Questions from the Floor

We’ve highlighted three questions that came from the audience at this month’s Quarterly Investment Reviews.

With negative interest rates becoming more common around the world, and President Trump calling for lower rates in the United States, do you see negative rates coming to North America anytime soon?

While it is true that negative interest rates have become more prevalent around the world, and, in particular, in Europe and Japan, we don’t see North American investors having to pay to get their money returned to them anytime in the near future.

Negative interest rates are largely a result of local central banks trying to stimulate economic growth and fight deflation with “quantitative easing” programs. Central banks buy government bonds in the market, thereby pushing up bond prices (and driving down yields), and injecting liquidity into the economy. The deflation/inflation picture is very different in North America than it is in the Euro Zone and Japan. For some time, Europe and Japan have been troubled by low and falling inflation. The inflation rate in Europe is currently hovering around one percent and it is half that level in Japan. The current inflation rate in the U.S. is 1.7% and it is 1.9% in Canada. GDP growth rates in the U.S. and Canada are also considerably healthier than those in Europe and Japan.

Recent experience in Europe shows that negative interest rates have not been an effective tool in stimulating economic activity. Also, low or negative interest rates run the risk of imperiling local banking systems due to the effect of diminishing the banks’ all-important net interest margins.

(Editor’s Note – On September 18^th, after our second of three Investment Review lunches, U.S. Federal Reserve Chairman Jerome Powell declared that the Fed would not use negatives interest rates as a tool to combat slow economic growth. Was the room bugged?)

Recent headlines regarding the U.S. trade war with China have resulted in a great deal of market volatility. Is it being overdone?

Over the summer, large-font headlines and unconstrained tweets about new tariffs and tariff implementation extensions between the U.S. and China resulted in multiple 100-plus point swings in the Dow Average, in both directions. Part of this volatility may have been caused by the reduced share volume that typically occurs during summer months, but it is important to keep the trade issue in perspective.

Trade is less important to the U.S. economy than it is for many other countries and economic zones. Goods exported from the U.S. amounted to 8% of the country’s GDP in 2018. That compares to the Eurozone, where exported goods contributed 20% to its collective GDP, and China’s 19%. Over the last decade, China’s domestic demand for goods has grown and China has diversified its customer base, such that it now exports more goods to emerging market countries than to the U.S. As a result, China’s trade with U.S. plays a lesser role in its overall economic health than it has historically.

While we are concerned that the incessant sabre-rattling and uncertainty are keeping corporations from making important investment and hiring decisions, we are hopeful that when a deal is finally in place, supply chain re-adjustments will work through the system and that a recession will be avoided.

If you think that Microsoft is such a great company, why did you trim its position in portfolios?

(Editor’s Note – During our Investment Review, we like to highlight a company which may have recently been added to portfolios, or which may be noteworthy for some other reason. For our September Investment Review meeting, we updated attendees on Microsoft’s successful transition under CEO Satya Nadella, and also identified it as a stock that we had trimmed from our Pooled Funds.)

Since 2014, when Satya Nadella took over as Microsoft’s CEO, he has overseen the transition of the company from a consumer-focused supplier of Windows personal computer operating systems sold on disks in shrink-wrapped boxes, to being a leading subscription-based cloud services company focused on enterprise customers. And since that time, the stock has more than tripled from $37 to $138.

An important aspect of our disciplined investment approach is that we constantly monitor our holdings and the make-up of our portfolio. As some stocks materially outperform other holdings in the portfolio, they become a larger percentage of the overall holdings and can eventually become “outsized”. In this event, we trim the position back to what we consider to be the size of a typical “core holding”. The cash proceeds provide us with some “dry powder” to look for other attractive opportunities.