Opinions John O'Connell, CFAA Comment -- General Comments From an ExpertA CommentaryCOMMENTSep 18, 2018
John O'Connell, CFAYou might be interested:
We've gone through one cycle of investments, which were largely in large language models and data centres. Now we're entering another investment phase, which revolves around agentic AI. The types of hardware needed for model training are very different from the types needed for agentic AI. That means change, and that's where we're seeing a lot of opportunities.
For the model training era, the main focus was on GPUs. You were able to use one CPU to connect 16 GPUs together. Now, in the agentic AI era, we're using one GPU per CPU -- creating massive demand for CPUs. That's why stocks like AMD, INTC, and ARM perform really well. We're at an inflection point, and we're in year 1 of that cycle.
Another area she likes is networking. The number of people on earth is finite, but the number of agents is infinite. Connecting these agents leads to tremendous opportunity -- copper, connecting components, and optical components.
A third area is memory, but this one is trickier because that sector is a lot more cyclical than the other two.
Yes, she'd absolutely invest in traditional players. Concerns around software were valid, but the concerns around cybersecurity were mispriced. Cybersecurity stocks sold off together with software stocks, but it wasn't justified.
Seeing lots of opportunities. First time in history where robot traffic on the web exceeds human traffic. Interfaces will have to change to accommodate this new reality.
Her team is very excited about this. Use cases haven't scaled or been proven over the last 2-3 years. They've been looking at commercial applications, which are in a very experimental phase. Makes it hard to justify on risk/reward right now. Time to invest is once we see commercial acceleration.
Big players are IONQ and RGTI. Unclear which technology will be the winner.
She blames US monetary policy for distorting the current market. The Fed Reserve has been too eager to print money for the last 20 years while the treasury has been too willing to spend big on stimulus. It's no longer true that the dollar moves in the opposite direction of risk assets and most commodities. Patterns: when Trump was first and sworn in, the dollar fell 15%; it also fell the next time he was sworn in, but later bounced when US companies repatriate their cash. Oil: In March when the dollar bottomed, oil soared. Any oil rally will cap at $80-85 for WTI, or $105 if the US-Iran war resumes. If prices keep falling, it will reach a floor of $57. Gold: When gold bottomed in mid-2022, the USD was peaking. In early 2026, it was the reverse. When gold sells off, it sells off hard, now down $1,500 from highs. Any relief rally won't last and gold will continue to fall.
Is bullish. US margins were 11% of sales and expected to hit 13-14%. The AI flow is driving the economy as the hyperscalers spend and the chipmakers raise prices. This will pick up the rest of the economy. Industrial companies have put behind Covid, and profits are picking up. He sees strong opportunities in Canada, particularly minerals.
The oil price has returned to pre-war prices. So, the market will shift attention to the U.S. 10-year bond yield. That yield has risen to 4.5% in recent weeks; typically at this level, forward market returns are muted. AI stocks are insulated, but all other areas, namely growth stocks, have seen downward pressure. He expects the U.S. 10-year to come down and broaden out the rally. Falling oil and gas will lead to lower inflation expectations. Meanwhile, rent prices are starting to roll over, which will lead to tailwinds for core CPI.
The thing is that the US is the biggest economy in the world, so it has leverage over Canada and Mexico. They're going to make additional progress from what the deal was before, but the structure mandated that it was up for review. It either gets extended through to 2042, it gets extended 10 years, or it's up for annual review.
He suspects it will take a number of months, but the US will come out ahead. PM Carney will probably be very good at dealing with President Trump as far as public perception goes. But recently at the G7 meeting, there was an off-mic comment that caught the PM in a vulnerable position.
From Canada's perspective, we're on our heels. But when it comes to terms of trade, what matters most is energy distribution for Canada.
It would be nice to have it between Canada, Mexico and US, but it could go bilateral. The difference between Canada and the US is that, ex-oil, they actually run a surplus with Canada, but a clear deficit with Mexico. That should demand a different focus. For example, Mexico couldn't care less about milk; but it'll be a big issue for the Canada-US talks.
When we look at forward pricing on crude oil, pricing for oil in the back months is $50 out past 2031-32. The question is timing of a resolution. For political reasons, Trump would like oil prices to stay low through the midterm elections, and his decision-making will be largely leveraged off of that. Make no mistake, he started something and he'll probably need to finish it.
Right now, Iran has the upper hand on the president.
Makes no sense that a $1T company should swing 5% in valuation in a day. Massive amount of speculation going on in this wonderfully exciting area. Given the nature of retail investors, and the second-order effects of what buying call options does to create leverage in markets, it's creating some dramatic imbalances. This is adding to volatility and, typically, doesn't end well.
Hedging
Trump's been talking about the US being self-sufficient on energy. It's not actually true. When you look at how many barrels of oil the US produces, it's about 14M a day. They consume about 20M barrels. They need to import a lot of heavy crude. They need Canadian oil, despite what he says.
How this will impact Canadians is on the value of the CAD. We're 3% of the world. When most people look at their investment portfolios, the vast majority of exposure is in the US (over 60% of the world's capital markets). So it matters what the CAD-US rate is, especially in registered accounts.
Today the CAD is trading around $1.42. Short-term interest rates relatively drive a lot of capital flows. If you back out crude oil, Canada actually has a deficit to the US. If we can hammer that point home to the US during CUSMA negotiations, we can gain a lot of ground.
Correlation between the interest-rate differential and the current value of the CAD is much more of a factor recently than what's happening with oil prices. We have a more hawkish Fed, a BOC that probably still needs to cut rates, and a structurally weaker economy here in Canada. It's debatable whether PM Carney's policies will drive foreign investment into Canada.
Very rare for the CAD to hold above current levels. So, for a lot of investors in registered accounts, look to switch your exposure in ETFs to hedge that foreign currency. He encourages people to check out the related links on his blog.
Very bullish on Canada. Lots of opportunities to invest, with big structural themes that are working. These are multi-year themes, not just 1-2 years. Lots of capital going into the Build Canada theme.
As well, he's very bullish on Canadian defense. We're in very early innings of what's to come. They're trying to build a whole supply chain from scratch, and increasing our domestic percentage of defense spending. So money doesn't get sent abroad, it stays in Canada.
Over time, a list of "national champions" will be developed. These are Canadian companies, which will be designated by the government as structurally important to both our national and domestic defense capabilities.
There will be a massive change from how things were done in the past to how they'll be done in the future. The best comparison he has is what's happened to the Canadian banking sector over the last few years. They've seen outsized ROE because they're structurally important, protected by the government, and an oligopoly in many respects. This protection will now turn to critical infrastructure and defense.
As much as possible, he tries to avoid making macro calls. Predicting exchange rates, interest rates, or commodity prices is not how he likes to allocate capital. Odds of successfully making predictions outside of the market are very low. Instead, he'd rather predict things that are structural and highly predictable.
Despite the interest rate paths to be taken by the BOC and the Fed, he's very bullish on some structural themes that should compound capital at very high rates of return for an extended period of time. Adverse interest rates would, of course, have a dampening effect on market multiples.
If you don't overpay for a business, you like it fundamentally, and it's exposed to a growing area, you should be in a really good position irrespective of interest rates.
Why is the Canadian dollar so cheap against the USD? He shares the caller's frustrations. Canada needs its resources to be extracted in a safe way. He blames the current government, though these problems go a long way back. We don't have a strong industrial policy--we need to get our act together. Petty politics by provincial and city politicians doesn't help. We're not a country right now. That's what is driving investors away from Canada.