What Is Keeping The Bank Of Canada Up At Night?

"Canadian and global economic activity remains unusually uncertain" from the October 2020 Monetary Policy Report.

Yes, we have recovered some of the lost growth that we were experiencing pre-pandemic, but as you can see in the above chart, it is not expected to return to pre-pandemic levels until mid 2021 in the best case scenario.

And here is what the BOC has to say about the risks to that:

"Given the continued uncertainty about the evolution of the pandemic, the projection is highly conditional on the following assumptions:

• Extensive lockdown measures, such as the widespread closures imposed early in the pandemic, will not be reintroduced, although more localized and moderate containment measures will ebb and flow.
• Vaccines and effective treatments will be widely available by mid 2022, at which time the direct effects of the pandemic on economic activity will have ended.

Precautionary behaviour of households and the effects from the uncertainty surrounding COVID-19 are, however, likely to linger.

The pandemic is also likely to have persistent effects on the behaviour of consumers and businesses. This could lead to lasting changes in the structure of the economy and could weigh on its potential output."

As I have stated so very many time in past blogs (ad nauseum), economic activity is a function of confidence by consumers and businesses. Uncertainty is going to be a major hurdle.

The outlook for the global economy is also somewhat hazy:

and apparently not expected to get back to pre-pandemic levels as far as their forecasts go out (at this moment).

This morning the U.S. Commerce Department reported a record Q3 GDP growth rate of 7.4% (33.1% annualized) , slightly better than expected, however, still running at levels well below where it was in Q4 2019:

So, my friends, lets keep some perspective: lets hope that the BOC's optimistic forecast is correct, but let's be prepared for this to drag on longer than we might wish.

One thing we can count on is low interest rates for an extended period: the BOC release on interest rates yesterday stated "well into 2023". They are also buying longer dated bonds, mostly direct from the federal government, which should keep longer term rates in check.

If you think that low interest rates in bond markets compels you to want to own more over-priced stocks, give it some thought.

Here is what our friend David Rosenberg had to say recently in one of his morning letters:

"You don't own Treasuries (government bonds) for the yield, obviously. You no longer have a whole lot of potential for capital gains, either. That's not why you own them. You own them because they have no capital risk. They have no default risk. they may obviously have inflation risk. But there is no other investment where there is no default risk and perfect certainty of what your payment will be at the time of maturity. You don't own bonds to propel your total return; you own bonds to preserve and safeguard returns and use them as a risk-management tool. That I see so many knuckleheads talk about how 60-40 doesn't work anymore is a true mystery...

Equities are sexier after all. Nobody talks about the Treasury Market at cocktail parties."

The economy, the state of the consumer (household) and business confidence will keep the Bank of Canada up at night. Clearly there is risk in the "unusual" uncertainty. Now, more than ever it is time to take stalk of the risk in your investment portfolio and how best to manage and mitigate that risk.