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Copyright © 2017
Gal^Stad
Investments Inc.

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Year in Review

2016 in Perspective,
from the January 2017 issue

Let's call 2016 the “Year of Disgruntlement.” In southern Europe, people took to the streets to protest years of austerity and a flood of migrants. In Britain, a feisty majority voted to pull out of the European Union. And of course the grumpy American heartland propelled Donald Trump to victory in the U.S. presidential election.

What all these events had in common was anger towards an establishment that seemed to be giving their concerns short shrift.

The mainstream media, a favourite target of the irked, reacted with bitter disillusionment. Why would people prefer fake news to their balanced brand of journalism? Many fixated on the long list of celebrity icons who died over the course of the year. Even mosquitoes seemed to bug us more, with the Zika virus spreading to 50 countries. As one local Toronto paper headline had it, 2016 was “truly terrible.”

For investors, there were few long faces. For all the worries that circulated last January about a Chinese hard landing, record levels of consumer debt, inflated housing prices, blah, blah, blah, instead we had a year of economic stability: slow and steady GDP growth, tame inflation and employment, and a tentative rebound in the oil patch.

Stock markets that lean on commodity prices did well. Russia, Brazil and Peru soared by over 50 percent, and our TSX was no slouch, with a 17.5 percent climb. Meanwhile, our dollar edged its U.S. counterpart by 3 percent.

And how about all those pundits who warned of unpleasant fallout from Brexit on the British stock market? They are eating a side order of crow with their fish and chips as the FTSE clocked a solid gain of 14.4 percent.

The Trump rally put the Dow within spitting distance of 20,000, while the broad S&P 500 finished with a tidy 9.5 percent gain. The list of market losers was scant —one of the few was the Shanghai Composite, which trimmed deep losses during the early months of the year and finished with a 12 percent dip.

In Japan the Nikkei closed as flat as a soba noodle. Speaking of noodles, Italy limped 10 percent after a referendum on proposed constitutional reforms failed and banks struggled.

Gold had a fairly quiet year, but ended up ahead by 7.1 percent when measured in USD. Oh yeah, and remember our old buddy Bitcoin? It blew by every other asset class by a country mile in 2016, closing the year up 125 percent, and its capitalization grew to around $16 billion.

As the fiasco with discontinued banknotes in India attests, fiat currencies have inherent vulnerabilities; there is a growing global demand for a currency fully independent from government.

There wasn't much to be disgruntled about in the Contra portfolios. The President's Portfolio had another excellent run, with a 19.8 percent gain, bringing the 5- and 15-year annualized gains to 26.9 percent and 19.0 percent respectively.

The VPP ended the year 11 percent higher. The portfolio has more than doubled its original stake over seven years, showing that high levels of cash and some sleepy dividend stocks are not an impediment to capital accumulation.

Looking ahead, the prevailing sentiment is that Trump, backed by a Republican Senate and Congress, will cut taxes and regulation, which will fertilize corporate profits and the stock market. In particular, Trump's proposal to allow U.S. corporations to repatriate the billions stashed in overseas subsidiaries at a special 10 percent tax rate has Wall Street licking its chops.

Stock buybacks have been a favourite game in recent years; they can make both management and money managers look good. This could shovel some coal into that engine.

Though all of this sounds grand, we are skeptical. As the old saying goes, if you think it's expensive to hire a professional to do the job, wait until you hire an amateur. Trump's lack of experience could easily touch off a serious international incident. That could prove very costly in any number of ways. A trade war would be destructive, but is hardly the worst-case scenario.

Domestically, expectations have been set that are completely unrealistic. GDP growth of 4 to 6 percent? Not going to happen. Millions of Americans will decide to take the place of undocumented immigrants working for the minimum wage to pick spinach, clean offices and change diapers? Preposterous.

Many of Trump's populist ideas are anathema to the power brokers in the Republican Party, yet he will need their support when it comes to necessities, such as raising the debt ceiling. This will not make for smooth sailing.

Aside from politics, there are fundamental reasons why America cannot suddenly regain its post–World War II status, when it accounted for half of the world's economy.

Demographically, the U.S. is aging. The manufacturing jobs that rust belt workers covet haven't just fled to Mexico; they are now being done by industrial robots. The country has fallen behind in public education. And globalization and intense competition are major forces.

No president can reverse these trends in a four-year term. Or two. It's doubtful these tides can be turned at all.

We believe our portfolios are well suited to our muted expectations. Higher interest rates should be good for our bank holdings, and they may benefit from lower compliance costs. There is exposure to an increase in oil and gas drilling and higher prices if the OPEC deal holds.

The key is diversification, over different sectors of the economy, company scale and geography. The goal is resiliency for a wide variety of possible outcomes.

So, was 2016 truly terrible? Not for us. We shall be very happy if 2017 turns out as well.


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