Hello and welcome to The Download. I'm your host, Dave Richardson, and it is a Labor Day delayed Stu’s Days. We're one day late, like the garbage pickup this week in Mississauga. I don't know why it was. Is it a day late in the city of Toronto too?

No, they keep it rolling the way that the schedule says.

Really? Wow. Is that like a Mel Lastman legacy kind of thing?

Could be just that too many people forgot if they didn't keep it on the same day. I don't know.

Well, I get the little email. You can sign up for this email, garbageday.com. It's actually an RBC promotion actually. It's RBCx, the ventures company actually created this whole thing. And you can sign up for it and it sends you the email. It reminds you of the day for your garbage and it tells you what they're picking up. If they're picking up recycling and yard waste or regular garbage. I thought you'd be on top of that, Stu?

Well, yeah, it's like all these agents that people have doing different tasks for them. But I don't mind going to look at toronto.ca and just popping my address in and seeing what it is. But there's seconds I could be saving. These are valuable seconds.

These are valuable tips. This is the other exciting news, Stu. We're pretty excited here on the podcast. And tell your friends about this. Because they're missing something big. This podcast is in the top 1.5% of global financial services podcasts or financial advice podcasts. Now, we know it's mostly Stu. So, Stu, thank you for your commitment. Stu, we always have to mention this, is the Global Chief Investment Officer at RBC Global Asset Management. And that's a big job. And Stu's episodes are always popular. But that was something. We were having trouble finding the ratings and then all of a sudden, they popped up. We thought, wow, people actually listen to this thing.

Well, my mom had it on replay. She just hit it again and again.

At the Euchre games, she's been getting people to sign up. Is that the trick? Well, anyways, we're pretty happy with that. Anyways, thanks everyone for listening. Thanks for subscribing. Thanks for following wherever you get your podcasts. Thanks for all the reviews. Thanks, Mom. Thanks, Stu's mom. And we're going to keep doing this and Stu will be here. Actually, we were just talking about something exciting. We can now confirm it. But check your local listings or if you're in the Vancouver area, we're going to be doing a live taping of the podcast with people in the audience. And if we can get the technology right, we'll even do a live Q&A. Producer Nancy will be on that to make sure we got microphones that work out in the audience. And we'll be live on stage doing Stu's Day's review of what's going on in the global economy, investment insights from Stu. But the technology is always tough in a low-budget operation like ours. So hopefully, we'll have it up and running so we can take some questions from the crowd. But if you are working with an advisor in the area, check in and see if you can get a valuable seed. I think on the secondary markets too, they're selling for a lot of money. There's an investment you could make in your dividend fund. But Stu, we'll go from having some fun to getting fairly serious. We're seeing a lot of unserious stuff around tariffs, but we're also seeing serious things. These tariffs are hitting, the retaliation's coming from the Canadian side. It's real. And we've talked about this before. You can have some significant impacts. We're going to have Eric Lascelles on to talk about how it might float through the Canadian economy on this particular set of tariffs. But it does hurt people on the ground. And there's all kinds of follow-through impacts. But I think what we talk about generally, Stu, and what you and your team think about as you're managing money for Canadians is what's the ultimate effect in the investment markets? And so when you think about that as someone leading hundreds of portfolio managers around the world and thinking about the follow-through impacts on this, what do you think about in terms of managing your portfolio? Does this change anything or how do you react to it?

Well, it's a great question because markets of all types have to deal with uncertainty. The laundry list of uncertainty over the years is very lengthy. So the first thing you do is you try and listen very carefully as to which industries and the impacts. And as you point out, certainly there's going to be some impacts felt in the economy. And then you try and steer that over to the markets. We've made this comment in the past that the Canadian stock market is not as reflective as the Canadian economy as you might think. That's one thing. The second is, in this instance, the Prime Minister has done a very good job of preparing Canada. He's out in the press and says, look, this is going to be some tougher times for some people and this is going to hurt a little bit and all sorts of things. So, in dealing with expectations, it's helpful to have someone out there managing the expectations at the same time. We can make a list of businesses that might be impacted. But already, we've seen in the last couple of days that that path can go in a number of different directions. And we don't know exactly what might be targeted in the near future. I think the point is that we're not really making changes to the portfolio based on tariffs. The first thing is, you go through a business and you look at its balance sheet. In general, we are invested in companies with what they call an investment-grade balance sheet. Which means those businesses are already set up for the odd storm.

Yes, exactly.

So right off the top, the first thing that you're asking yourself is how does this impair the earnings power of the business? If so, for how long? And if it impairs the earnings power of the business, does it require additional capital at some point down the road? And the likelihood of number 2 and number 3 in our minds is pretty low across many of the businesses. So yes, you're going to see some announcements. Yesterday we had no more purchases of Bombardier planes. And then it turned out that Bombardier employs a bunch of people in the United States. So it just gives you an idea about how complicated it is. For every action, there's a reaction. And where the dust settles is more difficult to determine. You tend to go company by company on, could they be targeted? How would they respond? What other markets could they find? How can we get through that? And in all honesty, if there's downward volatility, we always have some cash around. Those are normally the spots where you're trying to put money to work. The second thing that you might also look at: on the very first day of the tariff announcement, the Canadian dollar was 147 or 148 and hit its low in the middle of the night. You couldn't even have come in in the morning in Eastern hours in Toronto or New York and bought the dollar at that level.

67.4 cents, for non-investment.

So then you look at the dollar around the last couple of weeks and then nothing. So the global world has already reacted and positioned. If you're worried about it, you made a change 12, 18 months ago. Here you have more bluster and more news, but you haven't really seen any major reaction in currency markets. Canadian interest rates, pretty contained. Even the Bank of Canada came out and they reminded us— which I'm sure we'll talk about next— that there are some inflationary pressures and they're dealing with them. But the macro surrounding Canada has been reasonably well contained. So you have the company-by-company discussions, you have the macro discussions, you have very good messaging from both the Central Bank and the Prime Minister about how we're prepared and setting expectations. When you marry all that together, if anything, you're more trying to look for opportunity. That's always a little bit tough comment to make in a podcast because certainly it is going to impact some businesses.

And individuals.

That's right. But the role of the money manager is to sit there and say, am I being offered a good opportunity to own a business? Because someone, short-term, is concerned against a long-term that may not have changed that much.

I think when we were doing our pre-discussion, which we always do before we get on and start recording, I thought the most important thing you said— and it goes back to one of the primary reasons that we have this podcast is to have guests like Stu and others that we have on who are professional money managers. They manage billions of dollars. This is not a hobby. This is something they've dedicated their whole life to. They take it very seriously, as you can hear in Stu's serious tone. I'm the comedy here. Stu just chuckles away in the background from time to time. I can barely get a smile from him, but sometimes I do. But we’re trying to highlight the difference between the way a professional investment manager reacts and the way other investors react out in the marketplace, perhaps a retail investor. And it's often stark. What we want to highlight to you is these differences so that you can learn from them and you can be a more effective investor yourself. And that's the basic premise of why we do this podcast to begin with. And what Stu was talking about as we were preparing was the idea that you're not reactive on these things. The portfolio managers that work with Stu are constantly evaluating the risks that are out in the marketplace. And so when a particular company's name pops out in the news around a particular tariff or a tariff being taken off or any announcement, they're not reacting to that. They've already had a plan in place to either manage the risk around it, maybe reduce the exposure. But this is not something that is like, oh, wow, I never thought that would happen. I got to sell this, right? And that's something that you want to think of, why do you own this thing? Have you done the work behind the scenes like Stu and team would do to understand the risks and then the financial impact if any of these scenarios come out to play? So that's one which puts you in this position— which I think is another important difference between professional investors versus my friends and family who all invest— the idea of looking for opportunities. Because you've done that preparation, you're not reacting. You've been proactive. You're in a position, you've got some money aside that you can take advantage of the opportunities and you're looking for those opportunities. And you're looking at it objectively, not emotionally. And that's pretty much what you just highlighted here.

Yeah, 100%. Any type of concern ends in the stock market long before it actually ends. The financial crisis ended in the stock market 6 to 9 months before it actually ended in the economy. That's going back to the worst of the Canadian dollar at 67 cents. And since then, foreign direct investment in Canada is up. There's investors putting real money to work in the country. Another great line from one of my partners is, I'd rather be generally right and specifically wrong than specifically right and generally wrong. And the notion that there's change going on within the country, that today there's an announcement about trying to speed up the regulatory process around a project, there's this list of things to do to prepare the country for its next stage in the evolution, these types of things. The other way of saying it too: what you're worried about, the Prime Minister, the Central Bank, legislature, they're worried about it too. And sometimes you have more confidence in their ability to do something about it. But there has been a lot of preparation and response. And we'll just see how it unfolds.

So that's a great segue to the discussion on the bond market and AI that we were talking about before. We know— and anyone who listens to this podcast regularly knows— about the bond people: they're dour, depressed, always negative, always looking for the next disaster around the corner, looking for rain. I walked out in the rain today. A bond manager would never do that. They have an umbrella on a sunny day, let alone a day where it's overcast. The bond market, as you said, has generally behaved pretty well through this, relating to the tariffs. But overall, there's been concerns in the bond market. We've been seeing some yields rising. And AI plays a part in that. You were talking about the volume of credit out in the marketplace right now.

Everyone is very focused on some rising 10- and 30-year yields. And they have been rising for sure, but the amount of discussion around it has been rising far faster. A couple of things. It's probably worth just taking a step back. So a bond investor has a number of levers available to them, primarily duration and credit. So they can own short-term bonds, or they can own long-term bonds. The longer-term bonds you have, the more duration you have. Then you can own credit. When spreads are wide, you get a lot of extra return. Or when the economy is really good, even if return is tight, you get very low delinquencies. So we've been in a period of time where duration has been challenged, really since COVID. But the challenge, like the rate of change on anything, moving from 1 to 2 is a doubling, moving from 2 to 3, 50%, 3 to 4, 30%. As you can see, those percentages are declining. Yet when we get to around 4.5%, the crescendo— and I don't know if we're at a crescendo— but the discussion tends to get more dominant than it did when we were going from 1% to 2%. Meanwhile, in a bond portfolio, generally speaking, you've had shorter duration and more credit. So the duration has protected you against the rising interest rates. And in an inflationary period like we've seen, companies' margins have expanded. So they've been making money. The ability to pay back has been quite good. So spreads have narrowed. So now you're getting to a point in time where you have all these different levers and should you start thinking about moving from some of the spread-oriented lever to duration? And none of this would say that interest rates are about to start going down tomorrow. But equity markets or a stock over a long period of time will trend. A great business will have its ups and downs, but this up will be higher than the last up. This down will be higher than the last down. It's well managed. It has a competitive position. It just chugs away and trends over a long period of time. Bond markets are a little bit different because they're self-fixing— I don't know what the right word is— but the higher interest rates go, the more of a challenge they are for people who borrow money, which then slows down the use of money, which then fixes interest rates to some degree. So we've been through a period of time where government deficits have been higher. They are like a price taker. They have to pay, they have to borrow the money. And artificial intelligence, whether it's through hyperscalers like the Googles of the world borrowing money or signing new leases, they've been doing a lot of that to the tune of maybe 50, 60% as much of Treasury issuance last year. A really big number.

Which is incredible, right? Was there a historic parallel that you would draw?

You could go back to railroads, but I don't even know if you'd have seen that speed. So you've had 10- and 30-year bonds up half or three-quarters of a percent. But the important thing about duration is once you start receiving a coupon, you start receiving so much money each year, it's offering you a degree of protection. To the point where you can almost run scenarios that says, well, even if interest rates go 100 basis points higher and then they fall by 100 basis points, over the next 2 or 3 years, I'm starting to get a better return in fixed income. So anytime you see these long-term statistics, which right now the trailing 10-year return of holding, the total return of a 10-year bond has not been great. Credit's been very good. Short-term interest rates have been very good. So there has been other levers in the portfolio. But duration has not been something that you've wanted to have too much of. When you see those types of statistics, you have to think, well, let's go solve the worst case. What if it's still going to be -1%? I think buying the 10-year bond at the beginning of each year is something like -1%. If you're an equity investor, that doesn't sound like a bad negative case. But as a bond investor, you like positive. 10 years from now, if it's still -1%, long-term interest rates need to be substantially higher to the point where it would probably be a lot harder on the equity market than it would be on fixed income. And it's just interesting as we start to play with some of these numbers, even if that happened for 8 or 10 years and then in the next year after that, you got a 100 basis point drop, you'd get a good chunk of your return back. So I think just the point here today for bond investors is to think coupons are higher and coupons provide some protection against changes in interest rates that they haven't really in the last 3 or 4 years.

And income. Which for so many investors now are reaching that point where they're thinking about drawing on the income and they like the higher interest rates. For people who are going to buy a house, not so much.

Well, it's interesting. It's the same type of discussion that an individual might have. But a lot of pension plans out there they have a pool of assets that they have to support all their obligations with. And there's periods of time where those assets can be a little bit below the obligations. Right now, because equity markets have been strong, they're well above the obligations. And you might get some pension plans that just say, we're going to what they call immunize. We're just going to go buy bonds because the interest pays what we owe, and we've got a cushion. So we'll see how that all plays out as well.

So, Stu, I think the big thing for investors— I'm about to head out, maybe for about 3 months, in front of a lot of advisors and investors— I think the big thing that we emphasize, and this is just another example of it, is you just cannot be beholden to the news. You've got to not get emotional. You can't read headlines and be reactive around headlines. You've got to do the digging. The basis, as we always talk about, is the plan because the plan allows you to not overreact to something that's coming because you've done the planning already. But that emotional reaction just is never going to be a good thing. And again, all joking aside, you're an even-keeled guy. That's one of the reasons why you're so good at what you do, right?

Well, it's funny because with my family, when we're watching a show, I don't really like the suspense. I always like to hit the fast-forward button. And there's a lot of similarities to that in investing. When you read a piece of news that is either very good or not so good, you have to then ask yourself, and then what? And then what? And what comes next? And then what happens? And who does what then? It's just like watching some murder mystery and you're like, don't go around that corner. You know he's going to be sitting there. Well, you can think through, this will happen and then that will happen and then this will happen and just always be trying to run that movie forward in your head around any event that you either might be excited by or confused by.

And that's what the best investors are able to do, right? To look forward and run the different scenarios out and then prepare for, basically put a probability on each of them and then figure out how you want to be positioned going forward. And we've talked so many times about the importance of scenario analysis. And then what you've just said is exactly that. What's around the corner? I need to think about what could be there, what could not be there, and factor that into my decision to get to that ending, which is ultimately to get above average returns.

You got it, Dave.

Stu, thanks again. My big tariff thing, I'm going to go have a big tall glass of Canadian milk. That's what I'm going to have tonight. Maybe some cookies as well. Homemade cookies. But that milk is good, that Canadian milk.

Yeah, I'm a rye guy, so I'll toast Canada in a different way.

And we'll see you next week, Stu.