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Jason Del Vicario A Comment -- General Comments From an Expert A Commentary COMMENT Jun 06, 2025
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Depends where you look. Yes in some places, not so much in others. It'll be covered more in-depth in today's Educational Segment.
This week we get CPI, PPI, and retail sales. If we think about how the intersection of growth and inflation affect the world and the consumer, this is the big week for markets. We should start to see the beginning of the tariff impact.
Right now, given the weak employment situation, the tilt is moving toward a rate cut in September. But we'll see. Current makeup of the Fed Reserve Board is on pause. Jackson Hole is coming up in a couple of weeks where, if they're going to think about cutting, they'll almost certainly give that indication.
The worst economic outlook, bar none, is stagflation -- when prices are rising and growth is slowing. That, to him, is the biggest risk of a lot of these policy choices by the US administration. We have to get through this period. That's a big challenge. If he had a crystal ball he could tell you exactly what to do, but he doesn't.
If you look at the polymarkets and some of the betting pools, the expectation is that we get a slightly better-than-expected CPI number. So we could see equity markets continue to perk up. The YOY report for CPI is expected at 2.8%, and that's tomorrow. The betting markets have it coming in at 2.6-2.7%, and that would be flat to last month. If we get that, markets will grind higher.
You can't not like them, except for the breadth. Many companies are doing well, but the concentration of earnings growth remains very narrow in the big tech areas. That's not robust. President Trump is trying to change that, but it'll be a couple of years before we see the benefits of less regulation and a broadening of the US economy.
Today, core US inflation is up which translates to positive news. Tariffs were supposed to impact this July number, but is up only slightly from June. Some research says that a third to two-thirds of the tariff impact is being absorbed by companies instead of being passed onto consumers, such as inventory build-up. But in time, companies will inevitably pass the tariff impact onto consumers. However, credit car delinquencies show consumers are growing strained. We still have to watch the data. It could take up to 12 months before we see the full impact of tariffs onto consumers. The US Fed between announcements issues forward guidance, which is a softer way to make a rate announcement. Trump is strongly pressuring the Fed to cut rates.
That's the $1M question. Things are very fully priced right now. NASDAQ's trading at just over 28x PE, and S&P just over 24x. Historically it should be ~19x. There's sentiment that the US Fed Reserve will cut come September by 0.25%.
When you look at what's really driving it, it's the AI story. Here in Canada, the commodity side has done extremely well except for the energy complex. But base and precious metals are ruling the roost.
If you look back to 4 years ago, CPI topped out around 9%. It's come down and, really for the last year and a bit, has stabilized. He rather doubts it's going to get down to the Fed's target 2%. Everything's lined up now for them to cut by 0.25%.
Who knows what happens come December. Interest rates coming down will be reflected in the valuations, and that's why you can get PE multiples up this high. They're at nosebleed levels right now.
It's very much taken a back seat, mainly because Mr. Trump just turns it on and turns it off. Everyone's gotten numb to that. People are focusing now on price and earnings. You can't really trade or invest based on tariffs or negotiations, but you can trade on valuations.
Investors know that a lot of capex is being spent on AI, but they don't see people actually buying it. AI is truly transforming the whole modern defense landscape. Enables smarter, faster, and more autonomous military capabilities.
His bullseye chart has 3 layers. Bullseye is all about AI-powered defense platforms and systems. Includes autonomous drones, robotic vehicles, smart weapons, and so on.
Second circle includes PLTR, LMT, and LHX. It's all about decision-intelligence and command platforms. AI augments battlefield awareness.
Outer circle is more about dual use of cyber AI and defense infrastructure. PLTR is in this circle as well. Supports secure communications and AI-driven cybersecurity. The old-school players are in here -- RTX, LMT, and NOC. But there are spaces, especially when it comes to the drone side.
Investing 101: What is Keynesian Economics and When Did it Become Popularized?
When we think of the current economic structure and principles that we use today, most of them are using Keynesian economics. Prior to 1946, Classical economic theory dominated the principles followed by market participants, and it wasn’t until the Great Depression in 1929 that political leaders sought out new theories to assist the economy's recovery.
Classical theory was rooted in the idea of supply, and more specifically that following a recession the economy would balance itself out, as businesses would continue to create goods and those goods would be bought by individuals. When the Great Depression hit in 1929, it lasted for 10 years, and it was devastating to the US stock market, GDP, and employment. Demand for goods was so low that economists were unsure of how to rebuild the economy since traditional theories relied on demand being readily available to soak up excess supply. John Maynard Keynes developed the Keynesian economic model, which was rooted in the idea of aggregate demand. Keynes proposed that in times of economic recession, the government should begin spending money on infrastructure, tax cuts, and other forms of spending to force demand in the economy and restore a balance between supply and demand. This is what brought the world out of the Great Depression in roughly 1939 – the government began increasing expenditures and introducing programs that would bring back full employment.
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He favours exclusively high-quality businesses, though that's a buzzword that gets thrown around. He defines it primarily as a company's ability to generate above-average, consistent returns on invested capital (ROIC). You're looking at the profit in relation to how much capital needs to be invested to generate that profit.
Beyond that, he favours founder-run, founder-owned businesses. Likes to align with people who have significant skin in the game. Asset light, low debt. A company also has to be within his team's circle of competence and comfort zone, so it has to be a business that they can understand. Some things these days are just beyond his understanding or he can't foresee what they'll look like in 5 years.