Beutel Goodman Presentation – A Case for Canadian Equities
Vim Thasan is the VP of Canadian Equities from Beutel Goodman & Co – a partner of our team.
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Thank you, Peter and the team for having us here today.
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It's a lovely day and thank you for spending your time with us so.
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I'm vim. I'm part of the Canadian equity team.
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at Beutel, and I have three goals today in our.
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conversation. One is to talk to you about the Canadian context.
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And also specific items and case studies in.
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Canada to give you some appreciation for.
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this whole Canadian investment universe. The second is to have.
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a discussion about some of the things that are going on in the world.
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And how you manage through that the 3rd and.
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most important goal is to not put you to sleep so.
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I encourage you to have some coffee and hopefully we'll have.
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a lively dialogue through this whole process.
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This is our journey, hopefully you.
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see the same thing I'm seeing. This is a journey we're gonna take.
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We'll talk to you about Canada because Canada is very unique in.
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the structure of the market and the examples that we have.
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We're going to talk to you about the concept of winning.
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by not losing.
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Because there is an asymmetry to return and capital.
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preservation plays a very key role to compounding.
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returns. Then we're gonna talk to you about how we had Beutel.
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managed through these environments, including a stock.
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example, because it's about the philosophy, but.
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also the people and the process. And finally.
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let's kind of question the nature of the home country.
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bias and if it's actually paid off or not through history.
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So I wanna talk to you first about the Canadian context.
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The Canadian equity market is structurally.
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very attractive.
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It has a stable political structure. The regulators are.
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strong and we actually have some great industry structures think.
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of the grocery stores and the duopoly or the oligopoly.
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you have within groceries. Think of the telecommunications sector. Think of.
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the railroads and even the banking sector that has.
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been very stable and able to deliver great returns compared.
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to even the US market or from time to time.
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you will have issues you will have.
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issues because there have been examples of companies.
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in isolation.
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That really grow in value become very dominant.
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Everyone piles on and it creates a large distortions.
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in the market. And part of this is also because you.
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have sometimes a narrow marketing Canada, if you.
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look to areas like healthcare in Canada, in the Canadian.
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market, your choices are marijuana stocks or seniors housing.
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not the large pharmaceutical companies and the diagnostic.
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companies you'd have globally. If you look to the technology.
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sector, sometimes you riddled with a few issues.
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and one such example that you may know.
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We're going to time travel, go back 20 plus years as Nortel.
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It is probably one of the greatest examples of a stock.
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that got into so much hype.
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That took us all to a very wild ride and we didn't have to go to.
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Canada's Wonderland to get this ride. And you don't want.
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to face these rides in your portfolio. But it was a telecommunications.
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equipment company that became almost 1/3.
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of the TSX. Imagine your portfolios.
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Having 1/3 tied to a stock without.
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positive cash flows without positive earnings and.
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people are just jumping on because they think the ride is gonna continue and.
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it was a great ride for a period in time. You can see from 1999.
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it was one of the best performing stocks added a lot.
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of returns but.
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The unfortunate part is always when the music stops.
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People wake up and realize you do.
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need cash flows.
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All valuations do matter.
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And it's a very uncomfortable ride on the way down.
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Now you think people and investors will learn our lessons.
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but unfortunately we are human and if we Fast forward.
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20 years, you had another recent example a.
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phenomenal company that's an ecommerce platform.
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It was accelerated during the pandemic as well we.
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couldn't go anywhere. We went online, small businesses.
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needed a platform and they grew.
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And what happens with human psychology is sometimes we.
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have a tendency to extrapolate we see such.
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a fast pace of growth and we think it's just gonna go in a line up to.
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the top.
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This was yet another company that became a dominant part.
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of the TSX. Not as much as Nortel.
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But this was larger than Royal Bank. At one point in time and.
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it became such a key contributor to overall returns and.
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the question would always come why don't you own it?
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What are you missing out on?
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Did not generate free cash flows.
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The point in time it was trading at 50 times.
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sales 300 times EBITDA and people had.
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o build stories to justify why you held.
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on to this.
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And of course.
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Last year, the stock was down 73%.
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through a flurry of factors, but that.
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causes a lot of pain when it's the largest name in the TSX index.
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And what if it was the largest name in your portfolio without?
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an underpinning and foundation of cash flows and?
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the key parts of how we look at companies there?
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have been other examples like Valiant.
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BlackBerry. There's a new movie on it now.
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And there will be more.
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It's inevitable. So there is a rhyme to.
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it, and the rhyme has always been lack of cash.
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flows. Forget about revenue or just focus on clicks.
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or some other metric. Don't worry about valuation jump.
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on the train. But that's not how we invest.
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at Beutel.
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And it's gonna be an instance that you're gonna have to face.
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going forward as well. And a key part.
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of why we try to stay away from.
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overhyped companies without cash flows is that we believe.
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that downside protection is key.
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And our focus is on capital preservation and.
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there's this concept of asymmetry at return, which I'm sure you're familiar.
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with, but I'm gonna explain and take a moment here because.
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the path when you lose money.
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Is much steeper to get back to par, so if you.
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look at the middle of this chart, if your portfolio lost.
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50%.
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You don't need 50% to get back, you need 100% return.
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just to get back to par. So you go from $100 to 50.
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you need 100% return. So imagine.
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if your portfolio held Shopify, it's down over 70.
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you need over 250% in return.
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to kind of come back to par.
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But just as important as the math.
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Is the concept of the psychology of having losses.
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And what it means, there's been studies that show the.
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pain of a loss is 2 times greater than.
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the benefit of a game.
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What do you mean what happens when you're in pain? You just do the things.
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that you don't want to do. You sell at the wrong time.
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at the depths of the pandemic, and you have emotional reactions.
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that are not conducive to compounding returns.
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Now app you tell we have a philosophy and.
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a philosophy is around capital preservations because we do.
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believe that defense wins championships.
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And when you look through the history, there have been 7.
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periods of negative returns for the Canadian market.
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and the TSX.
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Each of those moments have been driven by a different.
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macro factor, call it the tech bubble call.
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it the financial crisis, call it the health pandemic and.
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there will be something else in the coming years and.
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in each of those periods what you'll see as the last line.
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in the management effect is that our funds are protected capital.
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We would love to have been positive in each of those years.
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but you can see the value creation of.
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protecting capital by staying away from overhyped.
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unlearning no cash flow.
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Hop on the bandwagon type stocks that can be very detrimental.
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to your overall portfolio. There will be a different.
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scenario, a different circumstances, but what's key?
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is the capital preservation and focusing on.
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downside protection to compound value.
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Now I want to take a moment just to share a little bit more.
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and to expand on what Peter has shared about Beutel. Goodman.
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So Beutel Goodman is an institutional.
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asset manager with over 70%.
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of our capital in institutions. What does that mean?
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We work with pension funds. We work with some of.
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the consultants like Mercer and Willis Tower Watson's and.
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hey put us through the ringer every single time around what it.
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means. And so we are entrusted by foundations by.
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y pension funds to manage their money on our behalf.
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We are also a long standing firm with over 50 years.
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of history, founded by some great investors like Net Goodman.
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at the late night, Goodman, Seymour Schulich Austin Beutel.
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So we have a long foundational history and another.
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very unique part is and in my past life before I joined Beutel.
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I worked at Scotiabank in 1832, asset manager for a good part of.
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15 years, but a unique part is that we are also.
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owners of this company. We are partners in this company.
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We care as much about your well being because we.
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very much understanding.
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That it's all related. It's not about an.
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individual stock, it's about an ownership culture and.
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the ownership culture also means continuity. You.
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know, we tried to say Beutel is like Hotel California.
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and once you come in, you never leave and everyone has.
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a long history with Beutel to that time.
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Another part is that we manage 45 billion in assets.
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We are a small independent company, but we're very sizable.
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Oftentimes you will see us as top 10 shareholders.
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in many of the names that we invest in and what that.
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means is we have access, we have credibility.
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with management teams and boards on a regular basis and.
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it's all about putting pieces of the puzzle together.
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So we've been long standing, but our focus is on.
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a value investment philosophy. Our focus is grounded.
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on capital preservation.
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This is the team, as Peter shared with you about the.
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what the one London group and the team this.
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is our Canadian equity team and a few things that.
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I'd like to highlight is one is it's.
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a small team focused on Canada.
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We are all analysts first, what that means.
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is that we individually build three statement financial models.
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meet with companies directly. There isn't an A hierarchy.
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in any way or form. We are all endless. That's the heart of.
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what we do. There is no separation of duties we.
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also have kind of a philosophy and a process.
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to get best ideas in this portfolio. We run a very.
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concentrated portfolio. We run about 30.
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035 names in any strategy and.
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all of this is founded on fundamental research.
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And there's low turnover on the team, which means we have a continuity.
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of culture and the heritage that has made us successful.
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over time. And each of these individuals brings something very.
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unique. James Black, for example, worked at TD.
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Securities, Todd Investment Bank. He also worked at Brookfield, Mary.
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Crowell used to work on the fixed income team, Dora who.
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used to work at CI financial buying firms. And so she.
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has a unique corporate development perspective. So we really bring you depth and.
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experience and the history.
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Now that the people, there's another really important layer.
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of consistency, it's your philosophy.
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and your process.
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Our philosophy is a mindset of capital preservation.
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And we believe that is a critical part. So how do we do it?
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There are three key things that ties into our philosophy 1.
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ne is as a value investor, we're not looking to buy junk.
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We really want to buy quality at a discount and a key.
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aspect of how we define quality is free cash flows.
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The actual cache companies earn.
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The second thing that we do is we're very patient investors, you.
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have to be disciplined and when you buy companies there.
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are times we waited 10 years before.
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we actually enacted and executed on a company. So we established.
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parameters and target prices where willing to buy to buy.
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a company, we need to tangibly see a 50%.
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return over three years. Put another way, we're looking to compound.
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about 15% a year on of our ideas because we.
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think that gives us a margin of safety to buy it that.
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if there is any mistakes.
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We have a buffer because we're looking for something that's hated in the market.
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at any point in time.
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But here's the other part that's often not discussed. When do you?
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sell? Is it when you have this gut feeling?
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that might be from bad wine or it's your?
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instincts telling you to sell? Well, we have a very defined.
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and disciplined process on when we take money.
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out, and it's also elaborate on why it's because.
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we go through cycles of fear and greed and you need.
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a system that's consistent to act on rather than just.
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how I'm feeling that day and reflective of Mr Market, which.
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you hear about where.
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Someone can wake up really excited about stock one morning and wake up.
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really upset about it the next day, and things fluctuate and opinions fluctuate.
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Now let's elaborate a little bit on one concept quality.
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This is free cash flow.
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This is the actual cache a company earns.
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This is not clicks. This is not website visits.
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This is actual cash flows. This is cash flows.
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after a company has invested its capital.
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for investments in needs to survive.
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And this is very different also from earnings. And so a key.
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metric that we look at is free cash flow conversion. How much of your revenues?
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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.
2023 Economic Update with Benjamin Tal
Benjamin Tal is the Managing Director and Deputy Chief Economist at CIBC World Markets. Watch now to hear Benjamin’s insights for the year ahead.
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.