“The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities — that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future — will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”– Warren Buffett, Berkshire Hathaway Letters to Shareholders, 2023

 

“I’ll never forget it. January of 2000 I go into (George) Soros’s office and I say I’m selling all the tech stocks, selling everything. This is crazy…at 104 times earnings. This is nuts. We’re going to step aside, wait for the next fat pitch. My two gunslingers (portfolio managers at his fund who were investing in the tech bubble stocks) didn’t have enough money to really hurt the fund, but they started making 3% a day and I’m out. It is driving me nuts. I mean their little account is like up 50% on the year. I think Quantum (the main fund) was up 7%. It’s just sitting there.

 

So like around March I could feel it coming. I just — I had to play. I couldn’t help myself. And three times the same week I pick up a phone – and don’t do it. Don’t do it. Anyway, I pick up the phone finally. I think I missed the top by an hour. I bought $6 billion worth of tech stocks, and in six weeks I had left Soros and I had lost $3 billion in that one play. You asked me what I learned. I didn’t learn anything. I already knew that I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself. So, maybe I learned not to do it again, but I already knew that." – Legendary Investor Stanley Druckenmiller’s 2015 Lost Tree Club Speech

Note that the contents of this memo are all my thoughts, and not the views of RBC Dominion Securities. As well, no part of this content was AI-assisted or created.

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[YOU CAN LISTEN TO THE ABBREIVATED PODCAST VERSION OF THIS NOTE HERE]

Friends & Partners,

Apologies for the longer than usual quotes this month, but I find them quite insightful, and they just may prove salient at some point in the future... I am sometimes flummoxed by the lack of a foundation in what passes as an investment strategy for many – the lack of a true foundation makes one susceptible to the wind, and sadly the de facto investment philosophy of many is to invest in whatever just finished working.

These quotes are wonderful reminders for us. Fear of missing out, greed, envy, or as Druckenmiller said, the need “to play,” are just a few magnets for mistakes. Emotions can cause even the best investor to do foolish things… even when they know deep down that it’s foolish.

I think true wisdom lies in knowing what you don’t know, and admitting that to yourself. This is why the smartest person in the room is often the one who most frequently says, “I don’t know.” Unfortunately, admitting you don’t know something doesn’t play well on social media or in the news media. But the real wisdom is out there if you look carefully and listen to the right people. And I hope to bring some of that collection to you via my Partner Memos. Humility is the most effective attribute as an investor/advisor in my view.

The world is never short of risks, and 2025 is so far an interesting year to put it mildly. Policy and geopolitical uncertainty, the erosion of central bank independence, markets reaching new highs, concerns over deficits, persistent inflation, US dollar headwinds and recession worries are a few of the risk items to note. And we still have a third of the year to go.

Social media feeds are a firehose of addictive and mostly useless content, curated by algorithms built not to inform but to keep us endlessly scrolling. Unfortunately, it also creates information overload, and many investors are distracted from some of the real drivers and narratives.

Unfortunately, negativity sells. Data shows a steady rise in pessimism across financial media over the past 50 years. It would be nice if the media reported the news objectively, but at the end of the day, this is not the reality or their incentive structure (and incentive structures drive virtually ALL behaviour, professional or otherwise). The press does not write about boring things. It writes about the extremes.

Investors tend to get things wrong when they cling to simplistic cause-and-effect models, especially when fixated on a single variable – there are many forces shaping a complex global economy and markets.

The level of the stock market is more a function of money flowing into the stock market (liquidity), and investors continue to plow money into stocks regardless of what happens with the economy. So far, but this could change.

The AI narrative has been a MASSIVE tailwind for markets, and is unprecedented in some ways. The stakes in the AI movement are incredibly high. The amount of capital expenditures from these companies is simply historic, and put plainly, it had better work. These companies (like Microsoft, Amazon, Google, Meta, etc) are spending as though they are laying the infrastructure for electricity and that all this investment will result in a technology everyone uses and no one can live without once they have it. Perhaps, but this is why concerns about AI adoption are so important. If AI isn’t adopted as quickly as these companies assume, or doesn’t provide an economic benefit in the near/medium term, then much of this massive investment will appear “wasted” and that will be substantially negative. I don’t love to send you to external sources for additional reading, but this is a MUST READ to highlight the risks on this front (considering we are only hearing about all the positives AI will bring, you need to hear an alternative and sceptical view from a very respected manager). We had better hope that the AI boom isn’t similar to the telecom boom during the dotcom bubble – at the time, telecom companies spent heavily on CapEx, but profits just didn’t materialize quickly enough. This led to a decline in their free cash flows and that ended the boom. We all know what happened next.

As well, keep in mind that sometimes in financial bubbles investors correctly identify the economic value of a technological innovation, but misidentify who will capture that value. Remember Pets.com…

The market follows the economy and company earnings almost exactly over the long term – full stop. So far, the US economy is OK, but is showing some cracks, particularly in the labour market. Bottom line there is that the labour market is not bad, but it is losing momentum. If the labour market goes, then likely so too will the economy, and the markets likely correct in this case.

To fight a slowing economy, the Central Banks lowered interest rates in September, as expected. Their decisions to cut interest rates confirmed widely held market expectations for the start of a rate-cutting cycle (at least in the US). That may not be a new bullish force, but it does strengthen the support under the markets. The evolving balance of risk between inflation and the labour market has led central banks to place a greater emphasis on keeping the labour market on steady footing. While easier financial conditions should provide broad support for the economy, there remains significant uncertainty over how far and how fast interest rates will fall, as central banks are also committed to maintaining inflation stability that is aligned with their long-term targets. As well, fiscal stimulus is occurring via the passage of the One Big Beautiful Bill, which solidified and boosted tax cuts, as well as unleashed billions in Federal dollars across various industries. We will be watching the future path of monetary policy closely alongside government bond yields as central banks navigate the complex trade-offs between the labour market, inflation, and the broader economy.

We are coming into a seasonally challenging period, and finding diverse sources of diversification remains prudent for portfolios with so many moving parts in the markets. Even in the face of all of this uncertainty, the world is flush with opportunities – one of which is highlighted in the section below.

 

 

Other Interesting Things To Highlight

We were honoured to be presenting sponsor for My Friend’s House HeART of Red Gala on September 20th. It was a wonderful evening of art & entertainment, and showcased artists and their work from all different mediums in an effort to raise much needed funds for the Southern Georgian Bay women's shelter.

I am proud to again be the presenting sponsor of the second annual Escarpment Corridor Alliance Annual Summit, taking place at Osler Bluff Ski Club on October 24th. This is a very important concern, and the Summit highlights a day of learning about Nature Corridors, how they are necessary for the longevity of the Niagara Escarpment of South Georgian Bay, its people and the economy that sustains it all. Purchase your ticket HERE

 

 

The Headwinds For Markets And Central Bankers*

The economy is clearly losing momentum, so there is going to be support by some central bankers (and the Trump administration!) for lower rates. But they are between a rock and a hard place, since inflation is stubbornly elevated.

If we can avoid recession, then the cutting of rates should portend the extension of positive markets. But if the Fed is reducing interest rates because of a weak economy, then the decline in the E (earnings) portion of a P/E ratio outweighs any expansion of P/E ratios from lower interest rates.

Inflation has remained stubborn, and making central bankers jobs difficult. This chart shows the percentage of the 140 items the Consumer Price Index tracks with 3% or greater price growth in the last 3 months. Similar to the stock market’s advance/decline line, this helps reveal the breadth of inflation pressure. As you can see, it’s rising. The last time 59% of the CPI items were rising 3% or more was in late 2021, and it got considerably worse from there. Hopefully not this time.

It is critical to remember that one of the things that always accompanies an economic crisis is the central bank losing its ability to be truly effective. In these instances, they simply react and attempt to contain the crisis. The argument today is that the next crisis may not be one that can be solved by providing liquidity to banks as it could be a sovereign debt crisis driven by higher long-term rates and ever-increasing debt. To put this into context, a total of $60 trillion debt in 2030 (expected) could mean over $2 trillion of annual interest payments, which alone would exceed nominal GDP. This is clearly unsustainable and would precipitate a significant crisis in its current form, and is something I have written about as a fundamental potential risk in time.

So, the issue for central bankers is that any policy they induce will not fix that issue. If central banks lose the narrative of their ability to solve a financial crisis, there is a perception (and therefore market) issue. This one may take time to play out but stay tuned.

Central banks have certainly been priming the pumps at historical levels, and interest rates are still at lows we haven’t seen in hundreds of years! Check out the timeline on these charts:

Markets are becoming more concentrated by the day, making all that passive investing and indexing less diversified and inciting other market risks. Top 10 stocks in the S&P500 are almost 40% of it!

Passive investing has been wildly popular and has worked – so far. But Torsten at Apollo (one of the most respected out there) notes that “the amount of money in passive investing continues to grow. There are three consequences of this development: 1) Reduced market efficiency and price discovery 2) Increased market concentration and volatility 3) Growing correlation and systemic risk”.

Stock market valuations provide a guidepost as to what future returns may bring. Stock market valuations have reached some truly rarified levels. The Shiller cyclically adjusted price-to-earnings ratio is hovering around 37.5x. And, as David Rosenberg points out, over 35 is, “the only cutoff point where every single time [the forward return] is negative.”

U.S. stocks have reached a new record valuation, exceeding those levels reached in both 1929 and 1999.

That said, investors can still find pockets of more reasonably priced stocks, particularly those in Japan, Europe, and the United Kingdom for example, and in certain sectors.

So, for general market risks, we have to watch the bond market for clues. One strategies is fearful and highlights this chart:

 

 

Is This The Start Of A New Economic Cycle And The Continuation Of The Bull Market?*

The market is continuing to rise, and the economy has proven generally resilient. Demand for discretionary services and upward price adjustments to meet that demand strongly suggest the economy is not falling into recession. The job market is weakening but not yet crashing. If this is stagflation, it looks different from the high inflation/mass unemployment seen in the 1970s version, so far at least.

The Fed is boosting monetary liquidity, which is good for asset prices. The interest rate cut(s) should boost CEO and business owner confidence. Small business sentiment is rocking (see chart below). Higher business activity obviously means improved hiring. The US housing market is shaky, but interest rate cuts support that sector and should reduce spread of mortgage rates to bonds. As well, these cuts make holding cash less attractive, which is risk-on.

When the Federal Reserve begins cutting rates market breadth dramatically improves:

The ability to sustain this improvement must be fundamentally driven.  We are now seeing broad-based positive revenue and earnings surprises across the market not just in the MAG7.

Carson Group, Ryan Detrick posted an interesting statistic: The last 20 times equities were within 2% of an all-time high and the Fed cut, stocks were higher every single time. The median gain was 13%. Nvidia is a case study in supplying a scarce product, and make a chip that every AI company needs. With a P/E of 26.6x, it’s cheaper than companies like Costco and Walmart. Looking back at Cisco in the late 90s, we can see what bubble valuations look like. In Sept 1998, CSCO $16 price and 56X P/E - by late 1999, CSCO $80 price and 210X P/E - P/E expanded by 4X in 12 months That is what a bubble looks like. We may be getting there in some AI names however.

Interestingly, sentiment remains surprisingly bearish. The AAII last survey of bulls less bears is still negative while markets are at all-time highs (typically a contrary indicator so this is notable).

Valuations are a concern, but valuations outside the MAG-7 are certainly more attractive:

So, we may just be at the start of a new economic cycle. The labour market is weak, but this is old news to the equity market. Here is the bullish outlook from respected Morgan Stanley strategist Mike Wilson:

“First, the labour market data is the most backward looking of all economic series. Second, it’s particularly prone to major revisions that tend to make the current data unreliable in real-time, which is why the Nation Bureau of Economic Research (NBER) typically declares a recession started at a time when most are unaware we were in one.

This insight adds support to our primary thesis on the economy and markets that I have been maintaining for the past several years. More specifically, I believe a rolling recession began in 2022 and finally bottomed in April 2025 with the tariffs announcements made on Liberation Day.

After the initial phase of this rolling recession it was led by a payback in COVID-pull-forward demand in tech and consumer goods, other sectors of the economy went through their own individual recessions at different times. This is a key reason why we never saw a traditional spikes in the metrics we use to define a typical recession. Although the revisions data is now revealing it more clearly. The historically significant rise in immigration post-COVID and subsequent enforcement this year have also led to further distortions in many of these labour market measures. While we have written about these topics extensively over the past several years, Friday’s weak labour report provides further evidence of our thesis that we are now transitioning from a rolling recession to a rolling recovery. In short, we’re entering a new cycle environment and the Fed cutting interest rates will be key to the next leg of the new bull market that began in April.

Perhaps the simplest way to determine if an economy is doing well or not, is to ask; is it delivering prosperity broadly. On that score, we think the answer is no, given the fact the earnings growth has been negative for most companies over the past three years.

The good news is that growth has finally entered positive territory over the past two quarters. This coincides with the V-shape recovery in earnings revision breadth that we have been highlighting for months. We think this supports the notion that the worst of the rolling recession is behind us, and likely troughed in April. As usual, equity markets got this right and bottomed then too.

Now we think a proper rate-cutting cycle is likely, and necessary, for the next leg of this new bull market. Given the risk that the Fed might still be focused on inflation more than the weakness in the lagging labour market data, rate cuts might materialize more slowly than equity investors want….

Bottom line; a new bull market for equities began with the trough in the rolling recession that began in 2022. It’s still early days for this new bull.”

 

 

In the Face of Expensive Markets, Opportunities Still Abound – This is One of Them*

Infrastructure represents one of the most stable investments globally – think toll roads, utilities and data centres to name a few. Stable long term plays.

To highlight this, see the chart below showing the sources of global infrastructure returns. This chart shows that core real assets can provide both income and diversification, even through difficult markets. Looking at the far right-hand side of this chart, although infrastructure assets saw prices decline earlier in the pandemic, the income they generated was robust. By providing stable income, infrastructure can help stabilize portfolios during various stages of the economic cycle while also providing the opportunity for capital appreciation.

Potential Benefits of Investing in Infrastructure: Attractive Opportunity in the Current Macroeconomic Environment

• Inflation Hedging: Infrastructure can provide a hedge against inflation due to its pricing power, contracted price and inflation adjustments, regulated return frameworks, and pass-through of operating costs.
• Consistent Cash Distribution: Infrastructure assets may provide an opportunity for potential consistent income and favorable risk-adjusted returns often supported by long-term contracts or regulated revenues.
• Capital Preservation: Essential services required through market cycles with strong market positions may create resiliency to economic shocks and market disruptions.
• Diversification: Potential low correlation to traditional asset classes and to other diversifying strategies including real estate.
• Upside Potential: Investment opportunities in thematic trends (e.g., digitization, decarbonization and deconsolidation) may benefit from sustainable, long-term industry tailwinds.

At this point, private infrastructure investing opportunities (thru a large and reputable firm) are potentially interesting. Private infrastructure companies are trading at much ‘cheaper’ levels than their public counterparts. We have partnered with one of the most reputable firms in the world to offer access to their private institutional infrastructure investing platform and have used our scale to negotiate lower fees than even a large institution can access. The Fund targets ~9-11% annual net total return with a ~4-5% annual distribution yield (expected to be a mix of income and capital gains).

This is only available to our clients.