Stockchase InsightsA Comment -- General Comments From an ExpertA CommentaryCOMMENTJan 19, 2024

Yes, unless it isn't ;  Depends what the post from Truth Social is at 3 am. The most likely scenario is that we're through this particular bizarre phase. Whatever "exogenous shock" is going to hit the market probably won't be Iran, but could be something totally different. There will be a bit of a hangover in the markets, just because after these traumatic events everyone's on a sort of mental high-alert.

Energy prices will probably continue to come down. Neither the US nor the president has any appetite to renew hostilities with Iran, as Trump really is looking down the barrel of the midterm elections. A lot of what happens in US foreign and domestic policy, as well as monetary policy, will be governed by the looming elections in early November. Those could determine whether Trump can continue to run things the way he has been, and he's going to do everything possible to achieve his desired outcome.

The pullback in the gold sector, for one. He's not asking anyone to catch a falling knife, but thinks the sector will continue to rally. The lack of faith in fiat currencies and government-issued currencies will be here for a while. Other stores of value will continue to be important.

We saw higher-than-expected inflation, thinks those numbers are understated. A lot of that inflation is because of supply constraints on oil, so it's not demand-driven. We may see inflation come back a bit, but governments aren't going to spend any less money.

Buying and selling.

If you're not sure whether to buy something or not, buy a little bit. It gives you confidence to buy a bit more, and a bit more, as you ease your way into a position. 

Selling works exactly the same way. If it goes down, you're glad you sold some. If it goes up, you still own some.

Earnings have been strong coming into 2026, being estimates, and GDP is higher than in Q4 2025. The US consumer has been robust. The one glitch is rising inflation because of the US-Iran war, raising inflation and rates. The Fed is hinting at a rate increase later this year, but should return to better inflation numbers later. The Fed is worried about inflation, still targeting 2%, which hasn't been at that level for 5 years. Nothing wrong with the Fed adding liquidity to the system in 2020, but they never pulled back from it; they should liquify only to save the economy, then stop it.

Are many positives with the Canadian banks: strong cash flows, buying back shares, raise dividends and expanding into other businesses and territories like the U.S. Also, M&A, retail, mortgages and asset management are doing well. But the PEs are much higher than before (higher than American banks). Don't sell them here, but don't expect this momentum to last. Banks are in the sweet spot.

Be cautious. We've seen this before and it ended badly. Many good things are happening: the US economy is doing well, Canadian jobs numbers were solid, the housing market is firming up a little, the AI boom. Though he's skeptical, the Middle East war is de-escalating. We're near the end of the bull market: are record-high multiples and the market should mean-revert in a correction. U.S. 10-year treasury notes are not being issued because 85% of the issuance is now at the short end. Even defensive stocks aren't cheap. Only energy and tech have gained in the last 12 months; all else has done poorly. In Canada, telcos are cheap because of competition and regulatory threats. Canadian banks have shot up to all-time high PEs. He's not in a hurry to deploy new capital.

Inflation should decline when gas prices normalize, assuming the peace holds (between the US, Israel and Iran). Meanwhile, there'll enough excess supply in other regions in coming years, such as Venezuela. However, it's projected that after 2032, oil prices fall to the $50 range. The premium is in the next 18 months before it reverts to pre-US/Iran war. Historically, in Q2 and Q3 before a US Midterm election there's more market uncertainty--will there be a turnover in Congress? Congress typically spend less money in those years. Overall, upcoming earnings will be pretty good again. So far so good, but much is due to massive spending in AI. Debt: he's more worried about spending by world governments than corporate debt.

These ETFs include some fixed income, but fixed income no longer offers a good return for the risks you take (government debt, inflation). You won't get that income if you're senior from these ETFs. Instead, look at private credit markets for that higher current income.

Look at Globex's corporate ETFs with no annual dividends, yet offers long-term equity growth.

The changing role of the U.S. Federal Reserve. Last week's new Fed Chief was surprisingly hawkish, since Trump appointed him to lower interest rates. Warsh is restructuring how the Fed will communicate with investors. This adds uncertainty and less transparency. And more volatility which is not necessarily negative. When 2008 hit, the balance sheet of the central bank became a policy tool. Critics of Alan Greenspan point to the late 1980s when he slashed interest rates to zero that maybe led to the real estate bubble. Since 2008, there's been a massive ramp-up of the Fed's balance sheet as a percentage of US GDP is what Warsh will manage, to lessen than past Fed chiefs. Warsh's intent is to lower the bond coupon of 3.36% and the T-bill yield of 3.84%; his hawkish stance will help the long end of the curve, but hurt the short end. It will add volatility.

Expects it to retrace. If you assume that peace holds with Iran, his suspicion is that the higher oil prices that we've endured for a while will kill some demand in lower-income countries (such as Pakistan and Sri Lanka), but not make much of a difference in Canada and the US. When supply comes back, he expects price volatility to the downside (as long as peace holds).

He doesn't know, and he's not sure anybody does. His own view is that the oil price runup that we saw was more a function of an anticipated supply shortage, while countries were able to work off inventories. He's told that there are ~200 loaded cargoes north of the Strait, and ready to proceed through. He suspects that producing countries (with the possible exception of Iran) have pretty good stored inventories that they couldn't move. 

This is all speculation on his part, based on whatever he's been able to read. To say that the data is conflicting is an understatement.

To the extent that the oil price falls off, his suspicion is that the market will begin to discount the fact that we're going to have shortages in the future that aren't war-related. Rather, they'll be related to the industry under-investing by ~$1B a day in terms of sustaining capital investments.

Over the next 5-10 years, he feels good about precious metals and mining. In the very near term (this summer), he wouldn't be surprised to see mining stocks in all shapes and forms go down. Two reasons for this: rising US interest rates plus higher oil might cause a synchronized global slowdown.

If mining and oil/gas stocks are sharply lower, this summer would be a lovely time to establish positions. Both industries should do very well over the next 5 years.