0:00

Forward guidance is brought to you by VanEck, a

0:02

global leader in asset management since 1955. You'll

0:05

be hearing more about VanEck ETFs later on,

0:08

but for now, let's get into today's interview.

0:15

Happy to welcome back to Forward

0:17

Guidance, Joseph Wang of fedguide.com and

0:20

Martin Peltier, Senior Portfolio Manager at

0:22

Wellington Altus Private Council. Guys,

0:24

great to have you back on Forward Guidance.

0:26

Welcome. You betcha. It was nice

0:28

to finally catch up and see what happened since

0:30

the last time we chatted. A

0:33

lot has happened, but it's so good to see you again, Martin.

0:36

I think that our interview was the

0:38

last interview that we did before Silicon

0:40

Valley Bank fell. So yeah, a lot

0:43

has occurred. Martin, how will

0:45

you just share with people how

0:48

you and your clients have been

0:50

navigating the market environment? The stock

0:52

market has risen precipitously in the

0:55

US at least, a lot of

0:58

your clients are Canadian, and that has been

1:00

driven mostly by large cap technology stocks with

1:02

the moniker, the Magnificent Seven, not all, but

1:04

a lot of that has. How have you

1:07

sort of been processing that and dialoguing that

1:09

with your clients? We take a goals-based

1:11

approach. So we're just trying to get, most of our clients

1:13

are just in their

1:15

retirement or in later stages of working.

1:17

And so they would be very happy

1:20

just getting a six to 8% and

1:22

minimize the variability. And

1:24

so we weren't heavy in that segment

1:27

of the market in 2022. So

1:30

we didn't experience the same kind

1:33

of variability and in

1:35

our returns, we're actually flat

1:37

on that year for some majority of our

1:39

clients. And then this year, we

1:42

did increase a little bit but on

1:44

the sell-off, but we're

1:47

closer to around 8%. So significantly

1:50

less than what that

1:52

segment of the market has done.

1:55

So over two years, we're ahead. And

1:58

that's for a balanced type of... portfolio and so

2:00

if you take a look at the S&P

2:02

and you had, you know,

2:05

treasuries or government bonds over

2:08

the last two years, you haven't done very

2:10

well. It's been really interesting to see, especially

2:12

since our last conversation because

2:14

Silicon Valley bank appeared

2:17

to be a catalyst for the Fed,

2:19

for example, and financial liquidity.

2:21

And so that as a result, I

2:24

think that was the bottom, not necessarily November,

2:27

October, November, that was the second, you

2:29

know, second charge. But I think Silicon

2:31

Valley bank was the turning point and

2:33

I missed it. I

2:37

should have went all in, but I did. But we

2:39

did OK. What can we interpret from the fact

2:42

that so much of the growth

2:44

has been in tech stocks, particularly large cap

2:46

tech stocks and where do you think

2:48

it goes from here? Well, I think

2:50

passive investing has really changed the

2:54

overall profile of the markets.

2:56

People have to benchmark their

2:59

portfolios, active managers do. And

3:02

if you stray too far from that

3:04

benchmark, you risk losing clients. And so

3:06

what I mean by that is so in 2022, if you got,

3:08

if you're down 50% on a balanced

3:13

portfolio, well, everybody else did that. And

3:15

then this year, if you're up 12%, well, and

3:19

your benchmark's up 12, then you

3:21

have to track that benchmark to

3:23

the upside. And so

3:26

benchmarking is forcing a lot of people

3:28

to own those segments of the

3:30

market, and so it's driving a lot of flow

3:32

into it. And so, for example,

3:34

if I read that since

3:37

January, 2023 with Microsoft's $10

3:41

billion investment in chat

3:43

GPT, that almost

3:46

100% of the price attorney S&Ps come

3:48

from the Meg 7. I

3:50

mean, that's just astounding. And 42%

3:52

of that coming from the video. And

3:55

so you have to own those, those,

3:57

those segments and it's compounding the moves

3:59

higher. And we

4:01

haven't seen that before. This is a little different than

4:03

2000, and the tech bubble in 2000.

4:08

The gains are being compounded by

4:10

that passive aspect. And it works both ways,

4:12

as we saw the year before. And Joseph,

4:14

how are you thinking about this? You predicted

4:16

at the beginning of this year that stocks

4:18

would crush bonds, and so far that has

4:20

occurred. The S&P up around 7% and

4:23

long-term bonds down 3%. Since

4:25

you said that, I believe on January 4th. I

4:28

gather you're still bullish on stocks. Tell us about

4:30

your view. And then also, do you

4:32

think that this concentration in the Magnificent Seven,

4:34

really, I mean, the Magnificent, the glory is

4:36

one, let's call it that, Nvidia. Is

4:41

healthy for the market, not healthy, a

4:43

cause for concern, an omen? What do

4:45

you think? Well, first, I'll agree with

4:47

Martin. I mean, it looks like it's

4:49

Mag1, right, Nvidia going up. So when

4:51

I look at the option skew in

4:53

Nvidia, you can see that it's

4:56

basically... So usually when you look at option

4:58

skew, the implied volatility for puts would

5:01

be higher than for calls because people

5:03

tend to reach for protection. Being

5:05

a prudent asset manager, you would try to

5:07

hedge your positions. And so there's structural demand

5:09

for puts. So puts can be more expensive

5:11

relative to calls. But when you

5:14

look at Nvidia, you can see

5:16

that basically the skew is

5:18

pretty even. And so the call actually sometimes

5:20

skewed to the upside. So you have a

5:22

lot of people actually buying calls. And

5:25

that is to say they want upside protection,

5:27

fear of missing out of all this huge

5:29

upside. And we've seen before that when a

5:31

lot of people go and buy a lot

5:33

of calls, that tends

5:35

to put a lot of upward pressure on the price,

5:37

right? So it seems what happens

5:40

is that people buy a

5:42

call and who's short to call? Arty

5:44

Maker, who then has to buy the underlying. So

5:46

there seems to be some options dynamics there that

5:48

are putting a lot of upward pressure on these

5:51

single-name tech stocks like Nvidia. But

5:54

that's your broader view. I am

5:57

very positive on the equity market this year.

6:00

mentioned before, I think

6:02

of one of the biggest determinants of

6:04

asset prices to be public policy. So

6:06

on the one hand, you have the Fed, and I'm

6:08

sure we'll talk about more of that later on, but

6:10

the Fed is basically engaging on a rate cut cycle.

6:13

J-PAL may go out and push out

6:15

the start of that rate cut cycle

6:17

from March to sometime later,

6:20

but we're at the highs in

6:23

the Fed funds rate, and the next move

6:25

is almost certainly a cut. So that's

6:27

very positive for risk assets. And on

6:29

the other hand, you have the

6:31

fiscal authorities who continue to deficit spend

6:34

at a very, very large rate.

6:37

So it looks like the deficit would be between 6-7%

6:39

of GDP, and

6:43

we're at a time when the economy

6:46

is pretty benign. It's expected that this

6:48

GDP, this deficit spending is going to

6:50

be elevated for the foreseeable

6:52

future. Now the CBO came out

6:55

with their latest forecast, I believe

6:57

today, about what, or maybe yesterday,

6:59

about what the budget deficit will be

7:01

going forward. But if you look

7:03

at the numbers, it's actually much worse than they're saying

7:06

because the way that they make their forecasts is

7:09

they have to assume basically what's

7:11

currently in law. For example, they

7:14

have to assume that the tax cuts are

7:16

going to sunset, like the Trump tax cuts are

7:18

not going to be renewed. Now is that a

7:21

realistic assumption? I don't know. And

7:24

of course, they make assumptions on interest rates, maybe

7:27

interest rates end up higher than we expect. So from

7:30

my perspective, so their

7:32

estimate of the deficit, which is already going

7:34

to be very high going forward, is just

7:36

going to be worse than what they forecast.

7:39

So as long as that continues, I think

7:41

that's very positive for risk assets. Now that

7:43

being said, it does seem pretty crazy what

7:46

we're seeing in the markets. The stock market

7:48

only goes up. And so I'm very cautious

7:50

right now. I think it would be totally

7:52

normal in the course of a bull market

7:54

for there to be a pullback of some

7:57

degree. that

8:00

on the deficit, I've always

8:02

wondered how much of it

8:04

is going towards military spending in

8:07

Ukraine, supporting Israel, Middle East

8:09

stability, and how much of

8:12

that deficit is going directly supporting

8:14

the US economy? Are we

8:16

netting that out? Have you done any work on

8:18

that? I think that that's a really good question,

8:20

right? We spend all this money and it goes

8:22

everywhere. And some of it just ends up in

8:25

Ukraine. But I suspect that even money that's spent

8:27

in Ukraine, that's US defense

8:29

contractors and so forth, right? And maybe

8:31

they take that money and maybe they

8:33

keep it in London or somewhere else. I don't

8:35

know. But I don't

8:38

know. It could be that all that money

8:40

flows outside and has a bigger impact on

8:42

what's happening in some certain segments in other

8:44

economies. But overall, I think when you

8:46

look at the big picture, you have

8:49

things like Medicare, Social Security, these things

8:51

go straight to the

8:53

US economy. You've got movements towards things

8:55

like forgiving student loans,

8:57

and you have our interest rate payments, which

9:00

again, part of that goes abroad. But the bulk

9:02

of it stays here as well. So I

9:05

sense that you're right. You're just kind of

9:08

spraying money everywhere. Some of it just leaks out of

9:10

the US economy. But I think the

9:12

bulk still directly impacts the US. Because

9:14

– sorry, Jack, just to jump

9:17

in, because this is really interesting. I

9:19

posted a chart on Twitter. It

9:21

shows that the percentage change in a real

9:23

net worth by age group, surprisingly,

9:27

it's under 40. It's massive change. The

9:29

change in wealth has been most dramatic for

9:32

younger adults, up to 80%,

9:34

compared to 20% for those over 55. And

9:38

the lowest is the Gen Xers,

9:40

like myself, maybe

9:42

because we didn't buy Nvidia. But

9:46

that's really interesting. So the younger population

9:48

is benefiting. Is that from the stimulus,

9:50

from the loans, those sorts of things?

9:53

It's really an eye-popping

9:56

number. And to your point,

9:58

Martin, so all this official – data

10:00

when they look at wealth by generation,

10:02

but they don't include crypto because that's just

10:04

not in the official statistics. But

10:06

as we all know, crypto tends to be an

10:08

asset owned by younger people and it's

10:10

an asset that has gone up a lot

10:13

in price. And so on the market cap,

10:15

you know, it's hundreds of billions of dollars

10:17

and that's just not in the statistics. So

10:20

official statistics would understate,

10:23

I guess, the wealth of younger generations. Like

10:27

gold did, Bitcoin is establishing itself

10:29

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prospectus link below. Thanks. Let's get back to the interview.

11:08

Joseph, I would be remiss if

11:10

I didn't ask about New York Community

11:12

Bank. The shares,

11:15

ticker NYCB, have sold

11:17

off tremendously when last week they

11:19

reported an earnings that was quite

11:21

weak. They cut their dividend and

11:24

the shares have continued to fall out and

11:26

there's been a lot of concern there. How

11:28

concerned do you think are you about that

11:31

bank and then how systemic or not do

11:33

you think it will be? And as I'll show, we're

11:35

recording this on February 8th. This likely will

11:37

air on Monday. So, you know, people, you guys don't

11:39

say something like there's a 0% chance

11:41

that agent is going to go wrong. You know, Never

11:45

say zero. So

11:48

I think New York Community Banks, it looks

11:50

like they're, they, so again, they had their

11:52

earnings call afterwards, just stock

11:54

basically got cut in half. So

11:56

it seemed like they're having some problems

11:58

in their portfolio, some. credit problems. So they

12:01

have big holdings in multifamily rental

12:04

apartments in New York City. So

12:06

loans against that and also loans

12:09

against offices. Now, as we all know,

12:11

offices are not doing well. Work from

12:13

home has really devastated that sector. And

12:16

half of their portfolio of offices is

12:18

Manhattan offices. So that part

12:21

is not going to do well. But the

12:23

bigger part of their holdings seems to be

12:25

multifamily rentals. And from what I

12:27

understand, there's been a

12:29

law change on this recently,

12:31

such that it's more difficult for landlords

12:34

to raise the price of rent if

12:36

they own these rent-controlled

12:38

multifamily apartments. And so the

12:41

value of their collateral is,

12:44

so they make loans against this collateral,

12:47

is not clear. And maybe the collateral

12:49

is worth a lot less than it

12:51

was before. And so they may have

12:54

some potential credit losses there. So that's

12:56

really hurting their asset values. Now, the

12:58

second thing is that because they got

13:01

bigger by taking on some

13:03

of Signature Bank's deposits,

13:07

they reached the $100 billion threshold in

13:09

their balance sheet. And in the US,

13:12

how you're regulated in part determines on

13:14

how big you are. And once you've

13:16

reached the $100 billion dollar asset threshold,

13:18

you come under tighter regulations and you

13:21

need to raise more capital. So

13:23

for a bank, capital is a liability.

13:25

It's basically cash that's used to cushion

13:28

against losses. So

13:30

where do they get the money to

13:33

have capital? They seem to be getting it

13:35

by cutting dividends. So they're taking money that

13:37

they earned instead of giving it to their

13:39

shareholders, they're keeping it as

13:42

their capital to meet these new regulations.

13:44

And so you have cut dividends.

13:46

And when you have an

13:48

asset portfolio that's maybe not doing very well,

13:51

people get scared. And so their stock price is

13:53

being cut down dramatically. Now, I don't think this

13:55

is systemic. And also, I don't think the Fed

13:57

thinks it's systemic as well. So you had... A

14:00

while back you had Governor Waller ask about

14:02

this commercial real estate exposure by small banks.

14:04

And he said that he's not

14:06

worried about it at all because they've had a

14:08

year to go and think about it. And today

14:10

you had Fed President Larkin basically say something similar.

14:12

He's not worried about it. These

14:14

guys have had a lot of time to prepare for

14:16

it. I think that's probably the right take. That

14:19

being said, we have over 4,000 banks in the

14:21

US. Some of them will be overexposed

14:24

to segments of the

14:26

commercial real estate market that are not doing well.

14:28

So yeah, they're probably going to be hurting.

14:30

But we have thousands of banks, thousands of

14:32

businesses. Some of them are not going to

14:34

do well. That's true in any industry. One

14:37

thing that really stands out to me, Joseph, is how in

14:40

the stock market, the shares of regional

14:42

bank stocks that aren't in your community

14:44

bank, maybe they're down a little bit.

14:47

There's no real fear of contagion as

14:49

there was on that Friday

14:51

when SBB failed or the Monday afterwards

14:54

where there were large regional banks

14:56

that went down 70% intraday, indicating

15:00

the market was pricing at a severe risk of

15:03

a failure in bank runs. Interestingly, the most recent

15:05

deposit data as of this

15:07

morning showed that as of earlier

15:09

this week, deposits from December 31st

15:12

to February 5th actually increased

15:14

a billion or two. But

15:16

then for people who are skeptical of the stock, it's never

15:19

enough to like, we need more recent data. We need more

15:21

recent data. Martin, as an

15:23

observer across the border, how

15:26

have you been observing this, if at all? Or

15:29

there's also the Canadian banking sector, which

15:32

those stocks seem to be hanging in there. So

15:35

there's $900 billion of

15:37

mortgages coming due in

15:39

the next two years here in Canada.

15:41

That's significant. And

15:44

they're being renewed at much higher

15:46

rates. And so

15:49

the banks are – we

15:51

don't have regional banks per se other than

15:53

credit unions, and so it's a

15:56

much different structure and a lot

15:58

– better

16:00

control around lending in some

16:02

cases. Now, from

16:05

a risk standpoint, reward standpoint,

16:07

I like the big US banks compared

16:10

to the Canadian banks. And

16:12

so we don't

16:15

own a lot of direct Canadian bank

16:17

exposure, but we do have some and

16:20

it's in those that don't have as

16:22

much of a retail exposure to

16:25

those terms coming due just

16:28

because of the risks

16:31

that come around that now from the

16:33

asset protection that these banks

16:35

have in Canada,

16:39

we had one and a half. I mean,

16:41

there's something really interesting happening here. There's a

16:43

huge experiment happening. We've had one

16:45

and a half million people come into the country last

16:47

year. I mean, that's

16:49

the population is 40 million. I mean,

16:52

that's unheard of at

16:54

any other OPEC, OECD

16:57

nation. And so there's

17:00

a huge amount of

17:02

immigration and there's

17:05

only 250,000 housing bills, housing starts. So

17:08

there's huge demand on housing and that's

17:10

key to keeping despite the higher interest

17:13

rates is keeping prices high. And we're

17:16

seeing a lot of that are about

17:18

people moving from Eastern Canada, Toronto and

17:21

Ontario into Alberta. Alberta is booming

17:23

now, not necessarily because of

17:25

higher oil prices, but also people coming in because

17:27

of lower cost of living and housing prices are

17:30

half to a third less

17:32

than where they are in

17:34

Toronto. And so there's that dynamic

17:37

playing out. So there's a huge risk in

17:40

the banking despite these resets coming due

17:42

because they're protected by the strong asset

17:44

values. But looking in the

17:46

US, I like

17:48

the US economy better than

17:50

the Canadian economy and

17:53

the health because if you look at our

17:55

GDP per capita, it's actually negative. And

17:58

so it's dilutive. in regards

18:00

to our economic growth. So

18:03

despite this huge immigration, we're not

18:05

getting the economic benefits from it.

18:07

And so from exposure to the

18:09

economic aspect, I like

18:11

the big US banks better than the Canadian banks. And

18:14

to Martin's point, if you look at a big

18:16

US bank like JP Morgan, they're basically at all

18:18

time highs. So it's been a really good trade.

18:22

The big US banks have done well. One

18:24

of the things when I look at Canada is, as

18:27

you mentioned, Martin, a lot

18:29

of the mortgages there tend to be shorter

18:31

in tenors. So you have to renew, let's say,

18:33

every five years. So for a country like

18:36

Canada, monetary policy really does have lags. Whereas

18:38

in the US, I mean, maybe, I don't

18:40

know, we'll see. But that seems to be

18:42

coming along right now. What are the commentary

18:44

about that? And how are people facing this?

18:47

I mean, I imagine for some of them

18:49

who took out a mortgage, say, around the

18:51

pandemic, it's gonna be a big jump in

18:53

their interest rate payments. Bagging

18:55

Canada is in a real, it's

18:57

a rockin' hard place. They've got

19:00

a tough problem here because

19:02

they have asset inflation and these housing

19:04

prices that are really expensive. Vancouver

19:08

and Toronto are as expensive as

19:10

not more than New York.

19:13

And the incomes are not

19:15

nearly the same. And

19:17

so the affordability is

19:19

becoming a major issue.

19:22

So if you cut rates in

19:25

an environment where there's strong demand

19:27

for housing that may

19:30

make the problem worse, but at the same time, you

19:32

have those who are already bought in, right,

19:36

and their payments are going up. And

19:38

so it's like, what do you do? And

19:41

so they

19:43

have to balance that against the currency impact and

19:46

what the Fed does. And fortunately,

19:48

the saving grace

19:51

and people in parts of Canada

19:54

Will hate to admit it, but

19:56

Saving Grace is oil for our

19:59

currency. See. It.

20:01

Wouldn't have a well, he doesn't currency

20:03

pressures and and he would put up

20:05

even more pressure on the Bank of

20:07

Canada. And. So here we are

20:10

will saving the day and in creating

20:12

some flexibility for the Bank of Canada.

20:14

So we're it's it's I don't I

20:16

don't envy the the governor out on

20:19

and be ten minutes. He's got a

20:21

tough job. And I'd add that

20:23

if you're really having you know one point

20:25

five million a year you know that's that's

20:27

is a source of inflation that market policy

20:29

just can't deal with right? All these people

20:31

that we have to have to live somewhere

20:33

and they have to eat and so forth.

20:35

That means housing inflation alone. A at that

20:37

it's going to go to the moon no

20:39

matter where rates are just because all these

20:41

people they have to live somewhere. And.

20:44

And a household debt is so high compared

20:46

to the U S. Household debt

20:48

is is again highs and the obesity

20:50

and can be weird when affinity for

20:52

debt. So. You have thought

20:55

that you know the all of these

20:57

rate hikes would have been catastrophic to

20:59

housing. and it wasn't. Really?

21:01

Was it's madness any you ask, because

21:03

you have thirty year term mortgages and

21:06

the mouth that we're short term said

21:08

like that. The exposure from that standpoint

21:10

to higher rates been in Quetta. Like

21:13

you mentioned most the past five years

21:15

terms were last variable and so they've

21:17

seen a big increase in their in

21:20

their payments and housing prices. Have it

21:22

really? Now they're started. come back again.

21:24

In Toronto and and and Calgary we're

21:26

We're just in in rocket ship mode.

21:29

Arm and so, er, that's it

21:32

tells you. That. Are that

21:34

immigration really exasperated The problem? These

21:36

least near a problem. and

21:38

that's gonna make it very difficult

21:40

for the bank of canada really

21:42

really difficult and i think you'll

21:45

also get upset like people are

21:47

are are seeing in all my

21:49

better off a and and i'm

21:51

a proponent of immigration absolutely it's

21:53

it's immigration we need more people

21:55

in this in in canada for

21:57

sure his roots geographically dispersed low

21:59

population We have to, the only way we

22:02

can get services is through

22:04

oligopoly. So we have oligopies

22:06

in our telecom, oligopolies in

22:08

our banking. Um, and

22:10

so that's because nobody wants to come up here. We're

22:12

such a small market. I mean, Hey look, Microsoft

22:14

could buy Canada. The

22:19

media could buy Canada. I mean, Microsoft is largest

22:21

in all of the Canadian companies combined. So

22:23

wow. Yeah. Think

22:26

about that. One company is as big as all

22:28

of the companies in Canada. Yeah. It

22:31

is remarkable that statistic. And

22:33

yes, those oil companies cannot grow their revenues

22:35

and the quality of the earnings are not

22:38

as high, but it is remarkable. I mean,

22:40

Canada is a huge

22:42

energy supplier to the globe and the idea that

22:44

the entire energy complex,

22:47

publicly traded complex and all of the other

22:49

Canadian companies are worth less than one company.

22:52

It is pretty remarkable. I mean, what do you, do

22:54

you think that's a bubblicious? I'll talk

22:56

about Microsoft, but Nvidia is worth more than all

22:58

the energy companies in the U S right.

23:01

So let's just talk and I've

23:03

used this example recently and

23:06

I think it's a perfect one and

23:08

it's, it highlights that, um,

23:10

difference between good companies and good stocks. Okay.

23:13

There's no doubt about it. Microsoft is

23:15

an awesome company. It's like, it's one

23:17

of the best companies in the world and

23:20

it's one that you want to have to want to own,

23:22

but you have to be careful with timing when you want

23:24

to own it. So for example, in

23:27

1999, if you bought Microsoft, okay, it was 50

23:29

times free castle, okay, 1999.

23:33

Now from 1999 to 2012, it grew, it grew, it grew its

23:36

free castle by 240%. Outstanding

23:42

financial results, really

23:44

good numbers, a great company executed

23:46

on his plan, it delivered on

23:48

his growth. What do you think his ship price

23:51

did? Yes. Any guess

23:53

flat. Lost 50%. Wow. So

23:56

it delivered everything it was going to do, but it lost

23:58

50%. The reason being. And the thing is,

24:00

it's free cash flow multiple trunks

24:02

from 50 to 8 times 8 times. Now,

24:06

if you bought it in 2012 to

24:09

now, it grew its free cash flow by 135%,

24:11

like half of what it did the previous period

24:13

of time. Okay?

24:18

But you made 12 times your money because it

24:20

went from 8 times back to 50 times. Now,

24:23

going back to the old Warren

24:25

Buffett intrinsic value, the value on

24:27

Judgment Day, the value of when you

24:30

sell, okay, has

24:32

a huge impact on your returns.

24:36

So it's not just the cash flow stream

24:38

that you're getting and the growth of that

24:40

cash flow stream. It's what the value is

24:42

at Judgment Day. And so you call that

24:44

your safety margin. So what are you paying

24:46

now? You're getting blowed down with the assets. And

24:48

you look at that. And so

24:52

if you look at 50 times free

24:54

cash flow or 12 times sales, is

24:57

it going to be worth that in 10 years?

24:59

And so I did a little chat GPT experiment,

25:01

and I said, name one company that's

25:03

been able to maintain its free cash flow multiple of over 30

25:06

times, not 50, 30 times, over 10 years, not 1. I

25:11

said, name one company over 10 times sales. Does

25:14

it able to maintain that multiple? Not

25:16

1. Okay? Well, price

25:18

journey is a little different because you have Amazon that's

25:21

done some different things there.

25:23

But generally speaking, not one

25:25

company's done it. So why is it going to be different this

25:27

time? What's going to be different? And so

25:29

don't forget, back in 1999, you

25:31

had the internet economy. And the

25:33

internet was as impactful,

25:36

it's not more than AI. Like the

25:38

internet was like, think about that. That

25:40

was like, that's as game-changing technology as

25:42

it gets. And so

25:44

you had companies like Cisco who

25:46

were benefiting from that and Sun

25:48

Microsystems, right? Outstanding companies.

25:51

And Cisco was trading at

25:53

a similar multiple as Nvidia

25:55

is. And So it lost its

25:57

value, and it took 20 years to get back, but

25:59

it delivered. Huge Ah operational results

26:01

are not like anybody as I could

26:03

be able to execute register matter if you

26:05

are be at multiple and was a

26:07

good be worth it at that point

26:09

in time. And so that's the thinking that

26:12

I'm looking at our disagree with a

26:14

narrative of all these technologies need practice

26:16

but have. But. How much is that

26:18

in the valuations? And the how's that going

26:20

to change over time? Yeah, yeah, I

26:22

guess the reason that companies that's what raucous

26:24

the cystic about. Is. No companies

26:27

maintain their thirty. The pray for us to

26:29

be casual. Most I wonder if there's some

26:31

of that they grow into it. Yet a

26:33

backfill that in so it's just look at.

26:35

Listen, look at the video. For example, it

26:37

spits five billion dollars. Over. The

26:39

last five years. Okay, and it

26:42

at a one point six trillion dollars

26:44

in value. To. The company. Now.

26:46

Over the next. Ninety

26:49

times increase self in his in his price

26:51

So it's got that feeling that value okay

26:53

just going at it. So let's let's say

26:55

that know that is it's going back to

26:58

lead in so it's going to spend ten

27:00

billion dollars. Over. The next five years.

27:03

Okay, that ten billion

27:05

dollars. Is going to generate

27:07

one point six trillion dollars in value and

27:09

so I like to ask. And I did

27:11

this with all companies back when you were

27:13

booming. when are spinning out of four times

27:15

that acid guy her and say okay, show

27:17

me your camera program and how are you

27:20

going to add that much value. By.

27:22

Drilling a well, And. Then you

27:24

can add that much that results so how

27:26

how are you gonna do that? And so

27:29

like I wanna know how Nvidia by spending

27:31

ten billion dollars. Is. Gonna create

27:33

one point six trillion. In.

27:35

Value. As film Air Pocket.

27:38

right? How are the I do it? And

27:41

I have an answer. I am

27:43

found anybody to to give me

27:45

that gimme answer. Like. Going back

27:47

to the previous multiples. Is. One company

27:49

came really close and I'm jersey be

27:51

the you guys guess it? One company.

27:54

And. seems not to get out of

27:56

a five hundred either a nail one

27:58

one companies is the outstanding. It came

28:00

close to me in those multiples. Take a

28:03

guess. FICO, Fair Isaac. No.

28:07

No idea. Do you drink

28:09

energy drinks? Monster. Yeah.

28:11

Best performance stock of all time. Unbelievable.

28:16

Unbelievable. So there

28:18

you go. I got one, maybe one. And

28:21

it's developing. It's

28:23

it's rocket fuel for kids. Hey,

28:25

Martin, a lot of people are thinking

28:27

about this and like drawing parallels to

28:30

the.com era. Is that a

28:32

sense that you get? Well, the difference being

28:34

is these companies have cash. Right?

28:37

So we've allowed

28:39

companies to create a local, I

28:41

mean, to be honest, the US

28:43

is allowed. And I think monetary

28:45

policies is a primary driver of

28:47

this. You had free capital for

28:49

10 years. And so these

28:52

companies were able to do the loss

28:54

lead model, give away the products and services

28:56

below their cost, and secure

28:59

a huge ecosystem. And

29:01

now they've secured it. Now they're putting

29:03

up moats to protect it. And so

29:05

now you got oligopolies. And so that

29:07

could actually drive inflation because, hey, with

29:09

the exception of like Tesla isn't at

29:11

that point yet, they're early and they

29:13

may have missed the whole

29:16

boat with the Fed, they may have been too late

29:18

to getting that access to that cheap capital, whereas

29:21

others were earlier to that game. And

29:24

so they may pass along higher costs

29:26

and higher products. You're seeing it with

29:28

Apple with their vision pro and their

29:31

new phones coming up, they're getting higher

29:33

and higher in price. So that deflationary

29:35

impact from technology, with the exception, I'm

29:37

not sure how AI is going to play out with that, that

29:40

deflationary pressures may not be the same. So

29:42

that's a little bit different from from 2000.

29:46

But the valuations in certain segments

29:49

among the large, these large, well

29:51

established companies are not

29:53

that different mean Microsoft's a 50 times free

29:55

cash flow. I don't even want to talk

29:57

about Nvidia and You

30:00

know even Apple is seven times sales But

30:03

Martin, I think the forward price to

30:05

earnings based on guidance and like Nvidia

30:07

has Tripled their earnings over

30:09

the past year. Like I think the

30:11

forward price earnings ratio is I think 33 not cheap by any means

30:18

You know Chipotle is an expensive stock

30:20

maybe it's two times. I don't know

30:22

but Chipotle's forward price earnings ratio is

30:24

50 fair Isaac's dimensions there is 70

30:26

so it's it's assuming all

30:28

of these very positive things based on recent

30:30

trends it's not ridiculously

30:33

expensive and I also say Would

30:37

you agree that so many companies of

30:39

the comm era were flat out? Bubbles

30:42

or not even legitimate companies with zero revenue That

30:44

is something I struggle to see in 2021 and

30:46

20.2 So

30:49

many companies went public that were junk

30:51

never even made a penny in revenue

30:53

and went to zero this time around

30:55

maybe you know Animal

30:57

spirits have gotten ahead of themselves, but

30:59

they're about legitimate companies that have real

31:01

earnings that are growing I haven't seen

31:04

that many fake AI companies, you know

31:06

go to many billion dollars. It's taking

31:08

a different shape It's not companies.

31:10

It's crypto

31:13

NFTs Mean

31:16

stocks they exist Right.

31:20

They're there. They're happening. They're just

31:22

not Companies as IPOs. They're in

31:24

a different form. So I mean these things

31:26

still exist Look at these look at these

31:28

cryptos. Look at look at the

31:30

NFT market. Look at like me. Look at

31:32

art They've lost 14 billion dollars

31:34

the art fund and

31:36

look at what they've invested in just

31:39

pull up those companies Look at SPACs, right?

31:41

But Marvin, I'm saying those I'm not I'm

31:43

not talking about crypto I'm talking about publicly traded

31:45

securities and stocks I'm saying that those haven't

31:47

zoomed up in price as much as Nvidia

31:49

whereas in 2021 they did no But

31:53

I'm saying is that it's just it's

31:55

that that risk is me

31:57

could consider those kind of like companies like

31:59

the dot-com companies.

32:01

I think it's

32:03

the mentality of the sports

32:06

betting that changed

32:08

the structural shift with

32:10

COVID, people coming in and Robinhood

32:13

and day trading and everything else, and

32:16

then sports betting. That risk is

32:18

not in those companies, those dotcom

32:21

companies, it's in that other segment

32:23

of the market. But you still have

32:26

some microsystems at 10 times sales. You

32:29

still had Cisco, you still had

32:31

all these large companies dominating. That's

32:33

the similarity, not the other

32:35

components of the NASDAQ. And

32:37

so that makes it very,

32:40

very difficult to see how far we

32:42

go from here. But

32:44

we don't have our Nortel networks moment,

32:46

right? Or Blackberry, or

32:48

I mean, we should go on about Canada

32:50

and our tech. We have one left, so

32:52

we're not going to wish some bad luck

32:54

there. No, which one is it? Shopify.

32:58

Oh, yeah. Well, that's a good one. Yeah,

33:01

no, and that's half of our tech index. So

33:06

we have 8% of our TSX and

33:08

half of that is in one company.

33:10

So for

33:13

the sake of that, I hope that keeps going. Yeah,

33:16

that's really interesting. Well, moving away

33:18

from stocks towards the world of

33:20

fixed income and treasuries. Joseph, you

33:22

had a recent piece, which is

33:24

about the levering

33:27

up of the basis trade,

33:29

which is basically going long bonds and

33:31

short futures against those bonds or vice

33:33

versa. And you know, very complex over my

33:36

head. Can you explain

33:38

your findings in this most recent

33:40

piece on FedGuy.com? We have, we're

33:42

issuing a lot of treasuries, right? So I mean,

33:45

the primary issuance is, looks like it's going to

33:47

be, you know, depends on

33:49

the deficit forecast to be about 1.6

33:52

trillion this year. So we're issuing a lot of treasuries

33:55

going forward. And there's been a lot of discussion as

33:57

to who's going to buy all this debt.

34:00

Now, the marginal buyer of all

34:02

this treasury issuance for the past

34:05

several months has been

34:07

the what's called the Cash Futures Basis Trait

34:09

Jack. And like you correctly described, it's when

34:11

the hedge fund basically buys a cash treasury

34:14

and then sells the future. So

34:16

instead of sell the treasury future, what

34:18

they're trying to do is they're trying

34:20

to benefit, they're trying to profit from

34:23

price differences between the futures market and

34:25

the cash market. So

34:27

what they're seeing right now is that

34:29

the futures market, the treasury futures are

34:32

too expensive relative to cash. So they're

34:34

selling futures and they're buying cash. Now

34:37

then the question becomes, so why are

34:39

the treasury futures so expensive relative to

34:41

cash? The reason that they're expensive, and

34:43

you can see many charts on

34:45

the internet on this is because the

34:47

asset managers, now these guys are, I

34:50

would say, your mutual funds, your pension

34:52

funds, your separately managed accounts, those guys

34:54

are tremendously, tremendously long treasury futures. Those

34:57

guys are the guys who ultimately bear

34:59

the risk because if you're a

35:01

hedge fund doing the Cash Futures Basis Trait, you

35:04

don't have any directional risk. treasury

35:07

futurist. On the other hand, you're a

35:09

long-cash treasury. So you don't have exposure

35:12

to treasury prices. All

35:15

that risk is being held in the asset

35:17

manager community. These guys are

35:19

basically the ultimate holders

35:21

of all this treasury duration risk that's

35:23

being issued. In order to

35:26

figure out just, is there a limit to this trade

35:28

and what would happen for

35:30

this trade to reverse, after

35:33

all, I think of the market as a supply

35:35

and demand. So being able to understand what

35:37

drives demand for treasuries is really

35:39

important. So there's this really interesting

35:41

research presented to the US Treasury about

35:44

this. What they're

35:46

finding is that the reason that these asset

35:48

managers are so tremendously long treasuries is because

35:50

they're livering up to try to beat their

35:53

benchmark. So if you

35:55

are active fixed income manager, you

35:57

basically try, you manage

35:59

to the Bloomberg AG index. That's

36:01

an index for fixed income. And

36:03

in the Bloomberg AG, a lot

36:05

of it is treasury securities. Obviously,

36:07

treasuries are the largest segment of

36:09

the fixed income universe in dollars.

36:11

What these guys are doing is

36:13

that they are trying to beat

36:15

the AG index by selling some

36:19

of their, so using some, so let's say right

36:21

now they have $100, right? And

36:23

let's say that $20 of that is

36:25

devoted to treasuries because they have to

36:28

at least, you know, have matched their

36:30

AG index. So what they're doing is

36:32

let's say that $20 in treasuries, sell

36:34

10 of that and load up on

36:36

credit. So let's say high

36:39

yield debt. And because that

36:42

offers a bigger yield than treasuries. And

36:44

so once they do that, they have a higher

36:47

yield. But of course, they're still

36:49

benchmarked to the AG index. And the biggest

36:51

driver of the AG index's return is interest

36:53

rate risk. And so they want to make

36:55

sure that their portfolio is again, has

36:58

the same duration as the AG index. So

37:01

what do they do? They can add

37:03

back that duration exposure by livering

37:05

up and buying treasuries futures. So at

37:07

the end of the day, their exposure,

37:09

the overall exposure is larger. And

37:13

some of that is in higher yielding, let's

37:16

say credit instruments, spread products. And that's

37:19

allowing them to beat

37:21

their benchmark. And this trade apparently is very

37:23

popular in the primary source of the demand

37:25

for treasuries futures, which of course is what

37:27

creates the basis trade. And so it seems

37:30

like this is something that's going to be

37:32

able to continue until they

37:34

get some kind of shock to their credit

37:36

investments. And then maybe they'll retrench. Long

37:39

only or the buy side. Long only, yes.

37:41

Yeah, wants to be long

37:43

the treasuries. They do so with leverage

37:45

to get exposure to duration exposure to

37:48

interest rates. Hedge funds then kind of

37:50

harvest the fact that treasuries futures trade

37:52

at a premium over cash bonds by

37:54

being long the cash bonds and short

37:56

the futures. And unlike like, you know,

37:58

being long a six. year and short

38:00

a seven year where you find some curve

38:03

in the trade, you know, these things do

38:05

converge over time because future contracts have an

38:07

expiration date. So that makes it kind of

38:09

a, you know, very safe trade, but safe

38:11

trades can become dangerous trades because you use

38:13

a lot of leverage on them. Interestingly, you

38:16

know, in one of your earlier paragraphs, you

38:18

said that the growth

38:20

and the basic leverage

38:22

for the cash

38:24

futures basis trade is linked

38:27

to the performance of credit where spread

38:29

widening could also trigger treasury selling. That

38:32

is really interesting because normally we think

38:34

credit spreads widen something people are worried

38:36

about the economy. People go into

38:38

treasury. This time you said that credit and duration could

38:40

sell off at the same time. Yeah.

38:42

So that's actually what happened in March, 2020.

38:44

So go back to my example. If you

38:46

are a active portfolio manager, a hundred dollars,

38:48

and then you sold some of your treasuries

38:50

and replaced that with, let's say

38:53

high yield debt to goose your yield. Now,

38:55

if there is some kind of, let's say

38:58

shock to the market and people are asking

39:00

for their money back, well, the problem is

39:02

you can actually sell your high yield debt.

39:04

That market is just not that liquid. So

39:06

at the end of the day, you're

39:08

going to have to sell your treasuries. If

39:10

there is some kind of stress to the market,

39:13

you would expect there to be

39:15

stress in the equities and credit.

39:17

So, you know, stuff that has risk,

39:21

but if everyone has to sell

39:23

their treasuries just to raise liquidity

39:25

to meet redemptions, then you could

39:27

also have treasury sell off as

39:29

well. And that's exactly what happened

39:31

in March, 2020. It's basically vinking

39:33

the treasury market and the

39:35

high yield market through these portfolio

39:37

managers who are levering up. Very

39:40

interesting. Marlon, what do you think of

39:42

this piece and the implications to a

39:44

broader financial system? Well,

39:46

I think there's a lot of embedded

39:48

risk on the fixed income side that

39:50

investors may not realize. And so,

39:55

all kinds of different things that potentially

39:58

derail it for investors. investors.

40:00

And I saw that in March of 2020, and

40:03

some of these so-called duration-neutral

40:08

type of

40:10

funds got completely destroyed.

40:14

And on the other side, other short

40:16

position, because corporate high yields just mean

40:19

that the whole market just went

40:21

no bid, and it was terrible.

40:23

And so, I mean, it could play out

40:25

many different ways, not necessarily just the economy,

40:27

but it can also play out with how

40:29

the Fed responds

40:33

with interest rates. And so, what

40:35

we've done is

40:40

we use long dated

40:43

bonds as just strictly as

40:45

a risk instrument. And

40:48

so, we're out of the high yield, we're

40:50

not in the high yield space for

40:53

a number of different reasons that you

40:56

just described, but we

40:58

started adding some duration in our

41:00

exposure, but we did that through

41:02

structured product. And so, what I

41:04

mean by that is we don't

41:07

think they are expensive,

41:09

but we don't really

41:11

want that yield. But if

41:14

something shit hits the fan in two

41:16

years with the economy, something happens, I

41:18

want to own that asset class. And

41:21

so, we did it, so we get 1.2 times

41:24

the upside of long

41:26

dated treasuries with an embedded 30%

41:29

downside protection in case

41:31

we get it wrong. So,

41:33

it's a zero cost hedge

41:36

for us, and we're giving away a

41:38

yield that we're not too enthralled about.

41:40

So, there is that

41:42

opportunity cost. So that's how we're

41:44

playing it. But if you're a traditional

41:46

60-40 type of investor, you're having

41:48

an active manager that's trying to

41:50

beat the Bloomberg, that egg

41:52

index that Joseph you were mentioning, is it

41:56

really worth the risk to get

41:58

that spread? above that index,

42:01

really? Is it worth it? Like how

42:03

much you, like what are your

42:05

take home and what

42:07

go wrong for that risk? I don't know.

42:09

I always look at things like what am

42:12

I getting for my return? Okay.

42:14

And then how much risk exposure

42:17

do I have? Right?

42:19

So if it's a couple, and so,

42:21

you know, with the FAD keeping rates

42:23

low for so long, you have people,

42:25

I don't remember, people are shorting vol

42:28

and, you know, and

42:30

running puts. And so you're picking up pennies

42:32

in front of a steamroller to get a

42:34

basis trade. And then the steamroller comes

42:36

in, all of those,

42:39

you get five years of returns wiped out in

42:41

a week. Right? And so

42:43

you have that tail risk exposure that

42:46

it's just like, why do you want

42:48

to have that in your portfolio? You know,

42:50

that's such a good point. And so when you're doing

42:52

the cash futures basis trade, it

42:55

looks like if you do 20 times leverage, you can get about

42:57

10% return over cash. But if you look

43:01

at a grasp of those earnings of

43:03

someone, of a fund that does that, you

43:05

know, over time, you go to a place

43:07

like 2020 when you basically wipe out all

43:10

your capital as they start over. So it

43:12

is picking up pennies in front of a

43:14

steamroller. Sometimes you lose everything. But

43:16

about managing money from a

43:19

Canadian perspective, when a

43:21

Canadian fund is looking at fixed income,

43:23

are they also looking at Treasuries? Or

43:27

is it a focus on Canadian gummies? Or

43:29

is it more global? I like

43:31

US Treasuries. I love

43:34

liquidity. Right? I go

43:36

to bed with liquidity at night. It keeps

43:38

me nice and warm. And I can wake

43:40

up and I just love it. And

43:42

I love the transparency. In

43:45

Canada, it's a small market. And

43:47

it's not very transparent. And so

43:50

we have some Canadian corporate bonds, you know,

43:52

yielding 5.5%. You know, that's okay. But we're

43:54

on the way

44:00

bonds period, like we've been underweight and

44:02

our 60-40, I call it the 50-40-10, you

44:06

know, we're 50% long

44:09

equities, 40% structured derivative

44:11

products and 10% cash

44:13

slash short-term bonds.

44:15

US floating rates have been fantastic. Now we're

44:18

taking that to like, you know, 50, 30,

44:22

20, adding in some duration for

44:24

risk management. So, and that's

44:27

where we're adding that is in the

44:29

US market, not

44:31

the Canadian market. And so, again,

44:33

that it's just strictly preference and

44:36

liquidity. And I like

44:38

US dollars as a Canadian, especially

44:41

with some of the policies, economic policies, I

44:43

just mentioned GDP per capita. If you look

44:45

at our productivity, this is fine, I don't

44:47

want to digress, but productivity

44:50

on a GDP basis,

44:52

like of our provinces, you can

44:54

rank them against the 52 states.

44:59

Alberta is ranked 14, so it's not bad,

45:01

tied with Texas, go figure. But

45:05

all the rest are at the

45:08

bottom, like Louisiana and Arkansas and

45:10

like, all of them are near the bottom. So

45:13

our productivity is, we can't compete with the US

45:15

at anything

45:17

more than $0.75. We need to

45:20

discount the dollar. And if we have oil, it'd

45:22

be more like $0.65. So

45:24

I like owning, the

45:27

US is doing so good, like the economy is

45:30

doing so well. Like I don't

45:32

know why Biden's pulling so low

45:34

in the bulls, I mean, the economy is

45:37

ripping, doing well, you've got inflation coming down,

45:39

you've got the markets at their highs, you

45:41

know, I want to own that. I mean,

45:44

I want to be there. Canada's,

45:47

the economic outlook is nowhere close to

45:49

what's happening south of the border. I

45:53

have seen a chart of Canadian GDP

45:55

per capita. And It's shocking, it's

45:57

basically been stagnant for really. Long

46:00

time. I. Mean: because of

46:02

immigration the overall gdp growth

46:04

but. Gdp. Per capita people

46:07

just. I. Are not

46:09

better off so know. It's.

46:11

It's really surprising. Sell. For and

46:13

any dimension inflation am I was a

46:15

speaker to counter see if they. Are

46:18

as you mentioned your their dire a couple

46:20

years ago and I know the great event.

46:23

Am. I was one of the yeah

46:25

palace this year and am I have

46:27

a fellow? A Palace told me about

46:29

his wife's from Argentina. And.

46:31

In Argentina the park their money in

46:33

cars because the dollar keeps getting worse

46:35

and worse and worse or the by

46:38

a car it's an inflation Hatch said

46:40

really buying new cars so it as

46:42

a Canadian. Armed. Instead of

46:44

buying cars and other i like

46:46

cars but I'm subway cars A

46:48

I like us dollars. And.

46:51

It's as our memory in our first interview. you.

46:54

Start. To at the structured products as

46:56

that worked out well and have you increase

46:58

your exposure to this structure. Products. And.

47:00

Could you also just ships explain again

47:02

the payoff structure. So. If

47:05

you're looking at you buying a mind.

47:07

And. You're trying to

47:09

get that spread trade. And.

47:11

And and if the gate yet twenty

47:14

times leverage and so you got that

47:16

that exposure to the underlying and some

47:18

he goes wrong. he got that that

47:20

exposure there. So I'm were structured. Product.

47:23

Comes and you could pick whatever index you want.

47:25

Ah, you could do you as you could you

47:28

need. yeah see could you your surgeries You could

47:30

do. Anything. That you want. And

47:32

and then you could do a derivative overlay

47:34

on it. And. It's done within

47:36

a contractual obligation with the counterparty,

47:38

not counterparty risk as important as you

47:41

know with Lehman Brothers and. and

47:43

society generale so mean we a

47:45

fleeting banks royal bank and and

47:47

national bank of back literally banks

47:50

are going anywhere anytime soon and

47:52

that's that's a counterparty so i'm

47:54

we can do we can take

47:56

a look at it and safety

47:58

russell two thousand We did well,

48:00

that's still 20% below the S&P,

48:05

it's highs, pre-coated

48:07

highs. But

48:09

we made some money on it. We

48:11

did really well. So we sold our

48:13

Russell 2000 exposure and did a structured

48:16

note on the Russell 2000. So

48:18

we locked in a nice gain, de-risked

48:20

it. And

48:22

so we de-risked by doing a note

48:25

on that index. And at the index, as

48:27

long as it stays above minus 30%, we get paid a

48:29

10.6% coupon, annualized out

48:34

monthly. And so we've turned it

48:36

into a fixed income like replication

48:38

and 10.6% our clients are in.

48:42

I mean, although it's a fixed income, and we

48:44

treated it as a fixed income component in our

48:46

portfolio, 30% downside in the Russell 2000 with 10.6%

48:48

coupon paid out monthly, that's

48:53

great, especially since we locked in our 40% gain on

48:55

our Russell 2000 for our clients,

48:58

de-risked it, now we're getting a coupon payment

49:00

on it. That's how a structured note works.

49:02

So it's not just an index by a

49:05

note by itself, we do it in context

49:08

of the market. And we've done that on a

49:10

whole bunch, we could do ones that will pay

49:12

a premium at the end of the year. We're

49:15

not trying to beat, that's the nice thing, we're not trying to beat

49:17

the Russell We're trying to get 68%. We're

49:20

getting 10.6%. And

49:22

that meets our targets, we're okay. So we can

49:24

watch all this stuff that's going up and down.

49:27

We'll talk about energy, energy is only

49:30

8% of our portfolio and that's extremely

49:32

volatile. And it's not

49:34

that 8% creating so much pain

49:36

and anxiety for such

49:38

a small percentage of the overall portfolio. Whereas

49:42

that Russell 2000, I'm getting my 10.6%, right? And

49:46

I'm sleeping at night, hooked next to my liquidity

49:48

trade on bonds. And

49:51

so is that Russell 2000 structured note, would that be part

49:53

of your, in your 50, 40, Would

49:56

that be part of your 50% equity or your 40%? We

49:58

move it to the, to the. bond side of things.

50:00

So we want to be long bond, we want to

50:03

be long equity. So you got to be, we

50:05

call it your beta, your beta trade, right?

50:08

And there's that portable alpha that some people

50:11

will term. And but you

50:13

know, we'll, we'll look at, we want to

50:15

have that long exposure at all times, because

50:17

we want to track that upside, a

50:19

portion of that upside. And recognizing we'll

50:21

track a portion of that downside. But

50:24

if we can narrow that distribute that

50:26

distribution curve, provide more predictability and getting

50:28

that six to 8%, our

50:31

clients are happy. And so we always want to

50:33

have that pure long exposure, we'll always be running

50:36

40 to 50% long, and at all times. And

50:42

so what percentage of your of

50:44

the 40% bond part is structured

50:47

notes on equity instruments or equity indices

50:49

versus structured note on the on the

50:51

tenure or a treasury? Of the 40,

50:56

20% would be on the fixed income aside, and

50:58

80% would be on an index

51:00

now, or on stocks in general. And

51:03

they'll, we'll look at all blue

51:05

chip. So we'll do one

51:07

on the S&P, for example, we're getting called

51:09

away, we've done really well on those. We'll

51:12

do one on Canadian banks, we'll do

51:14

one on utility companies, US utilities have

51:17

been beaten up. And

51:19

Canadian utilities companies have been beaten

51:21

up. And so as a risk free

51:23

component, we'll do like a deep 30 40%

51:25

downside barrier. And we'll get

51:29

coupons of, you know, 12

51:32

13%. And so we'll count that as a high

51:34

yield bond exposure, per se, I'd

51:37

much rather own that as a high yield instrument than

51:39

buy a junk bond. That is interesting. So

51:41

I would characterize that as

51:43

a short volatility trade, maybe

51:45

a short tail risk trade.

51:47

And in general, over the long term,

51:49

short volatility trade to have a positive

51:51

expected return, absolute return, and long volatility

51:53

is generally have a negative return. And

51:55

that's, I mean, I just know for

51:57

a fact, like if you look at

52:00

short mixed futures strategies, like that has

52:02

performed extremely well over

52:04

the past two years. How do

52:07

you sort of think about

52:09

that trade where, you know, I mean, you are in

52:11

front of that steamroller, right? Maybe you're picking up nickels,

52:13

10%, you know, 12% coupon, they

52:15

sound good, but you know, that what about

52:17

the, what's it, there's a crash below 30%.

52:21

You got to manage that tail risk,

52:24

right? You're right. 100%. So that's

52:26

why you, being an active

52:28

portfolio manager, you can add value. So

52:31

you run a portfolio of these, you

52:33

stay against the maturity dates. You can

52:35

add buffers on them. So what I mean by that is

52:37

not a, it's not a, if you

52:40

hit 31, you lose 31, hit 29, you

52:43

get all your money back, you buffer

52:45

the downside barrier, right? Your

52:47

term structure, five, seven years, and

52:50

you stay against those maturity dates. You

52:52

can sell them before their maturity

52:54

dates. You're not reliant on that one

52:57

day risk, right? And so you have

52:59

to manage that tail risk. Absolutely.

53:02

And, and then

53:04

you can, these things will, will trade,

53:06

I mean, typically not well above their

53:09

issue price, but traded at or below

53:11

it. And so your clients have to

53:13

recognize that there is

53:16

some downside not being, I mean, it's

53:18

being reflected in that, in that valuation,

53:21

but you've got that, that barrier. And

53:23

so you're right. Absolutely. It's not

53:26

just, it's not a

53:28

guaranteed income. It's not, it's something that

53:30

you really need a professional going in

53:32

and overseeing it because the, the, the

53:34

bad side about these structured products is

53:38

they have in Canada anyway, and I probably

53:41

didn't know this, but they

53:43

have a, one of the few areas that you

53:45

can get a sales commission on them. And

53:47

the advisors up here get anywhere from

53:49

three to 4%, one times sales

53:52

commission. So, I mean, I'll do

53:54

$5 million trades on

53:56

a regular basis. I mean, I got 3%

53:59

sales commission on that. I mean,

54:01

that's crazy. And so

54:03

it's almost like crack cocaine, you know, to get

54:05

a sniff of this and it's like, wow, this

54:07

is fantastic. So they sell it, they pick up

54:09

the phone and tell somebody, don't worry, the market's

54:12

never fallen 30% over five

54:14

years, you know, you're going to get a

54:16

15% coupon payment. But

54:19

they're not understanding how the index works,

54:21

the dividend impact on that index because

54:23

the dividends are harvested by the bank

54:25

on the writing down, they're not understanding

54:27

the tail risk. And

54:29

so it's a 40 billion a year market

54:32

in Canada. So it's pretty big. Yeah, it's

54:34

a huge market. So I

54:36

actually don't mind anybody who's doing that

54:38

because it's creating liquidity. Again,

54:40

as I mentioned, it's creating a big market for me.

54:43

And then of course, I'm not going

54:45

to, there's zero commission and I get

54:47

that 3% goes to my client. It's

54:51

not off the top. So they're going to

54:53

get the full benefit of it. So that'll

54:55

eventually get shut down. I'm okay with it

54:57

for now, because it creates a very liquid

54:59

market for me. But it's a really

55:01

good tool that I think

55:03

more people should have a look at. So

55:06

it's a $40 billion market now. Do you know what it

55:08

was a year ago or two years ago? How

55:10

much has it grown? So it's $40 billion

55:12

of new issues. It's a $100

55:14

billion market. So the stuff gets called away

55:16

and there's new issues coming out. So it

55:19

has a big turnover. So

55:22

there's like $20 billion, $30 billion, $40 billion. It

55:25

might be $50 billion this year in new

55:27

issue business. And it's

55:29

a $100 billion market in total, maybe going to $150

55:31

billion in Canada. Now

55:34

in Canada, all of the ETFs combined are $350

55:36

billion. I'm

55:38

talking small numbers. So if you think about this, Nvidia

55:41

added in February 2nd, 2024, $200 billion US.

55:47

What day? More than

55:49

entire, all of the ETFs in Canada in

55:52

one day. So I know

55:54

this is for your viewers, this

55:56

is small potatoes, but to us

55:58

Canadians, it's pretty big. Blockwerk's

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56:38

back to the interview. Wow.

56:41

So moving on to the oil and gas. I

56:43

didn't know, you know, you're from Canada, I know

56:46

you talked about oil and gas before, I would

56:48

have thought your exposure was larger than 8%.

56:51

That seems pretty small. Why is it?

56:53

Has it been so small? Why is it so

56:55

small? And when you say oil

56:57

and gas, I mean, we're talking to ExxonMobil, we're

56:59

talking Canadian companies. How are

57:01

you allocating based on jurisdiction,

57:03

geographic region, as well

57:06

as market cap size? Okay,

57:08

so we're bigger than the S&P, was

57:11

it 3% or 4%? It's smaller than the

57:13

TSX, which is 12%. It's a nice,

57:15

happy medium. I don't want to own energy long

57:17

term. One in commodities is not a good long

57:20

term investment. Commodity stocks,

57:22

because you're a price taker, and there's

57:24

a lot of variability in those

57:27

commodity prices. There's times we've been

57:29

almost zero weight. Now

57:31

we've locked in

57:33

some profits on really good, despite

57:37

oil prices being quite volatile, companies

57:39

like Suncor and CNQ in Canada

57:41

have done very well. And

57:43

we're leaning more towards Canadian companies.

57:46

The reason being is they

57:49

have a lot more capital discipline than US

57:51

companies. US companies like to

57:54

drill, and they're addicted to drilling,

57:56

almost like brokers are to selling the structured notes.

58:01

And so they wanted to just bring on more volume.

58:04

In Canada, there's a lot more discipline around

58:06

returning that cash flow back to investors in

58:08

the form of dividends and buybacks. And I

58:10

like that. I want that cash. I

58:13

don't know, oil is going to be at $75. It

58:15

may not be there in a year, but it'll give me that

58:17

cash flow. And right now that free

58:19

cash flow yield on these companies, assuming oil stays

58:21

flat at $75 is 15%. So

58:26

I'm getting that backward away. I don't want them to increase

58:28

production. I want them to give it back to me. And

58:30

they're doing that in Canada. They're

58:33

doing a lot of underbalances for a really good shape.

58:35

And finally, they get paid in US dollars. I mentioned

58:37

how I like US dollars and their

58:39

cost structures in Canadian dollars. And so

58:42

even though oil prices are at $75 US, in Canadian

58:45

dollar terms are higher than they were in the mid

58:47

2000s when the dollar was at par.

58:50

Right. And so we're getting a

58:52

tremendous benefit from that. And 8% is

58:55

a pretty big weighting. And it

58:58

can really add a lot of, like, keep in

59:00

mind, I'm trying to get 6 to 8 for

59:02

a conservative type of investor. And 8% weighing

59:05

to one segment of the market is to

59:07

me quite high. I mean, I seem

59:09

to, people in the US, where 30% is US tech. Yeah.

59:16

I like being, I mean, dividend

59:18

companies, IBM, Verizon, in

59:21

the US, Suncor, RBC, TDTC,

59:23

Energy, you know, those guys

59:25

are paying, you know, 5.5% dividends

59:28

and the Canadian companies are paying

59:30

6 to 8% dividends and free cash

59:32

will yield to 15%. That

59:36

does the job for me. I don't need to

59:38

get all its say. So I do tweet a lot about

59:40

energy because it's fun. I do tweet a lot

59:43

about tech because it's fun. And

59:46

I'm not as emotional because I

59:49

rent the space, I rent these

59:51

spaces. I don't own them

59:53

because they don't, if I do own them,

59:55

they'll own me and I'll get

59:57

really react, they'll get too emotional about these sorts

59:59

of things. That makes sense.

1:00:01

So you like energy, but you're not

1:00:03

all the non-energy. Maybe you're not as

1:00:05

excited about the well-valued,

1:00:08

high-valuation tech companies. Where are you seeing

1:00:10

opportunity in the market right now other

1:00:12

than what we talked about? If

1:00:14

you want to zoom in, there's a

1:00:17

real sexy trade in the

1:00:19

Canadian mid-caps. They've been completely

1:00:21

abandoned by

1:00:23

investors, institutional investors completely.

1:00:26

There's only one or two in Canada. They're

1:00:31

both, per my very table

1:00:33

pounding, energy bulls. But

1:00:35

in these mid-cap spaces, it's

1:00:37

been abandoned. Companies

1:00:39

that we own like Baytex, Tamarack,

1:00:42

Bali, Crescent

1:00:44

Point, Tourmaline Oil,

1:00:46

which would be almost higher. These

1:00:49

companies are able to buy back all their...

1:00:52

If energy prices stay where they're at,

1:00:54

just stay where they're at. They

1:00:56

don't need to go any higher. I

1:00:58

know there's concerns about China. India

1:01:01

is really doing fantastic on the

1:01:03

emerging growth side. Even if energy

1:01:05

man grows at 3% globally, prices

1:01:07

stay flat, they can buy back all

1:01:10

their stock and debt in four years. I

1:01:12

mean, that's just... I've never seen that

1:01:14

before. So I want a little

1:01:16

bit of that. And I know a lot

1:01:19

of it personally, not a lot, but I have over

1:01:21

8%, well over 8% in

1:01:23

some of these smaller ones for a little bit

1:01:25

of a torqued upside trade. I could get it

1:01:27

wrong, but the risk reward

1:01:29

to me is quite exciting. So that's

1:01:31

one little area for a little bit

1:01:33

of sex appeal and torqued your portfolios

1:01:36

that are good. I mean, we mentioned the

1:01:38

structured notes already. Canadian dividends and

1:01:40

US dividend players, the US economy, that whole

1:01:42

segment of the market is kind of being...

1:01:45

Nobody wants to own that. And

1:01:49

it's the bread and butter, it's just going to keep

1:01:51

chugging along and paying you a nice

1:01:53

dividend rate. And the economy is not

1:01:55

falling apart. I'm not one of those few that are

1:01:57

thinking the world's going to end and we're going to

1:01:59

a deeper set. because of the government

1:02:01

debt and they're spending too much

1:02:03

and the debt's going to blow up and the

1:02:05

currency is going to be worth nothing and that's

1:02:08

gotten you nowhere. And so

1:02:11

owning an IBM or Verizon

1:02:13

in the US is probably

1:02:15

not a bad trade. Owning

1:02:18

RBC in Canada, the bank

1:02:20

is outstanding. TC Energy,

1:02:22

some of the pipeline companies, Enbridge, they're

1:02:25

concerned about some of their debt. Industry is going to

1:02:28

come down faster in Canada than the US. So

1:02:30

their debt costs are going to come down,

1:02:33

in my opinion. And so

1:02:35

there'll be some upside. And utility companies,

1:02:37

utility companies look also really interesting as

1:02:40

industries come down. So if

1:02:42

you're a believer in deflationary

1:02:45

pressures and industries coming

1:02:48

down, why not own some

1:02:50

of that duration exposure through some of the utility

1:02:52

companies? So you're like utility companies,

1:02:54

dividend payers, companies that maybe could be

1:02:56

characterized as value in the US as

1:02:58

well as Canada. Martin, you said that

1:03:00

you think interest rates could decline faster

1:03:02

in Canada than the US. I want

1:03:04

to know why, but just starting on

1:03:06

the topic of interest rates, I want

1:03:08

to bring Joseph back to the conversation.

1:03:11

Joseph, what did you think of Fed

1:03:13

Chair Jay Powell's 60-minute interview? It was

1:03:15

not 60 minutes, it was only 13

1:03:17

minutes. I was left a little disappointed.

1:03:19

But there was some major forward guidance

1:03:21

in there. I think he said something

1:03:23

to the effect of unlikely

1:03:25

rate hikes soon, more likely to the

1:03:27

summer, which the market is kind of

1:03:29

interpreting as May and or June, because

1:03:32

that would be five

1:03:35

or six hikes. So, yeah, I mean, how has

1:03:37

your outlook on the rate

1:03:39

hikes changed? Or more accurately, how have

1:03:41

you perceived the fact that the market

1:03:43

is now perceiving that there's only

1:03:46

going to be five cuts instead of six, instead of

1:03:48

seven? I was also looking on CNN's website for the

1:03:50

rest of the 47 minutes, too. I

1:03:53

cannot find it. But, yeah, I

1:03:55

think Jay Powell's commentary was very much

1:03:57

what he repeated, what he already

1:03:59

said. at his press conference just a

1:04:01

few days earlier. My

1:04:03

sense is that what really stood out to me

1:04:06

was that Jay Powell made

1:04:08

very direct commentary on the fiscal situation.

1:04:10

Now he's done this before, but

1:04:13

this is the second time that I

1:04:15

remember him saying it, and the CNN

1:04:18

audience is a much broader audience. So

1:04:20

I think that's him doing his duty

1:04:22

and just telling the

1:04:24

public that the fiscal situation

1:04:26

is not sustainable. On

1:04:29

the monetary policy front, like he mentioned, he

1:04:31

did strongly suggest that rates hikes

1:04:33

are gonna be, rate cuts are probably gonna

1:04:35

be some time towards the middle of the

1:04:37

year, so maybe May or June. I think

1:04:39

the market is pricing in about a 50%

1:04:42

in May. This

1:04:44

seems to have shifted the market calculus

1:04:46

a little bit. I think the market

1:04:49

is pricing in about five cuts this

1:04:51

year. So what it's really done is

1:04:53

just kind of push into the future

1:04:55

and a very aggressive

1:04:57

rate cut path.

1:05:00

And for me, now even though the Fed is

1:05:02

only saying that they're probably gonna cut three times

1:05:04

this year, I think the market

1:05:06

is probably more right this time than before, and

1:05:08

I know, Jack, over the past few years, we've

1:05:10

been talking about how the market is so wrong,

1:05:13

but the Fed has also been very transparent in

1:05:15

how it sees the world. It likes to see

1:05:17

the world through real interest rates. You've had John

1:05:20

Williams of New York Fed come and talk about

1:05:22

this. You've had Governor Waller talk about this. And

1:05:25

in the September meeting, Chair

1:05:28

Powell also mentioned this view. So basically,

1:05:30

as inflation expectations have come down so

1:05:32

much, unless they cut nominal rates,

1:05:35

they're gonna be risk over tightening.

1:05:37

And because inflation expectations have

1:05:39

gone down so much, real

1:05:42

rates being nominal minus expected

1:05:44

inflation, even

1:05:46

if they cut five to six times, they're

1:05:49

gonna still have pretty high real

1:05:51

interest rates. And I'm pretty sure they don't

1:05:53

want to risk their hard

1:05:56

fall soft landing and over tighten. So

1:05:58

I think the market... is I

1:06:01

think it's reasonable for them to expect, let's

1:06:03

say, a deeper reek, let's say five, six

1:06:05

hikes, maybe starting in the middle of the

1:06:08

year, maybe J-PAL would delays it, but I

1:06:10

think that's reasonable according to the framework of

1:06:12

the FEDIS Telegraph. So five to six cuts

1:06:15

that are priced into the market by

1:06:17

the end of the year, you think

1:06:19

the market could be... About five is

1:06:21

priced in... yeah, about five is priced into

1:06:24

the market, but I think that's not unreasonable.

1:06:26

And you could always have some labor slowness,

1:06:29

we've seen. Okay, the labor market

1:06:31

report was very good in

1:06:33

January, but I think at

1:06:35

the end of the day, as we

1:06:37

see labor force participation not increasing anymore,

1:06:40

we're going to run out of people. And so

1:06:42

I think that would suggest that we'd have lower

1:06:45

increases in monthly employment, and I think that's

1:06:47

going to change the calculus a bit as

1:06:49

well. We didn't see it

1:06:51

in January, but I think it's coming. And

1:06:54

is 25 basis point cut, 25 basis point cut, 25 basis

1:06:56

point cut, is that your base case, rather

1:07:00

than 25 basis point cut, pause, 25 basis

1:07:02

point cut, pause? All I'm saying is that

1:07:04

what the market is saying right now, let's

1:07:07

say about five cuts this year, it's not

1:07:09

unreasonable according to the framework that the FEDIS

1:07:11

given, how that exactly plays

1:07:13

out. I mean, it's really going to be

1:07:15

data dependent and the data hasn't volatile, right?

1:07:17

So in January, we got a very big

1:07:19

upside surprise in payrolls, and

1:07:21

we do have many economic indicators that

1:07:23

seem to be suggesting some degree of acceleration

1:07:26

in the economy. So

1:07:28

there's a lot of uncertainty, just based on

1:07:31

all that uncertainty. I don't think what the

1:07:33

market is pricing in is unreasonable. What

1:07:35

actually happens, I guess we'll just have to see,

1:07:38

I really do think that the FED will be

1:07:40

data dependent. Got it. Thanks. Mark,

1:07:42

going back to your comment, what made you

1:07:44

say that you think the Bank of Canada

1:07:46

could cut interest rates faster

1:07:49

or more vigorously

1:07:52

than the Federal Reserve? The

1:07:54

economy is not as

1:07:56

strong. And you can

1:07:59

see that in some. the labor numbers and

1:08:03

with the exception of Alberta and energy

1:08:05

itself, which is doing well. And

1:08:08

so consumers are more levered and

1:08:11

they have to balance that against the acid inflation on

1:08:13

the housing. But I think when

1:08:15

it first comes to shove, they're

1:08:18

going to have to provide

1:08:20

more so from a stimulant

1:08:23

standpoint than being less

1:08:25

restrictive as what Joseph

1:08:27

was mentioning in the US. And

1:08:31

so they have to weigh that against

1:08:33

the inflationary pressures from the

1:08:36

immigration standpoint. And

1:08:38

so I do see them cutting

1:08:42

at least equal to the Fed or if

1:08:45

not more. It's actually nice to hear

1:08:48

that there's potential Joseph was

1:08:51

mentioning for those five cuts being

1:08:53

quite likely. And I think that's

1:08:55

exactly what Bank of Canada,

1:08:57

I wrote a piece on, you want to

1:09:00

know Canadian monetary policy? Follow the Fed because

1:09:02

we're not, you know, it's

1:09:05

mean, what a great job. I mean, you

1:09:07

just have to, you can make up all

1:09:09

kinds of economic numbers and make yourself sound

1:09:11

really smart, but you're really not

1:09:13

going to diverge much from the Fed. And

1:09:17

I think if the Fed

1:09:19

does act in that manner, that's really good

1:09:21

news for the Bank of Canada because we

1:09:23

want to have some currency stability as well

1:09:26

too. And so

1:09:28

I think you probably see if there's

1:09:30

five cuts in the US, you'll see seven in

1:09:33

Canada. I mean,

1:09:36

if that does play out. Very

1:09:38

interesting. Yeah, Canada didn't hike as much. The

1:09:41

overnight rate Bank of Canada is 5%, whereas for

1:09:43

the Fed's odds rate, it's 5 and 3 eighths.

1:09:47

The two-year Canadian rate is 4.2%, slightly below the 4.55% on

1:09:49

the US two-year. Gentlemen,

1:09:55

thank you so much for coming

1:09:57

on. People can find Joseph's.

1:10:00

work at fedguy.com. His Twitter

1:10:02

handle, of course, is

1:10:04

at fedguy12. And Martin, people can find you

1:10:06

on MpelteaCIO

1:10:08

on Twitter.

1:10:10

And what's your website? Where can people find out more

1:10:13

about your firm? www.trivestwealth.com.

1:10:17

And that'll flow through to Wellington Altus. That's

1:10:20

another good way to follow there. And you can also sign

1:10:22

up for our, we provide free monthly

1:10:24

research on all these sorts of things that

1:10:26

we're talking about. So if that's of interest to

1:10:28

you, happy to add you

1:10:31

to the list. Very nice. Thanks again,

1:10:33

guys. And thanks, everyone, for watching. Thanks

1:10:38

for watching. Remember to check

1:10:41

out vanek.com/hodlfg to learn

1:10:43

more about the Vanek Bitcoin Trust, ticker

1:10:46

HODL. Reminder that forward

1:10:48

guidance episodes are available on all

1:10:50

podcast apps and on Twitter, where

1:10:52

I post them regularly, at JackFarley96.

1:10:55

Thanks again. Until next time.