Stockchase InsightsA Comment -- General Comments From an ExpertA CommentaryCOMMENTFeb 07, 2025

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.

Gold price should do well over the next decade. Not so sure it'll do well over next 2-3 months given relatively high US interest rates. Hawkish stance of the Fed will be bad for gold in the near term. Gold will do well because of high US debt, high US deficits, and unfunded entitlement liabilities. 

He's a short-term bear, but a long-term bull.

And that's why he likes it. Natural gas has been in systemic oversupply in NA for 5-6 years. Oversupply in the US is beginning to take care of itself with massive investments in infrastructure. Canadian investments have been constrained politically. 

He wouldn't be surprised to see nat gas prices trend lower over the summer. Next 3-5 years should see them higher. Canadian nat gas is a more leveraged play than US nat gas, as Canadian companies are selling at higher discounts. The current Canadian PM is anti-energy, but also pragmatic on the need to fund deficits. If the political headwinds disappear in Canada, companies like PEY and BIR will do extremely well.

Really believes in the intermediate future of uranium. Current supply deficits. Political winds around uranium in the US have changed from vilification to subsidies. 

He is bullish in the short term. Rapid decline in price has everything to do with vastly increased production, especially laterite nickel in Indonesia. That's changing, as Indonesians are angered by the environmental destruction; government is being forced to crack down. Laterite mining is energy-intensive, and a lot less pleasant at $90 oil. So it's no longer a significantly better cost proposition than the sulphide nickel that Canada produces.

It's done too well of late. Suspects an economic slowdown in the very near term due to the impact of higher oil. So he's a near-term bear. In the long term, he's an incredible copper bull.

Underinvestment for 20 years. Use continues higher for AI plus for the electrification of the world. Five years from now, we'll be rationing copper by price.

Difficulty is between now and, say, October. But that's not enough to put him off.

If we're facing an economic slowdown due to higher oil prices, it should probably appear by then. If not, then the game is on for everybody. Over the summer, he's fairly cautious on the economy (both US and Canada) and on commodity prices.

Operation excellence. Definable development upside. Project pipelines with visible continued revenue growth. Making sustainable capital investments necessary to maintaining production (rather than distributing disproportionate amounts of cash back to shareholders). Dividends and share buybacks are good up to a point, but it's now reaching dangerous levels (particularly in the US). He's not in favour of cannibalizing a company's balance sheet.

Names he owns include CNQ, TOU, and (until recently) ARX.