April was one of our best months on record for the Growth Portfolio. Our largest holdings, gold and energy producers, saw significant price appreciation. A combination of low purchase prices and low consensus expectations setup a promising foundation for our investments, so when several pieces of good news came out in April, buying interest sparked up quickly. Consensus expectations for our companies are still far too low, so I anticipate more upside ahead.
In regards to our defensive bond position, the economic slowdown that I’ve been anticipating is taking hold. Short term interest rates have been rising, making loans more expensive for borrowers. Consumer loan delinquencies are rising, including credit card receivables, auto loans, and some lines of credit. Applications for consumer proposals are now rising. Historically, once these types of loans start experiencing trouble after a long period of calm, recession is not far away. The Income Portfolio’s bonds protect and benefit as the economy slows.
Most people believe interest rates are rising because of economic growth. What they misunderstand is that rates are rising in spite of a slowing real economy. What looks like economic growth and inflation to the general public is tomorrow’s consumption being pulled forward to today by debt-fueled spending. When tomorrow’s dollars are borrowed and spent today, there is less demand left for tomorrow. If we net-out the effects of tax-cut deficit spending by the US government, economic activity is meager at best. Therefore, hiking interest rates will likely weaken conditions into a recession faster than expected.
Such was the case in 2007, when central banks hiked rates to combat what they thought was inflation at the time, all the while steering the economy into recession.
While rising interest rates garner most of the attention in the news, few investors notice there are even more meaningful central bank policy actions on the horizon. Central banks are now slowing their purchase programs of stocks, bonds and mortgages (called “quantitative easing”). These programs have been in place since 2009 to help support economic recovery by providing liquidity. By this time next year, central banks will have started to sell off those stocks, bonds and mortgages, withdrawing liquidity from the economy. This amounts to a coordinated and synchronized global deflation.
Most investors are not adequately prepared for this outcome. The consensus investor today holds the largest position in stocks and real estate in history, while holding the relatively smallest position in government bonds, gold, energy, and cash in history. This reflects the tendency of the public to invest by looking in the rear view mirror, impressed by short term outcomes and naive speculation. Whereas they characteristically ignore the warning signs of excess, we are prepared to benefit from what comes ahead.
Good news for energy stocks: http://blog.knowledgeleaderscapital.com/?p=14069
Consumer proposals are on the rise: https://betterdwelling.com/canadians-seeking-early-intervention-from-bankruptcy-spikes-to-a-new-january-record/
Canada’s housing market dominos: https://www.thestar.com/business/2018/04/04/they-bought-their-prebuilt-homes-at-the-markets-peak-now-they-face-financial-ruin.html
The risk hidden inside today’s most popular investment strategy: https://latest.13d.com/big-tech-passive-algorithmic-investing-more-pain-market-action-threats-8e25503fd1e4
Hunter S Thompson on leading a good life: https://www.fs.blog/2014/05/hunter-s-thompson-to-hume-logan/
Ben W. Kizemchuk
55 Yonge Street, Suite 1100
All opinions and estimates contained in this report constitute the judgement of Ben W Kizemchuk of Wellington-Altus Private Wealth as of the date of this report and are subject to change without notice. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.