Chief Investment Officer, Partner at ETF Capital Management Inc.
Member since: Jul '02 · 5276 Opinions
He goes back and looks at the dot-com bubble. In December 1996, Greenspan was early with his comment about "irrational exuberance" and the market kept going for 3.5 years before it peaked out. Nobody can time this.
What we do know is that we're early in AI adoption as the next phase of tech and productivity growth for the world. It's a very bullish theme. But what do you pay for that today, and what's the catalyst to upset that? A few months ago the catalyst was tariffs, but now the market's not so worried about them. The next catalyst might be higher for longer; if they're going to run the economy hotter, then rates might just stay up. The market multiple should not be expanding in that environment, but so far multiples have held up.
We just saw some new headlines of the new need to fund debt and deficits. The cost of that debt is big. Looks as though the estimate is a bit below consensus, so that's a slight positive. So they either expect more revenues from tariffs, or they expect less spending somehow. We'll find out Wednesday morning how they're going to fund that -- are they going to fund it with bills (as the president wants) or are they going to issue more coupon debt (which has a negative implication for risk premiums)?
We have the Fed on Wednesday. They're not going to move on rates, but do they signal in their dot plot that they'll begin to cut rates later this year? Two reasons to cut rates: the economy is slowing and labour market is starting to weaken (some signs of that), or inflation is well contained (and we still don't know this piece yet).
We get the PCE (Fed's favourite inflation gauge) this week. We have yet to see any real transmission of higher costs from tariffs. That's still coming because even though there's a deal with Europe, there's a tariff. The tariff rates are going to be mid-high teens from all the estimates he's read. A lot of revenue from tariffs, but how much is going to get into consumer prices at the end of the day? It'll take months and months to find out.
Good case to be made that the Fed should be on hold until we see the labour market or the consumer really start to weaken. Typically, those start to line up together when people start losing their jobs.
It comes down to different styles. When BMO writes their options, they're writing a bit further out of the money so you get a bit more capital appreciation. The Hamilton style is writing more of the portfolio closer to the money, which increases your yield but limits your upside.
If you're really bearish, the Hamilton ones are a little bit better because they'll generate more income. If you're bullish but you need the income, then the BMO ones will probably give you a better experience because you're giving up less of the upside.
If you can positively tell him what the market's going to do over the next year, he could tell you which one will outperform. In general over time, since markets go up more often than not, he'd expect the BMO ones to provide a bit better performance.
Strategy that gets income off the bond market with an option overlay. When you look at the price relative to TLT, it's been down over the last couple of years but the yield has been higher. Total return vs. just owning TLT (plain long bonds without any enhancement) results in doing better with the covered call strategy. Reason is that yields have generally gone up and prices have gone down.
But if it was the other way around, TLT is going to do better.
In a defensive market for bonds you'll get more income off this one, but don't expect much price appreciation. It's an income play. That income is capital gains, which is very tax efficient. Good way to play the bond market, and better in taxable accounts than in registered accounts -- you're getting income from US bonds via capital gains instead of interest.
When you're investing in corporate bonds, you're investing in the spread of that bond over the government equivalent in terms of interest rate risk. Whether it's the 1-, 5-, or 10-year corporate, it's the additional yield (the credit spread).
Credit spreads have been very narrow. Here's the rule of thumb everyone should use: when equity markets hit their peaks, credit spreads are at their narrowest. Not a good time for new investment in corporate bonds. Much better to put $$ into government bonds at that point. Because when equities correct, government bonds do better and credit spreads widen. So the corporate bond will underperform when equity markets are correcting.
When equity markets have finished their correction (down 5-15% or whatever), that's a better time to own corporate bonds because the credit spread will narrow. And that's really what you're playing when you're investing in corporate bonds.
Bonds are less correlated with the ups and downs of the world. But when you're in an inflationary environment, bonds don't give you the same protection that they once did during the disinflationary environment we were in for decades. We're in an environment where inflation will be a bit more persistent than it's been for the last 40 years, so typically bonds will underperform equities.
If we get stagflation (no growth, but inflation) that's bad for all assets.
He always advocates diversifying a portfolio. You don't want to have too much in one name. Ever. He doesn't know the percentage of the investor's portfolio. If BCE is only 1% of the portfolio and with BCE being relatively cheap, he'd stick with it. But if BCE is a huge part of the portfolio, then diversifying that risk away would make sense.
Here's the challenge: what's in XDV? Banks, lifecos, energy names. Has done well in recent years, whereas BCE has underperformed dramatically.
For more diversification, he'd look at ZWU -- gives you some telcos and utilities plus a covered call. Nice, tax-efficient yield north of 7%. And you don't have the current extremes of the banks and lifecos of XDV.
He always advocates diversifying a portfolio. You don't want to have too much in one name. Ever. He doesn't know the percentage of the investor's portfolio. If BCE is only 1% of the portfolio and with BCE being relatively cheap, he'd stick with it. But if BCE is a huge part of the portfolio, then diversifying that risk away would make sense.
Here's the challenge: what's in XDV? Banks, lifecos, energy names. Has done well in recent years, whereas BCE has underperformed dramatically.
For more diversification, he'd look at ZWU -- gives you some telcos and utilities plus a covered call. Still some exposure to BCE, but diversified within the utilities space and given you an enhanced yield. Nice, tax-efficient yield north of 7%. And you don't have the current extremes of the banks and lifecos of XDV.
Gives you the S&P with a currency hedge. If you think about where the CAD is now, it's a bit below 70 cents. If you're going to hold this for the next decade, he'd argue that the CAD will be a little bit stronger. So may not be a bad idea to buy one with the currency hedge.
There's an annual cost to the currency hedge that's not part of the MER. Today it's about 1.75%. If the CAD is weak, you want your exposure hedged. If it's expensive relative to the US dollar, you probably want exposure to the USD. You can switch between the two in your RRSP.
BMO and other providers also have hedged vs. unhedged versions. They're all very good.
With gold prices where they are now compared to where they were only a few years ago, we're nearly double. If you can't make money today, you'll almost never make money. If you're looking at gold juniors now, and they're not profitable at this level of gold, then avoid them.
ZJG is a basket of junior gold miners. You'll get some diversification and most stocks have been around for a long time, so this is the way to go. He hates the idea of buying new, speculative gold with their "new thing" that they're pushing. 90% of those will never make it, so you'll lose your money more often than not.
The Coming Week
Lots going on, plus a lot of big tech earnings. This week has the potential of being an inflection week. We're heading into a negative seasonality period through September-October. Lots of risk to the market here. There's a rule of thumb when you're learning charts: if the market can't go up on good news, it's probably a sell.
So the tariff trade was potentially settled with the EU on the weekend. China's deal is kicked out 3 months down the road, we think. The market started up today, but now it's soft. We'll see where we close. There's a lot of information this week, so if the market can't go up on good news then we should take notice. On earnings and what's expected, George Soros always said to look at what's priced in and bet on the scenario that's not priced in.
He's looking at a chart of the S&P 500 going back to 1990 with anticipated earnings for the next 3 years. Earnings growth expectations are huge for the next couple of years. Do we have the economic backdrop to drive that?
The Congressional Budget Office recently put out an update. They took the "one big, beautiful bill" and forecast it out. Notwithstanding everything else, they put out a chart of where debt to GDP is going to go. Then they put out another one that assumes that all this AI investment adds to productivity and improves growth in the US. In that second scenario, the debt:GDP outlook starts to look a lot better if the growth rate and the economy can boom. Basically, it's a huge tailwind.
What's happening now in AI is huge. But so was the birth of the internet in the 1990s, and then the bubble broke and it collapsed for a couple of years. That's possibly coming.
Final chart shows the valuation of US long bonds against the S&P 500. When you take the PE ratio and invert it, you get the earnings yield of the S&P. We're now at the same level as we were at the dot-com peak. It's expensive. Bond yields today at the long end are ~5%. You're earning more in US treasuries than you are in the S&P 500. Historically, this isn't a buy/sell indicator but it tells you the market is very expensive at this point.
If we get a catalyst now, that catalyst is good news, and the market can't rally, then it's probably the end of this rally phase for the next 3-5 months.
It's always about what the market is going to deliver relative to expectations. The bar isn't particularly high this quarter. We normally get about 70% of stocks beating earnings.
The story is going to be what they say about tariffs and margin compression. Not sure enough companies know yet what that's going to look like. If you look at the 6.5% earnings growth estimated over the next year, it doesn't seem a stretch at this point. If we get nominal GDP growth of 5-5.5%, those numbers are achievable. But that nominal GDP growth number assumes no margin pressure from tariffs and a pretty decent economic outcome.
In the "big, beautiful bill" we get some current stimulus and tailwinds over the next year, though they're not what we saw in terms of tax cuts in the TCJA passed during the first Trump administration. But there's also massive bond supply being a headwind to future growth.
It's not going away anytime soon. If the tax revenues through tariffs are elevated enough to mitigate some of the need for bonds, that would be a good story from a debt finance perspective but a bad story related to margins. Either we're going to get inflation, or margin pressures, or bond yields are going to have to back up a little bit more. It's one one of those three things or some combination of all of them. To him, the market is priced for a more Goldilocks-type of outcome.
We've been in a situation like this before, where equity markets surprise to the upside. So we can't be too confused by that. See today's Educational Segment for some ideas to deal with that uncertainty and where to put your money if you're worried about growth.