Transcript
Hello and welcome to the Download. I'm your host, Dave Richardson. And it is Stu’s days. Did I seem excited enough, Stu? Or do I need to raise the level?
No, that was fantastic.
I got to get back to working on being expressive with just voice — body language that comes through voice, excitement — because we're no longer on video. Actually, I don't know if you've heard yet, Stu, but our first two videos, which got rave reviews, kind of blew up the system that we have to upload videos and so we won't be uploading videos for a while. But my mom said, well, that Stu is very handsome. He's a nice young man. That's my mom's feedback for you.
Yeah, well, tell her the check is in the mail.
She'd cash it too. I can tell you that much about my mom. So since we can't do video, we're going to launch another episode format and we're calling it the investment stew. Get it? It was producer Nancy's idea. She came up with it. I got completely confused by it, but it's like S-T-E-W. Like a stew, but with Stu, S-T-U. Speaking of my mom, when she'd make a stew, she'd just go in the fridge — we didn't have much — but she’d grab whatever was there and just throw it in a pot. And then she'd take the Bisquick out and make the Bisquick dumplings on top and they’d just bubble up and I would eat the dumplings and not much else of the stew. But I do like a good stew now. I was just a child then. So hopefully the listeners enjoy our investment stew.
All right.
You're good with that?
Are we going to do rapid stew?
Aren't stews generally more kind of slow? They stew. But we'll try and keep it rapid so we don't have anyone dozing off on us. They're two and a half minutes in and they probably already hit the fast-forward past this stuff. We got a lot of stuff going on in markets. Let's go to today. You're always watching bank earnings and they're always a good measure or view on what's going on. And if we're talking about Canadian banks, what's going on in the Canadian economy, how current interest rate policy is impacting the banks. And the banks are working with all of us, so they generally have a view through in their results of how we're responding to inflation, higher interest rates, etc. So a couple of Canadian banks report today. Anything there that you glean off that?
Yeah. So two banks reported. For one, the results are a little confusing, just trying to figure out some divisions after a recent acquisition. But generally speaking, your point is a good one around interest rates and the lag effect of monetary policy. So higher interest rates have eventually been finding their way through the bank earnings. And we're not talking about net interest margin here, we're talking about loan growth, and we're talking about some delinquencies for credit. About those two things; loan growth is a little sluggish, and then, on the delinquency side, they measure this on how far past due you might be, 30 days, 60 days, 90 days, and some of those statistics are creeping a little bit higher. I think importantly, the way that the bank accounting works is that they have to set these big provisions for credit based on what they foresee in the future. So the banks are ahead of this to some degree. They've known that the economy is going to slow down, so they've taken the provisions. But you can see it in some of the delinquency numbers that they're starting to pick up a little bit. I think what that shows is, going back to that general interest rate commentary that we've been on around how they bite, in the next 3 or 6 months, there'll be many consumers looking forward to a decline in interest rates. The bank of Canada has likely been successful here, and you can see some of that pressure could be alleviated as we get into the back half of the year with lower interest rates.
Yeah, we actually did get the Canadian inflation number last week, and it actually came in below expected, after seeing a lot of data around inflation out of the US and UK, where things — at least early in the year, through December and January — were looking a little bit hotter on the inflation front there. But when we get to Canada, the number looked pretty good.
Yeah. And it does show the difference in the United States, where you lock in your mortgage for a very long period of time and you maybe haven't felt higher interest rates. In Canada, there are pockets that are definitely feeling they would welcome some relief.
You're looking through those results — and again, they just came out this morning, so I'm sure you haven't done your complete deep dive through, or maybe you have. I think back to where mortgage rates bottomed somewhere in around early 2021. No, 2022, sorry. Well, they stayed low through that entire period. If I go back to 2021, you get a five-year mortgage at 1.5 or 1.75%, and a lot of people locked in at that point for 3, 4 or 5 years. So then you come forward, you start to see now maybe the first signs of some of those maturities. In 2025 and 2026, you'll see some more of those maturities. Are they talking about their credit books and when stuff is going to have to basically reset with higher rates, or they just use the all-encompassing figure of provisions for loss or estimates around how much of their book will underperform? Or do they get specific on that?
No. If they don't get specific, the questions are definitely asked. So the first thing is you have your fixed-rate mortgages. Five years ago was 2019 to today, and those are not crazily different in terms of interest rates. Where the rubber will hit the road is end of 2025-2026. That's where you'd like to see interest rates lower for these big cohorts of mortgages that will renew. But when you're having discussions with the banks, you're saying, what does the delinquency look like on fixed rate? Not surprisingly, that's a little bit lower because the rates are fixed. Then you have two types of variable rate mortgages in Canada. You have one that's a fixed payment — so you've been paying less principal as rates rose and you haven't necessarily felt the same type of tension yet. And then you have variable payment mortgages where you are feeling a little bit more of the tension. And you can see delinquencies pick up ever so slightly in those areas. And then you get into auto loans, credit card loans, unsecured personal credit. You go through the whole categories. And not surprisingly, if it's unsecured or if it's felt the burden of higher payments, the delinquencies are a little bit higher than they were. When all the analysis looks at those big cohorts of when mortgages are coming due, you would prefer the bank of Canada to remain quite vigilant now so that they can bring rates down at the end of this year and into 2025 when the bulk of those mortgages are renewing. And then when it comes to renewing, we all focus on how much will the payment be up. Incomes are also up. There has been income growth. Everything costs more, from groceries to you name it. But there is a buffer of better income growth as well for when this takes place.
Yeah, something we'll continue to watch. And the other big banks report through the remainder of this week, so we'll maybe tackle that next week. The thing that does hit this week only is the RRSP deadline. This used to be a much bigger thing. I remember my first job in the bank. I worked in the call center and the March 1 is the deadline, most years. On a leap year though, it’s February 29. Don't forget that. 60 days into the new year. So the 29th is 60 days in. So a little reminder on the broadcast here. But you could run right up to midnight on March 1. And sure enough, we were all sitting there, extra staff in at the call center and we were taking the calls and the contributions right up until midnight. And if you worked in a bank branch back then, hordes of people coming in right at the last minute to get their tax slips. Now things are much more planned out. People generally dollar cost average. They’re regularly investing through the year to make sure they maximize their RRSP. But Stu, is RRSP still something that people, in your opinion, should think about?
The benefits in your financial plan are definitely helpful. I always go to the CRA website and have a little peek at how much I can contribute to make sure that I've done enough. It wouldn't surprise you that I do have regular monthly contribution, but I don't always get it all nailed. So I go to the CRA website and they give you the number you're allowed to contribute. So I like to take advantage of that tax assistance of writing the contribution off. And yeah, I think it's a great thing to keep in consideration, but you now have all these tools that you don't have to get it all in. You can contribute through the year; you can invest through the year versus, a while ago, it used to be much more all contiguous. It all had to be done at the same time.
Yeah, I think we have a lot of younger listeners to the program, and not everybody but younger people are more likely to be working in a do-it-yourself environment or on a platform that doesn't necessarily provide a lot of advice to them. So one thing, if you are young and you're working and you're generating income, generally an RRSP is a pretty good way of sheltering your investments. So get the right advice or do the reading on it to see if it makes sense for you to make that contribution, because one of the things we talked about — I think just maybe about a month ago — was the whole idea of starting early and the value of that and the compounding over years and years as well. Compounding works even better when you're not being taxed on it. So that's when it gets super powerful.
100%. I remember my last year university, I took a course on tax, and the professor said, the government is your partner in everything you do. So your relationship with your partner is defined by these rules, and you should take advantage of them as best you can.
Yep. And I know many of our partners with the Canadian government are regular listeners to the podcast. So we say a big shout out to our pals there. And again, RRSP, TFSA, the new FHSA, first time home buyers’ savings account. So all of these things are designed by governments. They're government policy, and it helps us save and allows us to shelter some of that money to save for specific things or in particular for retirement. So all good stuff there. So, I'm heading over to Europe right now, and I was reading an article this morning about the Granolas. Do you know the Granolas?
No, I haven't heard that one.
Yeah. So this is a term. This is the Magnificent Seven of Europe.
Okay.
Now, don't ask me to rhyme off all of the Granolas. The Magnificent Seven, I can generally get most of those, at least six of them. If you listened to the podcast, when we've had Dave Lambert on who manages money over in Europe, he talks about the big drug companies and they're a big part of the Granolas. So GlaxoSmithKline and Novo Nordisk and all those. And then you've got your fashion brands, which we've talked about in terms of looking a lot like technology companies in the way that they innovate. So they make up a bunch of that. But similar to the Magnificent Seven in the US, if you look at the gains of these eleven stocks, they pretty much make up what's driven European markets to all-time highs, just like the US. So it's a similar dynamic playing out. A very narrow market. But last week — I started with the Granolas and we'll go to the Magnificent Seven — maybe the leader of the Magnificent Seven, at least from a performance standpoint — I think the third biggest company market cap wise as well — Nvidia released their earnings last week and what did you make of that whole announcement? What do the numbers look like? And then what happened to the stock after the earnings report?
Well, the stock went up considerably. There was a lot of commentary. I was early in my career during the 2000 period of time, and it had been a while since every investment eye was glued on a company's report. And that was certainly the case for Nvidia. That has some implications, I think, for long-term investors. But in the very short term, the results were very strong. Revenue was better than expected, the stock was up strongly. With all these discussions, which often happens during these big periods of time when there's a major change, the enthusiasm and excitement for this massive change that is likely coming, and the resources and the capital that's going to be invested to try and seize this opportunity against «are we overly enthusiastic in the valuation»? It's like the teeter totter. Or Warren Buffett would always talk about Aesop’s fables. How many birds are in the bush? How much cash flow is in the bush? When is it coming out? Will there be enough to justify valuation? So the biggest question around periods of time like Nvidia and others is will there be enough revenue and cash flow to justify the enthusiasm? It could still be a fantastic outcome, and that may or may not be the case. So that's what people are debating ever since.
Yeah, and I guess when we look historically at these things, the market tends to get ahead of itself. There's an enthusiasm and energy that's built up and momentum built up in the market. But we go back and look at previous big booms — the railways back at the turn of the last century, the advent of computers and big core brands back in the 60s and early 70s, and then through the Internet — these things all played out from a business perspective as really important things. But the stocks ran way ahead and then had a period where they had to check back. We're not going to predict that that happens with Nvidia, but as we did on a podcast about two or three weeks ago, we were talking about how you sometimes look at these companies — I think we were talking about Shopify, from a Canadian sense — that you can have a spectacular business that builds a stock to a very high valuation, and then the business can continue to be spectacular, but the stock can't match it because it can only go so high. The law of large numbers comes in and it's just tough.
My partner Doug says: sometimes the horses go on the track and sometimes they go in the barn. There's lots of great horses. So trying to match up that: when will a good company be a good stock, rather than just being a good company?
Except this podcast. The listeners just listen and they go, how can they get any better? How can Stu get any smarter? And there he is the next week. Stu's days is better than ever. So maybe we're one of those exceptions to the rule. And hopefully for anyone who owns Nvidia, it's an exception as well. So let's just finish off in terms of words of wisdom. That's what we always want to provide. Warren Buffett. I know someone that you think very highly of, and when we could see your wall on the video, we could see all the Buffett quotes in behind you. But he had his annual letter. Anything in there that really caught your eye this time around and something that the listeners might enjoy or get some benefit out of as well.
It's impossible not to be a fan of Warren Buffett and be a capital markets enthusiast. There's probably been no better educator to how markets function than him over the years, and this letter was case in point. It had a wonderful tribute to his partner, Charlie Munger. Even in the tribute, it outlined the difference between buying a cheap stock that isn't a good long-term compounder — maybe the valuation returns to normal and you make some money, but then you have to go find another one — versus these businesses that are just compounding at high returns on capital for long periods of time. And then the letter itself, after the great tribute, was also filled with all things about this water-on-stone approach to investing that has benefited Berkshire shareholders extremely well over time. Even if the returns don't match some of the early spectacular returns he's seen — going toe to toe with the S&P for a long period of time. One of the comments that struck me as interesting, he was talking about Burlington Northern, the railway they own. Like anything, you get fixated with the earnings that come from something on a quarterly basis. I think he estimated — it was likely rough math — that it would cost $500 billion to replace a Burlington Northern if you went out to do it today. So just a great reminder that when we own good businesses, the odds of them compounding for us over very long periods of time are very high.
Exactly. And that's the way you want to think about investing. And Warren is placing money all the time, is he not?
Well, there's a lot of it, too. He's up to 170 odd billions of cash that's built up. That is the definition of fortress balance sheet, but they've been quite good at putting it to work over time.
A dollar cost averaging devotee, no doubt? No doubt at all. Okay, Stu, well, that was our first investment stew. Let us know what you think. Go and subscribe to the podcast. Give us a five-star review or a four-star if that's your view. But we like fives. We aim for perfection. If they let you do five and a half, we'll take that too. But Stu, thanks again for another interesting discussion and we'll catch up with you next week.
Great, thanks, Dave.