Crude Oil + Products Storage

We have been watching the energy markets with interest in 2023, as prices have been volatile amidst a backdrop of tight supplies. As the chart shows, total storage for crude oil and related products is currently sitting near a 5-year low. Also interesting is the fact that the forward-looking views of two of the world’s top forecasters are at stark odds: OPEC is of the opinion that demand growth in 2024 will be robust (approximately 2 million barrels/day), while the International Energy Agency has recently reduced its’ forecast for 2023 demand growth to 880,000 barrels per day (IEA is forecasting that a weaker global economy will weigh on demand).

When the current geopolitical environment is added into the mix, it strongly suggests that 2024 may very well be a highly volatile period for crude oil and the energy markets in general.

Global Economy

The global economy is slowing down:

Economies around the world are losing steam. GDP growth in Europe was slow over the first half of the year and unemployment in the UK is beginning to rise. The manufacturing outlook globally has darkened, with manufacturing PMI (Purchasing Managers Index) surveys across most economies pointing to a pullback in activity. The Chinese economy looks wobbly, even controlling for a long-expected acceleration in demographic headwinds tied to a rapidly aging population.

Migration

Migration patterns are changing in Canada. The pandemic accelerated course reversals of longstanding inter-provincial migration trends in Canada. While Ontario saw its largest exodus on record, Alberta and the Maritime provinces emerged as astonishingly popular destinations. Career opportunities, lifestyle changes, and an affordable house are major themes behind this new migration trend; but with this change could come new challenges such as housing affordability and infrastructure needs.

https://thoughtleadership.rbc.com/canadians-on-the-move-pandemic-shakes-up-old-migration-trends-for-now-or-for-good/

Commercial Real Estate

It is hard not to see the impact of Canadians working from home. While we are back to work in the office full time, we have noticed other offices are not .

Empty store windows and for lease signs are very common, and vacancy rates remain elevated. If this trend continues, it is our view that commercial real estate issues will persist if not worsen. As this story unfolds, a buying opportunity may develop in the office REIT space through the purchase of Allied Properties shares.

Long Term Objectives

An interesting chart which confirms the challenges of market timing. Taking a long-term approach can certainly pay off.

What’s on Canadian Minds?

With today’s 25 basis point raise in the bank rate to 5%, the burden of servicing debt continues to grow for Canadians. Accordingly, we found the attached chart to be interesting, but not surprising. Give the significant rise in interest rates over the past 16 months, it is easy to understand why managing month-to-month expenses are at the top of the list of issues that worry us. With the current outlook for interest rates being higher-for-longer, it is difficult to see a solution to these issues in the short term.

Chart of The Week

Apartment Square Footage

It is interesting to observe patterns of change. The below chart shows the change in apartment square footage during various building periods. In recent years, the median size of a condo built in Toronto has been a meager 640 square feet. Is this sustainable? Can people really continue to live in such small spaces or will they seek more space and a move out of the city? If they do move, how will that impact the city core and the work from home movement? We think people will be seeking a better quality of life, which leaves us concerned about the impact these new choices will have on office vacancies and downtown businesses.

Chart of The Week

Cisco Systems vs. NVIDIA

In the run up to the last major peak in the NASDAQ in the year 2000, one of the most powerful stocks was the technology hardware company Cisco Systems. After peaking at nearly $80, Cisco shares would experience a massive selloff, and subsequently spend most of the next decade below $20. Fast forward 20 years (or so), and the markets are once again obsessed by technology; this time, the theme is Artificial Intelligence. This chart highlights the stock price of NVIDIA Corporation, and its uncanny resemblance to Cisco in the late ‘90s. Is NVIDIA doomed to the same fate? Only time will tell, but as Mark Twain once famously said: “History never repeats itself, but it often rhymes.”

Mortgage Liability In Canada

We have talked about the sustainability of our debt levels in Canada for some time. We now have the “honor” of having the highest household debt in the G7, the bulk of which is tied up in mortgages. With the expectation that rates remain higher for longer, it’s our view that Canadians will increasingly turn their attention to reducing this debt, thus causing a slowdown in the economy. As this happens, Canadian banks will experience pressure on their earnings ( it’s happening now) which will likely lead to a wonderful buying opportunity for investors at some point.

US Debt Ceiling

This week’s chart tracks the history of the U.S. national debt and the debt ceiling for the past six decades. As you can see, the national debt has grown substantially over the past 15 years. With the rise in interest rates, the interest expense to service the debt exceeds that amount that America spends on its’ military. At some point, servicing this debt will become very challenging.

HOUSEHOLD WEALTH

This chart comes from the U.S. Federal Reserve and tracks the aggregate level of household wealth in the USA. What caught our attention was the speed of destruction of household wealth in the last year and a half. We expect that with this rapid decline will come a change in investor and consumer behavior. Big ticket items will be delayed as investors focus on reducing debt and rebuilding that wealth.

Container Shipping Rates

This week’s chart shows shipping rates for some of the world’s most popular routes. With the onset of Covid-19, global shipping companies were confronted with huge challenges such as significant port congestion or even closures, as well as labour shortages and a lack of shipping containers. Since making a dramatic peak in mid-2021, rates across all major routes have unwound nearly all Covid-related gains as the ports reopened and capacity increased. What is the next major move? For now, markets are watching keenly for further evidence of a softening of global economic activity and the potential onset of a recession.

Crane Index

This week’s chart is of the Rider Levett Bucknall Crane Index, which tracks the number of operating tower cranes in 14 major cities across the U.S. and Canada. This Index, last published in Q1 2023, shows that Toronto’s crane count continues to lead the way (up eight cranes since the previous survey), over all other surveyed cities. As always, we watch with great interest to see how long Toronto’s real estate market can continue to hold up in the face of higher interest rates.

Bears Reload

The chart below tracks the net long or short position of the S & P 500 e-mini futures contract. As you can see, the current net short position is the largest since 2011, meaning that market participants are betting that the future direction of the S & P is to move lower. In our experience, whenever the market takes such a one-sided view on something , the opposite often happens. Could this mean that the markets may be setting up for a powerful move upwards? We shall be watching with interest.

The Growing Gap Between Money Market Funds and Bank Deposits

The yellow line below is the average interest rate being paid on bank deposits in the US. The blue line is the rate you can get if you move those funds to a money market fund. As the spreads have widened , human behavior has been very predictable; to take money out of the banking system and place these funds in an alternative investment vehicle which pays a higher rate. When this happens you can get a classic run on the banks, a situation that has been much discussed in the news recently.

Chart of The Week

Commercial Banks’ Cash & Treasuries

We have been asked many times this week if the banking system is likely to experience a major shock like it did in 2008. In our opinion, the answer is no. The below chart represents the amount of cash and treasuries as a percentage of total bank assets being carried at present. You can clearly see that they are in much better shape and, barring any major event, remain a vital functioning asset. We would suggest adding on any further weakness to Royal Bank as the 4% dividend appears very competitive going forward.

Chart of The Week

International Women’s Day

First off, we would like to thank all of the women in our lives for everything that they do, day in and day out . Mothers, grandmothers, sisters, daughters….not much gets done without them, and for that we should all be grateful. We thought that we would use today’s occasion to highlight a serious issue: wage inequality.

Below is a chart outlining the gender wage gap between men and women. While average wages for women are rising, male employees still have higher hourly earnings than women. Average wages can differ, depending on education, work experience, industry and whether full or part time employment. This often means women can retire into financial insecurity and even poverty.

Although wage parity is something to strive for, the World Economic Forum has predicted that at this level, wage parity cannot be reached for another 267.7 years.

2-Year Government Bond Yields

In the U.S. market, the yield on 2-year government bonds recently hit 4.88%, which is the highest level that they have reached since 2007. Why do we need to care? The surge in shorter-term yields will put upward pressure on mortgage rates, credit card rates, and other sources of consumer debt. The higher cost of servicing debt, combined with stagnant incomes, creates an environment where consumers across the wealth spectrum find themselves feeling “squeezed”. While we believe that inflation has likely peaked and will continue to subside, we believe that this combination of higher rates and elevated inflation will likely continue to put pressure on prices of real estate, automobiles, and other high-ticket items.

*source: Bloomberg

Chart of The Week

Disposable Income vs. Rising Debt

Recently, we have been reading about the struggles that many Canadians are having trying to get ahead. The chart below illustrates this by showing us that after inflation, taxes, and debt costs, Canadians have less money in their bank accounts. With less free cash, investors are focusing on paying down debt, and are less focused on buying investments. As this trend continues, we expect selling pressure in equity markets to persist until such time as interest rates stabilize and inflation becomes less of an issue. It is our view that better market conditions will come in the second half of 2023 and into 2024.

Chart of The Week

US Labor Force Participation vs. Overdose Deaths

Below is the U. S. Labor participation rate over the last 70 years. The formula represents the number of people aged 16 and older, who are employed or actively seeking employment, divided by the total non-institutionalized, civilian working-age population. The labor force participation rate can be influenced by a variety of factors, including social, economic and demographic. Looking at the chart, we notice the constant higher movement from the early 1960’s to the peak in 2000. So why is this chart in decline from the 2000s? There are a number of factors: the financial recession of 2007-09 saw many workers leave the work force and never return. COVID-19 saw another sharp drop as the US economy was shut down. Retirement played an impact as well. Baby boomers retired and were not replaced by younger workers, and finally college attendance increased as enrollment grew by over 35% from 2000 to 2018, (it’s now sadly falling).

The second chart is the one that really caught our attention. With more people staying at home and not working, what are they doing? This second chart follows the number of drug related overdose deaths from 1999 to 2021. Addiction is becoming an issue in today’s world and most certainly has become a major political issue.

Chart of The Week

Stock Market & Real Estate

Both the stock market and real estate have delivered attractive long-term returns

The persistent strength of many Canadian housing markets over the last decade has arguably left the general population with the impression that real estate is a more compelling long-term investment vehicle than other asset classes such as equities. Looking back over the past two decades, however, we find that both the stock market and real estate have delivered attractive long-term returns. As shown in the exhibit below, the TSX Composite has generated annualized total returns since early 1999 that are either in line or better than various Canadian real estate markets, including Toronto and Vancouver which have experienced some of the most robust house price appreciation in recent years

However, the exhibit below reveals that home price gains in a number of major Canadian cities have outpaced the performance of the Canadian equity market in recent years. While it may be tempting to extrapolate from housing’s recent strong run when forming future expectations, we note that time horizon matters and the TSX Composite has more than kept pace with many local real estate markets as time horizons are lengthened.

Chart of The Week

Large Cap Performance

S&P 500

They say history doesn’t repeat itself but, from the chart below, it can come pretty close. The darker blue line is the S&P 500 from 2002-2003 (post tech bubble and 9/11), while the light blue tracks the S&P 500 from 2022 through to today. Until very recently, they appear to be on the same course. Lori Calvasina, our Head of US Equity Strategy, points out that the S&P 500 will most likely continue to trade in a choppy fashion, with the likelihood of a retesting of the October lows. Lori is calling for the S&P 500 to hit 4100 by the end of 2023; favouring value over growth and small cap over large cap. Our view is very much in line with Lori’s, as we see inflation moderating, interest rates peaking and investors returning to the equity markets with more realistic expectations. The small cap area does appear inexpensive, and we recommend positioning your portfolios through one of our A+ small managers.

We look forward to hearing your comments,

Chris and Greg

Chart of The Week

Canadian Housing Prices

While we are all well aware that Canadian home prices have enjoyed a long period of strength, the attached chart still leaves us in amazement. When you look at the sheer out-performance of our prices relative to the rest of the G7 countries, it is quite apparent that we are vulnerable to a meaningful correction in values. Will 2023 be the year that we give back a major portion of the upside from recent years? Only time will tell, but it will most certainly be an uncomfortable time for those homeowners/speculators who are overexposed to real estate in the current interest rate environment.

As always, please call us to discuss this further.

Consumer Debt vs. Personal Savings Rate

We have seen many charts over the years, but this one really caught our eye. As rates continue to move upwards, it is our belief that individuals will focus on paying down debt. This could have many implications, but the most obvious is that consumer spending on discretionary items could contract dramatically. The question we ask is: with consumers in retraction mode, where will the growth come from? If you would like to know the answer, please give us a call!

Chart of The Week

Global Manufacturing Purchasing Managers Indexes

This is a two year chart of Global Purchasing Managers Indexes. Green indicates that the economy is expanding, white is neutral, and red is contraction. From this data, we can clearly see how the world economies have trended toward negative growth over the past year. The next six months could be challenging, but should also present some excellent buying opportunities. Please call us to discuss.

**above comment is from Tom Porcelli, Chief US Economist for RBC Capital Markets, LLC.

Chart of The Year

Ark Innovation ETF

For the chart of the year we present the ARK Innovation ETF, down 66% year to date. Managed by Cathie Wood, this was the poster child for the new wave of “disruptive investors”. Cathie’s big calls included Tesla hitting $3,000 and Bitcoin hitting $500,000. Throughout the year, Cathie appeared on many media outlets claiming that even though her stocks were materially lower, this was “a once in a life time opportunity to buy these disruptive technologies at bargain prices.” This proved to be a very costly mistake, breaking two fundamental investment rules:

Rule #1: Never add to losing positions.

Rule #2: Accept that you will be wrong and make adjustments.

The hardest thing in investing is admitting that you are wrong. The worst decision you can make is to convince yourself that you are right, and add to a losing position. As stocks drop, the market is telling you something: Either you don’t know the story well enough, or you over paid for the asset. Convincing yourself that stock is a bargain after dropping 30% and buying more is just bad investing tactics. The best solution is to find something that is moving up.

Chart of The Week

Market Yield on U.S. Treasury Securities

We are often asked about asset bubbles and how they are created. The easy answer is that human psychology towards an asset class moves from fear to greed and back again over time. Often the fuel is “easy money”; essentially, very loose monetary conditions. The chart below is the market yield on the 10 year U.S. Treasury bond, from 40 years ago to present. As one can see, until recently, it has been in a one-way trend towards lower rates.

With this belief in “free money” due to low interest rates, came the expansion in values of various asset classes— whether we consider stocks, bonds, real estate, art, or used cars, many asset classes benefited from this period of exceptionally cheap credit. Fast forward to today, and those conditions have changed drastically, and have resulted in the repricing of many assets.

The question we all ask is “where will the dust settle on interest rates”? We would argue that interest rates still have some upside, meaning that they can still rise, and the aforementioned asset classes could be at risk of further repricing. As we enter 2023, we will be keenly watching how the economy and corporate earnings are weathering the storm in a higher interest rate environment.

Gold

We have all heard that gold is a good hedge against inflation. With the highest inflation rates in over 50 years, we ask the simple question--why has gold not performed better? There could be many answers: the US dollar, crypto currencies or simply that inflation, while spiking in 2022, will return to a more normalized rate going forward.

Chart of The Week

Mannheim Used Vehicle Value Index

This week we highlight the Mannheim Used Vehicle Value Index. Used car prices, as the chart illustrates, went parabolic in 2020/21 as supply chain problems intensified and new car inventories dried up. Like many assets, prices were also “helped” to the upside by the introduction of extremely low interest rates and an onslaught of cheap and available capital. Now that those conditions have disappeared, we are witnessing a massive reversal of the price movements that took place. The question that we should all be asking ourselves is “what other assets are likely to experience a similar retracement?” While we have seen a meaningful correction in stock prices already, will real estate be the next asset to fall?

Chart of The Week

Canadian Dollar

This week’s chart highlights the Canadian dollar, and the significant selloff that it has experienced since early 2021. Looking forward, the Canadian dollar’s strength (or lack thereof) will largely be dependent on the actions of the Bank of Canada, as well as the economic data in the coming months. We expect to see further modest weakness in our currency into early 2023, followed by a rebound later in the year.

U.S. National Home Price Index

This week we wanted to highlight the Case Shiller U.S. National Home Price Index, which is a benchmark of average single-family home prices in the U.S., calculated monthly based on changes in home prices over the prior three months. The Index has recently turned lower, after a long period of consistent gains. In today’s environment of rapidly-rising interest rates, it is likely that home prices will continue to decline as buyers adjust to markedly higher mortgage rates. . As we saw in the 2008 financial crisis, housing plays a key role in the U.S. economy and is therefore one of the areas that we will be watching closely for clues as to where the economy overall, may be headed next.

Chart of The Week - 10  Year US Treasury Yields

This week we wanted to highlight the dramatic rise in global interest rates that has taken place in 2022. Ten year bond yields have risen to 14 year highs, and the trend is still pointing toward further increases. Why does this concern us? The impact of such a large move in interest rates affects all asset classes, and impacts consumers’ personal finances in a meaningful way. We are of the mind that, while patience is key at present, there will likely be an attractive point in which to buy bonds again.