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

Markets. The S&P 500 is showing wide divergence in stocks, more than is historically normal. A lot has to do with different central-bank policies and the secular changes in the economy. The US$ is going to continue to show strength against other world currencies, because the US central-bank is ahead of everybody else. The European Central Bank and the Bank of England are in a very expansionary monetary policy mode. Bank of Japan is considering “helicopter money”, which could consist in part of having the government issue bonds to the bank of Japan with no maturity and zero interest rates.

Gold. The argument for gold on the basis of negative real rates is valid. Gold has certainly been tracking real rates. In an environment where it costs money to put your currency in a bank, gold is pretty attractive. Money printing is one of the core arguments for holding gold. It is a purchasing power hedge, and has been for a long period of time. When you look at what is going on in the US, M2 is growing at 6% a year. There are not many periods in history where you can go back and see where you have been printing Fiat currencies at that type of rate, without having some type of inflationary response down the road. Gold is a purchasing power hedge that protects investors from that depreciating value of currencies. He doesn’t see gold going back materially, and sees this as a buying opportunity.

Platinum? A good portion of demand comes from industrial applications. It is a little bit like silver in that you not only have to get the monetary component right, but you also have to think about what is going on with industrial demand. At the moment, most industrial demand comes from automobile catalysts, typically diesel. With the scandal on Volkswagen and diesel admissions, there is the expectation that demand for diesel in passenger vehicles will go down. It is also hard to be positive on platinum demand for autos in Europe.

Markets. Trump is ahead of Hillary according to weekend polls. We will see after this week if Hillary is still gaining momentum. The majority of earnings on the S&P will be in by the end of this week and they are better than expected. There is a lot of potential for growth over the next couple of quarters, but there is also room for disappointment. He is worried about a correction up to 20% over the next 6 months.

US Stocks and Bonds. Caller is 75% US. The world is a little over 50% US. He likes being overweight in the US, but he would like to hedge against the currency risk. You can also be overweight Canada to get the dividend tax credit. He would be looking to trim the US exposure.

Canadian Banks. He would start liking them 10% lower. We are at the upper end of the trading range. He would hold through ZWB-T, but when it got 10% lower.

ETFs vs. individual stocks. The biggest difference is diversification.

Educational Segment. Concerns about the weekend’s G20 meeting. They are agreeing to continue spending and not worrying about who is going to pay for it. We need the growth pickup in the world, but the problem is the debt getting bigger. 150% of the world’s GDP has come from debt since the Lehman moment. You can’t stimulate by weakening your currency, but that is what they are doing. Infrastructure ETFs are very expensive right now.

Markets. Valuations in the US are rather high and that is caused by ‘free money’ and bonds that pay no money. He finds potential in the perpetual preferred market. You get premium yields and if rates don’t go up any time soon you don’t get hurt by them.

Markets. This has been a very unprecedented spring and summer, so far, with all the macro events. Now people have been bitten by the equity market, especially in Canada with 3 pretty significant down markets in the last 10 years. He is trying to generate a sustainable total return for his clients, by focusing on the return he gets in cash every year, which is a dividend. Whatever else the market gives for the rest over time, he is selecting good quality companies with sustainable businesses. He continues to average clients into those stalwart dividend paying names, banks, telecommunications, energy infrastructure and utilities. Utilities and telecommunications are the ones that are in the spotlight right now because of some pretty abnormal valuations, but when you compare their dividend yields to Canada 10 year, the spread remains abnormally high. He has been on the thesis for a long time that both demographics and interest rates are going to drive money into dividend paying stocks.

Car part makers? Car part manufacturers went on a pretty fantastic run over the past 3-4 years prior to last year, and then they checked back. This is the nature of this industry. He continues to watch these companies, but is waiting for a little bit worse economic time.

ETFs. Early on, praises were sung for low costs, tax efficiencies, etc. Now there is a recognition of a fundamental shift in the way portfolio management is going to be done in the future. It is moving from single high/low stock picking to multi-asset class investing, and recognizing that this is really a game changer for the portfolio manager industry. ETF providers have done this colonization of the asset classes. For example, previously access to gold bullion was very difficult and you had to pay storage costs, etc. Also, the offshore Chinese bond market is a really good example of something that nobody really knows about and is not represented very well in portfolios, but offers a lot of non-correlation as a different portfolio component. His process is to look at super trends, such as a 3-5 year view and looking to see what are going to be the drivers for portfolio returns. Then he looks at a less than 12-month view, which really relies on behavioural analysis including investor psychology and sentiment, and trying to position accordingly.

Effects of a Trump win on financial markets? Trump is promising tax cuts and infrastructure spending giving $10 trillion in renewed debt over the next few years. Initially that would be good for corporate profits. His policies relating to protectionism and closing of the world to the US, is very bullish for Asia longer-term.

A senior’s ETF portfolio? For his clients, particularly for a retiree, the goal is to avoid big mistakes in a portfolio. The 1^st line of defence is global diversification. When constructing a portfolio, think of core and satellite. The best way is to build a core of cheap peer beta, and be as widely globally diversified as possible. As a satellite component, he usually puts in country sector, different asset classes, that he thinks provides better risk return characteristics. The core functions as a minimum level of diversification.

Smart beta versus traditional market cap? Original ETFS were based on market capitalization, the underlying weights of the individual stocks, bonds, etc. Any departure from that creeps into the world of “Smart beta” where you can weight stocks by their dividends, revenue, etc. Because he is making the decisions on a global asset allocation basis, he wants the cheapest, purest beta that tracks a particular index, for example gold. You have to be aware of what is under the hood.