We’re Back: How to Invest in 2017

Dear Readers,

I just uncovered a secret plot that could wipe out half of your wealth by January 15th.

It could also destroy Washington and bring chaos to America overnight.

In fact, I was just told by a government agent with close ties to the story – whose name must remain anonymous – that this plot will begin to unfold as early as next week.

It’s also why Donald Trump has been so adamant about increasing America’s nuclear capabilities.

In 1973, during the Yom Kippur War, an Israeli A-4 Skyhawk jet carrying a nuclear weapon was shot down. This was never revealed to the public due to national security measures.

However, just recently, this weapon ended up in a far-right cabal led by an Austrian Neo-Nazi billionaire.This billionaire plans to trigger a nuclear war between the United States and Russia so that they can establish a fascist superstate in Europe and create a new world order.

Want proof?

Just go to Hillaryclinton.com and verify it.

Okay, so obviously what I just wrote isn’t real. In fact, I pulled it directly from the summary of the movie “The Sum of All Fears.”

But be honest, how many of you believed it?

I deceived you not to draw you into reading this investment Letter, but to show you how easy it is to spread fake news.

I am sure you have heard about the “fake news” that’s now finally being uncovered by the media.

As much as the Internet and social media have powered us into the next century, it has also become an outlet for propaganda, thieves, and liars.

But that’s not what worries me.What worries me is how our generation responds to it.

If we understand this, we’ll get a better understanding of how to invest.

I hope you will take the time to read this Letter in its entirety because it paves the way for how I will invest this year, what you should be aware of, and gives you an overview of how we performed last year – after all, performance matters.

How Millennials Consume News

According to the American Press Institute, 85% of Millennials say that keeping up with news is at least somewhat important to them.

However, the majority of them get their news from social media feeds, namely Facebook and Twitter.

And while these outlets do serve real news, most Millennials simply read the headline of an article rather than the whole story.

Let’s use our Equedia Facebook page as an example.

One look at some of the comments on our articles and you can see that the majority of the commenters haven’t even read the article – yet they feel as if they know enough to publicly put ignorant comments for the world to see.

Example?

Here are some comments from one of my recent articles on why Zinc prices are going up…

…I talked about how Trump’s infrastructure plans could boost the price of zinc. I never ripped on Donald Trump.

…no comment required on this one.

…please, check the periodic table.”

Either people leaving these comments on Facebook are just reading the headline, or we should be very worried about our next generation. Perhaps social media has made us dumber, or perhaps it has given dumb people an outlet where people might actually listen…

In just bit, I’ll tell you why this is important and how it relates to your investments.

For now, onto the real world.

A Difficult but Positive Year

The effects of monetary policies on the economy have been difficult to assess, while debt levels continue to grow. All of these factors contributed to the question of when the debt and equity bubble would pop – yet the market marched forward.

Furthering the uncertainty was the global political chaos unfolding around the world.

From Brexit to a Trump Victory (which we predicted), the organized chaos of populist backlash seemed to have the complete opposite effect on the market.

Instead of crashing, the market had a rather positive reaction to both potentially worrisome outcomes.

So perhaps they weren’t that worrisome after all – not in the short term, anyway.

Or perhaps the experts and analysts who try to make sense of the market are wrong in their thinking. They may have the right analysis and the right numbers, but they forget that the market isn’t logical – it’s emotional.

And the latest findings in neuroscience proves this.

Via Bigthink:

“A few years ago, neuroscientist Antonio Damasio made a groundbreaking discovery. He studied people with damage in the part of the brain where emotions are generated. He found that they seemed normal, except that they were not able to feel emotions. But they all had something peculiar in common: they couldn’t make decisions. They could describe what they should be doing in logical terms, yet they found it very difficult to make even simple decisions, such as what to eat. Many decisions have pros and cons on both sides-shall I have the chicken or the turkey? With no rational way to decide, these test subjects were unable to arrive at a decision.

So at the point of decision, emotions are very important for choosing. In fact even with what we believe are logical decisions, the very point of choice is arguably always based on emotion.”

In other words, decision-making is based more on emotion than logic. This is precisely why one simple headline can cause our emotions to drive the markets wild

We have seen this time and time again: when a stock is moving up, investors are more inclined to buy – even if the stock is overvalued. They feel they might “miss the boat.” The fear of missing out (FOMO) effect.

Conversely, when a stock is falling, investors may continue to dump shares because they fear they will lose their money. Yet, from a valuation perspective, the stock may be cheaper than ever.

In the case of both Brexit and Trump’s victory, we will undoubtedly see more pro-cyclical fiscal policy spread in the developed world.

That means more jobs in the near-term and more spending. Both are positive signs for the market.

A strong shift from monetary to fiscal policy – a shift I have been predicting over the last year – is precisely the shift that will gradually replace monetary policy as an economic growth and market driver around the world. This, too, is positive – for the most part.

Of course, you can cancel all of these rational outcomes if war were to break out. And I stress that cannot be ruled out.

But I have always said that we should focus on what we know, rather than what we don’t.

So let’s see where the market may be headed by taking a look at what we know, starting with the primary economic driver of our world.

The United States of America

Heading into 2017, the U.S. economy will be in its eighth year of economic expansion.

That’s the fourth longest expansion since 1900.

The tighter U.S. labour market also pushed average hourly earnings higher at the fastest pace since 2009.

And for the first time since 2008, the prices of more than half of the goods in the U.S. Consumer Price Index (CPI) pool are rising at an above-average historical pace.

But don’t let the numbers fool you.

Despite what appears to be a robust turn of events, economic growth has averaged just over 2% per year – the slowest pace of all the post-World War 2 expansions.

In other words, the U.S. is getting better – just very, very slowly.

However, everyone is expecting things to pick up under Trump.

Trump has pledged to slash taxes, boost infrastructure spending, and deregulate.

How much his plans will boost growth remains to be seen and many uncertainties remain over the details of his plans, but he already appears to be making an impact.

Ford Motor Co, the second-largest automaker in the U.S., has already canceled a $1.6 billion factory in Mexico and shifted its investment back into the U.S. via a $700 million upgrade for a Michigan factory.

I suspect we’ll see more companies bring investments back in to the U.S. as Trump cuts taxes and gives U.S. businesses more incentive to stay at home.

With republicans now controlling both houses of Congress, it will make it much easier to get things done.

While things like immigration and trade issues are likely not going to be as aggressive as what Trump alluded to in his campaign, there is confidence that infrastructure and defense spending, along with tax cuts for both families and corporations, will come through.

What we should be aware of is that all of this talk of infrastructure spending and lower taxes are never mentioned alongside a significant increase in government deficit spending – which I have no doubt will be a major topic later in the year.

How will this debt be paid for? Sure interest rates are low now, but how low will they be and for how long?

If Trump’s plans work, the U.S. economy will grow, which will likely lead to inflation, which means more rate increases. This also means a heavier debt burden on the U.S. overall.

And as much as I agree with Trump’s pro-business policies, the U.S. can’t operate like a business where debts are renegotiated or forgiven. Well, it could, but that would mean the end of the U.S. dollar as the world reserve currency. Or it means a war of some kind.

As a result, there’s no doubt that Trump’s plans are good for stocks and bad for bonds in the short term.

However, sentiment could shift as Trump’s anti-globalization agenda could restrict trade and thus negatively affect corporate profits.

But do people really care about the long term anymore?

Not An Easy Road

It’s easy to assume that Trump’s infrastructure plans would directly translate into growth, which should translate into higher stock prices.

However, that’s not necessarily true.

Interest rates are expected to rise as inflation picks up, and that means the cost to borrow money will increase.

This dynamic alone could be a headwind for stocks this year.

Let’s also not forget that much of the market last year was supported by record corporate share buybacks.

These corporate buybacks will likely slow significantly in 2017 as bond yields rise alongside record market prices.

In other words, it’s hard to imagine a scenario here where 2017 can even come close to the performance of 2016.

And we haven’t even begun to talk about the credit risks associated with outside forces…

Europe: Still Recovering…Slowly

It appears that Europe is slowing digging its way out economically.

Exports have recovered on the back of a weakened euro, and monetary expansion plans over the past years have created an all-time low-interest rate and credit growth environment. This has slightly boosted consumer spending and added more fuel to the real estate markets.

Additional support for refugees has increased government spending and has slowly translated into more jobs. Given governments will continue to face increasing populist pressures, I suspect we’ll continue to see further increases in fiscal spending.

Again, my guess is that increased fiscal spending is the primary theme for all of the developed countries in 2017.

Eurozone headline inflation hit a two-year high, but core inflation overall is moving sideways. That means the European Central Bank (ECB) will likely continue its easy monetary policy.

Despite signs that things appear to be getting better, the negatives continue to outweigh.

Unemployment remains high and I just don’t see that changing.

Given the political and economic uncertainties, we likely won’t see much corporate investment, while employment growth will likely be led by government spending, rather than the private sector.

If things keep quiet in Europe, economic expansion in Europe will likely continue this year.

Of course, I don’t believe that Europe will remain quiet.

The Brexit decision last year will negatively affect longer-term investment and growth prospects in the UK. More importantly, it has paved the way for others to leave the euro.

The immediate and sharp decline of the sterling post-Brexit not only helped the UK, but it immediately and negatively affected the Eurozone. While EU exports to the UK represent only a small portion of overall EU GDP, it may show other nations who question their position in the EU to do the same.

As Eurozone cohesion continues to be questioned, bank stability will as well.

Elections in France and Germany will be the next major focus this year and the rising populist backlash could bring about another shocking surprise to the Eurozone.

Very few expected Trump to be President and things are much worse in Europe.

Just a few weeks ago, Italy’s third largest bank was bailed out. And I have no doubt we’ll see more in 2017.

Don’t let a European banking crisis take you by surprise.

China: The Bubble Continues

How can we talk about bailouts, debt, and monetary expansion without talking about China?

China, together with Emerging Asia, contributed nearly 40% to global growth last year.

The pace of China’s growth won’t likely change given that China will continue to significantly boost infrastructure spending while continuing to have easy monetary and credit conditions.

In fact, Chinese banks just extended 794.6 billion yuan ($115.10 billion) in new yuan loans in November 2016 and are expected to have lent a record amount in 2016.

These monetary conditions continue to fuel credit growth and real estate investments, which should continue in 2017.

But all of these things are what we know.

What we don’t know is how China will handle the potential credit and liquidity crunch that has been in the shadow for years.

The market will depend on how quiet China will remain about some of the excessive credit expansion problems and its shadow banking activity.

Despite China’s upfront stance on both calming housing prices and reigning in shadow banking, both segments of the markets are roaring – fueled by the very policies that China has implemented.

On the real estate front, more than 70% of November’s nearly 800 billion yuan of loans were long-term household loans, a close proxy for residential mortgages.

This makes it the sixth month since April 2016 that real estate loans accounted for over half of the banking sector’s new loan book.

So much for calming the housing market.

On the shadow banking side, things have come roaring back.

Via Bloomberg:

“Often cast as one of the weakest links in the global financial system given the potential threat it poses to Asia’s largest economy, shadow credit – which consists of trust loans, entrusted loans and bank-acceptance bills – rose sharply to 479 billion yuan ($69 billion), after having dropped to 55 billion yuan in October.”

That’s more than a 770% jump in one month. Considering that as of June 2016, China’s shadow banking system represented 82% of China’s GDP, that’s something to worry about it.

And the market hasn’t even taken notice…

Canada: Not So Conservative

As I mentioned, the theme for the developed world will be fiscal expenditures.

And Canada is no different.

Trudeau will continue to borrow to spend, but given that he is already way over budget, Canada is in for a long and bumpy ride.

In fact, while Trudeau and the Liberals spend hundreds of millions in media exposure, they quietly released an update of Long-Term Economic and Fiscal Projections, just two days before Christmas. That’s right, when almost every one is away on holidays, they quietly released this report which warns that lower than expected growth combined with higher program spending “would be sufficient to put at risk the fiscal sustainability of the federal government.”

Whether his spending, which appears to focus on consumption rather than long-term infrastructure, will boost our economy remains to be seen. It hasn’t done much in 2016 yet…

Overall, we’ll likely see modest growth in Canada boosted by the potential strength of oil. If oil climbs slightly, it would alleviate some pressures on the potential housing correction we’ve all been waiting for.

Earlier last year, Canada’s household debt surpassed its GDP. Meanwhile, the combined debt of Canadian governments, companies, and households reached US$4.4 trillion in the first quarter, or 288 per cent of gross domestic product.

Given that Canadians have often been viewed as a more conservative group, these debt levels are quite alarming.

From the government front, these debt levels will increase. That’s why it will be up to consumers to reign in spending, which could put a damper on the retail sector in 2017.

From a valuation perspective, and according to Russell Investments, the trailing price/earnings (P/E) ratio for the S&P/TSX Composite Index is nearly 20x – a level not seen since 2011. Meanwhile, the P/E ratio of forward earnings is 16x, which is already higher than the longer-term average of 14.4 times.

That means we should be extremely selective of Canadian stocks.

With that being said, here is a look at how I plan on investing in each sector in 2017.

Where to Invest in 2017

*The stocks mentioned in the following sections are NOT new recommendations. We’ll have some new ones in the coming months, so hang tight.

Small-to-Mid Caps

With Trump’s aggressive pro-business administration, I expect that small to mid-caps stocks will fare much better than large caps.

We have already seen a large number of M&A in 2016, but 2017 could be even bigger.

The average balance sheet of larger companies is in excellent shape with low net debt and many of them have used the low-interest-rate environment to “term out” their debt at low fixed rates.

The high levels of liquidity created by quantitative easing (QE) went into large cap equities, and many of them have used their cash flows to return capital to investors through share buy-backs instead of large capital expenditures.

But these companies know that valuations are becoming rich, so they’re more likely to deploy their balance sheets than to buy shares this year.

And since smaller companies have lagged the large caps over the past few years, it would make more sense for the large caps companies to buy the smaller ones instead of buying back their own shares.

Lastly, private equity firms have over $1 trillion worth of committed money in uninvested capital that needs to be deployed and they’ll likely fuel this into the small cap sector in anticipation of the big guys making a move.

Financials

Higher interest rates along with deregulation – what more could you ask for?

This should bode well for financials in 2017, especially the U.S. banks.

Over the past few years, I talked about all of the money going into the banking system and how it fueled corporate share buybacks.

Via How the Fed Influences the Stock Market:

“…its difficult for banks to lend to unqualified borrowers. And since the majority of Americans have been terribly affected by the economic crisis, many of them don’t meet the requirements for borrowing.

With so much stimulus, where has all the money gone?

To the people who meet the requirements: big corporations with cash.”

Despite the growth in the U.S. banking lending system, credit seems to have only been available to the most creditworthy – namely, big corporations and rich people.

But now that interest rates are slowly rising in a more reflationary environment, U.S. banks will likely ramp up their lending business by loosening their credit standards. Along with deregulation, this could allow many of the regional U.S. banks to merge and create more opportunities to spread capital deployment risks.

In other words, overall credit is about to get even bigger.

Technology: A World of Disruption

This may be one of the strongest sectors of all and one of my favourite.

The amount of innovation driving this space is mind-boggling.

From virtual and augmented reality to the Internet of Things, and from artificial intelligence to cyber security, every area of technology is going through a rapid change.

Cybersecurity will be a big topic once again in 2017.

Hackers have become more aggressive and they will have even more power as new computing tools are at their disposal. And with increasing geopolitical risk at the forefront, cyber security stocks will surely benefit. I don’t cover the aerospace-defence sector, but those who do will likely benefit from Trump’s administration.

In the portfolio, and one of my biggest holdings, is none other than NexOptic Technology (TSX-V: NXO) (OTC: NXOPF).

Readers who participated when I recommended this one (on multiple occasions) are easily double their investment. But I think more is to come.

If you’re interested in a technology that represents a paradigm shift in an industry that has seen little change in terms of hardware, this one is it.

I’ll have a bigger update on this one shortly because, within the next month or so, NexOptic and Spectrum will unveil the world’s first flat lens telescope system to the public. And when it does, it will be a game-changer not just for NexOptic, but for the lens industry as a whole.

Biotech/Healthcare

Just like the tech sector, there has been a major wave of innovation in this space.

Institutions are piling money into the sector and many new treatments and product-pipelines are expected to come to market in 2017.

Via Franklin Templeton’s biotech outlook:

“We are also seeing the benefits of heightened activity in terms of development and the new-product pipeline, and we think the US Food and Drug Administration (FDA) has been sufficiently accommodative. If anything, there is increased pressure on the FDA to approve drugs faster, not slower.

An urgent need for treatments exists for challenging diseases such as cancer, Alzheimer’s, Parkinson’s and hepatitis B, to name a few.”

I am already invested in the sector, but one name stands out: 3D Signatures (TSX-V: DXD) (OTCQB: TDSGF)

3D Signatures Inc. (3DS) has discovered an entirely new class of biomarkers for diagnosis, assessment, and monitoring of major diseases, with a current focus on Cancer and Alzheimer’s Disease.

You can find the full report here: http://www.equedia.com/3d-signatures-new-class-of-biomarkers/

The increased pressure for the FDA to approve drugs faster also means that drug companies need a way to develop drugs faster. 3D Signature’s platform could accommodate that and I wouldn’t be surprised to see a major pharma partner with 3D in 2017 to help with drug development.

As Franklin Templeton mentioned, “an urgent need for treatments exists for challenging diseases such as cancer, Alzheimer’s and Parkinson’s.” 3D’s technology and platform could represent an integral part of the treatment process for all three of those categories – just to name a few.

That’s precisely why I have upped the ante on my investment in 3D Signatures by tripling my investment through their recently closed private placement at C$0.75.

However, I do expect some more pressure on 3D shares this week.

On Monday, January 9, 2017, a private placement that was done at $0.35 last year for nearly CDN$5.5 million will be free trade and hit the market. That’s likely why we’ve seen some pressure over the past week and could continue to see more pressure in the coming week.

Commodities

In 2016, commodities rallied off multi-year lows and mining has done particularly well.

This trend could continue into 2017 since inflation and infrastructure spend appears to be the theme around the world.

The combination of increased populism and diminishing globalization will likely introduce new inflationary forces over the next few years as governments around the world begin to spend more money.

The root of this inflation will be higher commodity prices since you can’t have true inflation if commodity prices are falling. And governments are all eagerly seeking some sort of inflation.

Core fundamentals for a strong commodities outlook not only remain intact, but a continued surge is expected this year.

The recent setback in mining shares is likely the result of profit-taking and cheap financings but much of that has already taken place. We could be looking at a decent rebound in Q1 2017.

Zinc was one of the strongest performers in the commodity space, and I believe prices will remain high in 2017.

I just wrote a big check into Canada Zinc Metals following my recent report, priced at CDN$0.40 and a $0.52 flow-through. The stock has seen some pressure, but I believe this to be the result of year-end sellers rushing to beat the calendar year in 2016. Also, it’s winter and the Company won’t likely have much news until just after Q1, so I suspect there are investors that are selling for the short-term who will likely re-enter when the Company begins to make more progress.

Gold

This may be one of the toughest sectors to call in 2017.

The Fed is expected to slowly resume tightening, while U.S. versus foreign yield spreads widen. The combination of the two likely means a stronger U.S. dollar, which generally also means that it’s bad for gold.

At the same time, gold has historically been viewed as an inflation hedge and we’re expecting inflation to creep higher in the U.S. This should be good for gold. However, over the last couple of decades, inflation hasn’t been that high and gold has soared.

So gold shouldn’t be viewed as just an inflation hedge, but rather a crisis hedge.

From that standpoint, the overall fundamental for gold remains strong.

Central banks continue to buy it and physical demand continues to increase and attract serious premiums. Banking issues in Europe and China have yet to be resolved, and we’ll likely see further bailouts in 2017.

Meanwhile, nothing has been done to decrease the debt bubble. In fact, much more has been done to increase it.

My philosophy for 2017 is to be extremely selective when investing in gold stocks, but continue to maintain a position.

From that perspective, I still hold some First Mining Finance, Red Eagle Mining, and K92 Mining.

First Mining Finance will do well if gold climbs, but will likely remain range-bound until that happens.

Red Eagle Mining is at the brink of commercial steady-state gold production. I see this happening in late Q1 to early Q2. After a quarter of achieving that milestone and showing investors the cost of production etc., we’ll likely see more activity in their stock. I suspect there are bigger players seriously looking at Red Eagle – if they can produce good numbers, I would not be surprised to see them make a move.

Furthermore, the Company will have lots of exploration results coming, which could help boost share prices even if gold trades sideways.

I still hold some K92 Mining, although not as much as I did before. I am hopeful that most of the stock from cheaper financings that needed to be sold has been sold, but we can never really be sure.

However, since I believe that anyone looking to invest in the gold space should have a longer-term focus, I believe K92 is great value at current prices.

From a corporate perspective, K92 has done and appears to be doing very well. The Company is now in production and has given investors a clear visible path to increased production rates as they bring Kora online.

Furthermore, drilling at Irumfimpa has significantly increased the grade and therefore the predicted ounces in the first two production stopes coming online.

Going into Q1 2017, K92 is expected to achieve steady state commercial production at Irumafimpa (currently in ramp-up state now). We should also see the commencement of the underground incline drive from Irumafimpa to Kora which is important not only to access Kora for production purposes but also because it will provide an underground staging area to drill the untested area between Irumafimpa and Kora and to test Kora at depth.

Lithium

I remain optimistic about the lithium space in 2017.

The big automakers will be ramping up production and a wave of affordable 2017-model-year electric cars will soon be hitting the market.

And they’ll need lithium to do it.

The most important theme here is that not every lithium play is the same.

We saw a lot of “new” lithium stocks in 2016 but I would say many of them were merely a play on the sector.

While lithium may not have the same run in 2017 as it did in 2016, it will remain a topic that needs to be closely followed. So be careful of what you invest in here and understand that you’ll see a lot of promoters talking about great projects that simply aren’t that great.

In this space, I hold a significant amount of stock in Millennial Lithium.

I visited the Company’s project in Argentina back in October and they were just beginning to drill when I was there.

Drilling is going better than expected and we should have more news in the coming weeks.

There was a financing done at C$0.65, which will become free trade in the middle of January. That means investors at that level are up more than double at current prices, so I wouldn’t be surprised to see some pressure in the coming weeks.

Once that pressure is gone, news flow should take care of the stock from there.

Marijuana

The marijuana sector will likely remain the biggest investment topic in 2017, and I will continue to aggressively pursue this sector.

I believe valuations will likely settle a bit as more licensed producers and other marijuana entrants become public. This will saturate the market and likely bring valuations to more realistic levels.

However, 2017 is the year that the recreational market in Canada is expected to be legalized and first movers here will be in the best position to win.

Institutions still have tons of money to divest and funding for many won’t be difficult. In fact, many of the institutions who have been liquidating on these high valuations have been surprised to see the retail market absorbing everything.

I am heavily invested in this sector, and will continue to add more positions.

Currently in the portfolio is Emblem Corp. (TSX-V: EMC) (OTC: EMMBF) and readers of this Letter should be up quite a bit if you invested on the opening day of trade when I first introduced this Company.

The stock is currently trading near its all-time high and the Company just announced a bought-deal financing for nearly C$14 million. Since the financing was completed at C$3.63, I would suggest some profit-taking at current valuations.

I’ll be introducing some newer issues within the marijuana space this year with much better valuations so hang tight for that.

Lots of millionaires will be created in this space so prepare for a whirlwind of profits within the sector.

Portfolio Performance

This Letter has built its reputation on exposing the truth, accurately predicting many political and economic outcomes, timing market events, and more importantly, presenting ideas to help grow your wealth.

I want to begin by addressing that despite the all-time market highs, 2016 has been one of the more difficult years for us, and many fund managers.

From a trading perspective, every one of our portfolio companies this year has done well – meaning every company under coverage in 2016 have hit new 52-week highs.

However, from an investment perspective – based on all companies under coverage – 2016 has not lived up to our previous years.

Of course, we’ve done extremely well over the past few years but that’s no excuse.

Here is our cumulative performance for companies under coverage in 2016, based on the closing price prior to our initial introductory report of each company.

Equedia Portfolio Performance 2016

(prices in CDN$, intro price based on price of closing prior to introductory report)

*The price at introduction for Emblem Corp. was C$1.15 based on the last financing prior to the Company going public. However, since the stock opened up much higher, we took the volume-weighted average price of the first day of trading which was $3.30. The stock traded between $2.85-$3.98 on the first day of trading.

Many of these companies will remain in our portfolio next year, so their relative performance will likely change.

I’ll be looking to exit some of the above positions as they progress to make way for new ones this year, so here’s my overall view going into next year.

2017 Outlook Overview

Finding investment portfolio returns that mirror or surpass our last few years is not going to get any easier in 2017 – especially against a backdrop of narrow credit spreads, low bond yields, and record U.S. equity prices.

The safest bet with the highest returns in my view are small-to-mid cap stocks within the marijuana and technology space.

Retail investors – especially the next generation of them – will be more comfortable with investing in sectors that appeal to them. Which, of course, are sectors such as marijuana and technology.

Everyone understands marijuana – especially millennial investors.

Earlier, I spoke about the ignorance of the millennials who post and get their news via social media. However, even these ignorant millennials have money and many of them will invest in marijuana just because it’s marijuana. They will be clueless of economics, which will drive the sector even higher.

I have already seen many comments on the Equedia Facebook page that talk about how marijuana could save the world by curing cancer and other diseases. That, of course, is far from the truth of what we really know about weed’s potential. Yet, one article about how weed could cure cancer could easily be spread to a number of clueless millennials through their social media feed, causing them to go and invest in the sector.

That’s one of the main reasons why marijuana stocks will continue to be a hit in 2017.

Technology, on the other hand, is influencing every industry, from banking to manufacturing, while slowly weaving into the services sector.

All of this change is making companies more efficient, but it also significantly reduces the number of traditional jobs.

When you consider that the number of people employed in U.S. manufacturing has fallen by almost 30% since 2000, yet manufacturing output has increased over the same period, you begin to see the darker picture as it relates to jobs.

Advances in artificial intelligence are now beginning to infiltrate every area of the services sector including transportation, restaurants, and even white-collar jobs such as finance.

Millennials will blame politics, but the very technology that they rely on is one of the primary reasons for their revolt and dissatisfaction.

Instead of learning, they simply expect that a “Google” search will give them the answers to make them as smart as anyone. Instead of learning how to build better technology, the majority of millennials simply believe that technology will make their lives better.

But just as the steam engine and cars replaced horses, technology will soon replace drivers and manufacturers with robots and artificial intelligence.

This rapid pace of technological change is causing disruption across almost every industry and in the process will displace many jobs.

However, horses don’t vote but people do. This is arguably one of the primary reasons fueling populist politics.

With that comes governments willing to spend in order to please.

And that’s what Donald Trump and other developed nations, including Canada, will do.

The Trump Card

Outside of what Trump could mean for fiscal policy, we have to remain aware that Trump’s massive plans will likely require massive deficit spending, which will add to a growing debt book against rising rates.

Short-term, this is positive. But long-term, the U.S. will likely owe more money at higher rates, requiring that much more input from its citizens to service that debt.

Now recall my Letter from back in March when I talked about why Trump would win the U.S. election:

“…For all we know, Trump, the master of the deal, may have already struck a deal with the bankers and politicians.

But as we know right now, Trump is anti-establishment and anti-globalization.

If Trump is elected under that presumption, we’re going to see the building blocks of the Establishment and globalization come under attack, and they won’t like it.

They will fight back, leading to major conflicts including riots, protests, and potentially even war and assassination attempts. It is quite possible that the Establishment might even be allowing Trump to succeed in order to cause chaos to show the people that the Establishment is a necessity once all hell breaks loose.

What I write may be difficult to grasp at first, but as time passes, the light will shine. Just keep in mind that throughout American history, whenever the Establishment has been challenged, it has always been followed by bear markets and economic contractions.”

If what I said is true, Trump could be the fall guy to cause this economic reset.

However, this won’t happen overnight and it will require that Trump gets a chance to let loose his fiscal policies.

Once the U.S. builds more debt, that’s likely when the economic reset will be pushed.

For now, a pro-business U.S, along with property rights protections, and reduced personal and corporate taxes, means those who want to make money and those who already have money will benefit.

Monetary to Fiscal Policy

It’s no surprise that monetary policy will take a backseat to fiscal policy in 2017.

But don’t be blinded into believing monetary policy and expansion is over.

Private sector momentum is still subdued in even the most advanced economies, and the debts of these governments remain high.

While the Fed looks to be raising rates, both the European Central Bank (ECB) and Bank of Japan (BoJ) will likely continue to stretch the limits of their easing ability.

That means monetary policy will still contribute to providing significant support in 2017.

Political Instability

Furthering the uncertainty is not only the political instability within nations themselves, but against each other as well.

The U.S. will likely further dull its relations with China under Trump, while tensions are mounting all over Europe with World War enemies now backtracking on peaceful progressions.

China’s relationship with Japan has always been shaky, but things are once again heating up.

The Japanese government just announced it will bolster its coast guard capabilities to defend the disputed islands in the East China Sea by adding more money, eight new ships, and more than 200 law enforcement officials. It also just approved a record defence budget of 5.1 trillion yen (approximately $44 billion), with a focus on China and North Korea.

The actions of both countries tell me that there will be more conflicts in 2017 between these two nations.

In Europe, the populist backlash will no doubt remain a concern as elections in France and Germany come into focus, while uncertainty remains in the U.S. as President-elect Donald Trump begins his reign in two weeks.

Lastly, and on a more positive note, we have to recognize that much of the money that has been created has yet to enter the market – despite the insecurities and uncertainty of geopolitical events.

Perhaps it will all vanish with a pop, or perhaps it will begin to enter the system over the next few years.

Barring any global political uncertainties aside, the focus of 2017 should be in small and mid-cap stocks, US banks, infrastructure and technology-related investments such as industrials and mining, biotech and healthcare, and new sectors such as marijuana.

As I mentioned earlier, big corporations are likely to slow down their corporate share buybacks given current valuations and an environment of rising rates. But with record cash positions and high stock prices, they will begin to swallow up the smaller guys. This makes the smaller guys much more attractive.

Companies have cash and if it were to be deployed, we’re likely to see more M&A and buyouts rather than employee hires, which means we should be viewing M&A activity as a precursor to higher share prices, rather than job creation.

From a risk-reward perspective, combined with banks looking to lend more, 2017 should fuel a small cap rally unlike anything we have seen in the past years of recovery.

Of course, all of this is off the table if the economic reset button is pushed…

Seek the truth,

Ivan Lo

The Equedia Letter

www.equedia.com

 

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