Market Commentary

Weekly Market Comment

“It is not light that we need, but fire; it is not the gentle shower, but thunder. We need the storm, the whirlwind, and the earthquake.” – Frederick Douglass (who was born 200 years ago this month as a slave)

The TSX Composite dropped 1.6% while the S&P 500 lost 2.1%. The S&P 500 is now down 3.9% from its recent peak close.

Even though our Legacy portfolios are bitcoin and marijuana free, events this week were too dramatic not to mention. Investors in both clamored for the exits. At least the marijuana sector is real and has some value, even if that value is probably lower for most of the names in the space.

But the bitcoin bubble is another story entirely. The cryptocurrency exchange Coincheck saw its offices raided by Japan’s Financial Services Agency after the firm lost US$530 million to hackers, helping push bitcoin below $9,000 (down from over $19,000 about a month ago). Sure, it was another type of cryptocurrency but investors are rightfully asking hard questions about the uber-bullish promises espoused by a small handful of its most shrill but delusional supporters. Cryptocurrencies face a lot of challenges – government scrutiny and bans, massive commission costs, cyber robberies, havens for money laundering to name a few –  but the biggest problem is they are being used for old-fashioned speculation and not as currencies. Most investors are unwilling to tie up material amounts of personal wealth in cryptocurrencies and this week’s volatility proves them right.

Wage inflation in the world’s largest economy is rising, now up to 2.9%, and, along with the continued increase of the key U.S. 10 year interest rate toward the psychological 3% rate (currently 2.85%), they exhorted some downward pressure on stocks this week. Official unemployment remains at 4.1% but a surprising uptick of unemployment amongst African-Americans that rose from 6.8% to 7.7% is worth watching for signs of broader signs of recession. So far, we don’t see it. But rising unemployment after a major contraction is one of the classic early signs of recession.

U.S. oil production has been booming thanks to growing shale production and stronger oil prices. Keeping a safe distance away from Washington policymakers and OPEC decisions, American oil production  is almost back to 10 million barrels of oil of crude per day, a figure it hasn’t managed since Nixon was in the White House. The two biggest differences is that 1) most of the production is raging from fracking and not traditional oil wells or off-shore rigs and, 2) oil is at $65 and not $3.35 per barrel.

World oil production is estimated to be almost 97 million barrels per day, making America the second-largest producer after the Saudis. But here’s the shocking part: America production might surpass Saudi production by the end of the year, and as a recent Bloomberg Businessweek cover story put it, this will make it more difficult for OPEC to shape prices. It will also make life tougher for Russia as its economy is woefully under diversified (it relies on oil for about 75%  of its economy).

Ironically, the Saudi led OPEC attempt to smother U.S. shale production worked only temporarily, as U.S. shale producers emerged far more efficient and smartly managed for the experience. In the meantime, the technological advancements that exploded the shale revolution continue to march forward. Drilling continues to get faster, cheaper and go deeper than ever before. American import trends have been going in the opposite direction, peaking over 12 million barrels in the 1980s but is now back below 2.5 million barrels of imports.

-In an impressive and ambitious move, Amazon has partnered with Berkshire Hathaway and JP Morgan to form their own independent health care provider that would be “free from profit-making incentives”. As the world’s richest man and CEO of Amazon, Jeff Bezos, put it: “Hard as it might be, reducing healthcare’s burden on the economy while improving outcomes for employees and their families would be worth the effort.” J.P. Morgan CEO Jamie Dimon suggested that the solutions they hope to discover for their own employees will “potentially…benefit all Americans”.

Imagine that: a healthcare system that counts its profits as outcomes and well-being and not monetary gain. And why not? Think about a corporate café open to employees only. It’s offered as a benefit, a perk, and a form of payment and is not a profit center. Nor is it altruism.

Treating healthcare as a perk could be highly disruptive to the status quo, where humans are not always treated as humans but as dollar bills.

Word of the Week

heed (v.) – to listen to, take notice of. “It’s fine to celebrate success but it is more important to heed the lessons of failure.” – Bill Gates

(n.) – careful attention. “I have found it advisable not to give too much heed to what people say when I am trying to accomplish something of consequence. Invariably they proclaim it can’t be done. I  deem that the very best time to make the effort.” – Calvin Coolidge.

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