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

[00:00:00] Welcome back to the Canadian Investor podcast. I have a special guest today. I have Rich Dias from the Looney Hour, Rich. Welcome back to the podcast. You were here last year, probably

[00:00:26] I think in the fall. So we're very happy to have you back and you making some time despite being at a bachelor party. So thanks a lot. Yeah, thank you so much Simon for having me on. It was really fun last time. Hopefully

[00:00:40] it was well received. And yes indeed, I've carved out some time at a bachelor party. So if people come screaming in with a banana costume or some shots that I'll be forced

[00:00:50] to take, please do forgive me. But no, I'm excited about this and I'm ready to chat something I love to talk about. Perfect. So we'll get started and well first of all, I'll give you a general question.

[00:01:05] You can take it whatever way you want to take it. So I did that purposely because I want to see where your mind's at. So what's your current assessment of the Canadian economy and the global economy in general? So like I said, take this any way you'd like.

[00:01:21] Sure. Well, I'd like to focus on the Canadian economy if it's okay with you. Well, it's called a Canadian investor. So definitely. I think that like so there's different ways that I look at the Canadian economy. Obviously there's GDP growth but that encompasses households consumption, there's business investment,

[00:01:39] there's trade that's related to that within each of those sort of bucket and there's of course government spending which each and within each one of those buckets, you know, you have how households consume what they consume on their savings or their debt, debt

[00:01:53] servicing businesses, you know what they're spending on and how trade is related to global obviously the global cycle and the US the big gorilla in the room 75% of our exports go to the US depending if you're thinking about goods or services. Manufacturing ties

[00:02:10] into business investment and trade and then there's obviously the government spending piece and I think that in the reality, I think you know a lot of the talk about being in a recession or not a recession. I think it's purely academic. The forecasts for GDP growth over

[00:02:28] the next year and this year are less than or equal to you know population growth which means that even though we have some positive real GDP growth, our economy is contracting on a per capita basis and I think ultimately for me personally that's what

[00:02:48] matters now there are some people out there who are detractors from that view. I think they're misguided and I think that even though the headline figures say that Canada is not technically in a recession, I think we've already been there for a while. Other

[00:03:04] people sort of confirm that view. The good people at RBC have come out with a piece on that you know saying how if they may we're not technically in a recession which is two quarters

[00:03:13] of negative growth or contraction in GDP but I would say our GDP per capita has been flat to down for the last, geez I don't know six or seven quarters or five out of six quarters.

[00:03:26] I always forget the number and our unemployment rate is now up 1% year on year and so yes our headline nominal GDP growth is positive because we're our immigration is so high and our real GDP

[00:03:43] growth has not contracted twice in two quarters. I would say that again that's purely academic. I think people are contracting their spending due to severe debt service ratios that are climbing or if not climbing are at all-time highs. We're having a bit of a dislocation in the housing

[00:04:06] market if there's loads of listings in Toronto but also the price increases across the board have slowed if not declined. It's difficult with house prices because it's not like a stock market where there's lots of quotes and the bid ask spread is really tight. If you don't think

[00:04:23] you're going to get your price you often delist which hides sort of the price action but I think there's a real big weakness there. I mentioned unemployment we're importing more people than we can employ our participation rate which was very very high around 8081 is now falling

[00:04:43] unemployment rate I mentioned is now rising as up 1% or a little bit more over the last year and so although consumer confidence is relatively high I would say despite all that and wage growth is okay. I would say that yeah Canada's sort of in this like weird

[00:05:04] yeah it's like not great it's not technically a recession and the last thing I would say was that I think that's sort of not reiterated but sort of confirmed by the behaviour and the

[00:05:16] actions and the tone and the speak of the Bank of Canada which is now cut two months in a row the likely cut in the next meeting and again the next meeting they're very dovish in their tones

[00:05:29] and they're worried about sort of the downside risks to inflation and so yeah like if you look at all sort of the different pieces like I mentioned it's just not a good outlook and I think it's partly

[00:05:42] a function of the slowing global trade although our major partner is doing very well there's obviously some weakness in the manufacturing sector and then largely Canada is a consumption driven economy I think 65% of our GDP is consumption similar to that of the UK

[00:06:00] it's more than Europe it's less than the US but without the consumer feeling good they're not going to spend and I think a lot of the indicators that you would sort of look at

[00:06:10] to determine how consumers are feeling or will they feel well despite what I said which is higher consumer confidence they're all taking down Simon and I think that I think it's yeah I think

[00:06:23] we're entering we are going to enter a recession and I think that people feel it despite what the data might say totally agree and I mean this it's more anecdotal but there's a couple of food

[00:06:35] banks near where I live and I've definitely noticed lines getting longer and longer in the past I would say probably the past year has been steadily increasing and to get back to the Bank of Canada

[00:06:49] and what you said I think it's fascinating because a lot of people get excited for rate cuts right and I know we talked about I know you're very passionate about politicians you know posting

[00:07:00] about you know the Bank of Canada should cut rates I think Doug Ford had something he posted just before the meeting that Ontarians needed help and I mean I think it's a bit misguided but

[00:07:12] it's also the fact that if the Bank of Canada is cutting rates pretty aggressively and we'll see how aggressively right it's only been two cuts but I think what you're saying I totally

[00:07:21] agree that you know it looks like people will probably cut some more they've kind of shifted their tone to being concerned about high inflation to now being concerned to buy the economy and I

[00:07:32] think a lot of people don't realize that when central banks start cutting rates it's usually because things are not going as well as they want yeah I mean there's a lot to unpack there

[00:07:41] I'll just say this quickly on politicians I will try very hard to stay away I don't think it's I think it's very unprofessional frankly for any politician of any stripe red blue black green orange to make any comment on the goings on of technocrats don't get me

[00:08:01] wrong I think behind closed doors I think they should use their sort of influence to improve a lot of their constituents which is fair enough I just think it's wholly unprofessional for that to happen in a public forum I mean there's nothing more I can

[00:08:19] say about that I do I will say just on the cuts I think it's indication that there's some real weakness in the Canadian economy one thing I forgot to mention was the real the negativity or negative or drawdown on business investment business investment in real terms has been

[00:08:36] on the client for about six or seven years I can't remember exactly the number but you know it's and then the thing I was looking at today was non-financial corporate credit growth you know if you exclude and so there's corporate bonds which companies can issue

[00:08:54] you know you think a dollar I'm at issues of corporate bond but there's also loans that they or credit lines that they might have with the banks we all know the banks

[00:09:03] and that loan growth is also sort of on the decline back to the cuts I think the cheering of the cuts I think is I would say just be careful what you wish for you mentioned that it's indication of

[00:09:17] sort of weakness in the overall market it's obviously in relation in part relation to much lower inflation impulse right Canada's inflation I can't remember the number even know I should know it off the top of my head yeah I think the headline CPI yeah yeah and then also

[00:09:36] the core the preferred measures of core CPI which are the factor model the weighted model in the trend mean or the weighted mean median excuse me and the trimmed mean are all sort of around

[00:09:48] that level I think it's 2.6 2.3 and 2.9 forgive me if I got the no you're right I remember looking at them you're if you're not right on you're pretty close I'll give you that okay cool

[00:10:00] but I think that there's sort of within that there's two things that are sort of hidden one is that a lot of that decline is due to goods goods a lot of the goods are stuff that we import

[00:10:12] because Canada has mostly a negative trade balance in everything except mining wood and pulp and paper and agriculture and of course the big big big positive to our trade balance is energy products all the other consumer product you know sections or sectors are negatives we

[00:10:36] that is to say we import more than we export if our currency declines because of interest rate differentials you know we might get sort of a second order effect which is that our currency

[00:10:49] weekends the prices for the goods that we import goes up and all of this decline in goods inflation may reverse at a time where services inflation is 4.8 and rising yeah it's really sticky on

[00:11:08] the services I've that's one I've been keeping an eye on for a couple years now and that's the one that seems very very sticky it's sticky for two reasons one in general it's much more related to

[00:11:20] labor costs and wages which have to Canada's credit I think been quite strong not sure why I haven't looked into that but it's also really high because such a big chunk of that is rent

[00:11:34] and sort of which kind of falls under the umbrella of like housing costs now people the tractors from that view will say mortgage interest costs are a big part of that and rents are lagging but be that as

[00:11:46] it may you know it's still high and it's now rising it's the rents are rising because vacancy rates are basically at 20 year lows vacancy rates are low because population growth is triple what it was for the last 40 years it averaged about 400,000 people for 40 since 1973 it's now at 1.2

[00:12:07] million and so there's a lot of pressure on the housing piece the counter argument of that and my colleague Steve you know would disagree he says you know those are lagging indicators and rent growth has already fallen housing prices are falling etc but my point really sorry I'm

[00:12:26] sorry I'm sort of going off but my point really is those cuts and interest rates are not going to affect in my view anyway are not going to really impact what I think is really hurting Canadians

[00:12:39] which is the record level debt service ratio and record level debts just to get back on the inflation and that's one point I've been pointing out a whole lot on the podcast and I haven't

[00:12:53] seen mainstream media kind of zone in on that but if you look at CPI I mean energy as a whole obviously there's a subsection has been relatively kind of low on the low end for a better part of

[00:13:08] a year now how big of a risk is that if energy prices start picking up whether I'm thinking here you know it could be just gasoline prices natural gas whatever kind of energy that falls into

[00:13:19] that bucket like I mean if these prices start going up it could be because of geopolitical events isn't that going to put a lot of pressure on the Bank of Canada and I know core kind of strips out

[00:13:30] a lot of that especially if you look at core trim but I mean isn't that a big risk that energy starts picking back up price increases and then that puts a wrench in the bank

[00:13:41] Bank of Canada a recutting cycle I think yeah absolutely I think you know crack spreads which is the terminology that you use for the difference between the crude barrel of oil so you know you

[00:13:57] you extract crude from the ground you get a barrel of oil I think it's 159 liters forgive me if I've screwed that up you then crack the hydrocarbons into kerosene jet fuel solvents diesel gasoline tar

[00:14:16] literally to repay roads bitumen what they call it in the UK and so the crack spreads which is how the premium you would get let's say from this is broad strokes here but the premium you would

[00:14:30] get from a barrel of oil to let's say how many liters of let's say diesel and gasoline let's just say far give me say it's actually quite low the problem there is that like refining capacity has

[00:14:43] is limited because we don't build refineries certainly don't build in Canada for some reason and so you know for me even though the WTI is around 70 and Brent is around 82 or what

[00:14:56] I have here I can't remember the number the it's the crack spread that I looked at which will have a direct impact on gasoline prices and then CPI and so the crack spreads low and I think you're

[00:15:09] right I think that there's a real case that the crack spread can jump whether it's because of geopolitical reasons or you know hurricane season coming up or whatever and there's also a

[00:15:21] situation where even though we know Saudi has cut production and we know you know the US has jumped to fill the void there's a situation where the OPEC which has been quite disciplined so the organization of petroleum exporting countries they and then there's OPEC plus whatever but

[00:15:42] if the US is productivity slows which there are people saying that that's already happening and OPEC remains disciplined you're right I think there's a situation where oil does improve and that will put pressure on it but just back to the BOC sorry really quickly it was just like

[00:15:59] this idea that we're going back to 0% interest rates or 1% interest rates people need to get that shit out of their head it's not happening I think central bank because I've learned that real interest rates so interest rates adjusted for inflation that are below zero are bad for

[00:16:16] capital allocation and investments and I think that inflation remains really high so even though there will be an adjustment I don't like this idea that we're going back to one or two whatever

[00:16:29] if I'm wrong about this you'll have me on and I will you know I will take my lashings but I just don't see it and for Canada that's really really important because of the debt

[00:16:39] service debt servicing how many people took on variable rate mortgages at really really high loan to value or income to loan ratios or loan to income I always screw up there but you know what

[00:16:54] I mean they know a huge amount of debt at variable rates and their debt servicing costs according to the BIS which is the Bank of International Settlements is at all-time highs and even though

[00:17:05] we cut interest rates of you know three let's say 2% let's say we go down to three or whatever you know I think our debt servicing ratios will remain extremely high and that'll continue to

[00:17:18] squeeze Canadians we need to work through this and I just all I think we need and is time and no one wants to hear that answer. No and I think a lot of people forget that there's going to be a

[00:17:30] lot of people refinancing between now and the end of 2026 that will even if rates go down another 100 150 basis points from here let's say they're at 3% I mean people will still be renewing at higher

[00:17:43] rates and have higher payments so I think a lot of people forget that and then you factor in the beautiful product that is the fixed payment variable rate mortgage where I've seen figures where people will be renewing the ones that are in the worst situation between

[00:18:00] with like 50 to 70% increase in their monthly mortgage payments that's kind of the figures I've seen them most often because obviously they were not even paying the full interest amount on those mortgages so I think those are I'm hoping they're not a ticking time bomb but those

[00:18:17] are the mortgages that definitely make me very nervous on especially the big markets Toronto Vancouver probably less so if you're thinking Ottawa, Montreal because prices have not been as crazy and other markets in Canada but those are the ones that definitely worry me a bit more

[00:18:34] and I know Steve has been one of your co-hosts has been pretty vocal about that too. Yeah so the you know who does a really who's done a really really great job on this which is

[00:18:45] the Bank of Canada and so I trying desperately to find it quickly but I can't seem to but anyway so they've done if you go on the website and try again I'm trying to do this as I talk but

[00:18:57] they have a great sort of you know analysis and they've modeled out sort of what will happen to payments for people on fixed variable I'm gonna get this wrong but you know what I mean

[00:19:12] there's like for this very variable yeah yeah so fixed and there's variable variable variable so your payment switches basically as interest rates go up and down your payments varies with that and then there's the static payment or fixed payment with variable interest rates where your payment

[00:19:29] stays the same but then people are being in a situation where they're amortizing over 60, 70, 80 years and then when the term comes back when they end their term after say five years it's re-amortized to the actual schedule that it should be and then it's a payment shock that's essentially

[00:19:47] what happens. Yeah so anyway so I shame I can't find it sorry but like what it is basically is what you're saying in some cases you have like mortgage payments will jump massively

[00:20:00] you know four five six seven hundred dollars you know people might I know I've had some colleagues who said you know 400 bucks a month you know that doesn't really matter I think that's

[00:20:12] a lot of money that's what's 400 times 12 I'm not good at math 48 you know what I mean that's 4800 of after-tax dollars that you need to spend just to keep your mortgage and that's presuming

[00:20:26] and what happens if that means what if that's just interest payment it means there's no capital repayment you know what I mean so anyways all this to say is you know there's two people points one

[00:20:36] is that the debt servicing issue is going to affect Canadians for a long time because we overleavoured and we bought assets you know for whatever reason tiff maclin you know at the wrong time in an already very intense housing bubble and the other thing that I think

[00:20:53] what's really important to note is that again if you look on the bank at Canada website don't take my word for it a lot of the mortgages the five-year mortgage rate or the five-year conventional mortgage rate had already priced the cuts months and months and months ago

[00:21:11] and so and that gap has actually opened up so I don't know what will happen but I actually kind of I kind of guess and again you'll have me on and you can lash me if I've got screwed this

[00:21:22] up but I actually think that the mortgage rate that you see now might actually not move in a sense that it already priced all of so for people not uh the fixed rate you're talking about

[00:21:33] yeah yeah so that five-year yeah yeah so the bond yields have already moved in anticipation of the bank of Canada cutting rates and if the bond yield moves the the five-year and other conventional mortgage rates move in lockstep with that long before the bank of Canada goes out

[00:21:53] and then cuts those rates and so my feeling is that you know you're not going to get any of the reprieve that Doug Ford or Christopher Freeland or any of these people who are tweeting about this

[00:22:06] are going to get that's I'm afraid of that yeah and well I mean I'm showing it here as the shared screen actually before we started talking I was having fun just kind of looking at that because

[00:22:18] that's what I'm doing for my in my fun time is like that bond yield but that's a good example right here right just over the past year bond yields the five-year Canada bond yield is essentially it's actually

[00:22:30] slightly higher than the bottom that it kind of had in late December of 2023 but it's so let's just say it's around a similar level right now than it was in late 2023 despite the overnight rate for

[00:22:43] the bank of Canada being 50 basis points more at the end of 2023 so to your point bond yields you know don't necessarily move in unison with bank of Canada rate cuts they will oftentimes

[00:22:56] pry like you know forecast the cuts coming and the fixed rates I mean who knows where it goes from now too right they could cut and rates could go up if bond markets and I think they call them

[00:23:08] bond vigilantes start worrying about the capacity of Canada with potentially paying its uh it's longer term debt I'm not saying it will happen but it's not a zero probability right and then there's another angle to this which I think we haven't really touched on which is the banks

[00:23:27] themselves so we we talk about this a lot in loony hour forgive the plug but you know the provisioning sorry I couldn't help myself but you know the provisioning for loan losses

[00:23:41] so again for people who might not be aware of this you know banks will set aside you know money for losses that they anticipate uh you know due to credit risk now you might have you know

[00:23:55] there's obviously a sort of run rate whenever you lend money to to a borrower you know you anticipate you know x percent of all the loans will sour and then you might have a loss given and then of the

[00:24:08] ones that sour some people will sort of you know they'll you know they'll sell assets to make their payments they'll refinance they'll whatever then there's certain losses that they just like they can either model or anticipate or they forecast or what have you in order to

[00:24:24] sort of make sure they have enough money in collateral that their shareholders are aware that the regulars regulators are well I know I know you know this Simon sorry forgive me for

[00:24:34] no no it's good I think it's a good refresher yeah and so so the bank the so Canadian banks will just like any bank in Canada or the world rather will provision for credit losses

[00:24:45] or loan loss provisions is what that's called and it affects it directly affects sort of their profits and so they're usually reluctant to do that because they've got to sort of set

[00:24:56] aside that money and what we're seeing in Canada is across the board that it's all rising so every single bank that you can think of there are not that many all the loan loss provisions

[00:25:08] are rising and the reason that's really important again for the mortgage stuff and all the rest of it is because it it sort of corroborates what we're seeing in the senior loan officer survey

[00:25:23] so again if you go to the bank of Canada website they've got these amazing publications and one of them is the senior loan officer survey it's a quarterly it's a quarterly publication and they

[00:25:34] ask all the lenders you know are you tightening conditions yes or no are you raising spreads so or is it more or less expensive relative to the market pricing to borrow and lend you know what

[00:25:49] how's your collateral how's the demand for those loans how's the supply for those loans etc etc and what we're seeing in the household lending conditions is that for you know non-mortgage lending so you know like stuff like credit lines and unsecured debt you know the conditions are

[00:26:09] as tight as they've been since COVID which is obviously an exaggeration of fear but nevertheless as tight as it's been in four years and we're seeing mortgage lending or you know the let's say

[00:26:20] the the credit conditions around secured debt which is secured on houses e.g. mortgage lending is starting to rise again so you know even if he greats fall and then you go to the bank and

[00:26:35] say I've got a house and I want to refinance or whatever number one they're worried about the collateral because we know house prices at the very least are no longer rising and they're worried about the

[00:26:49] loans that they're giving you and they've been it's been expressed in two ways one in a survey and then two in literally the numbers that they're provisioning for loan losses and so

[00:27:01] again it's just not a great picture I'm sorry to say I don't mean to be such a dead be down or I'm out of bachelor parties yeah no that's so that's okay you can forget about it with the beer so

[00:27:12] that's the way to do it but what I'm sharing here just to go to your point right I'm pretty familiar with the the Canadian banks and I'm just I just picked be here just as an example

[00:27:22] and they're all very similar I know them well enough so you can see the provisions that so this is on their income statement so this is the money they're setting aside each quarter it's not

[00:27:31] what they actually have on their balance sheet for these provisions so for people so they're familiar you know on their balance sheet is actually the total amount that they have but each quarter

[00:27:42] they will you know they're going to be writing off some loans so it kind of adjusts but they also put some more money aside or when they have too much they release some money as well so

[00:27:52] this I'll actually show where the MO and most Canadian banks they just did too much provisions when the pandemic started and then in 20 I think it was late 2020 through 2021 they started releasing those provisions so that's why we see the negative amount in 20 you know back in of 21 early 22

[00:28:12] and then you see the provisions for credit losses or provisions for loan losses I mean same thing kind of steadily going up and now they're you're looking at pretty large amounts so per

[00:28:24] quarter they had last year one quarter a billion and then it's been pretty much around minimum like high 400 millions above that since then so it's been they're not small amounts of money clearly these banks are well capitalized so they can absorb these kind of losses but just your

[00:28:43] point this is not just BMO this is every single Canadian bank they're just I forgot that you're the bank expert so forgive me oh no no it's okay I wouldn't say I'm a bank expert but I do no no

[00:28:56] but the first time we ever talked I remember you telling me that you were like really plugged into this so I forgive me for if I've stepped on a step on your toes a little bit no no

[00:29:04] but um I just wanted to say one thing I think is important people to contextualize all this is the default rates in Canada are generally extremely low so that's so like mortgage you'll read you'll read headlines I'll say like mortgage delinquencies have climbed 50% but what they often

[00:29:26] will forget because you know you gotta ask them click bait out there is that the mortgage delinquency rates in Canada are 0.1 or whatever it is right I think it's like between that remember correct yeah between like 10 and 20 basis points yeah yeah yeah so let's just forget for argument

[00:29:44] sake let's just say it's like 10 basis points so if they double it's still you know extremely low contrast that with the mortgage delinquency rates of the US which are much much higher

[00:29:56] there's different legal shit that goes on whatever my point the reason I brought that up was to is really that people it the last thing people will do is hand in their keys on their house and you know we

[00:30:12] have recourse loans in Canada's which means that the bank can go after your assets let's just say like broad strokes again I know there's some I'm not a lawyer I'm sure there's some shit around

[00:30:22] that that I've made a mistake about but my point is is that what is Canada's GDP run on it's on consumption and that's why I've stressed things like debt service ratios so that's like how much

[00:30:36] are you servicing your debt relative to your income and that's why I've stressed sort of the delinquency rates being really low even though they're rising slightly which is to say people will just buckle down and save their house right I mean I don't know how you would

[00:30:51] behave but if I had children in my home I would do everything on my power no vacations no new clothes you know hand me downs what have you right that's just behavior like economics in order to keep

[00:31:05] myself in my home what that means is that retail sales will slow you know consumption per capital will continue to slow you know you might not you know what it means so there's

[00:31:18] like a knock on effect that I think is very very important when you're when you're thinking about the Canadian economy which again is 60 percent 65 percent or whatever it is consumption and so I think that that's really the major headwind that we're fighting

[00:31:35] and again I know I've been saying this for a long time this immigration piece kind of screws everything up because you just have this bid and so what does that mean you know

[00:31:46] that's like finance bro talk for a constant push for there's like too much demand for the housing stock well yeah and so people who otherwise would have some relief on their rents or mortgages

[00:32:01] or whatever they can't because we just are importing so many people yeah and you're seeing and you probably know this better than I do but you're seeing I remember seeing in the U.S. where

[00:32:12] they're starting to see in some southern markets where they overbuilt rental units for sure during the yeah during the pandemic now you're seeing the opposite effect where they're having to offer

[00:32:25] you know months of free rents or lower rents to attract people or to get them to stay so that's kind of the opposite I mean obviously the U.S. with the border their south border it's a whole

[00:32:37] issue on its own but that's that's something that's pretty interesting to talk about the retail sales I just want to kind of double click on that because I've been seeing in earnings because we

[00:32:49] look at company earnings and for the past year I would say like it's been pretty obvious that Canadians and you're starting to see it in the U.S. as well with American companies that consumer are just shifting to essential items so the non-essentials the retailers that are

[00:33:09] more predominantly non-essential are struggling a bit more Canadian tire comes to mind in Canada but you're seeing even companies like Dalarama that have been doing quite well but they're seeing even their non-essential section is struggling a bit more but they they've

[00:33:24] done so well overall that their results have been quite good but then you see in the U.S. target is saying the same kind of thing where the non-essential is struggling a bit more they're

[00:33:35] trying to do price reduction they're trying to focus more on groceries you're seeing a Walmart and Costco doing pretty well because they have such a big grocery presence so I don't know I've

[00:33:45] been seeing it with earnings for quite some time I would say a year and maybe the last six months in the U.S. the last two quarters are you starting to see that and more the macro

[00:33:55] the aggregate data because I know you're more plugged in on that I mean the truth is I've been wrong about this for ages I think one of the mistakes that people let's just sorry forget

[00:34:06] people one of the mistakes that I make a lot is I think I'm just too early and you know some various wise investors will say that being early is the same as being wrong

[00:34:18] and so that is a roundabout way of saying that I've been wrong but I think what I've noticed in the U.S. particularly because the data is great and Canada I think would do well to spend

[00:34:30] more on on statistical data anyway is that you know delinquency rates for credit card payments for example for people who are aged you know 18 to 39 are as high as they've been since you know 2011 12 and so that's so during the Great Recession or what I think was a depression

[00:34:52] you know like and you know for and so and then certainly if you look at in the U.S. they split delinquency rates by large banks and small banks and it is you know when you look at

[00:35:08] large banks which is like the JPMorgan's Wells Fargo city group whatever and generally to fell yeah those systemically important banks their credit cards are usually aimed at higher income cohort older higher income it's a great point and it's the small list just so people understand

[00:35:29] there's like 4,800 there's like 4,000 banks in America Canada has six ask me on another podcast if I think that's good for Canada but nevertheless there's you know four almost more than 4,000 banks in America and then there's six banks in Canada but in the U.S. that bifurcation

[00:35:44] large banks small banks is very very indicative of your socioeconomic status and the region in which you live and small bank delinquency rates on credit cards so write-offs delinquency rates depending on you know if you look at delinquency rates for small banks it's as

[00:36:00] high as it's been in 25 years write-offs are the same things for small banks so that means lower income regional people and banks or whatever the large banks are the delinquency rates are much much lower they'll write-offs are much much lower in line with what it's been the

[00:36:18] last 10 years so basically nothing but those are also starting to rise and so you know you've got this in the U.S. I think you've got this like real split between like asset old asset holders who've

[00:36:31] locked in their mortgage rates or have lots of equity who feel wealthy and are doing well starting to slow and then the young less educated population who have no assets don't

[00:36:45] necessarily own their home and you know all the wage growth that you saw after the pandemic is sort of fizzled out and so that the U.S. that's what I would sort of describe and your point on the

[00:36:57] on the south is really really important because those multifamily delinquency rates have shot up I've been trying desperately to find the charts I don't remember the number and the listings so the sort of the supply available you know listings are sort of an indicator of like

[00:37:14] you know how much supply is out there you can do either do by months or whatever and that supply is shot up relative to the northeast which is actually quite contained and so that's totally

[00:37:26] totally changed but I started out by saying I was wrong and I want to reiterate that point because you know all that was true a year ago yeah and but I mean at the end of the day I wouldn't

[00:37:37] feel bad about being wrong I'm wrong all the time and you know you know as well as I do if we could just kind of touch really quickly on interest rates again you know if you looked at the

[00:37:48] trading instruments I know there's the CME Fed watch tool right I always look at that probably I probably look at it every like couple weeks at Moevri to be honest and if you remember in

[00:38:00] late 2023 they were saying that there would be what they were pricing in six seven rate cuts for the Fed so far this year so yeah and I think it was supposed to start in March so let's just say that

[00:38:14] sure maybe you've been wrong but a lot of other people have been wrong so that was my point well thank you and to get back to the US a little bit here how much do you think averages are skewing

[00:38:26] the data versus looking at the median because that's something that I've been talking about a little bit but obviously you know averages if you have a whole lot of people like a small

[00:38:38] cohort of people that are let's just say making a lot of money and you know living a great lifestyle they're going to skew that average quite a bit despite maybe the the vast majority of people

[00:38:49] not doing all that great so what are you seeing in terms of averages versus median? Yeah I mean I think that that's I yeah I think you're 100% right I think I want to touch on

[00:39:01] Canada because I think there's some things sort of happening here but I think the US is very much skewed by average and I think that there's a huge block of old relatively wealthy people in America

[00:39:15] who've locked in their mortgages at 3% which is probably the greatest trade you could ever make you know they own lots of equities in the only equity market that's worth holding and has been for years you know and those people why wouldn't you feel wealthy you know

[00:39:36] your mortgage rate your mortgage payments haven't gone up and they never will go up right in the US it's a 30 year you've locked in for 30 years and your stock market's up you're still employed

[00:39:47] because we know unemployment rates for people who are higher educated higher you know better incomes are very low versus people who work paycheck to paycheck don't own their homes rant etc and I think

[00:40:01] but and so yeah from a socioeconomic standpoint I think there's a it's a really really interesting conversation the problem is from a nominal GDP and growth and earnings perspective the bottom

[00:40:15] 50% don't move the needle the consumption is driven by a smaller and smaller rich cohort but boy do they drive that consumption right and so you've got a from a so again there's two sort of issues and I

[00:40:33] think eventually they shall meet but I think for now I think that there's still quite the moat between them which is you've got this really long tail of people who don't have any assets

[00:40:43] who are really really struggling and then you've got this you know chunk of people who own their homes they're old like you know homeownership in america is very very high just like it is in Canada and if

[00:40:55] you've locked in your interest rate and you have a pension fund and this and that blah blah blah you're fine you're not sort of affected by that and I think it's it's um you know if you look

[00:41:04] at tsa which is uh I can't I'm always horrible with acronyms which is a joke on the linear but the tsa is the uh transport authority basically oh yeah yeah yeah the transport safety authority

[00:41:17] something like that or yeah you know it's yeah it's no way you're talking about yeah yeah sorry forgive me it's the people who pat you down and make you take your shoes off but what they do is

[00:41:26] they keep great statistics on the number of people who are on planes and the number of people who are on business flights and you know we just hit record number of of travelers in america and

[00:41:37] I imagine canada it's the same and so and we'll get to canada second and so you know even though airlines are having trouble with their earnings it's purely a cost thing it's not a revenue thing

[00:41:48] and specifically labor cost thing but anyway so and in canada I think you have an exact same bifurcation sorry sorry you have a similar bifurcation but for different reasons and in canada

[00:41:58] it's do you own your home or not yeah and have you owned your home because as a stupid example my mother who's a retiree you know bought her house you know eight years ago and it's doubled

[00:42:13] her timing was impeccable her time it's better to be you know lucky than it is smart and so as my dad used to always say and you know she she's double and so she's nearly paid off her mortgage

[00:42:26] she could do if she wanted to but whatever and she's and so she's got all this equity and so you know a couple weeks ago a month ago you know Justin Trudeau said the quiet part loud

[00:42:37] which is he doesn't want house he said canadians rely on their equity for retirement and and the other sort of the the reciprocal of that comment is he does not want house prices to fall but he

[00:42:51] wants affordability which is kind of yeah I mean it was um I know exactly what you're talking about I listened to that interview I think it was a cbc interview where he mentioned that and yeah it's

[00:43:03] I mean yeah obviously we don't talk too much about politics but I mean it's true what he said right like he did say the quiet part out loud and at the end of the day you can't have your cake and

[00:43:14] eat it too so you howl almost have to make a decision our price is going to come down and then affordability gets better or I mean prices stay up people that use it for retirement can

[00:43:25] tap into that equity I mean you can't have it both ways I mean interest rates coming down massively will probably just end up you know inflating the housing market obviously like I don't think they're coming down three for 300 basis point but if they were it would just

[00:43:43] probably just create a whole lot of demand and then we have you know it wouldn't help afford ability because then prices would just go up even though interest rates would be lower yeah I mean and just for a little bit of revisionist history like one of the real

[00:43:56] sort of objections to all of the QE and lowering interest rates in response to COVID was the fact that it was basically a transfer of wealth from the labor class the renters the workers lower income uneducated people to the asset holders the owners the equity to the more

[00:44:24] educated people and and I think it's you know people sort of they people want collective amnesia over COVID but you know don't take my word for it that's exactly what Ben Bernanke in 2012

[00:44:38] wrote or 2016 or whatever he wrote in a Brookings Institute paper he said you know QE and all that messing around on the monetary policy front supports asset holders and we've seen it we've

[00:44:51] seen it with our own eyes and so I think that you know you talked of sort about like a bifurcation or a split in the American economy I would argue that there's a similar but different split in

[00:45:01] the Canadian economy which is if you own your own house and you have lots of equity in it you're laughing you don't care that your state costs twice as much because you've doubled your

[00:45:11] biggest asset has doubled over the last five or ten years whereas if you're renting we know that vacancy rates for multifamily units in Canada are 20 year low that data is on the Bank of Canada website and we know that the massive immigration is pushing up rents and so

[00:45:33] you know and rental CPI Steve will say is lagging nevertheless is that a 40 year high and so you've and so you've got a real sort of underclass of people and let's call it what it is

[00:45:44] it's an underclass of people who don't own homes who you know don't have much equity who are getting squeezed like crazy and a people and a section of the society whose doesn't care because they've got so much equity in their house and you know we talked about averages

[00:46:04] and eventually you know I think that that's for we speak to Canada specifically in general I think Canadians we spend too much time talking about America but in Canada you know you really really need something needs to give on that you know like

[00:46:19] we need rents to come down materially and in order that to happen we need to slow immigration a lot the you know we talked about the Bank of Canada they released their monetary policy report on

[00:46:30] page 13 or 14 there's an entire two boxes devoted to immigration and its effect on housing and inflation you know but it's a real thing the numbers are so huge that the Bank of Canada feels compelled

[00:46:44] to write you know a two-page paper on it and so I think that that's what Canada is struggling with right now. I mean it's all for in demand at the end of the day like it's just that

[00:46:53] you know if there's a whether there's unbalance or whatever you want to say it right if there's too much people wanting a certain good or service or you know lodging I mean and the supply is not

[00:47:07] adjusting accordingly then your gun SC prices go up I think it's just basics but there's a lot of questions I'd want to ask you but I'm cognizant of your time and oh I was having so much fun

[00:47:20] I didn't realize the time well I mean it's also for people listening so we're recording it's 1030 now and it's well past my bedtime but that's okay I will okay I'll give you two more questions I'll finish

[00:47:32] on a positive note as well for Canada so let's say my my next question I know this may be a bit of a longer one but you know whatever if you have a bit more time let's do it

[00:47:43] back to the Bank of Canada just central banks in general but let's say Bank of Canada and Fed so can they really be independent rich when you're seeing massive fiscal deficits happening in Canada

[00:47:56] and the US I know interest payments in Canada it's about 1.8% of GDP now it's probably going to go up in the next few years at this rate as debt gets refined yeah it's kind of pretty easy to see that

[00:48:11] and obviously fiscal deficits probably staying I mean they're probably gonna increase or at least stay around the same level in the US I think the congressional budget office was saying that it's going to exceed 3.2% of GDP from 25 to 2032 and typically they're a bit more conservative I think

[00:48:30] from my understanding in their projections those are pretty massive numbers because that's just interest how can central banks counteract that and be independent when they have to try and put the brakes on that essentially that's what they're trying to do right they're trying to

[00:48:45] counterbalance that and I know the Bank of Canada has said it a few times without being too direct but they've alluded to that as well yeah so I just in general I think is a general point I think

[00:48:57] I forgive the Bank of Canada for not going out and explicitly sort of attacking government policy I don't think it's their job and I think that no I agree on just that and I defend

[00:49:08] them staunchly for being for treating even bad policy with kid gloves like for example they came out and really hammered the immigration point home in the monetary policy report I think

[00:49:21] that's as strong a view as you'll ever see on a specific government policy we should be so lucky to have sober economists who are reluctant to make specific claims right wrong or otherwise on government

[00:49:38] policy however the independence thing I mean you know what I'm like my question is from right like you want me you want me to get in trouble and I'm gonna go no but it is like I mean it's I

[00:49:51] think during the during the code during COVID they were not independent and I think that that was and like part of me forgives them because everybody thought it was going to be the zombie apocalypse

[00:50:02] but part of me does not forgive them at all for not being independent they financed the entire deficit for almost two years and on my and give them a shameless plug for me if you go on my Twitter

[00:50:15] account Richard Diaz underscore CFA my pinned tweet and has been pinned for almost three years is showing that from Q2 2019 the Bank of Canada purchased 90% of government bond issuance that's not independence because when Canada ran massive massive budget deficits interest rates

[00:50:38] would have soared which would have curtailed their spending but the Bank of Canada stepped in and purchased virtually every single dollar of that debt issuance now they will say they bought it on the secondary market and it didn't affect blah blah blah but that's bullshit

[00:50:54] obviously they did that to control interest rates to answer your question and not to take a sort of unprompted swipe at the Bank of Canada I think that I think the real fear that I have is that

[00:51:07] you're right I think over the last two years I think they have their come to Jesus moment I think that they have been relatively independent I think that they've ignored a lot of the pressure

[00:51:20] that they have had from the Doug Ford's in the Christina Freelance of the world to cut interest rates in Canada I think that in general that bridge has been breached and I think that they

[00:51:35] aren't independent and I think that in a sense the mistake is again if I may sort of express another mistake that I've made the mistake was on my end I should never have assumed that they were

[00:51:48] independent and I think that I was too naive and I think that they'll they're gonna allow inflation to run hot which will provide cover for higher deficits higher inflation in order to deal with

[00:52:02] the value of the debt a huge huge debt bubble and yeah again you know it's a really tough question I thought about when you sent me the questions earlier in a little inside baseball

[00:52:15] you sent me the questions earlier and I was like I think they're gonna say that they're independent but when push comes to shove when there's a real emergency whether it's COVID whether it's Russia invading Ukraine whether it's you know great recession when push comes to shove

[00:52:31] they're not independent and they will bail out banks and asset holders and they'll do all kinds of funny business and I think for investors and for Canadian citizens I think it's important to

[00:52:43] sort of you know when people tell you who they are you should believe them and I think that they've told you who they are and it's my fault for not listening no and I mean I think I agree with

[00:52:56] you look at the end of the day maybe their intentions is to be independent maybe that's their intention but I think you know when you're seeing you know deficits and the debt being so large

[00:53:09] and interest payments being such a big percentage of GDP I mean at some point their hands are just tied right they have to try to make sure it just doesn't implode like I mean I like what other

[00:53:19] choice do you have I am not sure that like I know I'm kind of defending them a little bit and like the way I'm answering that but I don't know what else they can do like it's well I'll

[00:53:30] say like again let's just forgive them for the Covid's and shit like that I think right now them cutting interest rates I think is bogus because you know you have what's known as like a

[00:53:44] neutral rate of interest right it's the interest rate at which you're is meant to balance perfect harmony screw this up perfect harmony it's a theoretical sort of like it's kind of a bullshit concept that will help reference all the time yeah it sets the framework for how

[00:54:02] interest rate policy should be set and how one should think about are you too tight or too loose there's something called the tailor rule which you know considers the output gap and inflation

[00:54:13] and a bunch of other shit I always screw these things up so forgive me but I did learn this once upon a time ago and then there's you know there's the neutral rate which is sort of the

[00:54:22] interest rate where it's not inflationary or deflationary and whatever and Canada and that by the way is affected by your nominal GDP and nominal GDP is affected by people don't like to hear it but immigration so as a and or so let's just say population growth forget

[00:54:40] immigration population growth so like Nigeria that has a population that has a nominal GDP growth and how do you get nominal GDP you have like your population and your productivity of those people roughly there's different ways to calculate it but say roughly

[00:54:54] and so if that number used to be 1% and now is 3 or 4% the neutral rate of inflation sorry sorry sorry the neutral rate of interest which keeps that economy in relative balance has now jumped and so that's to me the main one of the main constraints

[00:55:14] like the bank of Canada is facing and so a really independent central banker would do actually what I think that Carolyn Rogers did in today in yesterday's speech which is she said listen folks I know you want relief on the housing but it's not going to

[00:55:31] do much and it's not up to us to affect deficits and it's not up to us to to deal with an immigration and I think in some ways although I'm very critical of bank of Canada for not

[00:55:42] being independent during COVID I think that they have sort of walked it back I think they have sort of realized their mistake I guess I'm talking full circles because I think it's an extremely difficult question so forgive me and I apologize to the listeners

[00:55:56] it is I mean I've heard a lot of people a lot of smart people talk about this I've read about this and I've seen different opinions and I mean it's almost an impossible question to answer

[00:56:08] I was kind of curious to get my favorite type of questions exactly and speaking of Carolyn Rogers it's kind of funny when did she start joining the press conference with

[00:56:17] it like a year ago I mean she's a much better communicator than Tiff I mean I was saying in a couple years back like where it was just him in the press conference they should bring her

[00:56:28] more often because she's a much better communicator than him so I think so here's my counter to regardless I think because you're the deputy I think you have like more leeway that's fair

[00:56:40] that's fair yeah right I mean maybe I'm wrong about that but just that you're not the ultimate decision maker yeah just to be the devil's advocate I think if you're like the assistant coach of a

[00:56:50] hockey team you can say whatever the hell you want but I think if you're the coach of the Montreal Canadians I think you have to be much more measured in your in your message

[00:56:58] if that makes sense maybe that's wrong maybe that's right who knows I will say that her speech on the on the productivity the emergency that the so the productivity emergency that Canada

[00:57:07] is facing yeah that she delivered in Halifax I think was seminal I think it was obviously ignored by the current government sorry for the pot shot but it's true and I really like her I think and then

[00:57:19] during the press conferences I think you're absolutely right she's much more direct in her language and she's I think she's an excellent communicator the question was do I think she'll be independent I think she'd be more independent than Tiff I don't know well we'll have

[00:57:33] to see okay well I'll finish on this last question so I said I would finish on a positing note yeah are there I mean is there something that makes you optimistic about Canada's economy longer term

[00:57:47] let's say you know five 10 15 years down the line let's just finish on a positive no because obviously we've been a bit bearish in our discussion but sure there's something that makes you really optimistic about Canada's economy and the future sure sure I've got three things the

[00:58:02] first one makes me a total hypocrite because all I do is complain about immigration but the truth is if you just have if you've imported a bunch of young people even if there is a labor mismatch

[00:58:15] the hope is the optimistic view of that is compared to countries like Japan who's literally shrinking every year their economy is just getting smaller and smaller because people are dying more than people are getting born that's probably going to be a good thing over the medium term

[00:58:33] that's the first thing I heard you shrink as you get older that might be it you definitely do my mom's getting small the second thing I think is really important that of course no one wants

[00:58:44] to hear this but it is absolutely true is oil crude oil fossil fuels Canada has the third largest oil reserves in the world fossil fuel demand despite everybody's bullshit naval gazing on demand falling is not going anywhere we burn 103 102 whatever million barrels of oil a day

[00:59:07] all the projections are always wrong it's politicized other more sort of sensible sober analysis of this has oil you know oil demand continuing to rise albeit at a slower rate Canada is the fourth

[00:59:26] largest producer of oil in the world we export 97% of our oil to the US we could probably work to fix that but fossil fuels are not going anywhere Canada is the fourth or fourth largest producer

[00:59:40] of fossil fuels thank god or else we'd be totally effed and so that's a real positive and the other thing is that as I will probably change with the the trans mountain line right

[00:59:52] that's gonna help that's more for where I think is it online now like I don't know we should just be we should just like enough with this shit we should be leaning into that like really really

[01:00:04] hard and people don't want to hear it you're gonna get lots of hate mail and but let's just I mean I think it's fair I mean even when you think about natural gas a lot of people kind of I mean

[01:00:14] we've been talking about that for a long time like if you can replace coal plants and braid in my clothes he's um he's an environmental engineer and he says yeah like it's I remember him saying

[01:00:27] at some point like it's obviously it's not easy but it's not that difficult to convert relatively cold plants to natural gas plants exactly and they're much cleaner like I mean

[01:00:36] if you want to reduce emissions that's a great way to do it of course actually use a cleaner carbon but um I think people just Simon and they shut down right I get really sort of amped up on this

[01:00:49] conversation not because I've had a beer but because I think that if you genuinely honest to goodness care about global emissions not Canadian emissions global emissions we should be doing everything in our power to export every ounce or mole or vol leader of natural gas to China

[01:01:11] kick them off coal and natural gas more or less is 50 percent of the emissions of coal what the opposite's happening Indonesia which is one of the largest countries in the world has increased their coal by 25 of last couple years China continues to build coal power plants

[01:01:28] the world is not going away from coal coal's going up not down Canada could be a major major natural gas exporter which could help alleviate the pressure from that if you really genuinely care so that's that piece we'll have a discussion and the third

[01:01:43] piece I think is a reality that people don't really want to talk about but which is we're entering slowly but surely you know a cold war 2.0 which is Canada versus China

[01:01:56] and I think them you know Canada used to be a huge huge exporter of rare earth minerals and critical minerals graphites and all kinds of shit that I don't really understand or know but what happened was China basically doesn't care about the environment or labor markets and so

[01:02:13] we basically exported all of our productive and refining capacity to China as the US and China become their relationship becomes more acrimonious the US will try to find secure and exploit friends, G Canada that have all of those rare earth metals were the largest land mass in

[01:02:38] the world after Russia we have them we just need to build roads and dig them out of the ground and I think that that's one a huge huge positive and so like we just need to sort of get out of the

[01:02:50] way of ourselves and I think the irony of course is that I think Canada is one of the more ethical environmentally conscious exploiters of natural resources in the world and I think this idea

[01:03:01] that we can't do it by paying people good wages pensions being safe and having an eye on the environment I think is wrong I think we demonstrate that every single day and so you

[01:03:15] asked me for three things that I think are positive and I think that that's yeah one of them makes me hypocrite the other two I think I've been talking about for a long long time

[01:03:22] yeah you have so I totally I support I mean I agree with that I think I mean at the end of the day I take our natural resources it's a big big reason to be positive about Canada going forward and you know we were blessed to

[01:03:38] have these natural resources I think we should be using them properly so I agree with you there like in a clean ethical sensible way exactly there's a lot of ways I'd like to take that

[01:03:49] discussion but I have to bring you back on because I mean just just about the you know kind of shift to protectionism that we're seeing globally or regionalism because you were talking

[01:04:00] about the US and that kind of you know it's neighbors or friends and you got on shore enemies and then obviously the elephant in the room the US elections Trump has been pretty vocal about increasing tariffs around the world but specifically China so there's a lot of different

[01:04:20] topics but that's okay it's just a good reason to have you back on the podcast any parting words that you'd like to say to our listeners before you go and continue the night in the bachelor

[01:04:32] party in northern Quebec other than no I just want to say thank you so much for having me it's always a real pleasure to chat with you I really appreciate the homework that you gave me

[01:04:43] and um and yeah I just uh yeah thank you really it's really really fun I really sort of love what you guys do I just really think that we need more of it we need more Canadians focused on Canada

[01:04:57] and I think and I just wish you guys all the best really that's it well I appreciate I appreciate you coming on for those of you are not familiar with the looney hour highly

[01:05:06] recommended especially if you like to like listen to uh you know a bit more macro I think that's when to be where you guys focus a bit more highly recommended great show thanks again for coming

[01:05:19] on rich and we'll definitely try to get you back on soon the Canadian investor podcast should not be construed as investment or financial advice the host and guest featured may own securities or assets discussed on this podcast always do your own due diligence or consult with a financial

[01:05:38] professional before making any financial or investment decisions