Good morning,

 

For those that are new to receiving my ‘periodicals’, welcome. I try to send out some information that those of you who follow your portfolios might find interesting. I’m always curious to know who actually reads them, who files them for a ‘later’ that might never come and who just deletes them with the idea that ‘I don’t want to know… that’s what I pay you all for!’ Regardless of which camp you fall into, I will keep writing them every few months. I’ll also write more often during periods of increased volatility, such as during the initial lock downs of COVID-19 or earlier this year, when we began to feel the effects of interest rate hikes around the globe. The 2022 editions of the newsletter seemed to a have a similar theme throughout the year; inflation. This letter will provide an update on that story, as well as some news on our team. For those particularly interested, you can find older articles on our website, listed below in my signature.

 

New Clients… To Us

I mentioned those new to receiving the newsletter because we recently began managing the investments for about 45 new families. For the past few years, I have been lucky enough to work in the same office as a long-time friend, Paul Robbins. Paul started in the investment industry in 2005 after a few discussions and an interview with my first boss, who became his first boss. He went on to build his own ‘book’ of client relationships. He moved to our offices in 2014 and we’ve worked in the same place (but for different clients) since then. This past summer, Paul decided to retire from our industry and sold a part of his book to our team, which took effect on December 5th. I have met many of Paul’s clients so far and look forward to meeting the ones I haven’t very soon. Either way, we are thrilled at the opportunity and look forward to working with all of you for a long time to come. I have no plans to retire anytime soon, as I’ve mentioned to many of you already! Onto the update…

 

Inflation is…

Easing, hopefully? In the past I’ve written about the different causes of inflation; whether it be an increased availability of cheap money (either through ultra-low interest rates or COVID-related stimulus) or a decrease in the availability of ‘stuff’ coming from overseas as a result of either Russia’s war in the Ukraine or China’s zero-COVID policies. Central banks began raising interest rates, correctly believing that prolonged inflation was a worse outcome than any recession, driven by said rate-hikes. However as we know, rate-hikes bring pain to investment portfolios – when investors can get short-term bonds or deposit notes that have decent yields, they need not take as much risk with equities or traditional bonds to get that same return. Today, it’s possible to get returns from high-interest savings accounts that are more than 3.5% and might even drift higher from here.

 

There’s hope for traditional asset classes, however. As I thought might be the case, China has began the process of walking back on their strict COVID measures (all the while claiming that cases are declining… but that’s not because they’re testing few people or anything… all this is too familiar…). This is important for the supply of goods to the west, as lock downs were causing the major delays for components and finished goods in most industries which caused prices to rise.

 

We’re also (fingers crossed here) starting to see some softening in the North American labour market, which has become the next major focal point for an indication on when central banks might stop hiking rates. One would think that higher unemployment would be bad for stocks and bonds but that’s the backwards world we live in – high rates are worse for these asset classes. Softer employment = less money to spend on ‘stuff’ = prices move lower = central banks cut rates…. All without triggering a deep recession in the meantime, or so the theory goes.

 

From here, my opinion is mixed. I do think we’ve seen the peak of inflation (fingers still crossed) but at the same time, I think it will be a longer road to get back to that 2% per year inflation target that most central banks aim for. Therefore it would not surprise me to see rates go down from here (or at least not move unexpectedly higher) but remain higher than they had been before COVID was a thing. I do also think we will avoid a deep recession. The main reason being that the labour market will remain tight; not because there are more jobs than before COVID but instead because there are fewer people who want to work. Many chose retirement in the past couple of years, and immigration in North America has stalled for mainly political reasons. Until those two factors normalize, I think it will remain easy to find work if you’re looking for it. For these reasons, I’ll be leaning toward shorter-term bonds (under 5 years) of high quality companies, as well as solid, dividend-paying (ideally dividend-growing) equities. The latter tends to be the best protection against inflation, which will erode the purchasing power of our dollar over time. I’ll continue to avoid longer-term bonds, only because I think the returns are too low for those loaning money for that long (say, 10 years or longer).

 

Conclusion

I apologize for the ‘wordy’ letter. When times are good, much of this space is devoted to the updates on our team. For example, Marta is expecting her 3rd baby in April, Lauren will be celebrating her first anniversary on our team on January 4th and Shalu has been recently promoted to Associate Investment Advisor! All we need now is for a strong end to 2022 and the outlook to remain solid for 2023 – I’m optimistic on both fronts. As always, I thank you for your continued support of our team. It is because of your support and their hard work that we were able to be the landing spot for some of Paul’s clients. On behalf of our team, I would like to wish you all a very safe and happy holiday season and certainly a prosperous 2023.

 

Best regards,

George