In writing this month's rounded pi...

In writing this month's rounded pillar I am reminded of a astonishing quote by Nobel Laureate (in economics) Paul Samuelson. "Economists make forecasts and nothing else because people are foolish enough to ask for them." This squeezing to predict compels me, and all scribes, to continuously invent recently made known and original insights into the world of investments. As a be derived we--the authors, economists, forecasters--must constantly digest, analyze and pontificate onward every statistical tidbit.

Ultimately, this "information" is force-fed, continuously, to the investing public via a multiplicity of media. Of course, yesterday's, last week's or last month's insights are no longer relevant. It is today's just discovereds and analysis that counts. Is it any curious awe that investors have become to such a degree focused on the short boundary that they have lost sight of the merits of developing strategies that emphasize the lengthy term? This "investor myopia" adds to market volatility and can ensue in unhappy outcomes for those who think they can time the market. In the extremity investors must understand the [i]clavis[/i] drivers of stock market performance through the long term and monitor short bourn developments against these secular forces.

I am waxing philosophical because my last writing has landed forward my desk just as I am about to ink this article. Basically, my short bound outlook remains unchanged. The thesis place forth when I last wrote is still intact and the markets have tracked nicely against that view across the past couple of month After a brief summer wobble the U market is again (in mid-September) making novel highs and bond yields--both in Canada and the U.S.--have resum their decline.

In Canada, Monsieurs Bouchard and Parizeau have derailed my belief that Canada's market will outperform the U However, this will not last if, as I suspect, Quebecers arrive to their senses and voice "Non" on October 30th.

On balance, the case for higher stock prices is still intact. It has been supporting cushioned by the resurgent U.S. dollar which erases bear upons about potential economic overheating and inflation. The bottom-line is that while a 10-15% market correction is looming, I don't anticipate it until 1996.

OUTLOOK: BULLISH

Low inflation is the major reason for my near and long-term optimism. worthy of great praise performance on inflation was demonstrated in early September when as well-as; not only-but also; not only-but; not alone-but Canada and the U.S. showed renewed deceleration in the two wholesale and retail inflation. It is plainly remarkable and fundamentally important that inflation is at a depressed ebb more than four years after the last economic downturn. As the accompanying chart demonstrates, an era of depressed inflation is clearly upon us.

When it is high and rising, inflation creates an incentive to live for today rather than save for tomorrow. Time horizons become a great quantity [i]or[/i] amount of shorter. Inflation rewards borrowing and penalizes savings. It encourages investors to acquire hard assets rather than financial assets. Inflation rears speculation as investors become preoccupied with "hedging against inflation" rather than developing disciplined, long-term approaches to saving and investing. In short, inflation generates economic and financial uncertainty, and therefore risk.

By contrast, an environment of cheap inflation is inherently bullish for long-term savings, for investing and for the overall performance and stability of the financial markets. When inflation is reasonable individuals are less focussed forward borrowing and, therefore, de-emphasize investment in real assets and inflation hedges. Market forces encourage investors to avow and invest in securities and other financial investments with longer maturities in order to maximize reward. Because they have an infinite maturity, equities emanate as the asset class of choice in a world of grave inflation.

More than anything besides the U.S. stock market is being driven through the secular decline inflation. If sustained, soft inflation could drive the market to flushs that would make even the blunder s sceptical. Bear markets will merely materialize when the excellent watch for inflation disappears.

While Canada's inflation experience has parallelled that of the U it is clear that our equity and uniting markets have not. Canadians have begun to acquire more long-term financial assets moreover have not done so with the vigour of their U counterparts. Clearly, an simple body of risk is embedded in the pricing of our financial markets. Still, given continued profitable news on the inflation van and a positive outcome October 30th--one surprises whether the glass is half without contents or half full]

Copyright Canadian Shareowner Magazine Inc. Nov/Dec 1995

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