September 22, 2017
Weekly Market Comment
“There are three certainties in life: death, taxes and unintended consequences.” – Ian Bremmer, geo-political risk analyst
As expected, the Fed did not hike interest rates this week at its meeting but the door remains open for future hikes. However, what they did do was give more details of some of its planned asset divestitures. The Fed is finally going to slowly unwind some of the $4.5 trillion in assets they are sitting on, much of it tacked on after the 2008 financial crisis. Specifically, the Fed said it will sell $10 billion in assets in October and gradually increase the monthly rate as time goes on. To put that into easier context to comprehend, it would be the equivalent of liquidating 22.2 cents worth of debt per month for every $100 they owe. Without any acceleration, it would take 37.5 years to unwind it all, though it is estimated they will only unwind 25% of those assets.
Futures markets are now signaling about a 65% probability of a Fed hike in December. The Canadian dollar’s immediate reaction was to drop about half a penny. Fed hikes in the face of a stationary Bank of Canada would put downward pressure on the Canadian dollar (all else being equal).
While NAFTA talks are curling paint off the walls of negotiation rooms, Canada’s CETA (Comprehensive Economic and Trade Agreement) has effectively removed EU tariffs for 98% of Canadian goods entering the EU. That’s up from 25% of Canadian goods that were previously exempt. Diversifying our customer base away from the United States is an unintended consequence of the NAFTA noise but sometimes necessity is the mother of invention. The EU is Canada’s second largest trading partner so it’s a meaningful improvement to trade relations.
Oil ticked higher in part due to increased pressure by OPEC leaders to bring some of its more gregarious and prolific cheaters in the cartel to fall into line with the group’s cuts. WTI oil closed at $50.64, helping the oil-soaked TSX Composite rise 1.85% on the week while the S&P 500 was only up 0.1%. For some of our Legacy portfolios, we bought Exxon as a safer way to play this out-of-favour sector. Exxon is an extremely vertically diversified business (that is, from exploration to extraction to transportation to refining and selling) and pays a hefty dividend of 3.9%.
Our praise for the Apple Watch may have been a little premature. In theory, 4G connectivity is a game changer. But only if it works properly. Not only does turning cell connectivity drain the battery in just a few hours but according to at least one reviewer, dropped connectivity has been a problem. Apple first denied knowing anything about the problem but is now working on software fixes.
It’s a good example of how high-profile media exposure can inform us, the consumers, while at the same time help keep companies (and other large entities) honest and on their best behavior.
Musings Beyond The Markets
Where does myth and lore come from? Often out of thin air and exaggeration:
“And most cowboys knew that wearing a six-shooter in a cattle town was an invitation to gunplay; most preferred to avoid altercations. Cowboys tended to settle a dispute with a fistfight. A revolver was best used to kill snakes, put wounded animals out of their misery, or signal for help. As Leon Clare Metz wrote in The Encyclopedia of Lawmen, Outlaws, and Gunfighters, ‘The image of the ordinary Western cowboy as a fast and accurate gun-fighter has practically no validity.’ “
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Word of the Week
This week, the leader of North Korea threatened the leader of America with an archaic word that sent us all scrambling to our dictionaries. He warned: “I will surely and definitely tame the mentally deranged U.S. dotard with fire.”
dotard (n.) – a state or period of senile decay marked by decline of mental poise and alertness. “Eyes and brains to the dotard lethargic and dull, Pale ravener of horrible meat.” – from a Herman Melville poem about a shark.
Hmm, what is the word for the equivalent person in his thirties?