The Canadian Investor - What Subprime Lending Growth is Telling Us About the Economy

Episode Date: December 5, 2024

In this episode, we start by discussing the Bank of Canada’s final rate announcement of the year. Will it be another 50bps cut, or will they ease up with just 25bps? We break down the economic data driving each case, including GDP contractions, inflation surprises, and the impact on the Canadian dollar. We also discuss Scotiabank’s fourth-quarter results—what went wrong with their targets, where they’re showing stability, and why provisions and write-offs are key metrics to watch. Plus, we analyze Intel’s CEO “retirement,” its struggle to regain dominance in chip manufacturing. Finally, we touch on Goeasy and Affirm Holdings' latest results, exploring what their growth and delinquency data reveal about the health of Canadian and global consumers.  Tickers of stock discussed: GSY.TO, BNS.TO, AFRM, INTC 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.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

coming through the pipeline or simply want to lower the risk of your overall investment portfolio, EQ Bank's GICs are a great option. The best thing about EQ Bank is that it is so easy to use. You can open an account and buy a GIC online in minutes. Take advantage of some of the best rates on the market today at eqbank.ca forward slash GIC. Again, eqbank.ca forward slash GIC. This is the Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Brayden Dennis and Simon Belanger. Welcome back to the Canadian Investor Podcast. I am back here with Dan Kent. And before we get started, I won't talk really in much detail about it, but obviously people have noticed I wasn't here for a few episodes. So I had a tragic event happen to my family. So I just had to step away from the

podcast for a little bit to spend time with my family. It's still very fresh. Things are getting slowly better. But that's the extent of what I'll say. I know for those of you who follow me on Twitter, you would have seen it or joined TCI. I also posted something about it. So those close to me, I know Dan, you know what it is, but know the situation. So no need to reach out to me. I just wanted to get out of the way, maybe at some point in the future, if or when I'm ready, I'll talk a bit more in detail about it, because I think it could help people in the same kind of situation. But having said that, I'm still happy to be back because the podcast is what I enjoy doing I love to do this it's nice to see you Dan to be back here and thank you for filling in with Brayden

while I was away yeah good couple episodes yeah I was glad to see you back I mean there's more important things sometimes than podcasts so glad to be getting back into it. Lots of economic-type earnings and news today should be a pretty interesting episode. Yeah, a lot of catching up to do, and Dan needs a gold star because he's doing this despite some pretty intense dentist-inflicted pains. Yeah, it's been a nightmare the last four or five days. Ugly experience at the dentist, but I'm getting through it now. Okay. Well, I'm sure everyone's glad to hear. So we'll start off with, of course, I think this is a macro also, you know, one of the episodes we missed, we actually had done all our notes and we were talking about CPI in a lot of detail around it. So the Bank of Canada decision, which is coming up, I believe it's December 11th.

I don't have the date here, but if I remember correctly, that's the dates that would be coming up next week. You know, I think the debate and then you can probably agree with that. It's basically the debate, not whether they'll cut or not, whether it'll be 25 or 50 basis points. That's what I've been reading. Same from me. I think you can never say guaranteed, but I'd say it's pretty – can't say guaranteed, but they're probably going to cut. The decision now is, yeah, like you said, whether it's 25 or 50. A lot of it, as you'll mention, is a lot of the stuff is too with the u.s

fed like they pretty much said they're not in any rush to lower rates which puts them in a really weird position uh because obviously you can't get too far but um it's definitely going to be interesting i'm betting on 25 but there's i believe there's a jobs report coming out soon or did it come out already i can't remember i think it may be coming out this week yeah so i think that's sure but yeah if that's really weak i mean maybe they lean more towards towards 50 but uh it's definitely going to be interesting yeah and that's kind of the case right so i'll just mention what uh some of the factors that they would be considering so a case or 50 basis point cut.

So the economy, the GDP growth was weaker than expected. The recent data that came out, GDP per capita was down 0.4%, which makes it the sixth straight quarter of contraction. And obviously, I think this is really it doesn't necessarily meet the official definition of a recession. But I think sometimes we get kind of bogged down into the definition of it, when in reality, things are not, you know, improving for a lot of people in Canada, if you're seeing this contraction per capita, job numbers have not been great in recent months, like you said, and in terms of the case for 25 basis points, and there's a few points I think are debatable here, but inflation did come in stronger than expected at 2% with the headline number. That was up from 1.6% a month earlier, of course, both on a year-over-year basis.

All three measures of core inflation actually increased in October. So you have core CPI common, CPI median, and CPI trim. So without going into detail here, these are the measures that the Bank of Canada tends to focus on even more. And you know, some of them are actually starting to show a trend of increasing some it's just one month. So we'll have to see whether it's a trend or not. But it's definitely something that I'm sure they're keeping an eye on. Powell, like you mentioned, the US Fed is not in a hurry to lower interest rates. So that means that if the Fed is slower to cut rates and Canada keeps cutting, it would exacerbate the pressure on the Canadian dollar. And of course, it could fuel some inflationary pressure. The bigger the differential,

the more pressure, well, differential between rates in Canada bigger the differential, the more pressure, well, differential between rates in Canada and the US, the more pressure it can put on the Canadian dollars. Then you have the wildcard of potential US tariffs. I'm putting this in the 25 basis point category, but you could argue for 50 basis point if you think it's a high likelihood and the Bank of Canada is scared of this and is trying to be preemptive and stimulate the economy. But again, I think you can make a case for 25 basis points here because, you know, Bank of Canada are typically, you know, central bankers tend to be more conservative. They tend to they've been saying they're looking at data, data, data. They're looking at data, data, data.

Well, if they would be preempted here, it's, you know, they're basically going on a whim a little bit, right, with the tariffs and the potential impact. So I actually think it's more of a case for 25 to give themselves a bit more leeway if the tariffs do come. And if they do come, what percentage it is, because you see the 25% in headlines and all that. But you have to keep in mind that, you know, this is just a threat and they're asking for things in return. So there's no guarantee that there's going to be these tariffs. And even if there are, it could be less than that, right?

So I think a lot of people get, it's easy to look at the headline is what I'm saying. Yeah. I mean, I imagine there's going to be a lot of give and take there in terms of negotiations. I mean, it looks like just a threat right now and there's probably room to move there on a few different things, but I mean, you're not going to be able to tell that until what, January, February, when that like really comes in. The one thing that I guess concerns me in a way, I mean, I actually don't have the chart, but we have the, I saw a chart of like real GDP growth per capita US compared to Canada. And the chart is just, it's very telling, like, you know, 2015, 2016, we've effectively flatlined where the US just, you know, continues to grow. And then we have the element that the one thing I read from the,

from the GDP report is that Canadians are pretty much hoarding cash, like however much they can, like the savings rate among Canadian households hit a three-year peak. So they're saving at more than double the rate they're spending. And this is, you know, despite what, how far have rates fallen? One, you know, 1.25%, I think they've dipped policy rates. Yeah, 125, I believe. Yeah. Yeah, because they're have 375 now yeah clearly you know that dip in policy rates isn't really helping a lot of canadians i would imagine like there's a chance that even if rates continue to go down i mean the cost of living pinch

might never go away and i mean obviously you know policymakers do this in order to encourage spending stimulate the economy but i mean if they continue to drop rates and people continue to not spend money, it creates a huge issue. Oh, definitely. So I think those are all considerations. Right. And on the inflation thing, when I was in Calgary, I couldn't believe it. A little like kind of thing of strawberries was ten dollars. Yeah. Yeah. I couldn't believe i was gonna

buy it and then i was expecting you know here i find typically we'll pay like five bucks for that i was expecting the same price range and i'm like okay i guess i'll i'll have a couple bananas instead yeah well i mean even if you go to a place like costco like blueberries strawberries things like that and costco is like typically cheapest prices you can get. It's just, it's ridiculous. And it's, yeah, it's, um, I mean, we, I would imagine we would import a lot of that stuff. So, I mean, Canadian dollar pressure. During the winter months. Yeah. That's what I'm thinking. Um, obviously unless it's, uh, in indoor growing, but I think the most of it is imported from like california but i guess the last thing i'll mention here that could be um you know the bank of canada could be weighing

is obviously the recent announcement from the federal government for stimulus with the gst holidays coming up on some items and the potential of a 250 check to canad Canadians who are in less than $150, although that one seems to be up in the air at this point. But I'm measuring that because it could put some pressure on inflation, whether it puts pressure on inflation or just pulls forward some spending for the GST holiday. We'll have to see. But I, you know, I'm not doubting that it is something that they are keeping an eye on and they may end up doing less 25 basis point because they don't want to overstimulate the economy if they're afraid of these measures, putting some inflationary pressures. Yeah, I've heard just from a few small businesses that like they don't they expect the costs of having to implement all this to be much more than the, than the added revenue it's going to bring in. I mean, obviously we won't get too in depth on that thing overall, but, uh, yeah, it's remains to be seen whether this is going to

provide any real benefit. Yeah, exactly. I've heard similar things, even restaurant owners saying like, well, it doesn't really change anything for us. This period is always our busiest period anyways. And now we just have that complexity of doing this. But again, you know, it is, I think, a consideration. They've been pretty vocal, the Bank of Canada for central banks in terms of fiscal spending. At times, you know, they've been a bit nuanced what they've been saying. But I think they've mentioned a few times where you know governments should be careful about doing too much stimulating um i guess the last thing here for our

joint tci subscribers you'll see the semi-fed watch tools so now you can see that yes the current rate is 450 to 475 so there is still a good chance, I would say that they would, you know, that they'll cut the US Fed at their next meeting, which is on December 18. So now the probabilities is 74%. If we round up and 26% that they would leave it as is. But again, it's definitely slower than we a lot of people were expecting. And then you're not looking at a higher like below four in terms of probabilities until mid of next year so i think that's a good reminder for people that yes the fed and the market is starting now to price in a much slower rate cutting cycle when it comes to the u.s fed and obviously i know they say they're independent, and I'm not debating that whatsoever. But, you know, they keep an eye on this stuff,

I can guarantee you. Yeah, and that'll be good news for US people like US currency cat, like people who are looking to earn interest on cash for sure, relative to Canada, probably. I mean, these were these odds were a lot more drastically leaned towards aggressive cuts, even when we looked at this like six months ago. So it's changed quite a bit. Even a month or two ago, I guarantee you it was more. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones,

all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Calling all DIY, do-it-yourself investors.

Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends. And there's other stuff like learning Duolingo style education lessons that are completely free. You can search up Blossom Social in the App Store and join the community today.

I'm on there. I encourage you go on there and follow me. Search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the app store and I'll see you there. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income.

But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. Airbnb.ca forward slash host. Anyways, enough about macro.

We'll switch over gears. It's the start of earnings seasons for the big Canadian bank. And I guess Nova Scotia kicked it off this morning. We're recording this on Tuesday. So it'll be bank earnings, I think, all of this week and potentially early next week. Yeah. I think that most of them report by end of the day Thursday. I think I might be missing a few, but... Okay.

Scotiabank kicked it off. It was a relatively soft fourth quarter, but overall the year was pretty solid, all things considered. Earnings came in just below expectations. They were expected to earn $1.60 a share and they earned $1.57. So the company, the one interesting thing is right on the front page of the quarterly report, the company, they had issued some medium-term targets. And I don't exactly follow Scotiabank all that much, so I don't know when they issued these. But effectively, they said they wanted to grow earnings at a rate of 7% annually

and have a return on equity over 14%. So for 2024, earnings actually declined by 0.2% and return on equity came in at 11.3%. So I mean, obviously, these are medium term targets, but over the short term, they missed these by a mile. It's interesting to keep an eye on the company's Canadian segment and just banks overall, because this is kind of what has fueled many of the Canadian banks' strong earnings this year. So in the Canadian segment, net income is up 34% year over year. Revenue is up 5%. And what is fueling this growth is provisions for credit losses, because revenue is up 5%, but expenses increased by, I think, 4.5%. So, I mean, it's mostly provisions that is fueling these results. So, 36% lower than

last year's fourth quarter. So, year over year. So, it kind of seems like the banks are kind of getting an idea on the overall situation with the economy and are now, you know, they're normalizing a lot of their provisions. When we look like to last quarter they only grew by three percent so there's definitely an element of stabilization there as you know if we remember in 2023 like these banks were reporting big increases on a quarter over quarter basis when you know the economy was a little bit more uncertain i'd say or or questionable as to how it would be moving forward. Loans increased by 2% and deposits are up by 7%. And I believe most of the loan activity is actually on the business end. So they're definitely seeing some lower activity on the borrowing end,

which kind of makes complete sense. When we look to provisions as a whole, like I'm not talking about just the Canadian banking in this time, they came in at 1.03 billion, which is down from the 1.052 billion that they reported last quarter and is down significantly lower than the 1.25 billion reported in the fourth quarter of 2023. And the main driver of provision reductions has actually been solely due to a reduction in performing loan PCLs. And I would imagine this isower hasn't defaulted at all, but they expected could go unpaid if the macro environment doesn't improve or gets worse, things like that. So with falling rates, I imagine they've put some of these performing loans off. They're no longer PCLs just because of the relief some borrowers have gotten. Gross impaired loans came in at 88 basis points, which is up four basis points from last quarter and 14 basis points year over year. So gross impaired loans came in at 88 basis points which is up four basis points from last quarter and 14

basis points year over year so gross impaired loans would be loans still on the balance sheet but are in some way impaired so lack of payment for the most part and net write-offs on the other hand came in at 51 basis points which is a six basis point jump from last quarter and 16 basis point jump from last year's fourth quarter so write-offs are effectively when the bank believes the chances of the loan being collectible are pretty close to zero and they kind of remove them from the balance sheet. Overall stability, pretty key here.

And from a provision basis, they seem to be doing quite well. Write-offs continue to rise along with total impaired loans. I mean, Canadian banks are far from out of the weeds right now. Scoti, I think it's taking a bit of hit in share price this morning. Maybe it's because of the big jump in write-offs and impaired loans. I would imagine because from a headline number basis and even from a segment basis in terms of PCLs, it didn't look like all that bad of a quarter.

even from a segment basis in terms of PCLs, it didn't look like all that bad of a quarter. Yeah, I'm trying to look that up. But yeah, I mean, it sounds overall, it was a decent quarter considering the environment for Bank of Nova Scotia. I know they had to like do, you know, a big write off for like a Chinese investment that they had or something like that. Yeah. Yeah. And that's that's like when you look at actual reported earnings, I believe they were like under $1.20 a share. But when you adjust it out, obviously, that's what they're going to do. And it came in at pretty close to headline numbers, but it was a big write off of some sort of Chinese investment. I can't remember. No, I mean, I think at this point, I mean, for all Canadian banks, my view, I think everyone knows on the podcast, I don't really

invest in Canadian banks and banks in general. I find them, obviously, they're very complex. Like, I think I understand banks relatively well. And even for me, there's some of the stuff that is pretty complicated. But right now, I think, I mean, there's still a lot of uncertainty going forward, right? In the next couple of years, whether it's the U.S. presidency with Trump coming in, what kind of impact this may have on Canadian banks, what kind of impact it may have, especially on those that do more business in the U.S. and potential investment in Canada, the ripple effect that it could have on their business loans. There's a lot of uncertainty with Canadian banks and without saying obviously the economy and where it's going. And if we see unemployment rise in Canada, this could impact some of their loans as well. So there's just, in my view, there's just a whole lot of uncertainty. And even if there was less, I would not be very inclined to invest in Canadian

banks, but that's just my personal perspective here. Yeah, I mean, I own a couple, Royal, National, and I guess Equitable. But Equitable kind of gets put off in its own kind of area separate from the big six. But I mean, they've had a hell of a year. I mean, even the lower end, like even Scotia's up by, I think, 33% on the year. like even Scotia's up by, I think, 33% on the year. And I think that is due to, you know, back in 2023 when provisions are just skyrocketing every quarter.

I mean, there's a lot of uncertainty moving forward. Whereas now, you know, they're kind of normalizing. They've been in that, you know, similar range for the last three quarters, which is definitely something investors are gonna wanna see rather than 2023 when they were just escalating. But I mean,

it's like I said, it's far from over at this point in time. I mean, there's a lot of issues with the Canadian economy right now. And obviously, you know, those impaired loans continue to accelerate quarter over quarter. And it's definitely going to be interesting to see what the Canadian economy looks like in 2025. Yeah, yeah, exactly. So I will move on here. Some pretty big news obviously made headlines. And I know you're like not super into the semiconductor space, but I'm sure we've talked about Intel before on the podcast. So Intel CEO left and for retirement, but I think it kind of changed throughout the day, basically saying that he was ousted by the board and now he's retiring. But even before that, I mean, knowing how they were doing and not well at all, I've seen enough of these to know that, yes, they may be selling

it as a retirement, but in all intended purposes, it is a firing. You know, just to sum up what happened here, there was a series of missteps, let's be honest, by Pat Gelsinger, the former CEO of Intel. I'll go over some. Some are quite well known. So Intel has been trying to turn things around and get back as one of the top chip manufacturers in the world. And just as a reminder here, many of the chip companies that people are familiar with, and we've talked about this on the podcast, like think of an NVIDIA, AMD, or even Apple, for example, with their M chips, right? They don't actually manufacture those chips. They design the chips and then the chips are manufactured by a third party. Typically,

it will be TSMC, so Taiwan Semiconductor, that will be doing the actual manufacturing of the chips. Now, currently, it's not really a contested crown for that manufacturing. It's really Taiwan Semiconductor and then everyone else behind. The numbers I keep seeing is that they produce roughly 90% of the world's most advanced chips. And TSMC has been investing in this for decades and decades. The issue with Intel is not only they produce chips, but they also design them.

So their area of focus is not on one thing. They're kind of an integrated player in the space, whereas other players only focus on either designing or manufacturing part and intel was still doing actually quite well up to like 2021 really on the strength of their pc cpu segment uh in 2020 and 2021 if you you know rewind back to the pandemic although i tried to i kind of forget about that time but still for the purpose of this, it's important. Well, people left, right and centers were actually buying personal computers, whether it was laptop

or desktop, because you were working from home, doing school from home, whatever it was. So if you didn't have a computer, you needed one. And if you had one and it was not fast enough, you needed one. So they really saw their PC sales do quite well in 2020 and 2021. But that slowed significantly starting in 2022. And with the turnaround plan costing tens of billions of dollars, like it is massive. If you look, you know, you can search what Intel has announced, but you can also just look at their annual statements or quarterly statements and just look at the sheer amount of capital expenditure, how much it's jumped in recent years. And what that ended up doing is actually put a lot of pressure on their free cash flow.

And, you know, one of the major mistake that I think they did is they actually did not cut the dividend when they should have. I took until early 2023 for them to cut the dividend and until August of this year to finally pause it altogether. And this, in my view, a good management team, a good CEO would have stopped the dividend like at the latest in 2021. would have stopped the dividend at the latest in 2021, when your CapEx was really pumping through and increasing very rapidly. Whether you want to criticize the plan or not, that's something else that he has. But they could have sold, like I was looking at the number, they could have saved $15 billion by just cutting the dividend in 2021. Say you ended at the end of 2021, they could have easily saved that amount.

And it's in a space where it's hyper competitive. You need to make massive investments. It's constantly innovating. Like there's no reason why you need to keep a dividend when you're getting into an investment cycle like that. I think that's just completely poor management. And I know we've criticized Bell quite a bit and it's a different area. It's not at the forefront of the technology like this, but there's a lot of similarities with Bell, right? They're trying

to grow. And instead of doing the smart thing and cutting the dividend, I'm actually seeing a lot more people or a lot more analysts that now are advocating for cutting a dividend after, I think we've been saying for over a year now. Oh, yeah. It's been pretty much since I started coming on here. We've been talking about it. Yeah. But it's just an example, right? Like, I just don't understand.

Sometimes these management team, like, I mean, you don't need to. It's not rocket science. You just look at the numbers. Like, what is your goal? What is your, like, goal as, you don't need to. It's not rocket science. You just look at the numbers. Like, what is your goal? What is your goal as a company going forward? What can you do to best achieve that? And now Intel, let's be honest, they're in trouble. But it's not the last misstep or unforced error that Gelsinger did.

I don't know if you knew that then, but in up until early 2021, they actually had an agreement with tsmc where tsmc would give them a discount it's reported that it was about 40 percent on all their most advanced chips manufacturing because even though intel was producing most of its ships the most advanced one they actually were not able to manufacture them. Only TSMC had the technology. And they had this agreement, a pretty good deal. And then Gelsinger started in May of 2021 saying that the designers shouldn't be too reliant on TSMC because of the Taiwan's relation with China and how it's a bit of a geopolitical time bomb

and they shouldn't have their eggs all in the same basket. Well, the problem is that, like I said, Intel didn't have the tools to do that. And TSMC management, even though they were kind of reserved in public, they were not happy in private. And apparently after those comments, TSMC told Intel that they would no longer be providing them that 40% discount, which meant that Intel had to pay full price for the manufacturing of their most advanced chip. It's just kind of one thing after the other. Like, it's just, especially saying that like publicly, to me, it's like, why don't you talk to TSMC first

privately, and then kind of gauge where they're at before you start saying that publicly. So, there's just a series of errors, in my opinion. Whether this turnaround plan works or not, we'll have to see. We'll probably not know for another few years. They have some mega fabs that are in the works in the US. I think there's one in Ohio, if I remember correctly, and one in Arizona. But we'll have to see. But there's a lot of stuff that I think, you know, I know hindsight is 20-20. But at the same time, like the dividend part, like really? Like really? You kept it going when you're making these massive investments? Yeah.

I mean, the comments about TSMC is, I mean, it's a prime case of don't bite the hand that feeds you. Exactly. Especially like publicly. I don't bite the hand that feeds you. Exactly. Especially like publicly. I don't really follow Intel all that much. I was reading over these this morning and I was like, wow, that is a significant misstep. And it was like only a few months after he came back. Because from what I'm reading, it's pretty short tenure.

Like he came back in February 2021. And they, well, I think he was the CEO before. Less than four years. Yeah ceo less than four years yeah like uh way less than four years i can't remember whether he was there before or not but um i think he was i think he was a ceo prior but and then he obviously came back and uh did not do a very good job but uh yeah i mean the free cash flow you can see just they're they've been burning money effectively because of large CAPEX since 2022. So, I mean, the dividend just needed to go earlier. And it's just a prime case of, you know, if the money isn't there, you shouldn't be paying it.

And now it's just it's effectively a large scale turnaround project at this point. But yeah. Yeah, exactly. So I'm looking here in terms of the capex i'm just curious how much it was i'm just gonna go on an annual basis because it's gonna make a little more sense here investing 20 25 billion in 2023 exactly so you saw the jump so they were doing like 16 in 2019 14 in 2020 and then it started ramping up in in 2021 with 20 billion and then 25 steady uh since then so you're like literally not quite but you're getting close to like increasing your capital expenditures by like

almost double not quite like let's just say 80%, some somewhere there quick math. But, you know, when that increases so rapidly, I don't know, to me, these are just like kind of obvious things. Obviously, they have some incentive to keep the dividend going. I'm sure he had like, tons of shares to his name. So he was probably liking the income. But at the end of the day, if they have the best, you know, if they really want the business to do as best as it can long term, they need to make those decisions. So I don't know the incentives that he had, but I'm going to suspect that he was getting a nice little paid in dividends. Yeah. Well, I mean, you look at it in 2021, they had pretty much 30 billion in operating cash flow 20 billion in

capex so that would have been the last time they could actually afford it because pre-cut they were paying out around 6.3 billion a year you look at you know 2022 they lost 10 billion like negative 10 billion uh 2023 you're talking negative 14 billion ish in free cash flow so i mean yeah there was no money there to to sustain. Yeah, I would personally have cut it already in 2021. Once you know your capex is starting to increase just to give yourself more leeway. But maybe I'm too conservative with that money. As do-it-yourself investors, we want to keep our fees low that's why simone and i have been using questrade as our online broker for so many years now questrade is canada's number one rated online

broker by money sense and with them you can buy all north american etfs not just a few select ones all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Calling all DIY do-it-yourself investors. Blossom is an essential app for you. It has been blowing up with now more than

50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends. And there's other stuff like learning Duolingo style education lessons that are completely free. You can search up Blossom Social in the app store and join the community today. I'm on there. I encourage you go on there and follow me, search me up. Some of the YouTubers and influencers and podcasters that

you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, Blossom Social in the App Store and I'll see you there. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who

don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host having said that let's move on i know we had canadian tire and next but since i talked quite a bit let's go to go easy and then uh affirm all things and if we have time we'll do a canadian tire at the end yeah so this like go easy reported a while ago would have been the start of

November, but because we're going to go over firm, I figured GoEasy would be great to talk about because again, the subprime market is just ripping in Canada. It's pretty crazy. I mean, applications for loans continue to grow. I mean, they're, you know, high policy rates are supposed to discourage borrowing, you know, slow spending. But the subprime market is just crazy right now. So applications for loans, they came in 22% growth year over year. Loan originations came in 16% higher year over year. So the company's charge-off rate came in at 9.2%. And we had chatted about the debt offering GoEasy made a while back.

That probably would have been like four or six weeks ago now and yeah they expected so they had to pre-release their earnings because it was such well not they didn't pre-release their earnings they pre-release you know a bit of a range of where they ended up where they're going to end up just because the debt offering was so big they had to do it so they had expected a charge off rate of 8.75 to 9.75%. And I did mention that I felt this was a very wide range, especially because they were reporting earnings and, you know, just a couple of weeks after that, but they did manage to come in at the midpoint of that range. And they actually posted a 10 basis point decline when we compare the previous quarter, like sequentially the quarter over that I expected it to rise because the company had reported, you know, a slow 10 to 15 basis point increase in the,

in the charge off rate quarter over quarter. But that's, you know, a lot of people would think this is high, but this is pretty typical for a company like GoEasy, like a subprime lender. Obviously their charge off rates are going to be way higher, lower credit. They make up for this by charging you 30% annually for a lot of their loans. But yeah, revenue is up 19.1% year over year and earnings per share up 13.4%. But the one really interesting thing on the quarter and one of the key indicators for me as to how like weak the canadian consumer really is is the heloc growth from go easy so heloc loan originations are up 57 year over year so this is having a huge impact on the company uh for one it's raising the average credit rating of its

consumers to pretty much all-time highs so it sits at at 624, which is, you know, that's still a relatively weak, not like terribly weak, but that it's not a good credit rating overall. I believe the average is around 680 in Canada. So you're talking like it's still sitting, you know, below average credit levels, but it's been in the 500s for quite some time. So this continues to tick upwards. And I believe this, typically credit ratings among mortgage holders and those who would be able to get a HELOC are higher, not always, but most of the time. But secondly, this is making more of the company's loans that are backed by assets instead of being completely unsecured. So it sits at 45% of their loans are backed by some sort of asset. One year ago, it was only at 41%.

So these are obviously higher quality loans because they have the home as collateral. So should be something shareholders should be happy to see. But in terms of economic weakness, this just kind of shows me that higher credit buyers are now having to tap into home equity and they're and they're going to like i can't i don't know for sure but i can't imagine go easy's heloc rates are as good as you could get at a major institution they can't be i mean no i had looked a while back just for fun when we were doing a segment and i remember the rates in general uh let's have a look here yeah they're definitely going to be higher because of the i believe and again this is

speculation rates starting from 9.99 yeah and that that's 10 on a heat lock is 10 i don't know what the helox it would be prime plus a couple percentage. Typically very little. So let's say you can probably get 7%, 8%, I would say. I'm just kind of ballparking. It's not my area of expertise, but that's what I would kind of expect, 7% or 8%. But this is rates starting from 9.9%, and if they're going there, they probably can't get it with their lender. So, I mean, these are like homeowners, likely higher credit buyers that have probably, again, I can't say this for certain, but they're probably heading to go easy because they can't get a HELOC through a prime lending institution.

And I mean, I would venture to say this is because of just the cost of living, you know, the crisis we're going through at this point in time, how tight Canadians are from a financial perspective, you know, more and more homeowners, they're having to tap into home equity. And I mean, like in Canada, a lot of Canadians' net worths are tied up in their home just because of how crazy the real estate market has been here over the last 20 years. So they're having to tap into that equity. As to what it's for, I don't know, but I can't see. A lot of people utilize HELOCs and stuff to go make home renovations or stuff like that. I can't imagine that's a big priority right now.

you know, stuff like that. I can imagine that's a big priority right now. But again, I don't really know any of that for certain. But the company speaks a lot on how credit applications are coming in from higher quality consumers in terms of the overall credit score, which again, is better for the company, no doubt, especially because they're backed by these homes. But it's just it gives you an indication of the economy as a whole. We're seeing the subprime market in Canada. I believe the article I read was from 2023, but I imagine it's still, obviously we can see from GoEasy's results, it's still very much growing, but they said it was growing at four times the rate of other lending markets. So the prime lending market, things like that. So it's pretty

clear the company has some pretty big tailwinds, but it's not without risk. And it's, again, I've mentioned it numerous times, it's a fine line. Its easy home segment continues to report declines in overall sales, but they're still relatively flat. only around 10% of the revenue. And it's really not surprising to see it slow down as much because it's effectively like a hundred percent consumer, like it's discretionary spending. I remember I was running the total cost. So effectively their easy home is like, you can lease furniture or not lease, sorry. You can finance furniture. You can finance like electronics. I remember, I can't even remember what it was it was like a playstation 5 but it was like 20 it was like 20 bucks a week for like 104 weeks so this 20 bucks a week for the rest of your life yeah i was like who is doing this but i mean like clearly people are just so you know 20 bucks a week that would that would be like almost $2,100 for a $700 PlayStation.

Yeah. So, I mean. Yeah, it's just stuff where you shouldn't be buying it if you need to finance it. That's my view on these things. And, you know, I'll be doing a firm holdings. A lot of the things that you're mentioning, you know, it holds true for a firm holding as well. They're doing quite well and same kind of thing and they get most of their revenues actually in the u.s so it's not like it's just in canada

obviously i know the headline data looks much better in the u.s but i think the problem with headline data is it tends to average out a lot of stuff. And the households that are doing the best tend to pull everyone else when, I would say the vast majority of people are feeling the pinch right now. Oh, definitely. There's zero question. I mean, again, GoEasy is not a company

that would be your first choice. You would never go to a subprime lender as your first choice because the interest rates never go to a subprime lender as your first choice because the interest rates are higher. Obviously they have to compensate for a weaker credit rating. And I mean, the HELOC activity really, I guess, didn't surprise me, but I mean, like the one good thing is the company is getting more asset back loans, which is ultimately, you know, better than just offering these secured loans with, these secured loans that people can just stop paying. Because the other thing I'll say about the subprime, I mean, if you have a loan with GoEasy, you have a mortgage, a car payment,

other things like that, and you have an unsecured loan with GoEasy, what is the first loan if you can't pay? What one is that going to be be it's probably going to be this loan it's not going to be your mortgage it's not going to be your car payment so but yeah it's again i think there's a fine line here where you know these companies thrive when the economy is bad but then the fallout you know if you're teetering on the edge and and you kind of go then you know the fallout can be massive and And I remember this is a company that was, I believe they had an 87% drawdown during the dot-com bubble in 2000. I think they lost 70% during the financial crisis. And I believe they lost around 60% during the COVID-19

crash. So yeah, it's a market that's growing really fast right now, but it's also one that does come with risks. From what I could find, it's Prime Plus 0.5 or Prime Plus 1, I think anywhere in between. So let's just say 7% compared to 10% starting from. Yeah, starting at 10%. And you're totally right, starting at 10%. So that already shows a pretty big difference. And why would you go with them unless your current lender just either doesn't offer the product or does not basically they don't want to give it to you because there's you know you're too high risk of a lender and you know just to add what you were saying yes the these kind of companies subprime

lender will do well as you know times start getting tougher but people still have jobs where it gets really where it could really start being painful for a company like go easy is when the job market starts rolling over and unemployment starts rising pretty rapidly that's when you know you don't you probably don't want to be holding this stock because that's when the default rates will start going up probably above above 10 i know now they're around like the write-offs is what like 9.2 you said two yep yeah so i think i mean unfortunately it's the kind of thing that could happen very quickly so that's why you just have to be careful with these kind of companies because yes it's kind of fine line between like, you know, benefiting from the boom

and then staying in too late. Yep. And I mean, you're like, the one thing is, is one bad quarter will scare the hell out of people. You know what I mean? Like if they reported one bad quarter, like over and above, you know, by, you know, charge off rates rises significantly, that will and above, you know, by, you know, charge off rates rises significantly, that will terrify investors because like, you know, obviously a lot of people who buy this company know that, you know, they thrive during conditions like this and they know that, you know, there could be a situation where it gets much, much worse. And it's going to be a company that you got to keep an eye on, you know, on a quarterly basis, especially, you know, in the current environment we're in. And even I would say, keep an eye on the macro.

If you start, it's in between quarters and you start seeing unemployment rising pretty rapidly, you know, you probably should examine your position. I'm not saying you should sell or not. It's not investment advice, but, and if you hold this company and what we're saying is brand new information, then you, you probably, you don't know what you're saying is brand new information, then you probably don't know what you're holding. This is one that there's a lot of companies that you can just buy and kind of stuff in your portfolio. I think personally, you probably don't have to worry too much, but this is one that I,

in my opinion, you got to keep an eye on. Yeah, definitely. Now we'll move on to a firm holdings. We thought, of course, both the companies reported, I think about a month ago at this point, but earning season starting to slow down. And I think they just these two companies work so well together in terms of comparing what's happening. I'm always kind of intrigued by buy now, pay later, because it's a a new product that's still very

murky in terms of regulation compared to what we see with other types of credits but you know they it's hard to argue with a firm holdings just like go easy i mean they are doing quite well so the numbers look pretty good but it is something that makes me nervous a bit like go easy, right in terms of where we're at in the cycle, if these companies are doing very well. And it's just one of many BNPL companies, so buy now pay later. But the growth is worrying, in my opinion, just for the economy as a whole, not for the company itself, at least not right now. Not only that, the increased availability of uh buy now pay later is worrying as well i don't know about you if you did like

some black friday shopping i was just gonna say now oh my god it's like it's insane on the amount of stuff yeah yeah my couch is like i haven't bought a couch in my life i've just kind of like but they're falling apart so i need a new couch and i go to i go to the brick and they are absolutely hammering that in your face like you can buy now you don't have to pay for you know i believe it it got up to like 36 months where you don't have to pay like there's obviously like with something like that it's not like because i don't think a firm charges fees there was fees attached to this so like yes they say it's zero percent oh do they they charge it to the merchant to the merchant they have pretty yeah i can go over the fees but

yeah they charge it to the merchant if not merchant could have other solutions available yeah and that's kind of the situation it was, but I mean, I couldn't believe like how much that, you know, don't pay now, pay later, pay equal monthly or, you know, defer it, pay later. It's really, it was in my face the whole time I was in there. It's definitely a market that I don't think is going to slow down anytime soon. Yeah. And what I find a bit alarming too is, I mean, you're seeing this more and more for items like below a hundred dollars, like non-essential items below a hundred dollars. And, you know, in my view, if you have to finance an item that's $60, that is not an essential, you probably should not be buying it. No. Like that's as bluntly as i can say it now like

i said it was a good quarter for them revenues were up 37 to 321 million they had a net loss of 100 million compared to a net loss of 172 million last year for the same quarter gross merchandise volume was up 35 year over year so that is a massive increase. And I'm going to show something here for our joint TCI subscribers. So this comes straight from the deck here. So you can see the 35% growth and gross merchandise volume. But there's also a yellow line that is very interesting. So this is the average order value, which was 331 in Q1 of 2023, and now is down to 279 for their latest quarter, Q1 2025. So it just means that, you know, I don't think there's any other way to interpret this is that, yes, there is more volume altogether, but the size of the order is actually trending down,

meaning that there's a good case to be made that people are just buying smaller and smaller items with these services. And I mean, it's been trending down and this is not inflation adjusted. Keep that in mind. So if you adjust inflation, the gap would be even greater. So you're talking about year over year, 6.7 decline in average volume and 10.7% decline since Q1 of 2023. So in two years. Yeah, I mean, there's some people who, like if you have these systems in place, if you're actually like financially responsible,

you can take advantage of them because they're typically 0% interest, you know, zero fees. And I mean, if you do, you know, make the payments, I mean, why not do them? But I think like the crazy growth you're seeing is just, you know, from people who don't really do that. I mean, they like what I guess what happens if like say it's four equal payments i imagine they hit you with a huge interest rate if you don't finish it off after that amount i don't know how that works yeah i think you get like late fees i've never used them myself so um that's you know take it with a grain of salt but again that's just part of the offering

so what ends up happening is the merchants end up like shouldering a lot of the fees as well. So the merchant, so if you're offering like pay in X, so pay in four, for example, they're going to take or like roughly a 5% hit on that. So the merchant will take a 5% hit. If you're offering instead a loan that has interest so i'm buying something on a loan it has interest then the merchants only pay like a couple of percent two percent to be able to offer that because a firm will make money on the interest for the loan where the fees are the highest and it reaches above 10 is when they are offering loans without interest above like more than 12 months yeah so if they're offering that then obviously they have to get compensated by the merchant for the risk and i get then i would

assume like just based on what i'm seeing people will i'm sure make the same conclusions here is that the merchant has to basically pay for the risk that they're taking by offering these zero interest loans yeah i mean obviously merchants are seeing a big advantage of it to it, you know, to give them 10 to 12% to just kind of, you know, get the sale, get the money off their hands. Yeah. It makes you wonder though, like I posted, like, you know, merchants will, you know, a lot of merchants will say like visa and mastercard fees and it's just not visa and mastercard but it's the fees of also the bank that issues the visa or mastercard you know typically what we hear is like one and a half two percent is kind of the range that

they're paying well they're paying like way more than that here and merchants you know are pretty vocal when it comes to like the fees associated with credit cards. So it makes you wonder if they're opting into these kind of services, they probably are doing it to prevent sales from declining. That would be my assumption because, you know, no matter what you're selling, you're taking a decent hit to your margins when you're taking 5% off right there. Yeah. So that's where I find it very kind of interesting slash alarming, unfortunately. I know I'm doing a bit of interpretation, but why would you offer that? Because you think if you don't offer it, you won't get the sale.

Like that's essentially why you're doing it. Yeah. And they're popping up everywhere. So, I mean, obviously, merchants are finding it valuable even when they're paying this much and i mean like i said with my situation at the brick like couches aren't cheap you know not a lot of people have three thousand dollars to pump out on a couch but if you defer the payments for three three years then it's you know it's not that big of a burden at that point. So just kick the can down the road. You know what I mean? So then they get the sale, right? So I can totally see that as an

avenue for why they're doing this. Yeah. No, exactly. And the transaction per active customer is also increasing. So they calculate the metric over the last 12 months. So it went from 4.1 last year to 5.1 this year. That's a 21% increase and has been steadily increasing since Q1 2023. And I know you weren't there for that episode was one I did with Braden, but I had gone over a New York Fed survey that talked about like buy now, pay later services. And one of the key takeaways, they said that the biggest barrier for like buy now, pay later is the first transaction. So once someone does one transaction, then they will usually be repeat customers. And they even said as much a firm here with 94% of transaction being repeat customers.

So just goes to tell you that, yes, it's definitely. And that New York Fed survey also said that most of the users were lower household income that were using these services. There were some richer households that were using it, but usually it was to do what you said earlier is just to take advantage of the service for a larger purchase. So basically they just kind of, you know, use the four installments, they do it, they keep the money in the bank, collect interest, and then they pay it off into four installments. So that's how more wealthier household would actually use the service. That was kind of my mentality when I went in there as well, is you can, you know, I'll take that money, just throw it in a high interest savings ETF, you know, earn that interest,

but there ended up being annual fees. So they said it was zero interest, but then they charge you annually. So it's really not zero interest. So I didn't end up doing it. But I mean, you know, like I said, if you use these responsibly, you can end up, you know, getting a little bit more money back. But I would say most people use it because they probably need to, sadly. quite a bit of traction since the rollout in 2023. They now have 1.4 million active customers. The card had 607 million in gross merchandise value during the latest quarter. So still a very small portion of total transaction. But what the card does, it uses the Visa network and links to customers' bank account. It can be used as a debit card or you can pay into installments when you use it there's an app that goes with it and you can use their app as well with the card to get pre-approved before you make the purchase for a larger amount like a couch for example i think

that's one of the ones they gave as an example so you can get pre-approved i mean encouraging people to buy on credit it's, I do have a lot of reservations for that. At the end of the day, look, it is there. People are clearly using it. But I'll finish on this note. So the monthly delinquency rate is now the highest it has been since 2019, whether we're looking at 30 days plus, 60 day plus, or 90 day plus. And obviously it goes down the longer the delinquency because someone who's not paying after 30 days may end up paying on the 67 day or whatever, right? So the 30 day plus is at 2.8%. That's up 40 basis points since last year. And there is some cyclicality to it. So it's best to look at it

for the same quarters. 60 day plus is at 1.7%, up 30 basis points since last year. And 90 days plus is at 0.8%. It's up 10 basis point from last year. So it's not alarming right now, but it is something to keep an eye on because you'll see and people can see it in their investor presentation for the earnings that you can see that steady increase that seems to be creeping up. So it is something to keep an eye on, especially since these kind of services are quite new. But I would suspect that they will act very similarly to a company like go easy uh where it's subprime lending i know it's not really qualified as that now but i think it does have a lot of the same characteristics yeah i mean those uh delinquency rates are actually lower than i would have

expected them to be i mean clearly like people people are doing it and paying for it. But, yeah, I mean, there's a reason why, you know, I mean, GoEasy's drawn down a bit, but, like, GoEasy and, I don't know why I'm losing the name, Propel, like the other alternative lender trading here. Like, they've been some of the best performing stocks on the TSX over the last while, and it just gives you, you know, kind of an indication as to you know the cost of living here and how many people are starting to need to finance stuff to

to survive it's pretty crazy no exactly and I mean at the end of the day you know I guess people have to do what they you know they have to do to, uh, you know, you know, to live their life. Um, I would say, you know, just based on personal experience, I had like a special episode on that when I got into tougher times, you know, it's, uh, don't wait too long. And, you know, the, the sooner you kind of start tackling it, the easier it will be, the more you push it back or try to, you know, get a loan to pay another loan, that's when you start getting into a lot of trouble. So that would be my tip to people to, you know, just kind of take ownership of it. Do what you have to do. It might be painful in the

short to medium term, but longer term, if you do things right, things will get better. So I guess we'll end it on that note. I guess we'll push back Canadian Tire. We will do it before the holidays, I promise, because especially with earnings kind of slowing down, I think next week we'll probably focus a lot on the Canadian banks like we usually do when they record. But we'll find some time to talk about Canadian Tire before the holidays because it's a very good bellwether, in my opinion, for the Canadian consumer. Yeah, it was a good episode. Thanks for listening, everybody. Okay, thanks, everyone. The Canadian Investor Podcast should not be construed as investment or financial advice.

The hosts 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.