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

April's uptick in inflation was expected, though surprisingly sharp due to pent-up consumer demand and yet we still have bottlenecks in the supply chain. She expects this demand to moderate later this year and inventories are restock, which will alleviate price pressures. Definitely watch inflation--if it remains high over a period of time, the US Fed will have to raise rates earlier than 2023, then stocks will pull back in reaction. US unemployment is 6.1%, but about half that pre-Covid. So, there are still a lot of people looking for work, but as things improve, people will find jobs. Also, caregivers are at home taking care of their kids, but in the fall these kids will return to school. Pullbacks are buying opportunities, because earnings are beating expectations and reopenings will continue to be driven by vaccinations. All are great tailwinds.

Lumber stocks Lumber is highly cyclical, so don't hold them but rather eventually sell them as lumber prices turn and supply catches up with demand. Lumber is now in a weird space because prices are rising, yet there's still demand. You can still hold them for a little longer, but really watch the price turn and inventory increases.

The markets are up 11% this year, but it could give a lot of it up in order to digest all the bond issuance from the stimulus. There will be upwards pressure on interest rates. Inflation is front and centre, and this will be here for months to years.

Gold. Geopolitics does not directly dictate selling equity but what is happening in the Middle East seems to be spreading. It speaks to polarization across the world of politics. It could feed into inflationary pressure.

Commodities. Seeing a lot of supply squeeze and it is not new demand or demand pull. The supply shock is temporary. Are costs and prices going up? There are parts that are, and it could lead to a permanent higher plateau. More temporary in nature.

Educational Segment. Gold. It looks like today, we might break out of the 200 and 50 day moving average. In January, we had a breakout but that did not last on a weekly basis. Need confirmation here. The chart may look bearish for gold, but if we look at it from another perspective, it might be consolidating. In multi-year, you get a more bullish tilt. The fundamentals make clear that the inflationary aspect and negative real yields is pointing to an uptrend. Crypto has taken a lot of flow from gold however. A weekly close of $1850 could see gold go up further.

Market. There is reason to be more bullish on Canada. For 9 of the last 10 years the US market has outperformed the Canadian market. A lot of it was due to multiple expansion. Canada never experienced any of the multiple expansion. The US market could contract and then the Canadian market would outperform. Energy and materials are about 25% (vs. 5% in the US) of the market and during inflationary times these tend to do better. Banks are 20% of the TSX and do better in rising interest rates. He still sees value in Canadian banking stocks because of the tail winds: increasing loan growth, increasing interest margin, release of reserves and excess capital in the hands of the banks.

He expects the Fed's Powell to keep interest rates low in order to boost employment levels, even though there's pressure to raise rates and to allow higher unemployment. Also, if interest rates rise, they tend to keep rising and this could lead to recession which sparks the need to issue more stimulus (which he doubts in a divided Washington). Alternatives to raising rates include allowing gold mines to issue more copper as a buy-product and China slows its orders (their economy is starting to cool); US drops tariffs on Canadian lumber to reign in those prices; plastic prices will plummet as plants they were shut down from recent storms restart; farmers buy needed equipment, plant a lot more and that will drive down those commodity prices; Permian basis drillers produce more which pushes down crude prices; Taiwan Semi shifts emphasis to car chips; the exodus from city to country ends (with Covid); steel mills add capacity; homebuilding slows as does demand for appliances along with need for metals, tech disrupts expensive goods.

Inflation. There are several risks to the market. Valuations in some places are dangerously high. The data is mixed on inflation. We have clearly seen inflation rates kick up. We must be prepared for persistent inflation. Must position portfolios so they work for both environments. There are also taxes being hiked that are changing portfolio allocations.

Cryptocurrency. There has been a past for them. Right now, it is a lot of speculation. There is little fundamental value, yet we are seeing them used. There is enthusiasm for them. The concern is that there is nothing anchoring their valuation. It is a pure momentum play. Likely to see central banks issue cryptocurrencies which could take the wind out of these private cryptocurrencies.

High Yield Bonds. It is a tricky place to be. The credit spreads are pretty low, which means the prices are high. Going through hundreds of bonds to balance risk with returns. Does not look at junk since risks are too high. 4-6% is possible, but you must do deep research in order to find good high yield bonds.

Active versus ETFs. When you own ETFs or index funds, your money is concentrated in high multiple plays. For example, investing in the S&P500, the top 5-6 stocks accounts for 25% of the market. Risks of higher inflation and interest rates means you have to be concerned about high multiple stocks. Companies that rely on higher future earnings will be worth less due to discounting the future more.

Portfolio in retirement. The intermediate solution is to create portfolios that have different target yields on the equity side. You give up a bit of appreciation but you can sleep better knowing you get the dividends. On the other hand, putting together investment grade and barely high interest bonds to get 3-4% yield on the fixed side. Banks are great places to put money in since they pay a dividend, tend to do better in higher interest environments, and it's a reopening play. Energy and industrials are similar.