The Canadian Investor - The Current and Future State of Canada's Economy with Rich Dias

Episode Date: August 1, 2024

In this episode of The Canadian Investor Podcast, Simon is joined by Rich Dias from The Loonie Hour podcast to delve into the current state and future prospects of the Canadian economy. Rich sheds light on pressing economic issues, including the troubling decline in GDP per capita, the rising provisions for credit losses by Canadian banks, and the persistent inflationary pressures. Despite these challenges, Rich concludes on an optimistic note, offering three compelling reasons to be hopeful about the long-term outlook of the Canadian economy. Tickers of Stocks & ETF discussed:  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 Sign up for Finchat.io 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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despite being at a bachelor party so thanks a lot yeah thank you so much simon for having me on it was really fun last time hopefully hopefully it was well received and yes indeed i've carved out some time at a bachelor party so if people come screaming in with a banana costume or some shots that i'll be forced to take, please do forgive me. But no, I'm excited about this and I'm ready to chat something I love to talk about. Perfect. So we'll get started. And well, first of all, I'll give you a general question. You can take it whatever way you want to take it. So I did that purposely because I want to see where your mind's at. So what's your current assessment of the Canadian economy and the global economy in general? So like I said,

take this any way you'd like. Sure. Well, I'd like to focus on the Canadian economy, if it's okay with you. Well, it's called a Canadian investor. So definitely. I think that like, so there's different ways that I look at the Canadian economy. Obviously, there's GDP growth, but that encompasses households, consumption, there's business investment, there's trade that's related to that, within each of those sort of bucket, and there's, of course, government spending, which each and within each one of those buckets, you know, you have how households consume what they consume on their savings, their debt, debt servicing businesses, you know, what they're spending on and how trade is related to global. Obviously, the global cycle and the U.S., the big gorilla in the room, 75 percent of our exports go to the U.S., depending if you're thinking about goods or services. Manufacturing ties into business, investment and trade. And then there's obviously the government spending piece. And I think that in the reality, I think a lot of the talk about being in a recession or not a recession, I think it's purely academic. The forecasts for GDP growth over the next year and this year are less than or equal to population growth, which means that even though we have some positive real GDP growth, our economy is contracting on a per capita basis.

And I think ultimately, for me personally, that's what matters. Now, there are some people out there who are detractors from that view. I think they're misguided. And I think that even though the headline figures say that Canada is not technically in a recession, I think we've already been there for a while. Other people sort of confirm that view. The good people at RBC have come out with a piece on that, you know, saying how we're not technically in a recession, which is two quarters of negative growth or contraction in GDP. But I would say our GDP per capita has been flat to down for the last, geez, I don't know, six or seven quarters or five out of the six quarters. I always forget the number. And our unemployment rate is now up 1% year on year.

And so, yes, our headline nominal GDP growth is positive because our immigration is so high. And our real GDP growth has not contracted twice in two quarters. I would say that, again, that's purely academic. I would say that, again, that's purely academic. I think people are contracting their spending due to severe debt service ratios that are climbing or if not climbing or at all time highs. If there's loads of listings in Toronto, but also the price increases across the board have slowed, if not declined. It's difficult with house prices because it's not like a stock market where there's lots of quotes and the bid-ask spread is really tight. If you don't think you're going to get your price, you often delist, which hides sort of the price action. But I think there's a real big weakness there. I mentioned unemployment. We're importing

more people than we can employ. Our participation rate, which was very, very high around 80, 81, is now falling. Unemployment rate I mentioned is now rising. It's up 1% or a little bit more over the last year. And so although consumer confidence is relatively high, I would say, despite all that, and wage growth is okay, I would say that, yeah, Canada is sort of in this like weird, yeah, it's like not great. It's not technically a recession. And the last thing I would say was that I think that that's sort of not reiterated, but sort of confirmed by the behavior and the actions and the tone and the speak of the Bank of Canada, which is now cut two months in a row, the likely cut in the next meeting,

and again, the next meeting, they're very dovish in their tones tones and they're worried about sort of the downside risks to inflation. And so, yeah, like if you look at all sort of the different pieces, like I mentioned, it's just not a good outlook. And I think it's partly a function of the slowing global trade. Although our major partner is doing very well, there's obviously some weakness in the manufacturing sector. And largely, Canada is a consumption driven economy. I think 65% of our GDP is consumption, similar to that of the UK. It's more than Europe, it's less than the US, but without the consumer feeling good, they're not going to spend. And I think a lot of the indicators that you would sort of look at to determine how consumers are feeling or will they feel well, despite what I said, which is higher consumer confidence, they're all taking down, Simon.

And I think that I think it's yeah, I think we're we're we're entering we are going to answer a recession. And I think that people feel it despite what the data might say. Totally agree. that people feel it despite what the data might say. Totally agree. And I mean, this, it's more anecdotal, but there's a couple of food banks near where I live. And I've definitely noticed lines getting longer and longer in the past, I would say probably the past year, it's been steadily increasing. And to get back to the Bank of Canada and what you said, I think it's fascinating because a lot of people get excited for rate cuts, right? And I know we talked about, I know you're very passionate about politicians, you know, posting about, you know, the Bank of Canada should cut rates.

I think Doug Ford had something he posted just before the meeting that Ontarians needed help. And I mean, I think it's a bit misguided, but it's also the fact that if the Bank of Canada is cutting rates pretty aggressively, and we'll see how aggressively, right, it's only been two cuts. But I think what you're saying, I totally agree that, you know, it looks like they will probably cut some more. They've kind of shifted their tone to being concerned about high inflation to now being concerned to by the economy. And I think a lot of people don't realize that when central banks start cutting rates, it's usually because things are not going as well as they want. Yeah, I mean, there's a lot to unpack there.

I'll just say this quickly on politicians. I will try very hard to stay away. I don't think it's, I think it's very unprofessional, frankly uh for any politician of any stripe red blue black green orange to make any comment on the goings-on of technocrats uh don't get me wrong i think behind closed doors i think they should use their sort of influence to improve the lot of their constituents which is fair enough i just think it's wholly unprofessional for that to happen in a public forum. I mean, there's nothing more I can say about that. I will say just on the cuts, I think it's an indication that there's some real weakness in the Canadian economy. One thing I forgot to mention was the real the negativity or negative or drawdown on business investment

business investment in real terms uh has been on the client for about six or seven years um i can't remember exactly the number but you know it's and then the thing i was looking at today was non-financial corporate credit growth um you know if you exclude and so there's corporate bonds, which companies can issue. You think a dollar amount issues a corporate bond, but there's also loans that they... Or credit lines that they might have with the banks. We all know the banks. And that loan growth is also on the decline. Back to the cuts, I think the cheering of the cuts, I think, is, I would say, just be careful what you wish for. You mentioned that it's an indication of sort of weakness in the overall market. It's obviously in relation, in part, in relation to much lower inflation impulse, right? Canada's inflation, I can't remember the number, even though I should know it off the top of my head. 2.7, yeah, I think't remember the number, even though I should know it off the top of my head. 2.7. Yeah. Headline CPI. Yeah. Yeah. And then also the preferred measures of core CPI, which are the factor model, the weighted model and the trend mean, or the weighted mean median,

and the trimmed mean are all sort of around that level. I think it's 2.6, 2.3 and 2.9. Forgive me if I got the number wrong. No, you're right. I think it's 2.6, 2.3, and 2.9. Forgive me if I got the numbers wrong. No, you're right. I remember looking at them. If you're not right on, you're pretty close. I'll give you that. Okay, cool. Yeah.

But I think that there's sort of, within that, there's two things that are sort of hidden. One is that a lot of that decline is due to goods. Goods, a lot of the goods are stuff that we import because Canada has mostly a negative trade balance in everything except mining wood and pulp and paper and agriculture and of course the big big big positive to our trade balance is energy products all the other consumer sections or sectors are negatives. That is to say we import more than we export.

If our currency declines because of interest rate differentials, we might get sort of a second order effect, which is that our currency weakens, the prices for the goods that we import goes up, and all of this decline in goods inflation may reverse at a time where services inflation is 4.8 and rising. Yeah, it's really sticky on the services. That's one I've been keeping on for a couple of years now. And that's the one that seems very, very sticky. It's sticky for two reasons. One, in general, it's much more related to labor costs and wages, which have, to Canada's credit, I think been quite strong. Not sure why I haven't looked into that. But it's also really high because such a big chunk of that is rent and sort of which kind of falls under the umbrella of like housing costs. Now, people, detractors from that view will say mortgage interest costs are a big part of that and rents are lagging. But be that as it may, you know, it's still high and it's now rising.

It's the rents are rising because vacancy rates are basically at 20 year lows. Vacancy rates are low because population growth is triple what it was for the last 40 years. It averaged about 400,000 people for 40 since 1973. It's now at 1.2 million. And so there's a lot of pressure on the housing piece. The counter argument of that, and my colleague Steve would disagree, he says, those are lagging indicators and rent growth has already fallen, housing prices are falling, et cetera. But my point really, sorry, I'm sort of going off, but my point really is those cuts in interest rates are not going to affect, in my view anyway, are not going to really impact what I think is really hurting Canadians,

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effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. Just to get back on the inflation, and that's one point I've been pointing out a whole lot on the podcast, and I haven't seen mainstream media kind of zone in on that. But if you look at CPI, I mean, energy as a whole, obviously, there's a subsection, has been relatively kind of low on the low end for a better part of a year now. How big of a risk is that if energy prices start picking up, whether I'm thinking here, you know, it could be just gasoline prices, natural gas, whatever kind of energy that

falls into that bucket. Like, I mean, if these prices start going up, it could be because of geopolitical events. Isn't that going to put a lot of pressure on the Bank of Canada? And I know core kind of strips out a lot of that, especially if you look at core trim. But I mean, isn't that a big risk that energy starts picking back up, price increases, and then that puts a wrench in the Bank of Canada rate cutting cycle? I think, yeah, absolutely. I think, you know, crack spreads, which is the terminology that you use

for the difference between the crude barrel of oil. So, you know, you extract crude from the ground, you get a barrel of oil. I think it's 159 liters. Forgive me if I've screwed that up. You then crack the hydrocarbons into kerosene, jet fuel, solvents, diesel, gasoline, tar, literally to repave roads, bitumen, what they call it in the UK. And so the crack spreads, which is how the premium you would get, let's say from this is

broad strokes here, but the premium you would get from a barrel of oil to let's say, how many liters of let's say diesel and gasoline, let's just say for argument's sake, is actually quite low. The problem there is that like refining capacity has is limited because we don't build refineries, certainly don't build in Canada for some reason. And so for me, even though the WTI is around 70 and Brent is around 82 or what have you, I can't remember the number, it's the crack spread that I looked at,

which will have a direct impact on gasoline prices and then CPI. And so the crack spread's low. And I think you're right. I think that there's a real case that the crack spread can jump, whether it's because of geopolitical reasons or hurricane season coming up or whatever. And there's also a situation where even though we know Saudi has cut production and we know the US has jumped to fill the void, there's a situation where OPEC, which has been quite disciplined, so the

Organization of Petroleum Exporting Countries, and then there's OPEC Plus, whatever. But if the US's productivity slows, which there are people saying that that's already happening, and OPEC plus, whatever. But if the US's productivity slows, which there are people saying that that's already happening, and OPEC remains disciplined, you're right. I think there's a situation where oil does improve and that will put pressure on it. Just back to the BOC, sorry, really quickly. It was just like this idea that we're going back to 0% interest rates or 1% interest rates. People need to get that shit out of their head. It's just not happening. I think central bankers have learned that real interest rates, so interest

rates adjusted for inflation that are below zero are bad for capital allocation and investments. And I think that inflation remains really high. So even though there will be an adjustment, that inflation remains really high. So even though there will be an adjustment, I don't like this idea that we're going back to one or two, whatever. If I'm wrong about this, you'll have me on and I will, you know, I will take my lashings, but I just don't see it. And for Canada, that's really, really important because of the debt service, debt servicing, how many people took on variable rate mortgages at really, really high loan to value or income to loan ratios or loan to income? I always screw up there. But you know what I mean? They took a huge amount of debt at variable rates and their debt servicing costs, according to the BIS, which is the Bank of International Settlements, is at all-time highs. And even though we cut interest rates of, you know, three, let's say 2%, let's say we go down

to three or whatever, you know, I think our debt servicing ratios will remain extremely high. And that'll continue to squeeze Canadians. We need to work through this. And I just, all I think we need is time. and no one wants to hear that answer no and i think a lot of people forget that there's going to be a lot of people refinancing between now and the end of 2026 that will even if rates go down another 100 150 basis points from here let's say they're at three percent i mean people will still be renewing at higher rates and have higher payments i think a lot of people forget that. And then you factor in the beautiful product that is the fixed payment variable rate mortgage,

where I've seen figures where people will be renewing the ones that are in the worst situation between with like 50 to 70% increase in their monthly mortgage payments. That's kind of the figures I've seen the most often because obviously they were not even paying the full interest amount on those mortgages. So I think those are, I'm hoping they're not a ticking time bomb, but those are the mortgages that definitely make me very nervous on, especially the big markets, Toronto, Vancouver, probably less so if you're thinking Ottawa, Montreal, because prices have not been as crazy and other markets in Canada.

But those are the ones that definitely worry me a bit more. And I know Steve has been one of your co-hosts has been pretty vocal about that, too. Yeah. So the you know who does a really who's done a really, really great job on this, which is the Bank of Canada. And so I'm trying desperately to find it quickly, but I can't seem to. But anyway, so they've done, if you go on the website, and again, I'm trying to do this as I talk, but they have modeled out sort of what will happen to payments for people on fixed variable i'm gonna get this wrong but you know what i mean there's like four there's a variable yeah yeah so fixed and then there's variable yeah yeah variable variables so your

payment switches basically as interest rates go up and down your payments varies with that and then there's the static payment or fixed payment with variable interest rates where your payment stays the same, but then people are being in a situation where they're amortizing over 60, 70, 80 years. And then when the term comes back, when they end their term after, say, five years, it's re-amortized to the actual schedule that it should be. And then it's a payment shock. That's essentially what happens. Yeah. So anyway, so I shame I can't find it.

Sorry. But like what it is basically is what you're saying. In some cases, you have like mortgage payments will jump massively, you know, four or five, six, seven hundred dollars. You know, people might. I know I've had some colleagues who said, 400 bucks a month, that doesn't really matter. I think that's a lot of money. That's what's 400 times 12. I'm not good at math, 48. You know what I mean? That's 4,800 of after-tax dollars that you need to spend just to keep your

mortgage. And what happens if that means what if that's just interest payment? It means there's no capital repayment. You know what I mean? So anyways, all this to say is, you know, there's two points. One is that the debt servicing issue is going to affect Canadians for a long time because we over levered and we bought assets, you know, for whatever reason, Tiff Macklin, you know, at the wrong time in an already very intense housing bubble. And the other thing that I think what's really important to note is that, again, if you look on the Bank of Canada website, don't take my word for it.

A lot of the mortgages, the five year mortgage rate or the five year conventional mortgage rate had already priced the cuts months and months and months ago. And that gap has actually opened up. So I don't know what will happen, but I actually kind of guess. And again, you'll have me on and you can lash me if I've screwed this up, but I actually think that the mortgage rate that you see now might actually not move in a sense that it already priced all of it. So for people not on the fixed rate you're talking about. Yeah. Yeah.

So the bond yields have already moved in anticipation of the Bank of Canada cutting rates. Bank of Canada cutting rates. And if the bond yield moves, the five-year and other conventional mortgage rates move in lockstep with that long before the Bank of Canada goes out and then cuts those rates. And so my feeling is that you're not going to get any of the reprieve that Doug Ford or Krista Freeland or any of these people who are tweeting about this are going to get. I'm afraid of that. Yeah. And well, I mean, I'm showing it here as a shared screen. Actually, before we started talking, I was having fun just kind of looking at that because that's what I do in my fun time is I like add bond yields. But that's a good example right here, right? Just over the past year, bond yields, the five-year Canada bond yield is essentially, it's actually slightly higher than

the bottom that it kind of had in late December of 2023. But let's just say it's around a similar level right now than it was in late 2023, despite the overnight rate for the Bank of Canada being 50 basis points more at the end of 2023. So to your point, bond yields, you know, don't necessarily move in unison with Bank of Canada rate cuts, they will oftentimes, like, you know, forecast the cuts coming. And the fixed rates, I mean, who knows where it goes from now to right, they could cut and rates could go up if bond markets and I think they call them bond vigilantes start worrying about the capacity of Canada, with potentially paying its longer term debt. I'm not saying it will happen, but it's not a zero probability. Right. And there's another angle to this, which I think we haven't really touched on, which is the banks themselves. So we talk about this a lot in Looney Hour, forgive the plug, but the provisioning...

Go for it. losses so again for people who might not be aware of this you know banks will set aside you know money for losses that they anticipate uh you know due to credit risk now you might have you know there's obviously a sort of run rate whenever you lend money to to a borrower you know you anticipate you know x percent of all the loans will sour. And then you might have a loss given. And then of the ones that sour, some people will sort of, you know, they'll, you know, they'll sell assets to make their payments, they'll refinance, whatever. Then there's certain losses that they just like, they can either model or anticipate, or they forecast or what have you, in order to sort of make sure they have enough money in collateral that their shareholders are aware that the regulars regulators are well i

know i know you know this simon sorry forgive me for no no no it's good i think it's a good refresher yeah and so so the ban the so canadian banks will just like any bank in canada or the world rather will provision for credit losses or loan loss provisions is what that's called. And it directly affects sort of their profits. And so they're usually reluctant to do that because they've got to sort of set aside that money. And what we're seeing in Canada is across the board, it's all rising.

So every single bank that you can think of, there are not that many, all of the loan loss provisions are rising. And the reason that's really important, again, for the mortgage stuff and all the rest of it, is because it sort of corroborates what we're seeing in the Senior Loan Officer Survey. So again, if you go to the Bank of Canada website, they've got these amazing publications. And one of them is the senior loan officer survey. It's a quarterly publication. And they ask all the lenders, are you tightening conditions? Yes or no?

Are you raising spreads? So is it more or less expensive relative to the market pricing to borrow and lend? You know, how's your collateral? How's the demand for those loans? How's the supply for those loans, et cetera, et cetera. And what we're seeing in the household lending conditions is that for, you know, non-mortgage lending. So, you know, like stuff like credit lines and unsecured debt, you know, the conditions are as tight as they've been since COVID, which is obviously an exaggeration of fear, but nevertheless, it's as tight as it's been in four years. And we're seeing mortgage

lending or, you know, let's say the credit conditions around secured debt, which is secured on houses, e.g. mortgage lending, is starting to rise again. So, you know, even if rates fall and then you go to the bank and say, I've got a house and I want to refinance or whatever, number one, they're worried about the collateral because we know house prices at the very least are no longer rising.

And they're worried about the loans that they're giving you. And it's been expressed in two ways. One, in a survey. And then two, in literally the numbers that they're provisioning for loan losses. And so, again, it's just not a great picture, I'm sorry to say. I don't mean to be such a Debbie Downer. I'm at a bachelor party. No, no, that's okay.

You can forget about it with a beer. So that's the way to do it. But what I'm sharing here, just to go to your point, right? I'm pretty familiar with the Canadian banks. And I just picked beer here just as an example. And they're all very similar. I know them well enough. So you can see the

provisions that, so this is on their income statement. So this is the money they're setting aside each quarter. It's not what they actually have on their balance sheet for these provisions. So for people, so they're familiar, you know, on their balance sheet is actually the total amount that they have, but each quarter they will, you know, they're going to be writing off some loans. So it kind of does, but they also put some more money aside or when they have but each quarter they will you know they're going to be writing off some loans so it kind of does but they also put some more money aside or when they have too much they release some money as well so this all actually show where bmo and most canadian banks they just did too much provisions when the pandemic started and then in 20 i think it was late 2020 through 2021, they started releasing those provisions. So that's why we see the negative amount in, you know, back in of 21, early 22. And then you see the provisions for credit losses or provisions for loan losses. I mean, same thing, kind of steadily going up. And now you're looking at pretty large amounts. So per quarter, they had last year, one quarter, a billion. And then it's been pretty much around minimum,

like high 400 millions above that since then. So it's been, there are not small amounts of money. Clearly, these banks are well capitalized, so they can absorb these kinds of losses. But just to your point, this is not just BMO. This is every single canadian uh bank there's just i forgot that you're the bank expert so forgive me oh no no it's okay on your i wouldn't say i'm a bank expert but i do no no but the first time we ever talked i remember

you telling me that you were like really plugged into this so i forgive me for if i've stepped on stepped on your toes a little bit no no but um I just wanted to say one thing I think is important to people to contextualize all this is the default rates in Canada are generally extremely low. So that's so like mortgage. You'll read headlines that will say like mortgage delinquencies have climbed 50%. But what they often will forget, because you know, you got to have some clickbait out there is that the mortgage delinquency rates in Canada are 0.1 or whatever it is, right? Yeah, I think it's like between, if I remember correctly, yeah, between like 10 and 20 basis points. Yeah, yeah, yeah. So let's just, for argument's sake, let's just say it's like 10 basis points.

So if they double, it's still, you know, extremely low contrast that with the mortgage delinquency rates of the U S which are much, much higher. There's different legal shit that goes on, whatever my point.

The reason I brought that up was to is really that people, the last thing people will do is hand in their keys on their house. And you know, we have recourse loans in Canada, which means that the bank can go after your assets. Let's just say like broad strokes. Again, I know there's some I'm not I'm not a lawyer. I'm sure there's some shit around that that I've made a mistake about. But my point is, is that what is Canada's GDP run on? It's on consumption. And that's why I've stressed things like debt service ratios. So that's like, how much are you servicing your debt relative to your income? And that's why I've stressed sort of delinquency rates being really low,

even though they're rising slightly, which is to say, people will just buckle down and save their house, right? I mean, I don't know how you would behave, but if I had children in my home, I would do everything in my power, no vacations, no new clothes, hand-me-downs, what have you, right? That's just behavioral economics in order to keep myself in my home. What that means is that retail sales will slow, you know, consumption per capital will continue to slow. You know, you might not, you know what I mean? So there's like a knock-on effect that I think is very, very important when you're thinking about the Canadian economy,

which again is 60 65 or whatever it is um consumption and so i think that that's really the major headwind that we're fighting and again i have people i know i've been saying this for a long time this immigration piece kind of screws everything up because you just have this bid. And so what does that mean? That's like finance bro talk for a constant push for, there's like too much demand for the housing stock. Well, yeah. And so people who otherwise would have some relief on their rents or mortgages or whatever, they can't because we just are importing so many people.

Yeah. And you're seeing, and you probably know this better than I do, but you're seeing, mortgages or whatever, they can't because we just are importing so many people. Yeah. And you're seeing, and you probably know this better than I do, but you're seeing, I remember seeing in the US where they're starting to see in some southern markets where they overbuilt rental units during the pandemic. Now you're seeing the opposite effect where they're having to offer months of free rents or lower rents to attract people or to get them to stay. So that's kind of the opposite. I mean, obviously the US with the border, their South border, it's a whole issue on its own, but that's something that's pretty interesting. As do-it-yourself investors we want to keep our fees low that's why simone and i have been using

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Let's just look at ZEQT, for example, the BMO All Equity ETF. One single ETF, you get globally diversified equities. So easy way for Canadians to get global stock exposure with one ticker. Keeps it simple yet incredibly low cost and effective. Very impressed with what BMO has built in their ETF business. And if you are an index investor and haven't checked out their listings, I highly recommend it. I bet you'll be as pleasantly surprised as I was that BMO, the Canadian bank is delivering these amazing ETF products. Please check out the link in the description of today's episode for full disclaimers and more information. It's been pretty obvious that Canadians and you're starting to see it in the U.S. as well with American companies that a consumer are just shifting to essential items. So the non-essentials, the retailers that are more predominantly non-essential are struggling a bit more.

Canadian tire comes to mind in Canada. But you're seeing even companies like Dollarama that have been doing quite well, but they're seeing even their non-essential section is struggling a bit more. But they've done so well overall that their results have been quite good. But then you see in the US, Target is saying the same kind of thing where the non-essential is struggling a bit more. They're trying to do price reduction. They're trying to focus more on groceries. You're seeing a Walmart and Costco doing pretty well because they have such a big grocery presence. So I don't know. I've been seeing it with earnings for quite some time, I would say a year and maybe the last six months in the US, the last two quarters.

Are you starting to see that in more of the macro, the aggregate data? Because I know you're more plugged in on that. I mean, the truth is I've been wrong about this for ages. I think one of the mistakes that people, let's just, sorry, forget people. One of the mistakes that I make a lot is I think I'm just too early. And some various wise investors will say that being early is the same as being wrong. various wise investors will say that being early is the same as being wrong. And so that is a roundabout way of saying that I've been wrong. But I think what I've noticed in the US particularly, because the data is great, and Canada, I think, would do well to spend more on statistical data at any way, is that delinquency rates for credit card payments, for example, for people who are aged, you know, 18 to 39 are as high as they've been since, you know, 2011, 12. And so that's, so during the

Great Recession, or what I think was a depression, you know, like, and, you know, for, and so, and then certainly, if you look at in the US, they split delinquency rates by large banks and small banks. And it is, you know, when you look at large banks, which is like the JP Morgans, Well Fargo, Citigroup, whatever. And generally to fail. Yeah. Those systemically important banks, their credit cards are usually aimed at higher income cohort, older, higher income. It's a great point. Just so people understand, there's like 4,000 banks in America.

Canada has six. Ask me on another podcast if I think that's good for Canada. But nevertheless, there's almost more than 4,000 banks in America. And then there's six banks in Canada. But in the U.S., that bifurcation, large banks, small banks, is very, very indicative of your socioeconomic status and the region in which you live. And small bank delinquency rates on credit cards, so write-offs, delinquency rates, depending on, you know, if you look at delinquency rates for small banks, it's as high as it's been in 25 years. Write-offs are the same thing for small banks. So that means lower income, regional people and

banks or whatever. The large banks, the delinquency rates are much, much lower. The write-offs are much, much lower in line with what it's been in the last 10 years. So basically nothing. But those are also starting to rise. And so, you know, you've got this in the US. I think you've got this like real split between like old asset holders who've locked in their mortgage rates or have lots of equity who feel wealthy and are doing well, starting to slow. of equity who feel wealthy and are doing well, starting to slow. And then the young, less educated population who have no assets, don't necessarily own their home. And, you know,

all the wage growth that you saw after the pandemic is sort of fizzled out. And so that the US, that's what I would sort of describe. And your point on the on the south is really, really important, because those multifamily delinquency rates have shot up. I've been trying desperately to find the charts. I don't remember the number. And the listings, so the sort of the supply available, you know, listings are sort of an indicator of like, you know, how much supply is out there. You can either do it by months or whatever. And that supply is shot up relative to the Northeast, which is actually quite contained. And so that's totally, totally changed. But I started out by saying I was wrong. And I want to reiterate that point because, you know, all that was true a year ago. Yeah.

And, but I mean, at the end of the day, I wouldn't feel bad about being wrong. I'm wrong all the time. And, you know, you know, as well as I do, if we get just kind of touch really quickly on interest rates again, you know, if you looked at the trading instruments, I know there's the CME FedWatch tool, right? I always look at that. I probably I probably look at it every like couple of weeks at Moevery, to be honest. And if you remember, in late 2023, they were saying that there would be what? They were pricing in six, seven rate cuts for the Fed so far this year. And I think it was supposed to start in March.

So let's just say that. Sure, maybe you've been wrong, but a lot of other people have been wrong. So that was my point. Well, maybe you've been wrong, but a lot of other people have been wrong. So that was my point. Well, thank you. And to get back to the US a little bit here, how much do you think averages are skewing the data versus looking at the median? Because that's something that I've been talking about a little bit. But obviously, you know, averages, if you have a whole lot of people, like a small cohort of people that are, let's just say, making a lot of money and, you know, averages, if you have a whole lot of people, like a small cohort of people that are,

let's just say, making a lot of money and, you know, living a great lifestyle, they're going to skew that average quite a bit, despite maybe the vast majority of people not doing all that great. So what are you seeing in terms of averages versus median? Yeah, I mean, I think that that's, yeah, I think you're 100% right. I think I want to touch on Canada, because I think there's same things sort of happening here. But I think the US is very much skewed by average. And I think that there's a huge block of old, relatively wealthy people in America who've locked in their mortgages at 3%, which is probably the greatest trade you could ever make. You know, they own lots of equities in the only equity market that's

worth holding and has been for years. You know, and relative and those people, why wouldn't you feel wealthy? You know, your mortgage rate, your mortgage payments haven't gone up and they never will go up. In the US, it's a 30-year, you've locked in for 30 years. And your stock market's up, you're still employed because we know unemployment rates for people who are higher educated, higher, better incomes are very low versus people who work paycheck to paycheck, don't own their homes, rent, etc. And so, yeah, from a socioeconomic standpoint, I think it's a really, really interesting conversation. The problem is from a nominal GDP and growth and earnings perspective, the bottom 50% don't move the needle. The consumption is driven by a smaller and smaller

rich cohort, but boy, do they drive that consumption, right? And so you've got to, from a, so again, there's two sort of issues and I think eventually they shall meet, but I think for now, I think that there's still quite the moat between them which is you've got this really long tail of people who don't have any assets who are really really struggling and then you've got this you know chunk of people who own their homes they're old like you know home ownership in america is very very high just like it is in canada and if you locked in your interest rate and you have a pension fund and this and that, blah, blah, blah, you're fine. You're not sort of affected by that. And I think it's, you know, if you look at TSA, which is, I'm always horrible

with acronyms, which is a joke on the Looney Hour, but the TSA is the transport authority, basically. Oh, yeah. Yeah. Yeah. The transport safety Authority, something like that. Yeah, I know what you're talking about. Yeah, sorry, forgive me. It's the people who pat you down and make you take your shoes off. But what they do is they keep great statistics on the number of people who are on planes and the number of people who are on business flights. And, you know, we just hit record number of travelers in America. And I imagine Canada, it's the same. And so,

and I'll get to Canada second. And so, you know, even though airlines are having trouble with their earnings, it's purely a cost thing. It's not a revenue thing and specifically labor cost thing. But anyway, so, and in Canada, I think you have the exact same bifurcation. I'm sorry. Sorry. You have a similar bifurcation but for different reasons and in canada it's do you own your home or not yeah and have you owned your home because as a stupid example my mother who's a retiree you know bought her house you know eight years ago and it's doubled our timing and she's impeccable her time it's to be, you know, lucky than it is smart. And so, as my dad used to always say, and, you know, she's double. And so she's nearly paid off her mortgage. She could do if she wanted to, but whatever.

And so she's got all this equity. And so, you know, a couple of weeks ago, a month ago, you know, Justin Trudeau said the quiet part loud, which is he doesn't want house. He said Canadians rely on their equity for retirement. And the other sort of the reciprocal of that comment is he does not want house prices to fall. But he wants affordability, which is kind of, yeah, I mean, it was, I know exactly what you're talking about. I listened to that interview. I think it was a CBC interview where he mentioned that. And yeah, it's I mean, yeah, obviously, we don't talk too much about politics. But I mean, it's true what he said, right? Like he did say the quiet part out loud. And at the end of the day, you can't have your cake and eat it, too. So you almost have to make a decision. Are prices going to come down and then affordability gets better? Or I mean, prices stay up. People that use it for retirement can tap into that equity. I mean, you can't have it both ways. I mean, interest rates coming down massively will probably just end up inflating the housing market. obviously like i don't think they're coming down

three four three hundred basis point but if they were it would probably just create a whole lot of demand and then we have you know it wouldn't help affordability because then prices would just go up even though interest rates would be lower yeah i mean and just for a little bit of revisionist history like one of the real sort of objections to all of the QE and lowering interest rates in response to COVID was the fact that it was basically a transfer of wealth from the labor class, the renters, the workers, lower income, uneducated people to the asset holders, the owners, to the more educated people. And I think it's, you know, people sort of, people want collective amnesia over COVID. But, you know, don't take my word for it. That's exactly what Ben Bernanke in 2012 wrote or 2016 or whatever he wrote in a Brookings Institute paper. He said, you know, QE and all that money messing around

on the monetary policy front supports asset holders. And we've seen it. We've seen it with our own eyes. And so I think that, you know, you talked to sort of about like a bifurcation or a split in the American economy. I would argue that there's a similar but different split in the Canadian economy, which is if you own your own house, and you have lots of equity in it, you're laughing, you don't care that your state costs twice as much because you've doubled your biggest asset has doubled over the last five or 10 years. Whereas if you're renting, we know that vacancy rates for multifamily units in Canada are 20 year low. That data is on the Bank of Canada website. And we know that the massive immigration is pushing up rents. And so, you know, and rental CPI, Steve will say is lagging.

Nevertheless, is that a 40 year high? And so you've got a real sort of underclass of people and let's call it what it is. It's an underclass of people who don't own homes, who don't have much equity, who are getting squeezed like crazy and a section of society who doesn't care because they've got so much equity in their house. And, you know, we talked about averages and eventually, you know, I think that that's for we speak to Canada specifically. In general, I think Canadians, we spend too much time talking about America. But in Canada, you know, you really, really need something needs to give on that. You know, like we need rents to come down materially.

And in order for that to happen, we need to slow immigration a lot. You know, we talked about the Bank of Canada. They released their monetary policy report on page 13 or 14. There's an entire two boxes devoted to immigration and its effect on housing and inflation. You know, it's a real thing. devoted to immigration and its effect on housing and inflation. It's a real thing. The numbers are so huge that the Bank of Canada feels compelled to write a two-page paper on it. And so I think that that's what Canada is struggling with right now.

I mean, it's offer and demand at the end of the day. It's just that whether there's unbalance or whatever you want to say it right. If there's too much people wanting a certain good or service or, you know, lodging, I mean, and the supply is not adjusting accordingly, then you're going to see prices go up. I think it's just basics. But there's a lot of questions I'd want to ask you, but I'm cognizant of your time. Go for it. Oh, I was having so much fun. I didn't realize the time. Well, I mean, it's also for people listening.

So we're recording. It's 1030 now and it's well past my bedtime, but that's okay. I will. Okay. I'll give you two more questions. I'll finish on a positive note as well for Canada. So let's see my next question. I know this may be a bit of a longer one, but

whatever, if you have a bit more time, let's do it. Back to the Bank of Canada, just central banks in general, but let's say Bank of Canada and Fed. So can they really be independent, Rich, when you're seeing massive fiscal deficits happening in Canada and the U.S. I know interest payments in Canada, it's about 1.8% of GDP now. It's probably going to go up in the next few years at this rate as debt gets refinanced. It's kind of pretty easy to see that. And obviously, fiscal deficits probably staying. I mean, they're probably going to increase or at least stay around the same level. In the US, I think the Congressional Budget Office was saying that it's going to exceed 3.2% of GDP from 2025 to 2032. And typically, they're a bit more conservative, I think, from my understanding in their projections. Those are pretty massive numbers, because that's just interest. How can

central banks counteract that and be independent when they have to try and put the brakes on that? Essentially, that's what they're trying to do, right? They're trying to counterbalance that. And I know the Bank of Canada has said it a few times without being too direct, but they've alluded to that as well. Yeah. So just in general, I think as a general point, I think I forgive the Bank of Canada for not going out and explicitly sort of attacking government policy. I don't think it's their job. And I think that... No, I agree.

And I defend them staunchly for treating even bad policy with kid gloves. Like, for example, they came out and really hammered the immigration point home in the monetary policy report. I think that's as strong a view as you'll ever see on a specific government policy. We should be so lucky to have sober economists who are reluctant to make specific claims, right, wrong, or otherwise on government policy however the independence thing i mean you know what i'm why my question is from right like you want me you want me to get in trouble i'm gonna get no no but it is like i mean it's i think during the during the co during covid they were not independent and i think that that was, and like part of me forgives them because everybody thought it was going to be the zombie apocalypse.

But part of me does not forgive them at all for not being independent. They financed the entire pinned for almost three years is showing that from Q2 2019, the Bank of Canada purchased 90% of government bond issuance. That's not independence. Because when Canada ran massive, massive budget deficits, interest rates would have soared, which would have curtailed their spending. But the Bank of Canada stepped in and purchased virtually every single dollar of that debt issuance. Now, they will say they bought it on the secondary market and it didn't affect blah, blah, blah. But that's bullshit. Obviously, they did that to control interest rates.

Obviously, they did that to control interest rates. To answer your question and not to take a sort of unprompted swipe at the Bank of Canada, I think the real fear ignored a lot of the pressure that they have had from the Doug Fords and the Christina Freelands of the world to cut interest rates in Canada. I think that in general, that bridge has been breached. And I think that they aren't independent. And I think that in a sense, the mistake is again, if I may sort of express another mistake that I've made, the mistake was on my end. I should never have assumed that they were independent. And I think that I was too naive. And I think that they're going to allow inflation to run hot, which will provide cover for higher deficits, higher inflation in order to deal with what is effectively a huge, huge debt bubble. And yeah, again,

it's a really tough question. I thought about when you sent me the questions earlier, a little inside baseball, you sent me the questions earlier and I was like, I think they're going to say that they're independent, but when push comes to shove, when there's a real emergency, whether it's COVID, whether it's Russia invading Ukraine, whether it's, you know, great recession, when push comes to shove, they're not independent. And they will bail out banks and asset holders

and they'll do all kinds of funny business. And I think for investors and for Canadian citizens, I think it's important to sort of, you know, when people tell you who they are, you should believe them. And I think that they've told you who they are. And it's my fault for not listening. No. And I mean, I think I agree with you. Look, at the end of the day, maybe their intentions is to be independent. Maybe that's their intention.

But I think, you know, when you're seeing, you know, deficits and the debt being so large and interest payments being such a big percentage of GDP, I mean, at some point their hands are just tied, right? They have to try to make sure it just doesn't implode. Like, I mean, like what other choice do you have? try to make sure it just doesn't implode like i mean like what other choice do you have i am not sure that like i know i'm kind of defending them a little bit and like the way i'm answering that but i don't know what else they can do like it's uh well i'll say like again let's just forgive them for the covids and and shit like that. I think right now them cutting interest rates I think is bogus. Because you have what's known as a

neutral rate of interest. It's the interest rate at which is meant to balance. Perfect harmony. It's a theoretical sort of like, it's kind of a bullshit concept. Powell references all the time.

Yeah. It sets the framework for how interest rate policy should be set and how one should think about are you too tight or too loose? There's something called the Taylor rule, which, you know, considers the output gap and inflation and a bunch of other shit. I always screw these things up, so forgive me. But I did learn this once upon a time ago. And then there's the neutral rate,

which is sort of the interest rate where it's not inflationary or deflationary and whatever. And Canada, and that, by the way, is affected by your nominal GDP. And nominal GDP is affected by, people don't like to hear it, but immigration. So as a, or so let's just say population growth, forget immigration, population growth. So like Nigeria that has a population that has a nominal GDP growth.

And how do you get nominal GDP? You have like your population and your productivity of those people. Roughly, there's different ways to calculate it, but say roughly. And so if that number used to be one percent and now is 3% or 4%, the neutral rate of interest, which keeps that economy in relative balance, has now jumped. And so that's, to me, one of the main constraints that the Bank of Canada is facing. And so a really independent central banker would do actually what I think that Carolyn Rogers did in yesterday's speech, which is she said, listen, folks, I know you want relief on the housing, but it's not going to do much. And it's not up to us to affect deficits. And it's not up to us to deal with immigration. And I think in some ways, although I'm very critical of Bank of Canada for not being independent during COVID, I think that

they have sort of walked it back. I think they have sort of realized their mistake. I guess I'm talking full circles because I think it's an extremely difficult question. So forgive me, and I apologize to the listeners. It is. I mean, I've heard a lot of people, a lot of smart people talk about this. I've read about this and I've seen different opinions. And I mean, it's almost an impossible question to answer. I just I was kind of curious to get my favorite type of questions. Exactly. And speaking of Carolyn Rogers, it's kind of funny.

When did she start joining the press conference? Was it like a year ago? I mean, she's a much better communicator than Tiff. I mean, I was saying it a couple years back, like where it was just him in the press conference. They should bring her more often because she's a much better communicator than him. here's my counter to that regardless i think because you're the deputy i think you have like more leeway that's fair that's fair yeah right i mean maybe i'm wrong about that but just that you're not the ultimate decision maker yeah just to be the devil's advocate i think if you're like the assistant coach of a hockey team you can say whatever the hell you want but i think if you're the coach of the montreal canadians i think you have to be much more measured in your in your message if that makes sense maybe that's wrong wrong. Maybe that's right. Who knows? I will say that her speech on the productivity, the productivity emergency that Canada is facing that she

delivered in Halifax, I think was seminal. I think it was obviously ignored by the current government. Sorry for the pot shot, but it's true and i really like her i think and then during the press conferences i think you're absolutely right she's much more direct in her language and she's i think she's an excellent communicator the question was do i think she'll be independent i think she'd be more independent than tiff i don't know well we'll have to see okay well i'll finish on this last question so i said I would finish on a positing note. Yeah. Are there, I mean, is there something that makes you optimistic about Canada's economy longer term?

Let's say, you know, 5, 10, 15 years down the line. Let's just finish on a positive note, because obviously we've been a bit bearish in our discussion. But is there something that makes you really optimistic about Canada's economy in the future? Sure, sure. I've got three things. The first one makes me a total hypocrite because all I do is complain about immigration. But the truth is, if you've imported a bunch of young people, even if there is a labor mismatch, the hope is, the optimistic view of that is, compared to countries like Japan, who's literally shrinking every year, their economy is just getting smaller and smaller because people are dying more than people are getting born. That's probably going to be a good thing over the medium term. That's the first thing. I heard you shrink as you get older.

That might be it. You definitely do. My mom's getting small. The second thing I think is really important that, of course, no one wants to hear this, but it is absolutely true, is oil, crude oil, fossil fuels. Canada has the third largest oil reserves in the world. Fossil fuel demand, despite everybody's bullshit navel gazing on demand falling, is not going anywhere. We burn 103, 102, whatever, million barrels of oil a day. All of the EIA projections are always wrong. It's politicized. Other more sort of sensible, sober analysis of this has oil demand continuing to rise, albeit at a slower rate. Canada is the fourth largest producer of oil in the world. We export 97% of our oil to the US.

We could probably work to fix that. But fossil fuels are not going anywhere. Canada is the fourth largest producer of fossil fuels are not going anywhere canada is the fourth or fourth largest producer of fossil fuels thank god or else we'd be totally effed and uh so that's a real positive and the other thing is that as well then it'll probably change with the the transmountain line right that's gonna help uh that's more for well i think is it online now like i i don't know we should just be we should just like enough with this shit we should be leaning into that like really really hard and people don't want to hear it you're going to get lots of hate mail and but let's just i mean i

think it's fair i mean even when you think about natural gas a lot of people kind of i mean we've been talking about that for a long time like if if you can replace coal plants and Brayden, my coals, he's, um, he's an environmental engineer and he says, yeah, like it's, I remember him saying at some point, like it's obviously it's not easy, but it's not that difficult to convert coal plants to natural gas plants. Exactly. And they're much cleaner. Like, I mean, if you want to reduce emissions, that's a great way to do it. To actually use a cleaner carbon. But I think people just and they shut down. Right.

I get really sort of amped up on this conversation, not because I've had a beer, but because I think that if you genuinely honest to goodness care about global emissions, not Canadian emissions, global emissions. We should be doing everything in our power to export every ounce or mole or vol liter of natural gas to China. Kick them off coal and natural gas more or less is 50% of the emissions of coal. What the opposite is happening, Indonesia, which is one of the largest countries in the world, has increased their coal by 25% over the last couple of years. China continues to build coal power plants. The world is not going away from coal. Coal is going up, not down. Canada could be a major, major natural gas exporter, which could help alleviate the pressure from that, if you really genuinely care. So that's that piece. We'll have a discussion. And the third piece, I think,

is a reality that people don't really want to talk about, which is we're entering slowly but surely, you know, a Cold War 2.0, which is Canada versus China. And I think Canada used to be a huge, huge exporter of rare earth minerals and critical minerals, graphites and all kinds of shit that I don't really understand or know. But what happened was China basically doesn't care about the environment or labor markets. And so we basically exported all of our productive and refining capacity to China. As the U. the US and China become, their relationship becomes more acrimonious, the US will try to find, secure, and exploit friends, e.g. Canada, that have all of those rare earth metals. We're the largest land

mass in the world after Russia. We have them. We just need to build roads and dig them out of the ground. And I think that that's a huge, huge positive. And so we just need to sort of get out of the way of ourselves. And I think the irony, of course, is that I think Canada is one of the more ethical, environmentally conscious exploiters of natural resources in the world. And I think this idea that we can't do it by paying people good wages, pensions, being safe, and having an eye on the environment, I think is wrong. I think we demonstrate that every single day. And so you asked me for three things that I think are positive. And I think that that's, yeah, one of of them makes me hypocrite. The other two, I think I've been talking about for a long,

long time. Yeah, you have. So I totally I support I mean, I agree with that. I think I mean, at the end of the day, I think our natural resources, it's a big, big reason to be positive about Canada going forward. And you know, we were blessed to have these natural resources i think we should be using them properly so i agree with you there like in a clean ethical sensible way exactly with there's a lot of ways i'd like to take that discussion we'll have to bring you back on uh because i mean just just about the uh you know kind of shift to protectionism that we're seeing globally or regionalism because you were talking about the U.S. and that kind of, you know, it's neighbors or friends and you got onshore enemies.

And then obviously the elephant in the room, the U.S. elections. Trump has been pretty vocal about increasing tariffs around the world, but specifically China. So there's a lot of different topics, but that's okay. It's just a good reason to have you back on the podcast. Any parting words that you'd like to say to our listeners before you go and continue the night and the bachelor party in Northern Quebec? Other than no, I just want to say thank you so much for having me. It's always a real pleasure to chat with you. I really appreciate the homework that you gave me and and yeah just yeah thank you really it's really really fun I really sort of love what you guys do

I just I really think that we need more of it we need more Canadians focused on Canada and I think and I just wish you guys all the best, really. That's it. Well, I appreciate that. I appreciate you coming on. For those of you who are not familiar with the Looney Hour, highly recommended, especially if you like to listen to a bit more macro. I think that's when to be where you guys focus a bit more. Highly recommended, great show. Thanks again for coming on, Rich. And we'll definitely try to get you back on soon. The Canadian Investor Podcast

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