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Hello everyone. Welcome to the weekly roundup. Today we will cover interest rates, AI, and market opportunities.

Hello Ben.

Hi Eva.

I feel like you've been riding solo for a while.

I've had a couple weeks. I think that's true.

Yeah.

Glad back. [laughter]

Okay, we're going to get right into it with interest rates. The Bank of Canada raised rates um while the Fed stayed on hold. What does this policy divergence mean for the Canadian dollar, bond yields, mortgages, and you know, generally for the Canadian investor?

I think that's a great place to start. Um, and that has been it's been flipping around so much this year as we came into the start of the year anticipating cuts and then we had the war start and we've been bouncing around even as [snorts] quickly as two weeks ago. It was 40% chance of a raise. um and then obviously popped up to the fact that they decided to move forward with a raise.

I think it continues to be my view anyways and our view is that they're so scared of the the recent memory of this COVID inflation runaway that they're scared of inflation getting out of control again. Um it's a bit of a surprise just because the other economic data doesn't tend to support it because uh unemployment's rising and the economy is stalling. So raising into that backdrop is typically a recipe for disaster. So we'll see what happens. Um but ultimately what it does is it puts an an additional tax on people that are already being taxed because your boring costs are going up across the board. Uh anybody with variable rate mortgages or home equity lines or any of those types of vehicles um are going to in increase the cost 25 basis points. Um, so it tightens financial conditions and so you know I guess you could argue that's probably slightly bullish the dollar.

Um, but uh so many other inputs on on that. I'd say that that would be the view. I think they're probably going to have to backtrack on this at some point. But um certainly the the raise happened and we didn't anticipate it, our economics team didn't anticipate it until start of next year before they started to raise. So I think we'll have to see what the next 30 days look like and the the knock-on effects of uh higher uh cost of money.

Okay. So we're just going to revisit the concerns around AI financing. I know we looked at this about a month ago. Um, but are we reaching the point where the rising capital spending uh is beginning to outweigh, you know, AI's growth potential?

That's probably the biggest question of uh the next decade, I think, um is how quickly can this happen? And yeah, I think it was maybe it was last week that I put out that there's, you know, the big five, Google, Meta, Amazon, Facebook, um, are all planning to spend, uh, something in the neighborhood of a trillion dollars in capex over the next year. And so it's that feeling that China and the US are deciding who's going to continue to be the leader here. Um, that one can't lose over the other. and this uh this kind of focus on who's going to be the leader there.

One of the things I struggle a bit with is now that AI has started to build on itself where the the um systems are now building the theirelves starting to make money um like the the transactions that are happening behind the scenes now are uh material and the systems are doing it all now. um I tried to balance where's the money going to come in, how's the revenue going to come in to support that and it seems like they're starting to do it by themselves. So that'll be an interesting nuance to pay attention to but yeah are we reaching the peak of the bubble I think is the kind of the question and uh I think the answer is the jury's out but the uh the self-fulfilling prophecy of you lend to me I lend to you like Nvidia Oracle the all these interconnected lenders that you know I'll I'll rent you my chips but you got to give me the money to do that. Um, it is a bit of a scheme and something to be conscious of and higher higher borrowing costs certainly have an impact on how quickly this could unravel.

Okay, so we're getting into the markets. Um, US stocks appear to remain, you know, expensive relative to international and emerging markets. Uh, could this be a good time for investors to consider increasing global exposure?

So I think so. I think so. I think I mean I think there's certain pockets of the world that are I'd say cheap on a valuations basis with China and India being two major ones. We looked at I think we discussed Germany briefly or I mentioned it last week. I think those three countries I think look relatively inexpensive to the other uh places in the world. I mean the S&P uh earnings have been continuing to accelerate. Um, so their their levels have been coming down as well because price has kind of been sideways for a bit here. And if you look at the underworkings, kind of the churning within the S&P, there's some companies and sectors that look uh extremely inexpensive. Like if you look at gaming or consumer discretionary, those look pretty inexpensive relative to the the big cap market.

So yeah, I think there's opportunity to look around. like there's opportunity to be a stock picker and uh look at different countries that can offer us some value as opposed to just buying the S&P and going to sleep. Um so I think the next five years probably are the the best times that we've seen in quite some time where you could look that look at good buys and outperform what the S&P is doing. Okay, let's see the charts.

All right.

All right. So, we are recording this on Thursday, October 29th around uh 1:30. So, anything that happens between now and next week, we'll comment on that. Um it is the uh last week October and last week of the fiscal year for all Canadian banks. Um so, we'll be uh everyone back to starting a new year next week.

Um, let's start off just thinking about sentiment a little bit. This chart is about the sentiment in the markets. This is a great way to assess how people feel about things. This is from our internal team. And it's broken down by momentum, volatility, breadth, risk, appetite, speculation, and surveys. And right now, we are sitting in this uh the red light red um pessimistic view. Last week we were a little bit higher. And you know, as I've said over the years, you want to buy extreme pessimism and you want to sell extreme optimism. We're leaning towards that pessimism area. So that does, I think, present some opportunities to continue to look at where is the areas that you could buy where the market's kind of pessimistic and and scared.

The other as you look, I like to look at the different levels as well. And if we look at this line uh specifically risk appetite, risk appetite is pretty low as well. So I think these are reasonably good ideas around where you could pick away good companies that are probably oversold that could present some good opportunities for you. So I like the area that we're sitting in today and it's something that gives me some confidence around if I'm looking to add to positions that, you know, maybe things are overdone to the downside in that area.

This is another one. This is around speculative positioning. So this is for speculative traders and this would be across the whole sector. So equities, rates, FX and commodities. So I like to look at these as well from a perspective of what they mean. You're looking at the S&P 500. Actually, you get a slight negative feeling towards the S&P 500. So that's interesting. Even though the levels that we're at are high on an absolute basis, there's kind of a negative feeling associated with that.

And then an area that I've been talking about now for a year is rates or bond markets. And so if you look at the 30-day, 2-year, 5year, 10 year, 30-year, you look across that uh sector as well. And 30 days, Fed funds pretty neutral actually. So no one's short or long, just kind of in a neutral positioning. But then if you look two-year out to the 30-year, like the 10 and the 30, pretty negative positioning. So, you know, if we do see yields start to uh fall and prices start to rise, you could get a bit of an impulse where you get a you get a day where the those areas are up 5 6 7 8%.

Obviously, if something materially happens, those can go up bigger than that. Um, but you get still negative sentiment around the bond market. And then if we look at FX and commodities, FX, there's a few areas there where the euro is quite negatively positioned versus the US dollar. Same with GBP sterling versus US dollar. So that's interesting if you get any positive news out of those two areas that could be a positive trade for owning euros and GBB.

If we look down into commodities um obviously energy which is getting a lot of attention right now so quite uh positioning is quite speculative to the long side still. Um, so that gives me a sense of, you know, maybe there's not uh necessarily the opportunity to buy or to sell in that area. It's more of a sit and wait and and be patient and there's not a material leaning to one side or the other.

Um, this one is about the earnings and so S&P, this is S&P 500. So this is US markets, 24% reported so far. Um, no really material stands out just yet. So, this consumer discretion area, as I mentioned, is an area that's been um it appears oversold. So, we're seeing actually some bounce in some of the names today. Same with utilities. We're getting some bounce out of those names where those stocks are down 25 30% um year-over-year. So, there's I think a couple of opportunities in that space.

This is where we are today. Amazon, Lily, Mastercard, Intel, um some big names that are reporting this evening. Bristol Myers, Altria, and then tomorrow would be Berkshire, Exxon, um are some major names to pay attention to. But uh overnight tonight after the close, we're going to have some really big earning calls to pay attention to with uh I'd say Amazon, Intel are big ones to see what happens from here.

If we look on the Canadian side, Canada's a bit later in their reporting cycle, only 4% reported so far. So nothing really material to come out of this. But um again on a on a daily basis here we get uh tech and TMX and Methanex and Air Canada some some bigish names to pay attention to see what happens with their results. Tomorrow we get a couple of energy names as well with Imperial Oil. CNR is a good one to watch at as well to see what's happening with transportation.

Last look is around Canadian inflation. So this comes back a bit to my thinking around why did they raise uh it was part of the question off the top biva you if you look at these two numbers the red line would be average core CPI so this would be um their their trim number that the bank of Canada looks at 1.9 which is below their level um and then if you look at total CPI 3.1 that's primarily elevated because of oil almost exclusively because of oil and so for the first time In a long time, we've seen the Bank of Canada say, "We're raising rates because we expect inflation to be up in the future," which is a bit of a different approach than they've done in the past.

So, we'll see what the impacts are from this, but you get typically when you get inflation falling like this, a trim inflation falling, they take no action. In fact, uh when that level reaches probably one and a half or one, if we do approach those, they tend to cut into that environment. And so I think this is a great chart just to think around why I'm a little bit confused with the outcome and the decision to raise into into a picture that isn't necessarily uh super inflationary, but uh they're starting to feel that that's a risk right now.

As always, the opinions expressed are not necessarily those of National Bank Financial. Anything that I we talk about and discuss today may not be appropriate for everyone. If you do have any questions about anything we spoke about, please reach out to Eva or I and we're happy to address and see if anything makes sense for you or your investment strategy.

Okay. Thank you, Ben.

You're welcome.

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

Well, we are starting a new month, so that's good and interesting. And we'll certainly uh be paying attention to to what happens into the next month.

Obviously, the 3rd or the Tuesday is midterm, so that will get pretty much all the air and attention of the market uh next week to see what the outcome is there. Presently, it does look like democrats have a ton of momentum in a positive way. Obviously, slots still can

happen between now and then and um Trump, I think, is trying whatever he can to tilt things in a positive direction for them uh for the Republicans. Um so, most of the tension will be with that. On the marketing side of things, uh earning seasons continue and so we'll continue to watch some surprises. Um Google had their results out before the open today and the market did not like that. stocks down about 10-12% um based on their guidance and so that was interesting. So we'll see if that continues to knock on with Amazon and and the other big names.

Okay. Thank you everyone. Remember to visit, subscribe and follow us on LinkedIn and YouTube at hard investment group. The link to our daily financial heartbeat will be in the caption of this video and in your email box if you're subscribed. for our clients. Please reach out to me if you have any questions or if you like to book a review meeting with Ben. Thank you once again for listening and enjoy the rest of your day. Bye.

Thanks. Thanks everybody. Bye.

Hey everybody, Ben Hart here, Hart Investment Group weekly roundup. It is uh 12:00 on Thursday, October 22nd. So um looking forward to going over what's going on in the world, markets, geopolitics, AI, it's all happening and it's all converging. So I appreciate you taking the time to watch and listen and hear what I have to say today. I am on my own today. So, we'll take you through some charts. We'll talk about many things going on.

But off the top here, we have AI under pressure, stocks under pressure, and bond yields falling. So, interesting. Uh there's so much pressure on yields over the last little while. And now we see the long end. Uh TLT up about 1 and a half%, zero up close to 2%. Even on the shorter end, if you follow the ETFs, IEF, which is the 7 to 10 year US Treasury, that one's up about 1% right now. Even on the Canadian side, you see see yields falling. And so, um, why is that? I think we're seeing the inverse of that, which is energyy's higher. We saw oil through $111 a barrel. Part of that has to do what's going on with Saudi and the Houthis, so Yemen. Um so lots of pressure there uh around what's happening with them right now. So that's forcing uh prices higher that's causing some risk and possible slowdown in economic activity etc. So that's what's going on off the top. So let's jump into the charts then I'll give you my thoughts on what's going on with individual stocks and markets and what we see happening coming ahead. So so thanks so much. Let's uh jump into the charts here.

All right. So, as I mentioned, October 22nd about noon. Um, and uh, let's jump right into the chart. So, first one here is China and Canada holdings of US treasuries. And so, this has caught a bit of attention over the last little while just around people following what's going on. Obviously there was a lots of I think thought around you know Chinese have so much so much US treasuries they can really make a negative negative impact on the economy if they wanted to if they want to sell treasuries if they want to put pressure on yields so on and so forth. I mean honestly that their uh treasury reserves been following now for a decade plus and a lot that has to be has to do with buying assets. So they've been buying assets in a lot of different c countries um Canada, Africa, many other places and uh really actively been doing that. At the same time, you've seen Canada starting to move up and be a larger holder of US treasuries. Some of the media headlines have been talking about the fact that maybe this are Chinese entities in Canada buying US treasuries and that money's been recycling and ultimately the Chinese government still wants to have control over what happens with treasuries. I think that's false and not not uh exactly what's happening. But we've seen a measured increase in Canada holding US treasuries. And so we'll look at what that means uh kind of bigger picture. But I think it's an interesting nuance given the economic warfare that we're seeing between Canada and right now um that we are increasing our position there. Some of that's diversification but really ultimately big picture that gives us a bit of leverage around who controls the outcome from yields and that does have a big economic impact um towards the US government and that's a that's a negative for President Trump right now.

Second chart right here is snapshot of Canada holdings of foreign bonds by sector. And I think this is interesting and important to look at because it is I mean a factual representation of where this money is. And so this is stats can data. And so if we look at the breakdown here, we'd be looking at CPP QPP. So this is Canada Pension Plan, Quebec Pension Plan. um uh of the $1.15 trillion in the holdings uh $161 billion is in CBP QPP and then if you look at another major player which are mutual funds hedge funds so that would be a huge player and historically has been the biggest um is right in line with Cany banks right now. So that's 358 billion. And if we look over here, this is insurance and pension company uh pension funds. And again, as we start to creep up, and I've mentioned this for a couple of weeks now, if you look at that longer duration, 5% plus, I mean 10 years, 5% plus for a US treasuries um as an actuary on a pension. Right now, you're licking your chops because you're happy to see this. And so it's a lot easier for you to forecast when you have some certainty around I have a fixed rate at this level. It gives me ability to show whether I'm more funded and helps the actuaries and helps the planning. So that number is uh 238 billion. And the last one would be the chartered banks 358 billion. So 31%. This isn't prop trading strategy type of thing. This is just the holdings by the chartered banks. Um and I think it's an important number to look at, but it's a good breakdown. there's nothing nefarious happening and it gives you a sense of where and who holds these uh bonds at this point.

I thought this was an amazing chart. So this chart says general government fiscal assets by country. And so when we think about the world and sometimes you know you may be happy or sad about your your present state in Canada. I mean the largest government financial assets in the world would be Norway because they have their sovereign wealth fund and so that is uh a massive number 200% of GDP and if we look at Canada Canada we're second in the world for government general uh sorry general assets um in the government and so this would be CPP and QBP and these other uh Canadian entities that um have uh assets and so Canada would be the biggest outside the north Norway from a sovereign wealth fund perspective which is pretty incredible and so we punch above our weight when we're looking at and deploying assets around the world. So I thought this was a great chart, really good breakdown. You look at these countries, all the developed countries around the world, Canada's the second biggest.

If we dig into the next phase of the Canada secured international securities transactions Jan 2025 to today and so I think this is a great way to look at it. So um when we're on the right hand side, this is where the a lot of attention's been coming in Canadian buying of foreign securities. So that's uh these are bonds. So 48 billion. So fairly small. Um foreigners buying Canadian securities is massive. It's huge. So I'd say this is 360 billion. So this is a big market increase in foreigners buying Canadian bonds over the past year effectively year and a half. Um and I think this is probably more the story and potentially more of the risk. And so as I've been reallocating u money into bonds, I have been looking elsewhere potentially US and internationally because I think if this tide starts to turn in the other direction, we get selling of Canadian bonds that puts pressure on yields puts and that that steamrolls quite quickly if foreigners start to stop allocating to Canadian bonds as much as they have. So this I think is a real big wild card that we need to pay attention to.

And so the last one I would look at is AI. Okay. And I think it's great and important to look at this because there is so much data coming and it is happening at an incredible speed right now. So this is a great note from Evercore. Um this uh chart is called the hyperscaler capex 12 month forward. So this is looking what are the big companies going to spend Microsoft, Amazon, Google or Kameta. Those those uh five companies what are they going to spend over the next 12 months? They plan to spend close to a trillion dollars in capital expenditures. So that's how much money they plan to spend. Obviously, Meta is getting hit today based on this view of the spend. Um, but the pace at which this is going right now is unbelievable and I think it's something we need to pay attention to because the whole AI economy is now starting to build itself. You're seeing trillions of transactions a day now happening on the AI network across all aspects. It's being integrated in everything you do right now in your life, in your economy.

Um, so huge amount of capex spend. Um, as I've said multiple times, I do believe from a market perspective, this is a this is a bubble. Um, is it h bursting tomorrow or the next day? I don't think so. I think there's a lot and more it can grow and and and scale and size can continue to grow quite quickly. but trillion dollar capbacks over these five companies. If you if you extrapolate that all to the other businesses that are spending on AI as well, it's a huge number. And so I try to think and wrap my head around what's this going to mean for stocks and markets and employment. It's going to have massive impacts and it's going to have ripple effects. And so spend quite a bit of time trying to assess what and where the opportunities may lie to ensure portfolios are positioned appropriately going forward.

As always, uh the opinions expressed in here do not necessarily reflect those National Bank Financial. Should you have any questions about anything we talked about today that may be appropriate for you, please feel free to reach out to Eva or I and we're happy to address and discuss them with you. Please uh book a meeting. We can chat and have a discussion around your portfolio and anything that you think may or may not be appropriate at this time given your risk tolerance.

So that's it for charts of the day. Um lots going on in the world. We're seeing a lot of the companies come out with earnings and so we've gone through the US has certainly been going through an earnings phase here. We had uh Netflix miss earlier this week and stock came off bouncing back a little bit here today. We had Meta uh as well with their results. Um next week we have a fair amount of data to come out that way. We have Lily, which is obviously the big weight loss drug company. Will they be coming out with results? Um, and many of the other big techs coming out. Google on Wednesday, as well as FOMC and Bank of Canada out next Wednesday. So, lots to pay attention to there on tomorrow. On Friday, we have uh CPI Michigan sentiment data as well coming out of the US. So, a huge amount going on the next uh few days, last week of October as we head towards November. So, we'll be watching, paying attention to all of that. As always, thanks uh for joining.

Thanks for listening. Please subscribe to Heart Investment Group on YouTube and have a listen. Watch us every day or every week to give you an update on what's going on in the world. As always, please feel free to reach out at any point. Happy to talk and address any questions that you may have. Thanks so much everyone. Have a great weekend and uh we'll see you all next week.