Ferguson's Law
July has been hot! We celebrated Canada Day, the 4th of July, and the Calgary Stampede – which experienced record attendance – YAHOO! In the U.K., the heat has been turned up, politically. The Labour Party won a landslide majority with only a 2% increase in the popular vote. The new Prime Minister, Sir Keir Starmer, gave his acceptance speech, stating that his government will ensure every British person is treated with respect, while they rebuild and renew the country with calm. This is reminiscent of a speech from Justin Trudeau, almost nine years ago, where he declared that “Canada is back!” Well, he was right – we are at the back of most economic benchmarks in the developed world.
The Labour Party’s platform states that it can stop the chaos, turn the page (not sure what that means), and start to rebuild by increasing spending on healthcare and education, providing free breakfasts to primary schools, and becoming a clean energy superpower. What is a clean energy superpower? Does he plan on harnessing the wind and blowing it someplace else, or maybe collecting light and transporting it to Europe? London, in fact, has decided that the weight from the electric buses is too damaging to the streets, so they are now returning to traditional powered (internal combustion) buses. The new government plans to raise money from different forms of tax, including a windfall tax on the oil and gas industry, to pay for all these respectful programs. All of this sounds so familiar in Canada, and we know how it ends: lower productivity, higher inflation, and budget deficits that take years to shrink, costing taxpayers money. Since the U.K. election, institutional equity has already started flowing out of the country!
On a more positive note, the U.S. CPI number for the month of June was lower than expected, with Core CPI running at 2.2% over the last three months – this is extremely important to fixed income investors, equity investors, homeowners, and renters alike! Since the end of COVID, inflation has been an issue, creating fear among new homeowners, businesses, and even governments that need to borrow to finance their spending (pretty much all of them). But with this number, we finally see some light at the end of the tunnel. It is important to understand that rent and mortgage payments are a lagging economic indicator that comprise over 30% of the CPI number – rents are finally cooling off, which should lead to lower CPI numbers, going forward, lower bond and GIC yields, and finally, a move up in value-based investments.
I love facts that are true, not the ones that special interest groups use to enhance their position. So, here are a few that you should understand and use to your benefit:
- One of BlackRock, Vanguard, or State Street (the largest asset managers globally) is the largest shareholder of 88% of the S&P 500 companies.
- They are also the three largest investors and owners of most of the DOW 30 companies.
- Overall, institutional investors own 80% of all stock in the S&P 500.
But more importantly, there is something known as Ferguson’s Law – Niall Ferguson, a historian who has analyzed the downfall of great empires, has formulated a simple law for predicting them – that even Bill Ackman has taken notice of! Essentially, a great power that spends more on debt service than on defense will not stay great. Understand that we are in different times today than those of the Ottoman Empire, for example, but the U.S. debt issue is a problem. By the end of 2024, according to the Congressional Budget Office, the U.S. will spend $892 billion on interest payments while spending only $822 billion on defense. As an investor, how do you either protect yourself and/or make money if the U.S. gets into trouble? Gold! The price of gold has appreciated almost 20% this year, finally breaking out of the consolidation pattern from 2011. As inflation slows and interest rates drop, gold should begin to move to even higher prices, and remember, Canada is abundant in both large and small gold mining companies that will benefit from higher prices.
