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

Part of diversification is recognizing that you don't always know the future. You want different things in your portfolio that are going to respond differently to economic factors. 

He thinks that we're going to run a little hotter and have a bit more inflation and growth. But at some point in the future, in the next couple of years, that's going to meet the deflationary force of AI. So yields could end up lower in the long term as well. 

We don't have one pervasive trend the way we did from 1982-2022, with 40 years of persistently falling interest rates. We're in an environment of inflation and interest rate volatility, so it won't be higher all the time or lower all the time. The average will probably be higher than people expect.

He has positions in gold/silver/platinum/palladium, and they change regularly through active management. He's both long and short, but generally long in the precious metals area. Scarce assets are something that most portfolios are underexposed to. 

We're at a moment in time of higher inflation and monetary debasement. We're printing a lot of money, monetizing debt at probably 8% a year over the last few years. When that happens, you want something in your portfolio that's not printable, but scarce. 

Scarce assets are things like gold and, to some degree, silver, bitcoin, platinum, and palladium. These can't be reproduced easily. If we need more oil, prices will skyrocket and more wells will be drilled. If we need more copper, more mines will be dug. For gold, the amount of gold that can be produced (even at all-out rates) is only ~2% of overall supply. 

A scarce asset serves a different role in portfolios. It responds to macroeconomic factors like monetary policy and geopolitical situations. Globally, sovereign nations are stockpiling gold as they look for alternatives to US treasuries as reserve assets.

Brookfield Entities: Brookfield Asset Management (BAM)

BAM operates as an asset management business that went public in December 2022 after being spun out of Brookfield Corporation (BN), following the steep discount investors used to apply to the old Brookfield parent on a sum-of-the-parts basis. Since becoming a separately traded entity, BAM has delivered an annualized return of around 30% (including dividends).

Fundamentally, BAM is a royalty on an asset management franchise. It offers investors strong earnings growth and a highly recurring, fee-based revenue stream. The company targets earnings growth of 15%–20% while paying out ~90% of earnings as dividends. Going forward, we think BAM could continue to provide investors with annualized total returns of ~15%–18%.
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We have these mega-gains. Both September and now going into October are the seasonally weak periods. Big investment houses like GS are saying that we've had so many good returns for so long, there has to be a regression to the mean for US equities. They say 30% odds of a recession and that the next 10 years aren't going to be as good. So that's one thing.

But on the other hand you have very powerful tailwinds. The "big, beautiful bill" has been passed and is very stimulative. One interest rate cut already, probably 2 more this year, and more next year. Those are also very stimultive. And we have all this AI technology that's proliferating -- delivering a lot of spending, a lot of demand, and a lot of productivity gains eventually.

You have these 2 things going on at the same time. But the question is valuations. Parts of the US have gotten very expensive, such as AI-related stuff and the Mag 7. People have been saying for a very long time that it's a very narrow trade and to be careful. But that didn't mean that they weren't going higher and that there wasn't value there.

We're at a point now where certain names still make sense, such as NVDA and AMZN. The other 5 are getting a bit pricey and over their skis. But there are other pockets that are still very investable. 

The Mag 7 are starting to look a bit tired and showing some signs of exhaustion. 

Financials are on fire; they have deregulation behind them, an upward-sloping yield curve, and strong capital markets activity. Aerospace and defense are global themes attracting a lot of spending to meet targets. If the price of gold bullion stays where it is, gold equities are trading a lot cheaper than they ought to be.

Small caps is another area he likes. There are 10k companies, and a lot of them are interest-rate sensitive. With lower rates and a better economy (we just had a 3.4% GDP print), there are some really strong tailwinds for them as well.

He's not as much a fan of oil stocks, as the price of oil is manipulated by OPEC. And you always have geopolitical issues, as with Russia. Harder to predict the price of oil. 

Whereas natural gas is an enduring theme that will very much help investors over the next 5 years. Canadian government's finally helping the sector after many years of not being helped; that's really good for the sector (and for investors).

The tech sector is driving things and, more specifically, it's really by the AI-related companies and the perceived AI winners. It tends to be like a gravitational force, where all the money gets sucked into the NVDAs, MSFTs, and ORCLs of the world and then also into the derivative plays. It means there aren't a lot of funds left over for consumer packaged goods companies, international insurance, etc. 

This is very much a US trend, as well as a global trend. So it's a tale of Haves and Have Nots, led by AI.

When it comes to perceived AI losers, or what's left behind, the market tends to be overly focused on certain areas of growth. The economy appears to be imbalanced at all times in certain areas. He doesn't mean this in a negative connotation.

For example, there's market leadership in terms of industrial production. For a while it was automation, then it was electrification. Now it's the industrial renaissance because the data centre is the new form of compute and intelligence. That type of coalescing around one theme just means that everything else gets left in the dust.

On the Canadian market, this will be good news for all the gold bugs out there. If we're being fully honest with ourselves, inflation hasn't really been conquered as a risk to the Fed's inflation mandate or to the BOC's focus on jobs. It's a nice way of saying let's go back to negative real rates.

The reason the BOC is more dovish, and needs to be, is because we have a housing financialization dynamic on the other end. The housing markets anywhere in the GTA and parts of BC are starting to see illiquidity and rising losses at the margin.

As for the Federal Reserve, they're looking at inflation and saying that's yesterday's problem (even though it's not). They're looking at unemployment, which is loosening at the margin from record generational highs, and saying that this is the big problem we have to solve.

Negative real rates, within reason, will be good for equities across the board. Also good for gold. And AI is the big conversation within equities.

This speaks to large catastrophe events, which typically go to the reinsurance market. If it's a really esoteric risk, such as piracy risk off the coast of Somalia, that goes to what's call the "excess and surplus" market, which then goes to Lloyd's of London.

These catastrophic risks will get more and more expensive as time goes on. Katrina in 2006 was the high-water mark for this. It's been pretty decent since then. So the reinsurance market has actually been one of the weakest, lowest-margin, competitive segments. A company like CB actually takes some of their risk and offloads it onto reinsurance.

His firm focuses on the stock itself. There's no need to add on a management fee to your holding. Foreign exchange considerations may offset the MER, but it's best to keep it as simple as you can. Single-stock ETFs tend to become vehicles for more leverage of 2x or 3x and so on, and you need to be very cautious of those.

The best tech companies in the world are most certainly not in Canada, as much as he wishes they were. If you're looking for technology, please don't start in the Canadian market. Look to Canada last.

Best tech company in Canada, far and away, is SHOP. It's a small- and medium-business e-commerce enablement platform. Not really AI. The other company that's closest to AI is CLS, but it's vulnerable in the AI value chain compared to a TSM, NVDA, MSFT, or anything else available in the USA.

Unlike with technology, here you can start your search in Canada. Canada's one of those countries that's a nexus for the gold market. He does own gold in his Canadian portfolio to stay true to what the opportunities in Canada bring.

His issue with gold in general is what in the world isn't priced in already? We're already talking about negative interest rates and central bank buying. The only thing left is that the miners may have a catch up, or more so, to the metal. He'd be cautious on gold, acknowledging its phenomenal return over the last 2 years.

Look at some of the AI "losers". Such as the ACNs of the world, or software companies that are being left behind in this tech rally. There's potential opportunity there, and that's where he's fishing today.