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

Perception that global growth is slowing. There will be a recession, he just doesn't know when. Looks like global economy has peaked. Debt levels are at record highs. Feds have taken a breather and given markets a boost. Policy makers don't have a lot of arrows in the quiver now. He never tries to guess where the economy is going, there are too many permutations and combinations.

Yield curve inverting. He doesn't like to say because of A, then B will happen. Bond markets have already reacted by knocking rates down. Who knows if yield curve will stay inverted for a long time. Globally, investors aren't afraid to buy Spanish and Greek low-interest credits anymore. German yields are 0 or negative, so the idea is just to not take on any risk. We don't see deflation around the corner.

US high-yield bonds. For US high-yield bonds, he hedges the currency. No sense buying a US high-yield bond fund, if the CAD rises from the 75 cent level. There is a US high-yield bond ETF that hedges the currency so you don't get burned. Do not buy US bonds unless you're going to have a currency hedge.

He isn't spooked by the inverted yield curve, given his long experience. He remembers Paul Volker who induced the 1981/2 recession when the prime rate hit 22.5% and the 10-year bond yielded 14%--a much-higher yield curve than today. The inversion now at 2.3% is a lot different. The US Fed raised short rates too far, too fast in December and took its foot off the gas selling longer-dated securities. It had continued, that 10-year yield would be 50-100 points higher. So, the inverstion is caused by regulation: on the long end by stopping selling bonds; on the short end by forcing up the Fed's funds rate. Now, we've never seen a recession with interest rates this low for so long, though it could still happen....Canadian banks go up and down like any stock and shorting is an investor's right, but our banks are nothing like the ones in America during the Recession. Defaults from consumer debt are still low. The dividend rates on the banks put a floor on the stock prices, and it's unlikely any bank will cut their yield.

Market. Stress in the US housing market. He presented a graph of the percentage of households who own homes and pay more than half of their household income to mortgage costs. The last peak in 08/09 had 17% doing that and now it is 23%. So this is a sign that leverage is a problem, even if we have low interest rates. However the credit core back then was better than it is today. This is another reason why interest rates cannot go up.

Canadian Banks. [Caller needed money soon]. Having a major use of the money in a year from now you should SELL, SELL, SELL, NOW. In the next recession Canadian banks will fall at least 30%. See his educational segment.

Educational Segment. The invested yield curve and is a recession coming? Germany forced interest rates negative recently. Banks borrow short and lend long and the spread is the profit. When funding rates go higher than lending rates, banks lend less because they make less money. At this point corporations pay down debt. There is an index out of New York that measures the likelihood of recession and this is peaking up. In '80/'09 long term rates in the US went above the short term rates for 18 months before the recession actually started. They stayed inverted 6 to 12 months before the Fed started bringing rates back. At this point, credit will contract. People are trying to buy longer term rates. The economy is shrinking. The economy shrinking will happen because of trade wars. He is as defensive as possible at this point. He is in capital preservation mode for the next couple of years.

Market. The inversion of the yield curve tells you only ONE thing and that is that there WILL be a recession, but it does not tell you WHEN it will be. A recession is like death and taxes – it will happen, but when? Some of the best returns in the market are between inversion of the curve and when the economic ACTUALLY goes into recession. He will be watching carefully. He can't tell you if it is 12 or 36 months to recession. If businesses have access to credit then the economy can grow. Utilities had shrinkage of 5% in EPS last year but were one of the best performing sectors. People bought the ETFs because they thought they were defensive. Today the utilities are so expensive that it is pointless to be involved.

Resources: He is zero weighted right now.

It was a boring day, though Asian came off a lot last night, but that's good for investors. This will allow investors to get back into the market to buy stocks on sale. He's neutral-slightly negative in terms of outlook and sees this time as a chance to take profits, build cash and/or but bonds. He doesn't fear the market, though. Today, Apple unveiled its move into TV streaming, but it lacked detail. For shareholders, this was another reason to be excited over Apple again. It will take time for this avenue to take shape. Apple is fairly valued now, though probably has some upside. There are tech opportunities elsewhere too.

5-year US dollar index. If there's one thing to look at to worry about, the US dollar is interesting. Nascent uptrend into late fall caused markets lots of problems. Started falling late November. Strong US dollar is not good for lots of reasons. Investors are anticipating good outcomes for Brexit, US-Europe, US-China trade relations. EMs benefit from weaker US dollar, as well as US global corporations. Weaker dollar is good for markets. General downward trend from 2016 should continue if we want markets to remain positive.

S&P chart. Bottoming pattern. Not surprised to see a bit of chop. By and large, pretty positive. May go sideways for a bit. Lots of people are concerned we're in late cycle. He says we're more in a mushy mid-cycle. Base metals and technology have been strong.

TSX. Has moved up faster off the bottom. Want to see it break through, should see some softness first, especially in energy and base metals. Some of the defensive plays will come back in the picture after the fall selloff.

Copper. Trying to make a bottom. Getting back above $3 is critical. Goes back to the US dollar, to which it's correlated in many spots. Expects copper to hold in here, and China is the biggest determinant of where it goes.

Market. The market is reactive and the FED has done a 180 from tightening to extremely dovish. Markets like that. Investors should be realistic about what the FED is signaling. Things are not as buoyant as they were in the US as previously perceived. Corporate results will be weaker this year. They were boosted last year from tax cuts. They will be up only mid-single digits this year. We should be looking for growthier stocks with higher predictability levels. 2019 could actually be better than some people think. It could be a decent year for the markets.