Investing Wealth

Prepare for Food to Get Way More Expensive

Nothing in life – or the markets – is totally predictable. It was only a year ago that the world was totally side-swiped by a global pandemic. Did anyone see that coming before the first reported cases coming out of Wuhan? Hardly.

This is why I believe a big driver for wealth management is risk mitigation. Today, I believe we must prepare for the possibility that food prices rise significantly.

After toiling away for 40+ hours a week the last thing you want is for your hard earned money to be devalued. While most investors think about total returns, embedded within that expected return is a data point called inflation.

When you let someone else use your money (i.e. you invest), you expect to be compensated for the risk they won’t be able to pay you back, the general cost of money and the devaluation of that money when they do. Some investments have a greater risk premium than others. Some are simply linked to the price of an underlying commodity. These commodities – such as copper, iron, wheat – are the most raw form of prices in the economy.

Commodity futures markets are probably best explained by the Duke brothers in the 1980s comedy “Trading Places”, starring Eddie Murphy. (OK, there are probably better explanations, but when else am I going to get to include this clip in an article?)

Commodities are inputs into much of what the world produces and consumes. If the price of a commodity rises, the cost to produce items using that commodity also rises. Those prices are typically passed onto consumers.

If the price of wheat rises, the price of bread in the grocery store will eventually tend to rise.

Agricultural commodity prices are determined by current and anticipated supply and demand (plus any related costs of ownership, such as storage). Commodity prices are also affected by the amount of money that exists within the economy and the value of the US dollar (since most commodities are priced in US dollars). At the moment – and for the foreseeable future – it appears that many of these factors are converging to lead to higher agricultural commodity prices.

Indeed, general agricultural prices are already at a 7 year high. Perhaps most concerning, prices have risen about 50% since just the middle of 2020.

Figure 1 and 2

We’ve seen these kinds of price rises before, around 2008 and 2012. These historical price changes have led to dramatic social and economic upheaval. Many argue that the 2008 commodity price pressure (this goes beyond agricultural commodities) helped tip the global economy into recession, ultimately leading to the Global Financial Crisis. Leading into 2012, many suggest skyrocketing food prices led to the ‘Arab Spring’ uprisings across much of the Arab world. My point is these surges not only affect our pocket books. They can have serious knock-on affects for the economy and society in general.

Since around 2014, we’ve benefited from relative agricultural price stability. This stability was assisted by surplus production in the United States, referred to by some as the ‘global food reserve bank’.

Unfortunately, this period of stability might be over. As demand (and prices) picked up throughout 2020 US producers have offloaded stockpiles to a worrying degree. Lower surplus reserves could exacerbate future price increases.

The world is always just days away from total anarchy.

Don’t believe me? Go look in your fridge right now. You probably have enough food to last a week. I’m not predicting grocery store shelves will go bare, but I’m pointing out the extremes to which food shortages can go.

We are all dependent on ample food stockpiles, and any deficiency will QUICKLY be priced to bring supply and demand back into equilibrium. Without a buffer, a weak harvest – perhaps in Russia or India – could send global food prices soaring.

The base case is for an orderly rise in food prices, but anyone that cares about their wealth and health must consider scenarios where food prices lurch higher.

One doesn’t have to look to Russia or other foreign nations to see supply risk. There are serious problems in our own backyard.

Weather patterns in the US have become increasingly unfavorable over the years. Currently, a massive portion of the US is experiencing drought. Climate change is only making it more challenging to reliably grow food.

North American’s only spend about 5% of their income on food, so we take food stress for granted. Of course, that proportion is not the same for everyone as income inequality polarizes spending patterns. That 5% figure probably doesn’t show the true nature of food insecurity across North America. The rise in food prices will hurt many.

My point is simple: the risk of food price inflation is real. People need to consider ways to mitigate that risk. This includes better grocery shopping habits, stockpiling non-perishables and allocating a portion of investment portfolios to assets that might benefit from inflation.


Why Have Rising Yields Hurt Tech Stocks?

Since the end of Q3 2020, there has been a marked rotation from ‘pandemic stocks’ (mainly tech) to ‘recovery stocks’ (industrials, financials, consumer discretionary, etc.). Many tech stocks – like Amazon, Facebook Netflix, Zoom – are flat-to-down while the broader market hits new all time highs.

While there might be some intuitive sense to this as return to normal approaches, many people are pointing to rising yields as the cause.

Why Rising Yields Impacts Some Stocks More Than Others

Many people understand that rising yields have a negative impact on the prices of bonds. A bond represents a series of cash flows in the future. The higher the discount rate (of which the risk free rate is a part) the lower the present value of those cash flows.

The sensitivity of a bond’s price to changes in yield is neatly wrapped up in a single data point called ‘duration’. Higher duration bonds have a greater sensitivity to changes in yields.

Duration can be sort of described as a weighted average of time to receive cash flows. The longer it takes to receive cash flows, on average, the higher the duration.

Therefore, a zero coupon bond will have a higher duration than a coupon-paying bond. All things equal, a 30 year bond will have a higher duration than a 10 year bond. And so on.

While many people understand how duration impacts bond prices, they forget that the same concept applies to stocks.

You can look at a stock like an infinite-term bond. In doing so, it becomes clear that a non-dividend paying stock (like most tech stocks) have a higher duration than more traditional dividend-paying stocks.

Going even further, because many tech companies don’t generate positive EBITDA or cash flow they trade on the expectation of a potential cash flow in the future. In comparison, most recovery stocks are tried and true, generating reliable cash flows quarter-after-quarter. So when considering the cash flows generated by the firm itself, a business that might generate cash sometime in the future clearly has a higher duration than a business generating cash today. For these reasons, most tech stocks have a higher duration than most traditional stocks, and are therefore more sensitive to rising yields.

Bonus Point

Yields are a component of the cost of capital. A rising risk free rate raises the cost of capital for all businesses. While tech stocks operating on promises of future cash flows might do well when money is virtually free, they face rising challenges when capital becomes more scarce or expensive. In comparison, businesses that can fund capital investment via retained earnings and current assets (i.e. through realized earnings and cash on hand) and don’t have to tap into capital markets to stay afloat may start to outperform when yields start to rise.

With all that said, let’s be real. As a proportion of where they were last August, yields have risen a lot. But in absolute terms, yields are basically near the bottom of a 10 year range. The 10 year US Treasury yield is essentially where it was a week before the pandemic started.

Income Investing Investing

Data Visualizations on 8 Canadian Utility Stocks

Another gem provided by This time data visualizations featuring Canadian utility stocks including Fortis, Emera, Algonquin Power, Canadian Utilities, Northland Power, Hydro One, Captial Power and Transalta Corp.

Income Investing Investing

Canadian Natural Resources Increases Dividend by 11%

Canadian Natural Resources Limited (TSX: CNQ) (NYSE: CNQ) announces its Board of Directors has declared a quarterly cash dividend on its common shares of C$0.47 (forty-seven cents) per common share. The dividend will be payable on April 5, 2021 to shareholders of record at the close of business on March 19, 2021.

From CNQ’s recent Q4 2020 earnings announcement:

“The sustainability of our free cash flow generation provides the Board of Directors confidence to increase our dividend by 11% to $1.88 per share annually, marking the 21st consecutive year of dividend increases representing a CAGR of 20% since inception. The 2021 capital budget of approximately $3.2 billion drives targeted annual production growth of approximately 61,000 BOE/d, at the mid-point of our production range, from 2020 levels and robust free cash flow generation. At the current 2021 annual strip pricing of approximately US$57 WTI per barrel, the Company targets to generate significant annual free cash flow of approximately $4.9 billion to $5.4 billion, after our capital program and increased dividend. As a result, our balance sheet is targeted to strengthen further in 2021, with year end debt to adjusted EBITDA targeted to improve to approximately 1.2x and debt to book capitalization targeted to improve to approximately 29%, at the mid-point of the targeted free cash flow range. Subsequent to year end, in March 2021 the Board of Directors authorized management, subject to acceptance by the TSX, to repurchase shares under a Normal Course Issuer Bid (“NCIB”), equal to options exercised throughout the coming year, in order to eliminate dilution for shareholders. Our strong financial position, unique long life low decline asset base and effective and efficient operations continue to generate long-term shareholder value.”

Investing Master Class Wealth

Charlie Munger, Vice Chairman of Berkshire Hathaway, speaks at the Daily Journal Annual Meeting

Some notable quotes from Charlie Munger at the recent Daily Journal Annual Meeting:


Data Visualization: 11 Canadian Insurance Company Stocks is doing great work turning essential company information into simple-to-use visualizations. His visualizations include data such as Revenues, Book Value, Return on Equity, Price to Earnings Ratio, Dividend Growth, Payout Ratio and more. I like it.

Their latest effort includes data for 11 Canadian insurance companies, such as Manulife, Sunlife, Intact, Great West Life, IA, Power Corp and more.

I’ve shared the visualizations below. (Note: I didn’t create these so I can’t vouch for the accuracy.)

Source: AnrepViz

Income Investing Investing

Why I Abandoned High Yield Bonds

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Over the years, I have used high yield bonds as a hybrid asset class between stocks and higher grade bonds (like investment grade corporate bonds and US Treasuries).

Like stocks, high yield bonds benefit from improving business conditions, yet they rank higher on the capital structure because they are bonds. High yield bonds are issued by ‘below investment grade’ companies, and therefore pay higher coupons than investment grade corporate bonds because these companies come with a higher default risk. However, because of the higher coupons (and higher yield), high yield bonds have a lower duration (and are less interest rate sensitive) than lower-yielding bonds with a similar maturity.

Payments to bondholders typically take priority over stockholders – as a result, corporate bonds tend to be a less risky than the equity of the same company.

The Good Great

Believe it or not, high yield bonds have outperformed stocks from 1980-2019 with an average calendar year return of 15.10% vs 12.49%. Moreover, the worst calendar year performance (2008 for both) outperformed stocks by over 10 percentage points.

HY BondsInvestment-GradeStocks
Average Calendar Year Return15.10%7.81%12.49%
Worst Calendar Year Return-26.17%-2.92%-37.00%
Data source: High yield returns are represented by the Salomon Smith Barney High Yield Composite Index from 1980 through 2002, the Credit Suisse High Yield Index (DHY) from 2003 through 2013. From 2014 on, the S&P 500 Investment Grade Corporate Bond Index, and Federal Reserve Bank of St. Louis’ S&P 500 data were used.

Overall, the risk-return profile for high yield bonds has historically been quite favourable. After all, interest rates (as shown by the 10yr US Treasury yield in the chart below) have been in a bull market since around 1980. With this sort of tailwind, anything with a fixed coupon experienced long-term upward price pressure. This has been great for high yield bondholders.

The Bad

Looking at the chart below, one naturally has to wonder though if rates have bottomed for good. As I write this, the 10yr just moved above 1.3% for the first time since the pandemic began. With the firehose of fiscal and monetary stimulus expected to continue for the foreseeable future, it is likely yields continue to rise. I believe the Federal Reserve will allow the economy to run hot for a while before applying the brakes, so it is quite possible that both rates and inflation continue to creep higher.

While high yield bonds generally have a lower duration and benefit from an improving business environment, rising yields could put a damper on future returns expectations. At a minimum, I think it’s reasonable to argue that the capital gains are behind us, leaving only coupon clipping.

So why have I abandoned high yield bonds?

High yield bond yields have been pushed down to around 4%. As you can see in the chart below, this figure is historically low.

The following chart also shows yields on high yield bonds, but for a shorter time frame.

If high yield bonds are yielding a historically low 4% and rising interest rates act as a cap, at this point 4% is the best I can reasonably expect is for forward total returns on high yield bonds. I could be wrong, but given the information I have today I believe there are better alternatives.

You know what else yields about 4%? Royal Bank, Manulife Financial, TD Bank, Verizon and many other stocks out there. The kicker is that these companies will probably grow earnings and raise dividends over the years, flowing through a decent total return to shareholders. So at today’s cost, that 4% dividend yield could grow to a forward 5%, 7%, 10% yield on cost over several years. And as dividends grow, prices tend to follow. Try getting that kind of income stream and total returns profile from a bond.

So if the only remaining reason to hold onto high yield bonds is to collect the 4% yield, I’d rather move my money to dividend growth stocks. Consequently, I have sold all my high yield bond holdings and am redeploying into dividend growth stocks.


12 Warren Buffett Quotes on Bubble Psychology

  1. Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.
  2. The propensity to gamble is increased by a large prize versus a small entry fee, no matter how poor the true odds may be.
  3. Derivatives are like sex. It’s not who we’re sleeping with, it’s who they’re sleeping with that’s the problem.
  4. Wall Street makes its money on activity. You make your money on inactivity.
  5. I will tell you the secret to getting rich on Wall Street. You try to be greedy when others are fearful. And you try to be fearful when others are greedy.
  6. The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.
  7. We know that the less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.
  8. For some reason, people take their cues from price action rather than from values. What doesn’t work is when you start doing things that you don’t understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it’s going up.
  9. The stock market is a device for transferring money from the impatient to the patient.
  10. Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.
  11. Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market.
  12. The market is there only as a reference point to see if anybody is offering to do anything foolish. When we invest in stocks, we invest in businesses.

Visual Summary: John Hussman’s Case for a Market Crash

John Hussman of Hussman Funds is pretty bearish. Others are bullish. But I think it’s investing best practice to listen to both the optimists and pessimists. Only then can you approach the markets with a balanced perspective.

In his most recent market commentary, Hussman makes several points that shouldn’t be ignored. His most recent commentary is quite long, so I’ve provided a visual summary of his key points and charts below:

Valuations are at record highs for all stocks (not just an especially expensive segment of the market). The chart below shows price-to-revenues broken down by decile. Across the entire range of valuations, all segments are at record price-to-revenue ratios.

S&P 500 median price-revenue ratios by valuation decile

The same is true when breaking down the market by market capitalization. Small, medium and large cap stocks are all trading at record valuations.

S&P 500 median price-revenue ratio by market capitalization

Companies with negative earnings in particular have skyrocketed in valuation. This speaks to investor focus on the future. Unfortunately, expectations – like during the Internet bubble – often go unrealized, and lofty valuations eventually fall back to Earth.

Goldman Sachs non-profitable technology basket

As an investment strategy, hope is prevalent in the IPO market too. New issues – such as the recent Bumble IPO, which jumped 64% on the day of listing – shoot to the moon. Yet, many of these companies barely have any earnings (or even revenues in many cases) to speak of. Again, investors are flocking to IPOs in the hope of profiting off massive future potential.

Renaissance new issues index

Investors are so confident in the future they are willing to borrow to place their bets. Accordingly, margin debt as a proportion of GDP is at record levels! Borrowing to invest is a risky strategy. While one can profit handsomely investing other people’s money during a bull market, once asset prices turn it can lead to poverty. Moreover, the collective level of margin debt tends to exacerbate market declines as investors clamor to liquidate at the same time.

Margin debt to GDP

The US stock market capitalization is at record highs relative to US GDP. The value of companies relative to the value of what they produce has risen immensely.

Total equity market capitalization to GDP

Perhaps these charts don’t concern you because you’re a ‘long-term’ investor. Well, they should.

Valuations tend to be a pretty good predictor of future returns. The chart below maps Hussman’s estimated 12yr forward returns against actual forward 12yr returns – you can see the fairly tight relationship. Currently, Hussman’s model is forecasting a forward annualized 12yr return of -2.15%. Yes, negative. And yes, it is possible that long-term returns are negative because it has happened before. Moreover, historical periods of negative long-term returns tend not to be graceful and orderly. Rather markets violently oscillate between upward momentum and downward spirals.

Estimated 12-year total return for a passive 60/30/10 portfolio allocation (Hussman)

Is Hussman right this time? I don’t know. Nobody can predict the future. And the future doesn’t have to look like the past. So who’s to say that valuations don’t stretch even further? Or that revenues and earnings climb rapidly to close the valuation gap?

I don’t know. You don’t know.

But what I do know is that history shows the risks are real. Hussman is observing rhe signposts.

I’m not arguing there will be a crash tomorrow. Yet, the probability of one grows as valuations are stretched and investors gain confidence.

My suggestion to all investors is to keep your confidence in check. If you start to feel highly confident in your investing prowess you may be taking on too much risk. Great declines are often preceded by great hubris. Be aware of your own behavioural biases and remind yourself that investing in stocks could mean losing 50% of your money at any point in time. And no, you’re not good enough to get out at the right time.

If Hussman’s market return projections are right, individual investors will perform far worse. Most investors tend to plough more money into investments near market peaks and withdraw money near market bottoms, experiencing all the downside and missing out on upside.

Consequently, most investors could have real world experiences far worse than -2.15% annualized over the next dozen years.

Read John Hussman’s full commentary.

Investing Wealth

GameStop (GME): Investors Losing Millions

You live by the sword, you die by the sword.

Within the course of a week, GameStop (GME) stock has moved from about $90 to $468 and back down to $90. Just a couple days ago I heard stories about people becoming multi-millionaires overnight. One person turned $50k into $48 million.

Those who cashed out did well. But there are thousands of people left holding the bag. Many people were drawn in AFTER the short squeeze already drove the price through $200, $300, $400 per share. Now the price is $90. Where will it be tomorrow?

With GME hitting $90 today, the war stories are just emerging. People are losing huge amounts of money that they only gambled a few days ago.

While blood flows in the streets, GME bagholders are rationalizing holding the stock. I’m not here to say they’re right or wrong. I am just telling you that this is a very dangerous financial game people are playing.

For many this goes beyond money. They are squeezing GameStock shorts to flip the bird to Wall Street. So they continue to hold and continue to average down. Still, money isn’t infinite and at some point people simply can’t afford to trade their futures away for a cause.

On the other hand, maybe these people are right to hold on. Maybe they all get super-rich. I have no idea, and neither do they. I only hope most people didn’t bet more than they can afford to lose. Unfortunately, it doesn’t seem that way.

Here are some examples of the damage people are experiencing and sharing on Reddit’s ‘Wall Street Bets’:

This person is down $38k in total (down $151k from peak).

Down $1.1 million over the past week.

r/wallstreetbets - Down $1.1 Million over the week, and I Didn’t Hear No Bell 💎 👊 🦍

This person says they are down $400k (although the pic shows something different).

This one speaks for itself.

Dave Portney has lost $700k. (I assume he’s talking about Vlad Tenev, Robinhood CEO.)

r/wallstreetbets - Paper hand bitch lol

The person at one point owned $8+million in GameStock. Now he holds $1.3 million.

r/wallstreetbets - GME YOLO UPDATE: DOWN ANOTHER $7,000,000 STILL HOLDING! ✋💎🤚 We will not let them scare us. 🚀🚀🚀🚀