End of Q3 Report

Well, we are at the beginning of Q4 and the noise around all things important continues to get a bit louder. First, does anyone remember the BREXIT? That was going to change the world big time, and maybe it still is changing the world at a very slow pace. Fast forward a couple of months and every rock star from Bono to Bruce Springsteen are singing the realities of the next in charge of the US battleships. Even better is the new world paradigm of zero or negative interest rates for longer or forever. Below we will touch base on all of these points with some colour and realities of what might become of the future outcomes.

So what do we make of all of this? Most people do not know. Some are guessing and sometimes this is the reality of human nature. The world is in a tough place. These are just the simple facts.

First up is oil

We are looking into the headlights of the next Organization of the Petroleum Exporting Countries (OPEC) meeting in November. There was recently a meeting in Algiers, Algeria that may set the table for things to come, or at a minimum, give us a heads up on the likelihood of some sort of Iran/Saudi cooperation. The chart below gives you a basic look at some of the OPEC inflection points that got us to where we are today.

 

Source: VIP Wealth Solutions and Bloomberg

One can see that as OPEC continued to pump, oil continued to decline. The sticking point is, as noted in the past, lack of cooperation and full global compression of market players. The damage is still being felt in economies around the world. This will change.

Second up is the Clinton Trump thing

That’s right, we are calling it a thing. With the first debate that happened, it is really apparent that the US has done a pretty poor job at selecting candidates. It reminds us that when things are difficult, radical decisions sometimes get employed. We follow the polls like everyone else and are reminded that Hillary is still ahead, but like Springsteen and Bono we are left scratching our heads a bit. So what happens if we get a surprise and Trump wins, and he’s not fired! The market is likely going to do a Brexit-like response. Can this happen? Well, anything can happen, but the likelihood remains questionable. What if Clinton wins? Well, nothing should really happen. It should be Goldie Locks and the three bears – this one is just right. MOST IMPORTANTLY – this event has the world’s attention and has investors thinking “WHAT IF”. We are not fussed by either outcome because when the facts change we can shift gears.

Zero Interest Rates!

Who would have thought that the posted rates on 5-year mortgages would have dipped to 2.2%? Well here we are and the world loves the outcome on home ownership. Did anyone notice that the price of homes is gotten a bit steep lately? This is the direct result of “free money” and it is happening in more places than just real estate. Corporations and countries around the world are stuffing their balance sheets with cheap debt. Take the US for example. The national debt clock is at $19.5 trillion dollars. What if the US went to negative interest rates like other parts of the world? Would the national debt clock start to go backwards? What zero interest rates really means is slower growth globally and lower returns. All assets have generally been priced off of risk-free returns (meaning US treasury bills). If those investments yield zero, the only way to higher returns is more risk.

Asset Allocation

This is where things really get interesting. Someone mentioned the rule of thumb of one’s fixed income allocation should match your age. Suggesting that if one was 60 years old, they should have 60% in fixed income and 40% in equities. The world has changed materially. Most bonds of any quality today do not have the yield to justify most people’s income requirement. Given this shift, risk has also changed. This also makes for a different platform of investing. It challenges traditional constructs and forces the market to look for new and innovative ways to produce income for retirement.

Complex to Simple

All of this gets pretty confusing as the complexity expands and the world shifts to better constructs. How does one keep challenging aspects like those mentioned above and turn them into simple outcomes? Follow the facts and be prepared to change. Just look at the facts and avoid getting caught up in behavioural beliefs. An old economics professor once said that humans would become excited when interest rates started to go down. So excited that some would even believe that they would go negative! The professor at that time suggested that was crazy thinking – it would never happen. But it has. He was not wrong, he just did not have all the data at that point and the data and facts over time have changed. We continue to look at the facts and the data and make strategic changes.

Final Thoughts

In a world where anything can happen, sometimes it will and does. We are not guessing. We are simply following the facts and acting accordingly. Will Trump win? Does it really matter? If he does, we will shift gears and make the appropriate change to reflect the new outcome. Will the Saudis cut production? We will not know until November and will adjust accordingly. Between now and those final decision dates, the noise will likely amplify. We will continue to pay attention to the data and facts.

Thanks for tuning in and enjoy the day.   

 

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