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Opinions Paul Harris, CFAA Comment -- General Comments From an ExpertA CommentaryCOMMENTJul 22, 2021
Paul Harris, CFAYou might be interested:
They typically last 1-3 weeks. Seeing short-term price momentum weaken, and NASDAQ moving below its 50-day MA. These short-term corrective phases normally see a 2-3% pullback.
But what his team is actually monitoring are 10 different technical factors that indicate a transition to phase 3 of their market-cycle model. That's typically when the economy is late cycle, and is the peaking phase of your average 4-year cycle
More broadly the S&P 500, the TSX Composite, and the Russell 2000 remain quite constructive. All are trading above 50- and 200-day MAs. Starting to see early signs of some fraying, so market internals are coming off a bit. Market breadth is weakening a bit.
One of the most interesting things over the past couple of weeks is that the S&P and the TSX are making new highs, while the SOXX (Semiconductor) ETF is heading in the opposite direction.
Look at a 3-year chart. You can see how, with the Iran conflict, it's broken out of the longer downtrend. For 2026, you can spot the higher lows. Given where we are in the market cycle (phase 3), that's typically where energy is really strong. Economy's running on all cylinders. Geopolitics lead his team to believe that oil is going higher.
The Canadian Energy Index shows that Canadian energy stocks are leading to the upside. The concern is that we're transitioning to phase 3, which is the peaking cycle of a 4-year cycle. If we were starting a new cycle, he'd be very bullish. Markets are toppy, and he's worried about a broader pullback in the net 6-9 months.
Crude corrected quite a bit, while Canadian energy names moved sideways. They're now trying to reaccelerate to the upside. Energy stocks are poised to push higher, and that rising tide should lift all boats. Better to buy the worst stock in the best-performing sector, than the best stock in the worst-performing sector. Energy will continue to see tailwinds over next 6-9 months.
All the banks are doing well in capital markets. If he's correct on the long-term cycle work, seeing a rotation into hard assets -- gold, copper, silver, lithium, oil. That will attract foreign investor interest, who can't invest easily in hard assets but can invest in their proxies (the banks).
He's very bullish on Canada. The banks should continue to work. They're extended here, doesn't mind trimming a bit (especially if an outsized portion of your portfolio). For the most part, technicals are positive.
The US-Canada trade war doesn't change his positioning. He's long term, 5-20 years, so he accepts all manner of macro events. So, he finds businesses that withstand all macro backdrops. The investing greats generally hold a concentrated portfolio and hold them through ups and down. The average holding period for a stock was 5 years in the 1970s, and today it's 10 months. So, it's a competitive edge to hold long. His two main criteria for a stock: the executives and board must be strongly aligned with minority shareholders (meaning they own a big stake in the business); and boast over 20% return on invested capital, which often have moats or other competitive edges.
He didn't expect any. It's relatively de minimis from the perspective of what it really means broadly for Canada.
Most of it is still noise and bluster with Trump's belligerent style and how he deals with everybody, always. He takes it to an extreme, as far as it will go, and then he starts to bring it back. Question is, when does he start to bring it back? And do we want to bring it back? That's the unknown.
From a political standpoint, if you understand the importance of the US elections and Congress staying with the Republicans (increasingly seeming as though it won't), what can Trump do on the trade file to help with that? In line with that, he probably wants a deal of some sort before the elections.
If you're partisan, you already know which way you're going to vote. The moderate person makes up their mind in the last few weeks. And often, it depends on how they're feeling about things on the day they vote. That will determine where the swing vote will go.
He expects the back and forth to continue even into October.
It's everything. But today, it's magnified on chips. Tomorrow, it'll be something else. Three days from now, it could be back to the Middle East.
All those things are relevant. The thing that matters a lot, in the big picture, is earnings. Right now, earnings are still good and growing. Analysts keep revising estimates upwards. As long as that happens, corrections in equities will be small until the market says "Hmmm, maybe this isn't sustainable."
The US administration is trying to do something about interest rates and minimizing the cost of funding all this debt that will be endless for decades.
US labour market was looking better. Now, with a couple of revisions, all that is showing softness. How strong is the US economy when you neutralize earnings? That is, if you take the AI capex spend out? It's still pretty good, but there are a lot of knock-on effects in other industries from all that spending that otherwise wouldn't be there.
Outside of that, he's not sure that the economy today is really strong. Shrinking labour force because of the aging demographic. There's competition from AI, and a skills mismatch in terms of what society needs.
Holding US treasuries pays you a yield, while holding commodities pays you nothing. So there's an element of income when you're talking about foreign reserves or monetary reserves such as gold/silver bars.
Not sure you'd want to hold uranium. For other critical minerals, there's the cost of storage, decay, theft, and other issues. Not practical for a central bank to store things like that. That said, there are critical storage things like strategic petroleum reserves. So there could be an element of a strategic reserve in terms of critical minerals and metals to help with supply constraints from time to time. He'd be OK with something like that.
Central banks understand gold's role in the monetary system. Decades ago, debt to GDP wasn't meaningful; today everywhere around the world, it's tragic. And only going to get worse. Central banks will probably continue to buy gold as a backing to reserves.
If it was just one government dealing with massive debt, then you could isolate it and see the currency get obliterated. Think Argentina or Turkiye. Japan's debt to GDP, for example, is double what it is in the US.
The US is the reserve currency of the world, so it has this luxury that not everyone has when it comes to fiscal prudence. The US debt situation can go on for decades. The question is at what cost to finance, to future growth, to political capital?
Those issues are above his pay grade, but he has some thoughts in today's Educational Segment.
US Government Debt of $40T
Jackson Hole is this week. The market didn't like Warsh's laissez-faire approach to interest rates at the last FOMC meeting. Bonds have been selling off, but not just in the US. It's a story of total debt to growth that probably ends badly.
Larry brought along a chart that shows revenues/expenses of the government as a percentage of GDP. Post WW2, for many decades, revenues and expenses were pretty aligned. Overall debt to GDP came down after financing WW2. Then partisan politics started kicking in over in Washington, DC, with parties wanting to outdo each other. So deficits and debts got crazy.
Today, the amount of debt to GDP is 121%. Debt is $40T, on a $32T economy. Question is: How do we finance all of this?
One of the mandates of the US government is to lower the cost of debt. As long yields got higher, Scott Bessent said a few weeks ago that they were going to buy back some of their long bonds, issue a few more treasury bills, and twist how they raise $$ for the government. There's a hope and expectation that stablecoins will be backed by US treasury bills.
His next chart shows the total cost of US treasury bills, bonds, and the current yield. Of all treasuries outstanding right now, current yield to maturity is 4.55%. The old ones are in the range of 3.6%. So new debt is coming in around 90 bps more than the debt that's maturing. That'll just put upward cost on the debt, and add hundreds of billions to the deficit.
Catastrophic in terms of what it means for future spending and budgets. It limits governments' ability to help when things get bad. Times have been good, and the government's still spending massively. We've been fiscally mismanaged by the lot of them around the world -- Republicans, Democrats, Liberals, Conservatives.
There's a universal hate on right now for long bonds. There's a trade here, but not for the faint of heart (as yields could keep rising). Speculators are bearish on long bonds. Hasn't been like this since the last time yields were over 5%. Price of these bonds is really low. You can use some options to protect yourself. On risk/reward, long treasuries are one of his favourite asset classes right now. See his YouTube channel for more.
Sectors to focus on. Tech, pharma will continue to do well. Those trends will continue and grow. Consumer discretionary like AMZN, Costco, and Walmart will continue to do well. The more cyclical plays started strong, but are now having a difficult time because the economy is much more choppy. He wants to be in the sectors that did well during the pandemic, as they will continue to perform now.