A Comment -- General Comments From an Expert (A Commentary)

Know that markets can go down and be prepared to sell stocks - don't be stuck holding them. The discipline of selling is the hardest part. Buying stocks is easy.

All these concerns (Iran war, software, private credit) look dramatic but are fairly benign, believe it or not.

The beat that the market's marching to now is the inflation print from Wednesday morning. The market's ready for the story of:  OK we have elevated oil now, how long will that last, and what will that do for inflation? But it was not ready for an inflation print from before the war that was far too high. 

For him, that means that the rate path was not what we thought. It means that the market multiple was not what we thought. And we're seeing the effects in the market.

Every time you're in a bull market, you always have narrative shifts and tests. Everything we're seeing now is consistent if we can get to a place where earnings growth resumes, inflation is in check, and interest rates do start to go down.

But we're probably not going to see that for a while, even if the Iran war were to get under control and the Strait were to open tomorrow. We can always get a rally, but we're still dealing with inflation being too high even before the war started.

One of the reasons for inflation was US tariffs. Those tariffs do get passed through to the economy. The long-term trajectory of AI is a lot of disinflation. 

So the disinflation story is intact, but it depends on how long it takes oil to start to come down.

When you have market carnage like this, everything gets attacked. While market multiples still need to come down for the likes of banks and industrials, tech already took its drubbing. Tech is the belle of the ball.

Private equity is selling off. Where's that $$ going? Might be going into the REITs. He likes the ones with a more stable profile, such as CRR.UN and the retirement homes.

Might be some fair value in the retail ones. Office ones have been really tough, with one thing after another.

Everybody knows the story on gold -- hedge to the US dollar and to geopolitical uncertainty, with central banks buying. It goes up big after shocks like Covid and war. 

But were precious metals priced for inflation in the system to the extent that we've seen since Wednesday? It might take a while to open the Strait sufficiently. So we don't know when oil will come down, and it might even go higher. Investors in these commodities weren't ready for inflation to be at this level.

First gold fell off, and then silver did the same thing. It's a tough call. For silver and gold, you're relying on the fickleness of investor appetite. A much tougher theme to play than just owning tech stocks that are changing the world.

He owns silver and gold, but bought at way lower levels. He'd rather put new $$ into nuts and bolts that he can be more sure of for the long term.

Great question! It always breaks a little bit. Usually a stock breaks a bit, and then rights itself. If it leads to a deeper correction, then that's a different story.

If he's correct and we have another 3 weeks of peak non-visibility for this hot war, traffic through the Strait starts to move better, and oil prices stabilize, then many stocks are great buys right now.

One of the huge issues that the US should be facing is what happens to Iran? Does the society there collapse? In which case, they're going to have to have more boots on the ground. They've already promised a bunch of Marines, but now they're talking about much more than that.

We've seen this before, in Iraq. Costs just spiral away. That's a really big concern.

It has the potential to get a lot worse, as it did the two other times the US intervened in the Middle East.

No. There isn't really much benefit to individual taxpayers. Most benefits are to big corporations. 

The US balance sheet is weak. The problem is now that it will result in a huge increase in the deficit. That tends to push down the USD and increase inflation.

Let's go back 26 years to 2000, when we had the last big-tech explosion. It's not that the companies weren't all needed. The problem is that in the short-term, if you way overbuild AI server farms, utilizing all that capacity is in jeopardy and so is the profitability.

You can even go back to railways in the 1800s. It's happening all over again. Vast overbuilding, and then you get a big correction in stocks. And he means a BIG correction, like 85%. This isn't trivial. 

In 2000, even great companies like CSCO had huge setbacks, though that company came through OK. We're facing very much the same kind of issues. There's the initial euphoria, and then a big setback.

Everybody's talking about AI. But who's really using it, and who's using it to make money in a substantive way? We may well get there, but it's going to take a while.

But in those big setbacks, you get some marvelous trading opportunities. That's what you need to watch for.

He looks at gold in the context of the US balance sheet, which is brutal (and potentially getting a lot worse). In that environment, tend to get currency weakness and renewed inflation. 

How do you protect yourself? Historically it's been precious metals, high-quality industrial stocks, and unlevered real estate. Perhaps gold got a bit ahead of itself. But does he see any improvement in the US balance sheet? No, certainly not with Donald Trump in charge.

We always have to be on the lookout for change. After 18 months of great performance from anything that was economically sensitive or an inflation hedge, the nature of the market has been going through a shift in the last few weeks. 

So far this year, defensive assets have done better. That's a bit of a tell. Energy was doing well leading up to the conflict in Iran, and has been doing well since. Consumer staples and energy doing well coupled with weakness in technology and financials is not a great combination.

The percent of stocks that are in long-term uptrends has deteriorated over the last 6-7 weeks, in Canada and the US and internationally. 

Markets are assessing a higher degree of risk. The longer the disruption in Iran and the Strait of Hormuz goes on, the longer you have to take that into account in your calculations.

His firm is sitting on a bit over 20% cash. His biggest weight would be energy. In general, they're being a bit more cautious.

As we're going through this correction, he'd encourage you to be building your "farm team" -- a list of companies you'd like to own. As things start to show some improvement, then you have names you can start entering.