Hello and welcome to The Download. I'm your host, Dave Richardson. And it is (S)Tuesday. Now, quickly becoming (Stu)ednesday, because we seem to be missing the Tuesday taping every week, Stu.

We would almost need a nickname for every day. We've been a little random recently.

Well, I don't know if we can do that because your parents named you Stu. I think it only works with Stu’s days, unless your middle name is Weddle or something like that.

Pardon the pun, but my mom would be happy with Sunday.

Very good. We may end up doing it some of those days because we're pretty busy right now. We were at a great event together yesterday. All kinds of fantastic speakers talking about the global economy, markets, everything that's going on, because, of course, it's a very uncertain time, might be the best way to say it. We plan to have a discussion about some of what we discussed yesterday with the audience, some of what we heard from the other speakers. But in the middle of our presentations, Stu, when we were up on stage together, one of the Fed board members came out and said some things that really roiled markets. Maybe you can go through what she said and how it changes the backdrop, or at least what the Fed is saying anyways— not necessarily what they're doing, but changes in what they're saying. And then if they follow through, what does it look like?

Yes, it's a great point. Governor Brainard came out and said that quantitative easing was going to end. Quantitative tightening is when the Federal Reserve starts to sell some of the fixed-income securities that they've purchased over the last two years. They have a variety of U.S. Treasuries and mortgage backed securities and a variety of things in their inventory, and not only are they likely to raise interest rates, but they're also likely to sell some of those securities, which should put some upward pressure on yields. The remarks yesterday are probably worth putting into context of the last two years of Covid, because when Covid struck, the message from the central bank was that we do not want what happens in financial markets to magnify the impact that was going to happen in the real economy. The Fed's dual mandate is unemployment and inflation. They thought that Covid was going to be a depressing event from a pricing standpoint. They were going to buy assets to preserve asset pricing and hopefully preserve employment. Fast forward to today, where we had a very strong employment report last Friday from the non-farm payroll, and we've had a string of them. You have the unemployment rate at very low levels relative to where it has been, which allows the Fed to then focus more on the second part of their mandate, which is inflation. What they're telling you now is that we're willing to risk some of the economic activity, because we're not as worried about employment at this juncture, to tamp down inflation. The debate around how much of inflation is transitory and how much of it is more permanent is lengthy. We certainly know that there's parts that are transitory. The used car pricing up 50%. There's a handful of categories that are not likely to repeat themselves at those levels. But any central banker, especially when they have the luxury of very low levels of unemployment, is going to make sure that it doesn't get into expectation of longer-term inflation, because while in the short term some of their actions cause volatility, we all want long-term inflation expectations because the economy can function at a better level if inflation is predictable; asset pricing is more protected, the terminal value of asset pricing is more protected in a lower level of inflation. Yesterday's news just really reminded people that the Fed has a number of tools at their disposal, higher interest rates, and as they start to sell the inventory of fixed-income securities that they've built up, that's another way for them to affect less accommodation in financial markets. There are three ways that you look at that. The first is, where have risk-free rates gone? We've seen those rise fairly dramatically in the last six months, but off very low levels. You still have a ten-year bond that’s sitting here today around 2.6%. The interesting thing from an inflation standpoint is that the thirty-year bond sits right on top of it at 2,62%. That really says that there's not a long-term inflation problem that the market is worried about. Then you have spreads which have widened a little bit, and then you have equity markets— we talked about this last week— that have bounced off of the levels from a couple of weeks ago, and they're not at highs, but they're also at levels that don't necessarily anticipate a slowdown in the economy. The last caveat on that point is that within the markets, in terms of where leadership has come, based on some of the Fed activity, you've started to see the defensive sectors do quite well— telecommunications, consumer staples, utility stocks. Those have been the leadership in the last couple of weeks as people have digested some of the words from the Fed. Meanwhile, some of the more economically sensitive names, particularly not the ones that are basic materials— and that's a whole different kind of discussion at this juncture—, things like housing, some areas of semiconductors, some areas of consumer discretionary, the stock market has worried about their earnings prospects either due to higher interest rates, higher energy prices, a little bit at the margin. You see the market at its absolute level not fully pricing in some type of concern, but underneath it, we're beginning to see it. I think there's always the movement and we're constantly rerunning scenario analysis on every business. What does this business look like if things are firing on all cylinders? What does this business look like in a bit of a downturn? While we've seen these businesses correct, I wouldn't say that they've corrected to all-out cheap levels. They're correcting to pretty reasonable levels in the context of interest rates. But that's some of the activity that we've seen in the market in the last couple of weeks.

Yes, it was quite stark, the reaction, if you look at the way stocks were moving yesterday afternoon. As soon as that announcement was made or released, you saw a real divergence and some stocks continued to go up. Many stocks sold off and went down, and you're seeing a continuation of that today— we're taping this on Wednesday, April 6. Stu, I just wanted to go back for the benefit of some of the new listeners— we got a lot of new listeners who are joining us, and thank you for everyone who started listening to us regularly, we're really happy with the growth we're seeing in the audience—, but for the benefit of new listeners, we've talked about quantitative easing on previous episodes of the podcast. So quantitative easing is when the Federal Reserve is buying bonds in the market. What that does, the supplies are fixed, the increased demand, of course, pushes up the price of the bonds, and that actually brings the yield down. There's an inverse relationship between the price of the bond and the yield to maturity. When the Federal Reserve says they're going to start selling those bonds instead of buying, you've got that supply and now the demand goes down and that pushes pricing down, so yields go up. That's one of the things we talked about with Eric Lascelles last week. We've talked about with several guests on the podcast about this whole idea that when the Fed was in buying, particularly longer-term bonds, they were artificially suppressing that part of the yield curve, while they had full control over raising the short end. This inversion of the yield curve was a little bit different this time than previous times. Anyway, I thought I'd just throw this in. One of the questions I really loved from yesterday that I thought you did a spectacular job with— and the audience did too—, about where the value is in the market just, as you went through, and what's had the positive reaction. Just in terms of the composition of those stocks, it just seems to scream Canada. If we look at the U.S. market, the S&P 500 is at a little over 30% technology. The Canadian market, you look at financials, you look at energy and mining stocks, about 50% of the TSX, or even a little bit more than that. Again, it just screams Canada. Now, you're the co-head of North American Equities at RBC Global Asset Management, U.S. or Canada? Is that even the right question?

That's another great point. Canada had its very glorious period coming out of the tech bubble, and that was a period where there were multiple cylinders firing for the Canadian stock market. You had a very attractive valuation when you began. You had a level of leverage in the Canadian consumer that was below average and was really at a state where it could expand, which was fantastic for domestic banking businesses. You had China entering the World Trade Organization, which was fantastic for a variety of our commodity businesses. The combination of a very strong domestic economy with these additional sources were very powerful for the TSX for probably five or six years. Today, you have tailwinds in a lot of these sectors, but it's a little bit different than last time. When we have a discussion around the Canadian banks, you have fantastic capital levels, you have average valuations, you have the benefit of higher interest rates to come. But you also have Canadian consumers that are more levered than they were in the last decade. The ability to take on new loan growth is not as high. You need to see a switch towards commercial lending. Eventually with higher energy prices and maybe higher interest rates, you also have to begin to worry about slightly higher provisions for credit, although we think that's farther out. Still not a bad set up in any stretch of the measure, but not quite as robust as it was in the 2000s. On the basic materials front, you have some very strong demand likely to come from the electrification of the global economy. But that's not an all-material story, that's a little bit more copper and some others oriented. On the energy front, you've had this big change in supply overnight due to the tragic events in Ukraine, which is benefiting Canadian energy now. You have decarbonisation plans to come, which will keep Canadian oil hopefully in the mix for some period of time. You could have an elongated cycle. But you always worry when you see high prices and you have politicians that are looking at some of the cash flows in different industries. Hasn't it been too far, too fast, and will something happen on that front? Too early to tell. I don't think that's a major concern here right now, but it's something that we're thinking about. We tend to think about Canada versus the U.S. as not the question in and of itself. It's more some Canadian stocks, some U.S. stocks, because the tailwinds and the headwinds are more stock specific or sector specific than they are one big market versus the other. Think about finding technology opportunities or healthcare opportunities, there's just an abundance of those in the United States relative to what's available domestically.

That's the benefit of managing money on a North American mandate instead of just Canada or the US. Going back to your mom being proud of you that had to be a big moment for her when you moved from Canada to North America. That was a big promotion.

That's right.

I know it happened many years ago. My mom got very excited when we went from being an asset manager to a global asset manager. With her friends, she was pretty good at the tea party when they had those conversations. I'm sure your mom was the same.

Yes. The first thing that comes to mind from my mom is her rubbing her fingers together, if I was complaining about something, and saying this is the smallest violin in the world playing just for you.

All joking aside, the thing we've always got to remember is how fortunate we are here in Canada or North America, overall. Stu, thanks as always. I'll see you tomorrow in Montreal where we'll get up on stage again. Thanks, as always.

Great. Thanks, Dave.