Market must-reads: Canso’s Market Observer provides outlooks and insights for 2022
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What’s troubling crypto? Just how bad are bond markets? And are investors as worried about rising rates as they maybe should be? In their Market Observer newsletter, leading Canadian institutional investment management firm Canso Investment Counsel Ltd. tackled those questions and shared their thoughts, insights and outlooks for financial markets in 2022. To read the full report, please click here.
Looking back – and looking out
Despite the ongoing pandemic, 2021 proved a very good year for equity markets, but even the S&P 500, which gained nearly 30 per cent last year, couldn’t keep up with soaring cryptocurrency valuations. Bitcoin rose by more than 50 per cent, while Dogecoin – a cryptocurrency that started as a joke to poke fun at the wildly speculative valuations in the space – returned more than 1,700 per cent. Ironically, the driver of equity markets and crypto alike was the same: plentiful supply – perhaps oversupply – of money, courtesy of big-spending governments and highly accommodative central banks. “The mania for all things digital,” Canso observes, was “made possible by central bankers running their presses overtime. The riskier and more speculative an ‘asset class,’ the more elevated its return was last year.” By comparison, so-called “safe” assets like fixed rate bonds had an annus horribilis, making them one of the only asset classes in which investors lost money in 2021.
Inflation: A ‘70s rewind?
While central bank-watchers expect monetary conditions to tighten this year, there is reason to be skeptical of how far policymakers will go to combat what increasingly looks to be persistent (and high) inflation. The Canso team sees clear parallels between today’s pandemic response and the fiscal largesse of policymakers during the Oil Crisis of the 1970s. “More money is always politically more popular than less money,” they wrote. “Tightening monetary policy after a crisis has passed is a very difficult thing to do.” In the late 1970s, U.S. President Jimmy Carter endorsed then-Federal Reserve Chairman Paul Volcker’s inflation-fighting regime of ultra-high interest rates – and paid the price with a sharp recession and losing the 1980 election. Would any politician today take such a chance?
Crashing the digital party
Bitcoin plummeted 45 per cent in January, only to rise again in February. That volatility comes as no surprise to the Canso team, who noted in their January newsletter that the mania for cryptocurrencies, as well as for NFTs and digital real estate, “includes some of the most nonsensical investment idiocy we have ever seen. When money and capital are too plentiful, then investors join the herd and buy anything they can get their hands on.” With rates bound to rise, those investors could be in for a rough ride. The Canso team notes that the Fed has never been able to raise rates at just the right pace to engineer the panacea that is a “soft landing” for financial markets. This time around, rising yields will hurt asset prices – especially assets like crypto, which have little or nothing behind their current valuations. “When money and credit grow scarcer, the veritable ‘stuff’ will hit the fan, as levered speculators try to sell their risky investments and get their hands on cold hard cash,” the Canso team wrote. “As always, there won’t be enough to go around.”
For more insights and analysis, see the full January 2022 Canso Market Observer by clicking here.
The views and information expressed in this publication are for informational purposes only. Information in this publication is not intended to constitute legal, tax, securities or investment advice and is made available on an “as is” basis. Information in this presentation is subject to change without notice and Canso Investment Counsel Ltd. does not assume any duty to update any information herein. Certain information in this publication has been derived or obtained from sources believed to be trustworthy and/or reliable. Canso Investment Counsel Ltd. does not assume responsibility for the accuracy, currency, reliability or correctness of any such information.
This story was created by Content Works, Postmedia’s commercial content division, on behalf of Canso Investment Counsel Ltd., which is a member and content provider of this publication.