Tri-annual Review - September 03, 2020

Sep 02, 2020 | Nick Foglietta


It is time to reap the harvest for those who have participated in the risk rally since the March 2020 lows. Not to be reaped all at once of course. Just tending the garden.

Tri-Annual Review

September – December 2020

Opening Thoughts:

Many of you know I have taken up farming as a new challenge.

The farm my wife and I have chosen, is not just any farm; it is the farm that my grandfather owned and land that I helped on as a young boy.

It is located in Extension, which is just south of Nanaimo. We bought it in 2013, but have only put any real effort into the land in the past year or so. There are 26 acres that varies between pastures, wooded areas, a peat bog, and it borders on Starks Lake.

There is an incredible reconnection I sense spending time on the farm.

The feeling of actually accomplishing a project; working hard with my hands; seeing stuff grow, and watching the animals and nature do what they have done for generations.

It is simplicity and complexity rolled into one. It is both caring and violence before your eyes…either one can erupt at any given moment.

There is also the connection to my grandparents and my past that appeals to me when I am there. I spent a lot of time with my grandparents on the farm before the age of 10. It is a special feeling.

It is also the legacy to my future. Our kids will inherit this property and know it was a labour of love for their great-grandfather who would be delighted it is still in the family.

Life slows down when I’m there. Seasons come and seasons go.

Each day needs to be tended to, it carries with it a number of challenges and successes, and when it ends another begins.

There is balance to the farm; the rules of engagement are clear.

The same cannot be said for the financial markets in September 2020. There is extremity as far as the eye can see, and none of it occurred naturally. The once bastions of capitalism are now coerced and synthetically maintained as public utilities…unfortunately.

So to open this letter, I will begin with my conclusion.

It is time to begin to reap the harvest in your portfolio. History tells us that valuation is rich, the market cycle is out of sync with the business cycle, and unnatural supports for valuation have been assumed to last forever into the future.

You don’t harvest all of your crops at the same time. Nor should you harvest all your investment profits at once.

But if you have been exposed to risk assets you have likely profited nicely since the downturn in March 2020. It is time to lock in some of those gains.



Before writing these triannual letters I always review the previous letter to reference. I did not write a letter in April, it was a little hectic then to be reviewing or forecasting, so we are looking at January 6th, 2020.

Wow, what a distant set of concerns I shared in that letter compared to where the world ended up a few months later.

But, ironically, the January 2020 report is still valid because it focused upon the Fed pivot away from raising interest rates and embraced endless money printing as the only strategy the central banks would employ.

Below is the Executive Summary from that report. If you think of everything the central bank response to the COVID Crisis triggered both economically and debt-wise, the January 6th 2020 conclusions are even more valid now than then.

Macro Executive Summary:

  • The “Great Mistake” – Central banks letting Quantitative Easing (QE) run for more than a year back in 2010.
  • Ten Years Later – The snail’s pace of raising interest rates continued. Central banks never took back the “great mistake” for fear of stalling asset price increases, but in the final quarter of 2018 stocks declined anyway: real estate stalled too.
  • The Panic of 2019 – No it wasn’t investors that panicked…it was the central banks. The Bank of Japan, European Central Bank, and the US Federal Reserve all pivoted from tightening monetary conditions back to loosening them.
  • The “Hotel California Economy” – Pathways to interest rate normalization are nowhere to be seen. In 2019, investors around the world scrambled to try and lock in yield on investments. As the old Eagles song hauntingly informed us…You can check out anytime you like, but you can never leave…the highly indebted, low interest rate world was baptized into permanence.
  • Asset inflation without growthResistance is futile. Looking into 2020, lower asset prices are not considered an acceptable outcome. Any and all means necessary to inflate asset prices will be employed. If that means printing hundreds of billions of dollars every month to create liquidity…so be it. But will interest rates co-operate?


I would add the following bullet for future reference.


  • COVID Crisis and the birth of Universal Basic Income (UBI) What seemed like a torrent of money being printed before March 2020 now looks like a trickle. Not only is QE ramped up beyond imagination, but the central banks now enable governments to replace incomes with “helicopter money” direction from the government into individual bank accounts. Endless money creation.


So much for “hundreds of billions per month”…how about trillions?

Yet, even though the reasons for the government support shifted to fighting the COVID downturn all that actually occurred was a greater aberration of traditional capital markets taking them further away from self-sustaining status.

The common denominator holding the narrative in place is low interest rates. That is key to remember, but even low interest rates can only justify valuation stretch to a certain extent.

Before I move on, imagine for one moment if government and central bank intervention was rolled back only to what it was in February 2020. The negative shock to financial markets would be immediate and swift.

Therefore, to remain BULLISH on real estate and financial assets one has to hold tight to the confidence the interventions into capital markets will be infinitely able to expand. The prior sentence encapsulates the correct market posture to maintain at present but highlights the difficulty in remaining overly committed to the narrative.

In other words, there is a huge potential for downward revision in asset prices if the “capital markets are public utilities to be supported with tax payer money” narrative breaks down.

I think it is also reasonable to review the state of affairs before considering specific asset classes. In bullet format:

  1. Valuations are rich in most asset classes. I view nothing as cheap.
  2. The US is heading towards a hotly contested election that quite possibly ends up in violent dispute no matter which party wins by the slightest of margins on November 3rd.
  3. The widening of the political gyre in the US is nearly unfathomable. The two sides hate each other. The silent majority that remains in the political center is the silent minority now. America is as broken as it was prior to some of its darkest hours in history.
  4. COVID-19 never left us. The numbers are surging again around the world but this time the politicians will do nothing to shut down economies. Personally, I believe this is the correct decision and it is up to individuals to do what is best for them and their families. But this leaves the economic recovery in serious jeopardy when businesses stay open but a significant percentage of the population chooses not to participate.
  5. Universal Basic Income (UBI) is now a reality of our Canadian and US economy. In simple terms, this means businesses will have new challenges finding workers, government deficits will increase, and taxes on the wealthy are going to get significantly higher.

Notice that, without the “capital markets are public utilities” narrative in full force, any one of the five points above would have already had huge negative impacts on financial markets.

Moving on in this letter, let’s get more specific:

Interest Rates – Since interest rates are the key to the future, we begin with them.

Interest rates have started to turn higher. Mind you, that is like saying that after you walked down one side of the Grand Canyon and the first steps past the river on the far shore is “climbing” again.

But I am going to make a case I have not made before in this review.

I no longer believe interest rates will go negative. Actually, I am going to make a case that interest rates saw the bottom of their long term cycle in March - July 2020.

This is a significant departure for my forward view.

It is predicated upon my belief that the introduction of Universal Basic Incomes (UBI) are here to stay and they will cause more inflation than central banks are bargaining for.

Junk bond yields are also at record lows. This will likely persist for a longer period of time as well because the central banks are buying in the junk market.

If interest rates are no longer likely to decline, then they either have to stay about the same or rise. The entire financial market needs to adjust to this possibility. Maybe it is already adjusting?

Stock markets - Stock market indexes are priced out of sync with both historical valuations and economic fundamentals.  

It has been an incredible ride for investors in the areas of stock market that were positively correlated to COVID themes. There are companies that have seen their prices increase 10x to 50x since the March lows. Many others have gone up between 50% and 100%.

But if the end is in sight for interest rate declines, then my expectation would be for the stock market indexes to peak soon.

The indexes are greatly skewed by a few large sized companies so one must be careful not to over-react to an “index peak” by selling companies that have not participated in the stock market orgy.

High dividend paying companies, banks, and many industrial names are not trading like “bubble stocks.” They will still decline if the stock market is peaking but not by the same percentages as the “bubble stocks.” I would be a reluctant seller of too many of my dividend companies.

It is important to separate out your portfolio holdings and not view them as “homogenous,” or “the market in general.”

Gold/Silver – I am making the case that Gold has seen its peak price for 2020…or at least until something goes weird with the US election. It’s important to note though, that if gold can close above $2,050 US I would back away from this outlook.

Profits can be taken in precious metals investments. Don’t sell all of them, just trim. If we get another buy signal, investors can beef up these positions again at higher prices.

It has been a great run in these names. Some of you have suffered through a long holding period of holding at a market loss.

Time to “reap some harvest.”

Bank Stocks – Up until the middle of August, banks traded in the “undervalued” area of the post-COVID landscape. I no longer believe this is true. The banks are not expensive, but they are not cheap anymore.

Those big dividends make them easy to hang on to…and for now, we should hang on.

But banks are no longer great buys. Add slowly here buying the dips.

Preferred Shares – The preferred share market still offers excellent value relative to other fixed income comparisons. Rate-reset preferred shares love a rising interest rate environment.

I recommend still adding to this sector in smaller sized allocations.


It is time to reap the harvest for those who have participated in the risk rally since the March 2020 lows.

Not to be reaped all at once of course. Just tending the garden.

From a risk asset perspective, 2020 has been a year like no other. The world went from “extreme valuations on the upside,” in February to “no bid,” where market analysts were publically calling for stock markets to be shut down due to the pandemic.

And now, five-months later, financial markets are at even more extreme valuations than in February.

Not every asset class is extremely overvalued and the amount of “tending of the garden” relates to your risk profile correlated with your long term financial plan requirements.

But let me be clear about what I see.

Markets have been repriced to central bank liquidity and government support (UBI) of citizens in terms of asset prices. Markets have not been repriced to the economic recovery.

Therefore, investors must respect the fragility of what that might mean in terms of loss of control by the central bank supporters. The way I try to judge central bank loss of control is via the direction of interest rates. (Higher interest rates are kryptonite to central banks).

The harvest is plentiful in risk assets. Don’t be afraid to take a hard look at your holdings and redeploy capital where valuations may not be so extreme.

I will be calling all clients over the course of the next 45 days to consider the reallocation of investment dollars given the change in market conditions. If you want to chat sooner than later, please send me an email back to call.