Today’s environment is mark by such afast-changing policy landscape, that it makes it all the more difficult to make accurate predictions. After all, we are livingin this mind blowing world where bad news can turn out to be actually good news and vice-versa.

While 2017 and 2018 were marked by globalsynchronized growth, 2019 paints acompletely different picture. The graph below clearly shows a downward trend in G7 GDP growth (Graph 1). Tighter credit markets and shaky stock market have led to tighter financial conditions at the end of 2018. At the beginning of 2019, the stock

A SHINDER-TREMBLAY NEWSLETTERA Wealthy Insight

Volume 8

July 2020

Hello friends, “A Wealthy Insight” is a newsletter produced quarterly by the Shinder-Tremblay group to help investors understand investment, theory and strategies, markets movements, leading economic indicators and macroeconomic topics that can affect your investments. We also produce a blog, case studies, white papers and videos to help enrich your investment experience with us.

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central banks through unusual monetary means. This support is likely to have less impact going forward, partly due to theaccumulation of massive amounts of debt indeveloped markets, aging population, and

CONTENTS:

The Macro View

Entertainment Corn erReading idea

2

12

higher political risks. Under such conditions,central bank’s ability to contain the next crisiscould be limited with yields on 12 + trillion dollars of sovereign debt being negative. (Graph 2)

market has rebounded; corporate spreads have narrowed and consumer sentiment hasrisen. However, since May, this advance has been muted by a return to a negative mood.with the US–China tensions on the rise, (US slapping a 25% tariff on approximately 45% of Chinese goods), coupled with employment slowing down, the GDP forecast being lowered across the board, and market volatility all of these have led central banks to be more patient. In the midst of this slowdown, equity markets remain expensivein the US, less so in Europe and other emerging markets. The growth of worldeconomies, since the last financial crisis, hasbeen supported by very accommodative

INFLATION

A recent Oxford Economics paper (Graph 4)has highlighted that an additional tariff on the remaining goods from China will addapproximately 25 bps to inflation. It has alsoargued that if the US were to levy 25% tariffson foreign cars, then inflation would increaseby another 50 bps. For now, importing companies have been absorbing the extra cost associated with Trump’s tariff increases.Nobody knows whether companies would keep absorbing these new costs if the USwere to expand their protectionist stance. Ifthey refuse to keep shouldering the burdenor if their bottom lines simply will allow it, these companies have three main options:

1. They could pass on these extra costs to consumers, which could be hard to do if there are strong alternative products on the market that are made elsewhere;

2. They can reduce their orders;

3. They can look for non-Chinese suppliers

If corporations were to keep absorbing thesecosts, they would see their cash flows shrinkthat would inevitably put buybacks at risk; not a healthy situation for the stock market.

Meanwhile, since the beginning of the year, oil has gone up 50%, and consumer spendinghas gone up 1.6% (1.1% in March and 0.5% in April).

The inflation trend for 2019 is pointing up:

1.3% February

1.4% March

1.5% April

1.6% May

We have had many clients mentioning to us that these stubbornly low inflation rates arerather surprising given the fact that rents area big part of the CPI calculation (Graph 5) and that housing costs as a percentage of disposable income are at an all-time high. The current rent component of the Personal

Consumption Expenditures (PCE) Index—Theuse of PCE is justified as it is the measure that the Fed uses when it evaluates inflation—actually makes up a small portion of the overall inflation component at approximately4%. This low inflation figure could be theresult of the weight of certain items that are

LABOR AND WAGES A surprisingly weak job market pushed the equity markets higher in early June. Bankingthat a negative payroll figure would add to negative sentiment and help force the Fed’s hand in cutting rates sooner rather than later.The payroll numbers came out at a paltry 75,000 last month versus the average of 186,000 per month since the beginning of 2019, which is down from 223,000 per monthin 2018. The current unemployment rate in the US is sitting at a 50-year low of 3.6%, and

yet wages are only up by approximately 3%. Yes, globalization, technology, and demographics are keeping a lid on wage growth, but maybe workers are just afraid to ask for a raise because of all the talks of an impending slowdown. I’m still somewhatperplexed as to why wages are not higher, given that the latest report says that there are over 7.45 million job openings and that this figure exceeds the number ofunemployed workers by 1 million (see graph 7): there is not much slack left. How will all the current job openings be filled?

acyclical: health-care prices, for instance, aregovernment-administered and represent a large portion of the index at 22%. On graph6, you can see that the cyclical component of the inflation gauge is above the Fed’s target but that the acyclical component has been falling steadily.

The current trend in Unit Labor Costs (ULC) is sloping downward. Lower ULC leads inflation lower. Currently, ULCs are below their last recession level, average hourly earnings are up by approximately 3%, but aggregate hours worked is slowing down andproductivity is moving higher towards 3%.

As mentioned in our previous work, data shows that historically, on average, 30

months after the first rate hike in this currentcycle is December 2015 that unemploymentstarted to rise. Also, as you can see on the graph 8 below, the Fed’s easing cycle, whichtook place before the last three recessions, was not enough to spur employment growth.Actually, unemployment (white line) startedto rise almost as soon as the Fed issued a rate cut (blue line).

The Macro View

ShinderTremblay.caVolume 8 | July, 2020

The Bull and the Bear

2 of 13

central banks through unusual monetary means. This support is likely to have less impact going forward, partly due to theaccumulation of massive amounts of debt indeveloped markets, aging population, and

higher political risks. Under such conditions,central bank’s ability to contain the next crisiscould be limited with yields on 12 + trillion dollars of sovereign debt being negative. (Graph 2)

INFLATION

A recent Oxford Economics paper (Graph 4)has highlighted that an additional tariff on the remaining goods from China will addapproximately 25 bps to inflation. It has alsoargued that if the US were to levy 25% tariffson foreign cars, then inflation would increaseby another 50 bps. For now, importing companies have been absorbing the extra cost associated with Trump’s tariff increases.Nobody knows whether companies would keep absorbing these new costs if the USwere to expand their protectionist stance. Ifthey refuse to keep shouldering the burdenor if their bottom lines simply will allow it, these companies have three main options:

1. They could pass on these extra costs to consumers, which could be hard to do if there are strong alternative products on the market that are made elsewhere;

2. They can reduce their orders;

3. They can look for non-Chinese suppliers

If corporations were to keep absorbing thesecosts, they would see their cash flows shrinkthat would inevitably put buybacks at risk; not a healthy situation for the stock market.

Meanwhile, since the beginning of the year, oil has gone up 50%, and consumer spendinghas gone up 1.6% (1.1% in March and 0.5% in April).

The inflation trend for 2019 is pointing up:

1.3% February

1.4% March

1.5% April

1.6% May

We have had many clients mentioning to us that these stubbornly low inflation rates arerather surprising given the fact that rents area big part of the CPI calculation (Graph 5) and that housing costs as a percentage of disposable income are at an all-time high. The current rent component of the Personal

Consumption Expenditures (PCE) Index—Theuse of PCE is justified as it is the measure that the Fed uses when it evaluates inflation—actually makes up a small portion of the overall inflation component at approximately4%. This low inflation figure could be theresult of the weight of certain items that are

LABOR AND WAGES A surprisingly weak job market pushed the equity markets higher in early June. Bankingthat a negative payroll figure would add to negative sentiment and help force the Fed’s hand in cutting rates sooner rather than later.The payroll numbers came out at a paltry 75,000 last month versus the average of 186,000 per month since the beginning of 2019, which is down from 223,000 per monthin 2018. The current unemployment rate in the US is sitting at a 50-year low of 3.6%, and

yet wages are only up by approximately 3%. Yes, globalization, technology, and demographics are keeping a lid on wage growth, but maybe workers are just afraid to ask for a raise because of all the talks of an impending slowdown. I’m still somewhatperplexed as to why wages are not higher, given that the latest report says that there are over 7.45 million job openings and that this figure exceeds the number ofunemployed workers by 1 million (see graph 7): there is not much slack left. How will all the current job openings be filled?

acyclical: health-care prices, for instance, aregovernment-administered and represent a large portion of the index at 22%. On graph6, you can see that the cyclical component of the inflation gauge is above the Fed’s target but that the acyclical component has been falling steadily.

The current trend in Unit Labor Costs (ULC) is sloping downward. Lower ULC leads inflation lower. Currently, ULCs are below their last recession level, average hourly earnings are up by approximately 3%, but aggregate hours worked is slowing down andproductivity is moving higher towards 3%.

As mentioned in our previous work, data shows that historically, on average, 30

months after the first rate hike in this currentcycle is December 2015 that unemploymentstarted to rise. Also, as you can see on the graph 8 below, the Fed’s easing cycle, whichtook place before the last three recessions, was not enough to spur employment growth.Actually, unemployment (white line) startedto rise almost as soon as the Fed issued a rate cut (blue line).

Where Did The Bear Go?

We are six months into the year and we had a recession and a bear market! Anybody remember this? If you look around, it doesn’t feel like both events happened at all. Retail sales were up 14% month over month in May, car sales are surging, pending home sales and mortgage applications are also moving higher, the number of people filing for unemployment is falling rapidly, and the savings rate is rising at a record clip. These figures are great, but they are all headline news. You have to dig a bit deeper, however, if you want to find the valuable nuggets of

information. In this quarterly newsletter, we will give you our perspective on what has been one hell of an unprecedented quarter.

As the market moved further and further from its bottom on March 23, investors have been finding more and more arguments to explain why

this bear market is now in the rearview mirror and will continue chugging to the upside. I will try to enumerate some of these arguments and try to

flesh them out for you.

Today’s environment is mark by such afast-changing policy landscape, that it makes it all the more difficult to make accurate predictions. After all, we are livingin this mind blowing world where bad news can turn out to be actually good news and vice-versa.

While 2017 and 2018 were marked by globalsynchronized growth, 2019 paints acompletely different picture. The graph below clearly shows a downward trend in G7 GDP growth (Graph 1). Tighter credit markets and shaky stock market have led to tighter financial conditions at the end of 2018. At the beginning of 2019, the stock

ShinderTremblay.ca

3 of 12

market has rebounded; corporate spreads have narrowed and consumer sentiment hasrisen. However, since May, this advance has been muted by a return to a negative mood.with the US–China tensions on the rise, (US slapping a 25% tariff on approximately 45% of Chinese goods), coupled with employment slowing down, the GDP forecast being lowered across the board, and market volatility all of these have led central banks to be more patient. In the midst of this slowdown, equity markets remain expensivein the US, less so in Europe and other emerging markets. The growth of worldeconomies, since the last financial crisis, hasbeen supported by very accommodative

INFLATION

A recent Oxford Economics paper (Graph 4)has highlighted that an additional tariff on the remaining goods from China will addapproximately 25 bps to inflation. It has alsoargued that if the US were to levy 25% tariffson foreign cars, then inflation would increaseby another 50 bps. For now, importing companies have been absorbing the extra cost associated with Trump’s tariff increases.Nobody knows whether companies would keep absorbing these new costs if the USwere to expand their protectionist stance. Ifthey refuse to keep shouldering the burdenor if their bottom lines simply will allow it, these companies have three main options:

1. They could pass on these extra costs to consumers, which could be hard to do if there are strong alternative products on the market that are made elsewhere;

2. They can reduce their orders;

3. They can look for non-Chinese suppliers

If corporations were to keep absorbing thesecosts, they would see their cash flows shrinkthat would inevitably put buybacks at risk; not a healthy situation for the stock market.

Meanwhile, since the beginning of the year, oil has gone up 50%, and consumer spendinghas gone up 1.6% (1.1% in March and 0.5% in April).

The inflation trend for 2019 is pointing up:

1.3% February

1.4% March

1.5% April

1.6% May

We have had many clients mentioning to us that these stubbornly low inflation rates arerather surprising given the fact that rents area big part of the CPI calculation (Graph 5) and that housing costs as a percentage of disposable income are at an all-time high. The current rent component of the Personal

Consumption Expenditures (PCE) Index—Theuse of PCE is justified as it is the measure that the Fed uses when it evaluates inflation—actually makes up a small portion of the overall inflation component at approximately4%. This low inflation figure could be theresult of the weight of certain items that are

LABOR AND WAGES A surprisingly weak job market pushed the equity markets higher in early June. Bankingthat a negative payroll figure would add to negative sentiment and help force the Fed’s hand in cutting rates sooner rather than later.The payroll numbers came out at a paltry 75,000 last month versus the average of 186,000 per month since the beginning of 2019, which is down from 223,000 per monthin 2018. The current unemployment rate in the US is sitting at a 50-year low of 3.6%, and

yet wages are only up by approximately 3%. Yes, globalization, technology, and demographics are keeping a lid on wage growth, but maybe workers are just afraid to ask for a raise because of all the talks of an impending slowdown. I’m still somewhatperplexed as to why wages are not higher, given that the latest report says that there are over 7.45 million job openings and that this figure exceeds the number ofunemployed workers by 1 million (see graph 7): there is not much slack left. How will all the current job openings be filled?

acyclical: health-care prices, for instance, aregovernment-administered and represent a large portion of the index at 22%. On graph6, you can see that the cyclical component of the inflation gauge is above the Fed’s target but that the acyclical component has been falling steadily.

The current trend in Unit Labor Costs (ULC) is sloping downward. Lower ULC leads inflation lower. Currently, ULCs are below their last recession level, average hourly earnings are up by approximately 3%, but aggregate hours worked is slowing down andproductivity is moving higher towards 3%.

As mentioned in our previous work, data shows that historically, on average, 30

months after the first rate hike in this currentcycle is December 2015 that unemploymentstarted to rise. Also, as you can see on the graph 8 below, the Fed’s easing cycle, whichtook place before the last three recessions, was not enough to spur employment growth.Actually, unemployment (white line) startedto rise almost as soon as the Fed issued a rate cut (blue line).

Volume 8 | July, 2020

Right now, a bull would say:

• A vaccine is coming: There are over 100 trials, in over 15 countries, that areunderway to find a cure — or cures — to the coronavirus. They are in avariety of phases, and so it is only a matter of time before we get one.

• The central banks have our back: Well, I should add that this time even theother branches of the government are involved now. Liquidity is finding itsway into financial assets of all kinds.

• Rates are low: With the help of the central banks, borrowing rates havenever been this low...ever. It is time to borrow and spend!

• The government will do everything to keep this economy running: Withthis massive fiscal spending, $3 trillion and counting, and probably more tocome, it certainly feels that way.

• Capital waiting to be deployed: As per the graph below, investors, bothinstitutional and retail, are sitting on a mountain of cash waiting to beinvested:

• TINA: Where else would you go but to the stock market? Government bondsare yielding next to nothing, corporate bonds yield spreads versus treasuriesare low, and junk bonds are too risky and have limited upside potential.

• Volatility: The volatility measured by the CBOE VIX Index has been fallingsince the highs of the first quarter. With every drop in volatility the marketmoves higher.

• The US Dollar: The government appears to be successful in lowering thevalue of the world’s reserve currency. This will help global growth and makeUS products/services more affordable on a global basis.

And obviously, there is always another side to every argument.

Graph 1: Assets In Money-Market Funds

Today’s environment is mark by such afast-changing policy landscape, that it makes it all the more difficult to make accurate predictions. After all, we are livingin this mind blowing world where bad news can turn out to be actually good news and vice-versa.

While 2017 and 2018 were marked by globalsynchronized growth, 2019 paints acompletely different picture. The graph below clearly shows a downward trend in G7 GDP growth (Graph 1). Tighter credit markets and shaky stock market have led to tighter financial conditions at the end of 2018. At the beginning of 2019, the stock

central banks through unusual monetary means. This support is likely to have less impact going forward, partly due to theaccumulation of massive amounts of debt indeveloped markets, aging population, and

ShinderTremblay.ca

4 of 13

higher political risks. Under such conditions,central bank’s ability to contain the next crisiscould be limited with yields on 12 + trillion dollars of sovereign debt being negative. (Graph 2)

market has rebounded; corporate spreads have narrowed and consumer sentiment hasrisen. However, since May, this advance has been muted by a return to a negative mood.with the US–China tensions on the rise, (US slapping a 25% tariff on approximately 45% of Chinese goods), coupled with employment slowing down, the GDP forecast being lowered across the board, and market volatility all of these have led central banks to be more patient. In the midst of this slowdown, equity markets remain expensivein the US, less so in Europe and other emerging markets. The growth of worldeconomies, since the last financial crisis, hasbeen supported by very accommodative

Consumption Expenditures (PCE) Index—Theuse of PCE is justified as it is the measure that the Fed uses when it evaluates inflation—actually makes up a small portion of the overall inflation component at approximately4%. This low inflation figure could be theresult of the weight of certain items that are

LABOR AND WAGES A surprisingly weak job market pushed the equity markets higher in early June. Bankingthat a negative payroll figure would add to negative sentiment and help force the Fed’s hand in cutting rates sooner rather than later.The payroll numbers came out at a paltry 75,000 last month versus the average of 186,000 per month since the beginning of 2019, which is down from 223,000 per monthin 2018. The current unemployment rate in the US is sitting at a 50-year low of 3.6%, and

yet wages are only up by approximately 3%. Yes, globalization, technology, and demographics are keeping a lid on wage growth, but maybe workers are just afraid to ask for a raise because of all the talks of an impending slowdown. I’m still somewhatperplexed as to why wages are not higher, given that the latest report says that there are over 7.45 million job openings and that this figure exceeds the number ofunemployed workers by 1 million (see graph 7): there is not much slack left. How will all the current job openings be filled?

acyclical: health-care prices, for instance, aregovernment-administered and represent a large portion of the index at 22%. On graph6, you can see that the cyclical component of the inflation gauge is above the Fed’s target but that the acyclical component has been falling steadily.

The current trend in Unit Labor Costs (ULC) is sloping downward. Lower ULC leads inflation lower. Currently, ULCs are below their last recession level, average hourly earnings are up by approximately 3%, but aggregate hours worked is slowing down andproductivity is moving higher towards 3%.

As mentioned in our previous work, data shows that historically, on average, 30

months after the first rate hike in this currentcycle is December 2015 that unemploymentstarted to rise. Also, as you can see on the graph 8 below, the Fed’s easing cycle, whichtook place before the last three recessions, was not enough to spur employment growth.Actually, unemployment (white line) startedto rise almost as soon as the Fed issued a rate cut (blue line).

So right now, a bear would say:

• A vaccine is coming: Not sure about that. Very few are in clinical trials. If history is any guide, finding a vaccine takes years, and finding one for a coronavirus was never successful.

• Volatility: You really have three levels where volatility plays a major role in terms of potential returns (see table below, thanks to Rosenberg Research). The first one is where volatility trades between 10 and 20. That’s the regime where every asset class does well. The second one is where volatility is between 20 and 30. In this environment, you must manage your exposure, your asset allocation, and your sector appropriately. The last level is the one where volatility explodes to the upside to 30 and above. This is an extremely challenging environment where investors experience huge percentage moves intra-day. I would agree that the occurrence of the last regime is rare, but in a world where politicians and central bankers are trying to suppress the business cycle by keeping interest rates artificially low, flooding the market with a huge amount of liquidity, this dynamic is keeping companies alive that normally wouldn’t be around. This suppresses the perceived risk. But trying to solve a debt problem with extra debt is not a cure. Quite the contrary. With the VIX Index stubbornly high (over 30 now) during the stock market’s march closer to its all-time high, a message now is being sent that government policy is not over, so buckle up!

Volume 8 | July, 2020

Table 1: CBOE Volatility Index Regimes Occurence And Average Return

Source: Bloomberg, Rosenberg Research

Today’s environment is mark by such afast-changing policy landscape, that it makes it all the more difficult to make accurate predictions. After all, we are livingin this mind blowing world where bad news can turn out to be actually good news and vice-versa.

While 2017 and 2018 were marked by globalsynchronized growth, 2019 paints acompletely different picture. The graph below clearly shows a downward trend in G7 GDP growth (Graph 1). Tighter credit markets and shaky stock market have led to tighter financial conditions at the end of 2018. At the beginning of 2019, the stock

ShinderTremblay.ca

5 of 12

central banks through unusual monetary means. This support is likely to have less impact going forward, partly due to theaccumulation of massive amounts of debt indeveloped markets, aging population, and

higher political risks. Under such conditions,central bank’s ability to contain the next crisiscould be limited with yields on 12 + trillion dollars of sovereign debt being negative. (Graph 2)

market has rebounded; corporate spreads have narrowed and consumer sentiment hasrisen. However, since May, this advance has been muted by a return to a negative mood.with the US–China tensions on the rise, (US slapping a 25% tariff on approximately 45% of Chinese goods), coupled with employment slowing down, the GDP forecast being lowered across the board, and market volatility all of these have led central banks to be more patient. In the midst of this slowdown, equity markets remain expensivein the US, less so in Europe and other emerging markets. The growth of worldeconomies, since the last financial crisis, hasbeen supported by very accommodative

INFLATION

A recent Oxford Economics paper (Graph 4)has highlighted that an additional tariff on the remaining goods from China will addapproximately 25 bps to inflation. It has alsoargued that if the US were to levy 25% tariffson foreign cars, then inflation would increaseby another 50 bps. For now, importing companies have been absorbing the extra cost associated with Trump’s tariff increases.Nobody knows whether companies would keep absorbing these new costs if the USwere to expand their protectionist stance. Ifthey refuse to keep shouldering the burdenor if their bottom lines simply will allow it, these companies have three main options:

1. They could pass on these extra costs to consumers, which could be hard to do if there are strong alternative products on the market that are made elsewhere;

2. They can reduce their orders;

3. They can look for non-Chinese suppliers

If corporations were to keep absorbing thesecosts, they would see their cash flows shrinkthat would inevitably put buybacks at risk; not a healthy situation for the stock market.

Meanwhile, since the beginning of the year, oil has gone up 50%, and consumer spendinghas gone up 1.6% (1.1% in March and 0.5% in April).

The inflation trend for 2019 is pointing up:

1.3% February

1.4% March

1.5% April

1.6% May

We have had many clients mentioning to us that these stubbornly low inflation rates arerather surprising given the fact that rents area big part of the CPI calculation (Graph 5) and that housing costs as a percentage of disposable income are at an all-time high. The current rent component of the Personal

LABOR AND WAGES A surprisingly weak job market pushed the equity markets higher in early June. Bankingthat a negative payroll figure would add to negative sentiment and help force the Fed’s hand in cutting rates sooner rather than later.The payroll numbers came out at a paltry 75,000 last month versus the average of 186,000 per month since the beginning of 2019, which is down from 223,000 per monthin 2018. The current unemployment rate in the US is sitting at a 50-year low of 3.6%, and

yet wages are only up by approximately 3%. Yes, globalization, technology, and demographics are keeping a lid on wage growth, but maybe workers are just afraid to ask for a raise because of all the talks of an impending slowdown. I’m still somewhatperplexed as to why wages are not higher, given that the latest report says that there are over 7.45 million job openings and that this figure exceeds the number ofunemployed workers by 1 million (see graph 7): there is not much slack left. How will all the current job openings be filled?

The current trend in Unit Labor Costs (ULC) is sloping downward. Lower ULC leads inflation lower. Currently, ULCs are below their last recession level, average hourly earnings are up by approximately 3%, but aggregate hours worked is slowing down andproductivity is moving higher towards 3%.

As mentioned in our previous work, data shows that historically, on average, 30

months after the first rate hike in this currentcycle is December 2015 that unemploymentstarted to rise. Also, as you can see on the graph 8 below, the Fed’s easing cycle, whichtook place before the last three recessions, was not enough to spur employment growth.Actually, unemployment (white line) startedto rise almost as soon as the Fed issued a rate cut (blue line).

Volume 8 | July, 2020

Even with the equity market back up to almost breakeven on a year-to-date basis, the volatility is still higher than where it was three months after hitting peak level, outside of 2008. You can witness today’s level (dark blue line) on the below graph:

• Inflation: There are two sides to this issue. The first is that the moneysupply is growing at one of the fastest paces we have ever seen. Itis close to an annualized rate of 30%. But the velocity of money isstill low, which means that it is not circulating. Money velocity expandswhen banks are lending and when people and corporations areborrowing to either consume or invest. It is not happening now: oneneed only look at company capex plans that have collapsed.

Chart 2: The 2020 Volatility Vintage is Aging Well

Today’s environment is mark by such afast-changing policy landscape, that it makes it all the more difficult to make accurate predictions. After all, we are livingin this mind blowing world where bad news can turn out to be actually good news and vice-versa.

While 2017 and 2018 were marked by globalsynchronized growth, 2019 paints acompletely different picture. The graph below clearly shows a downward trend in G7 GDP growth (Graph 1). Tighter credit markets and shaky stock market have led to tighter financial conditions at the end of 2018. At the beginning of 2019, the stock

ShinderTremblay.ca

6 of 12

central banks through unusual monetary means. This support is likely to have less impact going forward, partly due to theaccumulation of massive amounts of debt indeveloped markets, aging population, and

higher political risks. Under such conditions,central bank’s ability to contain the next crisiscould be limited with yields on 12 + trillion dollars of sovereign debt being negative. (Graph 2)

market has rebounded; corporate spreads have narrowed and consumer sentiment hasrisen. However, since May, this advance has been muted by a return to a negative mood.with the US–China tensions on the rise, (US slapping a 25% tariff on approximately 45% of Chinese goods), coupled with employment slowing down, the GDP forecast being lowered across the board, and market volatility all of these have led central banks to be more patient. In the midst of this slowdown, equity markets remain expensivein the US, less so in Europe and other emerging markets. The growth of worldeconomies, since the last financial crisis, hasbeen supported by very accommodative

INFLATION

A recent Oxford Economics paper (Graph 4)has highlighted that an additional tariff on the remaining goods from China will addapproximately 25 bps to inflation. It has alsoargued that if the US were to levy 25% tariffson foreign cars, then inflation would increaseby another 50 bps. For now, importing companies have been absorbing the extra cost associated with Trump’s tariff increases.Nobody knows whether companies would keep absorbing these new costs if the USwere to expand their protectionist stance. Ifthey refuse to keep shouldering the burdenor if their bottom lines simply will allow it, these companies have three main options:

1. They could pass on these extra costs to consumers, which could be hard to do if there are strong alternative products on the market that are made elsewhere;

2. They can reduce their orders;

3. They can look for non-Chinese suppliers

If corporations were to keep absorbing thesecosts, they would see their cash flows shrinkthat would inevitably put buybacks at risk; not a healthy situation for the stock market.

Meanwhile, since the beginning of the year, oil has gone up 50%, and consumer spendinghas gone up 1.6% (1.1% in March and 0.5% in April).

The inflation trend for 2019 is pointing up:

1.3% February

1.4% March

1.5% April

1.6% May

We have had many clients mentioning to us that these stubbornly low inflation rates arerather surprising given the fact that rents area big part of the CPI calculation (Graph 5) and that housing costs as a percentage of disposable income are at an all-time high. The current rent component of the Personal

Consumption Expenditures (PCE) Index—Theuse of PCE is justified as it is the measure that the Fed uses when it evaluates inflation—actually makes up a small portion of the overall inflation component at approximately4%. This low inflation figure could be theresult of the weight of certain items that are

acyclical: health-care prices, for instance, aregovernment-administered and represent a large portion of the index at 22%. On graph6, you can see that the cyclical component of the inflation gauge is above the Fed’s target but that the acyclical component has been falling steadily.

Volume 8 | July, 2020

The second is that, with the forced halt to the lion’s share of the economy, the supply side as been altered. This, in any typical economic environment, is highly inflationary because of a reduction in supply while demand stays the same and pushes prices up. This time, at least in the short term, it will most likely be deflationary. The reason for this is that the shock seems to be on both sides of the equation, both supply and demand. With every crisis comes a higher savings rate. This time will be no different. We believe that consumers will become more frugal and spend on goods that they need rather than on those that they want, see chart 3 . We will see inflation, but it won’t be general. And this inflation will be in stuff that people need such as food (see below chart 4 where substitutes are few. The blue bars represent the likelihood of more spending in each category while the black bars represent the pull back in spending.

Some areas where we believe inflation will show up are — just to name a few — food, medical supplies, commodities, and outdoor furniture.

Chart 3: Consumption Habits Chart 4: US Food Price Inflation Accelerating

• Covid-19 Cases: The most recent trend was that the curve was flatteningand the number of cases decreasing. But in the United States, we haveseen a spike in cases in Florida, Texas, and California. This has stoppedsome areas from reopening or has had them go back on their reopeningplans, but in other geographies this is has not been the case. In Canada,and certainly in Quebec, business continue to reopen in phases, and theyare all taking precautions with respect to hand-washing, socialdistancing, and the wearing of masks. What’s most worrisome in boththe US and Canada is that many people do not seem to care anymore.After being forced to stay home for a few weeks (now months), peoplewant to get back to their normal life in a hurry. They becoming more risk-averse, but they are holding their lives and others’ lives in their hands.

Today’s environment is mark by such afast-changing policy landscape, that it makes it all the more difficult to make accurate predictions. After all, we are livingin this mind blowing world where bad news can turn out to be actually good news and vice-versa.

While 2017 and 2018 were marked by globalsynchronized growth, 2019 paints acompletely different picture. The graph below clearly shows a downward trend in G7 GDP growth (Graph 1). Tighter credit markets and shaky stock market have led to tighter financial conditions at the end of 2018. At the beginning of 2019, the stock

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central banks through unusual monetary means. This support is likely to have less impact going forward, partly due to theaccumulation of massive amounts of debt indeveloped markets, aging population, and

higher political risks. Under such conditions,central bank’s ability to contain the next crisiscould be limited with yields on 12 + trillion dollars of sovereign debt being negative. (Graph 2)

market has rebounded; corporate spreads have narrowed and consumer sentiment hasrisen. However, since May, this advance has been muted by a return to a negative mood.with the US–China tensions on the rise, (US slapping a 25% tariff on approximately 45% of Chinese goods), coupled with employment slowing down, the GDP forecast being lowered across the board, and market volatility all of these have led central banks to be more patient. In the midst of this slowdown, equity markets remain expensivein the US, less so in Europe and other emerging markets. The growth of worldeconomies, since the last financial crisis, hasbeen supported by very accommodative

INFLATION

A recent Oxford Economics paper (Graph 4)has highlighted that an additional tariff on the remaining goods from China will addapproximately 25 bps to inflation. It has alsoargued that if the US were to levy 25% tariffson foreign cars, then inflation would increaseby another 50 bps. For now, importing companies have been absorbing the extra cost associated with Trump’s tariff increases.Nobody knows whether companies would keep absorbing these new costs if the USwere to expand their protectionist stance. Ifthey refuse to keep shouldering the burdenor if their bottom lines simply will allow it, these companies have three main options:

1. They could pass on these extra costs to consumers, which could be hard to do if there are strong alternative products on the market that are made elsewhere;

2. They can reduce their orders;

3. They can look for non-Chinese suppliers

If corporations were to keep absorbing thesecosts, they would see their cash flows shrinkthat would inevitably put buybacks at risk; not a healthy situation for the stock market.

Meanwhile, since the beginning of the year, oil has gone up 50%, and consumer spendinghas gone up 1.6% (1.1% in March and 0.5% in April).

The inflation trend for 2019 is pointing up:

1.3% February

1.4% March

1.5% April

1.6% May

We have had many clients mentioning to us that these stubbornly low inflation rates arerather surprising given the fact that rents area big part of the CPI calculation (Graph 5) and that housing costs as a percentage of disposable income are at an all-time high. The current rent component of the Personal

Consumption Expenditures (PCE) Index—Theuse of PCE is justified as it is the measure that the Fed uses when it evaluates inflation—actually makes up a small portion of the overall inflation component at approximately4%. This low inflation figure could be theresult of the weight of certain items that are

LABOR AND WAGES A surprisingly weak job market pushed the equity markets higher in early June. Bankingthat a negative payroll figure would add to negative sentiment and help force the Fed’s hand in cutting rates sooner rather than later.The payroll numbers came out at a paltry 75,000 last month versus the average of 186,000 per month since the beginning of 2019, which is down from 223,000 per monthin 2018. The current unemployment rate in the US is sitting at a 50-year low of 3.6%, and

yet wages are only up by approximately 3%. Yes, globalization, technology, and demographics are keeping a lid on wage growth, but maybe workers are just afraid to ask for a raise because of all the talks of an impending slowdown. I’m still somewhatperplexed as to why wages are not higher, given that the latest report says that there are over 7.45 million job openings and that this figure exceeds the number ofunemployed workers by 1 million (see graph 7): there is not much slack left. How will all the current job openings be filled?

acyclical: health-care prices, for instance, aregovernment-administered and represent a large portion of the index at 22%. On graph6, you can see that the cyclical component of the inflation gauge is above the Fed’s target but that the acyclical component has been falling steadily.

The current trend in Unit Labor Costs (ULC) is sloping downward. Lower ULC leads inflation lower. Currently, ULCs are below their last recession level, average hourly earnings are up by approximately 3%, but aggregate hours worked is slowing down andproductivity is moving higher towards 3%.

As mentioned in our previous work, data shows that historically, on average, 30

months after the first rate hike in this currentcycle is December 2015 that unemploymentstarted to rise. Also, as you can see on the graph 8 below, the Fed’s easing cycle, whichtook place before the last three recessions, was not enough to spur employment growth.Actually, unemployment (white line) startedto rise almost as soon as the Fed issued a rate cut (blue line).

Volume 8 | July, 2020

• Federal Programs Ending: The US government’s stimulus checks doledout in the last few months by way of transfer payments is more thanwhat has been paid out over the last 25 years! Between now and thefall, a slew of support will come to an end, unless the programs arerenewed. The latter is a real possibility for an incumbentadministration that seems to be shuffling the bill to the nextgeneration without batting an eyelash. Early July credit card forbearancesare coming to an end at the same time, where states are most likelygoing to cut their budgets. Mid-month delayed income taxes are due.At the end of the month, the enhanced employment benefit willdrop off. Later in the fall, student loan forbearances as well asmortgage forbearances will come to an end notwithstanding theirrenewal. But how long can these forbearances go on for?

• Buybacks: During the last bull market, corporations had been using amix of extra cash from the 2018 tax break and newly issued debt tofund share buyback programs. On the graph below, you can see thesize of those buybacks. They are massive, to say the least: goodbyeto financial engineering. Now that corporations are not even willingto provide guidance, you can expect this important source of bid tothe market to be absent for a while. Have a look at the graph below

Chart 5: Gross Share Buyback Announcements

Today’s environment is mark by such afast-changing policy landscape, that it makes it all the more difficult to make accurate predictions. After all, we are livingin this mind blowing world where bad news can turn out to be actually good news and vice-versa.

While 2017 and 2018 were marked by globalsynchronized growth, 2019 paints acompletely different picture. The graph below clearly shows a downward trend in G7 GDP growth (Graph 1). Tighter credit markets and shaky stock market have led to tighter financial conditions at the end of 2018. At the beginning of 2019, the stock

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central banks through unusual monetary means. This support is likely to have less impact going forward, partly due to theaccumulation of massive amounts of debt indeveloped markets, aging population, and

higher political risks. Under such conditions,central bank’s ability to contain the next crisiscould be limited with yields on 12 + trillion dollars of sovereign debt being negative. (Graph 2)

market has rebounded; corporate spreads have narrowed and consumer sentiment hasrisen. However, since May, this advance has been muted by a return to a negative mood.with the US–China tensions on the rise, (US slapping a 25% tariff on approximately 45% of Chinese goods), coupled with employment slowing down, the GDP forecast being lowered across the board, and market volatility all of these have led central banks to be more patient. In the midst of this slowdown, equity markets remain expensivein the US, less so in Europe and other emerging markets. The growth of worldeconomies, since the last financial crisis, hasbeen supported by very accommodative

INFLATION

A recent Oxford Economics paper (Graph 4)has highlighted that an additional tariff on the remaining goods from China will addapproximately 25 bps to inflation. It has alsoargued that if the US were to levy 25% tariffson foreign cars, then inflation would increaseby another 50 bps. For now, importing companies have been absorbing the extra cost associated with Trump’s tariff increases.Nobody knows whether companies would keep absorbing these new costs if the USwere to expand their protectionist stance. Ifthey refuse to keep shouldering the burdenor if their bottom lines simply will allow it, these companies have three main options:

1. They could pass on these extra costs to consumers, which could be hard to do if there are strong alternative products on the market that are made elsewhere;

2. They can reduce their orders;

3. They can look for non-Chinese suppliers

If corporations were to keep absorbing thesecosts, they would see their cash flows shrinkthat would inevitably put buybacks at risk; not a healthy situation for the stock market.

Meanwhile, since the beginning of the year, oil has gone up 50%, and consumer spendinghas gone up 1.6% (1.1% in March and 0.5% in April).

The inflation trend for 2019 is pointing up:

1.3% February

1.4% March

1.5% April

1.6% May

We have had many clients mentioning to us that these stubbornly low inflation rates arerather surprising given the fact that rents area big part of the CPI calculation (Graph 5) and that housing costs as a percentage of disposable income are at an all-time high. The current rent component of the Personal

Consumption Expenditures (PCE) Index—Theuse of PCE is justified as it is the measure that the Fed uses when it evaluates inflation—actually makes up a small portion of the overall inflation component at approximately4%. This low inflation figure could be theresult of the weight of certain items that are

LABOR AND WAGES A surprisingly weak job market pushed the equity markets higher in early June. Bankingthat a negative payroll figure would add to negative sentiment and help force the Fed’s hand in cutting rates sooner rather than later.The payroll numbers came out at a paltry 75,000 last month versus the average of 186,000 per month since the beginning of 2019, which is down from 223,000 per monthin 2018. The current unemployment rate in the US is sitting at a 50-year low of 3.6%, and

yet wages are only up by approximately 3%. Yes, globalization, technology, and demographics are keeping a lid on wage growth, but maybe workers are just afraid to ask for a raise because of all the talks of an impending slowdown. I’m still somewhatperplexed as to why wages are not higher, given that the latest report says that there are over 7.45 million job openings and that this figure exceeds the number ofunemployed workers by 1 million (see graph 7): there is not much slack left. How will all the current job openings be filled?

acyclical: health-care prices, for instance, aregovernment-administered and represent a large portion of the index at 22%. On graph6, you can see that the cyclical component of the inflation gauge is above the Fed’s target but that the acyclical component has been falling steadily.

The current trend in Unit Labor Costs (ULC) is sloping downward. Lower ULC leads inflation lower. Currently, ULCs are below their last recession level, average hourly earnings are up by approximately 3%, but aggregate hours worked is slowing down andproductivity is moving higher towards 3%.

As mentioned in our previous work, data shows that historically, on average, 30

months after the first rate hike in this currentcycle is December 2015 that unemploymentstarted to rise. Also, as you can see on the graph 8 below, the Fed’s easing cycle, whichtook place before the last three recessions, was not enough to spur employment growth.Actually, unemployment (white line) startedto rise almost as soon as the Fed issued a rate cut (blue line).

Volume 8 | July, 2020

• Bankruptcies Accelerating: We all saw the news about the bigbankruptcies so far this year such as those of Hertz, JC Penney, Aldo,Roots, and J.Crew. But many more companies, many of these muchsmaller companies are on their way to the graveyard as well. And itshould be mentioned that the number of businesses shutting down forgood are not counted as bankruptcies. On the chart below, the bluebars represent the percentage of businesses in the services industrythat were opened on March 1 and that are now permanently closed.Another industry under great pressure and highly leveraged is the USshale gas sector. The combination of low demand, low oil prices, andhigh debt levels is a sign that things might be beyond challenging in thefall.

Chart 6: Business Marked Temporarily or Permanently Closed on Yelp That Were Open On March 1st, 2020

• Unemployment: We believe that the economy will not get back towhere it was recently (i.e. pre-COVID) for years to come. Theunemployment rate will remain elevated, and millions of folks willneed the government’s help. A recent University of Chicago studyprojects that 42% of the jobs lost during the pandemic will bepermanent. This is not great for public finances or for consumption.The job numbers released on July 2 were impressive. The headlinesaid that 4.8 million Americans went back to work. That’s great news.The problem is that those jobs are not new jobs created and are in (1)areas of the economy most at risk of seeing massive lay-offs againcome a new COVID wave and are in (2) low-wage fields.The unemployment claims have been steadily going down, but whatwe’re more worried about are the numbers of people still claimingunemployment insurance. The total is still at 20 million and refuses togo down. See the chart below:

Today’s environment is mark by such afast-changing policy landscape, that it makes it all the more difficult to make accurate predictions. After all, we are livingin this mind blowing world where bad news can turn out to be actually good news and vice-versa.

While 2017 and 2018 were marked by globalsynchronized growth, 2019 paints acompletely different picture. The graph below clearly shows a downward trend in G7 GDP growth (Graph 1). Tighter credit markets and shaky stock market have led to tighter financial conditions at the end of 2018. At the beginning of 2019, the stock

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central banks through unusual monetary means. This support is likely to have less impact going forward, partly due to theaccumulation of massive amounts of debt indeveloped markets, aging population, and

higher political risks. Under such conditions,central bank’s ability to contain the next crisiscould be limited with yields on 12 + trillion dollars of sovereign debt being negative. (Graph 2)

market has rebounded; corporate spreads have narrowed and consumer sentiment hasrisen. However, since May, this advance has been muted by a return to a negative mood.with the US–China tensions on the rise, (US slapping a 25% tariff on approximately 45% of Chinese goods), coupled with employment slowing down, the GDP forecast being lowered across the board, and market volatility all of these have led central banks to be more patient. In the midst of this slowdown, equity markets remain expensivein the US, less so in Europe and other emerging markets. The growth of worldeconomies, since the last financial crisis, hasbeen supported by very accommodative

INFLATION

A recent Oxford Economics paper (Graph 4)has highlighted that an additional tariff on the remaining goods from China will addapproximately 25 bps to inflation. It has alsoargued that if the US were to levy 25% tariffson foreign cars, then inflation would increaseby another 50 bps. For now, importing companies have been absorbing the extra cost associated with Trump’s tariff increases.Nobody knows whether companies would keep absorbing these new costs if the USwere to expand their protectionist stance. Ifthey refuse to keep shouldering the burdenor if their bottom lines simply will allow it, these companies have three main options:

1. They could pass on these extra costs to consumers, which could be hard to do if there are strong alternative products on the market that are made elsewhere;

2. They can reduce their orders;

3. They can look for non-Chinese suppliers

If corporations were to keep absorbing thesecosts, they would see their cash flows shrinkthat would inevitably put buybacks at risk; not a healthy situation for the stock market.

Meanwhile, since the beginning of the year, oil has gone up 50%, and consumer spendinghas gone up 1.6% (1.1% in March and 0.5% in April).

The inflation trend for 2019 is pointing up:

1.3% February

1.4% March

1.5% April

1.6% May

We have had many clients mentioning to us that these stubbornly low inflation rates arerather surprising given the fact that rents area big part of the CPI calculation (Graph 5) and that housing costs as a percentage of disposable income are at an all-time high. The current rent component of the Personal

Consumption Expenditures (PCE) Index—Theuse of PCE is justified as it is the measure that the Fed uses when it evaluates inflation—actually makes up a small portion of the overall inflation component at approximately4%. This low inflation figure could be theresult of the weight of certain items that are

LABOR AND WAGES A surprisingly weak job market pushed the equity markets higher in early June. Bankingthat a negative payroll figure would add to negative sentiment and help force the Fed’s hand in cutting rates sooner rather than later.The payroll numbers came out at a paltry 75,000 last month versus the average of 186,000 per month since the beginning of 2019, which is down from 223,000 per monthin 2018. The current unemployment rate in the US is sitting at a 50-year low of 3.6%, and

yet wages are only up by approximately 3%. Yes, globalization, technology, and demographics are keeping a lid on wage growth, but maybe workers are just afraid to ask for a raise because of all the talks of an impending slowdown. I’m still somewhatperplexed as to why wages are not higher, given that the latest report says that there are over 7.45 million job openings and that this figure exceeds the number ofunemployed workers by 1 million (see graph 7): there is not much slack left. How will all the current job openings be filled?

acyclical: health-care prices, for instance, aregovernment-administered and represent a large portion of the index at 22%. On graph6, you can see that the cyclical component of the inflation gauge is above the Fed’s target but that the acyclical component has been falling steadily.

The current trend in Unit Labor Costs (ULC) is sloping downward. Lower ULC leads inflation lower. Currently, ULCs are below their last recession level, average hourly earnings are up by approximately 3%, but aggregate hours worked is slowing down andproductivity is moving higher towards 3%.

As mentioned in our previous work, data shows that historically, on average, 30

months after the first rate hike in this currentcycle is December 2015 that unemploymentstarted to rise. Also, as you can see on the graph 8 below, the Fed’s easing cycle, whichtook place before the last three recessions, was not enough to spur employment growth.Actually, unemployment (white line) startedto rise almost as soon as the Fed issued a rate cut (blue line).

Volume 8 | July, 2020

Chart 7: Continuing Jobless Claims

• November 2020 Elections: Let’s not forget this important event inthe fall. The upcoming election will probably be the mostimportant in our lifetime, and we may see several majoreconomic reforms. So far if you read the polls or the bettingmarkets, Biden is clearly ahead by somewhere between 8% and12%, depending on the source. What is worrying for POTUS is thelost ground in swing states. Nowhere in history has a president beenreelected with the unemployment so high at 13.3% (if you believethis number) or the budget deficit higher than 10% of GDP (it is mostlikely near 20% now). Trump has dug himself a deep hole, so deephe may not be able to get out. But in his defense, he made thepollsters blush last time around by winning the White House againstall odds.Joe Biden’s electoral platform puts front and center the wealth gapissue. Some of the Democrats’ initiatives have talked about theredistribution of wealth through higher taxation both on thecorporate side and on the personal side, a tax on wealth, some kindof Universal Basic Income (UBI), and free education for all.

Today’s environment is mark by such afast-changing policy landscape, that it makes it all the more difficult to make accurate predictions. After all, we are livingin this mind blowing world where bad news can turn out to be actually good news and vice-versa.

While 2017 and 2018 were marked by globalsynchronized growth, 2019 paints acompletely different picture. The graph below clearly shows a downward trend in G7 GDP growth (Graph 1). Tighter credit markets and shaky stock market have led to tighter financial conditions at the end of 2018. At the beginning of 2019, the stock

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central banks through unusual monetary means. This support is likely to have less impact going forward, partly due to theaccumulation of massive amounts of debt indeveloped markets, aging population, and

higher political risks. Under such conditions,central bank’s ability to contain the next crisiscould be limited with yields on 12 + trillion dollars of sovereign debt being negative. (Graph 2)

market has rebounded; corporate spreads have narrowed and consumer sentiment hasrisen. However, since May, this advance has been muted by a return to a negative mood.with the US–China tensions on the rise, (US slapping a 25% tariff on approximately 45% of Chinese goods), coupled with employment slowing down, the GDP forecast being lowered across the board, and market volatility all of these have led central banks to be more patient. In the midst of this slowdown, equity markets remain expensivein the US, less so in Europe and other emerging markets. The growth of worldeconomies, since the last financial crisis, hasbeen supported by very accommodative

INFLATION

A recent Oxford Economics paper (Graph 4)has highlighted that an additional tariff on the remaining goods from China will addapproximately 25 bps to inflation. It has alsoargued that if the US were to levy 25% tariffson foreign cars, then inflation would increaseby another 50 bps. For now, importing companies have been absorbing the extra cost associated with Trump’s tariff increases.Nobody knows whether companies would keep absorbing these new costs if the USwere to expand their protectionist stance. Ifthey refuse to keep shouldering the burdenor if their bottom lines simply will allow it, these companies have three main options:

1. They could pass on these extra costs to consumers, which could be hard to do if there are strong alternative products on the market that are made elsewhere;

2. They can reduce their orders;

3. They can look for non-Chinese suppliers

If corporations were to keep absorbing thesecosts, they would see their cash flows shrinkthat would inevitably put buybacks at risk; not a healthy situation for the stock market.

Meanwhile, since the beginning of the year, oil has gone up 50%, and consumer spendinghas gone up 1.6% (1.1% in March and 0.5% in April).

The inflation trend for 2019 is pointing up:

1.3% February

1.4% March

1.5% April

1.6% May

We have had many clients mentioning to us that these stubbornly low inflation rates arerather surprising given the fact that rents area big part of the CPI calculation (Graph 5) and that housing costs as a percentage of disposable income are at an all-time high. The current rent component of the Personal

Consumption Expenditures (PCE) Index—Theuse of PCE is justified as it is the measure that the Fed uses when it evaluates inflation—actually makes up a small portion of the overall inflation component at approximately4%. This low inflation figure could be theresult of the weight of certain items that are

LABOR AND WAGES A surprisingly weak job market pushed the equity markets higher in early June. Bankingthat a negative payroll figure would add to negative sentiment and help force the Fed’s hand in cutting rates sooner rather than later.The payroll numbers came out at a paltry 75,000 last month versus the average of 186,000 per month since the beginning of 2019, which is down from 223,000 per monthin 2018. The current unemployment rate in the US is sitting at a 50-year low of 3.6%, and

yet wages are only up by approximately 3%. Yes, globalization, technology, and demographics are keeping a lid on wage growth, but maybe workers are just afraid to ask for a raise because of all the talks of an impending slowdown. I’m still somewhatperplexed as to why wages are not higher, given that the latest report says that there are over 7.45 million job openings and that this figure exceeds the number ofunemployed workers by 1 million (see graph 7): there is not much slack left. How will all the current job openings be filled?

acyclical: health-care prices, for instance, aregovernment-administered and represent a large portion of the index at 22%. On graph6, you can see that the cyclical component of the inflation gauge is above the Fed’s target but that the acyclical component has been falling steadily.

The current trend in Unit Labor Costs (ULC) is sloping downward. Lower ULC leads inflation lower. Currently, ULCs are below their last recession level, average hourly earnings are up by approximately 3%, but aggregate hours worked is slowing down andproductivity is moving higher towards 3%.

As mentioned in our previous work, data shows that historically, on average, 30

months after the first rate hike in this currentcycle is December 2015 that unemploymentstarted to rise. Also, as you can see on the graph 8 below, the Fed’s easing cycle, whichtook place before the last three recessions, was not enough to spur employment growth.Actually, unemployment (white line) startedto rise almost as soon as the Fed issued a rate cut (blue line).

Volume 8 | July, 2020

In a Nutshell

We expect that the economic numbers will continue to get better until the fall, that the unemployment rate will fall slightly from here, and that domestic policy will remain very accommodative, but we are weary of the next phase of this reopening. We think that, once this excitement about the recovery phase starts to diminish and starts to sputter, likely stubbornly high unemployment claims, weak consumer demand, lower profit margins, and higher prices could derail this irrational exuberance towards risk assets.

In terms of indicators we point to the fact that equities were down 35% before they went up 40% from the bottom in the first six months of 2020. Earnings per share expectations are dropping, but are most likely still too high. We are witnessing a very expensive equity market relative to any time in history as well as sky-high debt levels. Further, there is no vaccine and we are still a reasonable distance away from knowing when we can expect one and whether the international community will work together to deliver it efficiently. Unemployment is at a record high, and recent dents have not been as significant as they could be. Bankruptcies are on the rise, and companies are going out of business. Furthermore, elevated geopolitical risks (related, for example, to the Chinese trade war and interference in Hong Kong, and Russian interference in US politics) and an upcoming US election have us tilting defensively before a potential tumultuous fall.

We remain of the view that we are headed, after this bounce from the trough, to a much slower growth environment, a weaker corporate profitability cycle (hurt by higher cost structure and less demand), and a period of higher inflation against a backdrop of higher debt levels and consumers unwilling to get back to their pre-crisis spending mood.

Thought Leadership Spotlight

Now, we’d like to further support our position by briefly discussing a recent thought piece by William and Mary and University of Delaware economics professor Peter Atwater (@PeterAtwater), who also runs Financial Insyghts, a consulting firm that studies investor confidence and decision-making and the relationship between the two. His article, entitled “Why the Call-Buying Craze Matters,” looks at a recent trend that sees many investors keen on buying and selling call options in a market that had been inching upwards. He sees this trend as being potentially dangerous, as it based, in his view, on a cognitive bias, the belief that the market will ultimately always head upwards.

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CANADIAN PADIS

• Performance for the month:The market bounced back in June, partiallyrecovering the losses of the previous month. The S&P/TSX composite gained 2.52%, while the portfolio gained 1.38%. This lagging return can be attributed to our defensive positioning

• Performance YTD:On a YTD basis, the portfolio is up 14.14%while the S&P/TSX composite return is 16.20%. During the first-half of 2019, we have taken the opportunity to reduce the volatility by trimming and selling some higher beta positions.

• Sector performance:The top performing sectors in June were Consumer cyclicals and Financials, who combined provided a return of 1.56%. Onthe other side of the spectrum, healthcaredragged the portfolio’s return by 0.64%, while technology, real estate andcommunication services also dragged the return by a combined total of 0.32%.

Sector allocation has also changed slightlyin the past month. We increased our cashfrom 6.45% to 11.31% between May 31st and June 30th. Our allocation to basic materials (Gold) was also increased from 5.44% to 9.91%. We reduced ourexposure to the industrial sector from 23.12% to 17.59%, which is still the secondlargest sector allocation in the portfolio. Additionally, the exposure to utilities wentup from 5.42% to 7.68%, by adding sharesof Superior Plus Corporation, and due to good performance from Emera and TransAlta Renewables. By trimming downour position in Shopify, our allocation to the tech sector diminished from 10.33% to 6.57%.

• Stock Performance:From an individual stock perspective, the top contributors to performance for this

month include MTY Food, Franco-Nevada as well as Canadian Tire, who together, produced more than 0.70% of the return.Out of the 40 positions to which we were exposed during the month, 9 yielded negative returns. The two biggest losers, which are now sold, were Descartes Systems (though at a gain since the original purchase) as well as HEXOCorporation, which dragged the return by a combined 1.06%.

On top of selling these two positions, we also sold our position in Canada Goose, after a lackluster earnings report, TFI International and Ritchie Bros, and reduced our position in Shopify after a solid half-year performance of more than108%. We added positions in the goldsector by buying shares of SSR Mining as well as Centerra Gold. We also added a position in Cronos Group after selling our HEXO position, to maintain exposure to the growing cannabis industry.

US PADIS

• Performance of the month:The US market bounced back in June froma negative month of May, with the S&P 500gaining 7.05% while our portfolio gained 6.14%. These gains were slightly enough to totally recover last month’s losses.

• Performance YTD:On a YTD basis, our portfolio is up 13.72%lagging its benchmark by 4.82%, whose return for the year is 18.54%.

• Sector performance:Every sector yielded positive returns in June. Technology bounced back strongly from the previous month, contributing 1.87% of the 6.14% return for the month.Consumer cyclicals, Healthcare, Consumerdefensives, Industrials, Financials and Communication services respectivelycontributed to 1.20%, 1.15%, 0.84%, 0.47%,0.44% and 0.17% of the monthly return.

We remained un-invested in Materials, Energy, Real Estate and Utilities.

Our sector allocation also changed inthe last month. We sold the position in Emerson therefore reducing our exposureto the industrials sector from 18.90% to 15.67%. We also sold our position in Walgreens Boots Alliance and we added shares in PepsiCo. Our exposure to Consumer Defensive rose from 18.67% to 21.71%. We sold our large position in NetApp Inc. and bought, with part of the proceeds, Cisco Systems Inc., resulting in a reduction of our exposure to the tech sector from 21.28% to 17.83%. The cash collected from these sales was not fully reinvested as of the end of Q2, resulting in our cash allocation moving from 1.83% to 5.22%.

• Stock Performance:Only 4 out of the 29 stocks to which we were exposed in June had negative returns. Top performers included Estee Lauder, Analog Devices and StrykerCorporation, who together contributed to more than 1.69% of the monthly return.The biggest detractors to returns included Paychex and Church & Dwight, who dragged down the return by a mere 0.27%.

The investing landscape remains very tricky due to a slew of different macro events such as trade spat, weakening leading eco indicators, lower earnings growth, changing monetary policies just to name a few. For us, the utmost

important rule is to preserve capital. Our actions over the last 6 months have been aimed at exactly that. We raised the cash level, reduced the beta, kept our cyclical exposure underweight and remained in the defensive camp. There are times to play offence and times to play defense. Now is time for the latter. We believe we are late in the business cycle and will remain prudent with our hard-earned client’s funds.

intervention known as quantitative easing or QE. The term premium (the extra yield demanded by investors for holding a longermaturity than rolling over one year paper over the same time frame) has beensubdued, and hence yield curve has loweredwith regard to longer-term maturities. Well,my view is that we ought to look back at history and see just how unique a situation we are in. In 2007, the distorted message was due to foreign buyers of treasuries, in 2000 it was due to a government savings glut, and in the late 1980s it was due to low inflation. Well, during these three periods the yield curve was an accurate predictor of a recession. So let’s be careful before calling the current period “different.”

PMIS The latest PMI (Purchasing Managers’ Index) prints are somewhat disappointing. We are tracking those closely, especially the new orders and price paid components. Recently, Europe dropped below 50, which is where Japan and China are, while the US is hanging by a thread at a touch over 50. On graph 15 below, the green line shows the current level of global manufacturing, which is a touch over the expandatory 50 line, and the yellow line shows the percentage of the country where the indicator is not contracting. This number is falling quickly.

He likens this optimism to the bitcoin craze several years back, where there was almost no end to investors seeking to gain an edge by buying this and other crypto-currency. But when the craze gets too big, and the “crowd” is too convinced that something is inevitable, it is Atwater’s view that the crowd will at some point be proven to be very wrong:

Volume 8 | July, 2020

While the common narratives suggest that the recent surge is a function of the introduction of costless trading and the absence of sports/sports betting, I think those are simply the easiest factors to identity – akin . . . to the idea that the assassination of Archduke Ferdinand caused the First World War.

While the identified factors help to explain why now, I think we need to widen the lens, especially because the mantra underpinning it all is “Markets Only Go Up.”

Twelve years ago, amid the financial crisis, if you had suggested to anyone that markets only go up, you’d have been laughed at. At the time, the impression was that markets only go down. Day after day, as more problems in the housing and banking industries surfaced, the stock market fell to further and further lows. In fact, by late 2008, the only thing the crowd believed was that the markets were going to continue to go lower.

As human beings, we love to extrapolate trends. Cognitively, good or bad, continuation equates to certainty. We take great comfort in believing that the past will be the future.

Atwater links the current trend to investors’ underlying belief that Fed will continue to support and bail out the economy as needed and ensure that asset prices remain stable. And recent Fed actions have proven as much. But how can long can this be sustained. We have previously spoken about how history may not repeat itself but that it certainly does rhyme, and Atwater argues that, just as investors were certain of unending market decline or a continuous market rise in the past, investors’ cognitive overconfidence very likely signals that we are at a turning point. He concludes by making the following assessment: “That the crowd is now certain that markets only go up thanks to the Fed, cautions that a major change is in the wind.”

CANADIAN PADIS

• Performance for the month:The market bounced back in June, partiallyrecovering the losses of the previous month. The S&P/TSX composite gained 2.52%, while the portfolio gained 1.38%. This lagging return can be attributed to our defensive positioning

• Performance YTD:On a YTD basis, the portfolio is up 14.14%while the S&P/TSX composite return is 16.20%. During the first-half of 2019, we have taken the opportunity to reduce the volatility by trimming and selling some higher beta positions.

• Sector performance:The top performing sectors in June were Consumer cyclicals and Financials, who combined provided a return of 1.56%. Onthe other side of the spectrum, healthcaredragged the portfolio’s return by 0.64%, while technology, real estate andcommunication services also dragged the return by a combined total of 0.32%.

Sector allocation has also changed slightlyin the past month. We increased our cashfrom 6.45% to 11.31% between May 31st and June 30th. Our allocation to basic materials (Gold) was also increased from 5.44% to 9.91%. We reduced ourexposure to the industrial sector from 23.12% to 17.59%, which is still the secondlargest sector allocation in the portfolio. Additionally, the exposure to utilities wentup from 5.42% to 7.68%, by adding sharesof Superior Plus Corporation, and due to good performance from Emera and TransAlta Renewables. By trimming downour position in Shopify, our allocation to the tech sector diminished from 10.33% to 6.57%.

• Stock Performance:From an individual stock perspective, the top contributors to performance for this

month include MTY Food, Franco-Nevada as well as Canadian Tire, who together, produced more than 0.70% of the return.Out of the 40 positions to which we were exposed during the month, 9 yielded negative returns. The two biggest losers, which are now sold, were Descartes Systems (though at a gain since the original purchase) as well as HEXOCorporation, which dragged the return by a combined 1.06%.

On top of selling these two positions, we also sold our position in Canada Goose, after a lackluster earnings report, TFI International and Ritchie Bros, and reduced our position in Shopify after a solid half-year performance of more than108%. We added positions in the goldsector by buying shares of SSR Mining as well as Centerra Gold. We also added a position in Cronos Group after selling our HEXO position, to maintain exposure to the growing cannabis industry.

US PADIS

• Performance of the month:The US market bounced back in June froma negative month of May, with the S&P 500gaining 7.05% while our portfolio gained 6.14%. These gains were slightly enough to totally recover last month’s losses.

• Performance YTD:On a YTD basis, our portfolio is up 13.72%lagging its benchmark by 4.82%, whose return for the year is 18.54%.

• Sector performance:Every sector yielded positive returns in June. Technology bounced back strongly from the previous month, contributing 1.87% of the 6.14% return for the month.Consumer cyclicals, Healthcare, Consumerdefensives, Industrials, Financials and Communication services respectivelycontributed to 1.20%, 1.15%, 0.84%, 0.47%,0.44% and 0.17% of the monthly return.

We remained un-invested in Materials, Energy, Real Estate and Utilities.

Our sector allocation also changed inthe last month. We sold the position in Emerson therefore reducing our exposureto the industrials sector from 18.90% to 15.67%. We also sold our position in Walgreens Boots Alliance and we added shares in PepsiCo. Our exposure to Consumer Defensive rose from 18.67% to 21.71%. We sold our large position in NetApp Inc. and bought, with part of the proceeds, Cisco Systems Inc., resulting in a reduction of our exposure to the tech sector from 21.28% to 17.83%. The cash collected from these sales was not fully reinvested as of the end of Q2, resulting in our cash allocation moving from 1.83% to 5.22%.

• Stock Performance:Only 4 out of the 29 stocks to which we were exposed in June had negative returns. Top performers included Estee Lauder, Analog Devices and StrykerCorporation, who together contributed to more than 1.69% of the monthly return.The biggest detractors to returns included Paychex and Church & Dwight, who dragged down the return by a mere 0.27%.

The investing landscape remains very tricky due to a slew of different macro events such as trade spat, weakening leading eco indicators, lower earnings growth, changing monetary policies just to name a few. For us, the utmost

important rule is to preserve capital. Our actions over the last 6 months have been aimed at exactly that. We raised the cash level, reduced the beta, kept our cyclical exposure underweight and remained in the defensive camp. There are times to play offence and times to play defense. Now is time for the latter. We believe we are late in the business cycle and will remain prudent with our hard-earned client’s funds.

ShinderTremblay.ca

ENTERTAINMENT CORNERJim Simons is the greatest money-

maker in modern financial history. No other investor — Warren Buffett, Peter Lynch, Ray Dalio, Steve Cohen, or George Soros — can touch his record. Since 1988, Renaissance’s signature Medallion Fund has generated average annual returns of 66%. The firm has earned profits of more than $100 billion; Simons is worth $23 billion.

Volume 8 | July, 2020

Drawing on unprecedented access to Simons and dozens of current and former employees, Gregory Zuckerman, a veteran Wall Street Journal investigative reporter, tells the gripping story of how a world-class mathematician and former codebreaker mastered the market. Simons pioneered a data-driven, algorithmic approach that is currently sweeping the world.

As Renaissance became a market force, its executives began influencing the world beyond finance. Simons became a major figure in scientific research, education, and liberal politics. Senior executive Robert Mercer is more responsible than anyone else for the Trump presidency, placing Steve Bannon in the campaign and funding Trump’s victorious 2016 run. Mercer also impacted the campaign behind Brexit.

The Man Who Solved the Market is a portrait of a modern-day Midas who remade markets in his own image, but failed to anticipate how his success would impact his firm and his country. It’s also a story of what Simons’ revolution now means for the rest of us.

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Echelon Wealth Partners Inc. is a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.This newsletter is solely the work of Nick Shinder and Thierry Tremblay for the private information of their clients. Although the author is a registered Investment Advisor with Echelon Wealth Partners Inc. (“Echelon”) this is not an official publication of Echelon, and the author is not an Echelon research analyst. The views (including any recommendations) expressed in this newsletter are those of the author alone and are not necessarily those of, Echelon. Every effort has been made to ensure that the contents have been compiled or derived from sources believed to be reliable and contain information and opinions that are accurate and complete. Forward-looking statements are based on current expectations, estimates, forecasts and projections based on beliefs and assumptions made by author. These statements involve risks and uncertainties and are not guarantees of future performance or results and no assurance can be given that these estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.The opinions expressed in this report are the opinions of the authors and readers should not assume they reflect the opinions or recommendations of Echelon Wealth Partners Inc. or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results. These estimates and expectations will prove to have been correct, and actual outcomes and results may differ materially from what is expressed, implied or projected in such forward-looking statements.

Nick ShinderVice President,

Portfolio Manager(514) 905 3619

nshinder@echelonpartners.com

Thierry TremblayVice President,

Portfolio Manager(514) 905 3620

ttremblay@echelonpartners.com

Caroline PaquierAdministrative Assistant

(514) 905 3617cpaquier@echelonpartners.com

Louis GazailleData Analyst(514) 395 0290

lgazaille@echelonpartners.com

CANADIAN PADIS

• Performance for the month:The market bounced back in June, partiallyrecovering the losses of the previous month. The S&P/TSX composite gained 2.52%, while the portfolio gained 1.38%. This lagging return can be attributed to our defensive positioning

• Performance YTD:On a YTD basis, the portfolio is up 14.14%while the S&P/TSX composite return is 16.20%. During the first-half of 2019, we have taken the opportunity to reduce the volatility by trimming and selling some higher beta positions.

• Sector performance:The top performing sectors in June were Consumer cyclicals and Financials, who combined provided a return of 1.56%. Onthe other side of the spectrum, healthcaredragged the portfolio’s return by 0.64%, while technology, real estate andcommunication services also dragged the return by a combined total of 0.32%.

Sector allocation has also changed slightlyin the past month. We increased our cashfrom 6.45% to 11.31% between May 31st and June 30th. Our allocation to basic materials (Gold) was also increased from 5.44% to 9.91%. We reduced ourexposure to the industrial sector from 23.12% to 17.59%, which is still the secondlargest sector allocation in the portfolio. Additionally, the exposure to utilities wentup from 5.42% to 7.68%, by adding sharesof Superior Plus Corporation, and due to good performance from Emera and TransAlta Renewables. By trimming downour position in Shopify, our allocation to the tech sector diminished from 10.33% to 6.57%.

• Stock Performance:From an individual stock perspective, the top contributors to performance for this

month include MTY Food, Franco-Nevada as well as Canadian Tire, who together, produced more than 0.70% of the return.Out of the 40 positions to which we were exposed during the month, 9 yielded negative returns. The two biggest losers, which are now sold, were Descartes Systems (though at a gain since the original purchase) as well as HEXOCorporation, which dragged the return by a combined 1.06%.

On top of selling these two positions, we also sold our position in Canada Goose, after a lackluster earnings report, TFI International and Ritchie Bros, and reduced our position in Shopify after a solid half-year performance of more than108%. We added positions in the goldsector by buying shares of SSR Mining as well as Centerra Gold. We also added a position in Cronos Group after selling our HEXO position, to maintain exposure to the growing cannabis industry.

US PADIS

• Performance of the month:The US market bounced back in June froma negative month of May, with the S&P 500gaining 7.05% while our portfolio gained 6.14%. These gains were slightly enough to totally recover last month’s losses.

• Performance YTD:On a YTD basis, our portfolio is up 13.72%lagging its benchmark by 4.82%, whose return for the year is 18.54%.

• Sector performance:Every sector yielded positive returns in June. Technology bounced back strongly from the previous month, contributing 1.87% of the 6.14% return for the month.Consumer cyclicals, Healthcare, Consumerdefensives, Industrials, Financials and Communication services respectivelycontributed to 1.20%, 1.15%, 0.84%, 0.47%,0.44% and 0.17% of the monthly return.

We remained un-invested in Materials, Energy, Real Estate and Utilities.

Our sector allocation also changed inthe last month. We sold the position in Emerson therefore reducing our exposureto the industrials sector from 18.90% to 15.67%. We also sold our position in Walgreens Boots Alliance and we added shares in PepsiCo. Our exposure to Consumer Defensive rose from 18.67% to 21.71%. We sold our large position in NetApp Inc. and bought, with part of the proceeds, Cisco Systems Inc., resulting in a reduction of our exposure to the tech sector from 21.28% to 17.83%. The cash collected from these sales was not fully reinvested as of the end of Q2, resulting in our cash allocation moving from 1.83% to 5.22%.

• Stock Performance:Only 4 out of the 29 stocks to which we were exposed in June had negative returns. Top performers included Estee Lauder, Analog Devices and StrykerCorporation, who together contributed to more than 1.69% of the monthly return.The biggest detractors to returns included Paychex and Church & Dwight, who dragged down the return by a mere 0.27%.

The investing landscape remains very tricky due to a slew of different macro events such as trade spat, weakening leading eco indicators, lower earnings growth, changing monetary policies just to name a few. For us, the utmost

important rule is to preserve capital. Our actions over the last 6 months have been aimed at exactly that. We raised the cash level, reduced the beta, kept our cyclical exposure underweight and remained in the defensive camp. There are times to play offence and times to play defense. Now is time for the latter. We believe we are late in the business cycle and will remain prudent with our hard-earned client’s funds.

Thierry Tremblayshindertremblay.ca shindertremblaygroup

@shindertremblay

Nick Shinder