A Comment -- General Comments From an Expert (A Commentary)

Minimun volatility ETFs. Min vol ETFs do a better job than low vol ETFs at harnessing volatility and keeping the portfolio diversified. They do it through portfolio construction, rather than just looking for low vol stocks. Invesco has one each for Canada, US, and global. Posits that min vols are a superior way to harvest market beta.

Gold exposure. If you don't own gold, you either don't understand economics or you don't understand history -- quote from Ray Dalio. Minimum 10% to start, and then consider how you'd alter that allocation.

Market Outlook There are a lot of champions for a US Fed rate cut today. It is questionable whether it is needed or not, he thinks. Generally it will be positive, but for REITs, supply and demand for real estate is more important. The Canadian REIT space for rental apartments, industrial, and seniors housing are all doing well. He is less constructive on retail. Industrial has become the new retail, because of e-commerce and the warehouse requirements needed.

Industrial real estate The growth in e-commerce sales as a percentage of total retail sales is growing exponentially. The land zoning in the right area can be challenging. Getting the right property in the right location can be key to how over 90% of your other costs are managed. This means there is great value in the right industrial properties. Going back to 2011 the demand for warehouse space has more than doubled and will increase by another 50% over the next two years. Simple laws of supply and demand make this space highly valuable.

The US Fed cuts rates by 25 points today, but the market wanted a signal for a 50-point cut. Ht thinks the market got what it deserved--the US economy is still strong. Consumer spending is at record highs and employment is high. Powell told the market today that cuts won't be a trend. Again, the market got what it deserved. Preserve your bullets for when you need it, so Powell was right. Manufacturing is weak, though. However, Canada is doing well here, benefitting from the US's pain. The Bank of Canada is not cutting rates. This creates diverging policy. Look at your USD exposure and consider bringing some of it back to Canada. Q3 is the most volatile quarter, starting now into October. We could be seeing the start of it right now with little to drive markets higher. We could see big moves up and down.

Gold and silver seasonality Gold benefits from volatility and a lower US dollar. Inflation pressures are starting to build. Usually in Q3 you see a weaker US dollar which helps gold. But gold is now making highs--which is a red flag. We just had a big breakout above $1,380 for gold after a multi-year base. $1,380 is a good point to pick up gold and mining stocks. He's loaded up recently in precious metals. After this explosive move in this sector, expect a retracement to $1,380 for gold.

Is there a danger in having too many indicators for a stock? Definitely. At the very least, look at major moving averages - 20/50/200-day. He also looks at the 14-day RSI and oversold/bought levels.

Market Outlook The US economy and employment remain strong. He thinks there is some weakness in home and auto sales, but sees them as short lived. Commodity consumption is also flattening. He tries to avoid these sectors, favouring technology and other growth spaces. He thinks technology has grown 5 fold in terms of its contribution to the economy over the past decade. AI is now leading to a third industrial revolution. Google, Facebook are all good places to be. The Fed rate change expected tomorrow could move towards negative yields soon if rates are cut too much and this would not be good for the economy. From an economic perspective, rate cuts in Europe are required, because the issues there are much greater.

Pipelines? Lower interest rates should be beneficial on these utility type stocks. Global investors are leaving Canada, that could be holding these stocks back. There is negative press over oil and energy development. Politicians are now jumping in. These companies are all good buys for the dividend yield.

Today Trump tweeted that he will decide, not China--nobody knows what that means. Trump clouds over every stock out there. He's amazed that interest rates are negative in Europe and parts of Asia. He predicts Powell will cut US interest rates by 25 points tomorrow, because Trump wants 50, but there's no reason for them to cut in the first place. The US has a deficit of a trillion dollars or over 4% of GDP--this is unprecedented. The US has ultra-low unemployment and good consumer spending. Housing starts and manufacturing numbers are weak, okay, but a 25-point cut won't make a difference. Cutting the rate will stop the US dollar rise higher. The German and US 10-year treasuries differ by a huge 300 basis points.

On Friday, Trump said maybe China won't do a trade deal until after the US election. The markets are very complacent now, though we are entering seasonal volatility. Trade is a big negative, one of his four risk factors. We're more likely to see what happened in Q4 2018 than a melt-up. The US Fed cut interest rates at full employment shows how weak the broad economy is. As the trade war persists, we'll continue to see downgrades to continue and it's only a matter of time before stocks reflect that....Powell risk is in presenting the US economy as weak, because that could turn into a self-fulfilling prophecy...The big selloff of the UK pound today is linked to a growing acceptance of a no-deal Brexit under new PM Johnson. Maybe don't pile into this trade now, but in 5-10 years the UK pound will turn out to be a great investment.

How did negative interest rates happen? Japan was the first in order to stimulate the economy. It doesn't work, because of demographics and debt issues that won't change. An aging population won't take advantage of lower rates to go out and spend a lot; a younger demographic will. In fact, an aging population wants a safe savings rate that is not negative. Policies that worked 50 years ago, don't work now. It's a different game. It's hard for banks to be profitable. We'll be stuck in a slow-growth world perhaps for decades, limited by so much debt. Central banks are printing money because they've lost control of fiscal policy.

How low will the US 10-year yield go? -1%. The British 10-year is -0.70%, so why can't the US go there? The old low, post-Brexit, was 1.35-1.60% It will be stuck in that range, depending on how bad the economy gets. He expects the US 10-year to fall to -1% and the 30-year will be -2%. He still likes bonds. We won't normalize rates for a while, unfortunately.

Educational Segment. The US-China trade war There's no trade deal right now (though we'll see what happens at talks this week), and maybe Trump is backing off on his tariff threats and will fight with Europe over cars. Who knows? With his pressure on the Federal Reserve, we're headed to currency wars. In 1987, the US and Germany were in a trade battle about cars and the Deutschmark, a main catalyst in the 1987 crash. In the Russell index pver 5 years, the broad markets are riding, but fewer and fewer stocks are lifting the market. This is troubling. The Bloomberg World Index shows that only the US market is making new highs, not the rest of the world, and this is unsustainable. As stock markets weakened in 2015-16, the Eruo and the Yen weakened in tandem well in advance. This is weakening again now. He wants to see a strong Yen here (he doesn't like Japanese bonds or stocks). A trade idea is Invesco Currency Shares Japanese Yen Trust (FXY-N) that exposes Canadian investors to the USD which is good in a downturn and long exposure to the Yen, too. We're heading into currency wars.

Market Outlook The US Fed is likely to decrease rates by 25 points this week. Central Banks globally are trying to avoid having the economy sink into recession. He questions whether they have that power to delay it indefinitely. The business cycle is coming close to the end and he wonders if President Trump is trying to create a trade war ahead of the next election. The US 10 year treasury yield has dipped below 2% and could fall into negative territory. As long as we are below 2.7% yields we are in a financial "repression". He thinks we are already in recession and the bond yields are already telling us this. We actually need a recession.