Hello and welcome to The Download. I'm your host Dave Richardson , and it is (S)Tuesdays. But this time on a Wednesday. Very busy, Stu Kedwell these days. Stu, you're in high demand these days.

It's a busy time, Dave. It’s supposed to be the last quiet week of the summer, but it's busy.

Yeah. Because it really isn't quiet and really hasn't been quiet in markets all year. All kinds of stuff going on. And then like you say, really everyone gets back and in a way not everyone, but a big chunk of people; that line in the sand, particularly here in Canada, where most kids go back to school that first day after Labour Day and things get just that touch more serious than they might have been in the summer. One of the reasons we talked about last week why markets tend to react, or make moves in September and October, as people recalibrate their thoughts. So lots of stuff to review today. Stu, why don't we start with one of your areas of expertise, which is the bank earnings? All the Canadian banks reported, and did you glean anything out of that? Any surprises? And then maybe we'll take it, and connect it to all the other stuff we're seeing in the background around rates and inflation and such.

Yeah. So all the Canadian banks reported. The numbers themselves were, you know, some were a little bit better than expectations, some were a little bit worse. Where they were worse, it was for areas that we already knew were quite slow; capital-markets related. You could see in all the deal activity that was slow and we've talked about that in the past. When you get into a volatile period, some of that activity slows down. There were some marks on some trading positions that impacted results. The good thing about those markets is you can't take them twice. So they tend not to repeat. Net-interest margins were better. Significantly better in some cases, and look to continue to get better. But, the debate that came out of the quarter, which is very similar to the market as a whole, is there's been a fair amount of tightening, and that sits inside the economy. There's no signs of its impact as of yet. For a bank, that means will provisions for credit be higher next year? They're expected to be higher, but how high? We went into this quarter knowing that there was not likely to be any conclusive evidence on that part going in. So you couldn't really solve that kind of itch that the market has around where provisions for credit go, where will business be next year? Capitalization was very good. As I say, net-interest margins expanding. All those facets were quite reasonable. But it really was the same thing that the market is thinking about in general is that we've had tightening. We're going to have a little bit more - I don't think a whole lot more - but a little bit more. And what will that do to the economy and earnings on the other side? We've talked about how price is kind of the arbiter of where earnings might be in the short term. As valuations come down, then you're getting compensated for a slowdown, which is a good thing if you're a long-term investor. That's when you want to think about putting some money to work.

Yeah. And Stu, if we now dovetail into the broader economy and some of the things we've seen just over the last week since we since we spoke. It just continues to be an unbelievable news flow. I guess that's what it is living in 2022, in this day and age. Stuff just comes at you like a firehose. But the chart that you sent me this week; you always send me something interesting. I like that, actually. It's almost like a birthday card every week in an email. But a really smart one. It was the chart on inflation expectations. And I know when I've been doing events with investors or advisors, I've had the same chart out. A little bit different format than what you sent me, to really highlight where those inflation expectations have been moving. Particularly since the middle of June when the Fed just did their first 75 basis-point move. Bank of Canada followed up with a full percent. Why don't you talk about that chart in terms of inflation expectations and how you read it, and what that means to you from a market perspective?

Yeah, well, it's a great point. You can look inside of a yield curve. You can compare a nominal yield curve, which includes inflation, and a real yield curve, which doesn't. And that gives you an idea about the market's expectation for inflation at different times and different maturities. If you look out on a one-year basis, the expectation for inflation, as calculated by the differences in these yield curves, has almost halved going into next year. It was thinking it might be north of six and now it's come quite a bit down. That pathway of the decline in inflation is going to be really important. There's lots of evidence that inflation is declining. Still positive, but declining. We've mentioned in the past, which I think is still the last kind of significant question on the inflation front, is wage growth. We've seen some wages get renegotiated here at still-healthy levels, and we'll have to see next year whether or not that comes off the boil a little bit. But nevertheless, you're seeing inflation migrate in the right direction, which the Federal Reserve is going to be very vigilant on talking about wanting to get the inflation genie back in the bottle. But they also at the same time say that they're data dependent. The evidence that these expectations that are now setting up inside fixed-income markets are correct will be the data that eventually allows the Federal Reserve to take to take their foot off the gas on tightening monetary conditions. We always thought we would see a healthy increase in September, but in all likelihood, we'll start to see smaller increments as we move forward.

Yeah. We saw Fed Chairman Jerome Powell’s comments from Jackson Hole last Friday really roiled markets. Markets have been really to the downside since then, because he used a very interesting word to describe where the economy was headed. And that was the word ‘pain’, which I think is just kind of a visceral image that he creates. That word, that pain. I think back to the old Star Trek episode with the Vulcan mind meld, with Spock and that creature that was experiencing that pain. That was one of my fears. But the analogy I've been drawing when I've been speaking to clients and advisors around the Fed, and what they're doing in terms of the talk and actions too, is parenting. I'm sure lots of listeners are parents. I'm a parent. I've got two teenage daughters. And they’re the great kids, but they'll get off the path occasionally. And we'll say, what's the best way to punish today? Well, the Fed, it’s raising interest rates and tightening monetary policy. For us, it's hey, we'll take your phone away if you go off course. And if we think back to last year, what were they at the Federal Reserve doing as a as a parent? Well, if we say, we're going to take your phone away, and then we don't; our kids go and do the same thing again, and we don't take the phone away. And we do the same thing again, we don't take the phone away. All of a sudden, the kids start to think, “Hey, Mommy and Daddy aren't serious. They're never going to take the phone away.” What's changed is that when the Fed raised rates 75 basis points in June, and followed up with 75 basis points, you saw the Bank of Canada raise a full percentage point. All of a sudden the parents got serious. They didn't take the phone away for a week. Now they said they're going to take it away for a month, and they took it away for a month. Now the kids are worried that Mommy and Daddy are so serious, maybe they'll take it away for two months next. And so they've got that credibility back. And that's why the chart with inflation expectations, I thought, was so important. Because that's a reflection, in a way, of the belief that serious steps have been taken. So like, wow, we're not going to let this get completely out of hand. When Mommy and Daddy have to be serious, they're going to be serious, and the kids better take notice.

Yeah, there's no question of that, Dave. The other stat that I would point to is the 10-year bond. Where we're sitting here, say at around 3% on the 10-year bond in the United States, which was not far off. It's actually lower than where we were in June, when the peak of the worry around inflation was in place. The 10-year bond is so important that it remained at a reasonable level. It's very important to valuation. We've talked about the two legs of the stool: the multiple and the earnings. It's very important to the multiple. But also, it is the indicator that the phone is being taken away long enough, right? If you didn't take the phone away, the 10-year bond would migrate to 3.5%, to 4%. It would be indicative of that, not just the phone, but the television and you name it, is going away for an extended period of time. So you're bang on. The Fed is going to be talking tough around inflation. And the 10-year, the longer-term interest rate, is really the sign of some degree of success on that front.

And I guess the next measure - and we'll have Eric Lascelles on in the next couple of days to talk about -is the jobs reports that are coming out over the next week. And some other economic measures that will hopefully, I think -- if we're on the bullish side of things--, continue to show signs of an economy that's doing okay, inflation that's peaked, and rates that have somewhat peaked.

Yep, that's bang on. I think we'll watch for the wage growth components of these statistics. Those will be very important. But containing inflation, even if near-term earnings are a little sluggish, gives you the confidence that the longer-term earnings picture will revive, and those earnings can trade at a reasonable multiple. That is the ticket to equity market returns over time.

Great. Well, a lot of great stuff there, as always Stu. Just for our regular listeners, we always thank you. We’re growing by leaps and bounds. So I'm glad people are listening and enjoying. Particularly Stu, you got to put up with me. But we've got a lot of growth in the in the listenership, and we do appreciate it. We really do hope that we're giving you a lot of information that's helping you make better investment decisions, and better financial planning decisions, because that's what this is all about. I told you at the front end of the summer that there will likely be a few more gaps in between episodes than normal, and that's kind of the way it played out. But next week, we cross Labour Day. We talked about the implications that that has for markets here. We're setting up our schedules so that we will be a little bit more frequent and a little bit more regular. Maybe even a lot more regular through September and October. So please continue listening. We'll have a whole gamut of fantastic guests from all around the world, including a continuation of (S)Tuesdays. And so, Stu, the message for you on all that is that the podcast host is getting serious. No more skipping Tuesday. I don't care how busy you are, you got to be on time to do your guest appearance.

As long as I have my phone, Dave. Someone takes it from me, then I'm in trouble.

Yeah, we'll figure out a punishment for you. The last time I checked, you're not a teenage girl, so that the phone might not be the best way to get at you.

Okay.

Take away your golf clubs. All right, Stu, thank you very much. And again, thanks everyone for listening.