00:07:25.755 --> 00:07:28.815
Thank you, Peter and the team for having us here today.
00:07:28.815 --> 00:07:32.145
It's a lovely day and thank you for spending your time with us so.
00:07:32.145 --> 00:07:35.225
I'm vim. I'm part of the Canadian equity team.
00:07:35.225 --> 00:07:38.305
at Beutel, and I have three goals today in our.
00:07:38.305 --> 00:07:41.935
conversation. One is to talk to you about the Canadian context.
00:07:41.935 --> 00:07:41.935
00:07:42.735 --> 00:07:45.905
And also specific items and case studies in.
00:07:45.905 --> 00:07:49.185
Canada to give you some appreciation for.
00:07:49.185 --> 00:07:52.235
this whole Canadian investment universe. The second is to have.
00:07:52.235 --> 00:07:55.435
a discussion about some of the things that are going on in the world.
00:07:55.435 --> 00:07:55.435
00:07:56.125 --> 00:07:59.515
And how you manage through that the 3rd and.
00:07:59.515 --> 00:08:02.695
most important goal is to not put you to sleep so.
00:08:02.695 --> 00:08:05.725
I encourage you to have some coffee and hopefully we'll have.
00:08:05.725 --> 00:08:07.825
a lively dialogue through this whole process.
00:08:09.015 --> 00:08:12.105
This is our journey, hopefully you.
00:08:12.105 --> 00:08:15.335
see the same thing I'm seeing. This is a journey we're gonna take.
00:08:15.335 --> 00:08:15.335
00:08:16.075 --> 00:08:19.095
We'll talk to you about Canada because Canada is very unique in.
00:08:19.095 --> 00:08:21.725
the structure of the market and the examples that we have.
00:08:22.345 --> 00:08:25.835
We're going to talk to you about the concept of winning.
00:08:25.835 --> 00:08:26.895
by not losing.
00:08:27.645 --> 00:08:30.705
Because there is an asymmetry to return and capital.
00:08:30.705 --> 00:08:33.835
preservation plays a very key role to compounding.
00:08:33.835 --> 00:08:37.295
returns. Then we're gonna talk to you about how we had Beutel.
00:08:37.295 --> 00:08:40.375
managed through these environments, including a stock.
00:08:40.375 --> 00:08:43.615
example, because it's about the philosophy, but.
00:08:43.615 --> 00:08:46.815
also the people and the process. And finally.
00:08:46.815 --> 00:08:49.855
let's kind of question the nature of the home country.
00:08:49.855 --> 00:08:52.935
bias and if it's actually paid off or not through history.
00:08:52.935 --> 00:08:52.935
00:08:55.085 --> 00:08:58.565
So I wanna talk to you first about the Canadian context.
00:08:58.565 --> 00:08:58.575
00:08:59.265 --> 00:09:02.535
The Canadian equity market is structurally.
00:09:02.535 --> 00:09:03.405
very attractive.
00:09:04.155 --> 00:09:07.235
It has a stable political structure. The regulators are.
00:09:07.235 --> 00:09:10.945
strong and we actually have some great industry structures think.
00:09:10.945 --> 00:09:14.285
of the grocery stores and the duopoly or the oligopoly.
00:09:14.285 --> 00:09:17.375
you have within groceries. Think of the telecommunications sector. Think of.
00:09:17.375 --> 00:09:20.605
the railroads and even the banking sector that has.
00:09:20.605 --> 00:09:23.825
been very stable and able to deliver great returns compared.
00:09:23.825 --> 00:09:27.055
to even the US market or from time to time.
00:09:27.055 --> 00:09:30.205
you will have issues you will have.
00:09:30.205 --> 00:09:33.505
issues because there have been examples of companies.
00:09:33.505 --> 00:09:34.855
in isolation.
00:09:35.315 --> 00:09:38.545
That really grow in value become very dominant.
00:09:38.545 --> 00:09:42.105
Everyone piles on and it creates a large distortions.
00:09:42.105 --> 00:09:45.125
in the market. And part of this is also because you.
00:09:45.125 --> 00:09:48.165
have sometimes a narrow marketing Canada, if you.
00:09:48.165 --> 00:09:51.425
look to areas like healthcare in Canada, in the Canadian.
00:09:51.425 --> 00:09:54.845
market, your choices are marijuana stocks or seniors housing.
00:09:54.845 --> 00:09:58.465
not the large pharmaceutical companies and the diagnostic.
00:09:58.465 --> 00:10:01.715
companies you'd have globally. If you look to the technology.
00:10:01.715 --> 00:10:04.865
sector, sometimes you riddled with a few issues.
00:10:04.865 --> 00:10:07.425
and one such example that you may know.
00:10:07.555 --> 00:10:10.505
We're going to time travel, go back 20 plus years as Nortel.
00:10:11.175 --> 00:10:14.565
It is probably one of the greatest examples of a stock.
00:10:14.565 --> 00:10:16.395
that got into so much hype.
00:10:17.345 --> 00:10:20.475
That took us all to a very wild ride and we didn't have to go to.
00:10:20.475 --> 00:10:23.595
Canada's Wonderland to get this ride. And you don't want.
00:10:23.595 --> 00:10:27.315
to face these rides in your portfolio. But it was a telecommunications.
00:10:27.315 --> 00:10:30.755
equipment company that became almost 1/3.
00:10:30.755 --> 00:10:33.395
of the TSX. Imagine your portfolios.
00:10:34.365 --> 00:10:37.695
Having 1/3 tied to a stock without.
00:10:37.695 --> 00:10:41.035
positive cash flows without positive earnings and.
00:10:41.035 --> 00:10:44.575
people are just jumping on because they think the ride is gonna continue and.
00:10:44.575 --> 00:10:47.935
it was a great ride for a period in time. You can see from 1999.
00:10:47.935 --> 00:10:51.075
it was one of the best performing stocks added a lot.
00:10:51.075 --> 00:10:52.005
of returns but.
00:10:52.745 --> 00:10:55.445
The unfortunate part is always when the music stops.
00:10:56.355 --> 00:10:59.415
People wake up and realize you do.
00:10:59.415 --> 00:11:00.285
need cash flows.
00:11:00.995 --> 00:11:02.905
All valuations do matter.
00:11:03.535 --> 00:11:06.915
And it's a very uncomfortable ride on the way down.
00:11:06.915 --> 00:11:06.915
00:11:08.425 --> 00:11:11.585
Now you think people and investors will learn our lessons.
00:11:11.585 --> 00:11:14.785
but unfortunately we are human and if we Fast forward.
00:11:14.785 --> 00:11:18.425
20 years, you had another recent example a.
00:11:18.425 --> 00:11:21.245
phenomenal company that's an ecommerce platform.
00:11:21.885 --> 00:11:24.915
It was accelerated during the pandemic as well we.
00:11:24.915 --> 00:11:28.155
couldn't go anywhere. We went online, small businesses.
00:11:28.155 --> 00:11:30.435
needed a platform and they grew.
00:11:31.175 --> 00:11:34.245
And what happens with human psychology is sometimes we.
00:11:34.245 --> 00:11:37.445
have a tendency to extrapolate we see such.
00:11:37.445 --> 00:11:40.505
a fast pace of growth and we think it's just gonna go in a line up to.
00:11:40.505 --> 00:11:40.995
the top.
00:11:41.805 --> 00:11:45.095
This was yet another company that became a dominant part.
00:11:45.095 --> 00:11:48.505
of the TSX. Not as much as Nortel.
00:11:48.505 --> 00:11:48.505
00:11:49.155 --> 00:11:52.865
But this was larger than Royal Bank. At one point in time and.
00:11:52.865 --> 00:11:55.895
it became such a key contributor to overall returns and.
00:11:55.895 --> 00:11:57.725
the question would always come why don't you own it?
00:11:58.395 --> 00:11:59.665
What are you missing out on?
00:12:00.325 --> 00:12:01.895
Did not generate free cash flows.
00:12:03.005 --> 00:12:06.035
The point in time it was trading at 50 times.
00:12:06.035 --> 00:12:09.185
sales 300 times EBITDA and people had.
00:12:09.185 --> 00:12:12.295
o build stories to justify why you held.
00:12:12.295 --> 00:12:12.815
on to this.
00:12:13.725 --> 00:12:14.695
And of course.
00:12:15.735 --> 00:12:19.105
Last year, the stock was down 73%.
00:12:19.105 --> 00:12:22.165
through a flurry of factors, but that.
00:12:22.165 --> 00:12:25.745
causes a lot of pain when it's the largest name in the TSX index.
00:12:25.745 --> 00:12:25.745
00:12:26.395 --> 00:12:30.165
And what if it was the largest name in your portfolio without?
00:12:30.165 --> 00:12:33.405
an underpinning and foundation of cash flows and?
00:12:33.405 --> 00:12:37.025
the key parts of how we look at companies there?
00:12:37.025 --> 00:12:39.975
have been other examples like Valiant.
00:12:40.665 --> 00:12:43.045
BlackBerry. There's a new movie on it now.
00:12:43.745 --> 00:12:45.025
And there will be more.
00:12:45.675 --> 00:12:48.785
It's inevitable. So there is a rhyme to.
00:12:48.785 --> 00:12:52.085
it, and the rhyme has always been lack of cash.
00:12:52.085 --> 00:12:55.315
flows. Forget about revenue or just focus on clicks.
00:12:55.315 --> 00:12:58.565
or some other metric. Don't worry about valuation jump.
00:12:58.565 --> 00:13:01.625
on the train. But that's not how we invest.
00:13:01.625 --> 00:13:02.875
at Beutel.
00:13:03.575 --> 00:13:06.755
And it's gonna be an instance that you're gonna have to face.
00:13:06.755 --> 00:13:09.835
going forward as well. And a key part.
00:13:09.835 --> 00:13:12.935
of why we try to stay away from.
00:13:12.935 --> 00:13:16.235
overhyped companies without cash flows is that we believe.
00:13:16.235 --> 00:13:18.495
that downside protection is key.
00:13:19.335 --> 00:13:22.845
And our focus is on capital preservation and.
00:13:22.845 --> 00:13:25.995
there's this concept of asymmetry at return, which I'm sure you're familiar.
00:13:25.995 --> 00:13:29.235
with, but I'm gonna explain and take a moment here because.
00:13:29.235 --> 00:13:30.875
the path when you lose money.
00:13:31.515 --> 00:13:34.605
Is much steeper to get back to par, so if you.
00:13:34.605 --> 00:13:37.745
look at the middle of this chart, if your portfolio lost.
00:13:37.745 --> 00:13:38.525
50%.
00:13:39.235 --> 00:13:42.425
You don't need 50% to get back, you need 100% return.
00:13:42.425 --> 00:13:45.685
just to get back to par. So you go from $100 to 50.
00:13:45.685 --> 00:13:48.715
you need 100% return. So imagine.
00:13:48.715 --> 00:13:51.985
if your portfolio held Shopify, it's down over 70.
00:13:51.985 --> 00:13:55.245
you need over 250% in return.
00:13:55.245 --> 00:13:57.875
to kind of come back to par.
00:13:58.555 --> 00:14:00.545
But just as important as the math.
00:14:01.705 --> 00:14:05.275
Is the concept of the psychology of having losses.
00:14:05.275 --> 00:14:05.275
00:14:06.005 --> 00:14:09.135
And what it means, there's been studies that show the.
00:14:09.135 --> 00:14:12.335
pain of a loss is 2 times greater than.
00:14:12.335 --> 00:14:13.435
the benefit of a game.
00:14:14.105 --> 00:14:17.415
What do you mean what happens when you're in pain? You just do the things.
00:14:17.415 --> 00:14:20.595
that you don't want to do. You sell at the wrong time.
00:14:20.595 --> 00:14:23.915
at the depths of the pandemic, and you have emotional reactions.
00:14:23.915 --> 00:14:26.765
that are not conducive to compounding returns.
00:14:27.505 --> 00:14:30.735
Now app you tell we have a philosophy and.
00:14:30.735 --> 00:14:33.935
a philosophy is around capital preservations because we do.
00:14:33.935 --> 00:14:36.475
believe that defense wins championships.
00:14:37.245 --> 00:14:40.435
And when you look through the history, there have been 7.
00:14:40.435 --> 00:14:43.495
periods of negative returns for the Canadian market.
00:14:43.495 --> 00:14:44.735
and the TSX.
00:14:45.635 --> 00:14:48.785
Each of those moments have been driven by a different.
00:14:48.785 --> 00:14:52.205
macro factor, call it the tech bubble call.
00:14:52.205 --> 00:14:55.675
it the financial crisis, call it the health pandemic and.
00:14:55.675 --> 00:14:58.705
there will be something else in the coming years and.
00:14:58.705 --> 00:15:01.745
in each of those periods what you'll see as the last line.
00:15:01.745 --> 00:15:05.245
in the management effect is that our funds are protected capital.
00:15:05.245 --> 00:15:08.445
We would love to have been positive in each of those years.
00:15:08.445 --> 00:15:11.645
but you can see the value creation of.
00:15:11.645 --> 00:15:15.245
protecting capital by staying away from overhyped.
00:15:15.245 --> 00:15:17.785
unlearning no cash flow.
00:15:17.865 --> 00:15:21.765
Hop on the bandwagon type stocks that can be very detrimental.
00:15:21.765 --> 00:15:24.935
to your overall portfolio. There will be a different.
00:15:24.935 --> 00:15:27.975
scenario, a different circumstances, but what's key?
00:15:27.975 --> 00:15:30.995
is the capital preservation and focusing on.
00:15:30.995 --> 00:15:33.315
downside protection to compound value.
00:15:34.925 --> 00:15:38.195
Now I want to take a moment just to share a little bit more.
00:15:38.195 --> 00:15:41.275
and to expand on what Peter has shared about Beutel. Goodman.
00:15:41.275 --> 00:15:44.335
So Beutel Goodman is an institutional.
00:15:44.335 --> 00:15:47.355
asset manager with over 70%.
00:15:47.355 --> 00:15:50.535
of our capital in institutions. What does that mean?
00:15:50.535 --> 00:15:53.695
We work with pension funds. We work with some of.
00:15:53.695 --> 00:15:56.805
the consultants like Mercer and Willis Tower Watson's and.
00:15:56.805 --> 00:15:59.855
hey put us through the ringer every single time around what it.
00:15:59.855 --> 00:16:02.895
means. And so we are entrusted by foundations by.
00:16:02.895 --> 00:16:05.155
y pension funds to manage their money on our behalf.
00:16:06.085 --> 00:16:09.435
We are also a long standing firm with over 50 years.
00:16:09.435 --> 00:16:12.915
of history, founded by some great investors like Net Goodman.
00:16:12.915 --> 00:16:16.235
at the late night, Goodman, Seymour Schulich Austin Beutel.
00:16:16.235 --> 00:16:19.495
So we have a long foundational history and another.
00:16:19.495 --> 00:16:22.815
very unique part is and in my past life before I joined Beutel.
00:16:22.815 --> 00:16:25.855
I worked at Scotiabank in 1832, asset manager for a good part of.
00:16:25.855 --> 00:16:28.955
15 years, but a unique part is that we are also.
00:16:28.955 --> 00:16:32.075
owners of this company. We are partners in this company.
00:16:32.075 --> 00:16:35.195
We care as much about your well being because we.
00:16:35.195 --> 00:16:36.555
very much understanding.
00:16:36.735 --> 00:16:39.785
That it's all related. It's not about an.
00:16:39.785 --> 00:16:42.845
individual stock, it's about an ownership culture and.
00:16:42.845 --> 00:16:46.245
the ownership culture also means continuity. You.
00:16:46.245 --> 00:16:49.605
know, we tried to say Beutel is like Hotel California.
00:16:49.605 --> 00:16:52.695
and once you come in, you never leave and everyone has.
00:16:52.695 --> 00:16:55.365
a long history with Beutel to that time.
00:16:56.005 --> 00:16:59.135
Another part is that we manage 45 billion in assets.
00:16:59.135 --> 00:16:59.135
00:16:59.845 --> 00:17:03.135
We are a small independent company, but we're very sizable.
00:17:03.135 --> 00:17:06.335
Oftentimes you will see us as top 10 shareholders.
00:17:06.335 --> 00:17:09.495
in many of the names that we invest in and what that.
00:17:09.495 --> 00:17:12.535
means is we have access, we have credibility.
00:17:12.535 --> 00:17:15.755
with management teams and boards on a regular basis and.
00:17:15.755 --> 00:17:18.815
it's all about putting pieces of the puzzle together.
00:17:18.815 --> 00:17:21.935
So we've been long standing, but our focus is on.
00:17:21.935 --> 00:17:24.955
a value investment philosophy. Our focus is grounded.
00:17:24.955 --> 00:17:26.155
on capital preservation.
00:17:27.385 --> 00:17:30.555
This is the team, as Peter shared with you about the.
00:17:30.555 --> 00:17:33.695
what the one London group and the team this.
00:17:33.695 --> 00:17:36.715
is our Canadian equity team and a few things that.
00:17:36.715 --> 00:17:39.895
I'd like to highlight is one is it's.
00:17:39.895 --> 00:17:42.245
a small team focused on Canada.
00:17:43.175 --> 00:17:46.225
We are all analysts first, what that means.
00:17:46.225 --> 00:17:49.305
is that we individually build three statement financial models.
00:17:49.305 --> 00:17:52.425
meet with companies directly. There isn't an A hierarchy.
00:17:52.425 --> 00:17:55.485
in any way or form. We are all endless. That's the heart of.
00:17:55.485 --> 00:17:58.625
what we do. There is no separation of duties we.
00:17:58.625 --> 00:18:02.165
also have kind of a philosophy and a process.
00:18:02.165 --> 00:18:05.285
to get best ideas in this portfolio. We run a very.
00:18:05.285 --> 00:18:08.325
concentrated portfolio. We run about 30.
00:18:08.325 --> 00:18:11.425
035 names in any strategy and.
00:18:11.425 --> 00:18:14.505
all of this is founded on fundamental research.
00:18:14.505 --> 00:18:14.505
00:18:14.785 --> 00:18:17.795
And there's low turnover on the team, which means we have a continuity.
00:18:17.795 --> 00:18:21.015
of culture and the heritage that has made us successful.
00:18:21.015 --> 00:18:24.115
over time. And each of these individuals brings something very.
00:18:24.115 --> 00:18:27.215
unique. James Black, for example, worked at TD.
00:18:27.215 --> 00:18:30.895
Securities, Todd Investment Bank. He also worked at Brookfield, Mary.
00:18:30.895 --> 00:18:34.095
Crowell used to work on the fixed income team, Dora who.
00:18:34.095 --> 00:18:37.195
used to work at CI financial buying firms. And so she.
00:18:37.195 --> 00:18:40.235
has a unique corporate development perspective. So we really bring you depth and.
00:18:40.235 --> 00:18:41.995
experience and the history.
00:18:43.245 --> 00:18:46.435
Now that the people, there's another really important layer.
00:18:46.435 --> 00:18:49.455
of consistency, it's your philosophy.
00:18:49.455 --> 00:18:50.335
and your process.
00:18:51.375 --> 00:18:54.885
Our philosophy is a mindset of capital preservation.
00:18:54.885 --> 00:18:54.885
00:18:55.705 --> 00:18:58.745
And we believe that is a critical part. So how do we do it?
00:18:58.745 --> 00:18:58.745
00:18:59.535 --> 00:19:03.225
There are three key things that ties into our philosophy 1.
00:19:03.225 --> 00:19:06.785
ne is as a value investor, we're not looking to buy junk.
00:19:06.785 --> 00:19:06.785
00:19:07.515 --> 00:19:10.845
We really want to buy quality at a discount and a key.
00:19:10.845 --> 00:19:13.985
aspect of how we define quality is free cash flows.
00:19:13.985 --> 00:19:16.425
The actual cache companies earn.
00:19:17.315 --> 00:19:20.825
The second thing that we do is we're very patient investors, you.
00:19:20.825 --> 00:19:24.185
have to be disciplined and when you buy companies there.
00:19:24.185 --> 00:19:27.385
are times we waited 10 years before.
00:19:27.385 --> 00:19:30.875
we actually enacted and executed on a company. So we established.
00:19:30.875 --> 00:19:34.125
parameters and target prices where willing to buy to buy.
00:19:34.125 --> 00:19:37.245
a company, we need to tangibly see a 50%.
00:19:37.245 --> 00:19:40.665
return over three years. Put another way, we're looking to compound.
00:19:40.665 --> 00:19:43.905
about 15% a year on of our ideas because we.
00:19:43.905 --> 00:19:46.975
think that gives us a margin of safety to buy it that.
00:19:46.975 --> 00:19:48.325
if there is any mistakes.
00:19:48.545 --> 00:19:51.875
We have a buffer because we're looking for something that's hated in the market.
00:19:51.875 --> 00:19:52.835
at any point in time.
00:19:53.595 --> 00:19:56.645
But here's the other part that's often not discussed. When do you?
00:19:56.645 --> 00:19:59.785
sell? Is it when you have this gut feeling?
00:19:59.785 --> 00:20:03.025
that might be from bad wine or it's your?
00:20:03.025 --> 00:20:06.065
instincts telling you to sell? Well, we have a very defined.
00:20:06.065 --> 00:20:09.165
and disciplined process on when we take money.
00:20:09.165 --> 00:20:12.325
out, and it's also elaborate on why it's because.
00:20:12.325 --> 00:20:15.505
we go through cycles of fear and greed and you need.
00:20:15.505 --> 00:20:18.565
a system that's consistent to act on rather than just.
00:20:18.565 --> 00:20:21.925
how I'm feeling that day and reflective of Mr Market, which.
00:20:21.925 --> 00:20:23.645
you hear about where.
00:20:24.045 --> 00:20:27.145
Someone can wake up really excited about stock one morning and wake up.
00:20:27.145 --> 00:20:30.925
really upset about it the next day, and things fluctuate and opinions fluctuate.
00:20:30.925 --> 00:20:30.925
00:20:32.065 --> 00:20:35.535
Now let's elaborate a little bit on one concept quality.
00:20:35.535 --> 00:20:37.415
This is free cash flow.
00:20:38.125 --> 00:20:41.395
This is the actual cache a company earns.
00:20:41.395 --> 00:20:44.555
This is not clicks. This is not website visits.
00:20:44.555 --> 00:20:47.695
This is actual cash flows. This is cash flows.
00:20:47.695 --> 00:20:50.875
after a company has invested its capital.
00:20:50.875 --> 00:20:53.035
for investments in needs to survive.
00:20:53.715 --> 00:20:56.825
And this is very different also from earnings. And so a key.
00:20:56.825 --> 00:21:00.085
metric that we look at is free cash flow conversion. How much of your revenues?
00:21:00.085 --> 00:21:03.205
do you convert to cash flow? How much of your earnings do you convert?
00:21:03.205 --> 00:21:07.025
to cash flow? This is the fuel that keeps these businesses going.
00:21:07.025 --> 00:21:07.025
00:21:07.805 --> 00:21:10.835
Because you pay dividends, you pay.
00:21:10.835 --> 00:21:14.255
for buybacks, you pay down your debt with cash.
00:21:14.255 --> 00:21:17.375
Not good, well and not clicks. And so we very.
00:21:17.375 --> 00:21:20.805
much focus on the essence of sustainable.
00:21:20.805 --> 00:21:24.155
normalized free cash flow. And here's why I say sustainable.
00:21:24.155 --> 00:21:27.295
and normalized, we may get the question of look at all the.
00:21:27.295 --> 00:21:30.315
cash flow energy companies are generating right now, isn't it a?
00:21:30.315 --> 00:21:33.355
agreed invest? The question is what does that?
00:21:33.355 --> 00:21:36.405
predicated on and what is normalized look like? Are you telling me?
00:21:36.405 --> 00:21:39.555
what cash flows are at $120.00 oil or negative oil like we've?
00:21:39.555 --> 00:21:40.415
had in the past?
00:21:40.585 --> 00:21:43.895
Is it based on normalized investments that they're making to continue?
00:21:43.895 --> 00:21:47.035
production or some sort of depressed value because they?
00:21:47.035 --> 00:21:50.675
wanna show how much cash flows they're generating so sustainable?
00:21:50.675 --> 00:21:54.155
and normalized cash flows are very important concept.
00:21:54.155 --> 00:21:54.155
00:21:55.015 --> 00:21:56.265
This is my favorite slide.
00:21:57.405 --> 00:22:00.875
Markets are not as technical.
00:22:00.875 --> 00:22:03.915
as fundamental or math driven as we'd all.
00:22:03.915 --> 00:22:07.135
like them to be. It's not a scientific there.
00:22:07.135 --> 00:22:10.175
are two key components of markets that I'd want to share with.
00:22:10.175 --> 00:22:13.255
you. One is what you see on CNBC and BNN, it's.
00:22:13.255 --> 00:22:15.995
a lot of stories and narratives that feed the market.
00:22:16.735 --> 00:22:19.805
As important, it's dripping as a voting machine.
00:22:19.805 --> 00:22:23.075
in the short term, where you and I are buying and selling.
00:22:23.075 --> 00:22:23.075
00:22:23.945 --> 00:22:26.645
And as humans, we are driven by emotions.
00:22:27.535 --> 00:22:30.585
And the market is driven by emotions of fear and greed.
00:22:30.585 --> 00:22:30.585
00:22:31.665 --> 00:22:32.965
So we need a process.
00:22:33.785 --> 00:22:36.925
To capitalize on these cycles of fear and greed.
00:22:36.925 --> 00:22:40.215
that go through macro scenarios or company scenarios. But.
00:22:40.215 --> 00:22:43.235
the first thing I shared with you is that golden line to the right you.
00:22:43.235 --> 00:22:46.355
have to find great companies because there are companies that do not.
00:22:46.355 --> 00:22:49.775
compound value that can destroy capital like 2 examples.
00:22:49.775 --> 00:22:53.155
we shared with you in the past. So you have to identify these companies.
00:22:53.155 --> 00:22:56.655
then we have to wait for a point of fear and.
00:22:56.655 --> 00:22:59.805
it happens in a number of companies where something goes.
00:22:59.805 --> 00:23:02.855
wrong. There's some concern about management.
00:23:02.855 --> 00:23:05.435
and capital allocation, about the industry structure.
00:23:05.695 --> 00:23:08.785
And that's the point when we buy because on every.
00:23:08.785 --> 00:23:11.815
single company that we own, we have a buy price that gives us.
00:23:11.815 --> 00:23:15.035
a 50% return. That means we should act at that point and.
00:23:15.035 --> 00:23:18.535
if we don't act, what are the emotions that are dragging you down we.
00:23:18.535 --> 00:23:21.685
e have a target price. That's how much we think the companies worth.
00:23:21.685 --> 00:23:24.845
on a three to five year basis, not the next quarter and the next day like.
00:23:24.845 --> 00:23:28.225
he market will look tell you on a normalized basis and.
00:23:28.225 --> 00:23:31.345
our process has an automatic trigger where we.
00:23:31.345 --> 00:23:34.465
sell 1/3 of the position when it hits our target price.
00:23:34.465 --> 00:23:35.285
no questions asked.
00:23:35.965 --> 00:23:38.995
This is the systematic nature in which we operate.
00:23:38.995 --> 00:23:42.055
to take emotions out, to take instincts out so to.
00:23:42.055 --> 00:23:45.135
give you an example, if we buy a company that's hated at a.
00:23:45.135 --> 00:23:48.355
00, that means if it hits our target.
00:23:48.355 --> 00:23:49.735
price, it's $150.
00:23:50.405 --> 00:23:53.415
We take 1/3 of that. It takes every our gains. We're back.
00:23:53.415 --> 00:23:56.925
to $100. What we do at that point is assess.
00:23:56.925 --> 00:24:00.215
how things have changed and establish a new target.
00:24:00.215 --> 00:24:03.235
price. Because the world changes companies.
00:24:03.235 --> 00:24:06.715
change, management changes. You can't use old information.
00:24:06.715 --> 00:24:10.115
on your assessment of value. There's something else that happens.
00:24:10.115 --> 00:24:13.935
because oftentimes when a company is loved, there's.
00:24:13.935 --> 00:24:17.415
some other company that's hated. You may look at the overall TSX.
00:24:17.415 --> 00:24:20.755
composite, but underneath it, there are 300 companies.
00:24:20.755 --> 00:24:20.755
00:24:20.875 --> 00:24:23.925
And all of them are different stages. So what it allows?
00:24:23.925 --> 00:24:27.345
us to do is sell into greed for an individual company.
00:24:27.345 --> 00:24:30.465
recycle that capital into companies that.
00:24:30.465 --> 00:24:32.275
are hated, that we've done our work on.
00:24:32.965 --> 00:24:35.665
But we have other layers to help with emotions.
00:24:36.575 --> 00:24:39.665
Another example is when we review companies, we monitor these.
00:24:39.665 --> 00:24:42.715
companies, but I want to give you 2 examples where.
00:24:42.715 --> 00:24:45.785
when a stock hits are downside target so we.
00:24:45.785 --> 00:24:48.905
set it down target which is what's the worst that could happen for.
00:24:48.905 --> 00:24:49.415
stock.
00:24:50.115 --> 00:24:53.325
When a stock hits, it hits the downside target, cause things don't.
00:24:53.325 --> 00:24:56.385
always go as you expect, and as you hope what happens.
00:24:56.385 --> 00:24:59.545
is the file gets moved over to another analyst for a fresh.
00:24:59.545 --> 00:25:02.285
set of eyes. This is very unique and important. Why?
00:25:02.965 --> 00:25:06.135
What happens when someone does when you know you?
00:25:06.135 --> 00:25:09.325
ock that you have fallen in love with in a way? Because you're.
00:25:09.325 --> 00:25:12.575
nchored to it. You've done so much work on it the general.
00:25:12.575 --> 00:25:15.615
answer is everything's OK, don't worry about it. It's fine, but.
00:25:15.615 --> 00:25:18.685
if you remove the emotional anchoring and you put the file.
00:25:18.685 --> 00:25:22.235
to another person, you have an independent set of eyes and.
00:25:22.235 --> 00:25:25.775
This is why not only the process, but the systems we take.
00:25:25.775 --> 00:25:29.115
help to cater and address the issues of emotions that happen.
00:25:29.115 --> 00:25:32.145
in all of our decisions. Like when you love a stock, the.
00:25:32.145 --> 00:25:33.205
last thing you want to do is sell it.
00:25:33.905 --> 00:25:37.035
When a stock is going down, the last thing you want to do is buy it. So we have.
00:25:37.035 --> 00:25:40.895
a system in place to help us address these emotional.
00:25:40.895 --> 00:25:44.255
wonders of being a human, but also shortcomings.
00:25:44.255 --> 00:25:45.175
when you're an investor.
00:25:46.685 --> 00:25:49.205
I want to talk to you a little bit about ESG.
00:25:50.085 --> 00:25:53.235
This is environmental, social and governance.
00:25:53.235 --> 00:25:56.355
factors that is very topical and I wanna.
00:25:56.355 --> 00:25:59.055
share with you how we think about it at Beutel.
00:26:00.075 --> 00:26:03.185
Now the first thing is sometimes you get drowned in.
00:26:03.185 --> 00:26:06.225
so much alphabet soup and so much noise you don't even know.
00:26:06.225 --> 00:26:09.305
what you're looking at, and so the question becomes what?
00:26:09.305 --> 00:26:12.465
are the most material factors? So when we look?
00:26:12.465 --> 00:26:15.865
at all these factors, we focus on financial materiality.
00:26:15.865 --> 00:26:18.965
What does that mean? Tell me about how this issue.
00:26:18.965 --> 00:26:22.345
impacts my assessment of value of revenue.
00:26:22.345 --> 00:26:25.425
of cost of capital, of terminal value.
00:26:25.425 --> 00:26:28.465
The second thing we do is we don't only.
00:26:28.465 --> 00:26:30.325
look at the risks of a factor.
00:26:30.885 --> 00:26:34.075
We also look at the opportunities we own a company called BRP.
00:26:34.075 --> 00:26:37.175
for anyone who owns a skiddo, a CDU, this is the company.
00:26:37.175 --> 00:26:37.805
that makes it.
00:26:38.545 --> 00:26:41.635
And there's a great opportunity from the environmental front because they're.
00:26:41.635 --> 00:26:44.765
investing in electrification of their motors and.
00:26:44.765 --> 00:26:48.095
they're expanding into new markets, including electric motorcycles.
00:26:48.095 --> 00:26:51.225
This is an incremental opportunity where they have a cost.
00:26:51.225 --> 00:26:54.635
in no revenues. So we also consider the implications.
00:26:54.635 --> 00:26:57.735
Another example is TC Energy. We own, these are natural.
00:26:57.735 --> 00:26:58.435
gas pipelines.
00:26:59.315 --> 00:27:02.425
You've learned is that you can pass hydrogen through these.
00:27:02.425 --> 00:27:05.665
natural gas pipelines that you carbonize there's a great opportunity.
00:27:05.665 --> 00:27:08.885
because you cannot build anymore pipe in the ground anywhere, so.
00:27:08.885 --> 00:27:12.265
there's an incremental value that you have to consider now.
00:27:12.265 --> 00:27:15.345
the last thing is as investors, we don't look.
00:27:15.345 --> 00:27:18.365
at what's happening today. We have to look at where things.
00:27:18.365 --> 00:27:21.555
are going, where the puck is going, how are things going to evolve. So we're.
00:27:21.555 --> 00:27:24.755
not buying renewable companies or technology companies.
00:27:24.755 --> 00:27:27.845
because they have a low emissions profile. We're looking at which companies can actually.
00:27:27.845 --> 00:27:29.145
improve going forward.
00:27:29.495 --> 00:27:32.895
About three to five years, and our independence of research.
00:27:32.895 --> 00:27:36.105
means we're doing the digging by ourselves. We have our shovels.
00:27:36.105 --> 00:27:39.395
in our hand. We're trying to understand these companies. We're having real dialogue.
00:27:39.395 --> 00:27:42.465
with companies, not a checkbox exercise and our.
00:27:42.465 --> 00:27:45.985
key pillars on how we approach it is one, we engage with companies as.
00:27:45.985 --> 00:27:49.005
you may recall, 45 billion in assets, a top 10.
00:27:49.005 --> 00:27:52.045
shareholders management and teams and boards want to talk.
00:27:52.045 --> 00:27:55.095
to us, to give you one example, we are a large.
00:27:55.095 --> 00:27:58.225
investor in a company called Restaurant Brands. Anyone drink Tim?
00:27:58.225 --> 00:27:59.125
horton's in the crowd.
00:27:59.745 --> 00:28:02.865
So Tim Horton's Burger King Popeyes Firehouse.
00:28:02.865 --> 00:28:06.105
sub this is a company that owns those we bought it in.
00:28:06.105 --> 00:28:09.165
the point of fear when everyone thought Tim Hortons was not gonna make any.
00:28:09.165 --> 00:28:12.425
money. No ones going back to work and that it is a destroyed.
00:28:12.425 --> 00:28:15.465
franchise in various forms. We bought this at a point.
00:28:15.465 --> 00:28:18.845
of fear where actually have done extremely well on it, but.
00:28:18.845 --> 00:28:20.625
this was a company that had a few issues.
00:28:21.255 --> 00:28:24.845
There's a few issues on governance that we weren't quite happy with this.
00:28:24.845 --> 00:28:28.185
related to the skill sets of the board, where there were more financial.
00:28:28.185 --> 00:28:31.205
ngineers than industry experts. This had to do with board.
00:28:31.205 --> 00:28:34.225
diversity where we didn't think they had a diversity of thought in.
00:28:34.225 --> 00:28:38.005
their leadership and it also had to do with leverage. They have a fantastic.
00:28:38.005 --> 00:28:41.145
business model that generates a lot of cash flow essentially other.
00:28:41.145 --> 00:28:44.215
eople pay them money to build restaurants and then they get.
00:28:44.215 --> 00:28:47.445
the cash flows from it. They clip a coupon on it. Phenomenal business.
00:28:47.445 --> 00:28:50.585
But we pressed them and we said. We'd like to see a lower leverage.
00:28:50.585 --> 00:28:53.225
We'd like to see you mindful of different payout ratio.
00:28:53.385 --> 00:28:56.755
We hammer them every single time we caught, talked to them. We talked to them every quarter.
00:28:56.755 --> 00:28:59.815
and what we saw is a change in the board and a.
00:28:59.815 --> 00:29:02.995
change in the capital allocation and leverage target.
00:29:02.995 --> 00:29:06.065
and this is being through numerous ingredients on the phone.
00:29:06.065 --> 00:29:09.255
We've met with the different heads of Burger King of you.
00:29:09.255 --> 00:29:12.275
Horton's of Restaurant Brands. We've had dinner.
00:29:12.275 --> 00:29:15.485
with the chair of the board around these. And so when you're.
00:29:15.485 --> 00:29:18.735
engaging the question to ask is how meaningful is that?
00:29:18.735 --> 00:29:22.115
when you have a top ten shareholder engaging who's a fundamental?
00:29:22.115 --> 00:29:23.975
investor, who cares about business value?
00:29:24.255 --> 00:29:27.405
They listen. They also engage us on it. We also.
00:29:27.405 --> 00:29:30.505
go through proxy voting. We are independent. We just don't follow.
00:29:30.505 --> 00:29:33.705
a rating that's put forward and we collaborate with different.
00:29:33.705 --> 00:29:36.945
organizations. So that's some context around risk management, but also.
00:29:36.945 --> 00:29:40.185
integration. I want to give you an example to tie this together.
00:29:40.185 --> 00:29:40.185
00:29:41.015 --> 00:29:44.065
The process on a company that we bought.
00:29:44.065 --> 00:29:47.105
in Q1 of 2021.
00:29:47.105 --> 00:29:50.205
custard is a leading convenience store operator.
00:29:50.205 --> 00:29:53.305
You will know it as Circle K when you go to a.
00:29:53.305 --> 00:29:55.625
convenience store, you go and fill up gas.
00:29:56.425 --> 00:29:59.595
This was a market darling for a period of time we had done.
00:29:59.595 --> 00:30:02.815
work on it. We never thought it hit the value to give us that 50.
00:30:02.815 --> 00:30:04.435
return over three years.
00:30:05.165 --> 00:30:08.535
Then we had a great moment because where patient investors.
00:30:08.535 --> 00:30:11.615
what happened? Well, one climate.
00:30:11.615 --> 00:30:15.135
change and the concern of climate change in the pandemic caused.
00:30:15.135 --> 00:30:18.395
everyone to think gas stations are going to be worthless and.
00:30:18.395 --> 00:30:21.555
they have a terminal value of zero. We have done work.
00:30:21.555 --> 00:30:24.795
on it. They have an experiment in Norway which.
00:30:24.795 --> 00:30:28.045
is the furthest ahead. And we had confidence, comfort.
00:30:28.045 --> 00:30:31.355
that they were going to be able to generate returns. In fact, the gross margin dollars.
00:30:31.355 --> 00:30:35.035
were higher in Norway through this transition, the.
00:30:35.035 --> 00:30:36.055
second thing was.
00:30:36.485 --> 00:30:39.735
Because of the pandemic, there was an assumption that no one was going to drive.
00:30:39.735 --> 00:30:42.845
They make money in two ways. They sell gas and they sell.
00:30:42.845 --> 00:30:45.925
all the chips and the Gatorade and everything else you want.
00:30:45.925 --> 00:30:49.055
If no one's gonna fill gas because the assumption was no one's gonna drive.
00:30:49.055 --> 00:30:52.305
again. The fuel volume assumption changes. Well, we had a different view.
00:30:52.305 --> 00:30:55.415
That wasn't this extreme of extrapolating what happens when you.
00:30:55.415 --> 00:30:58.445
get locked down that the world changes and you're never leaving your house again.
00:30:58.445 --> 00:31:01.665
We get an assumption of some sort of normalization that.
00:31:01.665 --> 00:31:04.765
the real estate of this also had tremendous value.
00:31:04.765 --> 00:31:08.085
And the final thing is you would have read this in the newspaper.
00:31:08.085 --> 00:31:08.085
00:31:08.305 --> 00:31:11.555
There was a rumor and somewhat confirmation.
00:31:11.555 --> 00:31:14.655
that they were gonna buy a European grocery store or store called.
00:31:14.655 --> 00:31:15.095
care for.
00:31:16.135 --> 00:31:19.345
The market got freaked out like you're going to Europe, you're going to grocery stores.
00:31:19.345 --> 00:31:22.355
What's going on? And we as a large investor.
00:31:22.355 --> 00:31:23.965
got a call directly to the CFO.
00:31:24.755 --> 00:31:27.995
We spoke to the CFO about their thinking behind this.
00:31:27.995 --> 00:31:31.025
acquisition. If it moved forward, we understood the.
00:31:31.025 --> 00:31:34.305
history of acquisitions. So we haven't done our work.
00:31:34.305 --> 00:31:37.665
got a great chance to buy this company at the point of fear.
00:31:37.665 --> 00:31:40.815
for all those factors of a quality franchise that.
00:31:40.815 --> 00:31:41.845
generates free cash flow.
00:31:42.535 --> 00:31:46.365
Now let's Fast forward to Q 42022 last.
00:31:46.365 --> 00:31:48.435
year, the stock hit our target price.
00:31:49.105 --> 00:31:52.695
It had done extremely well and what we did we.
00:31:52.695 --> 00:31:56.535
did on 1/3 sale, we took the capital of.
00:31:56.535 --> 00:31:59.675
1/3 of the proceeds. Now we're reassessing because the.
00:31:59.675 --> 00:32:02.715
circumstances are different than when we bought it, so we,
00:32:02.715 --> 00:32:05.775
cannot rationally say that this is the same value.
00:32:05.775 --> 00:32:08.985
of the company, but we're taking that capital and then we recycle that.
00:32:08.985 --> 00:32:12.755
capital into other companies that we found value coincidentally.
00:32:12.755 --> 00:32:15.855
around that same time is also when we found a great opportunity.
00:32:15.855 --> 00:32:18.915
in a company called CGI, it's an IT consulting.
00:32:18.915 --> 00:32:20.015
and outsourcing firm.
00:32:20.475 --> 00:32:23.485
It got sold off with the tech wreck when all the technology.
00:32:23.485 --> 00:32:26.585
gets stocks got hurt. We didn't go and try to buy a Shopify.
00:32:26.585 --> 00:32:29.635
which is not generating cash flows. We found a real free.
00:32:29.635 --> 00:32:33.045
cash flow generating company that was hated at that time.
00:32:33.045 --> 00:32:36.605
and that's the recycling of capital that comes along.
00:32:36.605 --> 00:32:39.675
this very much this process that's ingrained at Beutel.
00:32:39.675 --> 00:32:39.675
00:32:40.445 --> 00:32:43.455
This is the CIBC ICS managed portfolio.
00:32:43.455 --> 00:32:46.995
These are the parameters of the portfolio.
00:32:46.995 --> 00:32:46.995
00:32:48.355 --> 00:32:51.415
The market cap is about 3 billion or so, and to give you.
00:32:51.415 --> 00:32:53.395
some context, when you're a value investor.
00:32:54.015 --> 00:32:57.545
You're naturally not in early stage companies because.
00:32:57.545 --> 00:33:00.845
you're looking for cash flows. So the very nature of the maturity.
00:33:00.845 --> 00:33:04.045
of some of these companies gives you an element of stability.
00:33:04.045 --> 00:33:07.105
and security from the size and liquidity and.
00:33:07.105 --> 00:33:10.205
maturity of some of these companies we have.
00:33:10.205 --> 00:33:13.325
generally low 30s in portfolio, so it's run.
00:33:13.325 --> 00:33:16.825
as a concentrated portfolio and then we put some guardrails around the portfolio.
00:33:16.825 --> 00:33:19.845
1 component is picking Gray companies, the.
00:33:19.845 --> 00:33:22.925
second is building a diversified portfolio that.
00:33:22.925 --> 00:33:25.445
we're not over our skis at any point in time.
00:33:25.605 --> 00:33:28.725
That gives you risk exposures that you don't want and these.
00:33:28.725 --> 00:33:31.955
are some of the parameters that you'll see that we've put in place.
00:33:31.955 --> 00:33:35.035
from the number of positions or the position size.
00:33:35.035 --> 00:33:38.395
not getting too large and the maximum turnover we.
00:33:38.395 --> 00:33:41.575
generally have about say, 20% turnover. What?
00:33:41.575 --> 00:33:44.955
at means is we hold companies for five years on average sometimes.
00:33:44.955 --> 00:33:48.085
es it's being low as 10 and sometimes it's been a little bit higher.
00:33:48.085 --> 00:33:51.235
about 25%. It's not because we feel like we want.
00:33:51.235 --> 00:33:54.855
to trade. We don't think there's a direct correlation between.
00:33:54.855 --> 00:33:56.695
he amount of activity and you returns.
00:33:56.985 --> 00:34:00.175
It's what the market does and what we do.
00:34:00.175 --> 00:34:03.415
because of what the market does. If the market loves custard, what we're.
00:34:03.415 --> 00:34:06.685
selling it and we're taking proceeds. If the market hates CGI.
00:34:06.685 --> 00:34:07.335
we're buying it.
00:34:09.345 --> 00:34:12.515
Let's talk about what's going on in the market and Peter or Paul.
00:34:12.515 --> 00:34:16.535
please throw bread at me if I'm running overtime so.
00:34:16.535 --> 00:34:18.455
don't mind that. Let's talk about the market.
00:34:22.055 --> 00:34:24.325
Yeah, not all at once.
00:34:25.425 --> 00:34:26.435
One at a time, please.
00:34:26.855 --> 00:34:28.935
UM, 2023.
00:34:29.615 --> 00:34:32.385
Has already started as a fascinating year.
00:34:33.885 --> 00:34:37.475
And 2023 started with concerns of a recession.
00:34:37.475 --> 00:34:37.475
00:34:38.435 --> 00:34:41.465
And I'm sure you heard market pundits say it's gonna be.
00:34:41.465 --> 00:34:44.845
a hard landing. It's gonna be a face plant. It's.
00:34:44.845 --> 00:34:47.905
gonna be a soft landing. Now. It might not be.
00:34:47.905 --> 00:34:50.985
a landing at all. We're just gonna stay flying and.
00:34:50.985 --> 00:34:54.005
they're going to be predictions in the economy and just look.
00:34:54.005 --> 00:34:57.205
at track records and figure out, well, how often are they? Right. They'll.
00:34:57.205 --> 00:35:00.635
e right. It's just they may be wrong for 10 years in a row before they're right.
00:35:00.635 --> 00:35:00.635
00:35:01.725 --> 00:35:05.015
And macro predictions for us have not been.
00:35:05.015 --> 00:35:08.315
where we found value in high probabilities and.
00:35:08.315 --> 00:35:11.515
what happened in January is the market was up 7%. Why?
00:35:11.515 --> 00:35:14.635
jobs were stronger, inflation was coming.
00:35:14.635 --> 00:35:17.875
down, the view was inflation's coming down everything.
00:35:17.875 --> 00:35:20.995
s more stable. The central banks may not hike as much and.
00:35:20.995 --> 00:35:24.455
we may continue on. And there's no problem and then bam.
00:35:24.455 --> 00:35:26.485
markets, Silicon Valley bank.
00:35:27.595 --> 00:35:31.155
Big issue focused on the venture capital space.
00:35:31.155 --> 00:35:31.155
00:35:31.835 --> 00:35:34.885
Some mismanagement and then Signature Bank focused.
00:35:34.885 --> 00:35:35.725
on crypto.
00:35:36.495 --> 00:35:39.855
And then you have Credit Suisse and all of a sudden the market Spanish again.
00:35:39.855 --> 00:35:39.855
00:35:40.705 --> 00:35:42.865
The markets panic, there's going to be a banking crisis.
00:35:43.935 --> 00:35:46.965
And the banking crisis means, hey, all that loan.
00:35:46.965 --> 00:35:49.415
that you had to spend, it's gonna get paired back.
00:35:50.175 --> 00:35:53.195
And that extended to Canadian banks, even though large banks.
00:35:53.195 --> 00:35:56.225
were the winners in this, when deposits were flowing.
00:35:56.225 --> 00:35:59.345
out of these small regional banks, large banks were actually earning.
00:35:59.345 --> 00:36:02.555
nks are able to buy at more attractive.
00:36:02.555 --> 00:36:04.365
but this is the most recent thing.
00:36:05.435 --> 00:36:08.935
And we've shared with you different stories and going forward there.
00:36:08.935 --> 00:36:12.025
may be other aspects. The questions are gonna be around.
00:36:12.025 --> 00:36:15.695
well, China and will invade Taiwan. No idea will.
00:36:15.695 --> 00:36:19.025
Donald Trump evade jail and become?
00:36:19.025 --> 00:36:20.345
the next president again?
00:36:21.625 --> 00:36:24.685
Will AI change the face of Google search or?
00:36:24.685 --> 00:36:28.035
your lives in our lives, there are going to be a number of factors.
00:36:28.035 --> 00:36:28.625
hat come out.
00:36:29.465 --> 00:36:32.635
No one predicted the health pandemic and the impact it would have.
00:36:32.635 --> 00:36:35.775
or when it was gonna end, no one predicted.
00:36:35.775 --> 00:36:37.695
Putin invading Ukraine.
00:36:38.505 --> 00:36:41.535
No one predicted bank. The reality is we are gonna live in.
00:36:41.535 --> 00:36:44.575
circumstances. They're gonna be uncertainty. We just have to.
00:36:44.575 --> 00:36:47.735
learn how to live with it, how to manage capital, how to protect your.
00:36:47.735 --> 00:36:50.875
capital and move forward. And if you look at the bottom of this.
00:36:50.875 --> 00:36:53.975
slide, what we focus on is our actions.
00:36:53.975 --> 00:36:57.155
the things we can't control. We can't control the world around us.
00:36:57.155 --> 00:37:00.395
We simply have to take queues and do what's in the best interest.
00:37:00.395 --> 00:37:03.775
of our unit holders. As I shared with you, we bought CGI.
00:37:03.775 --> 00:37:07.015
in the tech rec last year when everyone hated stock the.
00:37:07.015 --> 00:37:08.875
stock is up about 30 to 40%.
00:37:09.285 --> 00:37:12.705
Over that course, when we bought it because it was bought during hate as.
00:37:12.705 --> 00:37:14.265
a cash flow generating company.
00:37:15.025 --> 00:37:18.045
We on the other side have made some sales because we're.
00:37:18.045 --> 00:37:21.175
cognizant that a company has chapters.
00:37:21.175 --> 00:37:23.475
in its life like we all have chapters in our lives.
00:37:24.095 --> 00:37:27.245
We don't stay the same, they evolve and we have to update our views.
00:37:27.245 --> 00:37:29.905
of these companies. A company that we sold was Onyx.
00:37:30.645 --> 00:37:33.795
It's a private equity manager, but they've made a few mistakes.
00:37:33.795 --> 00:37:37.035
They bought a company called Gluskin Sheff that there essentially writing.
00:37:37.035 --> 00:37:40.175
down. They bought a company called WestJet before.
00:37:40.175 --> 00:37:40.895
the pandemic.
00:37:41.985 --> 00:37:43.875
Their returns were becoming poor.
00:37:44.685 --> 00:37:47.805
And in an asset manager like we are well if.
00:37:47.805 --> 00:37:50.835
f you're returns are poorer, no ones gonna trust you with your capital.
00:37:50.835 --> 00:37:53.875
and you're flywheel starts to come undone and so.
00:37:53.875 --> 00:37:56.965
we chose to take capital away from Onyx with our updated view on.
00:37:56.965 --> 00:38:00.195
the company and move it forward. And in the fat middle all those process.
00:38:00.195 --> 00:38:02.115
sales, we had a lot of winners.
00:38:02.785 --> 00:38:06.255
We had boring companies like Hydro One which delivers.
00:38:06.255 --> 00:38:09.275
electricity throughout Ontario in transmission and.
00:38:09.275 --> 00:38:12.315
distribution. We bought that company at the point of hate Q1.
00:38:12.315 --> 00:38:15.895
2020 in the pandemic. When people thought electricity.
00:38:15.895 --> 00:38:18.945
demand was gonna go down when people were worried about them.
00:38:18.945 --> 00:38:22.155
doing an acquisition. But we saw the path forward that was actually.
00:38:22.155 --> 00:38:25.295
a boring utility versus Shopify I want.
00:38:25.295 --> 00:38:28.635
to say hydro ones delivered 60 to 70% return over.
00:38:28.635 --> 00:38:32.195
that time period because we bought a cash flowing stable.
00:38:32.195 --> 00:38:35.355
great business model at a point of heat and you'll see the other names.
00:38:35.355 --> 00:38:35.355
00:38:35.755 --> 00:38:38.865
That we've done well on and these are process different sales. We don't fall in love.
00:38:38.865 --> 00:38:42.665
with companies, we recycle that capital because we think cash flow generation.
00:38:42.665 --> 00:38:46.025
we think sentiment and valuation plays a function and risk.
00:38:46.025 --> 00:38:49.815
and we are your risk managers as a number one goal this.
00:38:49.815 --> 00:38:51.385
is our portfolio as it stands today.
00:38:52.875 --> 00:38:55.905
This portfolio is an active portfolio and it will change.
00:38:55.905 --> 00:38:58.935
from time to time. You would not have seen Custard.
00:38:58.935 --> 00:39:02.325
before the Circle K stores, you would not have seen restaurant before.
00:39:02.325 --> 00:39:05.395
and you may see new names we probably have.
00:39:05.395 --> 00:39:08.725
three to four active files that we fully modeled out and we're waiting.
00:39:08.725 --> 00:39:10.135
for the point of pain.
00:39:10.975 --> 00:39:14.425
To buy these and when we buy it this portfolio.
00:39:14.425 --> 00:39:17.715
will change accordingly in any names that you below 2%.
00:39:17.715 --> 00:39:20.845
that's a function of names that are either on their way out because.
00:39:20.845 --> 00:39:23.865
we've done process sales or we're building up when we get that.
00:39:23.865 --> 00:39:27.165
opportunity. But we run a concentrated portfolio almost.
00:39:27.165 --> 00:39:31.565
50% all in our highest conviction names this.
00:39:31.565 --> 00:39:34.585
fund has done extremely well during periods.
00:39:34.585 --> 00:39:37.765
of pain like last year when the market was down 6.
00:39:37.765 --> 00:39:40.805
this fund was down one we would have loved to be positive, but we also.
00:39:40.805 --> 00:39:41.765
have to be realistic.
00:39:41.865 --> 00:39:45.195
Of how we manage it, that's 500 basis points of capital protection.
00:39:45.195 --> 00:39:48.285
over that period in this portfolio. And as I said, it's.
00:39:48.285 --> 00:39:51.295
not a static portfolio. It moves because of the process.
00:39:51.295 --> 00:39:54.555
It doesn't move because of my stomach and my gut feel it's a process.
00:39:54.555 --> 00:39:57.855
that's instilled that Beutel in 2021.
00:39:57.855 --> 00:40:00.965
Energy was the best performing sector, we're not.
00:40:00.965 --> 00:40:04.095
that big on energy because we are concerned about.
00:40:04.095 --> 00:40:07.375
what normalized free cash flow looks like. You can have periods.
00:40:07.375 --> 00:40:10.475
of time when the estimate is a 10 billion in free cash flow.
00:40:10.475 --> 00:40:12.315
six months later that estimates.
00:40:12.365 --> 00:40:13.295
Minus 5 billion.
00:40:13.955 --> 00:40:17.185
The Stability and stability does not lend itself.
00:40:17.185 --> 00:40:20.305
as well. We will buy it when it's heated we have owned.
00:40:20.305 --> 00:40:23.325
C and Cuba, for we have owned tech resources. There are no.
00:40:23.325 --> 00:40:26.645
sacred cows and as things change it will change. But.
00:40:26.645 --> 00:40:29.825
if you look at the top ten holdings, even Q.
00:40:29.825 --> 00:40:33.215
to this date, we've held up with the market as it's rallied even.
00:40:33.215 --> 00:40:36.465
though Royal Bank, TD Bank, BMO.
00:40:36.465 --> 00:40:40.045
TC Energy have not worked well. So we have a lot of latent potential.
00:40:40.045 --> 00:40:40.045
00:40:40.735 --> 00:40:41.805
Where we do our work.
00:40:42.925 --> 00:40:46.115
We assess it. We recently met with the CEO of.
00:40:46.115 --> 00:40:49.435
BMO. We recently messed with the CEO of TC Energy. Why?
00:40:49.435 --> 00:40:52.535
we wanna stay on top of our names and CEOs, wanna.
00:40:52.535 --> 00:40:56.055
talk to us as a top large shareholder in their portfolio.
00:40:56.055 --> 00:40:56.055
00:40:56.755 --> 00:40:59.765
This is our sector weight. Our portfolio does not look like the.
00:40:59.765 --> 00:41:02.815
index. It's not because we purposely wanna make it not.
00:41:02.815 --> 00:41:05.955
look like our index is because we do it at the bottom up level.
00:41:05.955 --> 00:41:09.425
It's because the names Nortel and Shopify can completely.
00:41:09.425 --> 00:41:12.615
skew your index. It's because we don't believe there's.
00:41:12.615 --> 00:41:16.005
value right now in names like healthcare. I have looked at a healthcare company.
00:41:16.005 --> 00:41:19.445
we disqualify companies when the quality is not there.
00:41:19.445 --> 00:41:22.625
So it's not like we're not looking. We've looked at real estate companies we.
00:41:22.625 --> 00:41:25.925
have not gotten to the point of finding equality company with free cash flow.
00:41:25.925 --> 00:41:29.005
You have seven investment professionals with a lot of experience who are.
00:41:29.005 --> 00:41:30.265
cycling through all these names.
00:41:30.365 --> 00:41:33.495
And sometimes more than once. I may take a file and look at it and.
00:41:33.495 --> 00:41:36.915
say I'm not sure if I'm comfortable with the parameters.
00:41:36.915 --> 00:41:40.135
or the outlook. Someone else may cycle through sometimes.
00:41:40.135 --> 00:41:43.315
will come with a different conclusion, but it has to be validated and it has.
00:41:43.315 --> 00:41:45.585
to be vetted in a very thoughtful manner.
00:41:46.485 --> 00:41:49.755
What you'll observe is 2 things. We are underweight energy.
00:41:49.755 --> 00:41:50.415
and materials.
00:41:51.035 --> 00:41:54.385
The portfolio outperformed in 2021 and 2022.
00:41:54.385 --> 00:41:57.545
when energy was the best performing sector, so that.
00:41:57.545 --> 00:42:00.725
tells you that we're focused on capital preservation and free cash.
00:42:00.725 --> 00:42:04.025
low, but it does not compromise your returns it.
00:42:04.025 --> 00:42:07.205
adds capital protection and we have been able to find.
00:42:07.205 --> 00:42:10.485
phenomenal companies like custard like Hydro.
00:42:10.485 --> 00:42:13.645
One like CGI that's giving you attractive return.
00:42:13.645 --> 00:42:17.185
So you do not have to take that risk. You just need a system and process.
00:42:17.185 --> 00:42:20.325
at will deliver that return. Right now our overweights aren't.
00:42:20.325 --> 00:42:22.605
staples companies and consumer discretionary.
00:42:23.175 --> 00:42:26.265
The reason is we found great opportunities to give you an example.
00:42:26.265 --> 00:42:29.585
We bought George Weston in 2020. George Weston.
00:42:29.585 --> 00:42:33.205
is a boring holding company by the Western family. It owns Loblaws.
00:42:33.205 --> 00:42:36.645
Choice Properties, which is the real estate for Loblaws.
00:42:36.645 --> 00:42:39.865
and it owned a bakery, and it was headed for a period.
00:42:39.865 --> 00:42:43.245
of time because blah blah was not performing because Galen Weston.
00:42:43.245 --> 00:42:46.725
wanted to turn it into an investment bank and buy more assets. We.
00:42:46.725 --> 00:42:49.745
met with Galen. We met with Richard, and we saw a.
00:42:49.745 --> 00:42:52.785
change in tone. We saw that they were less interested in.
00:42:52.785 --> 00:42:53.805
buying more assets.
00:42:54.025 --> 00:42:57.355
No one knew what was gonna be. Was it a Shopify, a technology?
00:42:57.355 --> 00:43:00.535
company was gonna be something tied to the grocery store. They changed it.
00:43:00.535 --> 00:43:03.585
and they narrowed. They sold the bakery business, blah, blah.
00:43:03.585 --> 00:43:06.775
Turned around. This has been also up 80%. Like hydro.
00:43:06.775 --> 00:43:08.195
One. Boring is beautiful.
00:43:09.045 --> 00:43:12.055
We like boring businesses that generate cash flows and.
00:43:12.055 --> 00:43:15.195
we're happy to buy these all day and that is what?
00:43:15.195 --> 00:43:18.835
drove up our exposure to consumer staples, not.
00:43:18.835 --> 00:43:22.095
because we had a view on the economy. These are not macro calls.
00:43:22.095 --> 00:43:25.115
We try to be fully invested as much as we can. There's.
00:43:25.115 --> 00:43:28.175
only one point in time where cash went up to about 10% and that was.
00:43:28.175 --> 00:43:31.275
in 2007. We just didn't find opportunities. We didn't.
00:43:31.275 --> 00:43:35.055
want to force capital when there were the opportunities and.
00:43:35.055 --> 00:43:38.255
it's not because we had a call on the macro either, but when we.
00:43:38.255 --> 00:43:40.035
don't find opportunities, cache will build.
00:43:40.235 --> 00:43:42.145
If not, it'll be bottom up ideas.
00:43:43.335 --> 00:43:46.365
Now let's close, because I'm sure you're bored at me, but thank.
00:43:46.365 --> 00:43:49.765
you for not throwing bread on this whole question.
00:43:49.765 --> 00:43:53.065
of that you've heard taking money out of Canada.
00:43:53.065 --> 00:43:56.205
put into international, putting into emerging markets, putting into.
00:43:56.205 --> 00:43:56.785
the US.
00:43:57.905 --> 00:44:01.155
But when you look back over a long period like the 20 years.
00:44:01.155 --> 00:44:04.185
where oil is done, what it's done, US tech has done.
00:44:04.185 --> 00:44:04.925
what it's done.
00:44:05.775 --> 00:44:08.905
The TSX is added and created a lot of value for you.
00:44:08.905 --> 00:44:08.905
00:44:09.675 --> 00:44:12.945
And we at Beutel Goodman, as one of the largest Canadian.
00:44:12.945 --> 00:44:16.425
quity managers with a disciplined process, have done extremely.
00:44:16.425 --> 00:44:19.565
well for you over a long period of time. What's?
00:44:19.565 --> 00:44:22.695
also really important to understand is that Canadian equities.
00:44:22.695 --> 00:44:25.705
does not just mean Canadian companies exposed.
00:44:25.705 --> 00:44:29.025
to Canada. That might be true for Loblaws that.
00:44:29.025 --> 00:44:32.405
might be true for Rogers and your cell phone bills, but it owns.
00:44:32.405 --> 00:44:35.665
magnet, which is the 4th largest auto supplier in the world.
00:44:35.665 --> 00:44:38.965
It owns restaurant brands that has restaurants in the US.
00:44:38.965 --> 00:44:40.785
internationally abroad.
00:44:40.905 --> 00:44:44.175
These are actually global franchises that are getting built in Canada.
00:44:44.175 --> 00:44:47.375
Even when you look at Canadian banks the some.
00:44:47.375 --> 00:44:50.455
of you may not know, TD has 40% of his exposure in.
00:44:50.455 --> 00:44:50.995
the US.
00:44:52.515 --> 00:44:56.145
That's he hurting the stock right now, but it's a North American franchise.
00:44:56.145 --> 00:44:59.465
that's growing and evolving. So even when you're buying Canada.
00:44:59.465 --> 00:45:02.685
you are buying global franchises that are dominant.
00:45:02.685 --> 00:45:05.865
that are structured in a very attractive manner, so.
00:45:05.865 --> 00:45:08.965
I would say, oh, Canada, don't steer clear of it because it.
00:45:08.965 --> 00:45:10.695
has added value over time.
00:45:11.665 --> 00:45:12.935
So I've shared a lot with you.
00:45:14.035 --> 00:45:15.265
But I hope it was.
00:45:15.995 --> 00:45:19.965
At least an interesting discussion with one or two key takeaways.
00:45:19.965 --> 00:45:23.055
But our philosophies core on.
00:45:23.055 --> 00:45:26.325
being a value investor are focus is on capital.
00:45:26.325 --> 00:45:29.525
preservation. It's built on a system, it's.
00:45:29.525 --> 00:45:32.665
not built on a person's, it's not built on a whim.
00:45:32.665 --> 00:45:35.755
It's a very structured process of how we look at companies and we do.
00:45:35.755 --> 00:45:37.495
the homework and we don't rush it.
00:45:37.775 --> 00:45:41.095
We are independent and I think.
00:45:41.095 --> 00:45:41.095
00:45:41.965 --> 00:45:44.975
When we meet with management teams and we meet with a lot of management teams.
00:45:44.975 --> 00:45:48.495
it's really for important for us to meet the people, understand the culture.
00:45:48.495 --> 00:45:51.615
because that is how decisions are made and.
00:45:51.615 --> 00:45:54.685
I think as an independent franchise, that's not pressured.
00:45:54.685 --> 00:45:57.755
bout short term performance, that's not driven by other.
00:45:57.755 --> 00:46:00.965
factors. All we do is equity management.
00:46:00.965 --> 00:46:04.025
by owners who are focused over in the next three to five years we're going.
00:46:04.025 --> 00:46:07.115
to make those decisions that are in the best interest of.
00:46:07.115 --> 00:46:10.465
our unit holders, not by the prerogative of a bigger holding.
00:46:10.465 --> 00:46:12.475
company. And that is actually true.
00:46:12.575 --> 00:46:15.975
And very meaningful and a key part of the reason I also joined Beutel overtime.
00:46:15.975 --> 00:46:15.975
00:46:17.105 --> 00:46:18.255
We've had a long history.
00:46:19.055 --> 00:46:22.075
And we've been here for over 5 decades. We'll be here for another.
00:46:22.075 --> 00:46:25.185
5 decades. You have consistency expert in.
00:46:25.185 --> 00:46:28.225
depth, and there are some slides just to show you some of the long term.
00:46:28.225 --> 00:46:31.655
performance of how we've compounded value while protecting.
00:46:31.655 --> 00:46:34.695
your capital. So let me end there and please.
00:46:34.695 --> 00:46:36.325
hand it back to the wonderful team.
 

Ben is managing director and deputy chief economist.
00:05:56.095 --> 00:05:57.375
at CIBC World Markets.
00:05:58.305 --> 00:06:01.765
He's a member of the CBC's economic team that is responsible.
00:06:01.765 --> 00:06:05.225
for analyzing macroeconomic developments and their implications.
00:06:05.225 --> 00:06:08.785
for fixed income equity foreign exchange.
00:06:08.785 --> 00:06:09.935
e and commodities markets.
00:06:12.065 --> 00:06:16.535
He has over 20 years experience and advising clients, industry leaders.
00:06:16.535 --> 00:06:16.535
00:06:18.065 --> 00:06:20.125
Corporate boards, trade associations.
00:06:20.755 --> 00:06:22.765
Governments on economic and financial issues.
00:06:24.225 --> 00:06:28.395
Ben's a regular commentator on BNN, CNBC and.
00:06:28.395 --> 00:06:31.675
many national newspapers. In fact, yesterday we're reading the.
00:06:31.675 --> 00:06:34.815
global mail. There's a great article.
00:06:34.815 --> 00:06:37.825
where Ben's featured talking about the pain and real.
00:06:37.825 --> 00:06:38.585
estate markets.
00:06:39.335 --> 00:06:42.085
Please join me in welcoming Ben tell.
00:06:46.245 --> 00:06:46.795
Thanks Ben.
00:06:52.865 --> 00:06:54.595
Hi, good evening everybody. Listen.
00:06:55.525 --> 00:06:59.075
I have 45 minutes to tell you everything I know about the situation.
00:06:59.075 --> 00:06:59.075
00:07:01.125 --> 00:07:04.385
That's a 44 minutes too long because.
00:07:04.385 --> 00:07:07.595
nobody has a clue. We all pretend nobody has a clue. Of course, this uncertainty.
00:07:07.595 --> 00:07:10.695
that we are dealing with is significant, so I'm going.
00:07:10.695 --> 00:07:14.275
to divide my presentation today into 3 segments.
00:07:14.275 --> 00:07:16.955
nts. The first part will be about inflation.
00:07:18.335 --> 00:07:21.205
The second part will be about inflation.
00:07:23.065 --> 00:07:26.305
And the third part, you guessed it, would be about inflation because.
00:07:26.305 --> 00:07:29.475
inflation is everywhere. You want to know where the stock market is going, you.
00:07:29.475 --> 00:07:32.625
have to have a view about inflation. You want to know about into sets are going.
00:07:32.625 --> 00:07:35.715
Clearly inflation is the center of attention and after.
00:07:35.715 --> 00:07:38.375
talking about inflation for half an hour, I will tell you.
00:07:39.095 --> 00:07:40.555
This is not about inflation.
00:07:42.445 --> 00:07:45.615
This is about the cost of bringing.
00:07:45.615 --> 00:07:48.875
inflation down to 2%.
00:07:48.875 --> 00:07:52.655
which is the target for the Bank of Canada and the Fed, the.
00:07:52.655 --> 00:07:55.935
Bank of Canada, the Fed over the past 40.
00:07:55.935 --> 00:07:58.955
0 years established their reputation.
00:07:58.955 --> 00:08:01.055
as inflation fighters.
00:08:02.625 --> 00:08:06.135
They're not going to toss it away. That reputation they will do.
00:08:06.135 --> 00:08:09.275
whatever it takes to bring inflation.
00:08:09.275 --> 00:08:12.495
down to 2%. That's the way to look at it. So it's not inflation being 5.
00:08:12.495 --> 00:08:13.595
ve, 6% forever.
00:08:14.675 --> 00:08:17.865
They will do whatever it takes. You give them two options. One.
00:08:17.865 --> 00:08:20.875
is the recession, the other is inflation rising there.
00:08:20.875 --> 00:08:23.315
will take a recession any day.
00:08:23.985 --> 00:08:27.055
That's the way to understand where we are going over the next few.
00:08:27.055 --> 00:08:30.665
months and why the Bank of Canada and the Fed are so militant.
00:08:30.665 --> 00:08:33.775
when it comes to raising interest rates and.
00:08:33.775 --> 00:08:36.825
maybe taking this economy into a.
00:08:36.825 --> 00:08:39.835
recession. So it's a mind game that we have.
00:08:39.835 --> 00:08:42.875
to understand. So we'll discuss this and then see.
00:08:42.875 --> 00:08:45.985
what it means. Interest rates, inflation, the labor.
00:08:45.985 --> 00:08:49.035
market, the housing market and clearly investment.
00:08:49.035 --> 00:08:52.435
allocation. The stock market does as the bond market so.
00:08:52.435 --> 00:08:55.455
let's start the first question. We are asking ourselves.
00:08:55.455 --> 00:08:55.455
00:08:55.735 --> 00:08:59.325
Is to what extent what we are seeing now, inflation, rising energy?
00:08:59.325 --> 00:09:02.445
prices is equivalent to what we have seen in the 1970s.
00:09:02.445 --> 00:09:05.805
that led to the double dip recession.
00:09:05.805 --> 00:09:08.895
of the 1980s. So I'll be back.
00:09:08.895 --> 00:09:12.325
to the 70s. I want you to take a very close.
00:09:12.325 --> 00:09:15.855
look at this chart and focus on the left for a second.
00:09:15.855 --> 00:09:15.855
00:09:17.645 --> 00:09:20.315
In 1973, in flesh and went up.
00:09:21.555 --> 00:09:25.345
No. What the Bank of Canada and the Fed care about is not inflation.
00:09:25.345 --> 00:09:28.775
What they care about is this red line.
00:09:28.775 --> 00:09:32.295
inflation expectations. What you and I think about inflation.
00:09:32.295 --> 00:09:35.605
tomorrow, a year from now, two years from now in flesh and.
00:09:35.605 --> 00:09:37.795
expectations are the key focus.
00:09:38.615 --> 00:09:42.145
So 1973 inflation went up. We all know the story.
00:09:42.145 --> 00:09:45.605
ficantly look what happened to expectations moved.
00:09:45.605 --> 00:09:48.845
a little bit. That's it. Why? Because the Fed.
00:09:48.845 --> 00:09:52.045
in the US went to the market and said everything is.
00:09:52.045 --> 00:09:53.145
under control.
00:09:54.625 --> 00:09:57.025
Inflation will just pick this is from the Minutes.
00:09:57.765 --> 00:09:58.125
The.
00:09:58.855 --> 00:10:01.925
Shared with their left, basically telling them that within.
00:10:01.925 --> 00:10:05.005
few months inflation will pick and it will start going down. Everything is.
00:10:05.005 --> 00:10:08.265
under control of course. The chart to the right is telling you that reality.
00:10:08.265 --> 00:10:08.905
did not happen.
00:10:09.705 --> 00:10:13.555
Actually, inflation continue to go out for more than a year, look.
00:10:13.555 --> 00:10:17.195
what happened in 1977.
00:10:17.195 --> 00:10:20.855
The next time we fashion reduction, look what happened expectations.
00:10:20.855 --> 00:10:21.505
like that.
00:10:22.725 --> 00:10:25.355
The Fed lost credibility.
00:10:26.185 --> 00:10:29.395
And the market did not believe that everything is under control.
00:10:29.395 --> 00:10:32.595
and inflation expectations went up and the minute they are up.
00:10:32.595 --> 00:10:35.935
wages go up and it's very difficult to control, that's.
00:10:35.935 --> 00:10:38.015
the nightmare. Look where we are now.
00:10:39.885 --> 00:10:42.915
Inflation is rising inflation expectations trying to figure.
00:10:42.915 --> 00:10:43.605
out where to go.
00:10:44.855 --> 00:10:47.885
That's why the Bank of Canada and the Fed have to be so militant.
00:10:47.885 --> 00:10:50.965
in their language and their action to make sure.
00:10:50.965 --> 00:10:54.305
that this red line is not going up like 77, that's.
00:10:54.305 --> 00:10:55.245
more or less where we are.
00:10:56.385 --> 00:10:57.495
Now in this environment.
00:10:58.375 --> 00:11:00.005
We have to understand a few things.
00:11:01.045 --> 00:11:04.055
One is that as of today.
00:11:04.055 --> 00:11:04.055
00:11:04.875 --> 00:11:07.995
Expectations for the next year are makes sense because nobody.
00:11:07.995 --> 00:11:11.385
believes that inflation will go down to 2% over the next year, which?
00:11:11.385 --> 00:11:14.485
makes sense. So far, so far, the market is giving.
00:11:14.485 --> 00:11:17.535
the Fed the benefit of the doubt for the next five years.
00:11:17.535 --> 00:11:20.685
that inflation will remain stable. So now.
00:11:20.685 --> 00:11:23.205
let's discuss that. Look at that.
00:11:23.935 --> 00:11:27.105
That's a survey that was done in the US.
00:11:27.105 --> 00:11:27.105
00:11:27.825 --> 00:11:31.155
85% of respondents thought.
00:11:31.155 --> 00:11:34.335
it's wrong that the question is today is the highest.
00:11:34.335 --> 00:11:37.045
inflation ever. Most of them said yes or we don't know.
00:11:37.845 --> 00:11:41.315
Only 15% got it right that the 70s inflation.
00:11:41.315 --> 00:11:44.655
was higher, so people are not very educated about.
00:11:44.655 --> 00:11:47.195
inflation, why it's happening.
00:11:49.515 --> 00:11:50.485
Because of this.
00:11:51.295 --> 00:11:52.195
This is not a joke.
00:11:53.255 --> 00:11:56.555
Social media is perceived to be.
00:11:56.555 --> 00:11:59.925
the most reliable source of information.
00:11:59.925 --> 00:12:00.885
about inflation.
00:12:02.045 --> 00:12:03.465
Not a joke reality.
00:12:04.235 --> 00:12:07.585
So think about this for a second. The Bank of Canada is.
00:12:07.585 --> 00:12:10.705
trying to figure out what we are thinking. We are heavily.
00:12:10.705 --> 00:12:13.805
influenced by social media, which means that the bank.
00:12:13.805 --> 00:12:16.875
of Canada is heavily influenced by social media. That's.
00:12:16.875 --> 00:12:19.885
how crazy the situation is. This is the first crisis.
00:12:19.885 --> 00:12:21.885
that we have with social media. So dominant.
00:12:23.055 --> 00:12:26.285
Now there is good news. In fact, extremely good news.
00:12:26.285 --> 00:12:26.285
00:12:27.045 --> 00:12:30.035
The Bank of Canada has a Twitter account.
00:12:31.265 --> 00:12:31.815
Really.
00:12:44.765 --> 00:12:47.975
So the final I'm making here is that the back of.
00:12:47.975 --> 00:12:50.325
Canada cannot tweet its way out of inflation.
00:12:51.155 --> 00:12:54.305
They have to be very aggressive in their.
00:12:54.305 --> 00:12:57.925
action and in their language to make sure that we understand.
00:12:57.925 --> 00:13:00.985
that they mean business, so we will not think about taking those.
00:13:00.985 --> 00:13:03.775
expectations up. That's more or less where we are.
00:13:04.945 --> 00:13:06.745
Now we are ready to discuss.
00:13:07.545 --> 00:13:10.735
What's going on in terms of where inflation is going but?
00:13:10.735 --> 00:13:13.155
before that we have to get one thing out of the way.
00:13:14.635 --> 00:13:15.605
Let me give you.
00:13:17.125 --> 00:13:17.865
One number.
00:13:19.015 --> 00:13:22.275
3.114159.
00:13:22.275 --> 00:13:22.855
2.
00:13:24.245 --> 00:13:25.425
3.14.
00:13:27.245 --> 00:13:30.555
Wow, congratulations. Just graduated.
00:13:30.555 --> 00:13:31.895
7 geometry.
00:13:33.635 --> 00:13:34.325
Why pie?
00:13:35.715 --> 00:13:38.925
Because Î  is the next Greek letter that comes after Omicron.
00:13:38.925 --> 00:13:38.925
00:13:41.535 --> 00:13:44.605
You see where I'm going with that? If you think that you cannot.
00:13:44.605 --> 00:13:48.265
get a straightforward answer from an economist, try biologist.
00:13:48.265 --> 00:13:48.265
00:13:49.085 --> 00:13:52.145
They have no clue, but what they're telling me by the end of this month.
00:13:52.145 --> 00:13:53.405
is we will be fluent in Greek.
00:13:55.675 --> 00:13:59.185
Namely, we need to have a working assumption.
00:13:59.185 --> 00:14:02.375
about Covic. You cannot continue investing and.
00:14:02.375 --> 00:14:05.465
thinking about the economy without a working assumption about COVID.
00:14:05.465 --> 00:14:05.465
00:14:06.195 --> 00:14:09.425
And we know that COVID will be with us if, in a year from now. But.
00:14:09.425 --> 00:14:12.615
what everybody is telling me in the field and they know I think is.
00:14:12.615 --> 00:14:16.745
that we are in the process of moving from a.
00:14:16.745 --> 00:14:20.025
pandemic to an endemic namely, Kovit will be there.
00:14:20.025 --> 00:14:23.215
but we will dominate it. We will be doing that.
00:14:23.215 --> 00:14:23.215
00:14:25.155 --> 00:14:28.465
That's a reasonable walking assumption, in my opinion.
00:14:28.465 --> 00:14:31.765
So we can proceed given that let's.
00:14:31.765 --> 00:14:35.125
take a look at what's happening overall at.
00:14:35.125 --> 00:14:36.085
any point in time.
00:14:36.905 --> 00:14:39.395
There are three sources of inflation.
00:14:40.755 --> 00:14:43.965
Demand driven inflation supply.
00:14:43.965 --> 00:14:47.195
driven inflation and we don't know, driven inflation like something.
00:14:47.195 --> 00:14:47.705
in between.
00:14:48.825 --> 00:14:51.885
Some people say all this inflation that is coming is because of the.
00:14:51.885 --> 00:14:54.955
fact that the government was printing money during copy, that there is no tomorrow.
00:14:54.955 --> 00:14:56.225
You remember all those checks.
00:14:57.215 --> 00:15:00.365
And we were printing money and printing money and printing money, so people.
00:15:00.365 --> 00:15:03.425
say all these impression is coming because of this money to an.
00:15:03.425 --> 00:15:06.495
extent. But the printing of money in.
00:15:06.495 --> 00:15:09.885
the US and Canada was doubled. What we have seen in Europe.
00:15:09.885 --> 00:15:09.885
00:15:10.555 --> 00:15:13.825
In terms of government spending, but inflation in Europe is actually higher.
00:15:13.825 --> 00:15:17.045
So it's not just that it's also supply, it's.
00:15:17.045 --> 00:15:20.125
Russia supply chain. We know the story we have.
00:15:20.125 --> 00:15:21.565
seen the situation in which.
00:15:22.495 --> 00:15:26.155
The increase in spending in the US.
00:15:26.155 --> 00:15:26.155
00:15:26.835 --> 00:15:28.905
During COVID on goods, not services goods.
00:15:29.955 --> 00:15:33.405
Was something that we haven't seen before. We squeezed 4 years.
00:15:33.405 --> 00:15:36.565
of consumption into one year because it was easy. Remember you.
00:15:36.565 --> 00:15:38.395
press a button and you get your exercise bike.
00:15:39.795 --> 00:15:40.595
It was like.
00:15:41.505 --> 00:15:42.405
Parachuting.
00:15:45.015 --> 00:15:48.615
450,000 new Americans.
00:15:48.615 --> 00:15:48.615
00:15:49.495 --> 00:15:52.605
Into the US overnight and the.
00:15:52.605 --> 00:15:53.975
minute the night they started to spend.
00:15:55.385 --> 00:15:56.415
So it was a shock.
00:15:57.275 --> 00:16:00.435
So supply chain is extremely important. The good news.
00:16:00.435 --> 00:16:01.565
it's improving.
00:16:02.415 --> 00:16:05.725
Supply chain is improving. So when I look.
00:16:05.725 --> 00:16:08.825
at inflation, the first thing I look at is at.
00:16:08.825 --> 00:16:12.065
t this index, which is the New York Fed supply.
00:16:12.065 --> 00:16:16.005
chain pressure index, it's going down and.
00:16:16.005 --> 00:16:17.245
down and down.
00:16:18.065 --> 00:16:20.575
Shipping costs down dramatically.
00:16:21.295 --> 00:16:24.305
Shipping activity back to basically normal today in.
00:16:24.305 --> 00:16:28.255
the US there are 20% more truck drivers.
00:16:29.425 --> 00:16:30.845
Then, before the crisis.
00:16:32.315 --> 00:16:34.285
This is significant. Now, why is it important?
00:16:34.975 --> 00:16:38.325
Because if all the information is coming from supply.
00:16:38.325 --> 00:16:39.325
from outside.
00:16:40.295 --> 00:16:43.325
Then the Bank of Canada can talk about inflation until they are blue in the.
00:16:43.325 --> 00:16:46.745
face. They cannot do anything about it. They cannot do anything about.
00:16:46.745 --> 00:16:49.625
China, about Putin, about supply chain.
00:16:52.195 --> 00:16:55.545
So if this is going down every basis point decline.
00:16:55.545 --> 00:16:56.275
in this.
00:16:57.565 --> 00:17:00.255
Index is enhancing.
00:17:01.395 --> 00:17:04.685
The ability of the Bank of Canada and the Fed to deal with the situation.
00:17:04.685 --> 00:17:08.325
because when the residence mates it's impacting the economy.
00:17:08.325 --> 00:17:09.895
that is domestic.
00:17:10.955 --> 00:17:12.235
And that's where reflection is.
00:17:13.225 --> 00:17:14.685
That's extremely good news.
00:17:15.365 --> 00:17:17.305
And we are starting to see the good news already.
00:17:18.315 --> 00:17:21.405
Commodity prices are actually falling.
00:17:21.405 --> 00:17:24.805
because the global economy is in a semi recession.
00:17:24.805 --> 00:17:28.165
Europe is definitely in a recession, demand is slowing commodity.
00:17:28.165 --> 00:17:31.225
prices slowing, which is actually good news, look at this.
00:17:31.225 --> 00:17:34.585
is called goods inflation.
00:17:34.585 --> 00:17:36.275
namely without energy and food.
00:17:37.115 --> 00:17:37.795
Look at this.
00:17:42.855 --> 00:17:44.855
It's approaching 0.
00:17:46.555 --> 00:17:48.335
This is really good news about inflation.
00:17:50.405 --> 00:17:53.435
That's something that you don't see in newspapers that you don't see the.
00:17:53.435 --> 00:17:56.595
Bank of Canada admitting that you don't see the Fed admitting why.
00:17:56.595 --> 00:17:58.775
We'll discuss why in a second, but we'll continue.
00:18:00.825 --> 00:18:03.575
The Federal Reserve Bank of Atlanta as two.
00:18:06.575 --> 00:18:09.745
Types of inflation that they're measuring, sticky and.
00:18:09.745 --> 00:18:12.965
flexible, flexible inflation is already negative.
00:18:12.965 --> 00:18:16.405
Sticky is down to 4% from 8%, so.
00:18:16.405 --> 00:18:19.485
we see significant progress when it comes.
00:18:19.485 --> 00:18:23.265
to inflation. To me, that's extremely, extremely important.
00:18:23.265 --> 00:18:23.265
00:18:24.235 --> 00:18:27.445
So why aren't we seeing the Bank of Canada in the?
00:18:27.445 --> 00:18:27.855
Fed?
00:18:29.095 --> 00:18:29.835
Discussing.
00:18:30.585 --> 00:18:33.805
That's important to ask because we meet one, understand.
00:18:33.805 --> 00:18:34.575
the.
00:18:35.425 --> 00:18:36.195
Rationality.
00:18:37.125 --> 00:18:40.525
Because inflation is starting to move in the right direction, so we know.
00:18:40.525 --> 00:18:44.605
and that's almost a given that the move from 7.
00:18:44.605 --> 00:18:47.775
inflation to 4% inflation will be like that, it's.
00:18:47.775 --> 00:18:51.345
all supply that is improving even the service.
00:18:51.345 --> 00:18:54.725
the demand inflation is starting to improve, look at this.
00:18:54.725 --> 00:18:54.725
00:18:55.925 --> 00:18:59.255
Look at this is rent inflation.
00:18:59.255 --> 00:19:02.515
and as investors you really have to understand that this.
00:19:02.515 --> 00:19:04.895
is rent inflation in the US.
00:19:05.615 --> 00:19:09.005
Which is 40% of core.
00:19:09.005 --> 00:19:10.475
inflation in the US rent.
00:19:12.105 --> 00:19:15.455
And it's rising by 8%, to put it in perspective if.
00:19:15.455 --> 00:19:18.635
tomorrow all prices in the US are zero, everything.
00:19:18.635 --> 00:19:22.035
is 0. This trend will lead to steel.
00:19:22.035 --> 00:19:25.775
3.8% inflation justement because.
00:19:25.775 --> 00:19:28.825
it's 40% of core inflation. Now you have.
00:19:28.825 --> 00:19:32.395
two types of friends. You have what the government is measuring.
00:19:32.395 --> 00:19:32.395
00:19:33.225 --> 00:19:36.175
Which has been red line. This is what goes to the CPI.
00:19:37.335 --> 00:19:40.825
And there is new nesses which is the.
00:19:40.825 --> 00:19:42.425
red number.
00:19:44.415 --> 00:19:45.465
It's almost 0.
00:19:46.675 --> 00:19:49.965
This is the flow and the stock. The Grey line is all.
00:19:51.975 --> 00:19:55.195
And the red line is the new Ulysses, and the new leases.
00:19:55.195 --> 00:19:58.305
are basically 0. Every day, more new noises getting into.
00:19:58.305 --> 00:20:01.645
the stock. So clearly we all know that within.
00:20:02.945 --> 00:20:05.955
This red line would go down dramatically.
00:20:05.955 --> 00:20:09.965
40% of US CPI.
00:20:11.415 --> 00:20:13.455
Will be going down dramatically.
00:20:14.465 --> 00:20:17.615
We are going to see major progress in.
00:20:17.615 --> 00:20:18.795
fighting inflation.
00:20:20.775 --> 00:20:23.905
So the move from 7% to 4% would be very quick.
00:20:24.815 --> 00:20:28.405
But still we have to deal with service impression.
00:20:28.405 --> 00:20:31.465
and we have to deal with the crazy.
00:20:31.465 --> 00:20:33.355
labor market.
00:20:35.045 --> 00:20:36.605
This is a real science somewhere.
00:20:38.445 --> 00:20:41.895
As you in I told you, the past every first.
00:20:41.895 --> 00:20:42.885
Friday of the month.
00:20:43.665 --> 00:20:47.095
At 8:30 in the morning, we get the employment.
00:20:47.095 --> 00:20:50.115
numbers from such calendar 8:30 in the morning, first Friday.
00:20:50.115 --> 00:20:53.555
of the month. So at 8:29 in the morning, every economist.
00:20:53.555 --> 00:20:56.965
is sitting in front of his hair, computer, looking, waiting, anticipating.
00:20:56.965 --> 00:20:59.375
the numbers. Believe me, it's very exciting.
00:21:01.975 --> 00:21:05.245
And every time we look at those vacancy rates and they are.
00:21:05.245 --> 00:21:08.255
in the sky and people say, where is everybody?
00:21:08.255 --> 00:21:08.255
00:21:09.235 --> 00:21:11.345
So people said they're at home watching Netflix.
00:21:12.345 --> 00:21:15.635
No, they are not. Something else is happening here, but.
00:21:15.635 --> 00:21:18.735
just to illustrate how crazy the level market is, this is.
00:21:18.735 --> 00:21:20.275
what we got last week.
00:21:21.495 --> 00:21:25.335
The Jordan labels for December the market expected.
00:21:25.335 --> 00:21:28.805
5000 new jobs. That's.
00:21:28.805 --> 00:21:32.105
the market expecting we got one.
00:21:32.105 --> 00:21:33.545
and 5000.
00:21:35.505 --> 00:21:37.235
So much for economic forecasting.
00:21:38.975 --> 00:21:42.685
It's crazy. This volatility in the market is unbelievable.
00:21:42.685 --> 00:21:45.805
and that's one of the reasons why people are talking about the Bank of Canada.
00:21:45.805 --> 00:21:47.345
moving again. We'll discuss it in a SEC.
00:21:50.625 --> 00:21:51.915
No, look at this.
00:21:52.785 --> 00:21:53.825
It's not so simple.
00:21:55.615 --> 00:21:57.095
This is the number of jobs.
00:21:58.985 --> 00:22:01.765
This is the number of hours worked.
00:22:04.055 --> 00:22:07.265
Much, much loyal. So people are being employed.
00:22:07.265 --> 00:22:08.645
but they're not working long hours.
00:22:09.335 --> 00:22:12.485
The question is why and one of the answers.
00:22:12.485 --> 00:22:15.505
and let's call it as it is, we are here in the business of.
00:22:15.505 --> 00:22:18.525
investment. We cannot sugarcoat anything we have to.
00:22:18.525 --> 00:22:21.545
look at the market as it is. And one of the reasons why.
00:22:21.545 --> 00:22:24.625
the number of hours down is because of the fact that.
00:22:24.625 --> 00:22:25.495
people are sick.
00:22:26.595 --> 00:22:30.025
Let's face it, let's call it as it is today in the US.
00:22:30.025 --> 00:22:33.565
you have 16 million people.
00:22:33.565 --> 00:22:35.065
with long COVID.
00:22:38.225 --> 00:22:41.455
You look at the Gray line in Canada, this Gray.
00:22:41.455 --> 00:22:43.215
area, this about.
00:22:45.455 --> 00:22:48.705
This is the number of excess extra hours.
00:22:51.045 --> 00:22:54.105
It's more than in 2020 and 21 during coffee.
00:22:54.105 --> 00:22:54.105
00:22:55.415 --> 00:22:57.595
People are sick, so they don't have to work.
00:22:58.445 --> 00:23:01.715
In fact, we are talking about 230,000 people.
00:23:01.715 --> 00:23:05.155
in terms of equivalent number that are missing.
00:23:05.155 --> 00:23:08.695
So basically if you assume that all of them are unemployed.
00:23:08.695 --> 00:23:08.695
00:23:11.795 --> 00:23:14.845
It's basically like taking the unemployment rate from 5% to 6%.
00:23:14.845 --> 00:23:14.845
00:23:15.825 --> 00:23:19.035
What I'm telling you is maybe the market is as tight.
00:23:19.035 --> 00:23:19.885
ght as perceived.
00:23:21.305 --> 00:23:24.775
OK, something interesting is happening again.
00:23:24.775 --> 00:23:24.775
00:23:25.795 --> 00:23:28.905
And we have to recognize that that's the case now that will.
00:23:28.905 --> 00:23:31.045
improve over time, especially after the winter.
00:23:31.855 --> 00:23:35.645
But for now, companies have to hire people.
00:23:35.645 --> 00:23:38.945
to replace the people that are sick but are not working very long hours.
00:23:38.945 --> 00:23:42.285
That's basically what we're seeing. That's one thing, but more is happening.
00:23:42.285 --> 00:23:45.695
Look at this, look at. This is fascinating.
00:23:45.695 --> 00:23:45.695
00:23:46.715 --> 00:23:50.055
We created 600,000.
00:23:50.055 --> 00:23:53.065
new jobs since the beginning of COVID went.
00:23:53.065 --> 00:23:56.315
up and down, up and up 600.
00:23:56.315 --> 00:23:59.865
000 new jobs since the beginning of COVID basically.
00:23:59.865 --> 00:24:03.415
all of them. Basically all of them are university.
00:24:03.415 --> 00:24:05.065
educated individuals.
00:24:07.165 --> 00:24:08.535
I find it fascinating.
00:24:09.895 --> 00:24:13.165
I believe something big is happening here I.
00:24:13.165 --> 00:24:16.865
believe that COVID opened up the market for.
00:24:16.865 --> 00:24:17.685
educated people.
00:24:19.515 --> 00:24:23.165
Before COVID we are this mismatch in the labor market we.
00:24:23.165 --> 00:24:26.285
are people without jobs and jobs without people we.
00:24:26.285 --> 00:24:27.685
are educated people.
00:24:29.315 --> 00:24:32.485
That are unable to find a job in the field serving coffee at Starbucks.
00:24:34.235 --> 00:24:37.545
Today you are educated, you have skills. You cannot find a job.
00:24:37.545 --> 00:24:41.025
in Toronto or London. You can find it in.
00:24:41.025 --> 00:24:41.025
00:24:41.805 --> 00:24:45.155
Alberta in BC in New York, zooming.
00:24:45.155 --> 00:24:45.155
00:24:45.995 --> 00:24:46.505
Beautiful.
00:24:48.165 --> 00:24:50.155
COVID opened up the market.
00:24:51.295 --> 00:24:52.025
Fall.
00:24:52.985 --> 00:24:56.475
Educated people. That's extremely important to understand, but.
00:24:56.475 --> 00:24:58.555
nobody's left to serve coffee.
00:24:59.775 --> 00:25:02.865
And what we know that the vacancy rate is very.
00:25:02.865 --> 00:25:05.965
very high. And what we also know is.
00:25:05.965 --> 00:25:07.145
this correlation.
00:25:08.185 --> 00:25:10.735
70 the lawyer the wedges.
00:25:11.395 --> 00:25:15.265
The higher the vacancy rates, namely the demand.
00:25:15.265 --> 00:25:17.335
is for low wage individuals.
00:25:19.655 --> 00:25:22.545
Hotels, restaurants, we all know the story. You cannot find them.
00:25:23.765 --> 00:25:25.835
So economics 101 is telling you.
00:25:27.405 --> 00:25:30.675
That if there isn't enough of something, the price.
00:25:30.675 --> 00:25:32.515
of this something will rise.
00:25:34.175 --> 00:25:37.785
Namely, the wage of low wage individuals will rise faster.
00:25:37.785 --> 00:25:41.235
than the wage of other individuals. Makes sense.
00:25:41.235 --> 00:25:42.705
but it's not happening.
00:25:43.815 --> 00:25:44.945
It's not happening.
00:25:45.825 --> 00:25:47.235
We have a situation.
00:25:48.325 --> 00:25:51.715
In which the wage of low wage individuals.
00:25:51.715 --> 00:25:54.815
namely the bottom 20, is rising basically along the.
00:25:54.815 --> 00:25:59.145
line of other individuals. It should be double this.
00:25:59.145 --> 00:25:59.145
00:26:02.165 --> 00:26:03.215
It's not happening.
00:26:04.175 --> 00:26:07.205
The market is not clearing economics 1.
00:26:07.205 --> 00:26:09.085
01 is not working.
00:26:11.945 --> 00:26:15.275
And the question is why? And the answer is that small businesses that employ.
00:26:15.275 --> 00:26:18.485
80% of those low wage individuals are.
00:26:18.485 --> 00:26:21.615
telling us, listen, we simply don't have the margins.
00:26:21.615 --> 00:26:24.815
we cannot pay just a few years ago minimum wage.
00:26:24.815 --> 00:26:28.255
went up dramatically. Our margins are very, very narrow.
00:26:28.255 --> 00:26:31.355
And we are talking about this recession coming. Do we really want to start?
00:26:31.355 --> 00:26:34.735
raising wages just before the recession? We're not doing it so.
00:26:34.735 --> 00:26:38.045
the market is not clearing and that's extremely important.
00:26:38.045 --> 00:26:41.165
to understand. Another interesting story in the labor market.
00:26:41.165 --> 00:26:41.595
that is.
00:26:42.035 --> 00:26:45.335
Unfolding is the following. In a normal recession.
00:26:45.335 --> 00:26:45.335
00:26:47.765 --> 00:26:49.695
Not this one and normal recession.
00:26:50.505 --> 00:26:53.855
Let's assume that you were an employee for Air Canada. You lost.
00:26:53.855 --> 00:26:56.815
your job, you got employment insurance for six months.
00:26:58.325 --> 00:27:01.435
The recession is over. You go back to Canada or any.
00:27:01.435 --> 00:27:04.255
other airline today after three years.
00:27:04.995 --> 00:27:06.345
You moved on.
00:27:07.315 --> 00:27:10.705
You are in a totally different industry doing totally different things.
00:27:10.705 --> 00:27:12.385
So if you are.
00:27:13.345 --> 00:27:16.355
Air Canada, you have to start fresh.
00:27:16.355 --> 00:27:19.415
and that's exactly why yesterday my flight was delayed by.
00:27:23.635 --> 00:27:26.785
They eventually will find the people they would train them, but it takes longer.
00:27:26.785 --> 00:27:30.105
This is very, very different.
00:27:30.105 --> 00:27:33.305
than any other recession. Something big is.
00:27:33.305 --> 00:27:36.525
happening in the labor market, but the labor market is as tight.
00:27:36.525 --> 00:27:39.665
ght as perceived, although it is tight, it's not as tight as.
00:27:39.665 --> 00:27:42.745
perceived. And the question is to what extent all those vacancies.
00:27:42.745 --> 00:27:46.005
are nothing more than a mirage when the economy.
00:27:46.005 --> 00:27:49.045
slows down, they will disappear. That's something that we have to.
00:27:49.045 --> 00:27:49.685
figure out.
00:27:49.945 --> 00:27:53.655
They will discuss it in a second. So that's more or less where we are now.
00:27:53.655 --> 00:27:57.475
You are the Bank of Canada, you are defended you.
00:27:57.475 --> 00:27:59.295
see the good news about deflation.
00:28:00.065 --> 00:28:01.905
But you would never admit it.
00:28:03.255 --> 00:28:06.335
You will never admit it. In fact, the opposite is the case.
00:28:06.335 --> 00:28:06.335
00:28:07.865 --> 00:28:08.975
We have a situation.
00:28:09.725 --> 00:28:10.475
In which?
00:28:11.175 --> 00:28:13.565
The Bank of Canada in the field are telling the market.
00:28:14.705 --> 00:28:17.385
Don't get too excited.
00:28:19.065 --> 00:28:22.395
We don't want you to get too excited about inflation slowing.
00:28:22.395 --> 00:28:25.765
down. Those mean misinterpret our message. Why?
00:28:25.765 --> 00:28:27.155
Because of this.
00:28:28.165 --> 00:28:31.455
As investors, we have to understand this in the very.
00:28:31.455 --> 00:28:31.455
00:28:33.595 --> 00:28:34.475
Particular way.
00:28:35.855 --> 00:28:39.125
This is something that can impact returns.
00:28:39.125 --> 00:28:42.405
over the next six months in a very significant way, so let's cancel.
00:28:42.405 --> 00:28:45.705
This is the reaction of the market to.
00:28:45.705 --> 00:28:46.805
go news on inflation.
00:28:47.565 --> 00:28:49.865
In November we go we got some very good news.
00:28:51.305 --> 00:28:53.525
From US inflation, it was better than expected.
00:28:54.155 --> 00:28:55.485
Within a second.
00:28:56.645 --> 00:28:59.775
The 10 year rate went down by 40 basis.
00:28:59.775 --> 00:29:00.395
points like that.
00:29:02.095 --> 00:29:03.585
Now think about it for a second.
00:29:04.265 --> 00:29:07.335
The Bank of Canada and the Fed are raising interest rates to.
00:29:07.335 --> 00:29:10.435
slow down the economy. All of a sudden. Long term rates are going down.
00:29:10.435 --> 00:29:11.175
by 40%.
00:29:11.965 --> 00:29:15.115
It's undoing what the Bank of Canada is trying to do.
00:29:16.955 --> 00:29:20.305
Because the Bank of Canada and the Fed can control what we call the short.
00:29:20.305 --> 00:29:23.665
end of the curve, short term rates, they cannot control the Tenny rates.
00:29:23.665 --> 00:29:26.825
So if the tenure rates gets too excited and.
00:29:26.825 --> 00:29:27.745
goes down.
00:29:28.585 --> 00:29:32.005
It means that the Bank of Canada and the Fed have to raise more to achieve.
00:29:32.005 --> 00:29:35.215
what they want to achieve. We call it monetary conditions.
00:29:35.215 --> 00:29:35.215
00:29:37.695 --> 00:29:41.145
So you have two things moving in this different directions, it's.
00:29:41.145 --> 00:29:44.175
like putting a humidifier and a dehumidifier in the same room and.
00:29:44.175 --> 00:29:45.025
let them go at each other.
00:29:47.165 --> 00:29:50.175
So that's why Can you imagine for a second that the Fed and the.
00:29:50.175 --> 00:29:53.315
Bank of Canada announced that listen, we?
00:29:53.315 --> 00:29:56.415
are very happy about inflation is moving in the right direction, everything is.
00:29:56.415 --> 00:29:57.635
under control.
00:29:59.075 --> 00:30:00.575
What will happen to this right?
00:30:02.225 --> 00:30:05.285
It will continue to go down and that's exactly.
00:30:05.285 --> 00:30:06.785
the opposite of what they want.
00:30:08.135 --> 00:30:10.785
Because that can lead to overshooting.
00:30:12.295 --> 00:30:15.435
I believe and that's key. I believe that every.
00:30:15.435 --> 00:30:16.385
economic recession.
00:30:17.905 --> 00:30:21.075
Over the past 40 years, was helped.
00:30:21.075 --> 00:30:22.215
if not caused.
00:30:22.875 --> 00:30:26.085
By monetary policy error in which central?
00:30:26.085 --> 00:30:29.495
banks raise interest rates way too.
00:30:29.495 --> 00:30:31.015
much and kill their economy.
00:30:32.005 --> 00:30:35.075
You look at the 1990s as a.
00:30:35.075 --> 00:30:37.715
good example in flesh and targeting.
00:30:39.115 --> 00:30:42.405
Was established in February.
00:30:42.405 --> 00:30:45.465
1991 inflation back then.
00:30:45.465 --> 00:30:46.545
was 6%.
00:30:47.885 --> 00:30:51.235
And the Bank of Canada said, listen, our goal is that inflation.
00:30:51.235 --> 00:30:54.395
will reach 3% by the end.
00:30:54.395 --> 00:30:55.375
of 1992.
00:30:56.105 --> 00:30:59.135
Actual inflation reach 1% by.
00:30:59.135 --> 00:31:01.045
the end of 1992, better than they expected.
00:31:01.765 --> 00:31:04.975
By 1994, they wanted inflation to be 2 1/2%.
00:31:04.975 --> 00:31:05.615
It was zero.
00:31:06.505 --> 00:31:10.335
Basically, inflation was lower than expected.
00:31:10.335 --> 00:31:13.735
Why? Because they're raising this was too much and kill the economy.
00:31:13.735 --> 00:31:17.095
at the very significant cost in terms of unemployment, how long the?
00:31:17.095 --> 00:31:20.175
recession was we all know the story, so overshooting.
00:31:20.175 --> 00:31:21.095
is very costly.
00:31:21.765 --> 00:31:25.205
And the question is to what extent the Bank of Canada and.
00:31:25.205 --> 00:31:27.865
the Fed are starting to overshoot. I believe they're starting.
00:31:29.155 --> 00:31:30.185
I believe that started.
00:31:31.205 --> 00:31:33.275
I meet with the Bank of Canada very often.
00:31:34.935 --> 00:31:35.895
Unfortunately.
00:31:37.545 --> 00:31:41.155
And I can tell you that my message to them is talk now.
00:31:41.155 --> 00:31:44.455
Why? Because you are very powerful.
00:31:44.455 --> 00:31:44.455
00:31:45.395 --> 00:31:48.405
First of all, the Bank of Canada is more powerful.
00:31:48.405 --> 00:31:49.445
than the Fed. Why?
00:31:50.165 --> 00:31:53.795
Because in 2008, during the crisis.
00:31:53.795 --> 00:31:56.615
the US went through the mother of all the leverage.
00:32:01.085 --> 00:32:04.115
This is not. This was not our recession, but.
00:32:04.115 --> 00:32:07.065
then in 2008, we were seconds more second hand smokers.
00:32:08.735 --> 00:32:10.925
So I will then actually went up.
00:32:11.725 --> 00:32:14.895
So they're there to income, went down our debt to income ratio went up.
00:32:14.895 --> 00:32:18.735
So we have more debt. Also we have five few mortgages.
00:32:18.735 --> 00:32:19.915
they have 10 year mortgages.
00:32:20.935 --> 00:32:23.565
So therefore, when interest rates rise.
00:32:24.475 --> 00:32:27.685
We are much more sensitive to it. So what I'm telling you is that one.
00:32:27.685 --> 00:32:30.785
ncrease by the Bank of Canada in my opinion according.
00:32:30.785 --> 00:32:33.845
to my calculations, is equivalent to 2% increase by defend.
00:32:33.845 --> 00:32:33.845
00:32:35.105 --> 00:32:38.855
What I'm telling you is that the tiny Bank of Canada is.
00:32:38.855 --> 00:32:42.095
more powerful than the mighty Fed.
00:32:42.095 --> 00:32:42.095
00:32:43.275 --> 00:32:46.665
When it comes to interest rates, more than that, the.
00:32:46.665 --> 00:32:50.025
Bank of Canada is more powerful than itself.
00:32:50.025 --> 00:32:50.635
in the past.
00:32:51.755 --> 00:32:54.925
Look what happened in the 1970s.
00:32:54.925 --> 00:32:58.345
The interest rate increase that led to.
00:32:58.345 --> 00:33:00.355
the recession of 1991.
00:33:01.045 --> 00:33:02.995
650 basis points back then.
00:33:03.805 --> 00:33:05.405
Today we are at 400 basis points.
00:33:06.495 --> 00:33:09.825
So they said back then it's smaller than today. No if.
00:33:09.825 --> 00:33:12.885
you adjust to the level of that back then compared.
00:33:12.885 --> 00:33:16.025
to today there increase back then in.
00:33:16.025 --> 00:33:19.225
19 in the 90s was actually 300 basis.
00:33:19.225 --> 00:33:19.225
00:33:21.535 --> 00:33:24.685
So monetary policy today is more restrictive.
00:33:28.195 --> 00:33:30.845
If you compare it to the right level of debt.
00:33:36.735 --> 00:33:38.065
And I think they're very close.
00:33:38.705 --> 00:33:42.075
To stop him, the only reason why they will not be stopping.
00:33:42.075 --> 00:33:45.125
now and they will do it only in two weeks or now is.
00:33:45.125 --> 00:33:48.175
because of the fact that we got 100,000 new jobs and the.
00:33:48.175 --> 00:33:51.375
last thing they want to see is a situation which you and I believe.
00:33:51.375 --> 00:33:53.675
that they are behind the curve, remember.
00:33:54.445 --> 00:33:57.155
You don't want to be sound too davish.
00:33:58.445 --> 00:34:01.895
So they would take the risk of raising an overshooting.
00:34:01.895 --> 00:34:01.895
00:34:03.345 --> 00:34:06.595
Because if they don't do it, the bond market will adjust.
00:34:06.595 --> 00:34:09.795
and will undo what they're doing, so they know.
00:34:09.795 --> 00:34:11.705
that they're overshooting, but they are cornered.
00:34:12.925 --> 00:34:16.315
So my guess the Bank of Canada will.
00:34:16.315 --> 00:34:19.415
have to continue to listen to switch. The only question is.
00:34:19.415 --> 00:34:22.175
by how much today we are at 4:25.
00:34:23.565 --> 00:34:26.595
Maybe 434 in the half, maybe 475 I.
00:34:26.595 --> 00:34:30.005
really don't know. It's 5050, but I hope.
00:34:30.005 --> 00:34:33.235
and pray that this is the last move it's already.
00:34:33.235 --> 00:34:36.365
starting to be a bit of overshooting. Not much, but.
00:34:36.365 --> 00:34:39.395
a bit. And they know that they know that and.
00:34:39.395 --> 00:34:42.575
one of the reasons why they will stop soon is the real estate.
00:34:42.575 --> 00:34:45.775
market. I believe that housing is starting to get.
00:34:45.775 --> 00:34:48.795
into the psyche of the Bank of Canada, the housing market.
00:34:48.795 --> 00:34:51.975
is slowing. So we have to understand what's happening in housing.
00:34:51.975 --> 00:34:54.535
We add a crazy COVID.
00:34:54.925 --> 00:34:58.125
Period in the housing market, when prices went up.
00:34:58.125 --> 00:34:59.485
by known as.
00:35:00.565 --> 00:35:01.215
Then.
00:35:02.125 --> 00:35:05.175
Why by how much? 46% in two years?
00:35:05.175 --> 00:35:05.175
00:35:06.985 --> 00:35:08.755
Both the 6% in two years. Why?
00:35:09.955 --> 00:35:13.485
Because the S symmetrical nature of the crisis.
00:35:13.485 --> 00:35:13.485
00:35:14.635 --> 00:35:17.225
The fact that all the jobs that were lost were low paying jobs.
00:35:19.935 --> 00:35:23.425
Led to a situation in which rentals young people.
00:35:23.425 --> 00:35:26.475
lost their jobs, rent actually went down during.
00:35:26.475 --> 00:35:29.845
the pandemic, home buyers, potential home buyers.
00:35:29.845 --> 00:35:29.845
00:35:32.875 --> 00:35:35.925
Their job was there were assuming and interest rates.
00:35:35.925 --> 00:35:39.095
were in the basement. So if you want to understand the housing.
00:35:39.095 --> 00:35:43.185
market, you want to understand the following COVID.
00:35:43.185 --> 00:35:46.345
and during COVID homebuyers got the benefit.
00:35:46.345 --> 00:35:49.625
of a recession because of the extremely low interest rates without.
00:35:49.625 --> 00:35:52.905
the cost of a recession visible broadly based increase.
00:35:52.905 --> 00:35:53.985
in the unemployment rate.
00:35:54.945 --> 00:35:58.055
We have never seen anything.
00:35:58.055 --> 00:35:58.555
like that.
00:36:02.765 --> 00:36:05.915
There was a sense of urgency to get into.
00:36:05.915 --> 00:36:06.505
the market.
00:36:08.295 --> 00:36:11.465
And parents told their kids you do that and we will help.
00:36:11.465 --> 00:36:14.555
you. Gifting reached a record high during.
00:36:14.555 --> 00:36:17.815
covet in terms of parents giving money to kids for down payments.
00:36:17.815 --> 00:36:17.815
00:36:19.135 --> 00:36:19.925
Let go down.
00:36:21.285 --> 00:36:24.315
So there was a sense of urgency to get into.
00:36:24.315 --> 00:36:27.555
the market and people were front loading.
00:36:27.555 --> 00:36:30.595
activity. People were borrowing activity from the.
00:36:30.595 --> 00:36:33.915
future and the future has arrived.
00:36:33.915 --> 00:36:37.135
at the market is now going down. This is not a crush.
00:36:37.135 --> 00:36:40.635
This is not the meltdown. This is not.
00:36:40.635 --> 00:36:44.395
a freefall, this is reallocation.
00:36:44.395 --> 00:36:46.675
of activity over time.
00:36:50.625 --> 00:36:53.785
And we see a situation in which for the first time.
00:36:53.785 --> 00:36:53.785
00:36:54.495 --> 00:36:57.545
Stop lying. Still going down usually.
00:36:57.545 --> 00:37:00.885
when there is a correction, supply goes.
00:37:00.885 --> 00:37:04.345
up. People are selling, people are listing their homes, not.
00:37:04.345 --> 00:37:07.465
this time around, not yet. They are not listing their.
00:37:07.465 --> 00:37:10.865
arms that's protecting process and that's why the.
00:37:10.865 --> 00:37:13.225
price level is done by only 10%.
00:37:13.945 --> 00:37:17.175
Since February, it could have been much worse if you mention.
00:37:17.175 --> 00:37:18.675
it correctly apples to apples.
00:37:20.175 --> 00:37:24.385
I believe passes will continue to go down and I believe that's a good thing.
00:37:24.385 --> 00:37:24.385
00:37:25.095 --> 00:37:28.225
If you have a situation in which prices are going up by 46%.
00:37:28.225 --> 00:37:31.365
and nothing happens, this is a bubble and we don't want that.
00:37:31.365 --> 00:37:31.365
00:37:32.005 --> 00:37:32.745
More than that.
00:37:33.525 --> 00:37:35.135
We see a situation in which.
00:37:36.605 --> 00:37:39.135
The cost of buying a home now.
00:37:39.865 --> 00:37:42.995
Is higher dramatically than the cost of renting so.
00:37:42.995 --> 00:37:46.075
more people will be renting and the rental market.
00:37:46.075 --> 00:37:49.315
will be on fire. Rent is rising and not.
00:37:49.315 --> 00:37:52.695
only are we seeing potential home buyers becoming renters.
00:37:52.695 --> 00:37:56.305
but also we are seeing newcomers becoming renters.
00:37:56.305 --> 00:37:59.755
and here we have to talk about immigration and demand for.
00:37:59.755 --> 00:38:00.395
real estate.
00:38:01.475 --> 00:38:04.345
Listen to this. We have to go back to October.
00:38:05.595 --> 00:38:06.545
2020.
00:38:07.875 --> 00:38:11.065
The Canadian government is announcing we would like to see.
00:38:11.065 --> 00:38:14.175
no less, no less than 400,000 new.
00:38:14.175 --> 00:38:16.105
immigrants in 2021.
00:38:17.325 --> 00:38:20.495
And people said, are you crazy? How?
00:38:20.495 --> 00:38:24.035
can you get 400,000 new immigrants during coffee? Nobody is flying.
00:38:24.035 --> 00:38:25.785
Nobody is moving. Maybe you get 4.
00:38:28.255 --> 00:38:30.875
We got 405,000 new immigrants.
00:38:33.735 --> 00:38:35.645
70% of them.
00:38:36.565 --> 00:38:39.615
Came from one country 70.
00:38:39.615 --> 00:38:44.335
from 1 country and this country is.
00:38:44.335 --> 00:38:44.335
00:38:45.205 --> 00:38:45.875
Canada.
00:38:47.645 --> 00:38:49.355
How can you get to Canada from Canada?
00:38:50.565 --> 00:38:52.335
You were already here.
00:38:53.355 --> 00:38:54.865
You were a foreign student.
00:38:55.535 --> 00:38:58.645
Your visa expired the Canadian.
00:38:58.645 --> 00:39:01.965
government came to you and said don't worry about that expired visa.
00:39:01.965 --> 00:39:05.085
while you wait, why don't you apply?
00:39:05.085 --> 00:39:07.315
70%?
00:39:09.635 --> 00:39:12.745
This year, this number will go down to 40%, so we have.
00:39:12.745 --> 00:39:15.905
more newcomers this year. I mean to 2023 in.
00:39:15.905 --> 00:39:18.925
2022, we got no less than.
00:39:18.925 --> 00:39:22.205
700,000 newcomers.
00:39:22.205 --> 00:39:22.205
00:39:23.205 --> 00:39:24.105
New immigrants.
00:39:24.925 --> 00:39:29.135
Non permanent residents, students and people from Ukraine? Nobody.
00:39:29.135 --> 00:39:31.455
None of them is carrying their house on their back.
00:39:33.205 --> 00:39:36.275
Demand for rental units will continue to.
00:39:36.275 --> 00:39:39.375
rise in rent will continue to rise, and that's the reality.
00:39:39.375 --> 00:39:42.395
that we are facing. While the housing market has always slowed down on the.
00:39:42.395 --> 00:39:44.365
2023, but beyond that.
00:39:46.325 --> 00:39:49.455
We are seeing a mismatch because builders including.
00:39:49.455 --> 00:39:51.955
in London are not building.
00:39:52.675 --> 00:39:53.345
This is.
00:39:54.495 --> 00:39:57.535
Can you please set of condominiums in Toronto? But if we are?
00:39:57.535 --> 00:39:58.435
seeing it everywhere?
00:40:02.615 --> 00:40:03.825
Builders are not building.
00:40:04.685 --> 00:40:07.875
Because the cost of building is too high, it is which are too.
00:40:07.875 --> 00:40:11.455
high. They cannot find the label. Wages are too high, they simply.
00:40:11.455 --> 00:40:14.835
don't bill. So two years from now, three years from now, when all this demand.
00:40:14.835 --> 00:40:17.875
is ready, the supply that's supposed to be built now.
00:40:17.875 --> 00:40:19.075
is not going to be there.
00:40:19.765 --> 00:40:22.835
You don't have to be an economist to predict what will happen, so this is.
00:40:22.835 --> 00:40:26.025
not a across from the housing market. This is not.
00:40:26.025 --> 00:40:29.355
a long time story. This is a reset here in.
00:40:29.355 --> 00:40:32.635
the housing market to undo the crazy conflict.
00:40:32.635 --> 00:40:35.895
period. But the fundamentals of the housing market, the lack of supply.
00:40:35.895 --> 00:40:39.365
is still very, very significant, we definitely.
00:40:39.365 --> 00:40:42.465
have some stress in the system. We have a situation.
00:40:42.465 --> 00:40:43.735
in which many.
00:40:44.535 --> 00:40:48.425
Boils we love to reset their.
00:40:48.425 --> 00:40:51.255
mortgages at the higher rate.
00:40:51.935 --> 00:40:55.025
Significantly higher rate, some of them would love to sell.
00:40:55.025 --> 00:40:57.665
their units, not many, but some.
00:40:58.785 --> 00:41:02.115
And that's one of the reasons why we are so sensitive to iron into.
00:41:02.115 --> 00:41:04.955
Certs. And that's one of the reasons why we have to stop pressing into sports.
00:41:06.235 --> 00:41:07.825
The most vulnerable court.
00:41:08.715 --> 00:41:11.825
Is the Court of 2020 and 2021 the people who?
00:41:11.825 --> 00:41:14.945
took mortgages during COVID when interstitial 0 when?
00:41:14.945 --> 00:41:17.965
there is new in 20262027?
00:41:17.965 --> 00:41:21.315
interest rates would be much higher than the.
00:41:21.315 --> 00:41:21.875
got it?
00:41:22.715 --> 00:41:25.905
The hope and we'll discuss it in a second, is that interest rates will be fully.
00:41:25.905 --> 00:41:29.125
2024 and the wind in 2025 six.
00:41:29.125 --> 00:41:32.665
we'll discuss it, but clearly there would be a shock and some.
00:41:32.665 --> 00:41:35.845
borrowers will have to give up the latency rates that are not.
00:41:35.845 --> 00:41:38.985
rising yet would start rising, but it's not.
00:41:38.985 --> 00:41:42.225
a 2008 story by any stretch of the imagination, but.
00:41:42.225 --> 00:41:45.305
clearly the housing market over the next year will slow down.
00:41:45.305 --> 00:41:48.775
And I believe overall overall it is a good.
00:41:48.775 --> 00:41:51.885
thing because we need to reset this market otherwise it's.
00:41:51.885 --> 00:41:52.265
about them.
00:41:53.115 --> 00:41:56.005
So where are we? You are the Bank of Canada.
00:41:57.095 --> 00:41:58.275
You have to make some decisions.
00:42:01.325 --> 00:42:02.115
Where are we?
00:42:04.015 --> 00:42:06.675
When interest rates now at 4:25.
00:42:07.455 --> 00:42:08.295
They are not done.
00:42:08.985 --> 00:42:12.035
They're going to raise them again by the end.
00:42:12.035 --> 00:42:15.255
of this month. The only debate is 4 point half.
00:42:15.255 --> 00:42:18.285
or 475, but they are going to use it again and.
00:42:18.285 --> 00:42:20.505
then we call it terminal way they will stop.
00:42:23.055 --> 00:42:25.715
The next question is OK, what's next?
00:42:27.005 --> 00:42:27.995
When are you cutting?
00:42:28.805 --> 00:42:29.855
When are you cutting?
00:42:30.895 --> 00:42:33.405
Usually the gap between.
00:42:34.095 --> 00:42:37.125
The last type and the first cut is very short.
00:42:37.125 --> 00:42:40.145
not this time. This time I believe that.
00:42:40.145 --> 00:42:44.185
the Bank of Canada and the Fed will wait until 20.
00:42:44.185 --> 00:42:47.205
4 before they cut into switch. They will.
00:42:47.205 --> 00:42:50.445
live with the elevated into sweats for a fully.
00:42:50.445 --> 00:42:53.505
why? Because you want to make sure.
00:42:53.505 --> 00:42:55.245
that inflation is dead.
00:42:56.325 --> 00:42:59.435
Before you cut into sweats, you don't take any.
00:42:59.435 --> 00:43:02.935
chances. Remember the 70s. You don't take any chances.
00:43:02.935 --> 00:43:05.665
You want to make sure that reflection is dead.
00:43:07.435 --> 00:43:10.945
And then you cut into sweats. You cut into sweats by.
00:43:10.945 --> 00:43:11.535
how much?
00:43:13.125 --> 00:43:16.375
We started this saga at 175.
00:43:16.375 --> 00:43:16.375
00:43:17.805 --> 00:43:21.295
We are going to fall and 1/2 for 75. We stayed there for a year, then we cut.
00:43:21.295 --> 00:43:21.295
00:43:23.125 --> 00:43:25.105
To what I say 3.
00:43:26.425 --> 00:43:29.695
Almost Dublin, where it was before. Why? And that's extremely.
00:43:29.695 --> 00:43:32.995
important to understand. There are some major.
00:43:32.995 --> 00:43:34.445
inflationary forces.
00:43:36.075 --> 00:43:38.225
That are beneath the surface.
00:43:39.095 --> 00:43:42.135
We had before globalization that was anti.
00:43:42.135 --> 00:43:45.275
inflationary. Now we have deglobalization that is inflationary.
00:43:45.275 --> 00:43:48.345
Back then we have just in time inventory now we.
00:43:48.345 --> 00:43:51.535
have just in case inventory inflationary back then the label market.
00:43:51.535 --> 00:43:54.615
was very giving and cheap. Today the labor market.
00:43:54.615 --> 00:43:57.695
is not as available and not as cheap and back then.
00:43:57.695 --> 00:44:00.825
the environment was not so inflationary today the.
00:44:00.825 --> 00:44:01.945
environment is inflationary.
00:44:02.885 --> 00:44:04.725
In terms of the extra cost to companies.
00:44:05.775 --> 00:44:09.045
So all those forces are inflationary, the inflation.
00:44:09.045 --> 00:44:10.655
target is still 2%.
00:44:11.415 --> 00:44:14.755
The Bank of Canada, I can tell you that we're not change it anytime soon so.
00:44:14.755 --> 00:44:17.915
the inflation target is 2% the inflationary forces.
00:44:17.915 --> 00:44:20.985
are stronger by definition, interests have to be higher to.
00:44:20.985 --> 00:44:24.145
keep this target at 2%. So that's.
00:44:24.145 --> 00:44:27.165
why 3% from 175 after all.
00:44:27.165 --> 00:44:27.895
these coincidences.
00:44:28.555 --> 00:44:32.075
That's the new reality. That's the new normal, and that's healthy, that's.
00:44:32.075 --> 00:44:34.765
more or less where we are because I think that cash was.
00:44:36.805 --> 00:44:40.215
Miss Price, until no, it was simply.
00:44:40.215 --> 00:44:40.655
too cheap.
00:44:42.505 --> 00:44:45.565
This also means that companies.
00:44:45.565 --> 00:44:48.755
will face some difficulties dealing with their profitability.
00:44:48.755 --> 00:44:51.795
because all those forces are also going to put.
00:44:51.795 --> 00:44:53.995
downward pressure on profit margins.
00:44:55.205 --> 00:44:58.215
The globalization is not good for profit just in case in the.
00:44:58.215 --> 00:45:01.295
Tories clearly not good for profit, the labor market being.
00:45:01.295 --> 00:45:04.245
expensive, not good and the environment is not good, at least in the short term.
00:45:05.095 --> 00:45:08.585
So companies will have to adjust. And one of the reasons.
00:45:08.585 --> 00:45:12.305
why we're starting to see the stock market now moving in the right direction.
00:45:12.305 --> 00:45:12.305
00:45:13.585 --> 00:45:16.855
Is because of the fact that companies are now adjusting and the market.
00:45:16.855 --> 00:45:20.005
is adjusting expectations. Until now the market expected.
00:45:20.005 --> 00:45:23.655
earning per share to be about 6.
00:45:23.655 --> 00:45:25.895
in a recessionary year.
00:45:29.075 --> 00:45:32.245
And now the adjusting downward towards 0 and that's.
00:45:32.245 --> 00:45:35.275
why all of the sudden the market saying earnings more or.
00:45:35.275 --> 00:45:36.705
less where they should be.
00:45:38.405 --> 00:45:42.065
In terms of expectations and interest rates are already in the market and.
00:45:42.065 --> 00:45:45.075
that's why the market is starting to go out I.
00:45:45.075 --> 00:45:48.195
don't know how long it will last, but I'm clearly more.
00:45:48.195 --> 00:45:51.275
positive about the stock market this year than I was last year.
00:45:51.275 --> 00:45:54.795
And I believe that we will get more and more good news.
00:45:54.795 --> 00:45:58.125
from inflation that will appease the market I still.
00:45:58.125 --> 00:46:01.195
believe that earning will be under pressure. We are.
00:46:01.195 --> 00:46:04.215
entering a period in which we are going to have a semi recession.
00:46:04.215 --> 00:46:07.435
a mild recession because I hope that the bank.
00:46:09.785 --> 00:46:12.825
Significant depression, but they might recession. Still learning would be.
00:46:12.825 --> 00:46:16.205
under pressure and that will put some pressure.
00:46:16.205 --> 00:46:19.225
on companies and the stock market. But I do see.
00:46:19.225 --> 00:46:22.395
the Canadian stock market outperforming the US.
00:46:22.395 --> 00:46:25.795
stock market the way they did last year because of the fact that valuations.
00:46:25.795 --> 00:46:29.405
in Canada are much better dividend.
00:46:29.405 --> 00:46:32.465
paying stocks there. Our yield is higher than in the.
00:46:32.465 --> 00:46:35.825
US and we don't have the tech sector that is still facing significant.
00:46:35.825 --> 00:46:39.605
difficulties in the US over the next year in terms of taxation.
00:46:39.605 --> 00:46:39.605
00:46:39.805 --> 00:46:43.685
And liquidations, I do believe that.
00:46:43.685 --> 00:46:46.715
beyond if you look at the next few months, the bond market can.
00:46:46.715 --> 00:46:50.165
be tricky because now the market is expecting the Fed.
00:46:50.165 --> 00:46:53.275
to actually start cutting in 2023 when the market starts.
00:46:53.275 --> 00:46:56.475
realizing that develop will be cutting in 2024 yields.
00:46:56.475 --> 00:46:59.675
will go out over the next few months. So I will not get into the bull market.
00:46:59.675 --> 00:47:02.685
now, but after that after the first quarter after it happens.
00:47:02.685 --> 00:47:05.815
I will enter the bull market because I think the bond market will be a very.
00:47:05.815 --> 00:47:09.165
good place to be because I think that the tenant will go down within flesh and.
00:47:09.165 --> 00:47:09.975
trending down where.
00:47:10.055 --> 00:47:13.105
Surprising on the downside, that's the rest of the situation.
00:47:13.105 --> 00:47:14.345
So we have to realize.
00:47:15.815 --> 00:47:18.845
Everybody's talking about this recession. Recession is coming, but we.
00:47:18.845 --> 00:47:22.045
have to understand that this recession is going to be relatively mild.
00:47:22.045 --> 00:47:25.255
and you hope and pray because of two reasons. One is the labor market is.
00:47:25.255 --> 00:47:28.485
relatively tied and the other is the consumer sitting on 300 billion.
00:47:28.485 --> 00:47:32.045
of excess cash, excess savings that will buffer.
00:47:32.045 --> 00:47:35.265
the economy and the consumer is still able to spend that.
00:47:35.265 --> 00:47:38.305
is very different than any other recession I hope and.
00:47:38.305 --> 00:47:40.675
pray that interest rates will stop pricing after.
00:47:41.855 --> 00:47:45.155
The next meeting and that will be sufficient to prevent a significant.
00:47:45.155 --> 00:47:48.275
overshooting that will benefit the stock market and the.
00:47:48.275 --> 00:47:51.765
bond market. I also suggest that inflation will surprise on the downside.
00:47:51.765 --> 00:47:54.905
especially supply chain type of inflation.
00:47:54.905 --> 00:47:58.005
and even the rental market in the US will surprise on the downside.
00:47:58.005 --> 00:48:01.425
that would be beneficial for the market and sentiment.
00:48:01.425 --> 00:48:01.425
00:48:02.555 --> 00:48:04.535
And cooperations will adjust.
00:48:06.165 --> 00:48:09.735
They're not just going to see the profit margins going down, they will start investing.
00:48:09.735 --> 00:48:12.855
They will replace labor with capital that will lead.
00:48:12.855 --> 00:48:16.235
to higher productivity, higher productivity is the number.
00:48:16.235 --> 00:48:19.295
one protection from inflation that is not priced in the market.
00:48:19.295 --> 00:48:22.525
A lot of things are going to happen in reaction that maybe.
00:48:22.525 --> 00:48:25.815
ybe you're not going to be in 2024, but in 2025 and.
00:48:25.815 --> 00:48:29.505
remember, while the economy is going to slow down over the next two.
00:48:29.505 --> 00:48:32.695
quarters, the stock market has already seen it.
00:48:32.695 --> 00:48:35.835
Last year, the stock market is a leading indicator, so.
00:48:35.835 --> 00:48:36.745
we have to realize.
00:48:37.355 --> 00:48:40.675
After this crisis, after corvid after the huge increasing.
00:48:40.675 --> 00:48:43.805
inflation, clearly what was normal in the past is.
00:48:43.805 --> 00:48:47.125
not normal in the context of today's economy.
00:48:47.125 --> 00:48:47.125
00:48:48.225 --> 00:48:50.805
OK. Thank you very much for the attention.