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Pragmatic Capitalism

Practical Views on Money, Finance & Life

BANK OF CANADA: STOCKS ARE OVERVALUED

It’s refreshing to see a Central Bank that at least appears to reside in the same world as the rest of us.  While Bernanke remains oblivious to new bubble formation and overheated equity markets the Central Bank of Canada remains quite concerned about the the state of the global economy.  In their recently released Financial System Review they provide a mildly bullish outlook for the global economy, but remain defensive in terms of their outlook on the sustainability of the recovery:

  • The crisis of confidence that disrupted global financial markets in late 2008, resulting in heightened counter-party risk and intense funding pressures, has largely abated.
  • The likelihood of system-wide stress arising from the household sector over the medium term is judged to have risen as a result of increased indebtedness.
  • Although the uncertainty surrounding the global economic outlook has diminished somewhat, it nevertheless remains elevated.
  • Several medium-term risks have intensified.

The Bank says those risks are:

1.  No exit strategy in many countries.

Hmm, sounds familiar….

2.  Asset prices could outpace fundamentals.

Not according to Bernanke.  Then again, he does subscribe to the Greenspan policy of print or die which helped him to forecast approximately none of the problems that got us here to begin with….

In terms of the equity markets the Bank of Canada once again provides a very pragmatic view.  In addition to overheating equity markets they remain uncertain that revenues will follow-thru to sustain the earnings growth we have seen thus far:

The recent rally in equity markets is supported, at least in part, by better-than-expected earnings in the second and third quarters of 2009, with 70 per cent of S&P 500 firms surpassing expectations in the second quarter, and with 80 per cent of those reporting third quarter earnings up to 23 November exceeding expectations. In the second quarter, these better-than-expected earnings were largely the result of cost-cutting measures, while third-quarter earnings were also supported by revenue growth. For the recent improvement in equity markets to be sustainable, future earnings will have to be driven by revenue growth. Equity markets may thusexperience some reversal if earnings growth proves to be disappointing. While indicators point in different directions, various measures, such as forward price-earnings ratios, suggest that equity prices may have increased by more than warranted in the context of an expected slow recovery.

All in all it’s a very good and balanced read.  Take some time to review it over the weekend.  Full text can be found here.

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC.Orcam is a financial services firm offering asset management, private advisory, institutional consulting and educational services.He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.
Cullen Roche

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