Transcript
Hello, and welcome to the Download. I'm your host, Dave Richardson, and it is our first fall Stu’s day. Stu, are you all for fall like I am, or you're more of a summer type, right?
I'm an all for fall, Dave, although we haven't really had it so far. It's 25, 30 degrees.
I know, it's crazy. I'm in Montreal today and I grew up here, and I do not remember it ever being this warm this time of year in my childhood, although my childhood is a long way back, Stu, as you know.
And the weather is going to change quickly, Dave.
Yes. And then we'll be raking. You're an avid leaf raker or are you more of a blower?
I'm a raker. Yeah, sure. I'll go with the rake.
A little more precision. You always like a little more precision in terms of the way you get at stuff. You might miss a leaf or two with the blower, but with the rake, you can get right in there and get every last one, right?
And also, I'm impatient with the blower, so I end up going around and round in circles, blowing the pile here, there and everywhere.
Yeah, I'm more of a blower, but I got to say my technique is weak, but I've got a good risk snap with the rake, so that always helps. Well, we're teeing everybody up for a fall of leaf raking, but what we're seeing is a fall in bonds, which means yields are up. And it's been quite remarkable. We didn't do a podcast last week, but really, over the last two weeks, we've just seen a spike in longer-term interest rates. And, Stu, what do you take away from that in terms of what's driving it, while at the same time some of the shorter-term rates really haven't budged at all. So what do you think is going on here behind the scenes? And is there any message the bond market is telling us by its moves?
Well, yeah, I think there probably is. Howard Marks wrote this seminal investment book called The Most Important Thing, and it has a number of chapters in it, which then kind of begs the question: well, which is the most important thing? And when it comes to interest rates, there's all sorts of things that go into where a given interest rate might settle. And on the positive side, we've seen inflation coming down. Some of the internals of inflation look pretty good. Growth is slowing. It hasn't totally shown up in some of the statistics. Citibank does this surprise index about where growth sits relative to expectations, and it is starting to slip a little bit. Some of the firms do a lot of survey work, and there's no question that the survey work is slowing down. Confidence is low. So the ingredients for a slowing economy seem to be in place which from a traditional standpoint would be kind of positive for interest rates. But you throw into the mix some consternation in US politics. You throw into the mix healthy levels of fiscal deficits and a lot of focus on it. A fair amount of issuance in the second half of the year. And a Federal Reserve, which we knew will always be jawboning the market and saying rates are going to be higher for longer because they want to ensure that this inflation genie finds its way back into the bottle. It left markets a little bit exposed. So as the shift towards maybe away from some of the economic impact to fiscal deficit type discussion coupled with this higher for longer interest rates, the market shifted where its focus was at, and it resulted in a pretty big move up in longer-term interest rates. The signal that sends, for those concerned about the slowdown, is that it's just more fuel for the fire that things will slow. The word monetary conditions means how hard is it to get credit or how hard is it to get money? Monetary conditions hit levels that you hadn't seen in a while. So again, we're in this environment where we know that higher interest rates work with a lag. There's some evidence of it in some areas that are more acutely exposed to interest rates, but that lag has taken a bit more time. It's either we're impatient or it's taken a bit more time than people might want. So when you get higher interest rates it just makes the people worried about the lag worry more, and the people that weren't worried about the lag, have to sit there and say maybe now the impact will be felt. So that's what we've seen in the last couple of weeks, and it's been tough on the stock market.
I was going to say, Stu, none of this sounds particularly good for the stock market. Really, for any area of the stock market, none of this is good news and is going to draw a positive reaction out of stocks, right?
No. And because the type of move ends up hitting both sides of the stock market. If you were in the camp that stocks were priced as if there would only be a soft landing, then those stocks need to have their earnings in the near term reconsidered. And if you were in a more stable group of stocks, their valuation tends to be impacted by higher interest rates. So the breadth of losses of stocks that have been going down during this period of time has been pretty important.
Yeah. Eric Lascelles is coming on the next episode. I've got him on tomorrow with the US jobs report. He's had his prediction on a recession. I think he dropped it a little bit. He got up to 80% chance, and I think he's down to 65% right now, whereas a lot of other analysts in Canada and the US have taken it down to 20 or 25%. And that's what you're talking about. That recalibration. It almost seemed like people got impatient that the higher interest rates were not creating an economic slowdown faster. You got all this government money sloshing around out there and people are still on that bounce back out of COVID, spending wildly. So credit card balances are up at all-time highs. But eventually when you take interest rates from zero to five and a half percent, or from a half a percent on the ten-year to almost five, at some point things are going to slow down. And maybe, as you say, for those of us who have been patiently waiting for a recession— and not in a positive way; a recession call is always one you want to be wrong about—, but it's starting to feel like you're seeing things grinding down a little bit, right?
I think that's correct. A couple of things in capital markets that have continued to be interesting is that short term bonds, short term credit— by that I mean under five years. We've talked about this. You're collecting very attractive levels of coupon. It's a big difference in the price of the bond. When interest rates are 1% and they go to one and a quarter, versus when they're four and a quarter and they go to four and three quarters, it sounds the same when you listen to it, but the math is quite different. So the collection of coupon in the fixed-income market is pretty attractive. From a stock market standpoint, some of your favorite indicators, Dave, are VIX, the volatility index. If we think back right to the middle of the summer, which was probably the zenith of the soft-landing economy call, you had the VIX at 13. We're now back up at 20. A bullish sentiment was very high. It's come about halfway down. This range bound impatience in the market, the way that markets just normally play out over time, the movement of one side of the boat to the other side of the boat, it kind of persists. And that's just a story as old as time.
Yeah. And that was the other thing I was going to bring up, is the VIX, which kind of spiked over the last two weeks because, again, that's a relatively big move from 13 to 20, and it's been sitting down in that 14-15 range for a while and then just all of a sudden, it shoots up along with that big move in long-term interest rates. So that's why we've seen so much movement in stocks, and it's been really pretty much across the board. I guess on the bright side, in the middle of this, we've seen the price of oil come down, some of the materials are down off a little bit, so that takes some of the heat out of inflation. That was, I think, causing some of the concern as inflation flattened out on its descent. But it's still not a lot of good news out there as we're talking today.
No, the short term always has lots of things to think about. The longer term, we've seen some businesses decline to pretty good longer-term share price points. We do have higher coupons in bonds in the interest rate side of things. So the collection vehicles for longer-term return are improving. So we try and keep that in mind. And we also know, just like the change that we saw in the last couple of weeks, and we started the podcast talking about the weather, where we're going to go from 30 degrees today to 10 degrees on Sunday. When there is evidence of the slowing economy, right now the discussion point is the ability to kind of tweak what interest rates decline by 25 basis points or this side of the other thing. But normally what happens is that they hold on to the current interest rate environment for some period of time and then they drop a lot, and they drop in relatively quickly manner because the pressures are contained until they're not, and then that's where you get some weakness in the economy and then you get the response. We're always trying to have an intermediate-term view, as always, to know some of the challenges that we see on a daily basis.
I'm just sitting here. I know it's early in the morning and I'm in a hotel room in Montreal, so I might not be doing my best thinking, but there's got to be a strategy for investing in an environment like we've been seeing over the last month or so. If I had been doing this through this period, I would be just ecstatic at how it's working out for me. Do you ever use a strategy like that and what would you call it?
Well, yeah, the dollar cost averaging would be certainly a worthwhile strategy. My kids are in French immersion so they would know the French term, since you're in Montreal. But there must be a very fancy term in French as well for that, which I'm sure you'll pick up today.
I better figure it out because I got to do a speech in French in about 3 hours, so I better learn that term. But all joking aside, it's just been another year and we've talked about this almost incessantly. When you've got that much uncertainty, it just creates the environment where you want to wade in slowly and if you've been doing that, you've done very well. And if things get a little bit tougher over the next two, three weeks, then do you make an adjustment and maybe pull some of that money forward? Or do you tend to prefer to, if I was going to put the money in over twelve months, do I stick to that twelve-month dollar cost averaging?
Well, when things get worse, I normally accelerate it personally and then also I get the benefit of seeing what we're doing inside the funds as well. And you can have periods of not very much activity and then you can have periods of a lot of activity inside of the funds as we reposition and put capital to work to try and benefit from the other side.
And then again, just even inside the fund, you're taking more approaches as you're establishing a position you're not all in at the front, you're building it over time. And same rationale as dollar cost averaging in an investment plan for a retail investor?
Yeah, I think you asked me this once before, but in my 25 years— and it wasn't an entirety of a position— I think I have successfully sold one stock at its all-time high and bought one stock at its all-time low. So if that's your strategy, the marksman strategy is not your A game when it comes to investing.
Great. Well this is more a subdued fall version or end of summer version of Stu's days. Lots going on, and we're going to be keeping an eye on it. Stu, thanks as always for your time today and we'll catch up and I know you're doing some work on the housing market and impacts of higher rates in housing, and maybe we'll check in on that next week when we get together.
Great, Dave. Thanks very much.