MARKET WATCH

After an incredible January, markets have cooled considerably. Month-to-date, most are trading 1% to 4% lower, while commodities, being consummate outliers, have fared even worse. The price of gold (in Loonies) is down almost 4%, while Canadian energy stocks are – partly due to the unseasonably warm weather in North America and Europe – 6% below end of January levels.

Looking forward, the jury is still out on the recession investors have been bracing for. Economic numbers have been mixed, leading to no clear consensus, which is likely why markets have cooled after a hot opening month.

While I’m also expecting a recession, I don’t believe it will be severe. Having said that, enough issues hang in the lurch to change things quickly.

Either way, our portfolios are well-positioned and I wouldn’t be surprised if we continue outperforming for the next year or three.

As always, feel free to reach out if you have any questions, and if you’re looking for more timely information on the markets, you can find them on the research section of my website, or on my Twitter, Facebook, and LinkedIn feeds.

TIME FOR SOME RABBIT HOLES

Now that we’ve settled into our home, the holidays are in the rearview mirror, and the markets are mostly behaving, I’ve found myself with more spare time than I’ve had in years. This provided me with the opportunity to dive into two rabbit holes (one I’ve yet to emerge from): demographics and Russia!

The world has changed in so many ways, but one of the most meaningful changes has been our demographics. Further down you will find a summary of the videos I watched on the topic over the last month.

My second, and more intense, topic of study has been Russia. I’ve long been fascinated by the world’s largest country and, given the current geopolitical situation, I thought it time to gain a deeper understanding of Russia’s historical contexts, politics, and culture. So, apologies for the Soviet-heavy content. I should also caution that, as I’m still working through a number of things, I’m afraid next month might be equally heavy.

BOOKS

Lenin by Robert Payne: Before reading this 1964 biography, I knew little of the man. But, after grinding through this tome, I understand why some consider his life, and early death, among the most influential forces of the 20th century. Lenin was a man of extremes. His work ethic, efforts to educate himself, belief in socialism, and savage intolerance towards those with differing philosophies, were as fanatical as I’ve seen.

As you might imagine, I’m not among the great supporters of the socialist movement. However, though I frequently found his methods appalling, I came away with two surprising notions. First, he truly believed his work would improve the lives of Russians. Second, he deeply regretted his role in enabling Stalin to become his successor. Had Lenin recovered from his health issues, it appears as though he would have demoted Stalin. This, among other reasons, is why the author believed Stalin had a hand in Lenin’s death.

Red Notice by Bill Browder: The true story of an upstart American, who, in the nineties, moved to Russia and founded what would become the country’s largest hedge fund. Though I found that aspect of the story fascinating enough on its own, he also exposed a number of massive frauds orchestrated by Russian oligarchs and a well-known politician whose name rhymes with Newton… if you know what I mean. As you’d imagine, very Russian things began to unfold. This book was a real page-turner. Big thanks to Craig for telling me about it!

ARTICLES

Prisoners of Geography: Ten Maps That Tell You Everything You Need to Know About Global Politics by Tim Marshall: I’m getting back to my roots. In university (before the Internet), if I needed to research a topic, instead of reading a book on it, I’d read a chapter or two from numerous sources. To that point, I read the first chapter of Prisoners of Geography, which covered…you guessed it – Russia! Russia is truly a product of its geography. It’s vast, blessed with natural resources, and, while much of it is largely inaccessible, it’s also been surrounded by hostile neighbours. This confluence of factors has caused Russia to be governed by authoritarian figures throughout most of its history, be they tsars or dictators. If its geography differed, it would likely have been, and continue to be, a very different country.

The Munger Two Step via Farnam Street: “Personally, I’ve gotten so that I now use a kind of two-track analysis. First, what are the factors that really govern the interests involved, rationally considered? And second, what are the subconscious influences where the brain at a subconscious level is automatically doing these things – which by and large are useful, but which often misfunction.

One approach is rationality – the way you’d work out a bridge problem: by evaluating the real interests, the real probabilities and so forth. And the other is to evaluate the psychological factors that cause subconscious conclusions – many of which are wrong.”

The Art of Spending Money - and What it Reveals About Who You Really Are by Morgan Housel: Morgan Housel’s book The Psychology of Money is the best book on, well, the psychology of money that I have come across. This relatively long article, though not a replacement for the book, is a great summary of some of its big ideas. As the psychology of money is such an under-appreciated topic, I highly recommend this for anyone wanting to learn more about how money can better serve you and those you care about!

The Futility of Forecasting via QV Investors: This article discusses two good examples – England’s debasement of currency and the war in Ukraine – of how predictions came up short. As the saying goes: predictions are hard, especially those regarding the future.

DEMOGRAPHICS

Peter Zeihan on Demographics: The following videos are good summaries of the demographic issues facing various geographical regions. I’ve included some short blurbs to recapitulate his main points and share a few of my thoughts:

Understanding the Basics:

• Historically, demographics have been in the shape of a triangle – large numbers of infants/young people, less adults, and few elderly. This has generally been inflationary.
• For much of the last 70 years, as people live longer, demographic graphs have begun to look more like a chimney – equal number of people at each age group, not a lot of bubbles and inflation.
• Recently, due to lower birthrates and longer life spans, many European and some Asian countries have inverted triangles. This has caused them to be more export-oriented and will likely cause financial strains when it comes to supporting retirement pensions and social safety nets.
• We are moving into unprecedented territory.
• Solutions: Countries with challenging demographics need to increase their birthrates and/or immigration.

Canada: Canada’s immigration situation is unique. Like many developed countries, our birthrate is substantially below the replacement rate of 2.1 children per couple. Interestingly, those who move to Canada are older and wealthier than for most countries. This enables them to buy property and invest. On the flip side, a decent number leave Canada (possibly for warmer pastures), while maintaining their Canadian investments. However, new restrictions on property owned by non-Canadians might result in Canada being a less attractive destination, and could also dramatically affect our housing market.

Gen Xers and How They Will Affect the U.S. and New Zealand: The U.S. and New Zealand mostly have chimney-shaped demographics and, for a number of reasons, are doing better than one might expect. However, with relatively low numbers of Gen Xers (as compared to Boomers and Millennials), there will be a hiccup where the smaller number of Gen Xers attempt to fill the intellectual gap left by the retiring Boomers. Fortunately, this should mostly be alleviated when Millennials, ahem, grow up. 

Europe: You can break most of Europe into four categories:

• France and Scandinavia – Not too bad.
• Spain, Portugal and Central Europe – Not great, but have time before things get ugly. However, the clock is ticking.
• Germany, Belgium, Netherlands and Italy – Full inverted pyramid, outlook is grim!
• The Orthodox World (Serbia, Bulgaria, Romania, Belarus, Ukraine and Russia) – Mass emigration of young people due to poor economic situations and high abortion rates has led to some of the lowest birthrates in the world. Russia and Ukraine have the additional burdens of war affecting their populations. The situation is awful.

China: China has the fastest-aging population in history. The fruits of the one child policy are having a catastrophic effect. Recently released “official” childbirth numbers show the Chinese have one of the worst birthrates in history. And it’s quite possible these numbers are inflated.

PODCASTS, MOVIES, AND ALBUMS

Rhythm of the Saints by Paul Simon: When listening to Malcom Gladwell’s biography on Paul Simon last month, he mentioned how underrated he thought his follow-up album to Graceland, Rhythm of the Saints was. After several listens, I agree. It features West Africana and Brazilian drum beats (Graceland integrated South African music) in a manner that was unique and highly enjoyable. Perhaps not as iconic as Graceland, but definitely worth a listen.

A Hard Day’s Night: My neighbour is a huge Beatles fan. A few weeks ago, he got us tickets to see rock and classical musicians play a number of Beatles songs, followed by a screening of A Hard Day’s Night. Considerably more campy than I expected, but also a lot of fun. Sadly, “Back in the USSR” was neither played, nor heard…

Lex Fridman Podcast with Richard Wolff: Marxism and Communism: Richard Wolff began studying and teaching Marxism before it became acceptable, never mind fashionable. In this wide-ranging conversation, he provides a good foundation of what traditional Marxism is, how it differs from communism, those currently carrying the Marxist torch, cultural Marxism, the issues he has with capitalism, and a number of other issues. While he regularly “straw-manned” capitalism to make his points, he also brought up a number of valid points I hadn’t considered.

Lex Fridman Podcast with Bhaskar Sunkara: Socialism and Communism: While Richard Wolff (see above) has been an ardent Marxist longer than many of us have been alive, Bhaskar Sunkara, a democratic socialist and founding editor of Jacobin, is a younger (33) voice in the socialist movement. This is also a good conversation and focuses more on the opportunities and challenges that would face a potential move towards a socialist system. 

SELECTED INSIGHTS

“A lie told often enough becomes the truth.”

– Vladimir Lenin

“There are decades where nothing happens; and there are weeks where decades happen.”

– Vladimir Lenin

“You can tell what people want to believe by their standards for evidence. The lower their standard for evidence for x, the stronger their desire to believe x must be.”

– Paul Graham

“I’ve always had this view that success is not a straight line up. If you read the stories of successful people, almost every successful person has had to deal with some degree of hardship, whether that hardship is personal hardship, health-related hardship, or a business issue. I’ve always had the view that how successful you are is really a function of how you deal with failure. If you deal with failure well and you persist, you have a high probability of being successful.”

– Bill Ackman, on success