The world continues...part 2
We continue our discussion about stock market volatility and the performance of the economy. Last quarter was one of the more volatile periods ever recorded for stock markets, and we noted that this most likely came from the unprecedented number of geopolitical events that occurred in such a short period of time. We also noted that if we looked past the headlines and focus on the data, we could see some constructive economic developments. We concluded that while we should not ignore the headlines (they can ultimately impact the economy), we should focus on the observable data. This week, there was a significant amount to analyze:
- The Bank of Canada, the US Fed and the Bank of Japan all released their investment rate decisions and held their administered rates unchanged (Figure 1).
- There has been a lot of discussion about the pressure to significantly lower administered interest rates that the US administration continues to place on FOMC Chair Powell. This is concerning.
- One of the reasons that the US is such a strong contributor to global financial markets is because of the independence of their central bank. There are many examples of countries where mismanagement of balance sheet and a loss of faith in a central bank have caused serious issues. In the last 30 years, the United Kingdom, Mexico, Thailand, Venezuela and Iceland all have had 15% to 75% currency devaluations in very short order (hours to months) because of a loss of confidence. So, this kind of development, while rare, is important to monitor.
- US GDP came out way ahead of expectations for this most recent quarter, but the data is skewed because of buying ahead of tariff deadlines. If we look at the first half of the year as well, the smoothed results were 3% over the two periods. Canada was in a similar situation at 1.3%, but we also note that over the last two months, GDP here has been essentially flat.
- Inflation was higher with Core and headline PCE coming in ahead of expectations at 0.3% for the month. This translated to higher-than-expected year-on-year inflation at 2.8%. The Jobs report was also released this morning, and it was well below expectations and that has taken markets lower into the long weekend.
“This means that” we maintain our conclusion. While headlines remain alarming, we do not see real deterioration in the economy at this point. We must stick to our investment process and continue to buy great quality companies.
National Instrument 31-103 requires registered firms to disclose information that a reasonable investor would expect to know, including any material conflicts with the firm or its representatives. Doug Johnson and/or Pathfinder Asset Management Limited are an insider of companies periodically mentioned in this report. Please visit www.paml.ca for full disclosures.
Changes in Leverage. We are increasing the asset ceiling to 2.0 times the market value of equity for Pathfinder International Fund and Pathfinder Conviction Fund to be consistent with Pathfinder Partners’ Fund and Pathfinder Resource Fund.
For more information, please follow the links above to review the fund term sheets.
*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Partners’ Real Return Plus Fund are presented based on the masters series of each fund. The Pathfinder Core: Equity Portfolio and The Pathfinder Core: High Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder Core: Equity Portfolio (January 2011), Pathfinder Core: High Income Portfolio (October 2012) Partners’ Fund (April 2011), Partners’ Real Return Plus Fund (April, 2013), and Partners’ Core Plus Fund (November 2014).
Pathfinder Asset Management Limited (PAML) and its affiliates may collectively beneficially own in excess of 10% of one or more classes of the issued and outstanding equity securities mentioned in this newsletter. This publication is intended only to convey information. It is not to be construed as an investment guide or as an offer or solicitation of an offer to buy or sell any of the securities mentioned in it. The author has taken all usual and reasonable precautions to determine that the information contained in this publication has been obtained from sources believed to be reliable and that the procedures used to summarize and analyze such information are based on approved practices and principles in the investment industry. However, the market forces underlying investment value are subject to sudden and dramatic changes and data availability varies from one moment to the next. Consequently, neither the author nor PAML can make any warranty as to the accuracy or completeness of information, analysis or views contained in this publication or their usefulness or suitability in any particular circumstance. You should not undertake any investment or portfolio assessment or other transaction on the basis of this publication, but should first consult your portfolio manager, who can assess all relevant particulars of any proposed investment or transaction. PAML and the author accept no liability of any kind whatsoever or any damages or losses incurred by you as a result of reliance upon or use of this publication.