Transitory means Temporary (TWTW – Jul 26-30, 2021)

What is the inflation playbook? Is there one? Whether or not there is … I am wondering: will it address wealth inequalities, or reinforce them? Asking is maybe answering …

Inflation – Well, the topic of inflation – as to whether it is a “clear and present danger” threatening to become a bigger longer term problem, or a blip reflective of the impact of shutting down the economy to subsequently restart it now that COVID-19 looks to be something we can hope to have in our rearview mirror by 2022 – isn’t going away any time soon. (Although pricing action on the bond yield front suggests it isn’t going to be the big deal some fear – just saying).

Transitory means … part of a transition (seems obvious, no?) so the FED describing the bout of inflation we are currently witnessing as transitory means it is something resulting from the economy and pricing mechanisms transitioning from a “shutdown/shut-in” economy, to one back to “resuming normal operations/functioning” mode.

Transitory versus Temporary – To hear FED Chairman Jay Powell explain Transitory as meaning Temporary, what I hear is: we must accept that we are seeing prices increases and that these won’t necessarily go away (although, btw LUMBER prices did more or less roundtrip recently …) – but most importantly, something HE and the FED aren’t expecting to see turn into the opposite of a virtuous cycle. That, of course would be a vicious cycle (one where inflation becomes an entrenched factor expected to punish all of us not just this one year, but year, after year, after year in the years following) at that point, obviously, the FED would have a rather difficult problem on their hands, because it would mean that they fail in a critical regard – that of ensuring price stability. THAT kind of inflation, if I understand this correctly, is ultimately the kind that back in the day, Chairman Volcker had to tame via massive interest rate increase in the late 70s, so as to finally crush its devastating effects on the economy. It is likely very few of us remember firsthand what that felt like, but just to imagine rates in the high teens to tame endemic inflation… NOT this time, says Jerome. But be it as it may … the topic, well, it isn’t, as I said, going away. For that matter, at the other end of the spectrum, the deflation risk topic may also not be something that we’re done with, but whatever.

With the levels of indebtedness incurred by our society at large, and governments here there and everywhere – looking to inflating away the masses of debt accumulated … well, that may ultimately be the only way to address the maths of that crushing debt problem – no? I guess economists are best left to answer that, while pointing out that in the interim, presumably to be expected IF inflation was growing into a bigger issue, sharply rising rates would just lay waste to the economy AND, coincidentally the current Goldilocks world we live in in this “TINA” (There Is No Alternative …  to stocks) world of ours.

Oh well … another can kicked down another road? Or a soon a major headache?  That backdrop is here to stay. We didn’t hear that quickly (although the tab was run up hard to fight COVID-19), and aren’t going to see this mess left behind in a hurry either.

Key takeaway? Well, that this whole “inflation” scare associated with COVID-19 effects on society will capture headlines for some time. But basing one’s actions on either a) transitory or b) about to becoming an endemic problem … well, that, doesn’t make much sense, particularly when … as I read Oaktree Capital’s Howard Marks latest newsletter, he himself (a rather highly regarded investment expert) states that “the truth is that we know very little about inflation”. That, as part of an overall missive where he strongly urges investors to ignore “macro calls”, because effectively it is extremely hard to derive any additional value in being in the “consensus” trade. On inflation, he concludes that it is “mysterious”, and that we, therefore “should put even less stock in predictions surrounding inflation than in other areas”, admitting, however, that: “this does make life for investors tough, as inflation’s impact on interest rates is the most important wild card”.

As you’d expect from Mr. Marks – he does a great job looking at both sides of the Inflation argument in the newsletter/memo update to Oaktree’s clients in question => Click HERE!

July 2021 vs July 2020 – Vanguard Canada:

A look at Vanguard’s AUM as at July 30, 2021 suggests the company enjoyed AUM gains of CAD 1,449 Million for July as a whole. Of that, we estimate net issuance of new units of the firm’s ETFs brought in CAD 941 Million, with the difference (CAD 507.7 Million) effectively market gains across the firm’s 37 ETFs. Of note, Asset Allocation ETFs brought in CAD 259M last month, representing some 27.5% of net issuance of units for the month. Inflows in July favored the risk-on side of the equations, with top sellers consisting of S&P500 Index; US Total market; and Growth ETF Portfolio, as well as FTSE all Canada; and Vanguard All Equity ETF portfolio.

On a trailing 12-month basis, AUM is estimated to have grown by CAD 15.35 Billion (or 56.4%), with inflows contributing 65.6% to that total, or CAD 10.070 Billion, the remainder being market gains of CAD 5.285 Billion. Trailing 12 months issuance of Asset Allocation ETFs comprised 28% of total issuance over the period.

Performance-wise for July 2021, here are Vanguard’s top and bottom performing ETFs for the month:

and the year-to-date top and bottom performers:

Of note:

  • China – continued crackdown efforts are spooking investors, AND dragging down EM, which lost as above 5.29% in July alone, and are basically flat YTD, vs say Canadian stocks, up 18-20% YTD. (or US total market, up 16.87% YTD on a hedged basis, or 14.67% on an unhedged basis).
  • Canadian Real Estate – strong July = expectations of further “normalization” associated with the reopening, respectively people now more likely to return to offices than previously thought?
  • Bonds – continued to reclaim some of the ground lost earlier. Not as strong as in June, but up nonetheless
  • on a YTD basis – Long Bonds still in the red
  • Factors – Interestingly last month, Global Min Vol outperformed both Momentum and Value, both of whom were slightly to the negative for July (-.70%, respectively -.78%)
  • Canada vs US – Canadian exposure on the equity front looks to have underperformed the US in July, but is still ahead YTD

Generally strong earnings reported this past week, including in the O&G space in Canada, where Eric Nuttall (Ninepoint Partners) continues to pound the table on the FCF generated by the sector = > click HERE! for his latest interview on BNN Bloomberg. Or here, for the ETF Eric manages at Ninepoint Partners.

Exception to that was AMAZON ($AMZN), which dropped 7.56% on Friday, after posting results where top line was missed, but also the company guided for slower sales growth in coming quarters on account of the reopening … Click HERE!

Recent ETF news:

Hamilton ETFs – launching a high dividend-yielding ETF (courtesy some leverage and some call writing => Click HERE!

(let’s make no mistake here … the appetite for Yield is as great – ok make that greater … – than it has ever been. My view is that dividends play a significant role, but option-strategies overlay as well can have a beneficial role (but with some trade-offs, to be sure).

The Canadian ETF Association = CETFA = launched its updated website, including an ETF Screener => Click HERE!

BMO ETFs = Latest Portfolio Strategy Report Q3, 2021 => Click HERE!

Worth noting in terms of Alfred Lee’s commentary: The cyclical trade stalling; the Quality Factor regaining some ground relative to Value recently, and outperforming the broader market. And, well, bond yields backtracking was to be anticipated … but has now probably more than run its course.

S+P Dow Jones = July Index DashBoard Canada => Click HERE!

Noteworthy: Growth significantly outperforming Value in July in Canada; Ditto Low Vol beating both!

Sector = quite the pullback in Energy last month – the pause that refreshes?

Enjoy the long Week-end 🙂

Coming up August 24-26, 2021: MINDpath Virtual Thematic ETF Investing Summit 2021 => More info on this coming up next week! In Fact => Check HERE!