'In the U.S. you got an economy doing better and projected to do better': Levine

Key Concepts

• Stagflation: A situation characterized by slow economic growth and relatively high inflation.
• K-shaped Economy: An economic recovery where different segments of the population experience vastly different outcomes – some thriving while others struggle.
• Royalty Companies (e.g., Franco Nevada): Companies that provide financing to mining companies in exchange for the right to receive a percentage of the revenue or net profits from the mine.
• Small-Cap Stocks: Stocks of companies with a relatively small market capitalization. (Russell 2000/IWM are indexes tracking these)
• IWM: The iShares Russell 2000 ETF, a fund representing the Russell 2000 index of small-cap US companies.
• G7: Group of seven highly industrialized nations (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States).

Retail Sales & Economic Outlook – November Data & Beyond

The latest Canadian retail sales figures for November show an increase of 1.3%. However, Portfolio Manager Norman Lavine of Brook Wagman Private Wealth Management at Raymond James cautions that this increase is “very deceptive,” primarily driven by increases in beer, wine, and spirits sales, as well as food prices. He attributes the rise in these categories to increasing alcohol prices and Canada’s high food inflation rate – the highest in the G7, exceeding 7% year-over-year. Lavine suggests that excluding these two categories, the Canadian economy is essentially stagnant.

Concerns of Stagflation

Lavine expresses concern about the potential for stagflation in Canada, citing flat sales figures (excluding alcohol) alongside persistent high prices. He contrasts this with the US economy, which he believes is performing better and is not facing the same challenges. He defines stagflation as a combination of slow economic growth and continued inflation, warning that the current situation in Canada exhibits early signs of this phenomenon. Specifically, he points to the combination of over 7% food inflation and flat retail sales as key indicators.

December Sales & the K-Shaped Economy

Predictions for December sales are negative, with expectations of a decline. This, coupled with consistently high prices, paints a concerning picture for the average Canadian consumer. Lavine describes a “K-shaped economy,” where wealthier individuals and baby boomers are faring well, while younger generations struggle with job prospects, housing affordability, and food costs. This disparity further exacerbates economic concerns.

Precious Metals & Franco Nevada

Regarding investment opportunities, Lavine notes the rising price of gold, nearing $5,000, and the “parabolic” increase in silver prices. While acknowledging the potential for further gains, he expresses caution about the volatility of individual mining companies. He advocates for investing in royalty companies like Franco Nevada, which holds royalties on the production of various commodities (gold, silver, iron ore, crude oil, copper) from projects worldwide. He explains that Franco Nevada’s diversified portfolio and royalty-based structure offer a safer investment approach than directly owning individual mining stocks, mitigating risks associated with mine-specific issues or geopolitical instability. The company originated with gold royalties from Nevada properties but has expanded globally.

Small-Cap Stocks & the IWM

Lavine is beginning to increase exposure to small-cap stocks, drawing on his experience managing these portfolios in the early 1980s. He emphasizes the cyclical nature of small-cap performance, noting that they outperform during certain economic phases. However, he cautions against the challenges of individual small-cap stock selection, which requires extensive due diligence. Therefore, he prefers investing in small-cap indexes through the iShares Russell 2000 ETF (IWM), which tracks the Russell 2000 index.

He highlights that the IWM has underperformed the S&P 500 for 14 consecutive years, resulting in lower valuations. He believes small caps are now poised to outperform, benefiting from lower interest rates, lower energy prices, and their predominantly domestic focus. He anticipates positive performance from the US economy, particularly for individuals and smaller companies, further supporting his recommendation of the IWM. He referenced a chart (not shown) illustrating the performance difference between the IWM and the S&P 500.

Synthesis/Conclusion

Norman Lavine presents a cautious outlook on the Canadian economy, highlighting concerns about stagflation and the widening gap between economic winners and losers. He suggests a strategic investment approach focused on diversification, safety (through royalty companies like Franco Nevada), and a potential shift towards undervalued small-cap stocks (via IWM) as the US economy shows signs of strength. His analysis emphasizes the importance of understanding underlying economic trends and avoiding potentially risky individual stock selections.