Wherever you reside or wherever you have traveled, I hope you had an enjoyable summer so far. Here in Toronto it’s been hot, humid, and a bit wet at times, but a good summer nonetheless.

 

Unfortunately, COVID continues to control the narrative of most of our lives. With the onset of the Delta variant earlier this year, and the push for global vaccinations, we have all grown weary of the relentless nature of this pandemic. That said, we’ve adapted and stood strong in the face of adversity. For nearly eighteen months now, The Colling Group has started every day with a team video call.

 

While we’ve managed to retain our efficiency working remotely, I noted to the team on today’s call that I haven’t seen them in person for a long time. For example, the last time I saw Alex in person was last summer and David in March 2020. As most of you know, Luana has worked with me for eighteen years and Rocco for thirteen years, but I’ve only managed to see them twice since the beginning of the pandemic. Zainab replaced Ruby in January but other than her first day and one other occasion, our relationship has been virtual.

 

This has been fine as a temporary measure, but we do look forward to the day where we can come back to the office and combine all the efficient new processes we've implemented during our time working from home, with the benefits of face-to-face interaction. However, I don’t anticipate this will happen until later this year or some time in the first half of 2022.

 

As we look towards the fall months, there are a few key themes we are watching:

Inflation: Secular or Transitory?

As many of you know, I have been firmly in the transitory camp. Demographics, technological efficiency, and a fifty year low in the M2 money supply velocity are just a few of the secular disinflation themes that I expect to keep inflation in check long-term. COVID was a black swan event that created a hole in not only demand, but supply as well. Both have snapped back, driving up prices for certain commodities and goods as a result. However, we don’t see that as a sustainable long-term trend. We’ll continue to watch the data closely.

Continued Corporate Earnings Recovery

So far, so good. We have seen strong numbers across most sectors. We continue to favour secular growth stories over deep cyclical value companies for long-term positions.

Potential for the Reduction of Central Bank Monetary Support

It’s no secret that the unprecedented quantum of monetary support by central banks across the world during the pandemic, which was a temporary measure to support recovery efforts, will come to an end at some point; the market knows this, and is attempting to price it in. However, there is always a risk that expectations and reality are far apart. Central banks can make policy errors – look no further than the US Federal Reserve’s strong stance on initiating interest rake hikes in the fall of 2018. This move was far off market expectations, and as a result we saw a significant sell off. Eventually, the Federal Reserve reversed course and ended up cutting rates later. I think central banks will move very carefully given the potential cost of making policy errors this time around.

The Next Phase for a Calm Yet Cautious Market

We have come a long way from the elevated VIX levels (the VIX is a volatility measure, or fear gauge) in Q1 2020. In contrast, market volatility is low today while investor sentiment gauges put the market squarely in the cautious zone. As Warren Buffet likes to say, “Be fearful when others are greedy, and be greedy when others are fearful.”

 

Right now, greed is not driving markets. Taking that into account, and coupled with low interest rates, a continued earnings recovery, and a supportive monetary environment, we see the conditions in place for a modest move higher towards year-end. Of course, that analysis is data dependent and we’ll continue to monitor the situation closely.

 

I hope you and your families continue to stay safe, and manage to enjoy the rest of the summer. If you have any questions, please reach out to us by phone or e-mail any time.

 

I look forward to seeing you all soon.