Opinions
Jason Mann A Comment -- General Comments From an Expert A Commentary N/A Feb 12, 2016
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The US employment numbers at the end of the week are far more important than the digital services tax, which was nevertheless a big issue for many Canadians. It was also important for Trump, as he cancelled all negotiations on Friday, but today it's all good again.
We're going to see a lot of volatility around trade discussions in the coming weeks. Companies still don't have a better handle on the uncertainty ahead. We just heard that the EU is going to accept the tariff rates. We'll have to see how it all plays out. Those tariff policies are still inflationary.
We are seeing a decay in the employment situation for both economies. Demand for labour is softening, as well as the supply of labour. Starting to see an increase in how long it takes Americans to find jobs. That will matter far more to the Fed cutting rates than what President Trump says.
The Fed has a dual mandate -- inflation and full employment. It's balanced 50/50, though at times it skews. If we were already starting to see job losses, it would be far more weighted to the employment situation than to the inflation fight. If job losses are here and now, then inflation's going to come down because demand will fall dramatically.
Right now we're around 50/50, but there's concern that the inflationary policies of tariffs are going to be a factor. Things change by the hour these days, and we have no visibility. President Trump's policies put the Fed on the sidelines, it's just that simple.
Over the last couple months of uncertainty, we saw forward expectations on earnings flatten out for the US. They didn't come down in a big way, but they became flattened to slightly down. Recently, now that markets are at all-time highs, we're starting to see an uptick again.
He doesn't follow the Canadian marketplace for earnings as much. Canada is 3% of the world economy, whereas the US is 65%. We have a structurally weaker economy, and so our earnings will be structurally weaker in general. But our market multiple isn't expensive to the same degree that the US market is. There's still better value in Canada.
RY has been the Cadillac of the Canadian banks for years. But it trades at a premium. TD recently has had some idiosyncratic issues. BNS has perennial issues with Latin American exposure. National Bank has more of a growth story. BMO and CM are just average, doesn't see a lot of growth.
He doesn't like any of them right now for new money. They're all pretty expensive. Loves them long term, measured in years and years. If we are going into a harder economic landing (which is still his base case), these banks aren't going to maintain current levels. Need to buy them when they're cheap and there's blood in the streets.
You take the market capitalization of the entire US equity market, and then you compare it to the GDP. The market cap is $58T, and GDP in the US is $29T. So it's 2:1. Buffett says that when that ratio gets high, it's a bad time to invest. Remember, he's a value investor.
If you look at this ratio going back decades, you'll see that timing markets on valuation is a bad idea. Markets can stay irrational far longer than you can stay solvent. BRK.B has the most cash it's ever had, but the individual investor can't think that way. We don't have the same timeline to infinity that he operates on.
Yes, could compress prices even more. Tariffs are taxes. In the US and Canada, we are overtaxed. Tariffs also make trade more difficult, but trade makes us richer. Doesn't think Trump actually knows what he's going to do, which makes it difficult to forecast.
His hope is that this is mostly posturing. Trump makes outrageous demands so that he has a very strong position to retreat from. That's the best we can hope for.
He's watching the "big, beautiful bill", which is big, but it's certainly not beautiful. The arithmetic around the USD is very bad for the US, and very good for gold. On-balance sheet liabilities of the US are about $36T, which is dwarfed by the off-balance sheet ones exceeding $100T. And those numbers are growing. The only way to honour these debts is to reduce the purchasing power of the US dollar, much like in the decade of the 1970s.
Note that he thinks the USD will do OK relative to other currencies. But in absolute terms, the spending power of the USD falls. This budget bill is a classic example of Republican and Democratic log-rolling (there isn't a constituency in Washington for reducing spending; there's only a constituency for advancing the interests of one's own district). Things are going to get worse. This is bad for the economy and its citizens, but good for gold.
Tax cuts without any reduction in spending basically amounts to fraud.
In his experience, silver is a late mover in a precious metals bull market. Happens when the generalist investor is attracted by the momentum in gold and comes into the precious metals market, leadership generally changes from gold to silver. He'd expect that to occur because we're in a very endurable precious metals bull market.
It might not happen for a year or two, but you won't need him to tell you when it's occurred. Silver is extremely volatile to the upside when its time comes.
Markets. Looking at Price to Book Values on the TSX, it looks like a market bottom. There are lots of value signs, but stocks can stay cheap for a long time. Valuation is not a great catalyst for things to change. A 3rd of our market now trades below Price to Book. That has only happened 3 other times, 1982, 2000 and 2008. All 3 near cyclical lows for value stocks, 2000 being the exception where the market continued lower, but it was the high growth Internet stocks that rolled over, and more traditional cyclical value stocks did very well for the next couple of years. We are also 21 months into the bear market in Canada, which is well beyond the average of 11 months. From a US investor perspective, which does matter, Canada is down 45% from its highs. That should ultimately attract them. A US buyer not only gets the currency play, but also access to stocks that are well below Book Value in many cases. $7 trillion of government bonds globally are now trading at a negative yield, so the world is now pricing in this deflation scenario, this risk of global negative interest rates. It took a Fed rate hike to get treasuries to rally and yields to fall off. There is irony that the Fed is trying to raise rates, and the only thing that has happened is that rates have gone down. This is because Japan, Europe and other countries are using negative interest rates as a policy tool, which is what is crushing their banks. Overall the market is discounting this scenario of a US recession, which probably isn’t in the cards. He sees weakness currently in manufacturing in the US. Not particularly surprising given that energy is a large part of CapX. Energy is dragging down that part of the market, but we are seeing strong employment growth and wage pressure increase, which ultimately translates lower profit margins for companies, but more discretionary spending by consumers, and we are seeing a really strong service sector. The overall economy, when you combine it, is still strong. Doesn’t think we are on the precipice of a new recession, and thinks stocks are starting to discount that.