Berman's Call for Monday, Dec. 1, 2025

Here's a comprehensive summary of the provided YouTube video transcript:

Key Concepts

• Consumer Sentiment: A measure of how consumers feel about their financial situation and the economy, impacting spending habits.
• Nominal vs. Real Terms: Nominal figures represent current dollar values, not adjusted for inflation, while real terms are adjusted for inflation to reflect actual purchasing power.
• Federal Reserve (The Fed): The central bank of the United States, responsible for monetary policy, including setting interest rates.
• FOMC (Federal Open Market Committee): The committee within the Federal Reserve that sets monetary policy.
• Rate Cut: A reduction in the Federal Reserve's target interest rate, intended to stimulate economic activity.
• ETF (Exchange-Traded Fund): A type of investment fund that holds assets like stocks or bonds and trades on stock exchanges.
• Dividend Eligible Tax Credit: A tax advantage in Canada for dividends received from Canadian corporations.
• Interest Deductibility: The ability to deduct interest expenses from taxable income, often used in leveraged investment strategies.
• Valuations: The process of determining the current worth of an asset or company.
• Currency Hedge: An investment strategy designed to protect against losses due to fluctuations in currency exchange rates.
• Cyclical Industries: Industries whose performance is closely tied to the overall business cycle (e.g., iron and steel).
• CRM (Customer Relationship Management): Software and strategies used to manage and analyze customer interactions and data.
• Inflation Swap: A financial contract where parties exchange interest payments based on a fixed rate versus a floating rate tied to an inflation index.
• Five-Year, Five-Year Forward Inflation Expectation Rate: A market-based measure of expected inflation over a future five-year period, starting five years from now.
• Dual Mandate (Federal Reserve): The Fed's objectives of maximizing employment and maintaining price stability (low inflation).

Economic Overview and Consumer Sentiment

The discussion begins by examining recent Black Friday online sales figures, which Salesforce reported as up 7-9%. However, Larry Berman cautions that these numbers are in nominal terms and do not account for inflation or natural year-over-year growth in online shopping volume. He highlights that consumer sentiment surveys have been at their weakest in decades, indicating that the average consumer is not doing well. While the high-end consumer is performing better, their sentiment is also down. Berman suggests that retail sales numbers have been "soft-ish," and a mid-double-digit nominal increase would have been impressive. High single digits are considered disappointing.

Key Points:

• Black Friday online sales were up 7-9% (nominal).
• Consumer sentiment is at multi-decade lows.
• The average consumer is struggling, while the top 20-30% of earners are supporting spending.
• Nominal sales figures can be misleading due to inflation and increased online adoption.

Federal Reserve Policy and Rate Cut Expectations

There is significant discussion about the Federal Reserve's potential interest rate cut. A week and a half prior, a rate cut was considered off the table, but recent Fed speak and the anticipated appointment of a new Fed Chairman (potentially Kevin Hassett, though unconfirmed) have shifted the bias. The Fed meeting is scheduled for December 10th, with a blackout period starting seven days prior. Currently, there is an estimated 85% chance of a rate cut.

Key Points:

• An 85% probability of a rate cut by the Federal Reserve in December.
• The bias has tilted towards a cut due to recent Fed commentary.
• The government shutdown may impact the availability of the most updated, official economic data.
• ADP (Automated Data Processing) weekly labor market prints, though non-governmental, are being watched as an indicator of slowing employment.
• The weight given to non-governmental data by Fed governors is uncertain.

Investment Strategies and ETF Recommendations

The show then transitions to answering listener questions about investment strategies and specific ETFs.

1. Z Pay vs. ZWU (Scott's Question): Scott is looking to move from riskier growth investments to a more income-focused and defensive stance.

• Z Pay: Offers all US exposure, uses options to generate income, has less overall market risk but is still equity risk in US large-cap stocks. It provides a better yield and risk-reward profile than exiting growth investments.
• ZWU: Primarily Canadian utilities (70%), with 30% US exposure in pipelines and telcos. It is considered less market-sensitive and more defensive.
• Recommendation: Berman suggests ZWU for a more defensive play. He advises against combining them if the goal is a clear shift to defense, as Z Pay would essentially be re-entering similar US equity exposure.

2. Long-Term Investment Strategy (Chris's Question): Chris, a 29-year-old investor with a long time horizon, is seeking advice on where to invest for the long term, not timing the market.

• Challenge: Current market valuations are high, leading to lower expected average forward returns. Valuations are a poor timing tool.
• Speculative Opportunity: Berman identifies medical marijuana stocks as "dirt cheap" and compellingly priced. He anticipates potential banking reform in the US that would allow for more commerce in this sector.
• Recommendation: An ETF like MSOS (Multi-State Operator ETF) trading in New York is suggested for this speculative play, with an expectation of making money in 3-5 years due to potential US banking law changes.

3. BMO US Bank ETF vs. European Banks (Joe's Question): Joe is considering switching from the BMO US Bank ETF, which is off its five-year highs, to European banks.

• European Banks: Generally cheaper than US banks, but not as much as in the past.
• Currency Risk: As a Canadian, Joe faces currency risk with US dollar exposure. The Canadian dollar currently has limited purchasing power against the US dollar.
• Recommendation: If US exposure is desired, Berman suggests a currency-hedged approach for a 5-year outlook, anticipating a potential appreciation of the Canadian dollar. He is unsure if a hedged European bank ETF exists but notes that hedged European dividend payers do.

4. Iron Ore and Steel Industry (Andreas's Question): Andreas asks about the iron and steel industry, using Cleveland-Cliffs as an example, and the potential for shareholder returns compared to past situations like Stelco.

• Cyclical Nature: Commodity-related industries like steel are highly cyclical, performing well during economic expansion and poorly during contraction.
• Cleveland-Cliffs: Berman notes that the company is coming off a bottom. He cautions against expecting it to reach its 2022 highs, which were influenced by a supply shock.
• Recommendation: He suggests an average position at best, with potential for a drift back to the upper end of the trading range in the next couple of years, but not significantly higher.

5. Canadian Banks (Sam's Question): Sam asks about buying Canadian banks ahead of earnings, his favorite way to play them, and his take on the financial sector.

• Performance: Canadian banks have consolidated but had a massive run this year.
• Valuation: Looking at a 5-10 year picture of an equal-weight bank ETF (ZB), Berman sees a significant run. He believes it's not a great entry location, and forward capital appreciation is likely to be less than average, though the dividend remains good.
• Alternative: For yield, ZWU is suggested as it's cheaper and includes beaten-down telcos and more attractively priced utilities compared to banks.

6. Salesforce (John's Question): John inquires about Salesforce, given its recent good report and doubts about its business model in the face of AI.

• Company Assessment: Berman "hates the company," finding it difficult to deal with and very expensive.
• Market Position: While once a go-to for CRM, there are now more options.
• Recommendation: He considers Salesforce overvalued and expects failed rallies as it consolidates and rationalizes over the next year or two. He labels it an "underperformer."

7. Silver and Gold (Andrew's Question): Andrew asks about playing silver and gold after a gold bull run and silver's record highs.

• Sector Outlook: Berman likes the sector and believes it's going higher.
• Frothiness: He acknowledges the current "frothy" nature of the market, which can lead to violent corrections. He wouldn't be surprised to see a pullback to the trend line.
• Investment Style: From a value perspective, buying when markets are making new all-time highs or near them doesn't suit his style.
• Recommendation: He advises a conservative approach, suggesting an average position or less, rather than betting the farm.

Educational Segment: Inflation Indicators

Larry Berman's educational segment focuses on inflation indicators and their implications for the Federal Reserve and capital markets.

1. Potential Fed Leadership and Market Implications:

• Whispers of Kevin Hassett potentially becoming the next Fed Chairman are discussed.
• The combination of a cooperative central bank chairman and a Treasury Secretary who understands commerce suggests a coordinated effort to manipulate the market and keep the economy strong, especially in a midterm election year.
• This could involve adjusting Treasury funding or active participation in FOMC decisions.

2. The Five-Year, Five-Year Forward Inflation Expectation Rate:

• This is highlighted as one of the best indicators of market perception of future inflation.
• It measures the expected inflation rate over a five-year period, starting five years from now, using market-based pricing.
• The Federal Reserve Economic Database (FRED), managed by the Federal Reserve Bank of St. Louis, provides this data.
• Current Trend: Long-term inflation expectations have been relatively contained, with recent trends showing a downward movement. This has supported capital markets.
• Concerns: If Hassett becomes Fed head and the indication is for stimulative deficit funding, there's a concern that longer-term inflation expectations could rise and break out of their channel. This would be costly for the US government given the existing debt.
• Cost of Capital: Scott Bessent's focus on keeping the cost of capital low for US taxpayers is mentioned, emphasizing the need to prevent long-term inflation from becoming anchored.
• Fed Policy Debate: The debate is whether the Fed will cut rates when the economy is running hot and doesn't need it. The Fed's dual mandate (full employment and price stability) is central to this decision.

3. Data and Policy Uncertainty:

• It's difficult to predict policy and market movements precisely without knowing how inflation and unemployment will play out in the next six months.
• Key Indicator to Watch: If the long end of the yield curve "comes unanchored" and long-term debt funding becomes a concern, it would be negative for all capital markets.
• Viewer Action: Viewers can monitor the five-year, five-year forward inflation expectation rate; an upward movement would signal rising anxiety levels.

Conclusion/Synthesis

The discussion emphasizes a cautious outlook on the current economic environment. While some nominal sales figures appear positive, underlying consumer sentiment is weak, and inflation remains a key concern. The Federal Reserve's potential rate cut is a significant factor, influenced by evolving economic data and political considerations. In terms of investments, the market is generally seen as expensive, with lower expected future returns. Specific opportunities exist in speculative areas like medical marijuana, while more defensive plays might involve utilities and pipelines. Cyclical industries like steel are viewed with caution due to their inherent volatility. The long-term inflation expectation rate is identified as a critical indicator to monitor for potential shifts in market sentiment and policy.