During the quarter, Taylor Swift got married at Madison Square Garden, and Donald Trump became the center of attention of the FIFA World Cup which he co-hosted, first when he received the controversial inaugural FIFA Peace Prize, and then when he intervened directly to overturn a red-card suspension for a US player. Spain won the tournament by the way! The President of the People's Republic of China Xi Jinping made his first official state visit to the United States since 2015. Expectations were low and… did not disappoint. China managed to get a guarantee that Trump wouldn’t alter tariffs for 60 days and, in exchange, the Atlanta Zoo got two giant pandas on loan. Another major win for the United States! More importantly, the Iran War predictably went on and with that, daily ship transit volume in the Strait of Hormuz and diesel prices commanded as much attention as Kent Hughes’[1] attempts to land a credible 2nd line center…
In contrast to the 2nd quarter during which equity markets recorded their best quarterly performance since 2020, they seesawed during the 3rd quarter, rallying early before erasing most of the gains later. The S&P 500 Net Total Return Index advanced 2.22%[2] compared to 1.25% for the MSCI All Country World Index and 1.62% for the S&P/TSX Composite Index. Those headline numbers mask an uneasy pattern developing underneath the surface: market breadth[3] cratered to levels not seen in decades. To this point, just 33% of the S&P 500 constituents outperformed the index during the quarter. That figure sank to 24% for September alone. From a sectoral standpoint, in the US, every sector other than the Information Technology sector underperformed the index. In other words, big tech carried the markets in the quarter. A number of our third-party equity managers estimate that the AI thematic now drives half of the daily return variance in major equity indices. This phenomenon revived the debate about active versus passive investing in equities. Passive investing advocates argue that indexing is like buying the entire haystack rather than going through the painful exercise of finding the best straws in the haystack. This is not a bad idea as long as the straws are more or less the same size. When the largest 10 constituents of the most widely scrutinized index – the S&P 500 - represent upwards of 40% of the aggregate index weight, when 8 of the 12 largest constituents have a commercial relationship with each other, and when more than 425 of the 500 index constituents weigh less than 0.10%, are we still talking about a haystack? We would argue that it is something else and that the diversification benefits supposedly provided by passive investing is turning into a mirage.
In contrast with equities, the fixed income markets had their worst quarter in 4 years as Kevin Warsh, the recently appointed Federal Reserve Chairman, reiterated during his Jackson Hole address that monetary policy still felt too accommodative to rein in inflation, thereby resetting expectations for higher bond yields across the curve. Adding fuel to fire, a few days later, US Treasury Secretary Scott Bessent mentioned that the US Treasury would increase its purchase of long-term treasuries and that it would finance these operations through the issuance of more short-term treasuries. The market reaction was opposite of what Bessent expected. Instead of stabilizing long-term yields, the market interpreted Bessent’s move as a confession of vulnerability, and yields surged higher. Even Stanley Druckenmiller called his old pupil’s move ill-advised in a rather damning Wall Street Journal op-ed. Against this backdrop, the ICE BofA Canada Broad Market Index declined -3.03% while the ICE BofA Global Government Bond Index and ICE BofA Global High Yield Index lost 3.26% and 1.79%, respectively.
Commodities, as proxied by the S&P GSCI Commodities Index, advanced more than 25% during the quarter. While the oil price increase was contained as oil flows from the Strait of Hormuz progressively returned to their pre-war levels, the price of some refined petroleum products jumped over 50% as many refineries globally had been damaged and their production curtailed. For instance, the International Energy Agency (“IEA”) reported that that Russian oil refinery output plummeted to its lowest level in 30 years as roughly one-third of the country’s refining capacity had been taken offline by Ukrainian drones. Similarly, Saudi Arabia’s Ras Tanura refinery and Kuwait’s Mina Al-Ahmadi and Mina Abdullah refineries reported crippling outages caused by Iranian attacks.
The US midterm elections are just around the corner. High prices for food and housing, mounting friction against AI data centers, and increasing disapproval of the Iran war are the main topics that everyone cares about. As both historical patterns and current polling suggest a shift in the congressional majority and a decent chance of a shifting senatorial majority, the prospect of the Trump administration facing a "lame-duck" scenario has led some market analysts and institutional watchdogs to raise concerns about disruption risks on November 3rd and after. At the time of writing this, financial markets do not appear particularly concerned. In fact, the VIX term structure is exhibiting its natural contango state through the end of 2027, which implies that November 3rd elections is a standard event rather than a systemic risk.
THE ULTIMATE CONTRARIAN PLAY
In the past ten years ending on September 30th, the FTSE Canada Long-term Overall Bond Index delivered an annualized return of -0.02%. Its US equivalent, the Bloomberg US Universe 10+ Year Index achieved an annualized return of 0.23%. For all intents and purposes, these indices, which are comprised of long-term federal, provincial, state, municipal, and investment grade corporate bonds, have been dead money for 10 years. When taking into account inflation and the marginal tax rate on coupon interest, it has translated into a loss of purchasing power of over 25% over that time. The only way to make some kind of profit in public fixed income over this period has been to focus almost exclusively on investment grade and high-yield corporate bonds with maturities ranging between 1 to 5 years and to avoid entirely the dreadful long-term bond segment. This is what was needed to generate 4% to 5% per annum on average, which meant maybe 1.5% to 2% above GICs, with barely better fiscal efficiency.
But that was the prior decade, one defined by a no-holds-barred quantitative easing policy which induced a "lower-for-longer" mindset that pinned real yields near zero, if not negative. Public fixed markets have undergone a significant regime shift, and we believe that the current environment offers an increasingly compelling entry point for longer duration, high-quality fixed income assets. Here is why:
Nominal government bond yield curves, which had been inverted[4] from early 2022 to late 2024, have normalized. Government bonds with more than 10 years to maturity are now yielding over 1% above government bonds, with 1 to-3 years maturity in Canada and 1.3% in the US, thereby providing positive roll-yield as time passes;
Nominal government bond yields are at their highest levels since 2007 in Canada and since 2002 in the US;
Real government bond yields[5], which had ranged between -0.5% and 1% for most of the past 15 years, have broken through 2% for Canadian and US long-term government bonds recently;
For current income seeking investors, newly issued long-term government bond yields now provide comfortably superior income than most blue-chip equities in Canada and in the US.
In addition to the above, it is worth noting that sentiment around long-term fixed is extremely negative. For instance, short interest on the Blackrock iShares 20+ Year Treasury Bond ETF, one of the largest fixed income ETFs in the world, recently exceeded 20%. This is comparable to the short interest level witnessed for the most speculative stocks. Literally, nobody who is not obligated to own bonds wants to own bonds, which is why we believe it may be the ultimate contrarian play.
Lastly, there seems to be a growing disconnect between the promise that AI means for equities and bonds. For equity holders, the only logical way to justify the current capital spending bonanza is to believe that such investments will lift productivity to a point where nominal GDP largely exceeds inflation and, if that happens, we believe it should be good for bonds too, but bond investors seem to dismiss this possibility.
We are not suggesting to go all-in on fixed income or to switch entirely out of short-term fixed income instruments in favor of long-term fixed income instruments. It is far from being picture perfect. After all, considerable uncertainty remains around the sustainability of humongous fiscal deficits in countries such as Japan, France, and the US but also around the long-term impact of the output of AI applications on growth, inflation, and productivity. Long-term bond yields can move higher. What we are suggesting is that after a decade in the penalty box, all else being equal, both in relative and absolute terms, long-term bonds have become more desirable. Because of that, we have taken steps to increase exposure in discretionarily managed portfolios, reducing our strategic duration underweight relative to the ICE BofA Bloomberg Canada Broad Market Index. Should yields move higher, we are prepared to add further.
THE NORTH REMEMBERS
Three dramatic words. The same words that were repeatedly articulated by various members of House Stark in the popular Game of Thrones series after someone wronged them. Judging from Mark Carney’s actions during the last few months, we can only assume that this is exactly how he is feeling about his southern neighbor. To this point, following through on his World Economic Forum speech in Davos, Carney has been working hard to reduce Canada’s structural trade dependency on the United States. In a bold assertion of economic sovereignty, Carney refused to capitulate to Donald Trump’s aggressive demands during the critical USMCA renewal negotiations, signaling that Ottawa would no longer accept mercantilist coercion, thus pushing Trump to rename Lake Ontario
Separately, a cornerstone of this policy shift was a major summit in Toronto, orchestrated specifically to pivot Canada away from passive foreign ownership toward high-value Foreign Direct Investment (“FDI”). The forum was attended by a range of domestic and foreign sovereign wealth funds and institutional investors with serious capital to deploy. Importantly, rather than simply encouraging foreign multinational corporations to invest in Canada through the acquisition of existing Canadian enterprises, as might have been the case in the past, Carney’s policy architecture deliberately targets greenfield investment designed to build or expand domestic infrastructure and clean energy capacity. The unveiling of Bill C-39 on September 21, which aims to fast-track major infrastructure and resource projects, was the first incarnation of this resolve. The intention to privatize major airports in Canada also fits perfectly into this plan. Incidentally, many large Canadian institutional investors have equity participations in major airports all over the world. Giving them the option to own airports, power plants, or toll roads locally could be a way to repatriate capital that was deployed overseas by Canadians, thus creating better long-term alignment.
Lastly, Carney also announced that Canada would reduce its reliance on Space X controlled Starlink™. The motivation: Carney is concerned that relying on a foreign-controlled private company could mean that the whims of the world’s first trillionaire could disrupt Canada’s critical military and emergency communications in remote areas, a risk that is further aggravated in the current environment as tensions between Canada and the United States extend beyond cross-border trade.
Carney’s unyielding defense of middle-power economic and political sovereignty has elevated him into a symbol of resistance against wannabe hegemons. To the ire of Donald Trump, Carney’s ascendancy has made him a leading contender for Time Person of the Year and even for the Nobel Peace Prize[6]. Canadians are no fools. They know that it would be preferable to have free trade with its powerful neighbor south of the border but, absent that possibility, they appreciate that Carney’s approach and objective are the best among a series of worse options, and they overwhelmingly support him. If the Trudeau years were defined by multi-cultural virtue signaling, the Carney years will be defined by economic pragmatism and by reminding Washington that the North remembers.
SITUATIONALLY UNAWARE
During the third quarter of 2026, Leopold Aschenbrenner’s grandly named hedge fund, Situational Awareness LP, suffered a comical lack of awareness. Aschenbrenner, a 24-year-old former OpenAI researcher decided that the best way to prepare for the future was to borrow money like there was no tomorrow. Reportedly relying on more than 400% leverage, his eight-person operation[7] went aggressively "long" AI infrastructure hardware (like SanDisk, Micron, and SK Hynix) while shorting traditional software companies. But the rest of the world, lacking an appreciation for tech-bro hubris, swiftly humbled him. In July 2026, a sudden rotation spooked the markets, and Aschenbrenner’s AI hardware darlings crashed while the software positions he had shorted against them rallied. The result was a memorable multi-billion-dollar squeeze.
Wall Street sharks quickly smelled blood. Bombarded by margin calls from major prime brokers, Aschenbrenner was forced to dump his entire public equity portfolio at a steep discount into the waiting hands of Citadel, one of the world’s largest and most successful hedge funds. Within a few short weeks, the fund's assets evaporated from a peak of $45 billion down to roughly $10 billion.
To be clear, Situational Awareness did not cause the AI trade meltdown that occurred earlier in the quarter. It was a victim of it through excessive leverage and concentration, but he and others who were forced to cut risk involuntarily likely amplified it. As a matter of fact, the AI hardware play rebounded shortly after Aschenbrenner’s woes were revealed. Once again, the wreckage exposed record-breaking levels of hedge fund and exchange-traded fund leverage to certain issuers, drawing regulators’ attention.
None of our family clients were exposed to Situational Awareness. That’s because we do not spend much time considering managers who haven’t experienced a full market or business cycle, who are under-resourced given their asset growth trajectory, who run excessively concentrated or thematic strategies, or who employ excessive leverage. Our approach does not provide much excitement, but it is time-tested and it significantly reduces the odds of going through a catastrophic failure.
THE MUSE LEARNS TO ACT
In his seminal work The Muse Learns to Write, classicist Eric Havelock described how the transition from oral speech to the Greek alphabet fundamentally re-engineered human consciousness, reshaping how culture stored, organized, and accessed knowledge. In early September, Meta Platforms (NASDAQ: META), the parent company of Facebook, came up with a parallel cognitive and technological evolution with the launch of its Muse personal AI agent. Just as literacy liberated the mind from the limits of memory, Muse liberates the mind from tedious chatbots interactions as it performs that digital labor autonomously. Muse has already demonstrated a phenomenal proficiency in the execution of multi-step workflows and managing real-world transactions.
Meta finally delivered an application that people wanted – no, not the Metaverse – and with it, it shattered the view that Meta’s massive capital expenditure was a cash furnace. Driven by unprecedented consumer adoption, Muse was catapulted to the # 1 free app spot on both the Apple iOS App Store and Google Play Store. According to data from Sensor Tower, the app captured 5 million downloads globally in the first three weeks following its release. Crucially, a normalized marketplace comparison reveals that Muse was outpacing ChatGPT's historical early mobile footprint: in its first 12 days, Muse secured 1.8 million iOS downloads in the U.S. and Canada, eclipsing ChatGPT’s 1.3 million during the exact same post-launch window. Wall Street responded by sending META shares up 11.3% in a single day, adding over $190 billion to its market capitalization. META appreciated by more than 25% during the month of September alone. Its market capitalization rose from 1.4 trillion US$ to nearly 2 trillion US$ and causing ripple effects across related equities. For instance, AI hardware leaders like Advanced Micro Devices (NASDAQ: AMD) rallied heavily on incremental chip demand. Similarly, e-commerce platforms like Shopify (NYSE: SHOP) realized strong gains on the back of their deep ecosystem connection with META. Conversely, traditional travel booking and consumer service platforms slumped as Muse proved its ability to seamlessly bypass customer service walls. A few weeks after Muse, OpenAI released its own Dots application, adding more fuel to the AI trade and sucking oxygen from everywhere else, thus postponing the broadening trade, indefinitely. In the end, it seems like we have reached the moment when the muse learns to act.
Thank you for your continued support,
Patrimonica’s Investment Team
[1] Montreal Canadiens professional ice hockey team’s General Manager
[2] Local currency returns unless specified otherwise
[3] A measure of market relative health calculated by dividing the number of index constituents that outperform/underperform the index itself over a given period. Market breadth is considered healthy when the percentage of its constituents that outperform the market is above 40%.
[4] An unusual phenomenon: longer maturity bonds exhibit lower yield to maturity than short term bonds. An inverted yield curve is unusual because investors/allocators should be compensated for bearing the uncertainty of yields over the long term. This is referred to as the term premia.
[5] The difference between the nominal yield on a government bond of a given maturity and the implied inflation rate expectation over the same maturity. A negative real yield implies that investors are negatively compensated for bearing inflation uncertainty.
[6] The latter was ultimately attributed to South African lawyer Navi Pillay.
[7] Per the Fund’s most recent ADV Form.