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

Investors know that a lot of capex is being spent on AI, but they don't see people actually buying it. AI is truly transforming the whole modern defense landscape. Enables smarter, faster, and more autonomous military capabilities. 

His bullseye chart has 3 layers. Bullseye is all about AI-powered defense platforms and systems. Includes autonomous drones, robotic vehicles, smart weapons, and so on. 

Second circle includes PLTR, LMT, and LHX. It's all about decision-intelligence and command platforms. AI augments battlefield awareness. 

Outer circle is more about dual use of cyber AI and defense infrastructure. PLTR is in this circle as well. Supports secure communications and AI-driven cybersecurity. The old-school players are in here -- RTX, LMT, and NOC. But there are spaces, especially when it comes to the drone side.

Investing 101: What is Keynesian Economics and When Did it Become Popularized?

When we think of the current economic structure and principles that we use today, most of them are using Keynesian economics. Prior to 1946, Classical economic theory dominated the principles followed by market participants, and it wasn’t until the Great Depression in 1929 that political leaders sought out new theories to assist the economy's recovery.

Classical theory was rooted in the idea of supply, and more specifically that following a recession the economy would balance itself out, as businesses would continue to create goods and those goods would be bought by individuals. When the Great Depression hit in 1929, it lasted for 10 years, and it was devastating to the US stock market, GDP, and employment. Demand for goods was so low that economists were unsure of how to rebuild the economy since traditional theories relied on demand being readily available to soak up excess supply. John Maynard Keynes developed the Keynesian economic model, which was rooted in the idea of aggregate demand. Keynes proposed that in times of economic recession, the government should begin spending money on infrastructure, tax cuts, and other forms of spending to force demand in the economy and restore a balance between supply and demand. This is what brought the world out of the Great Depression in roughly 1939 – the government began increasing expenditures and introducing programs that would bring back full employment.
Unlock Premium - Try 5i Free   

Today, core US inflation is up which translates to positive news. Tariffs were supposed to impact this July number, but is up only slightly from June. Some research says that a third to two-thirds of the tariff impact is being absorbed by companies instead of being passed onto consumers, such as inventory build-up. But in time, companies will inevitably pass the tariff impact onto consumers. However, credit car delinquencies show consumers are growing strained. We still have to watch the data. It could take up to 12 months before we see the full impact of tariffs onto consumers. The US Fed between announcements issues forward guidance, which is a softer way to make a rate announcement. Trump is strongly pressuring the Fed to cut rates.  

Depends where you look. Yes in some places, not so much in others. It'll be covered more in-depth in today's Educational Segment.

This week we get CPI, PPI, and retail sales. If we think about how the intersection of growth and inflation affect the world and the consumer, this is the big week for markets. We should start to see the beginning of the tariff impact. 

Right now, given the weak employment situation, the tilt is moving toward a rate cut in September. But we'll see. Current makeup of the Fed Reserve Board is on pause. Jackson Hole is coming up in a couple of weeks where, if they're going to think about cutting, they'll almost certainly give that indication.

The worst economic outlook, bar none, is stagflation -- when prices are rising and growth is slowing. That, to him, is the biggest risk of a lot of these policy choices by the US administration. We have to get through this period. That's a big challenge. If he had a crystal ball he could tell you exactly what to do, but he doesn't. 

If you look at the polymarkets and some of the betting pools, the expectation is that we get a slightly better-than-expected CPI number. So we could see equity markets continue to perk up. The YOY report for CPI is expected at 2.8%, and that's tomorrow. The betting markets have it coming in at 2.6-2.7%, and that would be flat to last month. If we get that, markets will grind higher.

You can't not like them, except for the breadth. Many companies are doing well, but the concentration of earnings growth remains very narrow in the big tech areas. That's not robust. President Trump is trying to change that, but it'll be a couple of years before we see the benefits of less regulation and a broadening of the US economy. 

He's not a crypto expert. Exposure at his firm is done very conservatively. He's long bitcoin, which is the generic way to play, with an options strategy embedded. This mitigates the risk on the downside during periods of high volatility, while capping the upside. 

Blockchain is very real, the technology is very real. But when you buy a coin, you don't own the cashflow and that's the problem he has with the sector. Could bitcoin go to $1M? Absolutely. Limited supply and lots of demand. It's all about whether you can handle the volatility along the way.

He doesn't recommend this for everyone. Thinks a lot of these products turn out to be Ponzi schemes. 

For the HISA ETFs that came out, the regulations were changed. So there's no real benefit in the public versions of these. There are, however, still some benefits with the private ones. So you have to look at what the additional yield is.

He loves ZST.

Inflation

White House is pretty adamant that their tariff policies aren't inflationary. Last week, we saw President Trump nominate Stephen Miren for the Fed Reserve Board. If you go to Larry's post from today on BNN, there's a link to a paper by Miren. Go read it. It gives you the vision of why they're doing what they're doing. One of the reasons is the hollowing out of the US middle class in terms of jobs.

Larry brought a chart titled "Inflation pressures intensifying". Looking at the ISM prices paid survey, the prices paid component has a direct correlation to CPI. Prices are going up. Questions are:  by how much and when will it start? You may see it start this week, but prices are going up over the next couple of quarters.

The Fed will want to know if this is transitory. Last time prices went up, the Fed was late. Now they're on pause. Maybe they're making a similar mistake in the other direction. 

Miren believes that the way Trump is doing this is not going to be inflationary, based on how currencies adjust around the world. Lots of debate here. 

Why are they doing all these things? They're trying to improve growth, trying to make jobs better in the US. The chart titled "Manufacturing employment" is part of Miren's paper. Looks at the total number of manufacturing jobs in the US post-WW2, and as a percentage of employment overall. Globalization has led to the gutting of the US manufacturing sector, and this is nothing new. Trump's policies using tariffs is to change that whole picture.

Wall Street appears to believe the proposed outcome depicted in the chart, and that inflation will either not come to pass or will be transitory. We'll see. For the next few quarters prices are going up, and we'll see what the policy response is from the Fed. Suspects they'll be on hold unless the US employment picture continues to weaken, and that's the right move.

The TSX and U.S. markets are somewhat linked and there are several headwinds such as high valuations. In Canada we're more resource focused and energy is in the de-valued category. We're poised for continued strength because our valuations are at a relative discount to the U.S. This gap will close as earnings from TSX companies are likely to increase and there is increasing confidence in the market. With no trade deals being made this will likely add to the volatility but he sees the market higher in six months in spite of the overhang keeping it somewhat weak. He's not even sure if a trade deal adds much value. He doesn't think we are headed for an all-out recession in Canada. Stick with diversification and value deals.

The question was on his outlook for oil and gas. He feels that gas is likely to stay flat for a while. The full production of LNG is not ramping up for 8 to 9 months. Oil as a global fuel has a low growth forecast of around 2.5%. There is an appetite in international markets for natural gas. In Canada it trades at a premium to Europe. Coal production in the U.S. is in decline and being replaced by natural gas. Natural gas is a transition fuel to the full use of clean energy and will be around for quite some time.

The question was on crude oil. OPEC has brought on some production but the worry is that the discipline with restraint hasn't been there. Globally the traditional bases are rolling over and he is bullish on Canadian energy. Oil is not renewable and he sees a slight decline in the U.S., Russia, and Mexico too. The western basins are not in the same struggle as others and we are sitting in the crown seat. Getting it out of the ground is what hampers us and that needs to improve. Trump's tariffs on Russia and India help.

Investing 101: Excessive Trading

Excessive trading creates transaction and taxation costs that are hard to overcome.

Tax drag can be significant. Trading in a portfolio means an investor not only needs to be right by calling 'the top' on the stock they are selling but also be correct on the next investment they purchase and finally have that investment be so good that it overcomes the potential taxable gain created when the initial investment was sold.

This sets up a high bar for investors that trade a lot in their portfolio. We talk a bit more about when to sell here.

Think in terms of years, not months or quarters.

This one is so important and probably the one that gets ignored most often by investors. No one wants to wait 5 or 10 years to see their portfolio provide gains. We want it all now. Unfortunately, patience is key in a portfolio. Set up a structure that makes sense for the long-term and don't change it unless your situation sees a material change (or if it was inappropriate to begin with). 

Markets take time to generate returns and compounding takes decades to have the true power of compounding returns felt. It will be worth it though. 

Similarly, companies do not execute a strategy in three month periods. It takes years to change a large company and for its strategy to be fully rolled-out, so an investment in a company should in-turn be viewed in a matter of years and not quarters.
Unlock Premium - Try 5i Free   

The unemployment rate remains the same. But the job-loss number isn't too surprising given that we are expecting a bit of softness in the Canadian economy in the middle 2 quarters of the year. Jobs market will continue to be a bit choppy, especially with the push and pull between part-time and full-time.