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About this podcast

This episode, Stu Kedwell, Co-Head of North American Equities, talks about some of the tools that central banks can use to help stabilize the market during downturns. Stu also explains why current market conditions are a perfect example of why it’s important for investors to prepare their portfolios for a variety of scenarios. [14 minutes, 56 seconds] (Recorded: March 31, 2023)


Hello, and welcome to the Download. It is Stu’s days… on a Friday. One of these days, we'll actually do it on Tuesday, Stu. We’ve done it on Monday, and now we're Friday. And it's all my fault. I apologize.

No problem at all, Dave. There are seven days, and we could do it every day.

Every day is Stu’s days now. I've been traveling around, all over the country, and I've been doing a lot of speaking, and of course, people actually walk up to me and say, you know what my favorite day of the week is? I go, no, what? Because I'm not that smart, right? And they go, Stu’s days! And I go, wow, that's great. You're listening to the podcast. That's fantastic. Everyone's favorite day is Stu’s day. So, yeah, why wouldn't we have it on the weekends? Especially a long weekend. That's when it's really Stu’s days.

Well, you've obviously been talking to my mom.

That's the one thing we have very much in common: very supportive mothers. And Stu, again, I'm doing a lot of speeches and I'm doing a lot of Q&A sessions, but you have your favorite question that you've gotten, or interaction with an investor, in your time over the years doing these kinds of things?

Well, thankfully, I've had lots of great interactions, but one of my favorites is, I was doing a presentation and we were talking about the long term, and the gentleman got up and said, this is all fine and well, but I don't buy green bananas. I want to know what's going to happen right now. And every time I think about it, because the market is such a challenge sometimes in the short term— and I think we've seen that a little bit in the last couple of weeks— the reaction has befuddled some of some participants given some real challenges in the financial system.

We talk about doing Stu’s days on Monday the last couple of weeks. One week, I'm scrambling to get on and do the podcast with you while I'm on vacation. The next week, I think I woke you up at three in the morning on your vacation in Hawaii, because we urgently want to get information out to people so they can make good decisions and understand what's going on. As if banking crisis means greater risk of recession. I spoke to Eric Lascelles earlier today. He's gone from 70% chance of a recession to 80%. Pessimism around the economy. And, look, three weeks later, stocks are up, yields are down, the Fed is getting close to ending their tightening cycle. Even I filled up my gas tank at a lower price at the pump. So, how did this happen?

Well, it's a great point. One thing that we've tried to always harp on is that during periods of stress, there's lots of tools available in the toolbox for central banks. During that maximum, that crunch point, you're going oh boy! But they have tools that they pull out of their bag of tricks and they provide liquidity to the markets during those crunch periods. And that prevents a very significant liquidation, often, during those periods of time. So when we think back to whether or not it was the Federal Reserve opening up some new facilities after Silicon Valley Bank, or the quick merger of Credit Suisse and UBS over a weekend, all of this is designed to settle down people on the liquidity front. It has ramifications for the economy, but what it also does is it often drives liquidity or money into the stock market because it doesn't go into the real economy. It has to find a place, so interest rates come down, that changes some of the relative attractiveness across different assets, and that money often finds its way into the stock market. So you sit here today, and yesterday or the day before, the Nasdaq was actually up 20% from its low. And all things considering, if all you had was markets to look at in the last couple of weeks, you would wonder if something had happened.

Yeah, it's really fascinating to watch. What we've talked about in the last two episodes of the podcast was suggesting that this is a very different situation from what people started to make some an association with, which was the great financial or global financial crisis back in 2008-2009. This was a very different situation, a different banking system, really, because we retooled it there. And as you say, lots of tools, lots of tricks that can be pulled out and pulled out quite rapidly. I was highly criticized for my Mr. Miyagi comparison— people didn't like that as much; so just fast forward through that part in the last podcast—, but the main thing is that governments and central banks, like you say, pump that liquidity in, calm things down, and then we can start to look forward. But even still, Stu, again, in the near term, or towards the end of this, from here to the end of the year, you're likely going to have an economic slowdown or even a recession. So how can people get excited about that? Doesn't that mean earnings go down? Valuations aren't necessarily cheap. They're fair, but they're not cheap.

Yeah, 100%. My own personal philosophy, when I think about my stage in life, is I hope to have maybe two more doublings before I retire. So I tend to be a holder of what I own, and I try and add to it during periods of concern, when sentiment is down and valuations are great; and obviously I'm a dollar-cost averager too, as we've talked about many times. But there are other people who have to take for their retirement, and they almost need to think about the reverse sometimes. When things are really good, maybe it's time to harvest a little bit because they're using it for different things than I might be. So just to put it in perspective, in the very short term— this is my best attempt at green bananas— so money was in all these banks and money left some banks and it's gone to other banks. So the banks that have lost a little bit of money, it's harder for them to roll some of their loans that might come up for due. And you can see this in all the statistics where they survey lending officers and say, are you more likely or less likely to make loans in the future? And those surveys all show less likely. And less likely to make a loan is tough on the economy because you think about different businesses— I'm sure we have business owners on the phone— I got to finance inventory; I have to finance my revenue; I need to do everything that requires money from somewhere. And the banks that have received the money, they want to see how those deposits season. They may also want to hold a little bit more liquidity because everything that's gone on. They may not have abundant capital to make new loans with new deposits, things like this. So there's this period of time where the economy itself is likely going to have to deal with less capital or less money. Economy dealing with less money likely means less economic growth or, to your point around Eric, recession. The financial conditions in the real economy start to tighten up a little bit. Financial markets respond by going up, which tries to add liquidity back, but it's not a one-for-one. So the likelihood that earnings are pressured because of some of these financial challenges is quite high. And in the very short term, you've had a little bit of a boost because of liquidity. As the earnings message filters its way through after the first quarter and second quarter, maybe that will depress stock prices. It's anyone's guess, but today you look at multiples and valuations, as you say, like fair, not cheap. Risk premiums, a little bit lower than average. The likelihood of ongoing volatility is quite high, unfortunately. So in that environment, I'm of the camp, during the volatile periods that are negative and people are concerned that's when I'm trying to use my shovel and get more in to the portfolio. And during periods of calm or enthusiasm, which we've seen maybe in the last couple of weeks, for people who are thinking about the reverse, they may want to act trying to make markets your friend, take advantage of the ups and downs, depending on what your financial plan dictates in the short term. Because I think you're bang on, the odds of it being all clear in this environment don't seem too high.

Yeah, I guess in some respects, could the market even now be looking past the recession? Or they've now got that you're getting to the point where you're starting to feel a little more certain that we're pretty much at the end of the rate tightening, so you can look past that economic slowdown. Now let's look to 2024. That set-up looks a little bit better. Maybe you have lower interest rates. Economy is firing up again. You got China coming online. So maybe no reason to be as pessimistic as people have been over the last few weeks.

Well, that's a fantastic point too. The long-term investor always has the optionality of positive things happening. The person who needs the cash tomorrow or in the short order, when things are cheerful, they might get more cheerful, but they need the cash anyway. So they have different things that they're working on. Historically, markets correct with time and price. It was probably just a little bit over a year ago that the markets hit their high. So when we talk about commercial real estate or tightening lending conditions, this is not the first time that these have been discussed, so you just never know exactly how markets might bottom. You envision markets bottoming about eight to ten months after interest rates. You mentioned the interest rate cycle. So for the first time, two-year interest rates are below the Fed funds. Historically, somewhere in the neighborhood of five months to six months after that occurs, interest rates get cut. If we don't have that clench around liquidity, it allows people to look over the valley. We can all agree that earnings will go down and they will bottom and they will recover. It's during the midst of that valley, whether or not there's a liquidity vent, that causes that clench. And sometimes it happens, sometimes it doesn't. We're always on the lookout for it. But even in the case of Silicon Valley, where you could have a list of things that you worry about and they may never matter, but sometimes if they matter, they'll matter a lot. And that's why you prepare your portfolio for a wide range of scenarios and try and use volatility that you know is going to be in the marketplace to your advantage.

I know for people who listen to every episode of Stu's Days, at times it might even seem repetitive, what we're saying. But hey, when opportunity presents itself in terms of a lower price or a good investment that's on sale— you know it's a good investment in the long term, but it's on sale right now— you get in and nibble at it— that's the dollar-cost averaging— and you take advantage of it. And on the flip side, and I think a great point, because we often forget retirees who have built that nest egg and are now drawing income off it, and we absolutely shouldn't, there's a lot of retirees out there who need to think about these things and how you take advantage of strength in markets as well. But the classic «take advantage when it's uncomfortable to move dollars in and that volatility can become your friend». Certainly if you've got a long-term time horizon like you do, Stu. And even a medium-time horizon for older fellas like me. Okay, Stu, that's fantastic stuff, as always. Thanks for hopping in. And we'll connect next week. And I think we're going to get right back to your bread-and-butter next week, unless something happens over the weekend. Really talk about your favorite kind of investment.

Some of my favorite days are what they call ex-dividend days, Dave. That's when the dividends get paid.

Beautiful. If every day was Stu’s days and it meant an ex-dividend day, wouldn't life be grand? And no weeds, too. Right, Stu? All right, Stu, we'll talk to you next week.

Thanks very much, Dave.


Recorded: Mar 31, 2023

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