Category: Finance

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?

This post, in addition to everything else I write here, is not generated by AI.

However, AI is more than happy to scrape whatever it is I write and meld it into its consciousness and is more than happy to regurgitate it and indeed claim it is its own voice!

So you no longer have to read what I write – instead, just ask ChatGPT or the other dozen AI engines out there and I am sure they will be more than happy to tell you what you want to be hearing instead of my lonely voice on an obscure website.

I have taken a hiatus from writing over the past couple months. There was a multitude of reasons why which I won’t get into, but part of it is the value of stepping back and mentally detaching to gain a broader and more strategic perspective on the craziness that is going on. One disadvantage is that similar to the physical example of when you don’t work out for a period of time and your body starts to atrophy, the same applies to writing. It takes quite a bit of effort to finally put pen to paper again.

I have been in a low-risk mode for quite some time, a large part due to my own personal uncertainty and the fact that from around 2023 onwards, I do not think that my ideas and thought process has been very alpha-generating. Most of my ideas since then have not been good, with one notable exception (I’ll just leak it here and say it was Magellan Aerospace – I have not done a write-up on them, but suffice to say, just like any good trade, I wish I had taken a larger position to begin with… and there’s likely to be further upside from here, although the outsized returns are now finished).

Although the tariff tantrums that have caused VIX to spike to 60 have tapered away, we continue to live in a strange world where the narrative that is being created by digital media is the cause of the change of people’s perceptions, but not to the degree that one may think – while perceptions may change, underlying realities, when experienced on the ground, is much different than the digital narrative.

Much of what we perceive in the digital world is completely manufactured for manipulatory purposes – with digitization, it is easier than ever to manufacture stories and push the boundaries as to what can to believed. Originally a photograph was sufficient evidence of potential malfeasance, but now you can even ask the AI to photoshop it into some compromising position. Then a voice recording was a smoking gun – and this can now be faked with AI. I’ve also talked about in the past (a decade or even two ago!) about how video can now be easily faked (see: 1987 movie clip – The Running Man – roughly 2:20 into this clip). All of this virtual fakeness is cheaper than ever to manufacture.

While truth is absolute, it is unfortunately very easy to shroud it in a multitude of fictions – and being able to disprove fictions is a much more expensive process because fiction is so damn easy to generate.

In other words, the digital infrastructure is driving us collectively mad – inherently it is the example of a trillion monkeys keying into typewriters and eventually some sort of narrative will ‘stick’ just given our very human susceptibilities to believe in stories. This is the very strange and brave new world that we live in – at least when we stick to using digital media to “inform” us. Just five years ago, we saw a very powerful example of how digital infrastructure can be used to changing the narratives of people in rapid succession (wear a mask and take a vaccine or go to jail because you are killing Grandma) – and this will continue to get worse as long as people continue to believe the digital machine – and they do because it is much easier to listen instead of asking questions!

You can see now why I am going a bit nuts trying to distill everything and figure out where things are going. It can almost justify the valuations we see in the fiction generators of society – the NVidia’s, Facebooks and the like – while the “nuts and bolts” of society (e.g. the CN Rails) trade at much more reasonable price to earnings ratios.

Many years ago, Amazon’s founder bought out the Washington Post – this was not because Bezos decided to be a benevolent news-creator, but rather it was a channel into molding the narrative and public consciousness. Musk bought out Twitter for similar reasons. Facebook has built it up organically, much to their own credit. The value is clearly in creating these networks as a control mechanism to form the narrative that people believe, and this goes beyond dollars and cents and hence a P/E ratio is a meaningless measure of whether there is value or not. How much does one put on the value of an intangible attribute such as trust, for example?

I’m not sure where this is going. In terms of investment options, there is reality and there is virtual reality and the lines between both are getting blurred. Even the macroeconomic environment appears to be precariously positioned – it is quite evident that the infinite money-printing machine is coming to a close (just look at Japan’s long term bond yields which seemingly have a yield again) – US 30-year treasuries aren’t doing that much better either (TLT investors are down about 40-45% from five years ago!) and central banks are on the verge of QE-ing long-term yields into submission once again, which will only have the effect of inflating all asset prices like we’re living in 2009 or 2021. Something will break, but this be asset pricing? Or will the thing that break be future returns by virtue of inflated asset pricing?

One thing that can be taken for certain is that the powerbrokers are the ones controlling the bulk of the assets, and there is a huge vested interest in making sure that control does not get ceded by virtue of collapsing the financial system.

Doing a cursory yield scan of the corporate bond market and the preferred share market, almost nothing is suggesting outsized returns on fixed income. Reliable firms such as TRP or PPL have their preferred shares yielding around 600-700bps on reset, which is hardly a risk premium in light of yields given by corporates. Quite frankly, the environment out there for returns is terrible. Instead, one has to reach for anticipating the psychology of demand and getting that capital appreciation to make those outsized returns. With the TSX at all-time highs and the S&P 500 almost at all-time highs, it could entirely be the case that depreciating currency plus QE will be the vector to propel the markets even higher than anybody expects – keeping the asset values inflated and the speculative mania very much alive.

The crystal ball after March of 2020 was quite clear. Right now it is foggy, but after taking a small break, I’m getting a better sense as to where the AI dys-reality is taking perception and narrative and areas where it will be potentially clashing against reality. AI is great at taking existing information and meshing it into something that looks new, but my projection is a scenario where, similar to Covid, by necessity things go into original territory once again once there is too much of a distance to reconcile narrative to reality – there needs to be a game changing event to occur.

You’ll probably think I am crazy when I say this, but prepare for an alien invasion.

Clearly I’m not sane. Please consult ChatGPT for more saner advice than what I’m dishing out here.

The VIX index has been wildly dancing around, but as I write this it is roughly at around 50% at the moment.

April 16, 2025 futures (the predicted VIX 6 trading sessions later) has it at about 34%.

(Update: by the time I started penning this draft to when I hit the publish button, the numbers changed to 45% and 32%, respectively)

We are seeing a continuation of policy disruption and the realization that traditional structures that have existed are crumbling before our eyes. With the elevation of risk, prices are dropping and we are also seeing a deleveraging occurring.

It is always instructive to remember that whenever a transaction is performed, that no cash or assets are lost or created in the process – instead, the price of the asset is marked to whatever the transaction price is. The power of double entry accounting ensures that “Newton’s Law of Accounting” is followed at all times – assets equals liabilities plus equity.

Say your personal balance sheet looks like this:

Assets
Cash – $100
Stocks – $900 (10 shares of XYZ @ $90, mark-to-market)

Liabilities + Equity
Debt – $500
Equity – $500

Your own personal balance sheet has a gross debt to equity ratio of 100%, or net 80% with cash. Your loan agreement with the bank is a gross debt ratio of no more than 150% or a net debt ratio of no more than 100%.

Some other market participants decide to panic and take down the trading price of XYZ down to $60 because they want to raise cash.

Now your balance sheet looks like this:

Assets
Cash – $100
Stocks – $600 (10 XYZ @ $60, mark-to-market)

Liabilities + Equity
Debt – $500
Equity – $200

This is a result of a $300 loss in the value of the stock (whether it is ‘realized’ or ‘unrealized’ does not make a difference here). The loss flows directly down to equity. Now your gross debt to equity ratio has ballooned up to 250% (net 200%) and your bank is calling you asking you to normalize your debt ratios. So you sell half your stock:

Assets
Cash – $400
Stocks – $300 (5 XYZ @ $60, mark-to-market)

Liabilities + Equity
Debt – $500
Equity – $200

The transaction is a transfer of 5 XYZ in exchange with $300 cash from another participant. The gross debt to equity ratio is still 250%, but the net is now down to 50%. You then pay off a couple hundred dollars of debt to abide by the gross debt to equity ratio covenant:

Assets
Cash – $200
Stocks – $300 (5 XYZ @ $60, mark-to-market)

Liabilities + Equity
Debt – $300
Equity – $200

Now your gross/net debt to equity is 150% and 50%, respectively, which is within the bank covenant.

No cash or shares of XYZ were created in this equation. Instead, what happened is that your shares went to somebody else’s balance sheet in exchange for them giving you some cash. However, the payment (and extinguishment) of debt reduced the quantity of assets in the overall system – you gave $300 cash to a bank, which had your debt as an asset on its balance sheet – it performed an asset conversion (a loan to you to cash), while your balance sheet experienced a significant reduction.

Effectively this is what is happening – debt ratios get triggered with asset price drops and this forces cash to be raised – the pressure to liquidate further accelerates the asset price drop.

In other words, the anatomy of a margin call.

Fundamentally, asset prices are supported by cash flows provided by such assets, tempered by factors such as risks of business prospects and what one can get as a risk-free alternate. This does create a bit of a speculative outpouring where you get participants saying that assets such as common shares of NVidia will grow their earnings 25% annually for 10 years straight and the like – and when conditions change to thwart those expectations, the asset price corrects accordingly and those that have borrowed to pay for the stock will be forced to reverse course.

The net result is that those that are over-leveraged will have their assets taken away from them in a washout scenario. This applies to traders, but also to financial institutions that make bad loans and have an inability to abide by their regulatory limits.

It goes to show that high debt environments create huge amounts of volatility – Uncle Warren has preached about this for ages in his Berkshire letters. The irony is that those that have the highest amount of debt will have the highest amount of success relative to their equity – until a washout will take them out. This is best described in Greek mythology in Icarus, who was given a great gift of wings that could make him fly, but was cautioned to not fly too close to the sun otherwise they will melt – and indeed he crashed down to earth. High amounts of debt cause similar results.

When there is a race for cash, participants try to unload whatever is liquid – stocks, bonds and other alternatives. We see on a day like today that Gold is down 2%, and the two main cryptocurrencies (Bitcoin and Ethereum) are down about 6% and 13%, respectively. However, the world’s leading liquid cash substitute, US treasury bonds, typically a safe haven during equity market declines, have their futures down about 2.5% at present. Presumptively, today can be characterized as a race for cash. The race for cash provides opportunity for those that do not have to raise it – and timed well, can result in outstanding returns.

It is still far from the 2008-2009 days where I remember seeing corporate debt securities of credible and stable entities (e.g. telecom firms) trading at 15-20% yields. 2016 was also another ripe environment for fixed income (I remember the preferred share market was ripe with credible double-digit yields at the time). Perhaps my expectations are still too lofty for these types of returns in a 2025 environment that has been bathed in liquidity – if we receive a continued contraction in liquidity, there might be enough forced selling out there to make it happen. We will see.

It is psychologically damaging to see the equity component of the portfolio flailing so badly in this spiral (should I have gone 75% cash instead of 50%?), but I can only imagine how it would be if the portfolio was leveraged long – the financial stress would be considerable. I took a lot of chips off the table a couple years ago for this reason. I would only want to put those chips back on the table when it would seem to be crazy to do it – and believe it or not, it doesn’t seem like that yet, despite the fact that we live in crazy times (the causes of the increasing mental insanity can be the subject of another future post).