Hello, and welcome to the Download. I'm your host Dave Richardson, and it is Stu’s days. A Stu’s day that is close to the holiday season and Stu, I think most of the listeners would guess that you're a buy-everything-early guy. Very prepared. You go to the mall with a list, check it once, check it twice, and get it done and laugh at all the others that are hustling around and can't find a parking spot at the mall.

I'm a little bit of both actually. I like to get a few on board early. And then you settle in and feel good. And then all of a sudden, it's Christmas Eve. I help Santa fill the stockings, of course, but the stockings often get left right till the end. But for our younger listeners, of course, I'm just helping Santa here.

That's right. I do as well and I have for many years. A very solid helper. And the nice thing is that Santa feels he's around someone that's of similar girth to him when he's hanging out with me. I can't quite do the beard that he's got, but I do have the belly, and I never miss a cookie. Actually, we got some baked goods around the office today, which is nice. We can't share them with the listeners but I'm sure they've got their own baked goods.

One of my favorite sayings from my mom, if I get a little enthusiastic with myself, she'll say, you're too big for your britches. It always makes me think of Santa.

Yes, I'm literally too big for my britches. Although the pneumonia kicked the appetite out for a bit. So I'm down five. But let's not get too much off topic. Speaking of inflation on an individual level and that Santa Claus level, we had actually some good news on the inflation front today. We're taping this on Tuesday, the 13th of December, and the report on consumer prices out of the US today was what we thought was going to happen, maybe even a little bit better than what we even expected, right, Stu?

Yes, that's 100% correct and the metrics within also were reasonably solid; it was core inflation and headline inflation. People are very focused on the month-over-month change right now. You're still seeing a large year-over-year change, but the month-over-month has really come down and if we annualize what we're seeing month-over-month into the next twelve months, you're not far off kind of a 3ish percent type of thing. So people took that to be quite encouraging. It's been a major focus of central banks to get that headed in the right direction. We had a very strong open to the stock market today. It settled in a little bit. We do have the central bankers, most notably Chairman Powell speaking tomorrow, and there's always a little angst in the near term. He's likely to continue to be a little hawkish. He wants it to see it back in the jar with the lid on— not just back in the jar, so to speak. So that's one thing that markets have on their mind. Since we last talked, everything is kind of the same with a little bit of volatility. Interest rates are definitely lower. That's one thing. For a while when we were seeing inflation data start to improve, the 10-year bond kind of sniffed that out early. But interestingly, the 10-year bond started to come down and today we have some changes in some shorter-term interest rates which speaks more to the duration of the tightening cycle. So that's the second element. And we'll listen tomorrow, of course.

Yes. And a couple of things that I was looking at over the last couple of days— and we talked about this earlier in the year on a couple of the episodes—, is the idea that once things bottom out, they bounce back very quickly. And of course, we're not here calling a bottom or saying that the worst is completely behind us, however, if I'm looking at a diversified bond portfolio— I just took a diversified bond portfolio that I track on a regular basis— to October 20, was down 15.8% on the year. And again, it's been the worst bond market since 1780, so none of us have been alive for a bond market like this. This is a really extreme year on the fixed-income side. That portfolio in the six weeks since is up about 7.5%. Similarly, a 40/60 portfolio— 40% equity and 60% bonds; so just another portfolio that I track that's available out in the public—, it was down 14.4% to October 20 and is also up 7.5% in the six weeks since. So what we find is that a lot of more equity- or growth-oriented investors do get what happens with equities or with stocks over time, that they're going to see that volatility and those corrections. And then you see things come back. And it's that risk that gives you the greater reward over time. But you do it on a bumpier ride. But for fixed income though, more conservative investors tend not to like this. They go, hey, this is not part of the bargain that I was looking for. This year has been extremely unusual for them. And it all has to do with the Fed. It all has to do with inflation. It all has to do with central banks around the world trying to crush inflation, raising interest rates, which raises the whole curve, and that's what's caused this damage in the bond market. So it's nice to see a bit of a comeback. In terms of the scenario that we've talked about, that we think is the most likely to play out, it’s nice to start seeing those rates roll over as inflation has shown some signs of rolling over as well.

Yeah, 100%. You can look at long-term charts and you can see the pathways that are normally followed. And then we talk every week— a lot of people look every day—, and you go back through time, if inflation peaks, then interest rates peak eight to twelve months later. Then some period after that, the yield curve goes from having the negative slope that it has right now, or an inverted yield curve back to a positive yield curve, as money is injected back into the system eventually. Once inflation has been slayed, that can take some time after. So you have this succession and you can see it on a long-term chart. You look at the data points and you're thinking, okay, that happens, and that happens, and that happens. And everyone is generally aware that that's the pathway, but it doesn't happen day-to-day, bang-to-bang. So far, a couple of things that we've noted along the way is that repeatedly, CEOs have told us that this is different than the financial crisis. This is more of a slowdown-type environment versus a really acute crunch. So if the playbook holds an inflation that peaked early this summer, we're hopefully getting into the area where interest rates have peaked. We'll look for the yield curve. Eventually, when the Federal Reserve or central banks are done— and then they'll start talking about even easing financial conditions—, the yield curve will go back towards a positive slope. And in the equity market, we'll be looking for what we call early cycle stocks, things that benefit as interest rates turn. Housing, auto, capital markets, versus some of the maybe later cycle stuff that benefits from safety or from higher interest rates. There are playbooks. All occasions have playbooks, and we're busy studying them. And there's often a lot of overlap at different times. There's always a little nuance, but a lot of overlap. And we'll look at those pretty diligently here. As I say, you tend to get the playbook in your head and then you're thinking, why isn't it happening tomorrow? They do take a bit of time.

But there is an art to this. I know that in your career you've now been through six or seven cycles now, or five clear cycles.

Oh yeah. I remember when I first started, I was just about 18 months in, and I was sitting on the bond desk during the Asian crisis. We've been through all sorts of things, which helps from a grounding standpoint, and as you know, I got a bunch of comments on my wall or quotes that I like, and one of my favorites is: there are old portfolio managers and bold portfolio managers, but not a lot of old bold portfolio managers. So there is the consistency of applying the discipline of an investment process, and trying to keep everything in perspective at all times is pretty helpful over the long haul.

Now, one of the things that you pretty much never waver from is a belief in dividend payers and particularly dividend growers over time. We've seen dividend stocks do particularly well. And if we're looking at the Canadian setting, some of that has to do with the makeup of the Canadian market. You've got those energy producers and you've got banks, and these are areas that have been strong on a relative basis in some way on their own. But dividend stocks have done fairly well through this inflationary period as we move towards the next phase of the cycle where inflation is topped out and starts to roll down. Same thing with interest rates. Do dividend stocks continue to hold up or do they become less favored in the environment that we're heading to over the next twelve months?

Well, that belief in dividend stocks is a combination of two things. It's not just outright high dividends, it's a combination of an attractive current yield and dividend growth over time. At different parts of the cycle, some stocks that pay out very high yields that don't grow very much due to the heavy lifting, and at other times in the cycle, those that pay maybe a lower yield, but dividend growth comes to the fore. So, the attractive thing about dividend stocks is by and large you have mature companies that still grow and you have this cash flow that comes out of the business. They take a portion of that cash flow and they give it back to you and then they reinvest the other portion of that cash flow on your behalf. Sometimes they buy back stock, sometimes they make investments, sometimes they do M&A. And those investments keep the business chugging along. So in a normal period of time, if I had a stock that yielded at 3.5%, 4% or 4.5%, something like that, they could grow their dividends at 5%. That would be twice as much as inflation. So as a long-term investor, I really like that box. I'm going to leave that box on the side of my desk for some time. And the purchasing power of my money when I retire should have grown and be nicely ahead of inflation. So that's certainly appealing to someone like me. And the other thing too is that I love investment processes where the main ingredient is time. If I leave that strategy for a long period of time, I know it's going to work out. I'm not always depending on just a specific catalyst or growth in a new market. Those are interesting investments too, don't get me wrong, but the machine that I like to leave on the side of my desk and let roll for a long period of time is that dividend and dividend-growth strategy.

Excellent. Well, I can see what you've got on the side of your desk today: Christmas goodies. So you got to watch that. Now, I know that the one cycle I can count on is that my weight peaks right and around New Year's, and then I've got my winter and springtime rush to bikini season where I've got to look sharp in my Speedo. I got to take the weight off.

That goes back to another thing: you don't buy pants at Christmas time because that's not normalized.

So no pants for me when you're out shopping? I'll look for a different gift. Excellent. Well, that was a fantastic synopsis of what we're seeing on inflation and then bringing it back again to that area of expertise and an area that I know a lot of the listeners like to focus on in their investment portfolio. So, Stu, thanks again. Good luck with the rest of your holiday shopping. I'm not sure if we're going to get another one in this year, so if I don't see you, a happy holidays and Happy New Year, and we'll see you early in 2023 to get your perspective on what next year is going to look like.

Great. Thanks very much, Dave, and all the best to you and your family.