MARKET WATCH

It’s been quite the month, but you wouldn’t know from looking at March’s market performance. After a strong week, most international exchanges are trading slightly higher this month.

However, where things do look strange, is with commodities. Canadian energy stocks have fallen 6%, while the price of gold has risen 7%. You may have also noticed that most bonds are higher, with the exception of floating rate bonds, which are down 2%. So what really happened?

To oversimplify, in an attempt to increase profits, Silicon Valley Bank (SVB), a U.S. regional bank, invested a significant sum of their clients’ short-term deposits into medium- to long-term bonds as they were paying higher interest rates. This strategy usually goes unpunished. But, as interest rates unexpectedly rose, these bonds suffered severe (for bonds) unrealized losses. And when depositors needed more funds back than expected, SVB was forced to sell these bonds, incurring billions in losses.

To make a bad situation worse, panic broke out as word of these losses emerged. Clients rapidly withdrew everything they could – dramatically extending the bank’s losses, which were levered (as is common with banks), leading to the failure of the bank. As other banks made similar (but not to the same extent) mistakes, and with the modern international banking system being so interconnected, fear spread throughout the banking system. This subsequently hurt Credit Suisse, which had already been dealing with pre-existing issues along with Signature Bank in New York. 

To stabilize the system, the U.S. Federal Reserve and the U.S. government stepped up to guarantee all deposits at these American banks. Meanwhile, Credit Suisse is in the process of being taken over by UBS, as its balance sheet was too vulnerable to leave as it was. In short, it’s been a bit of a mess.

Looking forward, though vulnerable, it appears the greatest risks have abated. However, should inflation concerns reemerge, an unexpectedly bad recession hit, or some other unexpected event occur, things could be in flux again.

As for the Canadian banks, although their stock prices have been hurt a bit, given the higher degree of regulation imposed on them, there seems little reason to be concerned about their balance sheets.

In terms of our portfolios, we continue to weather the storm better than expected. This is, in no small part, due to our overweight positions in commodities and value stocks, and our religious rebalancing practice.

Energy stocks, as most of you know, dramatically outperformed in recent years. As we rebalanced, our energy profits were crystalized and reallocated to underperforming investments. Fortunately, the recipients of those funds (bonds and international equities) have done well year-to-date. Although energy prices have struggled this year, I expect them to rebound. I also expect value stocks to continue outperforming for the foreseeable future.

A Brief Note on the Federal Budget:

2023 Federal Budget Highlights: The 2023 federal budget was just released this week. Here is a list of the highlights.

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.

BOOKS

The Story of Russia by Orlando Figes: If you want to learn about Russia, The Story of Russia is as good as any to start. It succinctly walks through Russia’s history, while noting its myths. The implication being that a nation is not only a product of what happened in its past, but also what it believes (whether true or not) happened. Russia, more than most nations, leans heavily on its beliefs.

Courage is Calling by Ryan Holiday: A short book on the first of the four Stoic tenets: courage. (The other three are temperance, justice, and wisdom.) In his hallmark style, Ryan Holiday uses short biographies to make three overarching points: How fear keeps us small and robs us of courage; how to triumph over fear and take agency over our lives; and the importance of being heroic, to risk ourselves in order to benefit others.

THE FALL OF THE SOVIET UNION AND THE RISE OF PUTIN

Four short podcasts, courtesy of The Rest is History, on how the Iron Curtain fell and Vladimir Putin ascended to power.

Young Putin, the KGB and the Soviet Union (1/4): Focuses on Leonid Brezhnev, Putin’s formative years, and Mikhail Gorbachev’s descent into chaos.

The Fall of the Soviet Union (2/4): This episode covers the period between the 70th anniversary of the Russian Revolution (1987) and the fall of the Soviet Union on Christmas Day in 1991.

This period is an example of how isolated incidents and relationships can change the course of history. After becoming the first person to ever resign from the Politburo, Boris Yeltsin attempted suicide. Outraged over this slight, Mikhail Gobachev, the Soviet leader at the time, dragged a recovering, and highly medicated, Yeltsin from hospital to be dressed down for this action in front of his former peers. Yeltsin never forgave Gorbachev, which subsequently played a role in the breakup of the Soviet Union.

Yeltsin, Economic Chaos and President Putin (3/4): Highlighted by economic chaos and erratic leadership, the ’90s saw Russia’s international status plummet. If you want to understand Vladimir Putin, you need to understand how bad things were in Russia during this period and how it affected him.

Putin’s Russia (4/4): This episode covers Putin’s rise from relative obscurity to being the current uncrowned Tsar of Russia. It also highlights his relationships with the country's oligarchs (who were already in place before he took power) and the elaborate myths he’s created.

ARTICLES ON AI

The more I learn about and use the new artificial intelligence (AI) being developed, the more I’m convinced it’s a watershed technology. Given that, I’m trying to figure out how it will change the way we work and live, as well as how to use it to its best effect. Here are a few things I’ve come across that you may find interesting.

The Age of AI Has Begun by Bill Gates: Bill Gates thinks AI is one of the two most significant technologies he’s ever seen. In this blog post, he shares his thoughts on three areas (productivity, healthcare, and education) that may benefit most from AI.

GPT-4 by OpenAI: GPT4 is here and it’s a significant upgrade to GPT3.5. It’s not perfect, but it won’t take long for it – or another AI – to be very good.

GPT Playground: This is the interface I was hoping for. I’ve really enjoyed using Chat GPT, but the interface and output options are limited. GPT Playground, on the other hand, well, it allows you to get far more creative. 

OTHER ARTICLES, CHARTS AND VIDEOS

Karl Popper: The Line Between Science and Pseudoscience by Farnam Street: The line between science and pseudoscience can be hard to spot. Karl Popper spent considerable time thinking about this and provides a solid framework for us to follow. In short, something is scientific when there is a way to potentially falsify it. In other words, if a theory is so broad that it explains everything (ex. the Oedipus Complex explaining a whole range of behaviours), it likely explains nothing.

Having a method to test a belief (can it be falsified?), on the other hand, is the hallmark of science. Even though repeated confirmation may seem adequate, it’s not enough. Before Europeans discovered Australia, it was believed that swans could only be white. Why? Because only white swans had been seen. However, just the first black swan being spotted in Australia was enough to override (falsify) the belief that all swans are white.

A more relevant example occurred during the 2008 financial crisis. It was widely believed the entire U.S. housing market couldn’t fall at the same time. Why? Because it had never happened before. And this false belief almost took down the global financial system!

This Farnam Street article takes these ideas further by helping discern between what is likely, what is true, and what probably shouldn’t be entertained in the first place.

Chip War: Book Review by Confluence: In Chip War, author Chris Miller details the development of semiconductors from their beginnings in Silicon Valley to their current role as essential components in the global economy and military. He explains how the globalization of chipmaking allowed foreign firms to undercut American competitors while Washington ignored the issue. The book further outlines the potential ramifications of China taking over Taiwan and gaining access to TSMC's chipmaking facilities. Miller also provides his thoughts on how the U.S. should respond to the potential threat, including the reshoring of production to the U.S. or allied countries. In conclusion, the author suggests that this transition will be costly and time-consuming, but will be essential for supply chain security and protection of intellectual property.

Full disclosure: The above paragraph is what GPT Playground produced when I asked for a summary of this book review. I’ll let you decide if it did a better job than I usually do.

What I Think About the Silicon Valley Bank Situation by Ray Dalio: “Silicon Valley Bank recently failed, which is a sign of the beginning of the contraction phase of a short-term debt cycle that happens every 7-10 years. This cycle is characterized by tight money, a self-reinforcing debt-credit contraction, and a domino effect of bank failures. The US central government has large outstanding debts and is selling more debt than there is demand for, and central banks are monetizing the debt - this leads to a risk of too much money printing, which could lead to a big decline in the value of money. The next two years will be a risky time due to bad financial and economic conditions, internal conflict, and international conflicts. To reduce risk and maintain expected returns, it is recommended to achieve balance of uncorrelated good return streams.”

Eigenquestions: The Art of Framing Problems by Shishir Mehrotra and Matt Hudson: Nice reminder that if you’re having an issue with a problem or question – sometimes they just need to be reframed.

Mental Models Cheat Sheet by Steve Burns: Some good mental models to keep in mind when investing.

Electricity Access in India by Our World in Data: Over the last three decades, access to electricity in India has surged from half the population to almost 100%. Electricity won’t fix all of India’s problems, but it will certainly go a long way to help those who didn’t have it. I love seeing data like this!

Children Entrusted to Their Fathers: This made me laugh…especially the guy with the leaf blower.

SELECTED INSIGHTS

“The biggest obstacle to increasing your self-awareness is the tendency to avoid the discomfort that comes from seeing yourself as you really are.”

― Travis Bradberry

“Above all, we should acknowledge that the collapse of the Soviet Union was the major geopolitical disaster of the century.”

― Vladimir Putin

“I knew I had just seen the most important advance in technology since the graphical user interface.”

― Bill Gates, on the GPT AI software