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Stockchase Insights A Comment -- General Comments From an Expert A Commentary COMMENT Aug 05, 2024
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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.
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, and 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.
Two Types of Behavioral Biases: Cognitive and Emotional
To simplify the classifications, a cognitive error can be defined as an information processing error (statistical and/or memory). It is often the result of faulty reasoning. Many times an investor will "think" they are using a rational process in their decision making but fail due to these errors. Conversely, emotional biases are much harder to correct because they stem from impulse and/or intuition. Often an investor needs to first recognize these issues, then find a way to minimize the effects.
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Fears of a Recession:
What to do? First, do not panic. Panic selling is never the right move. Many investors will sell today out of fear: fear of losing embedded profits or fear of further losses. This may be a 'normal' but harsh correction, or it may be the start of something more. We do not know. No one does. But the fear-mongers will no doubt get lots of media attention. Bottom line: Companies are still quite profitable and interest rates are sure to come down now. Companies are still hiring, just not at the same fast rate. Valuations, even in the AI sector, are not that high when looking at growth and historical comparisons.
A recession is possible, but that is practically always the case in the economy. Most recessions are short. If one occurs we would expect it to be shallow as well, as investors have been already preparing for one for two years at least.
One twist in all this is the US election, which may cause more volatility as we head to November.
The plan: if as an investor you are not prepared to hold until the first quarter of 2025, we would ensure your cash levels are where you want them to be and you are well-diversified. Now is not the time to be a hero. If you have a longer time frame, doing nothing is probably the best strategy. It almost always is. If you have cash, we would be fine deploying some of it this week. We would keep some powder dry as the type of volatility we will see this week can last a while. Gold may be a good hiding place for those so inclined. But, bottom line, the world is not ending, it will just feel like it. Businesses, consumers and the market will carry on just fine, in our view. The correction may be harsh, but the steeper it is the shorter it should be as well.
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