2024 CW Money Talks

Welcome to 2024

Kani

Wealth Money Talks. I'm your host, Claudio

Cazzani

on behalf of our company, bringing you the latest update of uh markets,

economies and everything else around the world.

Um Now we have uh about 35 minutes of discussions

and a couple of graphs that hopefully find of interest.

But for our type,

a personality clients who would like to receive the executive summary,

we expect a very interesting 2024.

Uh It is certainly in elections here in the United States

and that would uh most likely be supportive of the market short term.

However,

the overall uh parameters that have uh given us a

little bit of concern in 2023 and moving forward in 2024

are abundant. So we vote for the deal. Let's uh take you to the summary

and uh offer you a bit of a of an economic update

in terms of the FED FED has been driving the markets for

the last couple of years and I think 2023 is no different.

We've heard lots about rate talks.

Let's see what the fed is up these days.

And uh as you can see the uh money printing exercise continues,

it uh takes different forms.

Uh It is most likely in the form of government deficits. Uh We do have to

uh find a way to cope with those deficits. Therefore,

money will continue to be printed for many years to come

and to substantiate the effect of that money printing.

I'm gonna offer you a bit of a graph here which shows

you that continuing of the current uh multi trillion dollar annual deficit

uh in the United States,

we would reach in 2032 a level of quantitative easing

uh that would replicate the COVID 2020 year.

And that is quite concerning, it's concerning for the US bonds,

it's concerning for the US currency

uh and, and everything else. Um And this is another graph to support

uh what uh the long term effects of the US deficit would be.

You could see uh with the uh dotted red line

that at some point in the future, you will have the interest on the US debt,

exceeding Medicare, exceeding uh defense

uh and exceeding Social Security as well.

So certainly, if we are to invest today with the have the future,

we have to keep at the back of our mind that the US

uh it will be traversing some challenging times

trying to balance their uh their budgets.

Now.

Certainly uh a lot of the uh business cycle pundits have been saying that

the business cycle is a myth and since the FED has been printing money,

uh business cycles do not exist anymore.

Uh We are not in that camp. We think that throughout history,

uh history tends to repeat itself in different forms.

We're looking back at the year 2000 or looking back at uh 2009 and current times,

we have the

same reasons for concern and what those would be.

Well, we have an inverted eel curve,

meaning that short term rates are higher than long term rates.

We have a couple of stocks driving the rally in the market

and I'm going to touch a little bit more about the magnificent seven.

And then certainly you have uh if you have the interest rate cycle.

So we're thinking we're gonna be somewhere right now in the orange and red area

where recession is not quite there in the United States,

but certainly uh growth. Uh it's challenged and inflation,

although inflation seems to be rece uh receding right now.

It's still not at the numbers that uh we would like to see.

So

what does that mean in terms of uh equity markets and investors like yourselves?

Well, certainly

we have seen certain uh periods of time where the markets have misbehaved.

They have recorded significant downturns followed by a couple

of decades of uh exponential growth if you will.

So on this graph, you could very easily see that long term markets are going up.

So there is a 75% probability that if you stay invested, you're gonna be just fine.

However, if you are a retirement client

and

uh you have to at some point draw cash flow from your portfolio

and your portfolio is down

56%. Hypothetically assuming that you're 100% invested in equities,

that is a serious uh cause of concern.

So we have to have a balanced view of where the world is going.

Uh for

Kani

Wealth. We haven't been 100% cash and we haven't been 100% equity.

So we've always been somewhere balanced in the middle.

Now,

the

interesting part uh about today's economy, it's that it, it,

it's certainly it's not

all rosy and it's not all gloom and doom.

So let's just talk about housing because real estate

has been a propeller uh for the economy.

Uh specifically in North America,

we've all seen the prices going up in Vancouver in

the last four or five years and pretty much last decade

as well as the rest of the world.

And now it appears that um significant number of

downturns are happening in Europe as well as Asia,

uh predominantly Hong Kong and China.

And that is the result of the amount

of debt and variable rate mortgages that we're carrying

so far. Canada has been able to break even. So uh in terms of the Canadian real estate.

I don't have to tell you that we're in a bit of a balance point where we're dealing

with supply and demand and higher interest rates that

have to tell the story for years to come.

But what's concerning here around the world

is that we're seeing more and more business insolvencies.

So to the right here on the graph, you see how in between France, Germany, UK and us,

uh insolvencies are starting to creep up and uh

the health of the business sector

and the health of the employment sector will always affect the markets.

Now,

it's interesting because if you are to Google right now,

what the investment investor sentiment would be in the market

will uh will have a lot more discussions about soft landing.

People are accustomed to the idea that soft landing it's inevitable.

And you know, we

found a way to um defeat inflation or at least

reduce inflation and growth might potentially return.

However, what happens when exuberance uh populates the market?

That's the point where we have to be most cautious

when we are most concerned.

You certainly have markets rallying.

And uh we've seen that happening in October of 2023.

A lot of the return of that uh 2023 has been the rally that was driven in October

and that was pretty much initiated by the Fed.

Uh highlighting that they will be decreasing rates may as much as six times in 2024.

And uh you know, if, if, if you look at all of that hasn't materialized yet.

So something to be cautious about.

Now,

one thing that will always give you an idea of where the world economies me would be

is what's happening on the supply side or the

inventory side with precious metals and industrial metals,

um, as well as other commodities in terms of copper, nickel, aluminum, corn,

everything in that range.

What you see here is that our inventories are at historical lows

now that gives us an opportunity to be bullish down the road

and we're certainly in that camp however short term, it,

it is a clear indication the world economies are

um challenged right now and I think we'll have to

traverse a period of time of uh slow economic growth.

Now, going back to um what drove this rally, I alluded a couple of minutes ago.

Uh that market rallies have been quite sustained uh last year starting in October.

October saved the day for the S and P 500

which uh dominated the return.

It also dominated the world economies.

Us economy has proven to be one of the strongest.

Now,

we know the Americans can take 30 year mortgages and uh

lock them in as they did actually about uh in 2020

at uh 1.5 and 2%. Um That's the type of mortgage is not available in Canada

or other parts of the world.

Um But I think it's the reason why the American consumer has

been a little bit more sheltered than other North American counterparts.

So the S and P 500 has uh given since October a sustained rally

and that rally has been driven by the

what do you call? Magnificent seven.

Now, the Magnificent seven are the top technology stocks

and include the Apple, the Microsoft, the Google,

the Tesla video and so on and so forth.

Those talks have been uh at the forefront of the rally

and they piggybacked on the uh hope that artificial intelligence

would give us the next level of productivity.

However,

the significant uh rally of the magnificent seven,

if we look at what happened in 2024

the magnificent seven have become the magnificent three

and all of a sudden, we just have Amazon

uh and we have NVIDIA

and uh and certainly, you know, the a couple of other names that

are still in positive numbers,

but the likes of Tesla, the likes of Microsoft and so on and so forth

uh have gone down,

I think metas uh one of the significant three that's still there holding tight.

Now,

that shift will have a profound implication on

where the markets are going in the future.

So I know if you look at our investment portfolios,

we like technology, we always did.

However, right now,

our portfolios have been curated since the beginning

of the year not to include those names.

We think there's too much risk.

Uh We think there's too much concentration in that uh in that area.

But one thing for sure,

the US market has been much stronger than the

rest of the world and led this uh this rally

and we talked about interest rates.

The promise of interest rates going down

in 2024 has not

uh materialized yet.

There is an 85 to 90% probability rates will not be cut by the US. In March.

There's a 75% probability that rates will not be cut by the US by the fed

in May.

And uh we have to go all the way further to June

where we think the first rate cut would appear.

So this is telling us that in what made the markets rally,

it's not the anticipation that rates will go down.

But the fed made it very clear that rates are not gonna go higher.

Now, of course, they don't have a crystal ball,

but they're highlighting to the market

that

we are done with high interest rates at least for now.

And the markets including the tech market including crypto.

They uh took that as a very favorable sign

and they rallied and some of those markets rallied a pretty significant pace.

And everybody say, well, what,

what if rates go down when rates go down is gonna get even better, right?

Obviously, um it's a good assumption

on paper.

However,

if we go back all the way to 1980 late seventies from the Volcker rate cut cycle,

if we go to the 2000 tech bust, if we go to the housing crisis

of 2008, 2009,

you see that by the time rates are cut at significant pace,

it coincides with the US uh and international economy slowing down

which translates into much lower markets.

Uh I don't have to remind you that the markets of the eighties, the 4009,

some of them have corrected as much as 50%.

So we're not hanging our hat on the fact that rates are gonna go down.

We are monitoring the unemployment numbers as well

as the pace of the economy with much more

interest that where the rates are going as long

as rates are not surprising on the upside.

Um I think the uh equity market has given indications that wants to

uh stay flat or rally into the end of the year.

So that's uh that's the interesting part and I suspect the positive that

we can foresee for the market for the next 6 to 12 months.

However, there are many um loan maturities in the high yield market,

high yield market would be small size companies that are burdened by debt

that have to refinance their debt at current rates.

And rates do not go down that

uh easily,

at least for the next 6 to 8 to perhaps even nine months.

What will happen when these companies have to refinance their debt,

some of them would uh go out of business, some of them would have to consolidate.

And um I think that will have a dramatic impact on the uh on the high yield on the

what, what do you call the uh junk bond market?

Very interesting to see and uh and those, those factors may not play in immediately.

But I think long term,

the easy money is not available to such companies and therefore

uh there will be some consequences in uh in that area.

I'm gonna move now to the story of China. China has been the driver

of a significant growth cycle in 2010

all the way to current days and, and at some point,

they ran into trouble with uh real estate

as well as uh exports

and we see their activity cooling off

the, the way we judge China based on their exports and their internal activity.

It's gonna give us a bit of a, a

window into what's happening in the world,

just like the commodities uh inventories did.

And you can see right now

in this, the chart is put here in front of you

in terms of things that are up in China, the traffic and the international flights,

but

in terms of their discretionary spending

in terms of, of their um uh frequency economic activity index,

they are not doing great.

So the engine that China brought to the world in 2010 is stalling right now at best.

Now, there could be an opportunity at some point with the uh Chinese stocks,

but we're not in that camp yet if we take one or two for a quick trade.

Um

It's, it's certainly on our radar screen.

Uh but we don't necessarily think that it's the safest way to deploy

um our capital

and some good news in other areas.

For instance, in India,

India has been a benefactor here with uh refining oil from Europe.

Um a lot of the Russian oil for that matter

and uh and as well as their overall population and activity,

India has had a 7.5% GDP growth.

So that's positive. Uh We can look at India to replace China

for helping the global growth.

Um We'll see how that story will unfold, but uh that's certainly promising.

And although we have not declared a victory on inflation,

take a look at the chart here on the right hand side, at

least the inflation numbers for now are lower.

I'm not gonna get into the, the uh debate of how

and why rates are of inflation are lower and how we truly, really measure inflation.

I think most of us know

that since 2020 life is 20% more expensive

however, a deceleration of inflation

has been taken as a positive by the markets and it is a reason why

uh the markets are rallied.

But what if,

what if the story of inflation has not

been told and inflation would eventually return?

It happens in the seventies, it did happen in the seventies.

And I think at this moment in time,

uh it's a possibility of especially for the emerging economies

and some countries that have been always plagued by inflation.

For instance, look at Turkey right now,

if you look at all of the inflation numbers from food, health, household equipment,

housing education, restaurants and so on and so forth

in 2023 all the way to mid 2023 they're looking really good

and right now they're going back in the red.

So inflation resurged in Turkey in a significant way,

affecting their currency, affecting their debt and so on and so forth.

So is this the uh canary in the, in the coal mine? Uh or is this

um something that the US and Canada, North America can avoid?

We don't know 100% but we certainly have to be careful in that area

and coming back to the global growth.

Uh I just want to show everybody that although the US

economy has been the best of all on a global scale,

uh The rates of growth are quite anemic

and at some point,

the story of inflation could very easily become a story of deflation.

We're not in that camp just yet.

Uh But we think that that's a distinct possibility for years to come.

Uh specifically,

if we have an extraordinary event in the credit market or the real estate market,

something that would shock the system.

Uh the world GDP across decades here as you can see and forecast it for the future.

Uh It's, it's looking more and more anemic

now.

Um

The next thing here,

um we're gonna go back to the financial

markets because that's of acute interest to us.

We are money managers, we are financial planners.

Uh We operate very much as a family office,

having day to day discussions with our clients

about their family, their succession,

um their, their savings and and so on and so forth and we'll continue that.

Uh It is our goal that all of our clients have an investment plan,

a financial plan and a risk management succession plan.

So that's, that's on the agenda for us,

but we did do have to focus uh mostly on your portfolios right now.

Uh And I'm,

I'm gonna give you a little bit of a since the beginning of the year summary,

see what has been running and what has not gone as well for 2024.

No surprise that the uh magnific magnificent seven

that remained the magnificent three still had a strong

start to the year and the NASDAQ is up 6.6%

and that has a direct implication on the S and P 500

which is also concentrating in technology for a pretty good degree.

Um, and they're both close to 7% up.

And you could say, wow, that's fantastic.

I mean, why don't we have a lot of money in the US? Stocks?

Well, diversified portfolio can't do that. It's too much of a gamble.

But we are acknowledging that the US market is generally a better performer.

However, there's more volatility there.

Now, in contrast, if you look at Hansen,

if you look at the international

in forest markets,

they're down 3%.

And you've seen the intervention of China

by uh allowing more liquidity just to rescue

their stock market, which was sliding 10 to 12 to 15%

at the beginning of the year.

We've settled along for our clients that we're not gonna

go into long bonds until we know for a fact

that

the opportunity for long bonds is there.

And here's the case in point here. If you look at the ishares uh TLT

in the US or XL B,

which is your long term bond gauge.

Those areas have done minus two and minus 3%.

So everything that you see red here has underperformed,

everything that you see in uh in yellow green has been a performer.

So definitely long bonds have not been the answer and we've been buying our clients

uh uh short bonds and G I CS and try to squeeze the best possible rates

on short income

um keeping them away from volatility on that front.

Now, we're a little bit more happy about preferred shares.

We're adding preferred shares to our portfolios. That's gonna be a

significant change or in the,

in the middle of uh of re tweaking the allocation for most clients portfolios.

Uh and what it matters. I mean, I if clients have only RSP assets,

uh you don't want to put tax

advantageous investments in R SPS or RS.

So we'll, we'll make sure that we place those preferred shares

um in the right accounts

now,

going back to commodities uh in between uh the

um oil prices that have gone up in value.

You can see for the first time, the opposite, uh natural gas has gone down 23%.

That is a significant drop

and uranium after having a spectacular 2023 is pulling back as well

and there will be no discussion in finance without mentioning

crypto crypto has had a stellar end of the year.

Um I always regard crypto as

three X

NASDAQ. Basically, the NASDAQ is running.

I find that Crypto Germany is correlated

but much higher.

So when you see NASDAQ going up 10% you're gonna see crypto going up 30%.

Um It'll be interesting to see at some point

in the crypto market can uh can exist by itself with its own fluctuation

independent of the tech market.

But as of now, for crypto investors at uh 60% return

year to date.

Uh And uh Ethereum and 57 in crypto,

it's uh

it's looking quite uh quite uh uh quite good. So

that's the summary of um

uh the major indices here.

Now, let's go at the uh fixed income performance.

Uh We talked about the long and the short bonds

and you can see how the bond sector

as reflected by, by the chart here has had a rally since October,

but it's pulling back a little bit

at the beginning of the year.

And why do you think that is,

that is because interest rates are not going down as fast?

So we are in the camp of hurry up and wait.

Let's see if the long bond market would eventually go on up to adjust to the short term

bonds or if there's gonna be more volatility based

on what the fed and the Bank of Canada does

and the Bank of Canada has been staying put.

So there's no desire to decrease rates in Canada as well. Um For, for the time being

in terms of um assets that are less conventional,

but they have their role in investment portfolios.

And

you know,

there's a certain demographic that believes very much in coin and Ethereum.

Um

The uh cryptocurrencies,

I can tell you that

from our perspective, you cannot add Bitcoin as a, as a valid asset class.

It is an investment vehicle. It's available

at some point if we talk to our clients and they wish to have it in their portfolio.

So we can facilitate that.

However, I cannot call it a go uh an

ASA class.

But

if you look at Bitcoin and Ethereum,

they have made tremendous stride.

Uh they are called by many liquid Gold. Um So they, there's a, there's a way to

think of them as being hedge assets,

they had tremendous gain. However, the volatility persists

and everything gold, as much as we like gold at any point in inflationary times,

it is a bet against the US economy in a sense.

So when I see the US economy sputter and after gold and gold stocks, correct,

it will become of a very um interest uh and of high interest to us

and you're gonna see more gold stocks in the investment portfolio.

However, for now,

we think most of the action is still in the conventional market

and there will be no discussion about

currencies and uh asset classes without bringing in

the Canadian dollar, the Canadian dollar. If you look at it and between 7080 cents,

it is what they call range bound.

What we like about the Canadian dollar

is that

reasonably stable?

What we don't like about a Canadian dollar

is that when you have significant volatility around the world,

you are going to see the American dollar

make significant gain against the Canadian dollar.

So if you see a uh an extraordinary event, a credit event, uh housing event,

a geopolitical of significance,

you will at some point

uh

understand that the Canadian dollar would go down against the US dollar

and our

US and international investments will appreciate by

the virtue of the Canadian dollar depreciating.

So,

you know, if you think what, what, what can protect me if things go really,

really wrong around the world,

the only thing that's gonna rally as a first step would be the American dollar.

I don't think gold or any other assets would give you that shelter.

But I do think the US dollar would be the first

thing to give you a very nice hedge in this area.

And um

we do have in our portfolios for some of our clients, alternative investments.

Now, not all portfolios have the room for alternative investments.

Uh but the ones that do

our area of focus here has been private real estate

and

it's not just any real estate.

It is rental real estate as we see through Centurion apartment re uh it

has been tremendous in performance.

It is self storage facilities uh by avenue living

within the trends of

individuals having to rent their homes, instead of owning them

individuals, having to own smaller places and

relying on self storage facilities to

be able to store most of their valuables. Um

II I think that will continue

and therefore when we talk alternative investments.

We're not talking hedge funds, we're not talking long short market funds.

We haven't had any luck with those.

And I'm, I philosophically, we don't, we don't believe in them,

but we do think that rental real estate and self storage are gonna be strong.

Uh And I'll give you a little bit of a, of, of a,

of a diversification against the conventional markets.

So some of you already have Centurion and Avenue living

in your portfolios and uh those have done really well.

Plus they pay around 6 7% in annual yield.

So

that's the uh area that uh we explored.

First, we went big picture, we discussed the world

and now let's look at what the Kani

wealth has been up to.

We take our investment

allocation for each client

and uh decide how much will go in Canada, how much will allocate to the US?

How much will go international?

Will you have fixed income? Will we have alternatives?

That has always been the case

if you look at our performance of our Canadian strategy,

which is made of approximately 30 stocks against the TSX

since 2000 since our move to blue short tracking the numbers.

Well, we are at the segment in blue,

we have had an average annual rate of return of 15% 15.3 for that matter

against the TSX at 10.8.

So at strategy level, we outperformed in Canada by quite a margin

and uh

you can see some years are uh are significantly higher performances.

Other years are just slightly shy of the index, but on an aggregate,

we're out performing.

And I think that's important

uh to our clients

in the US because we have not participated in the tech rally in the same way.

We are believing a lot more in diversification.

We have underperformed slightly.

So the average of of the SNP has been 20% for the same period of time

and we have been at 17. So over there, there's a 3% differential every year.

Am I upset about that? Not at all.

I think our time will come when our clients are gonna be very grateful about the

uh shelter that we offer them when markets become turbulent.

And I don't think it's a matter of if it's a matter of when

certainly we don't have the not Notre dame

ability to

tell you that it's gonna happen in the next three or six months.

Uh But I do think that we are long in the tooth here

in a bull market cycle and volatility is around the corner

and uh last but not least our international portfolio as we stack it against Europe,

Australia and Far East.

Um

We have been able here to uh outperform in a significant way.

Our average return in the international markets has been 15.78% per annum

uh versus the index that has been quite anemic at 4.89%.

So, um

I think this one is pretty straightforward and self explanatory.

Uh We have been, we've had the fortune of buying individual international stocks

trading on American exchanges in American dollars.

And we found the progress here being much better than relying on mutual funds

or ETF S or other package products to give exposure to the international markets.

So we're quite uh quite proud of that initiative that started about two years ago.

Now, in 2024 there's many areas of focus. Uh we just started with um

adding funds to your tax free savings accounts and doing a

lot of in house work preparing you for the tax season.

By the way, March 15th would be where our tax packages will be produced by

um our dealer and uh Serena and the administrative team will be in touch

with you or be able to forward the information to your tax professionals.

Uh Just stay tuned for that.

I know we have our uh type a personality clients who would like to have

the tax is a little bit earlier

and we just keep uh mentioning that if we produce a package that's incomplete,

it may trigger refiling fees.

So uh just asking you kindly to be uh patient

with us until those uh packages are available in full.

So

let's look at the area as a focus here. Uh Short term to medium.

We continue to be in the short uh range uh markets for fixed income.

The um high interest savings accounts have been great uh T bills as well.

We found some G I CS offered by National Bank and TD that

posting great yield

and we secured those uh last year, we can't find those rates anymore.

There's blue short G I CS at 6.1% that

we still have client portfolios can't secure that anymore.

This year, most G I CS are for term deposits are paying 4.8%

and we'll continue our la

la

uh structure notes

and stay in the short to medium range for fixed income.

Now, if you look at the opportunity for the longer term market,

uh we'll wait for the medium and long term bonds

and uh I I we're just gonna start adding those to the client portfolios very,

very gingerly.

Uh I mentioned that we'll start with preferred shares

and for capital appreciation and dividends, we'll stay defensive

uh utilities, telecommunications, pharmaceuticals.

Uh Those are what you'd call the boring businesses.

Uh But the ones that don't fluctuate as much now,

we're a little bit light pharmaceuticals because they're too expensive right now.

But in terms of utilities and telecom, uh we have those in there

and we'll carry the Canadian banks.

We said that we always carry the Canadian banks and their dividend

as there are solid investments until we see

the real estate becoming volatile.

If ever the Canadian real estate goes through significant volatility, then we'll,

we'll reassess uh what we, we do on that on that front.

Let's talk a little bit about financial professionals and

um what the narrative is these days as everybody

is exuberant about markets and markets can never go

down and things are gonna be uh uh excellent.

You can see the average uh advisor right now. If you look at a sweet spot,

the advisor about 35 to 44 years old and 45 to 54

the amount for, let's say 50% of the market.

Now, I am glad to tell you that I will join the 19% pretty soon. I'm gonna be 55 in May.

So I'm gonna fall into that bracket of 55 to 64 years old.

So advisers that are anywhere from 20 years old to

all the way to about 45 have not really seen

the markets being challenged and volatile as we did uh in 2000

and, you know, maybe 2009 was uh was as close to that.

Therefore, uh they would have a AAA

bias of being in the market long term.

We have the same bias for being uh long term in, in equities.

But I think our percentages are a lot more conservative when

we sense that there is more volatility on the horizon.

So,

um the chart on the right shows you the same thing,

the tightening of the, the tech bubble. We had a 48% decline in the market,

the housing bubble of uh 2006, 2000, 2009,

uh 56 decline.

And right now we are in a time of everything bubble.

And um II I think the story to be told here,

we're not saying that we'll um

be immediately going down,

but we're just saying this is a turn in

the market where you want to really be cautious.

And now, um

that's, that's pretty much the,

the summary. I just wanted to uh to close by saying that

um we are optimistic uh overall that we can deliver the right returns for you.

Uh We'd like to continue those discussions that are planning succession planning,

uh Everything that's on your mind.

Uh We will always be here to answer any questions and

where our next meetings may be virtual is in person.

We welcome to the Kani

World head office uh for a discussion or a visit to your

wo branches in the neighborhood.

Uh have a wonderful day. Enjoy us uh uh a, a spring day today.

Uh As we record uh at the beginning of March,

uh we hope everything's gonna be great for you and your family

and we're looking forward to continuing our business relationship.

Uh Everything that's on your mind, just give us a call.

Uh We'll arm ourselves for the tax package and I

know Serena will work over time in that area.

Alongside of us to make sure that you have everything that you need

until then, have an excellent day and on behalf of

Kani Wealth, uh

myself, my brother Flavius Serena and the entire team.

Uh Thank you very much and we'll update you one more time in the summer.

2024 CW Money Talks

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