Hello and welcome to The Download. I'm your host, Dave Richardson, and it is a 50% tariff Stu’s Day. Back early last year when the initial tariffs were put on, we did start charging briefly for the podcast a tariff. We quickly lost viewership and moved away from the tariff strategy. Which hopefully we'll move away from this time again, Stu. But between tariffs, bond yields in the US, debt levels in the US, we've set up a classic Stu's Views on the News episode of Stu's Days. So Stu, where do you want to start? You want tariffs, interest rates?

Well, why don't we start with tariffs?

OK, sure.

So everyone's likely seen the news on the weekend. Talks broke down between the United States and Canada, and there'll be higher tariffs. For how long and how it moves from here will be interesting to see. But certainly in the short term, it's a bit of a detriment for sure. Some industries will be affected if it's prolonged. And the government has come out and said that they'll be there to try and cushion that impact. Nevertheless, it will be an impact. And the second thing is just around the macro side. And it is interesting. I think the Canadian dollar hit its worst probably 15 months ago on Liberation Day. And I think the worst was about 1.147. I look at it not as cents per dollar, but the other way around. And today we're at 138, and this is not helpful news to the Canadian economy, but it only resulted in about a half a percent change to the currency. And certainly there's a lot of water to flow under this bridge in the next little while coming into midterm elections and ongoing discussions and what is taking place behind closed doors, what's taking place in the media. Those are things that we'll all have to sort through. But one thing that's worth considering, we've often talked about how company management, if you'll be worried about something, it turns out they're worried about it too, and they have plans put in place. And the one thing that did strike me about the press conference, particularly in the questions that followed, was the focus on the fiscal capacity of the Canadian balance sheet, like the Canadian government is positioned to assist in this environment. Not sitting there expecting that there would be a new trade deal, the amount of other trade deals that have been put in place, the Major Project office, the things that have been put in place. Regardless of what your political stripes might be, management has been focused on the challenge and how do we adjust things so that we're better positioned than we otherwise would be in this scenario. And so it's a great thing. We talk about central banks, you someone worry about the economy slowing down; they're worried about the economy slowing down too, worried about inflation. Companies worry about market share loss or this change or that change; they're worried about it too. So I thought that was the one thing that really struck me in the press conference and all the discussion we've had around this. There's more to come on this file, but there's been a lot done on other things. And I think that's likely why you're not seeing the dollar go back to mid-140s or something like that on a breakdown in this instance.

And that's actually one of the things that I caught, so I'm good. I've been learning from Stu over the years. It seems like I'm becoming more astute because I was looking at the dollar. In the street terms, we'd say 68 cents where she bottomed out last year. We were already back up by close to 73, and now we're a little bit above 72 cents, and that's not, as you say, as far back as it fell the last time. And what you're saying, that's reflective of a lot of different factors, but one would just be that when people look at the Canadian economy and the players directly in the Canadian economy, we've been thinking about this a lot and we're in a better position to weather this whatever way it goes. And so anybody analyzing what's going on in the Canadian economy would suggest the same thing, that we're in a better spot than we were in 15 months ago because the threat has been there and you're not going to just ignore a threat that could come at you at any time, particularly in the case of this particular administration.

Yeah, one of my lines is: necessity is the mother of invention. I think there's 19 projects sitting in the Major Project office. Last week, there's still a lot of things still to be sorted, but there was the discussion around the big hydro agreement between Quebec and Newfoundland. Again, there will be details that need to be hammered out, but necessity often plays big assistance in getting people to refocus on other things, and that's where we're at right now when it comes to the trade file and what have you.

I think one of the big things, and you emphasized this early on last year when we were talking about it— and again, you’ll want to follow Stu's regular appearances. We call them Stu's Days because you have a Stu's Day once a week, and that's pretty much the pace that we manage. Maybe we take a couple weeks off here and there, but we get 44, 45 in through the course of a 52-week year. But you can follow the podcast wherever you follow your podcasts, Of course, we're on YouTube if you're one of the people that maybe want to look at our mugs. But our mums are there, as we always say. But you can follow us on YouTube. But if you go back and you listen to what Stu was saying last year when we really had the first big realization that this was going to be an ongoing topic— and of course it started out heavy, heavy, heavy— was the split between the impact on the economy and the impact on the stock market, and that's evolved every time this flares up to be less of an impact.

No question. The Canadian stock market is not a direct overlay to the Canadian economy, unfortunately. There are private businesses that will be in some of these affected sectors, and they'll be challenged a little bit more than others. But the Canadian stock market has a different set of exposures than just the Canadian economy. Things like gold stocks and other things which have been quite strong in the grand scheme of things. And that's probably a segue to the other larger events. I'm writing my own segues, so I don't know what that means for you, Dave.

It would lean towards unemployment but it's probably better for the listener.

So gold has been quite strong. And there's been a couple of events in the last 2 or 3 weeks. The first was there was some intervention around the yen. And so that was the first event. And then the second was an announcement that the US Treasury, the way that they issue new bonds, and they buy back some, and there's a complicated process that goes on in funding the US Treasury, that they might make some adjustments to what they would do with longer-term bonds. And both of those are interesting. The first reason they're interesting is there's been a lot of discussion, obviously, around inflation. But the one thing that has happened in the last 2 or 3 months is that, one, the shorter-term inflation data has been a bit better than expected. And the second thing is when you look inside financial markets, the anchoring of inflation has been more stable than all the discussion around it. So we can look inside of different indicators, and you can get what they call the 5-year forward expectation on inflation. 5 years from now, what do we expect 5-year inflation to be? And that has been pretty contained. 2-3% bouncing around, but it has not gotten away from the market the way that the discussion might lead you to think.

Oil's been similar too. The spot price of oil has gone up significantly. But when you look at the futures chain out 18 months, it's higher, but it's probably not as high as you'd expect given the circumstances.

That's right. That's a great corollary. And so when you see rising the interest rates, they haven't really risen too much in the 2- to 5-year range, and a little bit more in the 10-year range, but they had started to drift higher in the 30-year range. And if you don't have higher inflation expectations, then you have what they call more term premium. And term premium could be due to all sorts of things. It could be just saying, well, if I'm going to give you my money for longer, I want a higher rate. And you could say, well, what are you worried about? I could say, well, I'm not worried about anything other than it's a long time, so I want a higher rate. Or it could be for a worry. Or it may not be for any worry, but people will speculate that it was for a worry. So, when you see very large fiscal deficits that we've seen in the United States— and people discuss some of their social security programs or what have you— the government, as an issuer, is very sensitive to the level of term premium that they have to pay. So, the two things that were interesting, one, in the Treasury's funding announcement, that maybe tipped their hand that they're a little worried about the level of longer-term interest rates. And also, when they went in to say the Japanese currency could be stronger, they worked with the Bank of Japan and the Japanese officials, and they did it in a manner that was quite protective of having to sell US Treasuries to do it. So in both of those instances, the market has said: they're focused on it, we should focus on it. And what does that mean? And the outlet has been higher gold prices. A slight weakening in the US dollar. Even Bitcoin had a bit of a better week. So you have all this discussion around the term premium, and maybe the Treasury suggesting their little concerned about it. The interesting thing is that real interest rates meanwhile have gone up. And real interest rates— and we've talked about this— are just on the other side of long-term averages. That doesn't mean they can't go higher, but you are now getting paid about 2.5% to 3% more than the inflation expectation, over the long haul. You may call it around 2.5%, depending on what term you want to look at. But that's not a bad real level of interest rates as well. So you get into all these discussion points in the market. Should they have just said, look, the real interest rate is attractive, interest rates will settle where they will, or do they augment the discussion by going about it in a certain way? And likely that discussion is going to carry on. And the other thing that we should also point out— and we've talked about this in the past— is it's coming at a time when the AI buildout is costing a lot of money. And they seem to be willing to pay higher rates as well. Last week, Google went to Australia and raised a bunch of money at 7%. And they've done it in Canada. Amazon did it in Canada. They've done it in a variety of jurisdictions. So investors are also sitting there saying, look, I see the real interest rate. It looks attractive, but there seems to be competition for the money now between AI and the government. And again, that's also not going to stop in the near term. So you've had more fluctuation in the bond market. This fluctuation receives a lot of attention— we've discussed this in the past— if you have a 10-year bond and the duration is 7 years, a 1% move in inflation or in interest rates, so if 10 years went from 4.5 to 5.5, that would impact the value of the bond by around 7%. And the movements we've been seeing have been 10, 20 basis points. So that's why you don't see the same movement in the actual price of the bond relative to the amount of discussion that you might have seen in the past.

So, Stu, I was out in BC last week in several small investor events, which was really great. We had a chance to actually engage and talk directly with the investors, find out what's on their mind. And we were talking about this, and I think just in what you said, it's important to remind people, as I was reminding them last week, that this is a market. They call it a market for a reason. There's a buyer and a seller. And that's why supply-demand dynamics come into play here too. If you've got a bunch of bonds flooding the market, which is new supply, and the big headline news last week was the US passing $40 trillion in debt for the first time. Clearly, if you're running up debt at the rate that they're running up debt, they're going to have to issue bonds. When I buy a Canadian government bond or US government bond, I'm lending money to that government. I'm lending it for a particular term, and I expect to get paid a certain amount. So when the government's issuing a bunch of bonds, and you've got then these hyperscalers, so the Googles and Amazons and the like, who are also issuing billions of dollars in bonds. That's a lot of supply coming to market. And we've good returns in the stock market. So where's the demand going to come from this stuff? And that in and of itself creates a problem for government bonds.

Yeah, so there's two things really to consider. The first is just the relative attractiveness of assets. As interest rates go higher, that becomes a more attractive spot for your capital than maybe common stocks. We can compare the valuation of the two things. And the second is the pressure that higher interest rates put on the government. We started the podcast talking about how governments think about all sorts of scenarios. Would the US government have to improve their fiscal deficit? Would they have to consider different forms of taxation? We're not in the point of discussing whether or not the US government is going to pay you back. It's just the implications that they might have to go into to keep those interest rates at lower levels. And many of those implications might slow economic growth. A fiscal deficit is expansionary. When they lower the fiscal deficit, even if it's negative, it's contractionary. If they have to put a sales tax or whatever the taxing might be, that means less money for you, more money for the government. So those are some of the things that come into consideration. And even general capital investment, while so far, the artificial intelligence companies seemingly have been willing to pay higher prices, at some point, there is some spreadsheet that says, hey, if we have to pay this, the math doesn't work as well on doing the investment. And so that's why it’s the balance between the two. And we've talked about the roles of fixed income in the portfolio. When inflation was benign, both headed in the same direction. Now we're at a point of time where the coupon and the real interest rate is more attractive, and it's a bit more of a teeter-totter, a bit more of a balance. So if the economy slows down, interest rates will look more attractive. If the stock market's booming, you might just get your coupon and deal with some volatility. So that part has certainly reengaged.

And that's better for most investors, right? Because most investors won't be 100% in stocks, they won't be 100% in bonds, they're going to build a diversified portfolio. They'll have some stocks, have some bonds, and then they kind of fulfill their traditional role in a portfolio. As you say, they move more like a teeter-totter, and that protects me if the economy does slow, and that's rough on stocks, or if the economy continues to be strong, then maybe I'm not getting the returns I'd like out of bonds, although I'm getting that good coupon when I buy already, but I'm getting more of a lift out of the stock market because growth and profits are going to be higher.

Say real interest rates are 2.5%. So I buy a 10-year bond, volatility goes up and down, but at the end of 10 years I get my money back. With the coupon I'm receiving, I'm going up faster than inflation. So my purchasing power is the same, plus if I put $100 into the bond, I get an extra $25 along the way. So now I'm getting a real interest rate. So even though blueberries— it's blueberry season, so I'm just trying to think of things recently that I've seen prices that surprise me— but even though those prices are going up, I'm getting enough from the bond to pay that and some more. So that's one of the big differences. And then, of course, the thing that we should probably also finish with around all this capital investment was another event that took place in the last week. Moderna. And Merck came out with a vaccine for melanoma. And as we worry about productivity and things that are the counters to higher inflation. These stocks were both up a lot and I don't know whether or not there'll be enough revenue to justify them, what have you. But science is going to use artificial intelligence, and the pace of discovery, every time the near-term focus on certain events and there's pessimism around them, we have to always remind ourselves that there is another cohort of people in there working to try and solve some large problems on our behalf.

Yeah. And that's got to be one of the reasons where we've come from an inflation perspective coming out of COVID, the impact that the war has had on energy prices and how that has perked things up a little bit, or at least concerns about it, that your longer-term view of inflation, which you spoke about, hasn't budged a whole lot, and you've got a lot of forces on the other side that could actually pull prices down or pull inflation down, and technology is always a big part of that over time.

Yeah, we use the teeter-totter, but that teeter-totter on everything is that there's pressures that push things certain ways, and those pressures then reverberate and cause maybe not immediately the same alleviating of the pressures, but there's two sides to every coin.

Yeah, now of course we're talking about the teeter-totter. There's the big teeter-totter in the playground, which I recall— I know that kids don't go out and play at the playground anymore— and what we obviously don't want to have happen is the one where the kid you're on the teeter-totter with he gets you all the way up in the air, and then instead of gradually letting you down, he just jumps off, and then you come crashing down to earth. And so we're not worried about that, are we? Despite the news, which is going to go $40 trillion, there's no real concern that we're about to have any kind of massive run-up, the bond vigilantes coming in and forcing the prices of bonds down and yields higher.

Well, I think in this case, rather than just two people on, or one person on each side of the teeter-totter, there's a lot of people on each side. And even the most recent movement in fixed income markets, it has gone to the fact that it is the market that is now setting interest rates at the longer end. So when someone comes along like Google and Amazon and they take capital that they traditionally didn't take, room has to be made for it. And then if those rates keep going higher, there'll be reactions. And we talked about reactions on whether or not I use the capital. Governments always have different things, different levers they can pull. Sometimes they make certain CapEx more attractive by giving you a depreciation holiday. Other times they might make certain expenditures more painful by taxing them a little bit differently. Again, when you come to the United States, the statistics around $1 trillion of interest— and interest is now as much as the amount they're spending on the military— and $40 trillion of debt and different obligations they have down the road, those statistics are always concerning. But then you also have to lay the total stock of debt up against the total stock of wealth. And those jaws have been widening. So there are abilities that exist out there. They're just dormant until there's a change. And of course, no government wants to be the one that has to make an adjustment to the spending side of the equation. But maybe that will come. And that would probably have a more significant impact on interest rates than some of this massaging around some of the different shorter-term impacts.

So, Stu, when rates go up, there's usually a direct impact in the stock market, and you've seen even over the last few weeks that some areas of the market have been affected more than others with what— and I think we should continue to point out— have been fairly modest increases in your 10-year Treasury yields. Even the 30-year that's gone up more is still at a pretty reasonable level.

No, for sure. And I think the government is very focused on it, not just because of their own financing needs, but housing directly feeds into mortgage rates, and housing activity is a big part of employment. So you have that impact. And then, from a valuation standpoint, if you think about the S&P 500 at 20 times earnings, a 10-year bond, if it's 5%, it also is at 20 times its earnings. So on the one hand, you sit there, you say, well, the S&P grows, so I pay 20 times, but I get growth. The other one doesn't grow. If I worry about growth, then the 10-year looks more attractive. If I'm focused on growth, then it looks more attractive than the 10-year, and that's the teeter-totter that kind of functions back and forth.

And then I think I've used this story on the podcast, but I was talking about last week the idea that you get to a point— we’re clearly not there yet— but when you get house poor. Effectively, the government becomes almost house poor. They've got lots of income, and they say they've got lots of facilities, but similar to when you buy your first house and you've got all this debt and then interest rates move up a little bit on your next renewal, that takes money out of your ability to spend money elsewhere. You're sitting at home having a can of beans instead of enjoying a nice dinner out. And the same thing applies for governments. They can't take money and invest it in other areas that they'd like to, to stimulate economic activity, or pay down debt itself.

That dovetails right back to where we started, which is the reason that the US is interested in tariffs, because it's a way of bringing in some revenue without adjusting the other variables that they might otherwise have to consider. So these are all interrelated discussion points.

That's right, which is again why you’re doing your own segues and just continuing on without my involvement has put a constraint potentially on my income in the future. But that's okay. We won't go there. Hey, let me just finish off with one thing. What do you think of this new Ted Lasso? Have you been watching it?

I haven't watched it. I've seen the reviews.

I don't know. We'll give you an assignment for the next few weeks to get caught up on that. I'm going to stick with it because I enjoyed the original and the characters are still there. But I make it akin to Happy Days. I think the first couple of seasons of Happy Days were very good, and then the characters became caricatures of themselves in a way. I don't know if I could explain it.

And then Fonzie jumped the shark.

And Fonzie jumped the shark. Exactly. Anyways, I thought I'd check that out with you because I was watching the one episode last night. But yeah, I mean, I think overall, in terms of your views of the news, it continues to be one where you want to watch. And of course, one of the great advantages, you're sitting there as the Chief Global Investment Officer at RBC Global Asset Management, so you're watching all this, and then you got a few hundred people or a couple thousand people who are watching this every day, and you seem fairly calm about it, but again, it's the kind of thing you want to pay attention to and think about, and there's a reason why you're sitting with pretty much on benchmark weightings across your asset mix.

I think that's a great way to finish. Risk is at the lower end, earnings have been extremely strong, so we haven't been negative on that event. But the change in the real rate of interest has been strong. And so there's lots to discuss both within the different buckets and between fixed income and equity. And for a long time, the positioning has been towards shorter duration, particularly credit, because if the economy is so strong, then the odds of getting paid back are quite high. And that's more attractive than longer-dated government bonds. So if you look at junk credit, investment grade, it's been quite strong relative to duration. But then as the real rate gets higher, it will chip away. As some companies' abilities to keep firing on all cylinders, and there will be a switch where all of a sudden that real rate starts to grab attention, and it might tug some marginal dollars away from others. The same in the equity market. There might be a period of time where people take some businesses that don't have strong earnings growth, that have been more stable in the past, and higher interest rates affect their valuation. But then the moment you worry about earnings growth itself, those stocks might become a bit more interesting. And some of the areas that have had strong growth might receive some questions. So we always think about general terms like how much offense is on the field, how much defense is on the field. How are the things correlated? Would you rather have your economy risk by taking credit or take it with some companies and looking at all the levers that are available inside of a portfolio. Right now, many of them are closer to home than kind of full throttle out on just one of the engines. And that's like touching the stones as you cross the river, just figuring it all out and looking for the things that might emerge.

Yeah, that makes sense. One of the other things I was talking about with the groups was the concentration of the major indices in the US around tech. You're getting at levels that you haven't seen in a while. So, just keeping a balance and making sure that you're thinking about diversification and where there's risk. So you say, I own stocks, or even, I own US stocks, but what kind of risk am I carrying? Am I carrying a normal risk, or am I carrying above normal risk because I'm just sitting holding a broad index instead of thinking about how I want to be positioned for where the index might move or where those different sectors of the index may move?

Yeah, I think you're always thinking about all those things. Sometimes it's easier to ask yourself, what would you regret rather than what you know will happen. If you make peace in advance. Credit spreads are extremely tight. So I would regret if we had massive ownership of something that was at a very tight level. So sometimes you have to just reverse the question and say would this bother me if I was wrong for 6 months on this? Those are things that also can be quite helpful in thinking through your portfolio.

That is a really interesting way of thinking about it. I think most people just think about the direct upside, and tend not to think as much about the risk and say, okay, well, I'm sitting here right now, and if this goes the other way, okay, here's where I'm going to be sitting, and I'm not going to like that. So maybe I'm out on a limb a little bit further than I want to be.

Yeah, you don't want to change your mind when something presents itself. You want to have been comfortable in advance that that might present itself. And so that when it does— if it does— you know what to do in your portfolio, which hopefully would be to add during periods like that. So that's why it's just this constant iteration of where is the attractiveness of different asset classes and what could go right or wrong. And how are we thinking through that?

So that is Stu's Views on the News along with uncommon wisdom from the oracle. The oracle of— what would we say?— Wellington? The 21st floor.

The 21st floor. This side of the table.

This side of the table. I've never had oracle thrown at me, but that's OK. Anyway, Stu, thanks again for catching up. We'll hopefully be able to schedule something next week and get on track for a big fall, because I think things are going to be pretty interesting as we head towards the US election. Still have this war to figure out, still have what ultimately ends up happening with these tariffs. So lots of stuff to keep investors on top, keep them on track, keep them invested, keep them moving towards retirement, all the things we love doing, which is why we do this podcast to begin with. And I appreciate all the support, because I know how busy you are.

Okay, great to catch up, and thanks to everyone for listening.