Insights for Investors: Navigating a Potential Stagflationary Crisis

This episode does not constitute as financial advice. Past performance is not indicative of future results. See Offering Memorandum for details and risks. As of February 15, 2023, average return is 8.14% annualized since inception with DRIP and loan to value ratio is 52.3%.

The global economy is facing an unprecedented crisis, one that combines the worst aspects of both the 1970s-style stagflation and the 2008 debt crisis. This new phenomenon, known as the stagflationary crisis, is characterized by a combination of high inflation and low economic growth. In this article, we will discuss what a stagflationary crisis is and how it combines aspects of both.

We will also examine the potential responses of the Federal Reserve and the Bank of Canada to the crisis, as well as provide advice for investors on how to protect themselves against a potential recession, debt crisis, and out-of-control inflation. Finally, we will take a closer look at how rising mortgage rates have impacted housing affordability in Canada and what steps the bank is taking to monitor and proactively reach out to clients at higher risk of financial stress.

What is a Stagflationary Crisis?

A stagflationary crisis is a unique economic phenomenon that combines the characteristics of both stagflation and a debt crisis. Stagflation is a situation where an economy experiences stagnant economic growth and high inflation. In contrast, a debt crisis occurs when many borrowers default on their debts, causing widespread financial instability. The stagflationary crisis combines these two problems. The result is a situation where the economy experiences high inflation and low growth, while simultaneously facing a debt crisis.

How will the Bank of Canada Respond?

Historically, the Bank of Canada might respond to a potential debt crisis, stock market crash, or explosion in debt defaults by implementing a series of monetary policies. These policies may include lowering interest rates, purchasing government bonds, and providing liquidity to financial institutions. The ultimate goal of these policies would be to stimulate economic growth while keeping inflation under control. However, with inflation at its current levels, this may not be an option for the Bank of Canada for some time.

Investor Strategies for Navigating the Crisis

As an investor, there are several steps you can take to protect yourself against the potential recession, debt crisis, and out-of-control inflation. One strategy is to diversify your investment portfolio to minimize risk. Another approach is to invest in assets that tend to perform well during times of economic crisis. An investment like gold, or in mortgage investment funds, such as the Cannect MIC.

Comparison of the Actions of the Federal Reserve and the Bank of Canada

The actions of the Federal Reserve and the Bank of Canada during the crisis have been similar in many respects, with both central banks implementing a variety of monetary policies to stabilize the economy. However, there have been some key differences between the two banks, such as the Fed's preoccupation with contemporaneous and lagging economic indicators, which carries risks.

Impact of Rising Interest Rates on Variable-Rate Mortgage Holders

The rising interest rate has had a significant impact on variable-rate mortgage holders, with many experiencing higher monthly payments. However, the percentage of Canadians with variable rates is relatively low, with most opting for fixed-rate mortgages instead. But are banks taking steps to monitor and proactively reach out to clients at higher risk of financial stress? That is yet to be seen.

In conclusion

The potential risks of recession, debt crisis, and inflation are on the minds of many investors and economists today. However, by remaining disciplined, diversified, and focused on long-term goals, investors may be better positioned to weather short-term market volatility. Additionally, it is worth monitoring the impact of rising mortgage rates on the Canadian housing market and considering the actions and approaches of central banks like the Fed and the Bank of Canada.

Finally, investment opportunities such as the Cannect MIC thrive during times like these as property owners look for ways to access equity and get them through this economic time.

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0:00 - Intro
1:12 - CIBC and eroding equity from mortgages
6:17 – How is the Bank of Canada making decisions for interest rates?
9:25 – Minimum wage and inflation
12:03 – US vs Canada inflation strategies
13:50 – Affects on the Housing Market
19:00 – When’s the right time to buy?
23:09 – Stagflation
25:09 - Nouriel Roubini and the Perfect Storm
35:15 – Cannect MIC vs Mutual Funds
42:36 – What’s going to happen next?
48:53 – Is this the new normal?