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Hello everyone. Welcome to the weekly roundup and happy new month. Today we will cover Jackson Hall yields and market sentiments. Hello Ben.

Hi Eva. How's it going?

Going pretty good. September though, you're right. Lots going on in September. I know. And it's just started.

That's right. It's going to be an eventful month. I think so.

Okay. So, we're going to kick things off with uh the Jackson Hole economic symposium that just um happened. Uh so, my question is, have markets fully absorbed the uh higher for longer interest rates and what does this mean for investors?

It's a good question and um I think the to your point the media has definitely taken what what went on at Jackson Hole as the fact that inflation's running higher and we need to be worried about this that and the other thing. Um I'm still not super convinced that that's what War said, but certainly that's what the general media has said is that yes, he he's effectively said rates are going higher. are some of our research from our research partners ISI and Argus the US research providers tend to say yes you know what happens if he does continue on this path which is start to raise in September and again in the next couple of meetings what does this mean big picture you know we've already entered that stagflation which is slowing growth and rising inflation but the US is really the one facing inflation as opposed to Canada And most of that has to do with tariffs. Um, so I'd say that that's a risk. Are we going to hire for longer? Really hard to say.

I think because we've seen Scott Vissent, who's the Treasury Secretary, talk about intervening in the bond market. We've seen bond yields go bananas, as you know. Um, and so, uh, he starts buying bonds September 9th, which is next Wednesday, I guess.

So, we're going to have a sense of what if that has any impact, but yeah, yields have have taken the cue to rise coming out of Jackson Hole and uh I guess guess we'll see what happens there, but not that's not a good sign for risk assets.

Okay. Uh we're going to come back to that uh in a minute. Um but we've recently seen rising Japanese yields.

Could this bring money back home and could this possibly trigger, you know, some global market volatility?

Yes.

We saw Yeah. Exactly. Exactly. Yeah. We saw the Japanese tenure get to 3%. I think it's the first time since 1996, something like that. Um so yeah I think for some of the research that we've been reading this is a huge risk and this is a system systemic risk you know if you get an unwind in the carry trade which is boring again investing in equities effectively um or treasuries um and that trade starts to unwind and leverage starts to come out and as you know this is a self-fulfilling prophecy as the as the ball rolls down the Hillick continues to gain speed and so that that's really I think a global risk that most of the central planners are worried about. Um part of why I think Bentan's starting to intervene in the bond market and um you know if Japan says okay we got two trillion treasuries and we want to keep a lid on our yields again because they've done yield curve control for decades. do they say, you know, maybe we want to push that back that 3% back down to one. Um, they'll start selling treasuries. Um, so you'll have a bit of a double whammy there.

And so I'd say yes, it's a it's a it's a huge risk. Um, can cause volatility, but

I think if it if the risk starts to spiral, then you know this is this is a huge risk to the US market.

Okay. Uh so back to elevated bond yields. Um what does this mean for the markets? Can strong earnings and you know general investor confidence keep stocks going? I think probably not.

I mean I think yields have gotten a little bit too high and so you know one of the things we've been through maybe 10 15 years now of there's no other alternative, right? Everyone thinks you can buy equities and that's it. Um but you know if you can lock in at five or 6% now um and guaranteed rates and you think you and you think inflation comes under control then you're starting to see some institutional money saying why would I own this stock uh ABC company trading at 60 times earnings that pays no dividend when I can buy this company that's that's going to give me a guaranteed bond coupon at 6% for 5 years you it starts to get more attractive and you it's less so individual retail investors, but on the institutional side, you're seeing that you're seeing institutions say, "Well, if I why am I still taking this risk when I have this?" And so I think there's there's um a chance that you see more money start to do that. Um but uh so I think it 5 minutes, 35 seconds would be it's a challenging environment in market and as you know September's October historically have been periods of volatility and you know we're on day two right now and we've already seen significant amount of chop in the markets and so volumes are back big time and so I'd say yeah that the these are these are significant risks that we need to worry about. Yeah. Oh, let's see the charts.

Okay.

Okay. So, we are um recording this uh this week on Wednesday, September 2nd at around uh 12 12:00 right now. So, anything that happens between now and next week, we'll comment on uh at that point.

Okay. So, we're going to touch on yields a bit more and start to point around these levels and just give a sense of what that looks like. And so this is the top line is Japan. Then Germany is the uh the green line. And then the the next blue line is the US. And then um Germany's the last one. Um so sorry, the UK is the the green one. So this is the twos 10. So the 2-year yield and the 10-year yield. And so if you look at Japan, we got a pretty steep yield curve there and materially different. And so that's interesting. And you know some people say that when you have a steep yield curve that's pretty good for economic activity. I think the Japanese one is not related to that because they did this flattening yield curve control for so long. Um they have stopped intervening to some extent and so yields have run up um as a result of there not being intervention in that market but this is a pretty steep curve. UK not too much 20 basis or 60 basis points. Um US and Germany fairly fairly flat curves now we're seeing. So this twos tens is interesting because some people say when you get an inversion that's when we start to see the recession happens within 6 months of inversion. So this is an interesting chart from capital e economics just to show us what the the yield curve looks like.

another chart here which is the excess cape. So cape is one of the um risk metrics that Warren Buffett uses when assessing uh where the risks are in the market. And so the blue line that we're seeing here um this is from 1900. So this is a long long chart. Um but what you notice from most of these peaks that we've seen historically when we get

these peaking types of levels um that tends to mean that we're seeing s excessive excess in the markets valuations are stretched and what you typically get in this kind of environment is you get significant amount of risk when you get valuations stretched to the levels we're at. we did briefly touch the uh 2000 highs on a adjusted basis. Um so I think this is an important level to pay attention to and why to your point is there risk in the markets absolutely. Um and maybe in the past there wouldn't have been places to go but because yields have gotten to the level they're at they're starting to look more attractive again and maybe not necessarily uh need as much concentration in uh risky assets. Um this chart is perspective on government bond yields. So this is since COVID. So a shorter term chart in nature where the red line would be the uh the 10year uh yields in both Canada and the US and so red would be Canada of course and then the black would be um the US. And so what we saw coming out of co we saw them start to track each other fairly closely but since then we've seen a material divergence. And so interesting to see what's going to happen here. Uh last couple of weeks I put up some slides based on the fact that there's lots of money still flowing into Canada, Canadian bonds, Canadian stocks, but more so in Canadian bonds. And so that's kept the yield artificially u uh depressed relative to the US. I do think we probably see this gap close. Uh but I think when I'm looking at asset allocation, this comes into my thinking around do I want to own US bonds versus Canadian bonds. Um and I think there's some reasonable attractive valuations in some of the US bonds given the levels we're at today.

A couple more slides. I think this one is more this is obviously geopolitical in nature. So markets increasingly doubt a straight o reopening before year end.

So this is a good thing to some extent u because the maybe now the market's starting to price in really what's

10:51

10 minutes, 51 seconds

happening in the world. You know we came in super confident at least the the market was super confident that we would get a reopening um before the end of this year. And so now that we've gotten down to the we'll say 30% likelihood of a reopening prior to year end. Now you're starting to see levels uh within commodities, agriculture, these kinds of assets start to be priced more for the fact that maybe this doesn't happen.

Maybe we don't open sooner than everybody thought. And so you get a better pricing of what's happening in the uh in the commodities markets right now. This is a this is this data is from poly market. So it's a predictive um kind of sense of how the world is feeling.

And last one. So, uh, world bond yields at generational highs. And so, you know, I think this is important to think about from an asset allocation perspective.

And so, this, if we take this back to 2000 to here, so effectively, this has been my whole investment, professional investment career. And so, what you're seeing here is you saw for decades, you just saw yields move lower and lower.

And the argument is why was that? Well, part of that was significant intervention in markets. And so we saw yields move lower and lower until we got to the COVID crisis.

And now we've seen yields move back up to the other side. And so if we look at this top one, so this top line, this is the UK. So you know, this is approaching uh 6%. And if we look at the the uh US as well, again, it's starting to move up to that kind of 5.3 5.4 four level. And so these are levels we haven't seen since the early 2000s.

And so when you look at that riskreward, we went through 2022, which was the kind the worst time to be a balanced investor. And so now I think we've approached the the point where being a balanced investor makes a lot more sense where you can get yields at four, five, 6% which gives you some balance. if there is a crisis in the markets, these bonds are going to help you and help protect the portfolio, which didn't happen in 2022. So, these are generational highs and you know, I don't think it gets enough press and attention because everybody wants to own the Nvidiaas of the world. Um, some of the safe, boring bonds right now are starting to look quite attractive.

Um, as always, the opinions in here do not necessarily reflect those of National Bank Financial. I prepared these with the best of my abilities and judgment. Everyone has their own risk tolerance. If you ever have any questions about anything we talk about in the presentation or the charts, please reach out to Eva or I and we're happy to address and discuss anything and if it's appropriate for you as an investment. Thank you, Ben. Welcome.

Uh so what's on the agenda for next week?

Um so yes, so next week uh we have a holiday Monday. Um, so K markets are closed on uh Monday and then we start to head into uh I'd say more of um as we start we get more more data start to come out. Um Friday I guess is probably the biggest data point for the US as we see the jobs numbers come out. Um so we had ADP today in the US which was about 30,000 light. Um but official US payrolls are on Friday. So that'll be probably the most I'd say market moving from a from a perspective of how's the how's the jobs numbers looking. You know, I think we continue to watch the Canada US relations where um this tariff issue is continue to be uh in place and Trump's been out there talking and you know, making up numbers effectively saying, you know, Canada is doing bad things and Canada has 10% unemployment which is worse than the US and all these things that are not true. Um so that'll be important to watch. And from a bond yield perspective, um, BENT is effectively going to start buying on Wednesday of next week. Initially said 2 billion, then 4 billion, I think 8 billion. I don't know. We'll see what that number looks like. Uh, but lots, as you say, we're 2 days in now. Um, by this time next week, I think there's going to be a lot more information and potential volatility in the markets. And so, we'll be watching all of those metrics.

Okay. Great. Thank you everyone.

Remember to visit, subscribe, and follow us on YouTube and LinkedIn at Heart Investment Group. The link to our daily financial heartbeats will be in the caption of this video and in your email box if you're sub subscribed. For our clients, please reach out to me if you have any questions or if you would like to book a portfolio review meeting with Ben. Thank you once again for listening and enjoy the rest of your week. Bye. Thanks everybody. Bye.

Hey everybody, Ben Hart here. It is Thursday, August 27th around 1:00 p.m. So, anything that happens between now and next Thursday, we'll talk about then. But thanks so much for joining me. Hart Investment Group weekly roundup. We'll go over a number of things today: markets, geopolitical events, and many things that are happening right now. I look forward to going through those with you today. So, let's jump right in.

We had Nvidia earnings last night, and they were big. They continue to grow this company. The stock is up about 10% today, plus or minus about $20 a share. Interesting to follow. Obviously, Nvidia has continued to grow, and people have continued to question its ability to continue to grow even at the size and scale they are at. It just shows you how quickly AI is moving and how quickly that continues to take market share.

The other big piece is Jackson Hole. Jackson Hole is the key U.S., and maybe international, market event of the year. We have the U.S. central bank Fed Chair speaking tomorrow, and he will be talking about the views. There is this back and forth around inflation versus interest rates: should we be cutting, or should we be raising?

I saw an interesting research piece today suggesting that it does not really matter what they do on the front end. If they cut rates, the long end is challenged; if they raise rates, the long end is challenged. There are a couple of schools of thought starting to take shape. One suggests that the front end comes way down, inflation is allowed to run a little bit, and then there is further central bank intervention where they put a cap on yields, similar to yield curve control, which Japan did for decades.

That is something we will continue to watch and monitor. If they choose the route of cutting and stimulating, that is going to result in higher asset prices across the board and inflation running a bit hot. It will be interesting to see. From a strategic asset allocation approach, I am not going to touch anything right now. As we know, I have been buying some long bonds further out the spectrum. If they decide to intervene there, obviously that is going to be great, but otherwise it is there to protect the portfolio if something materially bad happens and markets come under pressure.

All right. As I mentioned, we are recording this at 1:00 on August 26. Thanks so much for joining me today. We are going to start off with interest rates. This is a great chart showing the Bank of Canada, Federal Reserve, and European Central Bank.

We're going to start off with interest rates. And so, this is a great chart.

The Bank of Canada is our first column here. Right now, the next meeting is next week, so that is a key piece we are going to watch and talk about next week. The market is implying an 8% chance, which I would say is pretty much zero now. This report was put out on Monday, and some things have changed since then, so I would say there is a pretty low probability of anything happening next week. You would expect them to be on hold.

This is the forward-looking view for what happens in the next three months. The market is not pricing in anything materially happening in Canada, so right now it looks like we are on hold. There are a number of reasons: our inflation is a little bit lighter than the U.S., economic activity has slowed, and employment numbers are a little bit better. Effectively, we are on hold.

The U.S. is a different story. We are now in a position where this is coming forward on September 16, a couple of weeks from now. I think this will be a key piece, and what is said tomorrow in the Jackson Hole meeting will be important and may impact what happens with the forward-looking view. Looking at the bottom, expectations suggest maybe a little bit of a rate increase next year, possibly two increases in the next six months. There will be a lot of debate around what happens there, as the thinking potentially is that they will move forward with the original goal of cutting rates and stimulating the economy, but higher inflation has put a bit of a kink in those plans.

The European Central Bank, led by Christine Lagarde, is also coming up in about a week and a half. Right now, there is a reasonable probability of a 25-basis-point increase. This will be worth paying attention to as we get toward the end of the week. I think it may be more of a coin toss by then, but it will be interesting to watch as interest rates and inflation are moving quite materially, with much of that tied to global geopolitics, the Middle East, oil prices, and so on.

Next is the S&P 500. I always like to look at these numbers. This particular line, where it says weight, shows the weighting of each sector within the index. Technology is 37% of the S&P 500. If you combine technology and communication services, that is similar to capturing most of the tech companies. Looking at some of the smaller-weighted sectors, consumer staples have not done too well relative to other industries and sectors, so there may be some opportunities there. Utilities have also gone sideways to down while paying good dividends, and if interest rates come down, that is a real positive for utilities.

This is a look at the S&P/TSX from an earnings perspective. The S&P/TSX is 85% reported so far quarter to date. Looking at the reported numbers, who has beaten and who has missed, we see materials, industrials, telecom, and energy across the board. The interesting piece here is that materials show a 72% miss, which makes me think this may be worth looking at. Companies like Nutrien, or similar businesses that may have guided lower based on some pressure, could create opportunities if the stock gets hit as a result of the miss. A good business may become oversold, creating an opportunity to add to it.

Financials are 61% reported, with the other Canadian financials reporting over the next couple of days. We will start to see what that number looks like, but generally most financials have beaten from a capital markets perspective. That includes companies raising money through bond issuance, stock issuance, or notes, which makes up a big part of the revenue growth. The question is whether they can continue to grow at these levels. The biggest input for financials is human capital, and if AI is helping some of those numbers, maybe they have the ability to continue growing. That will be something to continue watching.

The next chart is the same as before, but for the U.S. market. The S&P 500 is 93% reported. From my perspective, the standouts are utilities and communication services, where a couple of companies have missed. In the utility space, as mentioned, many businesses have been relatively flat, and if they have missed, there could be an opportunity to buy some good dividend payers.

Information technology remains a big percentage of the S&P, and most companies have met or beaten expectations. That is interesting because forward guidance then becomes important. If companies are guiding significantly higher, what does that mean from a risk-reward perspective? These considerations play into asset allocation decisions, including whether to adjust or take profits in areas that have done quite well.

These are some of the things I am thinking about as we head into the fall, when markets tend to become more active. September and October have historically been quite volatile, as anyone who has invested for a long period of time would know.

This is a chart that I have put up multiple times, and I have put it up again because there has been so much noise in the media around what is going on in the bond market. I often get questions from clients and others about why they would buy bonds when they can buy stocks. Part of it has to do with what is going to happen with interest rates. Bond yields look as attractive as they have in a very long time, and we have reached a bit of a crossroads in terms of how the world’s central banks plan to tackle what happens next.

Starting with the Canada corporate bond universe, if you bought that today, the yield is 4.3%. That is what you would receive from it. If you are getting, for example, 8% on equities and 4% on bonds, you get a balanced conservative portfolio. The question is what happens if interest rates change, which is always the fear when owning bonds. If yields move up by 100 basis points, or 1%, from 4.3% to 5.3%, then you lose a little bit of total value, about 1.4%. If yields move down from 4.3% to 3.3%, then you get about 10% capital appreciation plus the coupon you have been receiving. From a risk-reward point of view, it is quite an attractive time to have exposure to bonds.

Looking longer term and further out the scale, if the U.S. does move toward yield control and pushes yields down, this could be an interesting risk-reward opportunity. It will have more equity-like volatility, but the 30-year U.S. Treasury bond is currently around 5.3%. If that moves from 5.3% to 6.3%, which would be a material move, that could result in about a 10% loss on the investment. If it moves from 5.3% to 4.3%, a 100-basis-point move lower, that could lead to about 20.5% growth in the investment. That is a material risk-reward opportunity in the bond space.

I know I have put this up before, but I think it is important to think about where the opportunity set is at this point. As always, the opinions expressed do not necessarily reflect those of National Bank Financial. They are prepared to the best of my judgment and understanding of the markets and risk tolerance. Everyone has their own unique risk tolerance. If there is anything you have questions about from what we discussed today, please reach out to Eve or me. We are happy to address anything, set up a call, and go through any exposures you have in your portfolio or any opportunities you would like to discuss.

All right, charts of the day are done. As we wrap up and look ahead, there are really two things I will be watching. First is Jackson Hole this weekend, which will be worthwhile to listen to in terms of what central bankers and other financial leaders are saying, and what we can take from the tone of those discussions. Historically, this has been a material event where leaders discuss what is happening in finance, and there are often behind-the-scenes conversations that are worth trying to understand.

For Canada, next week we have the Bank of Canada meeting. As I said, there is very little chance that they are going to do anything with rates, but what the central bankers say coming out of that will obviously be very important. Those are the two key things I will be looking at for next week: Jackson Hole and the Bank of Canada meeting. Last but not least, September and October have historically been more volatile periods, and as people get back to work and school and everything gets back into a flow, volumes may start to pick up and we could potentially see more volatility in certain areas.

We are thinking about how to position the portfolio for what may happen over the next couple of months. We have been quite active in trying to make sure we are positioned appropriately. As always, thanks so much for joining. If you have any questions, please reach out to us. Please go to Hart Investment Group YouTube and have a watch if you want to play this back. Any questions, reach out. Thanks so much, and see you all next week.