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Scott Barlow offers eight thoughts on the research, analysis and ephemera that’s crossed his desk this week.

The more I read about AI, the more I believe the hype. Citi’s Smart Thinking on AI in Health report includes nuggets like the revelation that AI has been outperforming human radiologists for the past decade and is now challenging oncologists and cardiologists. Microsoft just bought a company that listens to doctor/patient discussions and immediately writes clinical notes. Nvidia offers AI as a service that helps analyze protein molecules and DNA. Over all, Citi expects spending on AI-related diagnostics to grow 33 per cent annually.

Morgan Stanley reviews its top investment themes for 2023 this week. The most interesting for me is the combination of social media and new obesity treatments. Analyst Flynn Purcell recognized that Instagrammers were touting the benefits of Wegovy and Ozempic, two new obesity treatments, helping drive sales. “We believe global obesity sales could reach $50bn in 2030,″ writes the analyst. “This would lift obesity from a $2.4bn category to a top-12 therapy area by global spending.”

Also from Morgan Stanley, chief U.S. equity strategist Michael Wilson was on the firm’s Thoughts on the Market podcast. He detailed deteriorating credit conditions that featured the biggest two-week decline in lending on record. Deposit flight continues in the United States, with more than US$1-trillion leaving the banking system. Banks experiencing falling deposits have been forced to sell bonds to cover their liabilities.

A lot of the funds from smaller bank deposits have been placed in money market funds, and I’ve been trying to think through the extended ramifications of this. I’m not a big believer that money market assets represent “money on the equity sidelines” waiting to go into stocks – money market funds are an asset allocation decision.

Citi credit strategist Matt King published Stand by for Sudden Pressure Loss this week. The report argues that the U.S. Federal Reserve’s US$1-trillion credit injection to save the banking sector is the reason equity markets are trading well and with little volatility. Mr. King’s analysis implies that the US$1-trillion caused a 10-per-cent increase in global equities and a 50-basis-point narrowing in credit spreads. He notes, however, that US$600-billion to US$800-billion is set to be drained from the global economy.

His most popular chart, showing the strong correlation between global equity performance and changes in major central bank balance sheets, makes some strategists and portfolio managers pull out their hair. The mechanism connecting central bank balance sheets to equities is unclear. For instance, in the U.S., the funds from quantitative easing are held at the Fed on behalf of the major banks – they can not be lent out or used as collateral to increase lending. Citi argues that bank market operations cause lower risk-free yields that force investor assets into riskier asset classes.

BMO chief investment strategist Brian Belski likes Canadian stocks over their U.S. counterparts because of superior relative value, cash flow growth and lower volatility. This despite the S&P/TSX Composite’s 300-basis-point underperformance relative to the S&P 500 in March. Mr. Belski expects the Federal Reserve to tighten monetary policy more aggressively than the Bank of Canada, which is another reason to own domestic assets. The strategist also cites a positive outlook for gold – more heavily represented here than in the S&P 500 – as a reason for TSX outperformance.

This call will likely come down to the ability of Canadian oil companies to continue generating free cash flow growth and the big banks’ resilience to slower mortgage growth. Since the end of January, the S&P/TSX Bank Index has underperformed the broader benchmark by exactly 4 per cent.

I ran a Bloomberg report showing individual stocks’ contribution or detraction from the benchmark’s 6.7-per-cent or 1,296-point return year-to-date. The biggest contributors were Shopify (157 points), Royal Bank (84), Constellation Software (72), Canadian Natural Resources (59) and Canadian Pacific Kansas City (46). Detractors were TD Bank (-27), Cenovus (-21), Tourmaline Oil (-12), Suncor Energy (-8.5) and ARC Resources (-6.7).

Not a ton to learn here, but it can help to put actual numbers on, for instance, the weakness in natural gas prices and the rising short positions on TD Bank.

The Financial Times editorial board wrote “Threats to the dollar’s dominance are overblown” . The column notes that 60 per cent of the world’s foreign reserves are held in U.S. dollars. The greenback accounts for 80 per cent of trade finance and half of trade invoices. The renminbi accounts for 4.5 per cent of trade finance and is growing quickly thanks to increased trade with Russia. But China’s currency still represents only 3 per cent of global foreign reserves. The board writes that “the greenback’s eminence is reinforced by its enormous liquidity, America’s openness to trade and investment, and trust in its supporting institutions.”

The primary takeaway from the column is that while the renminbi’s share of global trade activity will rise – the country accounts for 15 per cent of global trade – there is no real alternative to the U.S. dollar at the moment.

Domestic retail sales data were released Friday – for my money the most important economic data point of the month. Results came in weak, down 0.2 per cent month-over-month, but much better than the expected 0.6-per-cent decline.

My expectation is that the pain of higher interest rates for famously debt-burdened Canadians will first become evident in retail sales numbers. Consumers struggling with higher mortgage payments will first cut back on trips to the mall.

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