Hello, and welcome to the Download. I'm your host, Dave Richardson, and it is a subdued Stu’s days. Stu, I'm under the weather here. I think it's my fifth or sixth bout in my life with pneumonia, so the old windbag who appears on this podcast with you is a little empty.

I'm going to send some chicken noodle soup out your way, Dave.

That would be very nice. I could use that. My wife's away on a ski trip this weekend, so I'm alone and ill. It's just a depressing scene here, Stu.

You know, I can make you what my grandma used to do for me, a mustard plaster. Put that on your chest and your pneumonia will be gone in seconds.

Does that actually work?

A lot of different stuff comes out of your chest when you put the mustard on there. You can't put it right on your skin, though, because it'll burn. But, yeah, it works. It’s like Vicks on steroids.

I always wondered about that. Ok, I'll take both, Stu. We didn't do it yesterday because I was still in rough shape, but the good news is that I'm on the mend today and so are the markets. At midday, the Dow Jones was down a couple of hundred points and the S&P was down 20, and then somebody got up to speak and things got lively all of a sudden. What happened, Stu?

The Fed’s Governor Powell came to speak. And the constant debate of taking the punch bowl away or filling the punch bowl back up a little bit. Today was more on the side of filling the punch bowl. It's this endless tug in both directions and for markets, the fact that we have loaded all this monetary tightening into the system and will we slow down to the point that we have a recession or could it be a soft landing? I think the slowdown is discounted to some degree. But what people are wondering is, will the Fed be a little bit forward looking and say, we've put a lot of tightening in, maybe it's time to back off a little bit? And they certainly said today that interest rates are still likely to go a little bit higher, but it was maybe a little different than what they said at the last FOMC meeting, or at least it was taken a little bit differently. This notion that there are different phases of Fed tightening. There's the aggressive phase, and we're likely through that now. We're into a bit more of a tinkering phase. They didn't say interest rates were going to come down, but relative to where people's heads were at, it was a little bit more benign. You had rates coming down today— they've been coming down in the most recent weeks—, and then equities responded favorably to that.

And the bond move. Once again, it's been quite a move since, I guess, the October inflation report that came out. For the first time, you saw that year-over-year decrease and that kind of rollover. And we've come from 4,30% on the ten-year— you just mentioned it before we started— down sitting around 3,60%. So that's a pretty big move. So, let's play out the scenario that he discussed today. One of the big things that chairman Powell dropped, right in the last couple of seconds of his formal presentation— and it came back in the first question in the Q&A today— is the whole idea that December is now going to be a 50-basis point increase instead of the 75. And then, of course, intimating that they might let things flatten out for a bit into next year. So, under that scenario where we start to not increase rates as much and things flatten out, what does that do in terms of your mind as you start to evaluate earnings? Earnings, at some point, you'd have to think, in an economic slowdown, have to come back. But does this give you a little more optimism that earnings might hold a little bit better? Or does it play out in that scenario where, if we have a recession now, it takes away the specter of a really deep and dark recession and brings you back to that mild and shallow recession that would reset things, and off we’d go when we get through the middle of next year?

There are two or maybe three big disjoints that existed in the market. We talked about one last week, which was that short-term interest rates— you could get 6% on a two-year basket of investment-grade credit— so when the S&P was around 4100, which is not far from where it is today, 6%, if we roll that forward and we do a break-even on the equity market, the equity market is saying: no recession. When you overlay S&P earnings with things like the ISM or leading indicators, it would say that earnings probably need to drop a little. And then the third one is, when you overlay the slope of the yield curve— short-term interest rates being quite a bit higher than longer-term interest rates— this has been a big indicator of slowdown in the past. And again, when you looked at earnings estimates and overlaid them with the slope of the yield curve, it was saying that that disjoint will not likely persist. It either means that the short-term interest rates had to drop so that the yield curve went back to a more normal slope and the earnings outlook was correct, or earnings had to drop because the bond market was correct. And, through time, the bond market, because it's so much larger than the equity market, is viewed as the dog, and the equity market is viewed as the tail. And the saying is: the tail doesn't wag the dog. People tend to believe the fixed-income market more. But that's not always the case. There are other indicators inside the equity market that would not be consistent with recession— the relative strength of industrial stocks and financial stocks, and things like this. So it is a fairly confusing environment in the short term because of all these different cross currents. The one thing that does stick out though is that first point, when you could get a higher rate of interest on short term and a quite reliable fixed income, and that stuck out as being interesting. That's just the way markets do. That has changed even a little bit in a week because those rates have come down. So we're always monitoring and trying to do our best against those indicators.

Yes, this one bears watching. One of the benefits of being on your back in bed, at home, in your jammies, watching chairman Powell, is that you get to watch the whole thing— and very rarely do you get that opportunity. And one of the things, it was a chart that I had added into my investor presentation that I've been doing across Canada lately, about a month ago, because I stumbled across it in some of Eric Lascelle's work— and we will have Eric Lascelles on later this week to talk about the job market— and this was something different from unemployment or different from the labor report in terms of jobs added or jobs moving out of the market. This was actually looking at a very rare occurrence in the economy, but part of the problem around inflation is the number of job openings that are sitting in the US economy. And we'd seen some really nice movement on that— I guess you got to be careful how you position this—; say, nice from an inflation perspective. Obviously, you want to have lots of job opportunities in the market. But when there's several million more jobs than people to fill them, that creates a lot of inflationary pressures in the economy. And through August and September, we saw about two and a half million job openings get lost out of the US market. And the report out today on October was another three or 400,000 jobs come out. So he talked quite a bit about that being one of those signals; that maybe we're starting to see some signs that the job market is loosening up. And that's really what you need, to be able to get inflation down to that 1 to 3% range— down to 2 to 3% is where we're looking now—, and to take some of that upward pressure off interest rates.

100%. Eric and I were at our last investment policy committee having a discussion with the broader group, and the discussion was the speed with which the markets almost stopped talking about inflation and gone to how big will the slowdown be. And that's where the narrative around central banks comes in as much as their actions, because if things are slowing and the central banks don't appear to be concerned, then you're thinking that that will continue to slow. If they seem indifferent. If they seem attuned to the idea that their tight monetary policy has had an impact and are perhaps willing to adjust that, then you don't worry. Even though you know we're still slowing, you don't worry about how deep it's going to be because they've told you to not worry about it quite as much. I think they're still likely to err on the side of really making sure inflation gets back in the bottle because that's the best thing they can do for all investors, but acknowledging that things are slowing just gives investors that little bit of sense that they're not going to throw us right off the cliff here with tight policy. They're going to be at least aware of it. So I think that's one thing that's going on.

It's going to be really important for all, the overall recovery from COVID in general, and that idea that things normalize in the labor market. I think everyone's experienced going to a restaurant or even expecting to go to a restaurant that's supposed to be open on a Tuesday for lunch and it's not. It's open Wednesday to Saturday, only for dinner. Just seeing things normalized. Because this is one of those things that was really sent out of whack by specifically the COVID lockdown, all the spending and then the recovery. To see things normalize would be nice. And obviously the central bank banks have got their eyes on those numbers.

100%. And you see it when you talk to all sorts of businesses. We were sitting with a business before the podcast and we were talking about building pipelines, in this case. Canada is building two pipelines at once right now. They're building the TMX and the coastal gas pipeline and both are costing more money and both were slow during COVID for a variety of different reasons. But give or take— this was a comment that management made— there are 10,000 pipeline workers in the country on an ongoing basis. And because of the cadence of these two projects, we've ended up needing 18,000 for a period of time. And that just puts a lot of negotiating power on the 10,000. Until it passes. It’s not permanent. It's not like we've permanently changed how many pipeline workers we need, but in this very instance, they have the upper hand in the negotiation.

I'm sure chairman Powell eats at much better restaurants than I do, but I'd love my McDonald's drive-through to be open 24 hours again. It's been pretty tough when the kids want to snack late at night. I know you're a big McDonald's guy. I think my pneumonia was brought on by the fact that McRib is done forever. I got my last McRib on the last day it was available in the US last week, and I've been feeling down ever since.

That's the ribs with no bones, right?

That's right. Are you a McRib fan, Stu?

I'm just generally aware.

Saucy, tasty. Just like this podcast: saucy and tasty. A little bit of bite, from time to time. Okay, Stu, let's wrap it up. We're going to get to some Canadian banking stuff because there's a lot of news on that when we get back next week. But thanks again, and we'll check in for Stu’s days next week.

Great. Thanks, Dave. Hope you're feeling better.