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Inflation comes down—gold goes up, banks earn money no matter the direction, and Netflix retains the streaming heavyweight title.
Kyle Prevost, editor of Million Dollar Journey and founder of the Canadian Financial Summit, shares financial headlines of the week and offers context for Canadian investors.
The world’s central banks faced plenty of criticism over the last 12 months, with skyrocketing inflation data dominating the headlines. Market watchers might not-so-fondly remember the whole “transitory” debate.
Here’s a potentially unpopular take on things: Central bankers may have got it right more often than they got it wrong. The pain of quick interest rate increases has caused people to forget the desperation of early 2020, when faith in the economy (and our ability to collectively stay alive) was plummeting. Central bankers around the world threw everything (plus the kitchen sink) at the anemic pandemic economy. And they successfully prevented a Great Depression-type of spiral. If its cost turns out to be getting a little behind the inflation curve—before successfully catching back up in a year or two—that price is pretty low, historically speaking.
With the U.S. annual inflation rate falling to 6.5% last week, it wasn’t a huge surprise to see Canada’s inflation come in at 6.3% on Tuesday. That said, the news was certainly welcome. These inflation figures were down from 7.1% and 6.8% respectively.
Of course, it’s also entirely possible the folks in control of monetary levers at the central banks are just stumbling through the dark and found the gift of plummeting oil prices.
Some key takeaways from Statistics Canada’s Consumer Price Index for December 2022 report:
For me, the final three-month core inflation number of 3.7% is the most important metric in the Statscan report. That is the most recent data we have on the key core inflation trends. Gas and food prices will always go up or down month to month, but it’s the core inflation number that most affects our personal finances over the long term.
Despite the mostly-positive inflation report, money markets are predicting a 77% chance the Bank of Canada (BoC) raises interest rates by 0.25% on January 25. That’s a jump up from a 70% probability before Tuesday’s report. We continue to believe the risks of over-tightening interest rates now outweigh the risks of inflation staying above 3%.
Hopefully the BoC stands firm after this upcoming hike and takes a “wait and see” approach as the effects of substantially higher interest rates work their way through the system.
In 2021, we saw the world of investment banking and trading rake in record profits. And banks that derive much of their revenue from those verticals, such as Goldman Sachs (GS/NYSE), were quite happy with the results. A year later, that momentum has decisively changed. Our first look at corporate earnings in 2023 reveals that boring-old consumer banking might be back in style, while investment banking isn’t nearly as profitable as it used to be. (All figures are in U.S, currency in this section.)
It’s tough to find the through line, in terms of the overall story here, when it comes to the earnings season for these banking conglomerates. But it’s fair to say the most pessimistic predictions were largely proven incorrect.
Goldman Sachs did have its biggest earnings miss in a decade, and it announced to cut 3,200 employees. However, Bank of America and JPMorgan rode consumer banking strength to earnings beats and announced they were still “in hiring mode.” Relative to where they were a month ago, here’s the market reaction to the banks’ earnings announcements was:
Wells Fargo’s earnings are a bit of a one-off result—thanks to paying $2.8 billion in after-tax operating loss because of legal and regulator costs in connection with customer abuse penalties.
While provisions for expected loan losses were up (cutting into the banks’ bottom lines), the overall message coming out of this early earnings season appears to be that someone forgot to tell consumers that they were in a recession.
While setting funds aside to balance out loan defaults might sting investors in the short term, it’s a prudent move in terms of overall stability. If those losses don’t materialize, shareholders will see money flow back onto the balance sheet at a more stable point in the future.
The Thursday number that had Wall Street watchers tuning into Netflix (NFLX/NASDAQ) was 7.66 million. That’s the number of paid subscribers that the service added since it launched in November. Those subscribers blew away the 4.57 million consensus prediction, and it bodes very well for the long-term revenue potential of the company, especially when you factor in the new advertising tier. (There’s a cheaper package for customers that includes commercials.)
The subscriber number seemed to be so important that investors largely ignored the fact earnings per share came in at $0.12, which is substantially below the $0.45 predicted. Currency movement was blamed for the lower-than-expected earnings, and this isn’t considered a long-term issue for the streaming company. Share prices were up in after-hours trading after the earnings announcement on Thursday.
This is welcome news for long-suffering Netflix shareholders who did not enjoy pleasant quarterly earnings announcements in 2022.
The other notable U.S. conglomerate to release earnings results this week: Procter & Gamble (PG/NYSE). In typical fashion for a company that’s been the epitome of stability, P&G’s earnings per share came right at the predicted amount of $1.59. Revenue of $20.77 slightly beat the consensus prediction.
While this was a dip both in earnings and revenue from a year ago, investors appeared to take the quarterly results in stride. The stock was down 2.11% on Thursday.
Management cited compressed margin pressure, and foreign exchange issues due to the strong U.S. dollar as the main culprits responsible for the decreased earnings.
It may finally be time for gold to shine again in 2023. Most of the air has come out of the bitcoin bubble, and gold has likely regained its cult status as the “best way to fight inflation.”
Speculators believe that, with the U.S. moderating its interest rate, the ultimate safe-haven status of the U.S. dollar might slide this year, with gold again being the beneficiary. With bond yields still under pressure from possible central bank rate hikes, safety-seeking investors might be ready to turn back the clock to a time when gold was king.
I vividly remember the 2010-2012 Gold-Bug era for these incredible commercials from companies that would “Buy your gold today!” And who could forget the gold buying schemes cooked up by media stars like Glenn Beck?
Rising gold prices would be a boon for Canadian investors, as Canada is the fourth largest country for mining of gold in the world (behind China, Russia and Australia). With 43% of the world’s mining companies listed in Canada, investors in Canadian indexes have pretty solid exposure to gold (whether they want it or not). Consider checking out the various ways to invest in gold in Canada on MillionDollarJourney.ca.
Of course, even if gold manages to stay above USD$1,900 (the same price point it hit back in 2011), it is worth noting that gold has been used as a currency for the millennia, it’s not a very good modern investment.
Here’s an inflation-adjusted chart that shows the value in today’s U.S. dollars of gold over the last 12 years.
Source: MacroTrends.net
In other words, you could sell an ounce of gold for USD$1,900 back in 2011—and you can do the same today. But you can buy substantially less of everything else once you put that $1,900 in your pocket.
Gold would have to skyrocket to USD$2,400 this year, just to make it back to a 0% real return since 2011! It’s a positive that “gold essentially tracks the general rate of inflation as a store of value,” but keep in mind that metals of any colour or lustre do not pay dividends and do not generate actual profits. Given all that, I’d be cautious about investing in physical gold in 2023—or any other year for that matter.
Kyle Prevost is a financial educator, author and speaker. When he’s not on a basketball court or in a boxing ring trying to recapture his youth, you can find him helping Canadians with their finances over at MillionDollarJourney.com and the Canadian Financial Summit.
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