the streets.

It might be time to heed the old expression: “Go away in May”.

This newsletter has been prepared by Raymond James Ltd. (“RJL”). It expresses the opinions of the writer, and not necessarily those of RJL. Statistics, factual data and other information are from sources believed to be reliable but accuracy cannot be guaranteed. It is furnished on the basis and understanding that RJL is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. RJL, its officers, directors, employees and their families may from time to time invest in the securities discussed in this newsletter. It is intended for distribution only in those jurisdictions where RJL is registered as a dealer in securities. Distribution or dissemination of this newsletter in any other jurisdiction is strictly prohibited. This newsletter is not intended for nor should it be distributed to any person residing in the USA. Raymond James Limited is a Member Canadian Investor Protection Fund.