Earnings will continue to improve, and the rise in equity markets reflected the strength of the stocks themselves and had nothing to do with monetary stimulus, said Brian Belski, chief market strategist of BMO Capital Markets. "Stocks went up because they are the best asset in the world, and that’s why they went up," Belski said.
Our next guest is Brian Belsky chief investment strategist at BMO capital markets. He is back with us to give us his outlook on the capital markets, the economy and stocks. Brian, welcome back. Always a pleasure to have you. Thank you so much for having us. It's always great to be on with you. You made the rounds of the internet last time you were on a couple of months ago by being probably the most bullish guests we've had about stocks.
And I love to get your take. You've had a lot of different viewpoints, um, around your, around your video. I love to get an update. The major change that I've noticed in the markets is a rising yield. Since a few months ago, we've had, um, I've had some guests call it a parabolic rise upwards. What's your take on this?
Has it affected your outlook at all? Well, I don't know who those guests were, but from a parabolic side of things where you're coming from zero to one and a half or 1.6 or whatever, and maybe the rate of change has been a large change in terms of just the pure percentage. But that's when you have to kind of take two steps back David and apply some perspective.
If you include, uh, the financial crisis. Uh, the average tenure treasury since 1950 is 6.3%. If you take out the financial crisis, it's 5.7%. So ladies and gentlemen take a deep breath, uh, when interest rates rise from excessively low levels, which obviously we were at, and that means the economy is improving.
The economy is improving. Companies are generating earnings. As companies are generating earnings. Stock prices are going up. So what's the equation of investing day that ducks lead earnings, which lead the economy. And that's exactly what we've seen. People need to take a deep breath. I think the problem, uh, that I've encountered, uh, is the, the, I like to call the OCD market.
We have obsessive compulsive disorder on particular topics right now. It's inflation inflation here comes inflation. And, uh, this is my 31st year on wall street. So I missed the early eighties, uh, as part of this. But, uh, we've been looking for inflation in the United States and for the world for that matter.
But especially the United States, it's night, teen 80. Two. And so this notion of inflation's coming tomorrow and today it's so short-term oriented. Clearly we are going to see some inflation pressures and we've seen some numbers of, with respect to PPI, meaning the producer price index. And that means earnings, power and pricing power for companies.
But it's not green light though, just because we're starting to see a little bit higher prices does not necessarily mean that we are in an inflationary environment. And that's why the fed. Has been so steadfast in terms of what they're thinking and why they're thinking. So let's just all take a deep breath with stop being reactionary.
Let's stop making these daily and weekly calls on, on what kind of environment we're in. Yeah. Well, if I remember correctly that, uh, in the seventies, uh, the, the environment that led to the high inflation environment, the eighties was the OPEC oil crisis. We had a supply crunch and energy. Which led to a stagflationary environment.
Now, I think some people are concerned today that we might be seeing something similar to, well, not from an energy side, but we had a supply crunch issue during COVID when the supply chain broke down. And that's part of the reason why some people are afraid of inflation. Do you see any merit in that argument?
No, uh, we don't, because I think there's plenty of supply of oil, right? Uh, and if you take a look at why emerging markets have rallied, emerging markets have rallied because for the most part, because of the weakness in the dollar typically, and historically, you don't want to buy assets based on currency.
You want to buy assets based on underlying fundamentals. There's plenty of oil. Plenty of supply. Uh, and remember we were coming off of depressed levels. You were trying to sell oil was negative a year ago, right? So we've, we've all we've forgotten about that already. And now we're off and running that we're in the next grade commodity Supercycle.
I think that's a short-sighted. I do think that global synchronized growth has improved. Um, but we're not on a early two thousands trajectory. Uh, in terms of commodities, going back to your seventies comment, uh, I think it's, again, shortsighted to only be focused on commodities. Now I remember the seventies, uh, there's a classic photo of me, David, on a mini pike in line getting gas.
I'm not going to ask you to share this photo. I'll just take your word for it. No, no, no, but here's where I'm going with this people forget. Okay. The, that the one of the largest increases. With respect to debt, to GDP. And the history in the United States was during the John F. Kennedy administration. And many people talk about that was NASA.
That was NASA. Actually, it was a buildup of the Vietnam war. And so then you had president Nixon coming in and trying to get the ship right. In terms of taxes and spending. Uh, and then we all know what happened to president Nixon, but at the seventies, we were still dealing with the unwind of the Vietnam war.
And that actually caused a lot of what was going on with respect to inflation. I wasn't just the oil embargo. It's not that simple. So again, this is about perspective, uh, and I think too many people default to the negative. And that's where exactly we were last year. Yeah. And let me go back to this OCD comment, obsessive compulsive disorder.
We were obsessive compulsive disorder, by the way, on some of the macro projections a year ago, today that the world was going into the next great depression. David, do you remember that? How that how'd that go? And so I think anytime we're, usually we meaning the marketplace, uh, is usually one-sided on a topic.
Like we were a year ago. That we're going into the next great depression. I think the same kind of rule can be applied on. This over-focus on inflation right now. I have one last question about inflation and we'll move on to the markets. Now, a common argument I've heard for inflation is that due to unprecedented, monetary stimulus and the expansion of the federal reserve balance sheet to unprecedented levels, that ultimately will lead to an increase in money supply, which by definition will lead to inflation.
Historically, we've seen that. In the past with, with, uh, with people like to cite what the Y Maher Republic and Germany and thirties, what's your take on that? Okay. So again, do your history, right? So, uh, in, in your, in your business school books and your fancy schools, you probably remember the little girl with a wheelbarrow full of German marks by not local bread, uh, the, the Y Maher Republic.
And what happened in terms of the devaluation of the German Mark was about paying reparations. Uh, after world war one and led to what happened going forward in terms of the more nationalism state that we saw in Germany, but people have to go back and do their history. And part of that was because of what, uh, Woodrow Wilson did.
post-World war II. I'm putting the league of nations together and, and, and forcing those war reparations. And so, uh, we had the remember too, we had the pandemic and all of that. So again, it's not as simple as that. And I would say. This, uh, on the money supply, we're still waiting for money supply to get going.
Um, and I think blaming stimulus or applying stimulus is the reason why stocks went up. Stocks went up because they're the best assets in the world, and that's why they went up. And we believe too, that even in March of last year, when we made the call that we believe the second half of our 20 year bull market began on March 23rd, that was the control alt delete.
We reset the next 10 years. We're in print on that it was a public report. So I don't, I know a lot of people claim they made the call. We made the call in print on that day. I think a lot of people didn't agree with us because it was all about chasing the money. Well, it was about chasing the best asset data and the best asset we believe still a year later, our us and Canadian stocks.
Okay. All right. Let's go back to interest rates for a sec. I've heard the argument that with the rise nominal yields, that will bring down the valuations of some of the growth sectors like tech stocks, which are valued using a 0% risk-free rate. And of course, if you raise that, it'll bring down the valuations.
What's your response to that? Well, you're probably talking to fixed income people that shouldn't be talking about, uh, how to, how to value stocks, right? I mean, that's my simple response to that. If you're using a zero interest rate, uh, in terms of your risk-free rate, I think that's too aggressive because obviously that was very shortsighted.
We weren't going to be at zero interest rate and if you're doing a discounted cashflow model or a dividend discount model, you're looking forward, we're not going to be at 0%. A year, two, three years from now. So I think that was so I think that, that, that knowledge, and that is a fallacy. Let's say that number one, number two.
Um, I think to make blanket discussions in terms of tech is, uh, doesn't make sense to me because if you take a look at the cash balances of companies like the Amazon machine, um, or the Apple machine or the Microsoft machine a much different than let's say Tesla, um, or even Bitcoin. And so I think on an individual basis, rising yields is, are going to have an effect on some of the high flying stocks.
Um, but the high flying stocks, actually, if you take a look at what has happened year to date, in terms of the Mustangs, if you want to call them dramatically underperforming. So guess what part of that's already happened? But they're not the major force in terms of where valuations are stretched. The major force of work valuations are stretched.
Let's just pick on the poster child. Tesla is, would be the, the better example of that. Okay. W uh, revise, are you saying that in your discounted cashflow models for the stocks that you work on, are you not adjusting, um, the discount rate for higher interest rates at all? Is that something that you've considered.
Well, let me be clear. Uh, we are, I think, uh, one of the only strategists in the world that run real life money. So I run $5 billion in Canadian money. That's a mixture of us and Canadian money in Canada and close to 2 billion in the United States. We don't build, uh, Individual discount models on every single stock that we own.
We rely on our great analysts at BMO and our other resources, uh, to, to run the money and manage the companies in the portfolios that we do with respect to building our, our discounted cash flow models and dividend discount model on the entire stock markets of both Canada United States. We never had a zero risk-free rate.
The risk-free rate that we applied were higher because that's common sense. And that's analysis going forward that the risk-free rate was going to be higher. So anyone that had a zero risk-free rate on markets, uh, on a market model, even if they actually, the people you're talking to maintained a model, uh, in published the model and had a track record of a model.
Um, I think that those are all different conversations. I like it bring up a key point. You just mentioned, which is that for looking via risk-free rate should be higher. Here's an argument I've heard recently that I found was pretty interesting, which is that? Yes, you're right. Historically, if you look at the, a longer-term history, the 10 year yield should be a five, 6%, right.
That's actually quite normal for that to be, uh, for that, to be the case. But right now, given the excessively high debt levels of the U S government has just accumulated over the last year, close to $30 trillion in total, total debt, the government cannot afford to for interest rates to go back to historically high levels of five, 6%, because then the interest expense alone or bankrupt the treasury it'll be, it'll be, you know, in the order of trillions, which is.
A high percentage of the, uh, of the attacks revenue that a country brings in. Do you agree with that? Well, I think that's why you're, you're not going to see first of all, to keep it simple. The Fed's going to maintain it. It's biased. Number one, number two, we're not going back to five to 6% for several years.
If not several decades, we know that number three, we've been deficit spending in this country for several decades. So the numbers are getting big. And I think people like to throw out the number. But on a percentage basis, obviously coming out from this unprecedented time, which I don't think should be looked at as a recession, it should be looked at as a natural disaster.
And we're still going to be dealing with this for several years. It's something that we wrote about in our year ahead piece for 2021, in terms of the return to normalcy is going to be a process. It's not going to be a single year event is going to hold down returns. Uh, but it also is going to hold down interest rates.
Okay, let's bring it back to equities now and talk about your positioning. Uh, can you give us a brief overview of your overweights and underweights right now? And then we look at how we position in both the us and Canada from a sectorial basis, as we look at over the next 12 to 18 months, and that's why we favor financials, consumer discretionary, industrials, and materials in both countries in the U S is a little different on, on the makeup of the sectors.
You know, clearly when you combine communication services and technology, it's 40% of the market, David. So we're maintaining those positions. We're not, we're telling people to not sell tech. In fact, you should be buying your Apple and your Microsoft and your Amazon, your Google, and your Netflix on these big down days that you had last week, because then you obviously didn't have these reactionary days of the upside that we've seen.
So maintaining positions in tech, I think is going to be a very important thing. And again, tech isn't painted with one brush. David. Apple's very different than Nvidia. Uh, Apple is very different than Peleton. Apple is very different than Tesla. So this is why we are advocating a bottoms up, stock picking active approach to portfolio management, not about index, uh, management, but this is about owning the right stocks and the right industries and the right themes and the right sectors.
Okay. And let's talk about the best performing. I know what you're about to say, but. The best performing asset class of 2021, which is Bitcoin. I'm quoting a, another bank here that they've released a what? Goldman Sachs. They just released a chart recently and it made the rounds on the crypto community because it was the first time that Goldman has included Bitcoin along with the S and P 500 other indices gold commodities.
So they've. Considered it an asset, like any others. So anyway, um, according to this chart, the Bitcoin, the crypto, the crypto space, Bitcoin in particular has been the best performing asset of 2021 so far. What's your view on this? And, uh, do you, do you look at cryptocurrencies in your analysis? See, all you're trying to do is increase the hits on YouTube with respect to, uh, because here we go, bell to talk about Bitcoin.
So. Listen. Um, I don't think that Bitcoin's an asset. I think Bitcoin's an instrument and nor do I believe, uh, that Bitcoin should be part of your asset allocation model. I don't typically comment on other people's research because I was not part of the process. And I think it's, it's not apropos to do that.
I am so congratulations, uh, Goldman Sachs for your report, but I would say this, um, anytime you sign up for an account, David, it tells you be prepared to lose money. Uh, and I think that's what has been lost this year with all the game stop stuff and the individual trading and having your own account, it just made it, made it clear that you need a financial management professional to run your money.
And every time again, you've you, you sign up for an account. It says, uh, there is risk of losing money. The way that we would play the Bitcoin thing is creating, create a separate account that is out of your asset allocation sleeve and say, put some money in in there that, Hey, if it goes up great, if it goes down great, it's not going to hurt me.
And so I, there, it remains to be seen whether or not a Bitcoin is an asset. I think some of these, uh, comments and new products or about because Bitcoin has gone up what happened in 2017, 2018, when there was no demand for Bitcoin and lots of supply. Well, guess what? The price went down. And so, uh, I think we have to be a little bit leery with respect to, um, defining it as an asset.
And I think that remains to be seen. I think the best assets in the world are things that you can actually reach out and touch and use as part of your everyday life. And that's kind of the Peter Lynch, Warren buffet way of investing. And that's what we've been living off of for over 30 years. Would you ever, at some point in the future change your definition in regards to Bitcoin?
If it becomes something like that? Well, it's not going to be physical and tangible, but. If it becomes sort of a, a means of payment or becomes more ingrained in our everyday life. If I'm not saying it well, but if. Well, you know, there, there's this whole saying you can teach an old dog new tricks. And for the record, I didn't like Netflix at first and I love Netflix.
Now. I just didn't understand the whole model in terms of getting a DVD in the mail and signing up for that. But then I understood the scalable part of it. When it was a platform with respect to having it on your iPad, for instance, and clicking on and getting movies. So, you know, Netflix has become, uh, the Kleenex of streaming.
Uh, and so there's Bitcoin have an opportunity to do that. I don't know. Uh, can you T again, can you need to be, you need to be, uh, adaptable in, in this world, so I'm open to it, but I have to learn more about it. And this whole notion of, if everyone's talking about something, David, I like to go the other way.
All right. Um, commodities now gold has been the worst performing asset. According to the chart that I cited. What's your take on commodities while commodities? It's a very broad index. I use gold is just one commodity, but your, your view on commodities is a, is a, is a, is a complex mental index, uh, has suffered a little bit more relative to what we're.
It was certainly last year. I think certainly last year we were talking about. Much more dollar weakness and what's going on in emerging markets with respect to currencies. I still think gold should be a part of your portfolio actually. And that is a hard asset. And so we do like gold from a longer-term perspective.
And you know, the gold is one of those areas that you want to buy when nobody likes it and you want to try to get out and everybody loves it. And that certainly is an emotional, uh, type rhetoric driven story in Canada. And so we would maintain our gold position. In fact, I think there's a very good chance that if, and when we see a stimulus package and another stimulus package in the United States, we could see interest rates kind of go down.
And I think that could, uh, actually, no one's saying that I think you could actually have a build a case for having gold as part of your portfolio. And I think part of it too, David is. Is this maybe belief that, you know, Bitcoin is an asset class and you've seen some redistribution with respect to literal money out of golden into Bitcoin.
I don't necessarily agree with that. Uh, but again, gold is that hard asset that I am more comfortable with holding. All right, Brian, I appreciate your candor and your update as always. Thank you very much for being on the show. Thank you. And thank you. Thank you for watching Kitco news. We'll be back. Stay tuned for more coverage.