Making sense of the markets this week: September 13, 2021

Check the supply chain: We’re out of chips

The pandemic has challenged businesses in many ways—and global supply chain problems are among the biggest threats to global economic growth, as well as a contributor to inflation. As we discussed in this space waaaaaay back at the beginning of the pandemic, if there is one part missing for the assembly of a product, that entire product might be put on hold. Think of a steering wheel for a car: No steering wheel, no car. But in modern times, we’ve discovered that cars run on chips. (Semiconductor shortages have also been called out as a culprit.) 

The move to more electric vehicles adds to the challenge for chip supply. From that CNBC post… 

“The shortage is thought to have been exacerbated by the move to electric vehicles. For example, a Ford Focus typically uses roughly 300 chips, whereas one of Ford’s new electric vehicles can have up to 3,000 chips.”

And the problem goes beyond chips. “You find shortages or constraints all over the place,” says Ford Europe chairman of the management board Gunnar Herrmann in that same post. 

Supply constraints could drop global vehicle production by some 5% in 2021 vs. 2020 levels. In the U.K., vehicle production plummeted to its lowest levels since 1956. And the U.K. is churning out more EV and hybrid vehicles. That eats up more chips. From that post… 

“Approximately 26% of the cars built by U.K. manufacturers in July were either battery electric, plug in hybrid, or hybrid electric, SMMT [the Society of Motor Manufacturers and Traders] said, adding that this is a new record. It said U.K. car factories have turned out 126,757 of these products since the start of the year.”

We’ll keep an eye on this chart and the search for chips. Auto sales figures courtesy of Liz Ann Sonders at Charles Schwab: 

And while the pandemic has created its own supply chain issues, the chip shortage and semiconductor challenge is not a new event. The modern (technological) world runs on chips. We need these chips in everything from our smartphones to our dishwashers to our vehicles. Chips are a necessary commodity, perhaps not much different in practice than a nation needing oil and natural gas and other materials. From that Time link… 

“In 1990, 37% of chips were made in American factories, but by 2020 that number had declined to just 12%. All the new pieces of the growing pie had gone to Asia: Taiwan, South Korea and China. Chip fabs aren’t just factories, but linchpins of American self-reliance.”

The geopolitical risks are massive. Relying on foreign chips is the same as relying on foreign oil. Stop the flow of chips, and you stop the flow of information and economic development. 

We certainly know that nations have gone to war over oil. 

The U.S. and other nations are waking up to the need to be more self-sustainable on the chip front. A new bill in the U.S. addresses the concern and dire need. From that Time post… 

“If the U.S. Innovation and Competition Act survives its journey through the House and becomes a law, billions of federal dollars will flow into the semiconductor industry—already one of the most profitable. But it will take years to turn that investment into new chip factories, new chip designs and a new pipeline of engineering talent.…

“Until then, chip manufacturing—and all of the geopolitical and economic reverberations it causes—will continue to depend on a global web, stretched delicately across the oceans.”

Such demand and scarcity might create an obvious investment opportunity. In a future post I will look into the ETFs and stocks that will help you gain additional exposure. It might be a good option for the “explore” component of your portfolio. 

On that, here’s a taste CHPS from Horizons. 

Bad news is now good news

This is a theme I have suggested over the last couple weeks. The great fear for the markets is that the economy might get too hot, creating inflation, and the need to remove stimulus and hike rates. (We covered the fear of a taper tantrum here.) 

If we have a weakening or tempering of economic growth and growth prospects that may remove the need to hike rates. It might give the excuse to keep much of the stimulus flowing. 

The concept is gaining steam from the real experts. We could enter a goldilocks period of tepid growth. In this Globe and Mail (paywall) market update, Ipek Ozkardeskaya, senior analyst with Swissquote, offered… 

“But bad news was mostly interpreted as good by the global equity markets, as the soft data revived the expectations of a delay in Federal Reserve (Fed) QE tapering.” 

Last week we looked at the slowing Canadian economy. This week the Bank of Canada kept rates steady at 0.25%, and in the accompanying statement painted a mixed picture of a mixed recovery for the Canadian economy. They see enough pockets of growth and still see higher inflation as transitory. They point to those supply chain issues we discussed above as temporary. 

That said, BOC is still ahead of most other major central banks in reducing emergency stimulus. The BOC has reduced government bond buying to $2 billion a week from $5 billion a week at the outset of the pandemic.

In last week’s post, we also looked at the trends that have created tepid growth over the last few decades—including declining the demographic trends of wealthy nations. We can add in technology as a major disinflationary force. 

It’s certainly possible that we could have a soft landing coming out of the pandemic and with respect to the stimulus-inspired economic recovery. If everything goes right, recent inflation will be transitory. 

No one knows the future, but perhaps we will carry on as we did in the last few decades: with tepid growth stoked by monetary and fiscal stimulus when required. 

Of course, that’s a lot of things that have to go right. 

Will “bad news” continue to be seen as good news? Economic growth is not too hot, not too cold. 

In this space, we’ll keep an eye out for the return of Goldilocks. 

Big investment houses turn soft or negative on U.S. stocks

And here’s a little round up of bad news as good news for the U.S. economy and markets. And yes, Lance Roberts (no relation—he’s the chief strategist at RIA Advisors—is beating that drum as well. 

This post on Seeking Alpha offers that there is very little room for error on U.S. stocks (especially growth stocks) or the economy. From that post… 

“If global growth remains resilient, the U.S. infrastructure bill passes and COVID-19 cases see a near-term peak (our base case), U.S. yields need to adjust higher. That is especially challenging for more expensive ‘growth’ parts of the market, which are trading with a positive correlation to bond prices. [See Morgan Stanley chart at the bottom.]

“Alternatively, if the economy does slow, many risk premiums look too low versus prior growth scares.”

We’ll see if this gets sorted into the good new files. Morgan Stanley has more than cut their GDP growth projections in half. From that same SA post… 

“While temporary, 3Q21 should see a deceleration; our economists have lowered their tracking estimate for U.S. GDP in the quarter sharply from 6.5% to 2.9%.”

Bank of America sees a U.S. market gain of just 2% for 2022. 

Scott Barlow of The Globe and Mail shared this interesting tweet and assessment from Bank of America and strategist Savita Subramanian: 

Some key points in that report suggest muted returns into 2022 and a negative real return over the next decade for U.S. stocks. They are suggesting the possibility of another lost decade for U.S. stocks. 

Martin Pelletier, portfolio manager at Wellington-Altus, shared this tweet/chart that shows the real earnings yield forecasts and actual earnings yields: 

In the following share on Twitter from Barlow, Subramanian suggested that for every yield increase of 10 basis points (0.10% on 10-year Treasuries), their model would knock 4% off of stock returns. 

It BOA is right, maybe U.S. stocks consolidate and catch their breath for a while. They’ve had quite a run, to say the least. 

BOA does not like the prospects for Fed bond purchase tapering and a rising-rate environment. 

Bill Gates checks into the Four Seasons

Bill Gates’ investment company, Cascades Investment LLC, will pay US$2.21 billion in cash for half of the 47.5% stake of Four Seasons owned by Saudi Prince Alwaleed bin Talal’s investment company, Kingdom Holding Co. The investment will make Gates the controlling shareholder. Gates originally invested in the company in 1997 when it was a public company, and he helped to take it private in 2007. 

Four Seasons is the iconic luxury hotel chain founded by Isadore Sharp in 1961. 

From The Motley Fool… 

“The Four Seasons operated 74 hotels when Gates and Alwaleed bought it in 2007. That count is now 121, on top of 46 luxury residences and 50 more projects in the pipeline. The impending deal values the chain at $10 billion.

“Hotels are coming off their worst year in history. There’s been a rebound in luxury travel, but, according to Bloomberg, mid-rate properties are recovering more rapidly.”

Buying into fear. Being greedy when others are fearful. Perhaps Gates has learned a thing or two from his good buddy, and the world’s greatest value investor, Warren Buffett? 

Canadian banks remove third-party funds

Due to ongoing regulatory developments, the big Canadian banks have pulled their offerings of third-party funds off the shelf. That means when you go see your in-branch TD Bank advisor the only funds that will be offered are TD mutual funds. You won’t get a sniff of the Mawer, Steadyhand, Leith Wheeler or Beutal Goodman offerings Jonathan Chevreau touted in his roundup of the best mutual funds you’ve never heard of. (I’d add Tangerine mutual fund offerings to that list as well; Chevreau says he did not include Tangerine in the post as they are passive index-based offerings, but he’s a fan.)

It has been suggested that the big banks are using regulatory changes as an excuse to tighten up their offerings and drop the competition from their sell sheets. 

Investor advocate Ken Kivenko is not impressed. From an email exchange with Kivenko…  

“The inadequacies of CFR are beginning to be exposed. We would not be shocked to find that CFR could have a net negative effect on investor outcomes as more ‘best interests’ loopholes are exploited. Until regulators and the ‘wealth management’ industry get serious about offering professional advice, there will be no positive change in dealer behaviour or ethics. A New SRO constrained by weak CSA regulations will provide only incremental improvement (reduced investor harm).

“The big losers will, as usual, be the typical retail investor.” 

That said, it appears in-branch advisors were not putting third-party funds to use in a meaningful way. From that Investment Executive post… 

“This change represents a 15% reduction in branch advisors’ product shelf, said Dave Kelly, former senior vice-president and head of TD Wealth Private Wealth Management and TD Wealth Financial Planning, in an April interview.”

And from that same post: the story at RBC…

“The effect should be minimal for the bank, as ‘only a small percentage (about 1.5%) of our assets under administration are held in third-party funds,’ said Michael Walker, vice-president and head, mutual funds distribution and RBC Financial Planning, RBC.”

On research for my site I discovered that, although you can do better with ETFs, some RBC mutual funds are surprisingly good. 

While the move by the banks limits choice and is not investor-friendly, it’s perhaps just more of the same bad experience for a Canadian with modest assets who walks into a bank looking to invest their hard-earning money. 

In a Twitter exchange with a few industry types and journalists I offered… 

It’s the status quo. Canadians are not well-served by the big banks or other mutual fund dealers when they don’t have enough assets to qualify for financial planning and lower fee offerings or fee discounts. There’s nothing on the table or in the works to change that reality. 

More Canadians should simply say goodbye to those high-fee funds. They could go with a lower-fee robo-advisor. On my site, and in this rethinking retirement (RIP) post, I offered a chart from Justwealth that compares their five-year returns to comparable balanced big-bank mutual funds. OK, there’s no comparison. 

Canadians can cut their fees by some 90% or so if they look to the all-in-one asset allocation ETFs you’ll find in the MoneySense Best ETFs in Canada for 2021. Those global ETF portfolios are offered with fees in the range of 0.20%-0.25%. Compare that to mutual funds at 2% or more. It’s a no-brainer. 

For even lower fees, you might do the required research and put in the time to build your own ETF portfolio. 

Looking at the big picture, the Canadian mutual fund industry (including regulators, IMHO) is not on your side. 

The answer is simple. Leave. 

Dale Roberts is a proponent of low-fee investing who blogs at cutthecrapinvesting.com. Find him on Twitter @67Dodge.  

About Dale Roberts

Dale Roberts is a former investment advisor and proponent of low-fee investing. He created the Cut The Crap Investing blog in 2018. Find him on Twitter for market updates and commentary, every day.

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