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

Gold and oil outlook in Canada No idea where either is going. But doesn't see sustained long-term upside or downside. A company can be the best-run oil company, but they don't control the price of what they sell. We are in an economic slowdown, so oil won't fare well. If the Russian war is resolved, oil prices will fall. To own only oil and gold is risky.

Inflation continues at a fairly high rate but there have been some price declines in some commodities, used car prices, shipping rates. The two biggest areas of inflation are food and shelter which will likely continue for some time. Consumer and business sentiment are at all-time lows which historically means that the market could be near the bottom. This could be considered a bright spot in the market turmoil. Feelings are very pessimistic everywhere which could mean a better second half. The short term investor should continue to trade the sell-offs and rallies, For longer term investors, one to two years, there is lots on sale.. Some strong companies are down 50, 60 or 70%. Investors can take advantage of the very negative mood in the market.

The question was on Canadian banks. There are recession worries so the banks are trading at quite interesting yields, historically. He recently added BNS and BMO to the Income portfolio and will add more. With a long term horizon, 5 to 10 years you will have a great yield.

It's breathtaking how yields slid this week. (The U.S. 10-year fell below 3% today.) If you go back to November 2018 to the highs of June 2022, the 50% retracement for yields is 2%. Those two dates were a double top for yields. He expects a respite for yields as commodity prices (gas and wheat) come in. This may convince Jay Powell to take his foot off the gas and result in yields come in from here.

Markets 2022: The Road Ahead. Topics include Federal Reserve rate hikes, Covid 19 economic fallout, Russia-Ukraine war, sanctions on Russia, inflation, market volatility. The guests today are: Earl Davis - Head of Fixed Income & Money Markets, BMO Global Asset Management Patricia Perez-Coutts - Portfolio Manager, PenderFund Capital Management John Zechner - Chairman & Founder, J. Zechner & Associates

It's been a wild ride already this year. Patricia: This is not the first time it's happened. We have to be patient investors at all times.

What does your world look like? Earl: He feels like the fixed income guy crashing the equity party. We'll see peak yields for the year shortly, by the end of July. Things will then calm down until January, when there will be a re-evaluation, depending on where inflation is. Base case is higher rates, not just for 2022, but also for 2023. The storyline will continue for the BOC. 75 is the new 50. He sees at least 2, and then they go back down to 50s. It depends when peak inflation hits, which he sees as September. But if it's not, then all options are open.

Stocks vs. bonds. John: For most of the year, it's been an odd situation where both stocks and bonds have been decimated. He concurs that peak interest and inflation will be relatively sooner. In the past month or so, you've started getting divergence. On extremely down stock market days, the bond market rallies.

Recession jitters and emerging markets. Patricia: The picture is not the same everywhere in the world. Europe is perhaps on the weaker side than in NA, given its proximity to the Russia-Ukraine conflict. The basis point increase was just 25, a very shy statement compared to the Fed and BOC. In some countries, including Asia, inflation is much more contained.

Opportunity amongst the pessimism? John: He doesn't want to be Pollyannish, but he agrees that there is. We've heard before that stocks are one of the few markets that when things are on sale, people run away. Look at valuations that have come down and pick your spots. Ultimately, things will be fine. We'll have a short, shallow recession. Pay attention to earnings in the next month. He's been using cash to add to positions.

What to watch for in bonds. Earl: Coupons are much higher now since bonds have sold off, and that's the long-term gain that you'll get. He hasn't gone long credit, but a number of names are on his watch list, and he anticipates buying over the summer.

Political leadership and spending to battle climate change. Earl: A lot of political dynamics globally, not just in the US. Inflation handcuffs politicians. That's why he thinks interest rates are going much higher, because they have to crush inflation. #1 reason why politicians don't get re-elected is inflation. They don't want a recession that's caused by higher rates and demand disruption. So they'd rather have a recession caused by higher rates, so they could lower rates, and then they could spend.

Implications and extent of stagflation? Patricia: Not a situation of stagflation. Whether inflation is entrenched depends on expectations by central banks and how it's managed. Doesn't see expectations getting carried away just yet. Stagflation has only happened once or twice. If we manage our behaviours to contain demand, the supply will come in shortly. John: We're in stagflation right now, with inflation running 7-8% and we're probably into a negative quarter in the US again. But the question is how long will it last? The economy is turning off in the short term, and that will reduce some of the inflationary pressures. Inflation is a bigger political issue than higher interest rates, because it affects more of people's day-to-day living requirements. Earl: When he worked at a pension plan, the #1 environment they did not want to see was a stagflationary one, because there's no safe place to invest. Everything net loses real dollars. That's why it's important to break the back of inflation.

Deflation. Patricia: News story about companies paying customers not to return unwanted items. The cost of holding items in inventory is much higher now. If you extrapolate over the next 6 months or so, this could actually be dis-inflationary and affect perceptions of inflation. It wasn't so long ago that we were worried about deflation, not inflation. Though inflation is not as high as it was in the 1970s, everyone is feeling it abnormally in this environment.

Commodities this year. Andy Bell: Surged after February 24, when Russia invaded Ukraine. The world was worried that Putin's attack would curb supply on major commodities. Oil spiked into March, but hasn't returned and stayed at that level since. Oil is up 40% this year, but down from its peak. Natural gas in the US has had an amazing year, but has come off a bit due to the explosion at the LNG export facility. The world is tight nat gas. Warnings of disruptions in the hydro supply this summer could make nat gas prices spike. Copper is actually negative this year. A breakdown of industrial metal prices this year is possible. Corn surged too, and has been moving up recently due to fears of the Russian naval blockade on millions of tons of Ukrainian grain. Bottom line: Prices spiked after the invasion, but have since given up ground on recession fears.