Category: Finance

The phrase “nobody rings a bell at the top” is the cliche, but the converse of this is that nobody screams at you telling to buy at the bottom.

There has been a profound shift in the market over the past few months, and it can be abstracted with “real is in, virtual is out”.

You see this in stock charts of software companies versus anything selling tangible product. Gold and silver are surging, while Bitcoin and the purchasing power of any fiat currency is cratering.

I have been experimenting with various AI technologies and trying to get an idea of how real this will be disrupting the landscape.

The best analogy I can make at present is the operating system abstraction. In the old days (and to a lesser extent today), software was compiled to run explicitly on CISC (Intel x86), RISC chips (e.g. ARM, PowerPC, MIPS, etc.), but it became a pain in the rear to rebuild the software for differing computational systems. Operating systems (Unix-based systems, DOS/Windows, MacOS, etc.) were developed to abstract from all of this. Of course it became a pain in the ass to develop for all three (plus more) at the same time, so the next level of abstraction was initially done with Java, which ran a virtual machine on top of the respective operating systems – the appeal is in “write once, run anywhere” – it didn’t have to care about the hardware OR operating system you were running on. Browser-based technologies also provided another layer of abstraction parallel with Java – for the most part it doesn’t matter whether you are using Chrome, Edge, Firefox, Safari or whatever, you get the same application delivered to you.

The issue now is that you actually have to code and use tools to generate what you want (fancy websites, database interfaces and the like). Entire university curricula are dedicated to the craft to assembling all of these disparate skills together.

Fast forward to today, where we have AI. The acronym is not artificial intelligence, but rather artificial interface. It is essentially an abstraction on top everything I have mentioned here, and using natural language parsing as a “graphical user interface”. Of course, there is nothing graphical about it – it is entirely textual.

Do you remember this?

In terms of economics, it is a huge question where the value will be extracted from. Going back to the old days, Microsoft was clever enough to extract a royalty out of nearly every PC sold in the form of a license to Windows (and later on, Office). When you think about it, there is little consumer utility in the purchase of an operating system itself – the end-user value is in the applications run on top of that layer.

We sort of see this extraction of value with the amount of queries you can ram through OpenAI, Claude, etc. – there is a limit before you have to pay a monthly subscription fee as the amount of computational energy required to process requests is, from what I can tell, an incredibly inefficient process. Is this sufficient for them, or is the value going to be in the applications?

I have been looking long and hard at Adobe, which produces well-known products like Photoshop, Illustrator, and other digital editing software. By all accounts, they are trading at forward P/Es that are very un-techlike (11.6x estimated 2026 earnings as I write this). Despite the existence of near-equivalent open source products (GIMP for Photoshop, Inkscape for Illustrator, OpenShot for Premiere, etc.) Adobe continues to extract incredible pricing power. An entire industry of graphic designers, marketing agencies and so on rely on Adobe software to produce style guides for millions of clients out there.

The ease of using AI to replace Photoshop and Illustrator is a material threat, however. If it no longer takes a professional graphic designer to generate different styles, it leads to the question of why one needs to spend nearly a thousand dollars a year on a professional software license (for them), or a few thousand bucks to contract the person out in the first place. The application layer where one can extract pricing power must be elsewhere. I don’t have easy answers for where this goes in the digital world, but it is one potential explanation why software companies are getting murdered in the stock market at present.

Just in case if you are wondering, nothing I write here uses AI. I still find the “Turing test” for AI-driven writing to be pretty obvious but I don’t think many people have this discernment skill, and it is one reason why AI-driven media (so-called “AI Slop”) is so prevalent. Paradoxically, it is also one reason why, as this trend of increasing procedurally-generated media continues to contaminate and permeate through everything, real is making a comeback.

Bitcoin goes to zero.

I have very little skin in the game for precious metals (aside from the indirect benefit Teck Resources, soon to be Anglo Teck, mines from the ground) but I was just looking at the futures trading today in gold, platinum and silver, and oh my god. Here is platinum (down 18%) and silver (down 26%):

Charts are Pacific Time Zone.

This type of trading reminds me of October 2008-styled selling. As in panic selling. Somebody got caught with long exposure on the futures and were clearly forced to dump – you don’t see 25% down moves in a day like this very often in any broad market! Silver actually got all the way to -35% before rebounding – timing this exact bottom would be an impossible feat. Just imagine you woke up, saw silver down 10% and thought to yourself “surely, this would be a great time to average down on my long” before receiving a summary financial execution hours later. Or at around 1:50am, you bottom-ticked the futures at US$95 long and was giving yourself a pat on the back until 7 hours later when you were underwater.

Volatility begets volatility and Monday will be very interesting. This should also be a warning shot across the bow of crypto traders, but will it be a portent to the main indexes?

The more things change, the more things stay the same.

We have two asset classes, precious metals (Gold, Platinum, Silver), and cryptocurrency (I will narrowly define this as Bitcoin, Ethereum, Solana and XRP as they are the only ones trading on the CME at present). They share some features in common – they are perceived to be a store of value and (using a crypto phrase) represent “proof of work”. They both have a yield of zero unless ‘leased’ or ‘staked’ in other parallels.

There’s now another characteristic in common – they are volatile. The chart of platinum, for example, has gone all over the place in the past week of trading. As I write this it down over 10% from 12 hours ago. There’s an obvious amount of speculation, day-trading, short covering, and media hype now covering the ascent of precious metals.

I am wondering whether we are entering in a phase where tangible is going to outdo digital, more broadly than what we are seeing with this trivial comparison. My level of general concern with the whole monetary system is also rising. I keep thinking about to my reflections on my brief attempts of being a corporate raider with Slate Office REIT, except instead of dealing with a borderline-insolvent REIT, we are all “financial flea” participants in our own national economy where there is no way to “win”, or even “staying even” – in real terms, not nominal. Even deciding what the measuring stick (which historically used to be the sovereign currency of the nation you live in) is going to be obscured – perhaps linking to Maslow’s Hierarchy of Needs is a better measure.

There was a story in the news about a woman in Quebec winning a lottery payout and she chose $1,000/week versus a $1,000,000 lump sum payout.

There were some very derisive internet comments against her decision. Intuitively it may seem to be the case – inflation and “bird in the hand” mentality, but when doing the math, it isn’t a terrible choice.

There are two strong variables here – your expected rate of return and your expected longevity. The higher your expected real after-tax rate of return, the more you should take the lump sum. The higher your longevity, the more you should take the annuity.

The woman in the picture looked to be around 60 years of age.

The finance math suggests that if your risk-free rate is 6% and you assume inflation of 3%, and your marginal tax rate on returns is 40%, your break-even is around 20 years.

If you expect equity-like nominal returns at 10%, then the break-even goes to about 28 years.

There are other lifestyle variables involved here, for instance, is a dollar spent today more valuable than an inflation-adjusted dollar spent tomorrow? Does this person have a pressing need for a large lump-sum amount of money today?

Perhaps the best reason I read in the discussion was that if she takes $1,000/week that her friends and family won’t hit her up for money, as this is what happens to almost all big lottery winners.

The lottery annuity is also iron-clad and virtually like a government-guaranteed and after-tax pension.

So I can respect this decision to take the $1,000/week. It can be justified.

Higher prices means lower returns going forward. Overall prices are quite high right now. Therefore, expect lower returns.

The few times that I have been able to identify something of value over the past year, my primary issue has been to not add enough into it. Perhaps I am just over-cautious, or perhaps I am just getting old and do not feel the need to swing for the fences anymore. The most poignant example of this was my tepid entry into Premium Brands (TSX: PBH) early in 2025 in the $75-80 range, which should have been a 10% position but unfortunately was much less. Rationally, it is better to get a small position of something that appreciates rather than nothing, but emotionally it just feels like another lost opportunity plagued with regret!

Here are some thoughts in no particular order:

1. (no surprises here) Precious metals have gone wild over the past few months, but especially silver and platinum:

Silver is most frequently mined as a byproduct of gold production and is a relatively ‘common’ element in comparison. However, platinum is a much more rarer metal (rarer than gold). It would suggest that platinum should be more expensive than gold, but currently due to historical factors and the fact that gold is used in higher quantities, especially in jewellery, it is not.

The pricing for precious metals is making me think about several questions –

a. High commodity prices will spur capital expenditures and more production. For physical mining projects, this will take half a decade and there will be a huge lag effect between the investment and when the supply will eventually hit the market – but it will eventually. The AI machine guesses that a ‘greenfield’ gold mine project will have an AISC of US$1,600-$2,200 per ounce and other projects will be less, so there is a gigantic margin to be made on this over the next couple years. When I look at the majors (e.g. Barrick Gold, etc.), it looks like that this story has already played out in the stock market.

b. In the late 1970s after many years of soul-crushing inflation, and short-term interest rates in the double digits, gold became a very popular way to escape. There were accounts of people lining up to buy gold and silver and of course this was the best time to be selling the precious metals and investing in US Treasury bonds. While I don’t see signs of that happening quite yet, there does seem to be some element of precious metal fever reflecting sentiment on the current state of our monetary system.

c. Is physical (or financial) ownership of precious metals displacing cryptocurrency? Is there going to be a “retro” trade? I was particularly intrigued when brokerage platforms (e.g. Wealthsimple) were advertising one-tap purchases of gold, and you can have it transformed into physical metal for a nominal fee. However, what will you do with it? Just put it in a display case and have it stolen like the crown jewels at the Louvre? At least, unlikely cryptocurrency, you can melt it and turn it into a piece of artwork or create some very conductive wire or something.

I am not a fan of holding physical metal. It is a huge security risk. I have one 2 ounce silver coin which I bought many years ago and it acts as a great paperweight on my desk. It doesn’t yield anything other than looking nice.

2. Telus’ “Look! Insiders bought back stock and we did a buyback of 1.5 million shares!” announcement.

Telus came up on my year-end stock screens. I am absolutely sure retail investors will pick them because they have an absurdly high dividend rate, yield is currently 9.3%. I guess when your dividend rate is so high a stock buyback makes sense on paper, but an issue is that the free cash flow going out the window for the past 12 months is higher than the regression to the mean – plus they are still spending billions in capex with no end in sight. While I have no doubt that over time there will be an element to an oligopoly price power to keep them afloat, I would view this public advertising of managing the stock to be a negative signal.

Telus has a ton of debt (about $30 billion net) which also puts them into a dangerous area where their free cash generation to gross debt levels is quite high. While their industry is very stable, it does make them vulnerable to an external shock that would involve withdrawing of credit – these are the times that one waits for to pounce, albeit it happens so infrequently that people get impatient and want to collect a 9% yield instead of waiting for the moment they can purchase shares for 50% cheaper.

The nearest comparable is Bell Canada (TSX: BCE), which is in slightly better financial position than Telus and they already cut their dividend to finance questionable acquisitions and shore up their heavily indebted balance sheet.

A general rule, however, is that if yield is the only thing you are seeking in an investment, you might get dissapointed. Telus sticks out like a sore thumb in this department and it makes me very, very suspicious, especially when seeing this press release from them.

3. Money supply keeps on growing – Bank of Canada – $4.993 trillion in June 2025, $5.090 trillion in October 2025… where does that cash liquidity end up? Some of it in gold, platinum and silver of course, but also the TSX, which was up 32% (total return) in 2025.

Money is reflected by a journal entry – somebody’s credit is somebody else’s debit and the total sum of liabilities plus equity is equal to assets – the larger this number, the larger the nominal returns will be sought after, and the larger the inflation. Hence, we have the Canadian financial sector doing very well in 2025:

The Bank of Canada reducing interest rates from 4.5% to 2.25% just might have something to do with this chart!

4. The compression in real estate, especially in the residential condominium markets in Vancouver and Toronto, is starting to have an effect on rental prices and this is reflected in the price of CAPREIT (TSX: CAR.UN), albeit not today when I am making this post!

There is so much levered finance on real estate that governments and central banks have huge incentives to not letting things get too bad. I suspect things will meander on this front for many years.

5. Lower interest rates create abundant credit conditions, causing a huge chase for yield – preferred shares are now a wasteland (lots of issues trading at/above par), corporate credit spreads are narrow, and Canadian debentures are mostly at par – things in fixed-income land are just terrible if you want to make a high return.

On the Canadian debenture front, I do note that George Aryoman’s adventures into Slate Office REIT (now Ravelin, RPR.UN) doesn’t look like it is going too well – his entity, G2S2, is lending a good chunk of credit and this has been extended out and is now being paid 10%. RPR.DB is a $29M debenture that is outstanding on January 31, 2026 and the debenture series have not been paid interest for quite some time. My comments I made nearly three years ago about this train wreck have aged fairly well, “I quickly came to the realization there is no way for a financial flea such as myself to “win”.”.

6. Software has not done well in 2025. The market starling, Constellation Software (TSX: CSU) has fallen from grace, from $5000/share to $3,200 presently. Its twin cousin, Topicus (TSXV: TOI), also has exhibited a similar price curve. Both of them have been a valuation mystery to me.

However, more common-name companies are also feeling the crunch. Adobe (Nasdaq: ADBE) is trading at 3 year lows, presumably a brand and suite of software that has a following nearly as strong as people’s familiarity with the Windows operating system. As far as large-cap companies go, Adobe seems to be relatively cheap for what it is.

Finally, the drama at Dye and Durham (TSX: DND) or should I say, Dead and Durham? has not resolved itself. We also have companies that have not gone anywhere for seemingly centuries, including Calian Group (TSX: CGY), and OpenText (TSX: OPEN).

7. Energy and lumber are two commodities that have not done well. Despite energy, Canadian oil and gas has picked up a bid – sentiment has made a notable turn there. Lumber, on the other hand, looks to be depressed as the state of the real estate market is suppressing consumption. However, when this turns, there will be a massive spike up in lumber prices as supply constrictions have been significant. Thus, I would pay attention to lumber as a potential “sleeper hit” for 2026. Surely it can’t get worse for them?