A $400-billion expansion to the Federal Reserve balance sheet — the most aggressive since the financial crisis — has weakened the U.S. dollar and boosted the global economy, said Larry McDonald, author and founder of The Bear Traps Report, at the CFA Society Calgary’s 43rd annual forecast dinner on Jan. 16.
That dollar weakness is good news for Canada, said McDonald, since it helps commodity-producing countries. “Oil is going to be supported by this, and natural gas is coming into a real bull market. We are looking at a bounce-back in commodities in the next two to three years —it’s going to be good for Alberta.”
He has tilted his portfolio accordingly.
“We are overweight commodities and we are overweight the currencies of commodity-producing countries,” McDonald said. “We are overweight silver, gold, uranium, natural gas and oil — we have a large portion of our portfolio in the energy space.”
He suggested avoiding the hottest sectors and stocks, like the FAANGs (Facebook, Amazon, Apple, Netflix and Google/Alphabet). Further, he predicted the portion of energy sector stocks in the S&P 500 will move from its current 4%–5% to “probably 8% or 9% over next two to three years.”
McDonald said he expects to see “a big rebalancing,” with $2 trillion to $3 trillion coming out of U.S. stocks and moving into global commodities and equities in the next three to five years.
Canada’s biggest risk, he said, is a housing bust: “The housing market is under massive stressors.”
How to be a better investor
Other speakers at the forecast dinner focused less on the economy and more on how to analyze economic indicators.
For instance, people tend to see risk as a force of nature that applies indiscriminately. But individual investors’ willingness to bear risk depends on their personal history, said Morgan Housel, a partner at the Collaborative Fund, a venture capital firm based in New York and San Francisco.
“When people think about risk, they don’t do it in an analytical way — they do it in a cultural way,” said Housel. “When we are thinking about the outlook for the economy and stock market, we are heavily anchored to what we have experienced in our individual lives, which influences how we think about risk in the economy.”
When thinking about where the economy is going next, Housel suggested two ways to improve decision-making. “First, it’s very important to expand your horizons as much as you can — talk to as many people as you can, particularly people from different generations and different countries, who likely have very different experiences than you. That way, you’ll get a more accurate view of how the world works,” he noted. “Second, realize there is not always one right answer.”
Fellow speaker Ben Hunt, chief investment officer at Second Foundation Partners, a consultant for large institutional investors, emphasized the need for critical thinking.
“All professional investors grow up with the idea that fundamentals matter for stock prices. But since the great financial crisis, story and narrative have mattered so much more than fundamentals and quality,” said Hunt, who added that wealth inequality is at a societally dangerous level. “It doesn’t mean that quality stocks haven’t gone up, but crappy stocks have gone up as much as quality stocks. This is the death of active management.”
Hunt attributed the gap between price and quality to “opinion presented as fact” in the media.
“Whenever you hear somebody say something — whether it’s a story about a stock or a story about a politician — ask yourself, ‘Why am I hearing this story now? What’s the motivation behind the story?’ It will make you a better investor and it will make you a better citizen,” Hunt said.