The case for Canada

To start this blog, I’d like to quote Jeff Currie of Goldman Sachs. If you don’t know who he is, here is his online profile: “Jeff Currie is an economist and the Global Head of Commodities Research in the Global Investment Research Division at Goldman Sachs. He rose to prominence during the 2000s by forecasting the commodity super-cycle and oil spiking above $100 a barrel. He has been labelled a “maverick” for making bold calls that ‘pack a punch’.” In other words, he’s part of the Smart Money. Here is a recent comment from Mr. Currie:

“We are at the start of a new commodity supercycle – I’ve been doing this 30 years and I’ve never seen markets like this...It is a molecule crisis. We’re out of everything – I don’t care if it’s oil, gas, coal, copper, aluminum, you name it we’re out of it. In oil, we are in super-backwardation, the upside risk is exceptionally HIGH, markets are incredibly tight from a physical perspective over the entire complex.”

~Jeff Currie, Goldman Sachs, February 7, 2022

 

I harp on this, but its important to keep you, the faithful reader, in the know. The transportation part of the chain can and will be fixed … eventually.  But supply will take longer to fix.

Wage growth

Beyond the supply issue noted by Jeff Currie, there is wage growth. As I have been saying (over and over) – its wage growth that is “sticky” insofar as inflation is concerned.

Small business is being forced to pay a higher price for employees. If you want to understand WHY that is the case – read my Trucker Trading blog here for the comments by one restaurant owner I spoke with. In a nutshell: the government shuts your business down so many times that nobody wants to work for you, or your industry. Now, the only way to entice someone to work is through higher wages. These wage hikes are not “transient”.

Guess how easy it is to roll back those new high wages in the future? Answer: Nearly impossible.

Guess what higher wages does to inflation? Answer: Higher wages in business “X” forces other businesses to compete for employees by raising their wages.

And so it spreads. Businesses must charge higher prices to meet the new wage demand = endless circle of inflation. Add this to the supply shortages noted above. You have an inflation rate that’s here to stay a while. Its about as “transient” as death and taxes.

Here’s the US wage chart, which is reflective of Canadian statistics:

Why buy the TSX

One way to profit in this dire picture of more entrenched inflation is to buy resource based markets like the TSX. But don’t take my word for it. A picture is, they say, worth 1000 words.

The 20 year chart below compares the Commodity Research Bureau (CRB) to the TSX (red). It paints a pretty clear picture that, if inflation – which is significantly driven by commodity shortages (and wage growth) is in the cards, investors need to concentrate on the TSX. Sure, the SPX/ NASDAQ was the place to be for investors for the past number of years. That was then. Note how the CRB and TSX move in tight lockstep most of the time. Quantitatively, the correlation line below the chart shows us that they move in sync well over 90% of the time. I’ve circled the correlation – the line is almost always above the “0” line, meaning positive correlation. If you buy into my argument (which I have been making since 2020) for tight supply and entrenched inflation, you need to invest in stocks listed on the TSX.

In addition to the CRB/TSX comparative chart below, you might want to visit a comparative of the TSX vs. US stock market index charts I made on this video. On that video, I illustrate the rotating strength of the markets into the TSX.

At ValueTrend, we remain around 40% invested in a wide variety of commodity focused securities. We hold producers of metals, oil, gas, potash, uranium and precious metals. Most (not all) of these are TSX listed stocks. While not in the same sector, they share the commonality in that they produce the goods necessary to meet the demands of an inflation-driven market. Of note, we have been particularly focused on the oil trade since 2020. We expect the demands noted above will force an increase in oil production in Canada and in the USA. Formerly capped-energy policies by the Prime Minister will need to be reversed, even if temporary. Energy imports from Saudi Arabia have increased 66% since Trudeau took office. We now relay on Arabian oil for 30% of our energy usage. In a moment of delicious irony, the Canadian Prime Minister may be forced to meet this reality by reversing the production caps.  This should only add to our case for focusing on the TSX and our energy producers.

Will there be volatility in the inflation and resource trade? Sure there will. Is it a sure thing? Heck, no! Stocks have risks, don’t ya know? Be that as it may, we are convinced that most growth orientated investors should hold some exposure to sectors offering inflation and interest rate protection (as discussed in my last blog here) stocks. As Warren Buffett says:

“The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffett

 

7 Comments

  • The other day Benjamin Tal commented that profit margins were good prior to the pandemic but even better in 2014-2018 period because inflation was low and wages never rose ( as I experienced first hand). Companies didn’t have to invest in CapEx for that reason among others.
    He said companies can mitigate inflation with productivity enhancements including automation and will therefore increase CapEx to maintain profit margins.
    To your point of small businesses maybe it is more difficult for them to achieve that.
    What do you think of Benjamin’s comments?
    Thanks

    Reply
    • My comment would be: that was then, but this is now. Trudeau shut down the investment in exploration in his “ESG” fantasy. The timing was ridiculous. Did capping
      Canadian production stop carbon use? No–we just import from Arabia to make up the difference – a known country of inequality & abuse – giving them the profits rather than our own producers.
      Read this blog: https://www.valuetrend.ca/you-cant-fix-stupid-but-you-can-profit-by-it/

      Reply
  • Hi Keith ,Thanks for the insights, can ETF’s be used for energy and precious metal sectors instead of selected stocks. I noticed you didn’t mention any particular stocks. Thanks

    Reply
    • Jim you can absolutely use ETF’s-with some limitations-they hold the producers of various commodities. I tend to focus on individual stocks – but ETF’s are a great way to diversify the risk of the trade. The only issue with ETF’s is with commodities like potash, uranium, nat gas, rare earth, or agricultures – in those cases you need to look for the few (if any) stocks in that industry, or play the commodity directly (aka not producers) via an ETF. Eg–uranium, you pretty much have to buy Cameco (disclosure: we own it). Or buy the Uranium commodity ETF. There is no producer ETF because there aren’t enough producer stocks to make an ETF.

      Reply
  • Hi Keith
    Do you have any thoughts on Brazil? It has broken broken a down trend; at least a higher low so far. I have been building a position but am worried about USD. Would like your opinion?

    Thanks Carey

    Reply
    • You will want to watch my video I just recorded–will be posted Friday or Monday–I cover EWZ. It is a trading zone play–not a trend play–see the video. For more on trading zones, take my online course. Zone trading (swing trading) is my personal favorite way to trade

      Reply

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