5 Signs a Business Has Staying Power

[00:00:01] 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 Braden Dennis and Simon Belanger The Canadian Investor Podcast, welcome to the show. My name is Braden Dennis, as always joined by the prolific Simon Belanger. Good sir, we are ready to rumble. Look at me.

[00:00:30] This is 1080p, 3K, what's going on? I'm gonna have to up my camera game. I will once I move to my new place and my podcast studio will look a bit better than it does now. Dude, I had just like the worst setup at home because the background of my apartment is this like floor to ceiling loft window just right on the back of me and there's no other orientation that I could have it.

[00:00:59] And people who know who do like a lot of zoom calls or whatever, if you do your background is all light and the foreground is all dark, quality is horrendous. Yeah. So here we go. I'm upgrading my game. I'm a real podcaster now. Yeah, I'll be joining you soon enough. We're talking. I mean, I'm recording my basement. There's no heat. So it's still like not too bad, but it's like 40, 50 degrees. You got a bomber jacket on.

[00:01:25] Yeah, exactly. And socks on and everything will tough it out. New place will have heat. So that'll be an upgrade right there. Look at us. You know, look at us. We're on the way up. No more dirt and ramen for the boys.

[00:01:39] All right. Today, you're going to talk about bond ETFs and leverage ETFs. I have just one segment as well called Porter's Five Forces. Before I'm sure you and Dan talked about it, but there's a lot of hope and optimism for the future of Canada with someone looking at the country a little bit more holistically from an economic standpoint.

[00:02:08] And talking real common sense. It's refreshing to have that. Of course, the news, Justin Trudeau is resigning as the leader of the party once they select a new leader. Yeah. You know, a lot of news sources, especially US ones are like, oh, great news. You know, this is to me more dragging of the heels and I'm not particularly fired up about it.

[00:02:35] I think people want an election now, not road and pony show with the soap opera that is the liberal party for the next six months. Yeah. I mean, at the end of the day, I think this was the most likely outcome. I listened to a lot of different podcasts. I was kind of interested on, you know, pretty, you know, well respected people in the political world in Canada just to get their view.

[00:03:01] And the most common thing I heard was that, yes, they would prorogue parliament until likely until March, which is what I think they're doing now. And then so they can have a leadership race and have someone, someone new at the helm of the liberal party. I mean, for me, at the end of the day, like I think people know me. I've always been an independent. I don't affiliate with any party whatsoever.

[00:03:26] I will, you know, when I vote, I looked at what each party offers and then I kind of make a list of what's the most important things for me and the ones that, you know, align the most because you're never going to find something that aligns completely with your views, whether it's economically or socially. I kind of vote that way. So that's the way I view it. I mean, I've said it time and time and again, for me, the most important issue is just reining in the spending and the deficits.

[00:03:54] I think that's the most important from a long term basis for the election. I mean, obviously, I would like it to be sooner rather than later, just because having whoever wins. Right. I've said that all along. Whoever wins, they need to have a mandate to negotiate with Trump at the end of the day. Like whatever you think about Trump, like he's not stupid. He knows that right now, Trudeau and the Liberal Party, like they know what's going on in Canada.

[00:04:20] So they're not going to try and negotiate a new deal if they like if they know he's not going to be a weakness very easily. And that's exactly the moment. So who knows how they'll approach it? Maybe they'll just kind of say like, you know what, let's just do status quo for like four or five months. And we'll negotiate with whoever comes in and has a mandate when there's an election. I think most likely, I think April, May is kind of what I've read. Yeah. Hopefully, man.

[00:04:51] Yeah. I mean, there has to be a confidence vote, right? So I think it's and the opposition parties have to agree on non-confidence. So that's that's that's the big thing, right? Like needs to happen. All right. Let's get into the show. I'm going to talk about Porter's Five Forces, which is a method of quantifying a moat or quantifying a business quality.

[00:05:19] I think that this is really important. You know, you and I talk about a business being high quality, low quality, wide moat, has competitive advantages. But the Porter's Five Forces is a albeit imperfect, but really good way to kind of assign different values to, you know, threat of entrance. How much competition that there is, these kinds of things.

[00:05:48] So I'm going to go through them and then we'll go through two examples for a company which I believe has a wide moat and one that has a moderate to low moat. All right. The five forces are as follows. One, threat of new entrance. So how is it for competitors to enter the industry? Two, bargaining power of suppliers. You know, how much influence suppliers have over pricing and terms.

[00:06:18] And then on the other side, the bargaining power of buyers. What are their terms? What are their pricing power that they have over the company? Four, threat of substitutes. So what's the availability of different products that fulfill the same need? And five, industry rivalry. Measures the degree of competition among the existing firms in the industry. So these are the five forces.

[00:06:46] Generally, it's quite easy because a very profitable company or very profitable industry, all of those things will be measured as low. Low threat of new entrance. Low threat of substitute products. Low threat of bargaining power from buyers and suppliers, which is three and four. And low rivalry among the existing competition. Signs of a unprofitable business or industry. Low margin typically.

[00:07:16] High threat of new entrance. High threat of substitutes. High threat of bargaining power of buyers and suppliers. And high rivalry. So that's the five forces. Any comments on them? And then we'll get into an example. Yeah, no. I mean, I think it's a great way to look at it. I know what example you're going to use. Like, it's kind of funny. I've always come back to Apple. I don't know why.

[00:07:41] Just because Apple is such a fascinating case on where they're at as a business. And I was kind of looking at the bargaining power of buyers. And that's starting to shift, in my opinion, for Apple products. Where buyers are like, eh, you know what? Like, don't need it right now. Like, I don't need it as much as I used to because your product is not improving as much.

[00:08:04] Or, you know, the Apple AI, I mean, is, from what I've read, a bit of a disaster from people who have used it. So I've seen a few examples from a friend of mine that I won't mention what it was. But I sent him a few texts and they summarized the text. Oh, yeah. And, oh, my God. Like, I'd be in jail if you'd be like, oh, wow. It really completely misunderstood what I said.

[00:08:32] FBI, don't look at the AI summary. Look at the real text. Yeah, exactly. Well, I mean, you'll laugh. But it was basically when I got, you know, the injection for my back. And I'm like, oh, I'm going to have, like, soon enough, like, the back of a teenager. And anyways, I'll let people think about, like, you know, what they actually summarized. Yeah, exactly. But it was definitely completely different than what I wrote. Yeah. Yeah.

[00:09:01] I'm pretty sure myself and the listeners can fill in the gaps there. Okay. Let's go through two examples. The Apple one is funny, too, right? Like, it is an interesting company to think about right now. It still did, you know, pretty tremendous. I mean, all big tech did nice to own last year. And you're right.

[00:09:24] And it's hard to put on this scale because I don't really think that people are evaluating alternatives. But they are evaluating buying frequency. That's the core issue with Apple. They're not going, oh, I'm switching to Samsung. They're just going, oh, I'm not going to be on this upgrade cycle that I used to subscribe to. That's how I look at the business right now. Yeah.

[00:09:51] And the bargaining power of supplier may be something that it kind of starts hitting Apple a little bit, too. Right. With, you know, the tensions happening with China and so much of their supply chain. And also, you know, I think from what I've read, the demand for from Chinese for Apple products has also gone down. So suppliers may end up having a bit more power depending on where they're located with Apple as well. Yeah. All right.

[00:10:19] The two companies are TSMC, a.k.a. Taiwan Semiconductor, ticker TSM, and Delta Airlines, the large U.S. airline carrier. Now, very two, you know, very different businesses, of course. But I think worthwhile to look at in terms of using the Porter's five forces.

[00:10:44] Again, you want all of them to be low. High is not ideal. You don't want high threat of new entrance, for instance. You want low threat of new entrance. Okay. Okay. So Taiwan Semiconductor, for those who do not know, the foundry business is they're fabricating semiconductors for the designers. So, you know, big customers, Lark, Apple, NVIDIA, those kinds of names, the designers.

[00:11:15] And typically a very, typically, you know, consensus wide moat business across the board. Threat of new entrance. Low. Low. The semiconductor industry requires substantial capital investment. Absolutely substantial capital investment. Ridiculously complex supply chains and lots of, you know, wide moat businesses in their supply chain all along the way.

[00:11:42] So, you know, creating a new foundry is a huge barrier to entry. And knowledge and knowledge workers that are trained, but also, you know, that have the education, but also are continuously trained on all the improvements on all the new machinery like that.

[00:12:02] I think a lot of people forget how specialized workers are and how difficult it can be to just replicate that very easily. Yeah. Yeah. It's like the most complex science experiment mixed with the most elite manufacturing execution. Those skills both need to be masterful when it comes to TSMC or an ASML. Yeah.

[00:12:31] And one thing I'll add, like you, so remember Chris Miller, Chip Wars, one book that I highly recommend or if anyone, you know, follow him because he's great at like he follows this industry very closely. And one thing I listened to him recently on a podcast, I can't remember which podcast it was on, but he was saying that one of the advantages of TSMC is that they have multiple factories in Taiwan.

[00:12:55] So if there's one factory that has downtime and with Taiwan being having such a good infrastructure when it comes to public transportation, they can literally like send workers very easily to another factory and avoid any major disruption in manufacturing of chips. So that was something very interesting that never thought about it, but it could be like another mode for TSMC here. Right.

[00:13:22] Like the risk, the geopolitical concentration risk is actually their strength if the boat isn't rocked. Yeah, exactly. That's it. I mean, it's an advantage and disadvantage all at once, but it is something I was like, oh yeah, I never thought about it that way. Yeah. Now on the Delta side, threat of new entrance is what I'll call low to moderate.

[00:13:44] And the reason is the airline industry does have hugely high entry barriers, substantial capital requirements, stringent regulatory standards, you know, typically very unionized environment. But it's a fairly low threat for people to come compete at scale. That's why I say kind of lowish, but there are always new low cost providers popping up here and there for sure.

[00:14:12] That's, that's, you know, a tale as old as time and I have a lot of pricing power, which we'll get into in the later points of Porter's analysis. But it's low to moderate because you can't just easily spin one up, but it's, it is easier than spinning up the next TSMC for sure. Yeah. Yeah, exactly. And I was actually curious out to, I just asked Chad GPT how many airlines have gone bankrupt in the last 20 years.

[00:14:40] And there's definitely quite a few as well. And I think that's probably, it's a, you know, there's not as much of a threat to entry. Like obviously it still requires substantial amounts of capital, but I think one of the disincentive is how difficult of an industry it is. I think you have to really think about it twice. Yeah, definitely. It's like, are you sure you want to join the, potentially join the pile of dead bodies of companies under here? Like, are you sure about that?

[00:15:11] All right. Number two, bargaining power, bargaining power of suppliers. So the suppliers feeding TSMC bargaining power is low. While TSMC scale gives its leverage, certain, certain specialized product suppliers hold more power due to limited specific materials or equipment. So this one, I think overall is low in terms of suppliers. TSMC is the big dog.

[00:15:41] They have scale. They have more power over the suppliers than vice versa, in my view. Yeah. Yeah, exactly. Although it's hard to, I wonder how much power Boeing has currently. Because they've been plagued with so many issues that I do suspect at some point, a lot of our clients will be like, look, better give us some good pricing on this, on these parts. It's because, you know what, next order we're making, it's not going to you, it's going to Airbus. Yeah.

[00:16:09] I do wonder, like, that's a great segue to Delta, right? Like, Boeing and Airbus, their suppliers typically, historically have had massive control or influence over pricing and contractual terms to a Delta. Does that change over time, you know, with this kind of duopoly environment with one gaining market share over the other?

[00:16:35] That's where money is made with the Porter's Five Forces, I think, is if something's changing from a moderate to a low is when a business takes off. Yeah. Or when it goes from a high to a moderate, while everyone else thinks it's still a high.

[00:16:53] That's where the money is made, in my opinion, is when there's a change in the ecosystem of that industry where something used to be a medium and is now a low, right? Like, that's where things get really interesting. Yeah. Yeah. No, I have nothing to add there. All right. Bargaining power of buyers for TSMC. Major customers like Apple and NVIDIA do have significant influence due to their large order volumes.

[00:17:22] So I'm putting it as just a moderate, not a low. And it's not a high because there's just limited choices of foundries. Like, they're not going to go to Intel. Like, Apple's not going to go back to Intel. That's for sure. I mean, they might if Intel, you know, it's new leadership. It's been a while, right? So they might. But again, Intel does not have the track record that TSMC has for manufacturing. Or the technology to deliver what they want.

[00:17:52] Yeah, exactly. So they're trying to catch up. Will they? I don't know. They're spending tens of billions of dollars. So they're definitely trying to catch up. But I don't know. Again, TSMC is number one. And there's everyone else. Like, it's... Yeah, exactly. Yeah. Nothing more. It's basically that. Yeah. They have technologically different product and far, far more advanced. Yeah. Never say never. Of course, they can go back to their old foundry.

[00:18:22] But like, that doesn't seem probable in the short to medium term, in my view. Yeah. For Delta, bargaining power of buyers. Pretty high, if not the highest possible that any industry I can think of. The buyers being you and I who want to go buy a seat on an airline. Customers can easily compare prices.

[00:18:45] I can't think of any industry where customers can easily compare prices on a dime with aggregator websites and make decisions super quickly on what has become a commoditized service. So bargaining power of buyers is very high. Yeah. Yeah. And I mean, sometimes it's not just price. But again, I agree with you. Like, you know, you may pay, maybe be willing to pay a bit more if you don't have a layover somewhere.

[00:19:15] Right? Like, stuff like that. But again... Right. You know, everything has a price. And if you, you know, you pay, I don't know, $500 for a ticket with two stops, one stop, let's say, to get your destination versus straight one way. But it's $1,000 more than... I think a lot of people will opt for the layover and, you know, saving $1,000. So, no, I totally agree. I mean, that's what I do when I book a flight. I don't really care which airline is. Yeah.

[00:19:45] I have a rule. If I fly for business, no stops, if possible. Of course, you know, can't go everywhere in the world without any stops. But if possible. But if I'm flying personally, I don't care as much, you know, especially when it's the personal. No bank account, not the business bank account. All right. Number four, threat of substitute products or services for TSMC. Low. You know, there are advances.

[00:20:14] This goes back to the Intel example, the Samsung alternatives. There are a few alternatives, but substitution for a certain type of technology that only TSMC provides with these, like, you know, low single digit nanometer wafer. There is no alternative. So, I would say threat is very low.

[00:20:38] This is kind of what speaks to what makes the company so great, in my view, is the threat of substitute products. For Delta, moderate. I mean, there's always an alternative, albeit maybe not as convenient. There's always an alternative, whether that's a road trip, boat, train, you know, plane, train, automobile. There are alternatives, you know, not as convenient, probably, but there are always substitutes.

[00:21:07] Or hitchhiking, you know, free of charge. If you're getting that. Thumb, side of the highway. Yeah, exactly. And at least, I haven't looked at it recently, but I know they do. Another thing, too, to overcome for an Intel, for example, with TSMC is it's not like TSMC is not spending money. Yeah. On, you know, capital expenditure, on, you know, new machines, new technology. The latest and greatest. The latest and greatest.

[00:21:37] It's not like they're just, like, at the top and not doing anything. They are continuously spending. Like, if ever you – I encourage people to look at their cash flow statement and just see the amount of money that TSMC spends every year. It's always in the tens of billions. It's always in the tens of billions of dollars. Yeah. Yeah. And, like, it goes back to threat of new entrants. Who's raising that capital in terms of a new entrant, right, for what's required? Just to start, right?

[00:22:06] You know, that doesn't even include what that, you know, perpetual investment looks like that you're mentioning. Industry rivalry. Moderate. You know, for TSMC, there are the competitors in the foundry market and they're vying for market share. It drives intense competition and technology development and pricing, as we've discussed. Which is, you know, a very net good thing for, you know, a technology as important as this one.

[00:22:35] This is one where if I had a time machine to invest. When it became clear that their business was becoming so much better than the rivalry and their technology becoming so much better than the rivalry, from a high to a moderate. You know, the time machine is where the money on TSMC has been really, really made. Yeah.

[00:23:00] Is when, you know, Apple cuts the deal with, they cut off ties with Intel, moved to TSMC. That was, like, the evidence of the industry rivalry moving from a high to a moderate. And I think where a lot of money is made for a company like this. Yeah.

[00:23:19] And I think the transition of having, you know, multiple more and more, like, very well capitalized companies getting into the chip designing space. So, if you're kind of new, like, think about Meta, Apple, I think Amazon even is designing their own chips now. So, all these companies are designing their own chips to fit a specific purpose. So, Apple designed the M1 or the M series. Now, they're, like, M3, I think.

[00:23:48] But they designed it to be kind of tailored to the MacBooks or the new iPhones. They really tailored it for optimal performance for what the users do on these laptops. Try to run a top-of-the-line video game on your MacBook Pro. Good luck. That's not what it's for, right? It's not a gaming PC. But do pretty much anything else and it'll be fantastic. Yeah, exactly. No, good point.

[00:24:18] And to wrap this up, industry rivalry in the airline industry for Delta here. I mean, intense competition. And especially intense competition from low-cost carriers, which drives the bigger guys to go for price commoditization.

[00:24:35] And so, you look at all of these and it's a way to – I love these types of frameworks because, Simon, you and I talked last episode about the art of investing is looking at structured numeric data and analysis of qualitative things about these businesses that make them great or poor investments or what makes a great company versus an okay company versus a low-quality company.

[00:25:04] This helps you put a framework between margin profile and business characteristics that they might have. Because all of these things being low are signs of a profitable company. And you'll see it in the margins. You will see it in the margin profile. It's a great way to connect the numbers on the screen to the actual qualities of the business.

[00:25:33] And I think the ultimate way to make money here is when there are significant changes to the direction of the forces before its consensus. Like if a company has perceived low bargaining power with customers and then it goes to high, you know, low-pricing power to high-pricing power, you know, at risk of stating the obvious, NVIDIA is the clear, clear example here.

[00:25:56] When their GPUs were the clear leader and the competition was far behind use cases that were emerging for their GPUs, what happened next is nothing short of remarkable with gross margins. Okay. I just pulled up a graph here of NVIDIA's gross margins. In 2015, they were at 55%, which is still for a hardware company like them. Fantastic. Yeah. Very, very good. Okay.

[00:26:22] It ticked up to 56, 58, 59, 61, 62, 63, 64, 72, 76. That is the last 10 years of data points of gross margins for NVIDIA. Up and to the right and even more so aggressively accelerating to the right post-2022. This is probably where it starts getting dangerous, though. I think a lot of people will bake in those margins and they're probably peaking right now.

[00:26:48] That would be my bet, not too big or my prediction, not very bold, but I would think it's pretty safe to say there's a high probability that margins are peaking right now. Yeah, it could be very well the case. But because new competition comes online, which is exactly the point of this exercise, right?

[00:27:10] It's an amazing way to analyze profitability without just numbers and a table on a screen, but numbers and a table on a screen with context of the business characteristics. What's happening in that industry? What's happened with the technology that they develop? How much bargaining power they have over buyers that they used to not have? You know, substitutes that used to be there for suppliers or buyers that are no longer there for the use case that they're looking for.

[00:27:41] Those dynamics are what happens and why a company like NVIDIA goes from $100 billion to $2 trillion, you know? Yeah, and what's so fascinating with NVIDIA is that their buyers are potential competitors down the line too. I think that's what's so fascinating is that you have, you know, the Amazon, Google, Alphabet, Meta, X, I guess, Elon Musk and his companies.

[00:28:07] Like, they are deep, deep pocketed. Like, clearly NVIDIA has, you know, quite a significant, you know, advance on those companies. But if there are companies that have the resources to really make a push towards eroding that dominance from NVIDIA, you know, it's those companies.

[00:28:30] And then down, you know, for those who have maybe a bit less resources like an AMD, but more expertise in the space, I would say, than probably the other ones. It's just so fascinating because the potential future competition, and you don't know, maybe they won't. It's just they have the funds to do it if they want to throw a lot of money at that. Yeah, I definitely see both sides of the NVIDIA conversation, no doubt.

[00:28:56] I mean, trying to compete with them right now, today, January 2025, good luck. I mean, it's immensely impressive what they've built, the advantage that they have, you know, building kind of this software ecosystem with CUDA on top of it. It's there's really no substitute and clear path for a substitute right now. No, I fully see that. But never is a long time, man.

[00:29:23] And like Bezos being back at Amazon for the sole purposes of AI, man, that makes me want to own some Amazon stock. Like, don't bet against Bezos, man. He's a stone cold killer. And he is back. He did that Andrew Ross Sorkin interview. And they go, why are you back? And he goes, AI. And they're like, what do you mean? He's like, AI. That's the only reason I'm back. He's like, okay. All right.

[00:29:53] You wonder also, side note, what kind of supplements he's taking. Seriously. I want the gear he's on. Yeah. I mean, it's I won't say anything, but like, you know, getting bulkier and more muscular as you get older. Yeah. Let's just say, you know, the supplements I would like to see are the ones he takes. But I guess the one thing I wanted to show is when I was talking about TSMC, right? The capital expenditure. This is in US dollar.

[00:30:22] I converted from. So don't worry about the top being in Taiwanese dollar. It is in USD here. It's massive. The capital expenditures that TSMC has done. So for 2020, 2021, 30 billion. 22, 35 billion. 23, 31 billion. Look at that build out. Oh my God. Yeah. And of course, you know, it's been a build out for the last few years.

[00:30:51] But even the years before that, they were well north of $15 billion. Yeah. Like it's, it's insane to think how much. Yeah. Pre air quotes build out, you know, 11, 11.1 billion US. And they're the leaders. And I think that's what I wanted to emphasize. They're the leaders already. They're spending that much. Can you pull up that chart for ASML? Sure. Yeah. I'm so curious.

[00:31:16] For those who want to see Simone's screen share, you can go to join TCI.com. It's our Patreon. We post the video. We got a brand new 2025 video setup going here. Super professional. But you also get to see us sharing different things on FinChat and using the platform. Okay. Quickly, you've already pulled this up on FinChat for CapEx on ASML. Yeah. So it's not as big. Definitely not as big.

[00:31:46] But they spend a lot in R&D. That's what they do. I think a lot of their- Oh, this is just CapEx. Yeah. If you pull up R&D, it's probably like another 10 billion or something insane. You can search it on the metrics there. Research and development. Yeah. R&D expenses. Perfect. Yeah. There you go. That's a- Yeah. So the R&D, when combined with CapEx, let's just say last year- Six and change, Matt? Yes. A bit more than six. The year before, closer to 6.5.

[00:32:15] The year before that, probably closer to four high fours. But it just goes to show. And they have the technology that no one knows how to replicate. Yeah. Yeah. No kidding. Crazy. It's kind of crazy to think. But it's our point, right? It- That's what we're talking about is just, you know, think about TSMC or ASML. Like, if you're a new entrance, let's say TSMC, because, you know, clearly there's other players that are building up like Intel.

[00:32:42] Like, you'd not only have to match the investments for TSMC, you have to do more than matching. So it just shows how much money is required for these businesses. I'm raising a fairly significant FinChat round of capital right now. And I think I'm all hot shit. And then I see these figures. It's like this. It's like a rounding error. And I feel like such a wimp.

[00:33:11] No, you know, it is what it is. But yeah, that's definitely a humbling number to look at. No, exactly. So yeah, Noah, is there anything else you wanted to add for that segment? Like, before we move on to the next one? No, let's move on. Let's talk about bond ETFs. I think that this is a fascinating- Yeah. It's kind of a topic that's always broke my brain a little bit. And you'll probably explain why. Yeah.

[00:33:41] Yeah. So, I mean, we've talked about bonds from time to time. Obviously, we invest more into equities, Bitcoin as well. Something, at least I have more exposure to that. For the purpose of this segment, I'll focus on longer duration bonds. Whether you're looking at sovereign debt or corporate, well, sovereign bonds or corporate bonds. The biggest advantage and disadvantage to bond ETFs are the liquidity. So I think it's important because a lot of people- And it's also a downside at the same time. So it's kind of-

[00:34:10] It's, you know, it's important to know that it can cut both ways. So you can quickly buy and sell those ETFs if you need money. It's easy to buy bond ETFs with just a few clicks. You do it just like you'd buy a stock with your online broker. They also constantly, you know, when bonds come to term, they basically roll them over constantly.

[00:34:38] So that's why it gets a little tricky sometimes with bonds. So if bond yields go higher, the value of the bond fund will go down. If bond yields go down, the value of the fund will go up. So I know if you're newer to investing, I know it's a little bit- It can be a bit confusing, but it's inversely related. Now, the downside here is that you can't hold bonds to maturity and get your capital back. Bond ETFs, like I said, they constantly roll over- Over bonds that mature into new ones.

[00:35:08] Most bond ETFs also provide a whole lot of diversification. So if you're looking at corporate bonds, they'll have debt from hundreds of different companies. Oftentimes, they'll group them together. So they'll group them, let's say, investment grade. They'll group those together. Or they might group junk bonds together. So even if one defaults, you won't really see an impact on the return significantly. Now, if you contrast that with buying the actual bond and holding into maturity,

[00:35:37] first, it likely won't be as easy as a bond ETF to buy individual bonds. So I did some research with Questrade, and you have to contact them by phone or email to place an individual bond order. I don't think this is out of the norm. I think that's probably pretty common when it comes to buying just a specific bond from a company.

[00:35:57] It shows you how far the demand retail or just markets generally have demanded for equities and not demanded for some of these. What are largely basic fixed income instruments? It's kind of crazy to look at. Which is also crazy. People think the stock market is big. Like the bond market is much larger than the stock market too.

[00:36:24] So sometimes people will be like, oh, I feel like, you know, if they're new, they might think, oh, the stock market is just so much bigger. Actually, no, the bond market is much, much, much larger than the stock market. And the private equity market is much, much larger than the public equity market. Yeah, yeah. A lot of people just kind of forget that because they're used to the stock market. But if you buy a bond, you might be able to find a buyer if you want to sell it. But it definitely won't be as liquid as a large bond ETF.

[00:36:54] So you're kind of trading off the liquidity here. The advantage here is that if you want to hold it to maturity, you get your capital back plus interest. The problem is that the company or government in question can always default on their bonds. So, you know, if you're going to own the individual bonds, you're likely going to want to own more than just one. If you're going to own corporate bonds, you'll want to understand the company well.

[00:37:17] So basically, as if almost you were like buying the company to hold it as a stock, you basically want to make sure that the company will be solvent to return your capital once the bond comes to maturity. So you should not just be randomly picking bonds. You should do your research for that. For government bonds, obviously, at the end of the day, you have to trust whichever government issues it. But can I interest you in some high yield Argentinian government bonds?

[00:37:45] I bet you they've been doing pretty well, those bonds. Like they probably, yeah, I mean, they used to be a dumpster fire, but ever since Millet took over. I don't know what they are now, but it's just that. But people, I think historically they're trading at like, you know, multiple double digits, multiple tens of in the yield. But I think they also defaulted twice in the last 20 years. So that's what you get. Yeah, yeah, exactly.

[00:38:11] Usually government bonds, what happens, it really depends on which country issues them. Right. And one of the issue they kind of get into is they they issue bonds in U.S. dollars, but they can't print the money. So, you know, if the U.S. dollar really strengthen, they can't really get U.S. dollars on demand like the U.S. government would be able to essentially print the money.

[00:38:35] So you have to when you're looking at government bonds, you have to realize are they issued in the currency that they can, lack of the better words, print or are they issued in another currency? If they are, it's usually in U.S. dollar, which poses additional risk because it's you add in some currency risk. But it can the governments can always print money.

[00:38:56] So if you buy U.S. government bonds, for example, you know, you're likely like I think there's a high likelihood that you'll get your money back, very high likelihood. But it's not a 100 percent chance. There's a reason why there's credit default swap, which is essentially insurance against the U.S. government defaulting. There's a reason why they're not priced at zero because there is a risk. It may be small, but there is a risk. But again, chances are they will just print the money.

[00:39:22] But the problem with that is if you hold it to maturity, yes, you'll get your money back. But your real returns may or may not be higher than inflation. And if they are lower than inflation, it just means that you've lost purchasing power. And, you know, that's I like to look at things in real terms. And at the end of the day, if you're not keeping up with inflation, at the very least, it's probably not going to be a great investment. So there are some issues with bonds currently.

[00:39:51] And I don't know if you wanted to add anything before I finish with this here. No, I'm loving it. So there is a case to be made that the U.S. Treasury bonds, the five year plus in duration, have actually been kept artificially low by the U.S. Treasury. Or, you know, so I guess technically Janet Yellen for a few more weeks. I guess it's the 20th, January 20th that the change of power goes over.

[00:40:15] However, the reason for that, and I've been looking into this, listening to some people that are much better versed in this in me, is that what the U.S. Treasury has done is when they're, you know, governments never pay their debt. They just reissue debt constantly. They roll it over constantly. So there has to be a market for that. But what they've been doing is they've been issuing more debt in the form of Treasury bill or short term bonds. So let's just say less than a year. That's been the bulk of their issuance.

[00:40:45] This means there is less supply for longer dated bond with a solid supply. But let's just say that demand is fairly constant. You increase the value of these bonds and therefore lower the yield. So it's actually a way to actually control the yield on longer duration bonds. So there's actually a pretty strong case to be made that U.S. bonds and the U.S. 10 year, which is typically the one that people will look the most at in financial market.

[00:41:13] There's a case to be made that it should be like much higher than it is right now, 5 percent plus if the U.S. would have kept a similar issuance of new debt in the longer duration form versus the shorter duration, a year or less. So these are things that governments can do to kind of skew things. People think that it's a free market. I don't think it's I think that's complete fallacy. The bond market is not a free market whatsoever.

[00:41:42] Governments and central banks constantly intervene in different ways, whether it's a quantitative easing where they actually will buy bonds with newly printed money and then they'll just put it on their balance sheet. There is a way to control that. You look at Japan, they do yield control where the central banks essentially what they do is they have a yield in mind for the longer dated bonds and they will buy all the bonds necessary to get to that yield.

[00:42:08] So you end up with the central bank owning most of the government bonds. Yeah, they have a few levers they can pull, no doubt. Can you I'm confused about this point. Can you explain this? Many your note here says macroeconomists say that the 10 year would be 5 percent plus if they had not significantly reduced the issuance of longer dated treasuries. Yeah. Yeah. Yeah, because they're what's happening, right, is that longer dated treasuries.

[00:42:35] Let's say, you know, a bond that was issued 10 years ago is coming up to maturity. So instead of issuing another 10 year or 30 year bond, whatever it is, they're just issuing it on the shorter. And so they're reducing the supply. Yeah, exactly. Long dated ones. Yeah. Which is, you know, if there's less supply and the demand stays, let's just say the demand staying constant. Right. Because the price up, yield down. Okay. Yep. Yeah. Yeah, exactly. I had the denominator and numerator flipped.

[00:43:04] I'm like, explain this to me. Okay. I'm with you. So it basically keeps like kind of this imbalance between the supply and the demand for US 10 year. Yeah. So that's and you can see that pretty easily. Like you don't have to look like you can just Google this. You'll be able to see it pretty easily. And the other thing with bonds right now is the credit spread for corporate bonds is actually the lowest it has been in the last five years.

[00:43:33] It's very low whether you look at junk bonds and you can get these credit spreads very easily. I'll just show my screen here for joint TCI. You can get it. You'll see that the bond, this is the credit spread. And the credit spread, there's different credit spreads. But the one I'm looking at is the basically the difference in yield between a BAA corporate bond. So I would say kind of midway in terms of investment grade compared to the US 10 years.

[00:44:01] So the lower the spread typically is the better the markets are doing. That's kind of a general interpretation. When the credit spread starts spiking like you can see here at the beginning, which is when the COVID like March COVID kind of started and markets panic. And they were asking for a super high premium for corporate bonds versus the US 10 year. Well, that's why like credit spreads are jumping.

[00:44:29] And when you see credit spreads jumping, it's usually around like financial crisis or like, you know, let's just say areas of turmoil. If you're thinking about the markets like that's usually what's happening. And it's really a head scratcher, I would say that it's so low right now. I think a lot of people are wondering why the credit spreads are so low.

[00:44:52] But it is something to keep an eye on because what's happening right now is you're you're not getting much of a premium for holding credit corporate debt versus government debt in the US. Yes. And you can look at credit spreads in Canada, too. Right. You can look at the government of Canada credit spread the five year versus, you know, Canadian company that would issue debt in Canadian dollars. So the difference between that credit spread, it's typically like I said, it's just comparing government issued debt to corporate issue corporate.

[00:45:23] Yeah. Yeah. Yeah, that is fascinating. Yeah, it's crazy. It's been like trending lower and lower. Yeah, it's basically been going lower to the right, I would say, for those who are not on joint TCI that are just sad. What's the common speculation on this? I'm not a I'm not a fixed income expert by any means.

[00:45:43] So my green assessment of this is, well, there's a long list of things, but is is the demand for the equity more so than the than holding the the debt in terms of that demand pushing this even more? It's like, OK, I'm going to hold government debt, but I'm going to own that company's equity. Why would I own the debt?

[00:46:06] I mean, I think what this says is there is a pretty high demand for both equity and corporate debt because the credit spread is so low between the corporate debt and the government debt is that I my interpretation is that there is plenty of institutions most likely out there willing to lend to corporations. That's why the credit spread is so low between corporations and the U.S. government debt. That would be my interpretation. Yeah.

[00:46:36] Right. This is actually a lot of demand for the corporate bonds, for the corporate bonds. Yeah. Yeah. Because when you think about it, right, like why would this spread be so low is because there's there's likely a high demand for that compared to the U.S. 10 year. Right. Right. I think I flipped the denominator and the numerator for two segments of your your analysis here. But, you know, that's it's all part of the show here. Yeah, that's fine.

[00:47:04] I know like bonds and I'm not a bond expert, although I am quite interested. I read a lot on it. But yeah, essentially it's, you know, the lower the spread is the lower the risk premium that, you know, institutions will require to basically, you know, issue, you know, by corporate debt. Yeah.

[00:47:26] Right now is probably the most concerning thing is it could be a sign a bit like the equity markets that the markets are being complacent right now. That they're just thinking, you know, this is just this is, you know, things are different now. You know, things will continue like this indefinitely. So it's fine if we get a low credit spread. You know, we're kind of projecting that this will just keep going on forever type of deal. So it's credit spreads.

[00:47:55] I don't have much room to go lower. I would say right now, if you look at historically, again, I'm not an expert. I'm not a macro analyst or anything like that, but it looks like there there's not that much room for them to go lower than this. No, especially not off this figure that you're sharing. OK, very cool. Thanks for listening to the pod, folks.

[00:48:18] We have, you know, it's this time of year, lots of new listeners coming on to the show and we appreciate you very greatly. If you have not, if you're if you're here in Canada and are interested in the real estate market, we have a sister show under our podcast network called the Canadian Real Estate Investor. And Dan and Nick are fantastic.

[00:48:44] They are real estate as a personality, which is exactly what I want in my real estate podcast. And they're, you know, these guys are on TV. These guys are the real deal now. They're on TV all the time, too, Simon. Like we got some real famous guys on the team here. Yeah. And Dan will come on the podcast as a guest towards the end of the month. I'll be recording the episode with him. Dan Foch, not to be confused with Dan Kett. Yeah, exactly. For the folks.

[00:49:13] Yeah, because I think our plan is to look at what 2025 has to offer for real estate investments, whether it's different type of real estate. But also we'll look at some REITs for 2025. So I'm recording this this week. It will probably be released towards the end of this month because I'll be moving and you'll be traveling. So we're trying to get a few recorded in advance. And I thought it'd be a good idea for Dan to come on and people who have never heard him.

[00:49:42] Dan knows his stuff really well. But also I know, you know, like we've talked before, Canadians love their real estate. So if you're interested in investing in real estate, maybe not the traditional way, maybe through REITs, we'll be looking at that and what 2025 might have in store. Absolutely. So check out that show and then they'll be on this show later in the month. We mentioned a couple of times our Patreon, joinTCI.com. It's $9 a month.

[00:50:10] You get our monthly portfolio updates and our faces for radio on video. And FinChat.io is the data and analytics platform we use for all things on this podcast. It's a company I started three years ago and excited to keep building it for you and the world. We'll see you in a few days. Take care. Bye-bye. The Canadian Investor Podcast should not be construed as investment or financial advice.

[00:50:38] 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.