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David Bruce
Matt Smith
Hayleigh Blaikie

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Quarterly Commentary

Q news – first quarter 2019

The objective of Q news is to clarify, educate and invite your questions.

“Abnormally good or abnormally bad conditions do not last forever”
-Benjamin Graham father of value investing, mentor to Warren Buffet
 
 
What a difference a few months can make

What happened? Returns on the major stock markets were sizzling in the first quarter. Stocks globally rose 11.9%. In the fourth quarter last year they were down 13.7%. How do we make sense of this? One big factor was the perception about interest rates. Late last year global interest rates were expected to rise further. Thinking changed early this year that interest rates would not keep rising in 2019. In fact “Slowbalisation” has led central bankers to consider lower interest rates rather than higher. As the quote above states neither good nor bad conditions last forever.  We did expect 2019 to be a good year but were amazed at how quickly the recovery developed. The selloff at the end of 2018 was severe which led to sharp recovery at the beginning of this year. The fundamentals remain strong. Of course there are always things to worry about which include:  a recession, rising interest rates, China’s economy slowing and trade wars.



Source: BMO Economics


Continued low interest rates make stocks relatively attractive
 
Our strategists believe that we are in a sweet spot for the stock market with economic growth slower but still positive, limited inflationary pressures and the prospect of continued low interest rates.
 
There are number of other positives for the stock market. There is a low probability of a recession this year or next. Most companies are profitable, economic momentum is improving in China which is good for commodity prices. Stocks are still relatively attractive especially relative to bonds. Low interest rates are positive for the economy and for stock markets since this lowers the cost of financing for companies and consumers.
Low interest rates are a global phenomenon with quarter of the global sovereign bond market trading at negative interest rates. It is hard to understand buying a German government bond with the investor knowing in advance that they will receive less money when the bond matures than they invested. This is highly unusual.
 
The diagram below illustrates how incredibly low interest rates are.

 G20 Sovereign Yield Debt Breakdown

Source: Bloomberg


Information is not wisdom
 
The more “news” we are exposed to the more confused we get. There have been few new developments in finance and investing in the past 20 years. Most of what I see is a new package with the same contents. Risk and return are directly related despite what numerous hedge fund providers would lead us to believe.
 
As simple as it may appear keeping costs low is one of the best ways to improve returns. There is a finite return available to any portfolio so investors are better off keeping as much of that return as possible.
 
Investing in the public markets is tough.  Along the way there are always lots of tests. Knowing the value of your investments continuously is both a blessing and a curse.  It would be very distracting to know the value of my house Monday to Friday all day long. I would probably do something silly, perhaps selling it on a whim. One key is to believe that capitalism works which results in growth in asset values over time.  It is very important to capture the returns that are available efficiently.

System 1 or System 2?
 
The stock market selloff in December was led by System 1 thinking much to the advantage of System 2 thinking. Nobel Laureate Daniel Kahneman brought this type of analysis to the forefront in his book Thinking Fast and Slow. System 1 thinking results in fast often unconscious decisions which are frequently error-prone. System 2 thinking involves slow decisions made consciously and which are mostly reliable.
 
Last December System 2 thinkers took easy money from System 1 thinkers. The fundamentals had not changed and yet the headlines in the press were scary, mostly short term focused. There has to be willing buyers and sellers and there were many on both sides.
 
How does inflation affect you?
 
Inflation affects each of us differently. Looking at the chart below if you smoke, drink and go to restaurants you’re experiencing significant inflation. This can be frustrating because the headline inflation numbers are broad averages of many different items. The overall CPI or inflation on the chart is 1.4% that can be very different from what we experience personally.



Source: BMO Economics


Income tax time – this is crazy!
 
According to Ian McGugan in the February Globe & Mail magazine The Fraser Institute points out that the income tax act went from six pages in 1917 to 1,412 pages in 2017. Staggering! The Canadian revenue agency has 40,000 employees. In the US the internal revenue service has twice as many in a country with 10 times the population.
 
Even with all these employees the CRA had a shortfall of $8.7 billion as of 2014. The Canadian tax system is just too complicated. This needs to change for several reasons one of them is fairness. Up to 60% of tax filers are not using some tax credits they are entitled to. They simply can’t figure out how to apply for these credits.
 
Perhaps a first step to simplifying our tax regulations would be to follow the lead of the United Kingdom and set up an Office of Tax Simplification. That sounds good. The last time there was a broad examination of the Canadian tax system was in the 1960s. This is long overdue in Canada.
 
Last thought
 
We are proud to offer outstanding family office services. If you have any questions about the details please let Matt or I know.
 
Hopefully spring will eventually appear.


Yours sincerely,
 
 
 
David R Bruce                     Matthew Whistance -Smith
Portfolio Manager             Investment Advisor
 
 
It’s a privilege to assist you and your family.


                                                                        


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