The Canadian Investor - The BoC Is Concerned About Inflation & Bond Yields Hit New Multi-Year Highs

Episode Date: September 5, 2026

Bond yields are climbing, energy prices are surging, and central banks are being forced to navigate an increasingly complicated inflation picture. Simon and Dan break down what the bond market may be signaling and why higher long-term yields matter even if the Bank of Canada keeps its policy rate unchanged. They discuss the potential impact on Canadian housing, rental construction and mortgage financing, along with why inflation-adjusted home prices can continue falling even when nominal prices stabilize. They also look at the sharp increase in diesel prices and refinery margins, what higher transportation costs could eventually mean for consumers, and whether households have enough room left to absorb another round of price increases. The conversation then turns to monetary policy following the latest Bank of Canada decision and Kevin Warsh’s Jackson Hole remarks, before digging into one of the biggest risks surrounding the AI boom: financing. With hundreds of billions being poured into AI infrastructure, rising borrowing costs and increasingly interconnected financing arrangements could become a major vulnerability. Simon and Dan discuss what happens if AI companies ultimately generate less revenue than expected, whether hyperscalers could be left with excess capacity, and why enormous technological breakthroughs can still coincide with massive capital destruction for investors. Stocks/ETFs discussed: NVDA, MSFT, GOOGL, ORCL, TSLA, WMT, TGT, HD, LOW, DLTR, L.TO, DOL.TO. Watch the full video on Our New Youtube Channel! Check out our portfolio by going to Jointci.com Our Website Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Asset Allocation ETFs | BMO Global Asset Management Sign up for Fiscal.ai for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

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Okay, welcome back to our macro live show. I'm back with Dan Foch here. So we have a fun one. Coming up, we're all on the, pretty much all the streaming platforms, X, Instagram, YouTube. So make sure you follow us. If you're hearing this on the podcast feed, you can go to our YouTube channel, see a replay of it. And we'll try to get to some of the questions. I know we have a few loyal followers. I think Stuart Sulfur is definitely one of them.

He's already lighting up the chat. Yeah, already lighting it up. Well, I put a, I forgot to, I forgot to mention this. I don't know. Did you see the thumbnail that I put for this one? I've been like split testing. It's funny because like I people always say I'm like a domer. So I'm like I like what do you want me to say?

Yeah, yeah, yeah, I guess I am. But so I've been split testing on my channel like bullish and bearish thumbnails. And bullish clickbait actually gets more clicks. So I'm going to probably stop putting bearish clickbait thumbnails because I think the bears still click on them to come and like yell at you. Right. Okay. I like it. Yeah.

But then the bulls like then you still kind of capture the bulls. So anyway, that's what I've noticed, which is kind of funny. So anyway, what are we talking about today? Hey, everyone wants a little bit of positivity, right? So I do listen to a few people that are into, I don't know if you're familiar with Michael Avery, who's kind of predicted a lot of this stuff happening right now. No. Joe Politic front.

And he talks about stuff. And you're kind of like, wow, he's pretty doom and gloom. But he does try to look at things in a positive lens, at least life in a positive front. at least life in a positive lens. So I think a lot of people want a bit of positivity. But I mean, there's a lot to talk about. So I know we'll talk about the bond market. I'll touch a little bit on a piece that was published using AI by Stan Drunken Miller a couple

weeks ago to basically hit that saying Scott Besson shouldn't have increased the buyback. So let the bond market speak. Talk a little bit about that. Obviously what's happening in the Middle East, oil and diesel. prices. Diesel crack spreads are just going through the roof and we have some data showing diesel prices in the U.S., but also in Canada. And it's just basically hitting new highs this year. So we'll talk a little bit about that, some of the implication on inflation. Obviously, Bank of Canada announcement talk about a little bit what Kevin Warsh said at Jackson Hole. And then

what else on your end? I think there's probably some stuff that happened on the housing front, real estate. I'm sure you're well informed on that. Yeah, I mean, not a ton of like news on the real estate side. Treb puts out their stats either today or tomorrow. I think the rates are really the interesting part for housing. Like, can it really afford to take another hit? You know, and, and I mentioned we would talk a little bit about like rental supply and how how sensitive it is to the bond yield. Because the first place that you're going to see all of the stuff. And Canada's been sort of insulated on the bond yield side of things, which has been sort of fascinating to me, I think the first place that you're really going to see pain show up is actually in a lot of the rental supply.

And it's not to say that, well, some of the deals in the pipeline would probably suffer if yields went up, you know, I don't know, 25 bibs or whatever. And it translated into CMHC rental financing because, you know, I've talked about this a handful of times on the show. It's a super high leverage product. So like, and it's on a 50 year amortization. So you pay a ton of interest in the first five years, first 10 years. And as a result, your pro forma, the model for your deal is very sensitive to interest rates. And they're on the five-year or longer-term interest rates? Depends.

It's a five or ten. Yeah. So the whole issue of five or ten, and they are, yeah, but yeah, it's really your five, right? So cheapest interest rate in the market, but the deals really depend on them being where they are or staying where they are. like, you know, and volatility in that, in interest rate environment really changes things in a lot of the models that are underwriting. So what would happen, my estimation would be if we do end up in even a slightly higher bond yield environment, that will constrict this huge flood of rental supply that we have coming on the market. And that would actually materialize in, you know, excess supply situation balancing a lot sooner than we originally anticipated.

Okay. Yeah, I'm just showing the Canada five-year bond yield. So it's the highest it's been in a year. How is that on a five-year chart? What's that? How does that look like on a five-year timeline? I mean, not too bad, but keep in mind, right? Like, we're looking at it's not as high as it was back in late 2023, or actually was that, yeah, late 2023, but you have to keep in mind that the Bank of Canada overnight rate was what close to 5% at that point.

or ahead. Yeah, it was still like around 5% at that point. So obviously long term yields are not, you know, they will be affected a little bit by the overnight rate, but not as much as there is definitely other forces in play. But to keep in mind how much lower the overnight rate is right now and seeing those bond yields. So 3.4 now, the highest in a year. Highest probably since I guess mid-2024. And then if you start looking here at the 10 year, same thing here for the 10 year. So same kind of thing where it's the highest it's been in several years.

And who knows what direction it will be, but definitely will probably like, do you know the housing market, the real estate market better than I do? But I would also think even outside of rentals, I'll probably have a bit of a dampening effect on maybe some of the recovery that we're seeing like in Toronto and other places or I guess the lack of recovery. Every, you tell me, you know, those markets better than maybe. I think it would just prolong and protract the downturn and it will continue to force the cycle. I mean, there are a lot of places outside of Ontario and BC that are hitting all-time highs on housing. I think I've pulled up the chart showing like I call it the tail of two markets. You basically have Ontario and BC being like, I'll pull it up because it's pretty cool to look at. But provincially, Ontario and BC, if I mark to January 2020,

so a month before the rate hiking cycle started, Ontario and BCR are the only provinces that are down. And could prolonged, hire for longer, kind of pull some of the steam out of the more affordable markets that we're seeing and sort of force them to kind of plateau or cycle. I don't think many of them have room to blow off per se, but and then could it push your Toronto and Vancouver further down by continuing to constrict buying power.

It would make sense, right? And then I think we're like, I really do feel like we probably, I can't see the Bank of Canada hiking even though the bond market is trying to push it in that direction. And I think that they have clearly communicated that they think about inflation differently than the consumer. And, you know, they were obviously wrong about the transitory nature of inflation during the pandemic. but fuel is very different. And they will not use that word again, but I think that they do,

they operate as though they feel like inflation that's outside of their control isn't like something that they should go after with their policy by trying to hike to further soften the Canadian economy. And so as a result, I could see them being comfortable with us being on like the,

you know, two and a half to three and a half range of inflation rather than the one and a half to two and a half. And, you know, when you get back kind of into that inflationary environment and they're trying to let, you know, they're comfortable letting the economy even grow through inflation, you know, on the nominal numbers. Housing becomes a part of that. And so what I would say happens, you know, sort of the way that I, that if you look at past cycles, you do sort of get to a bottom, but it ends up being a long, flat bottom, and you kind of bounce along it for a long period of time, a couple of years, frankly, as it takes so long for consumer confidence to rebuild, but where people really get smoked without realizing it is on the real house price.

If inflation's at three and a half and your house prices are at zero or one, they're not falling, and so people aren't really that concerned about the market, but they're losing value. And for most people, their highest component of their household net worth, it's interesting to me. It's like that I mean they are falling. The reality is they are. They are still falling on a year of your basis.

Yeah. People are when they stop. Yeah. Like the nominal is always a bit of an illusion. You have to always look at real prices, but no one really looks at real prices for the most part, whether it's mainstream media, whether it's even, you know,

the stock market, right? It's all nice and dandy. If you see the SMP 500 go up 10%, but you don't see CNBC or whatever, Bloomberg. saying, oh, the S&P 500 was up 10% last year, but in real prices, if you factor in for inflation, it was actually just up 6%. They never, never adjust for inflation.

It's always nominal. So I don't know whether it's on purpose, whether they think people can understand. They're not financially literally enough, but it's always interesting because to me, yeah, it's, you have a point there. If prices stay flat, I mean that at the end of the day, the nominal price, prices are flat, the real value is going down. And that's what's, I mean, you invest to keep your purchasing power, increase it, right? You own assets for that. That's all purpose. Yeah, 100%. If you're a DIY investor ready to take control of your portfolio, BMO all-in-one ETFs simplify the

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You want to talk about the Bank of Canada? Yeah, there's a question up here in the chat. By the way, fire us questions in the chat on whatever platform you're on. I think most of them show up on our feed here, so we'll try and read them and answer them. And the chat's on fire again, so we'll keep that live. Yeah, let's do it. If the Bank of Canada keeps holding, but bond yields remain elevated, what does that mean for commercial mortgage rates over the next 12 months? So there's a couple of, and I was going to mention this when you were talking about.

Yeah. I was going to mention this when you were talking about the, you know, consumers not really seeming to care what the bond yield curve is doing. You see this in the mortgage side too. Like Ben and Ron both mentioned it that more people are piling into the variable rate mortgage. Yeah. Which is scary because last time we did that, you know, the Bank of Canada rugged everybody and, you know, smoked 30% of mortgages with, you know, two or three X. increasing capital costs. But a lot of your commercial stuff, like, so we're talking like land, land debt, development debt, you're on like prime plus one to two. So you end up seeing, it ends up

mattering less what the bond market is doing because you're not doing as much fixed debt. Like, we don't have a similar system in the, in the U.S. where they have these like sort of commercial mortgage-backed securities, not at the same. They do exist to my understanding, but they're not, it's not like this scale in the U.S. where you have like these CNBS purchases. So in Canada, most of the rates actually depend more on the Bank of Canada. And most of your commercial financing, even beyond just real estate commercial financing is going to be more dependent on the Bank of Canada's curve. So again, the bond market can keep trying to say what they're going to do and push them.

And we've pulled up the chart. I have to pull it up again now that we're talking about. The bond market is actually wrong as often as it is right. So about what the rate environment is going to end up like. So I would say that if the Bank of Canada keeps holding, they're going to be able to hold the line for keeping capital available. and affordable for commercial purposes, despite your fixed rate environment, maybe changing mostly just the way that consumer mortgage is. Consumer five-year fixed mortgages.

I don't know if there's anything else I'm missing. Well, the government, obviously government financing and their costs, which doesn't seem to matter. I mean, they're going to spend an infinite amount regardless of what their capital cost is and pass the burden off to future generations because this is not just a Canadian tradition, but this is just how we run global finance right now. Well, yeah, exactly. And I mean, it's something that Drunken Meller did say in terms of his solution for getting longer term bond yields is essentially you have to do, you have to gradually reform.

And you have to essentially phase in long, like these changes over long periods of time. So it's spread out over multiple generations. But we know that that is unlikely to happen. And if it does happen, it would just happen. in terms of if there's enough political pressure to do it. And usually that happens when bond yields, so longer-term bond yields actually start rising pretty quickly where it just becomes that you,

you know, politicians no longer have a choice where they have to make the tough decision. Because if not, they'll always, when given the choice, they'll kick the can down the road unless it becomes unbearable. And obviously, no, the U.S. is not actually... The U.S. is different. Yeah.

Yeah, well, the U.S. is different because they can continue. to print, you know, the solution to the problem. But at what point is it like... Yeah, and they also have a whole shitload of unfunded liabilities. I think we do tend to forget about that, especially social security in the U.S. and then you start looking also at veterans' entitlement. I can't remember the U.S. government publishes the unfunded liabilities. I think it was like $88 trillion.

Yeah, there's a street chart from Bloomberg on it. They publish it. Like, the U.S. government actually updates it. It's crazy the number. Like, you have the $40,000. Yeah, $139 billion. That is, no, that's not right. It's in the trillion.

Yeah, no, yeah, I'm only, I only have state ones. I have to find a federal one. I'll grab it and I'll pull it up. Yeah, somewhat. But essentially, I think that's what governments will need to do. Obviously, like, I think that was just, it just highlighted in terms of what politicians and, like, they end up doing versus what they should be. doing and at some point it's easier to do it now the longer you weigh the more drastic you're going

to have to be and in his op-ed what he mentioned which by the way you wrote with AI and I guess he got called out he's like yeah I wrote it with AI but it is my ideas so good for him to say that I don't really like man I put I put this tweet out like about about the AI stuff it's like it's like steroids right to me like I used to work out a lot I mean I still do but like you know I was pretty into bodybuilding and lifting and stuff. And it's like, still have to do the work. Yeah.

Yeah, exactly. Right. So it's like if you, if you use steroids, like nobody really cares, honestly, right?

Like they really only care if you lie about it. And then, you know, they think you're a dick, right? Or like, then they think negative. Like nobody,

nobody. And so I feel the same way about, about like performance enhancing drugs and like AI. Like, it's very similar to a performance enhancing drug to me in the way that, that, yeah, I mean,

if you take them and, sit on your couch and do nothing, you will not get good results. If you take AI and just ask it to draft something and you don't review it or you don't give it some guidelines in terms of what it should do and then you review it, you're going to get AI slop. And so that's not really reflective of your view. So I think you probably forgot to remove a few dashes. That's why people probably identified it. Have you seen the M-Dash chart? No.

I got to pull that. Oh, dude, I'll pull it out. just because we do love doing charts. Like the number of M-Dash is in like M-Dash usage frequency by type of language. One sec. It's pretty funny, too. It's a hockey. It's a hockey stick graph have I ever seen one.

Oh, wow. Okay. Yeah, it's like, you know, informal writing is now, there's more, almost as many M-Dashes in informal as semi-formal writing. That's too funny. That's 20-25. 26, they got to have passed for sure. But you see that. It starts rising in 2023. Surprise, surprise. Yeah. Yeah, but I mean, just to kind of finish up on Drunken Miller, I essentially kind of push back at Besson, which is interesting because Besson was like essentially he's admitted that Drunken Miller's as one of the best traders in history. I don't think he had like a negative year in terms of return for running his hedge fund. And he was his mentor and essentially had that opt-ed and basically said, look, what they're trying to do in

bond buybacks, even though the amount is not big compared to the overall U.S. debt and what needs to be very financed this year is essentially they're attempting to control the yield. And the problem when you start doing that is the bond market will, it's usually short-lived and you'll have the bond market actually testing you out. And then you have to do more and more interventions. And it just, it never ends up being good. So you essentially need, you said, look, you need to let the bond market speak because it is telling you that something is wrong. If you need to refinance the 30-year debt at five and a half or

six percent, you do it and attack the actual problem, which is the deficit. And that's when he gets into essentially reforming entitlement programs, stuff like social security, like I mentioned earlier, and essentially doing it over several generations and doing it phased out. So it's not too much of a shock. But he said essentially it's the bond market and tell you there's a problem and you should be addressing it and that you shouldn't try to just treat the symptoms because that will just end up coming back. Yeah, I think we're hearing a lot about this in Canada too. Like there's been a pretty big movement.

And it's interesting because like the conservative versus liberal party, like I think there were some conservatives running on the idea of increasing old age security in Canada. But, you know, like your OAS versus like your OAS clawbacks start at like, what is it, 120,000 now? Oh, it's high. Yeah, it's pretty high. Yeah. And yeah, so I think that there's obviously some pretty big themes around this with,

this is fourth turning stuff, right? This is like the next generation saying, hey, look, we don't want to be sold out for you to kind of continue to party, right? For you, the current government. It starts at 95,000. Right, okay. 95 partial, yeah, partial clawback. And then I think you'd stop getting it if you have a household income.

of 155,000. Yeah, so I think, you know, what is that for a family with kids? I think it's like 35 or 40,000 where clawback start. So this is where things start to become like, you know, this is the comparison that people are using. It's like, well, what's that quote from Charlie Munger, right? Show me the incentives and I'll show you the outcomes. It's like, well, why are young people not having kids, right?

I just did a whole podcast on Ron Butler show. We talked a lot about this. It's like, you and I have kids. And like I think we've worked like quite hard to try and have that privilege. And it's not, I don't even think it's like a statement of people's work or whatever. But to be in an economic position in the Western world, especially in Canada, to be able to feel like that's a reasonable decision. It's sad to me that people, you know, have to, are forced to forego one of those fundamental human experiences as a result. Expensive to have kids.

Yeah. Yeah. Yeah. Yeah. Yeah. But this is really the dichotomy that you see between, you know, the young generations and the older generations who have benefited a lot from asset inflation, you know, house price inflation, cheap interest rates for a long time. And now it's just like the hits keep coming for the younger generations who are now, now the next problem that they're finally like where the market and the individuals are kind of saying, hey, maybe don't, maybe don't make us pay for this, you know, forever. Maybe let's start actually appropriately spending capital. And, you know, not, like, because it's not just. And was it, was it Powell who said this when Yellen had him, they were doing that

that thing? And he was like, I have to remind you that, like, I'm not the one spending the money, right? Yeah, I think it was. I think it was. Yeah. One of the, one of the most, like, the greatest central banker exchanges of all time, I think. So. Yeah, I mean, he's not wrong. I mean, he's, but it's also like, you're also the enabler, but that's a, that's a question for another day. Do you want to talk about the Bank of Canada decision? Did you listen to the press conference?

No, I didn't. Did you? I read the highlights, but I didn't get a chance to listen. I usually do, but they started it during a meeting that I was in and I didn't get a chance to get back. No, that's, I mean, it was interesting. I think it's still some mixed signals. What some key takeaways, they definitely spoke about inflation quite a bit. I think they were starting to focus a little more back on. inflation. Again, it's some mixed signals. I was looking at polymarket. The rates of the chances of a rate hike are around 35%. So they've gone up a little bit in the past week. I think they were more around 20, 25%. So a little bit more hawkish there, I guess. They don't expect the new tariffs to crush the Canadian economy just because we've talked about it before. It's like 5% of the exports. But there is a risk that the counter tariffs could fuel inflation. They also talked about oil when they did the July forecast, the monetary report back in July.

They were forecasting $75 oil in Q3. So that forecast does not look very good right now, but we'll have to see where it goes. But I guess they did mention the Middle East quite a bit and just saying it's still unclear. Obviously, the longer it goes, the more of an issue it becomes. And they're prepared to high rates if inflation stays too high. And they have some pretty, they have a good question about and I encourage people to just look at the replay on YouTube and you can usually get the transcript and just go to the right section if you want to. There was a reporter that asked him about long-term bond yields. And it was a pretty long question and a pretty long answer, but they essentially put it on three reasons. So they said there's high sovereign debt, heavy government insurance right

now. They even mentioned the AI infrastructure buildout, essentially more competition for capital because of the debt that's being issued by those hyperscalers, for example, and obviously higher oil inflation risk where markets are pricing in potential central bank hikes. So Carolyn Rogers also said that the recent bond sell-off looks more like normal repricing of risk, not market dysfunction, but are they really going to say that the market's like, you know, blowing up until it's actually like, until like the evidence is just too obvious that it is blowing up. They'll never admit it until they can't say it's not happening anymore. So they're not seeing any issues on the liquidity repo or funding market front,

but I thought it was interesting when the way they talked about it because they clearly have noticed that bond yields are going higher. Yeah. Like they're being forced to pay attention to it, but they don't seem like, you know, I think they chose their language carefully and it was appropriate. And they were kind of like, it's sort of outside of our control, right? Like, yes, it could be, it could create inflation fears, but these aren't really inflation issues that that are within the scope of things that we can control with the policy rate. Like, yeah, we can continue cooling the economy. And maybe this is a good. point for us to pivot on sort of like what we were discussing and texting earlier about how like the direction that this actually heads. You know, you were showing me the diesel chart. I think I pulled up diesel crack spreads on our last call. But at a certain point, this becomes cost push inflation. And the bond market right now, I am of the opinion, at least in the US, not in Canada as much because they're not accelerating as high. It's sort of saying that central banks are going to have to hike.

And if central banks are going to have to hike, that means that the bond market is. is assuming that consumers can actually absorb all of these, the cost push inflation that would come as a result of of these things. I don't, I'm not convinced by that argument. Like, I just don't, and I think you and I are, that's not what retailers are saying. I'll say that. Right. Right. And I think, and I think central bankers are saying this without saying it because they, they're not going to say that we, you know, like how this ends, right? But every, you know, you and I were kind of talking about like how do we examine the timing on this of you know at what point does it become too much for the consumer to bear and at what point does it actually start

becoming that we're talking about disinflation or deflation or recession because the cost push inflation has been added to the retail prices of goods and consumers have to start making real material changes to the way that they're spending to be able to to afford to survive right Yeah, and I'm sharing like so for Canada, I know we talk a lot about the U.S. because it has a been an impact here, but Canada, so this is a pretty cool chart. Now you can just grab on, I think, the Natural Resources Canada website, and you can pick whichever city that you want, and it's daily average retail prices for diesel in 2026. And for those listening on audio, you can definitely see, so you have cents per liter on the

left hand side. Obviously, it gives you. So it's well above $2 per liter. In Quebec, it's approaching $3 per liter. The average in Canada is about $250. And then the lowest is Calgary. Well, if the main city selected, you can select a bunch of different cities. But all that to say that it's risen quite a bit just in the span of two months here, the chart.

So it's gone for the average in Canada below $2 a liter to $250. So it has gone from 190 to 250. And I think that's important because the central banks tend to be saying, well, so far we haven't seen higher gas prices, seeing that pass through to consumers. But retailers are saying that they have seen increase in prices. And for the most part, they've been eating in the U.S. There were also tariff refunds that kind of softened the blow for the most part last quarter that was just reported. But at some point when you have diesel prices that are very important for the economy and those prices, at some point, companies will have to start passing that through to consumer. Like, when's the breaking point?

I'm not sure. And to your point, what you were talking about, we have Walmart saying that they're seeing softness in most things except grocery. Same thing at Target. You have Home Depot saying that most people are postponing some non-essential projects and that, overall comp sales are very soft. Same thing for lows. You have dollar tree that is essentially saying we're doing pretty well because people are trading down.

They're coming over to the dollar store. And at some point, you know, you can't trade down anymore. You can't find substitutes anymore. You've already found them. So you start going to a spot where you have to do some tradeoffs. So you don't buy something at D because you need to buy something else with your excess money. So that's why I'm, I'm kind of confused as to where they say the consumer will be resilient.

Maybe part of the consumer spending will be, but a big chunk of the consumer base will not be as resilient as I think they will be. Yeah. I think, you know, the Home Depot one that, like an example that you made like same store sales being down, it stands out to me a lot because they were slightly up to be fair, but they were not strong.

Yeah. Right. I just thought that one was interesting because it, feels like in the U.S., like you have all of these people who are trapped in their houses by low interest rates. And so, you know, anyone who sort of bought during COVID on a 30-year, and not dissimilar in Canada, it's just like the data is all U.S., right? Like all the stuff that you would use, you know, you're talking about in many cases U.S. companies, most of their earnings is going to be composed of the U.S. But the household thing is kind of similar.

So, but the difference in the U.S. is nobody's resetting at a, at a, a, increased interest rate. They won the mortgage lottery during COVID. If you bought a house at a 3% 30 year mortgage, you're not selling that house. In many cases, you can't sell it and afford to. And you are still seeing a lot of sellers in the U.S. housing market right now. I think sellers outnumber buyers by the highest margin ever in history. But people who are like people aren't selling to upsize. They're not, you know, because if you need more space, you're going to probably renovate so you can keep the capital cost that you have, you're going to do an addition or whatever. So spending, if residential investment was strong in the U.S., which it isn't, like, you know,

real estate commissions are super low, realtors are doing, I think it's the lowest pending home sales we've had since Redfin was able to start recording it. Lowest sales per realtor per capita ever, like a ton of numbers. And that, that, I mean, it's the hope cycle, right? I don't know. Do you know that Cantrow's hope cycle? Yeah. Yeah. I know. We're getting to, yeah. So you have housing orders, profits, employment, right? Housing contracts first to respond to interest rate increases because it's credit-sensitive product, then orders people aren't buying Home Depot or whatever to renovate their houses or new furniture or whatever. And then the profits of those companies start to contract.

And now we're finally getting to, from my perspective, the employment piece of that cycle. It's a weird setup and a bit of like one that sucks for that sector, given the potential for this inflationary environment and higher for longer rate set up that we're staring at. Yeah, no, exactly. And I'm just showing here, I was showing Home Depot same store sales. And I wanted to pull, I guess it didn't work here, but I wanted to pull Dollar Tree, which it was at 3.7% just improving. Dollarama has been doing pretty good here in Canada as well with same store. So they haven't reported the most recent quarter.

So it's not apples for apples. We'll have to see. But it just goes to show that people are definitely going towards more where the value is. I know Loblaws listening to their conference calls quite a bit. They're opening new stores, but they're focusing on the discount banner stores. They're not really opening like Loblaws, Loblaws store. They'll open what super store or is it no frills? I can't remember which is who, but one of the other discount store,

whether it's Dole's brands or Max C on the Quebec side. So you can see that retailers are seeing that. And I just don't know if there's that much room for the consumer to not be impacted by higher prices that would come from higher diesel prices. I mean, how can I just don't see how we don't get higher prices on a lot of goods with the prices right now. And then if you tack on the tariffs and the counter tariffs here in Canada on some of the things that, yes, it hurts the U.S., but it will hurt Canadian consumers as well because it's consumers that end up paying the higher prices. And then whenever you hear people say about,

or whenever we talk about the inflation thing, everybody always says like stagflation, right? They're like, but I don't know if that, like to me, I don't see a world in which we end up with, you know, a stagflation or a regime, I mean, you've really only ever seen it once, but I think they talk about it for like, people talk about it as if it's like every time,

inflation is high and and the economy isn't growing at where it should be, you know, it's that state of being. But I don't, I don't necessarily think that that's within the range of potential outcomes, like, because the idea that consumers can weather these cost increases and that inflation would be sticky, which is how the bond market is reacting right now. Like, that's what the bond market is saying. And I think you have to almost like compartmentalize what what part of it is bond markets trying to telegraph what the central banks are doing or like what they actually think the future rate environment will be and what part of it is the bond market saying we just anticipate governments are going to continue spending like drunken sailors and we're

trying to price in some of that risk because I mean that could be a big component too all of this to say I think it's it's hard to imagine a scenario where we get inflation and it doesn't cause the consumer to like a big contraction and on the consumption side of things I don't know like I don't know like I don't know what what version of the outcome people are already are trying to describe when they say that they think that that's possible. And I would love to know because I just can't really wrap wrap my head around the argument that like consumers are already tapped in in many of the cases. Let's say your bottom 80% for the most part. And in Canada, it's the same thing. And when I was on Ron's podcast, I was talking about this. Like I make decent money and I feel like I'm in an economically

good position and come, you know, all the ESG things I have to throw out there about like place of privilege and whatever. But I feel like it's economically difficult for me, you know? And I can only imagine how the average person feels in this setup. And I just don't know how and when this breaks. That's like the big question. It's like, what is the cycle actually? how does how does it like what's next okay we get to three four or five percent inflation prints consumers start scaling back spending is it a year from now where we're we're we're hearing central bankers start talking about cuts does the trade war continue to wage on and drag on on both the u.s and Canadian economies and and pull that forward because we we start getting negative

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Conditions apply. I mean, let's talk about the Jackson Hole speech because I think that will definitely give us a little bit more insight, whether Kevin Warsh was just job owning or trying to get the markets to think he's serious about hiking rates. I'm not sure because I think it was Waller that came out today. One of the, I believe it is another Fed governor. And he essentially was like, well, I mean, if we continue to see inflation stabilizing, we might not hike in September.

So I think yesterday the chance of a rate hike in the U.S. had increased from. Essentially, the odds had flipped from 33 to 66%. And now today they're back at 50-50, but a week prior was completely reversed. It was 33% for, yeah, so you see it there. If you look at the bottom, it'll give you an idea of how it looked a week ago compared to what it is right now. So it's just been just flipping back and forth. So you're getting mixed messaging from the central banks. And I think that is part of it.

it here. If we kind of believe to what Kevin Warsh was saying, he blamed the Fed essentially for it was 60 something months now of above target PC inflation because that's the metric they look at and that the Fed was to blame. So clearly

throwing Jerome Powell under the bus here. But, you know, it's still not coming down and now he's at the head of the Fed and is again, he read it again where 2% is the target and it's their role to get it to 2%. So I think the market's not quite sure how to interpret

that. Are they going to start focusing more on inflation with a president that's been pretty vocal about getting lower rates? Or are they going to just hope the economy does well and that overall the real growth will be there? That growth will have pace inflation and they'll just let it run hot, it's really hard to know. And on the consumer side, yeah, I mean, I think they're just getting really mixed data points and they don't really know what to do about it because if we get back to the AI data center buildout, it does not seem like it's a very restrictive policy when it comes to that. Yeah, that's what I was going to mention because like your credit spreads are on the on the AI stuff are rising like pretty massively. And and I feel like at a certain point that

materializes in this whole AI CAPEX thing running out of steam. Like if capital costs end up being constrictive to them continuing to spend the way that they want to spend, they're going to stop doing it. And then what happens next? Well, all of that economic growth that all of these models and the bond market and everything has been, and the stock market, you know, for the, for the AI trade has been priced. And like, it could just be an organic slowing of that trade. Like, all of these things are pricing on forward earnings as if they're they're going to successfully meet the megawat capacity that they intend to build. But if their capital costs just went up like, look, on this chart it shows from July, their capital costs are basically what? Doubled? Tripled?

Is it the spreads on the left? I got to go back to the chart. Basically doubled, right? on the, so like how with the relationship that we know happens and Canadians, this should be very easy to understand because of what happened with, you know, our market is housing. How did the housing market, the primary consumers of credit in the Canadian economy respond instantly when, when their capital costs went up in a comparable fashion. Well, you know, we saw what the volume of activity in that market dropped by 60%. If something similar happens in the AI trade, like, no, is really pricing in that that that could be the case. And it seems to be like the writing is on the wall with that. Well, I mean, there's a reason I think Nvidia started that kind of fund,

investment fund with private equity firms, right? Because they explicitly said some firms are finding that the borrowing costs are too high. So they're essentially starting this PE fund to make sure that there's financing available at a reasonable cost. And I think what they were saying is that there is financing available. It's just would be higher. So they, essentially started that fund and video would back up to 125 billion of it in terms of backing loans. So yeah, you're starting to see some cracks and we didn't even get into the what happens if, you know, you start a year, year and a half, two years from now, you start seeing Nvidia and not Nvidia but Anthropic and Open AI and they come out and they're like, okay, well, we really

misprise the revenue stream that we thought we would be getting and the potential profitability of it. Somebody's going to have to say it, right? What's that? Somebody's going to have to say it at some point. Yeah. And there are some of the largest customers of Microsoft, of Google, of XAI, or I guess it would be SpaceX at this point.

They buy that compute from those hyperscalers, Oracle's another one of them. So if Open AI Entropics start saying, you know what, we have to reduce our expenditure because we just can't monetize this as well as we thought. Well, someone's left with some compute that now needs to find someone new, a new customer. Are they able to find that customer? So you start impacting profits and margins over at the hyperscalers. And then the hyperscalers start seeing that and they say, okay, well, we'll still do the AI build out, but we'll actually slow it down a bit because our why on the investment is not as high as we anticipated, which, by the way, we still haven't shared with investors because we probably have no idea what the ROI is on those investments.

And then they start slowing in their purchases of Nvidia chips. And you also have a lot of Nvidia backing some of its own potential customer with some dead backing, some weird other types of financing. Like there is a whole lot of stuff that could happen if you just start seeing OpenAI Entropic just kind of slowing down and saying, you know what, we can't be spending that much. We have to cut cause then. It's a bit of a ripple effect that you see across the space. Yeah, I can't find the most recent circular financing graphic because there's one with, because SpaceX AI is in it now too, right?

Because it was revealed that Nvidia has a stake there. I'm trying to find it. But like so tropics supposed to be renting space from them too, if I remember correctly. Yeah, so what ends up being the catalyst for this? Like that one of these IPOs is going to end up being like being under. subscribed or priced, you know, everything gets priced back in very quick, very promptly or something like, I'm not a market, like a, you know, how do you see that playing out? My best guess is that an IPO, there'd probably be a lot of demand for. I think it's going to be

in the aftermath of the IPO, if whether it takes a year or two and investors just start saying eventually they want to get a return. Right. Like what that ends up being. at it. Yeah, because I mean, what happens if you're not profitable, you constantly need new capital. So how do you get new capital? You either issue debt or you dilute existing shareholders. So at some point, you need to get profitable because existing shareholders will just get diluted to death or you'll tack on more and more debt. Your cost will keep increasing because you'll have interest on that debt going up. your interest costs will probably be, your boring costs will probably go up as well because you'll have, I'm sure you'll get lenders, but they'll say, well, you know what? We're thinking you're getting riskier. So instead of lending you at 7 or 8 percent, now we'll do it at 11 or 12. These are all the implications that you can see. The timeline of that happening, I don't know. And will it happen for sure? It's not for sure. It's always probabilities. But when you start seeing charts, I know you have some good charts on that. But the, token costs for users, for businesses, just plummeting. I think it's the lowest it's been or

near the lowest now at this point. Yet, the cost for business is running those models is not really going down. Yeah. Yeah. Oh, yeah. Like cost per token is is decreasing. The other piece, the other piece that is worth noting and it does kind of feel like I guess somebody who develops I'm very reluctant to use that word. Like, as AI might say, that word is doing a lot of work. You know, I work at a company that develops AI tools for the real estate profession. And you can visibly see that, you know, things are becoming more efficient with the way the technology works, right? You know, I mean, we don't even really talk about them hallucinating anymore.

Or, you know, some of the things. They haven't figured out how to get rid of the M-Dashes and the, and the AI slopisms and whatever. But for the most part, it feels like people in the space are sort of running towards this thing with understanding how much risk they're taking. But they're optimistic that the technology itself

or the brilliant people in the space will be able to solve for it by making the output relative to the amount of tokens spent more efficient. So like Grockbot came out, recently, and I don't even know if we really talked about that because I think it happened like just after our last call. But, and I've been just absolutely shredding Grockbot. It's such a cool tool. It's like open claw, but like way easier to use. It's doing our clipping for our pod now, which is like the first iteration. And I'm, I'm still going to get you like really, really onto it. But I feel like, that, that to me, like, if we're just thinking purely business, like not equities aside, whatever, if we're just thinking purely like the business of SpaceX AI as an example, because they're the only publicly traded one so far. But buying cursor was a good move. They had to be. distribution through X, they're getting their models into the hands of more people. If they can get more people, if they can use those accounts to get more people using Rockbot and have every

human being on Earth now has a personal assistant that they're willing to pay decent amounts of money for. It's funny because I wrote a whole thing on it. Like if we, if I didn't have, if I didn't have subsidized tokens that we use from Open AI plugged in by Oath into our model, and it came on to Johnny Lambo wants to join us. I should get Johnny Lambo on here. He's actually jokes on X. Johnny, let me see. I'll see if I can DM you a link maybe and we'll get you on here. But yeah, like I feel like without the subsidy, it would cost me about three grand a month to run my real estate business assistant on an AI harness. But I actually would be saving probably 50 to 75K in salaries by doing that. So like there isn't that benefit, but most people are still

and consumers are still thinking about this as a SaaS product. And so spending three grand a month feels like and somehow And you might be more the exception to the rule, right? Like I think it's that's, I don't know if you, yeah, most people or most business owners would view it the same way.

Yeah. Yeah, maybe. I don't know. I feel like there are some, it depends if they are able to get the outcome, the outcomes that are comparable to what they would get from a, delegating the same task to a human being.

Yeah, but you also are comparing it. So you'd be prepared to pay $3,000 a month, but you're also just comparing it to humans, where in reality you have a bunch of different models that are being subsidized to different extent. So you could very well... Sorry, just quickly, are you cool if I bring Johnny Lambo on here?

Sure, yeah. If I can get him that. Okay, cool. I don't know how it was going to... But yeah, I mean, at the end of the day, right? Like that you're looking really at a cost benefit. And you're comparing it to human. But at the same time, there's so much competition.

It's almost getting commoditized. You're seeing these Chinese models that are much cheaper than a lot of the frontier models that will do some of the same stuff at a cheaper cost. Maybe the most advanced features are not as good. But I do feel like they're accepting. other than Anthropic, they've kind of gotten away from like continually trying to progress towards like super intelligence

and like as if there's going to be some you know, massive break like, you know, Anthropics not talking about them being the only company ever on Earth left or whatever anymore. You know, it's like nobody's really trying to price

that the models could become so intelligent that they just run Earth for us anymore. It's more like, oh hey, you're starting to see SpaceX AI and even chat CBT saying, hey, why don't we build like really, really reliable, cost effective models that actually can, like the people can trust and rely on to do their business activity

because most business isn't complicated. We don't need a super intelligence to run it. So I, like to me, the bull case for AI is they continue down that path and they stop trying to be frivolous and, you know, whatever, I don't know what the words are, but like the singularity and all that stuff. Yeah.

you know, and they actually just, we progress towards AI actually becoming something that can help every single person with like general tasks. Like, I can just dictate like build order. You go to stick trying to prove that you'll get, you always have the best model is probably that. Yeah. Yeah, exactly. Yeah. Like it is just a big pissing contest right now. And but if it's like, hey, I can dictate it in my phone like Grockbot order my groceries for the week and it, no, and it can like, you know, like finally we have a reason why I have a tablet on my. my fridge and it's looking in my fridge and saying knowing what I need, you know, like those are things that actually are of value, I think, to the average consumer who has convinced themselves

and identifying when you have moldy broccoli that you missed. Yeah, exactly. Yeah, what's that smell? Oh, your broccoli's been in the fridge food. That's like the word, broccoli is the worst food, man. But anyway, Johnny Lambo, I did send you the link in your, in your X DMs. We're only on here for another five minutes, but I would be happy to have you on if you want to. Anyway, do we have anything else we want to be in. I mean, I think to me the question's still there just because I think especially when you factor in the Chinese models, like you can say, I mean, it's easy to put your tinfoil ad on and say that China has an incentive to make sure that token cost goes down as much as possible to put pressure on the American models, right? Like if there's a way they can put pressure on the

US without being, you know, bombastic like the US is, like being as obvious as, as the U.S. is for certain of some of its tactics, like tariffs, for example, China could just be like secretly, just be pumping money into its AI models to just make sure that it's a race to the bottom and the whole AI trade becomes unraveled in the U.S., right? Like, I know it's a bit of tinfoil ad hon, but I would not see them. I wouldn't put it past them that this is the long game that they're playing. Yeah, fair.

It's just whether or not they can win. Like, it is a game. They're gambling. They are really rolling the dice on whether or not they are actually correct. And like, I don't know. I mean, that's every trade, man. You got to applaud their confidence. Like, it is cool.

It's a cool time to be seen to really watch like one of the craziest trades and like allocations of capital and human in our lifetime. It really is like from a nominal basis, maybe not adjusted for inflation. But I mean, seeing like this massive boom that like somebody, I don't know, man, is somebody going to get picked off? Like is there going to be a leaming? Like there's obviously a cycle in this. there's obviously a bear market in it.

There's going to be capital destruction. I think if you look at history, there's no question there will be. Where people get super defensive is like they think if you say this is a bubble right now that you're a bear and you don't believe in the technology, you can say at once that it's a bubble while you think AI will transform the world

maybe in 10, 15 years. You can say those two things are not mutually, they're not like separate. They can be mutually present at the same time. And I think a lot of people who invested in AI or super bullish around that they get super defensive when you start saying something like that when history is full of dead bodies,

of corpses, of companies that spent way too much during a boom, during the bubble phase of a new technology. And for that technology to be still be there decades or centuries later and be transformative, but the initial period really was a period of capital destruction. I have no question there will be. I just don't know which company that we see right now will be destroying the most capital and which company that may be is not even tell you the truth, man. I think like he's just, I mean, just like the reckless theatrics. It depends on how Musk and Open AI

how that whole saga ends, but like I don't think I don't think the U.S. courts are going to agree with Elon's thesis that these guys, I mean, like if you are you familiar with the whole thing that's going on there?

I read about it like months ago, but I didn't even realize it was still a thing. Yeah, no. Like I think Elon is like suing open AI. He was a, this is one of the crazy things. If you look at all the private companies, he was a co-founder of OpenAI, right?

It was supposed to be a nonprofit. Exactly. And it was supposed to be open source, and basically they closed, they made it not open source and open weight, and then they made it into a for-profit entity and his argument is that they stole a charity

is the way that he says it. Which like, I, like, you know, the argument is some, like it does kind of make sense to me. Whether or not courts are going to agree is really what matters. And I don't I can't see the U.S. courts just like, you know, sniping one of the largest capital formations in U.S. history, just like that. Like, there's something, you know, so open AI, I think from a, from a capitalistic perspective,

I know Dario was kind of saying that Altman was yoloing on his data center spends, but it seems to have been the right move. I think, I think Anthropic really feels like the one that's going to get, going to have a hard time here. They don't have compute. They're having a hard time scaling out, compute. they're, I think, kind of reckless and a little bit

like sociopathic in their marketing. And I just, like, if anybody's going to do it, it feels like it's them. And it's a shame because they have an exceptional product. Yeah. And I mean, I think the U.S. government is definitely aware, right?

Remember it was late last year where there started to be rumors that would the U.S. intervene if there's a bailout needed for Open AI? And I think David Sachs said, I guess, AI, it's our back then said, like, no, like, they would not intervene. And I guess the market would just do its thing. They're very well aware. That that's, they're, they're very well aware of the

risk. And I think, you know, we talk about it. There's a lot of commentators that will talk about the circular financing and potential risk and contagion and so on. I mean, let's be honest. Like, we talk about it. They're definitely aware of the potential risk. Like, they are, whether they're distracted by something else. I don't know. Like, yeah. Are they racing to be, are they, or are they racing, like, are the guys on the private side racing to be too big to fail?

So that they, so that the answer to that question becomes yes. Like, you know, and the circular financing and all of this stuff, like, it becomes systemic. I mean, it's, it's arguable that it's already systemic and like that there's no way that they can let one of these fail without pulling the rest of them down really hard. I wouldn't be surprised if the U.S. government bailed out an AI company at all. I mean, NVIDIA has like a new finance. financing deal of some sort or arrangement deal that it feels like every single week now. They have a new deal where they're like backing a customer.

Yeah. But then isn't that a reflection that like they're, I mean, because they're the highest valuation and they can raise capital the easiest, that there already is some sort of like, I don't know what you would call it, but like a capital like flattening or capital contraction where everybody has to keep going back to the same tap where, you know, where the capital is still flowing on the hardware side, you know, to, and they're, and they're basically keeping their customers alive so they can continue to give them money back. Like, this is the market already admitting that there's a problem. You can keep collateralizing it and stacking new financial

products on top of it to try and incentivize your, or to try and like, you know, ensure your way out of it. But at a certain point, you know, the bills come due, right? Somebody has to pay the interest and somebody has to return the capital of the loan or the, you know, the obligatory. the more they keep crossing this thing up, the more likely I think it becomes that, no matter which player it is, if it ends up blowing up the whole stack, I could see,

I don't know, I don't know if the argument that the guys made that the U.S. government won't bail them out is true to tell you, you know, honestly. That's my thought of year. Maybe it was true late last year. It could have been, yeah, but I think now they've,

now they've sufficiently made it systemic in nature. Yeah, no, absolutely. Absolutely. That's a good point. After what, 750 billion worth of CAPEX this year from the hypers? Maybe it's not true anymore. But also I think maybe a final thing to wrap it up on is just also the implication how much capital it's sucking out from government treasuries, right? I mean, when you have the Bank of Canada governor and I think it was it Carolyn Rogers, but one of the two saying that, yeah, bond yields are higher because in part AI is polling. some of the demand for the financing that they need, you can tell that they're all definitely taking notice and the interconnectivity of a whole lot of stuff we're seeing right now. Yeah, but it's going to be... Fun time to be alive. It makes our life really easy to be the guys who get to talk about this stuff every week.

So very far. I mean, there was a bunch of stuff that we were going to talk about, although I feel like it did kind of get distracted by what's happening in the bond market right now. But I mean, Canada GDP, et cetera, the title of this episode was supposed to be Canada Bull Run. We'll get to it next time. because I think it's still a big question mark to me, but I think that trade war and whether or not

there is a bull case for Canada with how much money the government's willing to spend to keep everything on the rails is an interesting thought experiment. But we'll leave it there in the interest of time. And thank you for everybody keeping the threads lit. And I mean, I know we're heading into a long weekend. I hope everybody has a wonderful last long weekend in summer. Yeah, Labor Day weekend, enjoy it.

I feel like it's coming late this year a little bit. It is, yeah, I think because like school ends up starting. I think this is the latest. it can possibly fall in September. Yeah. So yeah, enjoy the time with your young family, Dan. Yeah. I know we'll be in touch next week, everyone else too.

Enjoy the long weekend, whether it looks like, at least in Ottawa, it looks like it's going to be pretty nice, hopefully in Toronto too. And just make sure, you know, if you're going to eat outside, get ready to share your meal with some wasp. But aside from that, have fun. Yeah. Okay. Take care, everybody.

The Canadian Investor Podcast should not be construed as an investment or financial advice. The host and guests featured may own securities or assets discussed on this podcast. Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.