It’s been another volatile month for markets. While it was looking like indexes would yet again be in the negative for month-end, equities have rallied as of late. And you may not believe this, but most international markets (with the exception of Emerging Markets) actually trade higher since the end of June. The rally hasn’t just been in stocks - the bond market has bounced back as well. 

This year has been unusual in many ways, but one of the most unexpected factors has been the correlation between equities and fixed income. Traditionally, bonds rise when stocks fall because investors often flee to bonds (which are safer than equities) to protect portfolios from a declining stock market. However, with interest rates rising so aggressively, which is bad for bonds, this has been one of the worst years for fixed income in a long time.

Speaking of rising interest rates, the Bank of Canada increased rates by an incredible 1.00% on July 13 in an attempt to rein in inflation. A move of 0.50% would have felt heavy handed only a few months ago. But few things scare central bankers more than inflation. Thus, rates are increasing at their fastest pace since the '80s. Let’s hope we don’t need to endure those measures again. 

Looking forward, the waters remain as murky as ever. Covid numbers have risen, recession fears persist, inflation, while showing hints of plateauing, remains problematic, and the war in Ukraine continues. On the bright-ish side, some parts of the supply chain are improving and, as mentioned last month, lower investment prices provide a degree of protection. Having said that, should we endure a significant recession, markets would likely fall further.

Despite the cloudy horizons, I am comfortable with the way our portfolios are positioned, as they remain tilted towards value and commodities, and I believe we will continue to outperform for the foreseeable future.

As always, feel free to reach out if you have any questions, and if you’re looking for more timely information on the markets, you can find them on the research section of my website, or on my Twitter, Facebook, and LinkedIn feeds.

Dune by Frank Herbert: I grew up watching sci-fi films and TV shows, like Star Wars and Star Trek. However, I never got around to reading the genre. I decided it time to change this and gave Frank Herbert’s 1965 classic, Dune, a shot. I loved this first book of the Dune series. It’s well written, has great characters, in-depth prophecies, and a planet that makes most deserts look welcoming! I was especially impressed with how plausible the technology was, given it was written almost 60 years ago.

Pursuit as Happiness by Ernest Hemingway: Wonderful short story revealing the importance of doing what you love. Even when it’s hard and breaks your heart.
My Twelve Rules for Life by Russ Roberts: 12 wise rules to consider living by from the host of the EconTalk podcast.
Do We Need a New Theory of Evolution? by Stephen Buranyi: Although the theory of evolution is widely accepted, many scientists disagree with some of the field’s accepted axioms. Sometimes the ugliest fights involve nerds in lab coats.
The Secret Lives of Fungi by Hua Hsu: The more I learn - and to be clear, at this point I know very little - about fungi, the more fascinating I find them.
Canso’s July Newsletter: “We believe that the market is underestimating the amount of tightening that the Federal Reserve and other central banks have to do to get inflation under control. That means less money available and that markets will get much more illiquid.
We see a lot more potential downside than upside at present and prefer to continue keeping our portfolios in higher quality and liquid securities. The last two years have seen the most liquidity injected into the financial system in our careers. We think the reversal of this liquidity will take more time than the markets expect, and this could very well result in a grinding battle of investment attrition that most investors aren’t prepared for.”
Unity behind the Leader or Internal Fighting? The Mario Draghi Case by Ray Dalio: Really insightful article on Italian politics. For perspective, many were excited when Mario Draghi, the former President of the European Central Bank, was parachuted in as Italy’s prime minister. However, 18 months later, his coalition has fractured, and Italy will likely lose the best leader it’s had in generations. And, just as tragically, it’s likely destined to return to political infighting.
Although this article was written before Draghi’s ultimate fate was known, it’s worth reading for its historical and economic perspectives alone.

George Carlin’s American Dream: George Carlin was arguably one of the most important comedians in history. Not only was he one of the first to push the limits of what could be said in public and on TV, he also regularly reinvented his comedic style, while remaining true to his beliefs. It’s also an interesting comparison with The Zen Diaries of Gary Shandling, which I recommended last month. Although each spent their lives searching for something, they couldn’t have done so in more dissimilar ways.

Hedging Inflation with Real Assets by Brompton Funds: Really good explanation (with historical charts) of how “real assets” have been an effective way to hedge against inflation.
Megavalanche 2022: This is slightly insane. And if you’re interested, here is a map and the times from the race. Thanks to Joel from my racing team for sharing.
Tour de France: It’s been years since I’ve watched the Tour de France. But having gotten Covid a few weeks ago, Tanya and some time on our hands. This led to us watching highlights and a lot of live coverage from all the 21 days of racing. By all accounts, it was one of the best events in years.
Josh Younger on Rate Derivatives and Volatility Ahead of the Election by Odd Lots: Conversations about the bond market often feel like listening to Charlie Brown’s teacher. However, given everything that has happened from the beginning of the pandemic to the recent rate increases, the bond market has been a fascinating place to observe. To that point, this Odd Lots podcast with Canadian-born Josh Younger on what happened when the pandemic first hit and the current state of the bond market is really interesting.
Selections from the Museum of Failure - Twitter Thread by Trung Phan: It’s important to be reminded of our failures. Not from a pessimistic point of view, but to inoculate us from survivorship bias. And, as a side benefit, they can often be pretty funny. Some are real head shakers.

"Raise your ambitions. Lower your expectations.
The higher your ambitions, the bolder your actions.
The lower your expectations, the greater your satisfaction.
Achieve more and be happy along the way."  
James Clear 
"Not everything that is faced can be changed. But nothing can be changed until it is faced." 
– James Baldwin
"No change of circumstances can repair a defect of character."
– Ralph Waldo Emerson
Matthew Lekushoff
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