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Dennis da Silva A Comment -- General Comments From an Expert A Commentary N/A Aug 02, 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.
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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The U.S. banks just passed the annual stress tests with strong results. All the 6 big banks raised dividends and some have announced share buybacks which will support the stocks. He owns many banks and expects the good times to continue. Bank valuations are favourable compared to the overall market.
Commodities. The super cycle lasted over a decade. Feels the easy money was made, we have now corrected and the industries have gone through the necessary changes to readjust to the reality of what things are going to look like in a more normalized environment, where supply or demand is not taking off. It is about focusing on companies rather than if a company is going to double this year or whatever the expectation is. It is about what companies can excel in a more normalized environment over the next 5-10 years. Oil really ran ahead of itself a couple of months ago, and Short positions are playing a major role in terms of exasperating the fall, but he wouldn’t consider that as the fundamentals, although it plays a periphery role. For him, the rebalancing has started, and began in the middle of last year as the US supply has been steadily declining. Expects that balance will probably be completed by the middle of next year. $50 is a realistic number to be expected at around the end of this year. He still likes gold companies. Last year, and at the beginning of this year, margins were basically negligible in terms of whether they were really making money. All of a sudden they have gone from something like $50 margin per ounce to $300-$350 margins, so that easily justifies why these stocks have doubled.