Five super-obvious signs we were in a financial bubble. Plus, CIBC’s Benjamin Tal on what’s next for markets and inflation

New York magazine published The Clues You Missed: 5 Super-Obvious Signs We Were in a Financial Bubble earlier this month and, even though it was written with a definitively tongue-in-cheek tone, it raises some interesting questions for Canadian investors.

The first sign of an imminent bear market we missed, according to the column, was the stadium naming rights curse. Famously, Enron bought the naming rights for the Houston Astros baseball stadium ahead of the company’s mammoth fraud being uncovered. The recent re-naming of Los Angeles’s Staples Center to Crypto.com Arena should have been a warning that cryptocurrencies were set to fall hard.

Multimillion-dollar Bored Ape Yacht Club non-fungible tokens (NFTs) were another sign that things had gotten out of hand where monetary conditions and general asset prices were concerned. The recreational but fierce trading in meme stocks like AMC Entertainment and GameStop provided more signs that there was simply too much money chasing too few assets.

Special Purpose Acquisition Corporations (SPACs), the fourth clue mentioned by New York magazine, never made a lot of sense but raised hundreds of millions of dollars before many of them imploded. Finally, the capitulation of prominent market cynics like short seller Jim Chanos was the fifth clue that a bear market was around the corner.

These stories are fun to read and it’s easy for investors to beat themselves up in a ‘I should have seen it coming’ way. The key point, however, is that signs of a market top are only visible in hindsight – they can pile up for a long time before asset prices correctly lower.

The technology IPO frenzy in the late 1990s, for instance, went on for years, during which investors could buy a newly issued stock in the morning and sell it at 3:30 the same day for a big profit. It’s never that easy to make money for long and it was clear the boom couldn’t last forever.

The domestic housing market had similarly provided sign after sign of a market top – bidding wars in particular, but also affordability ratios well beyond where most Canadians can pay.

When the housing market enters an extended period of major price declines there will be no shortage of articles like that in New York magazine pointing out how obvious the correction was. The truth is, though, that no one knows when that will be.

— Scott Barlow, Globe and Mail market strategist

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The Rundown

Higher rates but less inflation panic: What CIBC’s Benjamin Tal is predicting for stocks, home prices and the economy

Mounting fears of a recession have gripped equity markets, with the S&P/TSX Composite Index now firmly in correction territory. The Globe and Mail recently spoke with Benjamin Tal, deputy chief economist at CIBC Capital Markets, who shared his perspectives on the risk of an economic contraction, monetary policy and implications for the housing market. mr. Tal also provided some suggestions on which stocks may do well in this challenging environment.

Growing forecasts for US recession may spell more trouble for stocks

The Federal Reserve’s aggressive monetary policy tilt has prompted some of Wall Street’s biggest banks to ramp up forecasts for a US recession, threatening more downside for an already bruised stock market.

Also see:

Friday’s Russell rebalance may stoke more volatility in nervous stock market

Outlook for US bonds improves as recession risk rises: Pimco

Retired and eyeing GICs? Why you should take a look at what insurance companies have to offer

Looking for redeemable GICs with reasonable rates? Insurance company GICs offer this, and a few additional features of interest to retirees in particular. Rob Carrick takes a look at these little-known products.

Pipelines have performed better than most during the market pull-back. Here are three to consider

Almost all stocks decline in a bear market, but pipeline companies are doing better than most. The reason is two fold. For starters, global demand for oil and natural gas is keeping their lines full and their pumps working at maximum capacity. There’s no indication this will end soon, even with growing talk of a recession. Second, the high dividends paid by these companies offer attractive yields that help put a floor under their prices. Gordon Pape takes a look at three pipeline companies he’s been recommending.

Why calling a bottom for bitcoin, or any cryptocurrency, is so misleading

Bitcoin and ether, the two most popular cryptocurrencies, have tumbled in waves since November, and every time a new swell hits, the believers swear this one will set a floor. These can be comforting words for anyone trying to make sense of the downturn, particularly so for unsophisticated retail investors. But the truth is it’s nearly impossible to call a bottom. Anyone suggesting a floor has formed is delivering marketing lines rather than any real analysis, writes Tim Kiladze.

Also see:

Crypto’s latest meltdown leaves individual investors bruised and bewildered

Crypto lenders face a DeFi drubbing

Upside down world of ‘reverse currency wars’ is real

Financial firms, such as Goldman Sachs, have warned for months that long-fought “currency wars” – where countries struggle to prevent a weakening US dollar and overvalued domestic currencies from crimping exports – could be inverted, with scary consequences. Dubbing this twilight policy zone “Reverse Currency Wars,” they reckon the re-emergence of inflation, a hawkish Fed and dollar strength would force governments and central banks to rethink exchange rate orientation and race to keep pace. There are signs this is now happening, and it’s a prospect that’s deeply disturbing for global markets, with lower equities, flatter bond yield curves and a severe squeeze on financial conditions at risk. Mike Dolan of Reuters explains.

Others (for subscribers)

Number Cruncher: Ten TSX energy stocks with strong price momentum

Wednesday’s Insider Report: Trustee invests nearly $500,000 in this REIT with a forecast return topping 40%

Tuesday’s Insider Report: Large institutional shareholder invests $15-million in this beaten-down stock

Wednesday’s analyst upgrades and downgrades

Tuesday’s analyst upgrades and downgrades

Globe Advisor

Pushback against ESG, claims of greenwashing have ‘some legitimacy,’ but will help improve transparency

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Ask Globe Investor

Question: I’m thinking of selling some stocks in my tax-free savings account to free up cash to help pay for a renovation. I realize it’s not an ideal time to sell, so what’s a good approach? My TFSA has a mix of ETFs, real estate investment trusts and individual stocks. I follow the buy-and-hold approach so I’m tempted to hang on to my stocks that have losses (such as Air Canada) and sell stocks where I have gains (such as TD). Thoughts?

Answer: Whether a stock is showing an unrealized gain or loss in your account shouldn’t be a factor in your decision. Just because Air Canada (AC) has dropped in price since you bought it doesn’t mean it will outperform Toronto-Dominion Bank (TD) in the future, and TD’s positive return doesn’t make it any more likely to underperform Air Canada. Nor do you need to consider capital gains – or capital losses – when deciding which stock to sell, because there are no taxes in a TFSA.

The only thing that matters now is your expectation of each stock’s future performance.

Airlines are notoriously volatile businesses. They carry a lot of debt, operate in a highly competitive marketplace and face an array of risks including unpredictable fuel prices, economic downturns and health-related travel restrictions. Air Canada’s stock ran up in price in the years before the pandemic, but it’s now back to where it was in 2017. Will it take off again? beat me.

Banks are much more stable businesses, particularly in Canada where the five largest financial institutions have their fingers in everything from personal and commercial lending to wealth management, investment banking and insurance. Banks also pay dividends that have risen steadily over the years. Including dividends, TD has posted an annualized total return of 12.5 per cent over the past 20 years.

Past performance is no guarantee of future results. But TD and the rest of the big banks have been cranking out rising profits and dividends for a very long time. I know which stock I would hang on to, but it’s your call.

–John Heinzl

What’s up in the days ahead

David Berman explains why energy stocks are now facing political risks as politicians grapple with high inflation and rising gas prices.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Globe Investor Staff

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