Full Comment - The end of affordability in Canada—and what to do about it

00:00:00.000 Hey, it's Anthony Fury. Welcome to the latest episode of Full Comet.

00:00:08.460 It has been a crazy year and a half for the economy. There have been a lot of people left

00:00:12.600 behind and a lot of people who made off like bandits. The stock market plunged. Then it soared.

00:00:18.660 Then real estate soared. Again. Interest rates are low, but inflation is not. The price of staple

00:00:24.360 goods like meat is soaring. Meanwhile, governments want to have a say in how we transition and

00:00:29.980 how we reset. How's that going to work out? Are things just going to get crazier? How should

00:00:35.580 you navigate the months ahead? Martin Pelletier joins us now, the perfect person for this

00:00:39.940 conversation. He's a portfolio manager with Trivest Wealth and a regular columnist in the Financial

00:00:45.080 Post. Hey, Martin, thanks for stopping by. You betcha. Yeah, great to have you. But, you know,

00:00:50.100 you can tell from the opening there, I've pretty much got it all wide open basically to ask you

00:00:54.620 what on earth is going on with the economy these days? And I'm sure you have a lot of people calling

00:00:59.420 you up and pretty much asking you that very question. Yeah, there's a lot of uncertainty

00:01:04.100 out there, especially given the ramp up in the very end with COVID and stock markets that seem

00:01:11.380 to be defying gravity thanks to massive liquidity being injected by central banks. So, you know,

00:01:18.820 younger investors have really, you know, have a good sense of a prolonged downturn as what happened

00:01:27.220 last year certainly came back in a quite quick fashion. And then you have older folks like myself,

00:01:35.560 Gen X or baby boomers, who have been more conservative with their balance sheets wondering 0.87

00:01:41.000 what the heck's going on with governments and households leveraging up again. And so there's a

00:01:47.700 lot of uncertainty out there. And so you're going to have to, you know, reposition portfolios,

00:01:52.800 I think, to reflect that uncertainty. And sitting in cash certainly isn't going to do you any good,

00:01:58.260 especially if you believe the inflation narrative as it's going to eat away at your savings. You're not

00:02:02.860 going to be able to meet sort of your goals and objectives for retirement. Yeah, well, let's talk

00:02:07.340 about that for a bit about inflation, because that was an issue that it materialized during the

00:02:11.300 campaign trail. A lot of the political leaders talking about the cost of living, something that

00:02:16.140 especially for people just getting by, it's making life all that much more difficult. What's fueling

00:02:21.060 this? Because I can't remember the exact stat, but it was the highest year over year that we've seen,

00:02:25.440 you know, I don't know, 10 years or something like that. I mean, we're looking at pretty high numbers

00:02:29.180 now in a lot of sort of basic staples of consumer life. Yeah. And so, you know, we have a cost of living

00:02:37.520 crisis in Canada, that's for sure. There's a couple of factors behind that. And it is happening globally,

00:02:44.820 not just here. And I think it's getting compounded here, given what's happening in our housing

00:02:49.220 market. So the first thing you have is you have, because of the Bank of Canada, making

00:02:54.980 credit readily available through printing money and providing that liquidity through to the banks

00:03:02.380 and keeping interest rates low. As a result, you're seeing, I read this morning that people in Canada

00:03:08.460 with fourth mortgages outpace those with first-time homebuyers in regards to buying homes.

00:03:14.520 Fourth mortgages. Break that down for me. What does that situation entail? What sort of

00:03:20.840 stress would they be under in terms of that? That's a lot.

00:03:26.000 Well, it just goes to show that people are leveraging and going all in on housing speculation.

00:03:31.600 And that's creating a real problem for first-time homebuyers who want to set roots,

00:03:35.620 especially in cities like Vancouver and the GTA. It's basically impossible to buy a home,

00:03:42.420 a starter home for young people. And that's a problem. I also read this morning that

00:03:47.700 in Toronto, the city itself has more cranes combined, more, sorry, more cranes than New York,

00:03:55.840 Boston, Chicago, Los Angeles, Seattle, San Francisco, and Washington all combined.

00:04:01.600 Wow.

00:04:01.900 So, yeah. And so we have a massive housing speculation being driven by, there are foreign buyers,

00:04:09.880 but Canadians themselves who are leveraging up and buying real estate for the sake of

00:04:15.160 it going higher. And you can't blame them because if you're looking at the Canadian stock market

00:04:19.960 over the last 10 years in US dollar terms, it's only posted an annual return of 3.7%.

00:04:27.720 And so Canadian investors are, well, you know, I'm going to make 20% a year in my housing. I'll just

00:04:32.720 keep doing that and keep leveraging to do so. And that's creating a cost of living crisis in this

00:04:39.100 country. And that's driving inflationary pressures in this country. And then there's things that are

00:04:44.300 happening globally that are starting to take root here. You've got energy crisis that's developing a

00:04:50.980 supply chain crisis and an evolving labor crisis. So you throw that all together and you're starting

00:04:57.820 to see inflationary pressures that are not being reflected by central bankers in their stats that

00:05:04.360 they're providing to consumers where, you know, we're seeing it on boots on the ground.

00:05:09.560 Yeah, I've certainly had people email me. I've seen people tweeting at me saying, yeah, I'm going out

00:05:13.580 doing grocery shopping for family four or five or what have you. And it used to cost me, you know, whatever the

00:05:17.880 bill was, I'd be paying $200. Now I'm buying the same stuff and it's costing me $240, $250 or what have you.

00:05:23.300 They're seeing that. And Martin, I understand there's a bit of a debate among people who are just sort of

00:05:27.740 watching the economy, various economists, and they're saying, oh, this is just a temporary thing.

00:05:31.600 Others saying, no, this is caked into the system now for quite some time. For those people who are

00:05:36.060 concerned, I mean, Martin, would you tell them, well, you know, don't worry, just ride the wave and things

00:05:40.580 are going to be okay coming up sooner? It's like, no, this is actually a reality and this is a challenge

00:05:45.940 that may get worse. What do you think is transpiring here?

00:05:49.440 Yeah, this is a real threat. This is something that has to be taken seriously. I think this is the biggest threat

00:05:55.280 since 2008 financial crisis. And central bankers and governments don't want you to realize it because

00:06:02.960 it will hijack an agenda that I believe is directed towards climate change. Now I'm a believer in

00:06:09.880 climate change, 100%. But it's an all or nothing strategy that's directing trillions of dollars of

00:06:16.840 capital towards converting systems towards renewables and infrastructure, which again, I agree with,

00:06:24.840 but that has resulted in a mass underinvestment in supply of investment in supply on oil and gas,

00:06:33.540 for example, which is 85% of the supplies, 85% of the global energy needs. At the same time,

00:06:39.780 you have COVID disrupting supply chain channels, and they're resulting in freight costs and container

00:06:46.480 shortages, some of which will be permanent. And then you have labor that is demanding increases.

00:06:53.360 And, you know, I also read the other day on Twitter that McDonald's is paying $17.50 an hour,

00:06:58.220 which is good. I mean, we need to see higher wages. But that's in itself, all of those combined

00:07:05.060 are going to drive inflation higher, going to make it much harder for families to get by.

00:07:12.660 And at the same time, governments and power are saying that's not a problem. We're going to keep

00:07:17.520 spending all this money on climate change, and it's going to only exasperate and create more troubles

00:07:22.500 in the energy space. And you're seeing that happen in Europe right now and Asia, where they're fighting

00:07:28.880 over spot LNG. And gas prices are $27 an MMBTU, compared to $3 here in Alberta, and $5 to $6 in the US.

00:07:43.020 And their Citibank came out saying that it could go to $100 an MMBTU. And if you apply that to,

00:07:48.960 let's say I took that for fun and applied it to my home heating, that would be $2,000 a month,

00:07:53.640 just to heat my home. And so we have to be careful about that. And there are things that

00:07:59.940 we can do to protect ourselves. Okay, so break it down a bit more simply. I'm going to ask you

00:08:04.900 some questions from a non sort of savvy mind here. So we talk about renewables and everything. And

00:08:09.500 I'm a believer that well, it seems like you know, the industry is kind of organically heading that

00:08:13.020 way in some direction, lots of R&D being put into it. I'm totally, you know, fine with that. I mean,

00:08:17.400 the free markets dictating that I'm a little uncomfortable with the government talking about as Trudeau

00:08:21.460 does, I got to phase out the oil sands, and they're just tossing so much money into it and

00:08:25.180 sort of forcing it by government fiat. But then I guess one can still shrug and say,

00:08:28.940 well, it's just one sector, it's just a few billion here and there. But you're actually saying

00:08:32.260 no, this sort of this all in on on sort of climate policies and pushing this sector is in fact having

00:08:40.400 distortionary effects beyond that sector. And that the fact that we are pushing so much for this

00:08:45.760 climate economic issues and climate financing, that that is actually fueling, you know, this cost

00:08:53.640 of living crisis. Absolutely. And, and so I mean, I think that that we can still take an aggressive

00:09:01.440 approach dealing with climate change, but just take a different approach and what's being done now,

00:09:07.940 rather than attacking the supply side. So you've got increased regulation and protesting that's

00:09:15.280 scuttling pipeline and infrastructure on purpose. And so as a result, you have at and at the same

00:09:24.700 time, sorry, you have ESG and capital from pension plans and endowments moving capital outside of

00:09:32.860 resource oil and gas resource development. And so you've got a mass under capitalized oil and gas

00:09:39.860 sector globally, that is certainly not going to be putting that money back in the ground because

00:09:45.500 there just isn't the capital to do it. And so these companies are taking cash flow and buying back

00:09:50.220 stock and paying down debt, which in some cases, it can do that within four years. So the return on

00:09:55.760 investment from deploying it through financial engineering is much more attractive than putting

00:10:00.840 it in the ground. And so as a result, again, you have 85% of the global energy needs being supplied by

00:10:08.380 oil and gas. And as a result, it doesn't take a couple of, you know, it doesn't take very many

00:10:14.840 barrels to swing the price dramatically higher. And we're seeing that right now. And so, you know,

00:10:22.540 as an individual or consumer, when your power prices and gas and gasoline prices and home heating

00:10:29.140 prices, natural gas go through the roof, you're not really going to care about where that's coming

00:10:35.020 from, whether it's from renewables or, you know, from wind or solar, you're just gonna look at your

00:10:40.440 bill and say, Oh, my God, what's what's happening here. And so, yes, we do need to make some serious

00:10:46.140 changes in regards to the infrastructure and how we consume. Absolutely. But the way of going about it

00:10:55.400 by attacking supply side is is outright dangerous. We saw that in the US and Biden. I mean, he's

00:11:02.180 implemented a number of policies, anti fracking, anti drilling policies. And as a result, now he's

00:11:07.200 going to OPEC asking OPEC to increase production rather than the shale producers domestically. And so

00:11:12.760 and in Europe, you have Europeans held hostage by gas problem in the Russians with Nord Stream 2. And

00:11:19.300 and as a result, you know, you're seeing what's happening there. And so we need to take a different

00:11:23.860 approach, an approach that will get us to net zero, but at the same time, isn't going to really hurt the

00:11:29.980 middle class and low income. Is that approach just letting the free market do its thing? Because

00:11:34.640 there's obviously people out there who want to go in the direction of green revolution or what have

00:11:38.840 you. So well, there you go, the consumer, you know, asks for what they want, they get what they want,

00:11:44.220 money talks, and there you go, we don't necessarily need all these sort of international agreements and

00:11:49.340 deals that are basically pushing us, you know, sometimes the way they talk about it, pushing us by

00:11:53.920 gunpoint to do these things. So we need to change consumer behavior. And the best way to scale out

00:12:01.640 is through cost and convenience. And so electric vehicles, for example, are a good longer term

00:12:09.200 solution. However, they're very expensive, and they're not very convenient. And so and we don't

00:12:16.640 have the infrastructure to support it. So, you know, when you had the rollout of the iPhone,

00:12:21.240 you had the internet and the infrastructure already built out. And it was expensive, but you know, not

00:12:28.800 in affordable. And it was a game changer, because all of a sudden, you had all of this power and

00:12:33.360 convenience at your fingertips, you could do all of these amazing things. So we need to find a way to

00:12:38.160 do the same thing with electric vehicles. And we need to change consumption patterns. And that's going

00:12:44.180 to be tough now with COVID. Getting, for example, more people to take public transit, which I'm a huge

00:12:50.000 proponent of, and using said public transit and converting it to electric is, again, outstanding.

00:12:58.560 But how are we going to get people on buses when we have we're having a tough time getting people

00:13:02.980 vaccinated, and getting people feeling comfortable going back in public transit again. So we've had

00:13:09.320 some challenges. But, you know, you know, the approach we need to take is, you know, how do we

00:13:14.640 change consumption patterns, instead of attacking oil and gas supply.

00:13:19.900 Now, Martin, when you talk about a cost of living crisis, I also mentioned in the opening,

00:13:24.200 those people who have lost their livelihoods, the people who have lost their life savings,

00:13:28.280 I know there's been data out that shows that it's not a sizable percentage of the Canadian population

00:13:34.080 who is in that situation. There was a lot of doom and gloom headlines early. And when you're told,

00:13:38.040 you know, don't go to work and so forth, first lockdown, that was really scary. It's,

00:13:41.940 it's, I guess, nice to know that this is not a sizable percentage of the population in this

00:13:47.500 situation. But it is still a percentage of the population, there is still a cohort of people

00:13:53.540 out there, a large number of people out there who have been left behind, and who I feel like are

00:13:58.180 still going to be left behind. Yeah, and we saw that in the election, the liberals, and I'm trying

00:14:05.360 to leave partisan out of it, but the liberals led with an agenda of climate change versus cost of

00:14:10.340 living. And they got reelected in, in big cities like GTA and Vancouver, where there is a serious

00:14:16.580 cost of living crisis. So that tells me that the majority are still focused on real estate,

00:14:22.220 and driving real estate higher, and having policies will that will actually make the cost of living

00:14:27.660 worse for younger people. And, you know, you that's a serious problem, because the next generation 1.00

00:14:34.400 are going to be the innovators, the disruptors, they're going to enable us to be competitive on

00:14:41.260 the global scale, to increase our level of productivity. And when you have a situation where

00:14:46.280 they can make 25 to 50% more income by moving to Denver or Austin, Texas, and have a house that's

00:14:55.400 half the price, they're going to, they're going to do that, they're going to take it under serious

00:14:59.240 consideration. So we have the real risk of losing, losing young people and the investment for the

00:15:06.300 future, for the sake of, of investing in a non producing assets like residential real estate.

00:15:12.900 That's crazy. And we're allowing it to spiral out of control. Now, it's a real tough problem. And I

00:15:19.400 don't have any solutions. And that's a, that's a tough thing to do. From a government policy standpoint,

00:15:25.760 but it's one that certainly has to be recognized. Are we just addicted to this cheap debt right now?

00:15:31.120 Because as I'm sure you know, well, in Vancouver and Toronto and other cities, it's, it's the big

00:15:35.280 conversation and all the papers and the glossy magazines and neighbors, they're just, Oh, did you

00:15:39.100 see what that house went for? Oh, did you see what that one went for? And then of course, my parents

00:15:42.960 and in-laws, they'll tell me stories about 18% interest rate that they paid a number of years ago,

00:15:47.740 a couple of decades ago. But meanwhile, people in my age category, when they sit down for beer,

00:15:52.100 they go, I can't believe I locked in at 3.7. I'm such a fool. Why didn't I could have locked 0.99

00:15:57.220 in at 3.1? I mean, we're almost kind of fighting over table scraps compared to how things used to be.

00:16:02.980 And potentially, I guess how they could become.

00:16:06.620 Yeah. And so one of the things that we have to be cognizant of everyone's saying that,

00:16:10.460 hey, look, governments are different than households, because they don't have to pay that

00:16:15.060 back. I mean, or economists look at academic economists primarily will say, hey, our debt

00:16:22.460 servicing costs are so low. But when you combine household and government provincial debt in this

00:16:27.500 country, we're right behind Japan, and we're actually worse than Greece. So we we've gone all 0.96

00:16:32.560 in on leverage. Now, the problem is, is that the Bank of Canada is going to be very reluctant from

00:16:38.060 raising interest rates, because that's really going to hurt the economy, given how we've gone all in

00:16:43.600 on levered real estate. And and it's also going to hurt the Bank of Canada, because they're going

00:16:48.720 to have to rely on actual buyers, not the Bank of Canada putting money in buying their debt to support

00:16:54.960 the largest deficit in the OECD. And so it creates a real problem. Now, the issue is, is that if you

00:17:02.880 look at what's happened in Brazil, is they've the currency was devaluing. And so they had they had no

00:17:10.160 choice but to raise interest rates because inflation went to 9% and they raised interest rates to 5%

00:17:15.520 and it's wreaked havoc on their economy. And so that is a concern for Canada is if we lose control

00:17:23.200 over the currency and oil is not there this time around to provide a backstop, then the Bank of

00:17:30.080 Canada may not have any choice but to raise interest rates to support the dollar. And as a result,

00:17:35.680 that's going to cause a lot of damage for those fourth mortgage people here that are larger than

00:17:40.960 first time home buyers who are buying real estate. And so we're walking a very fine line here. And I

00:17:47.440 don't know which way it's going to go. But as a wealth advisor to families, we say, hey, look,

00:17:55.680 why don't you take steps to protect yourself? Why don't you reduce your leverage if you have an

00:17:59.520 opportunity to or lock in that leverage, like you said, at a really low interest rate and look at

00:18:05.200 ways of diversifying your portfolio, maybe start taking some of that money off the table on real

00:18:10.640 estate and start looking at hedging yourself by investing in energy materials and commodities,

00:18:18.160 for example. And then at a very simplistic level, do what I did. I locked in my natural gas and power

00:18:25.280 rates for five years. I've never done that before. And so and if I'm wrong, I can you know, I can I can

00:18:31.120 do some changes there. But it's not going to cost me anything versus if if I'm right, and I didn't

00:18:36.720 hedge myself. Now you're talking about taking a very balanced and measured approach to investing in

00:18:41.120 your future. But what we've also seen since the pandemic is a whole new category of these cowboy

00:18:46.720 investors. There's this new website, a new platform out called Robin Hood that got very popular.

00:18:51.840 Lots of headlines out there, people wondering what's going on here, where young people are

00:18:55.840 are tossing a few thousand dollars here and there or more than that money that they have,

00:19:00.400 but probably shouldn't have or probably shouldn't be spending that way. They're going all in and

00:19:04.400 wild on these random stocks that that they probably don't even know what the stocks actually are.

00:19:08.800 And then they meet on these online forums, they say bye bye bye. And they kind of, you know,

00:19:12.720 pump it all up in a way that is, I guess, completely, you know, within the law for people to rally behind

00:19:18.000 these stocks in ways that seem totally disconnected from the underlying fundamentals. What's going on

00:19:23.520 there? Is that a thing that's still happening? Or was that just okay, these these kids, their

00:19:27.120 universities in lockdown, and they just want to have some fun with their 500 bucks?

00:19:31.600 There's always been that side of the market. And throughout history. And, you know, before these

00:19:40.160 meme stocks came out, I mean, there was marijuana, for example, and how it's going to change,

00:19:45.920 change the world valuations were completely unreasonable. So, and today, you've got meme stocks,

00:19:52.640 you've got clean tech stocks, that are you bought electric vehicle companies that haven't even

00:19:58.960 produced, produce anything that are large, any automobiles are larger, some of the main manufacturers.

00:20:03.840 And so, you always have those segments of the market. And, and, and, you know, that's,

00:20:09.440 that's no different than going to the casino and bidding on red or black. And, and, and if you happen

00:20:16.080 to get, you know, red, right, a number of times, you think that you've got it figured out until you

00:20:22.240 don't until something happens that you, you lose your money. And so the house typically wins because

00:20:28.000 you tip it, you don't know when to get out. And the longer you play the greater chance of you losing

00:20:32.240 and coming out worse or for wear. And so time is a great equalizer on when it comes to investing in

00:20:39.440 those sorts of things. Now, on the other side, there is a positive to it because it does encourage

00:20:45.840 some innovation. And, you know, we're getting blockchain that's come out of this. You've got digital

00:20:50.800 currencies that are really interesting. Again, very speculative, but I think that they're onto

00:20:58.240 something there and you've got clean technology that's really interesting. So you're getting all

00:21:04.800 that speculative money that's driving some of this innovation, some of which will stick around.

00:21:11.040 But as an investor, I don't call that investing. That's more speculating than anything else.

00:21:15.600 Do you find the very kind of nature of the economy may be set to shift in Canada? I mean,

00:21:20.800 we talk about people making these wild investments and buys and in green energy and putting tons of

00:21:27.520 money into it and so forth. And then at the same time, we're also talking about people who are having

00:21:32.320 trouble affording meat because of inflation and the price is going up. And I almost feel like we're

00:21:37.840 talking like Russian plutocracy territory here. I mean, I'm being very exaggerating. That's obviously not

00:21:44.080 the situation we're in in Canada, but you see beginning signs of a further divide. I mean,

00:21:49.360 when people basically talk about the split between the rich and poor, or perhaps you can categorize it

00:21:54.080 another way. Yeah. And so fortunately for a lot of younger people, they've got mom and dad

00:22:01.360 dad who have real estate and, and so, you know, they can, they can help. Um, and some, in some areas

00:22:09.600 like Vancouver, they can't because it's just, it's just gotten so ridiculous. Um, so for the younger

00:22:16.000 people in regards to, but you know, you're not going to want to live at home to your 40. Um,

00:22:20.640 you would think most not yet. Well, I got a 16 and a 13 year old and, you know, when they hit 20,

00:22:28.480 I'm turning off the internet in the house and maybe that'll be a motivator, but all kidding aside. Um,

00:22:36.160 so that is, uh, you know, for, for those who have mom and dad or grandparents who have exposure to

00:22:42.160 real estate through Gen X or baby boomers, that's okay. But for those who don't, or even immigrants 0.99

00:22:48.000 coming into the country, it's going to be real chat, really challenging, uh, for them to, to build

00:22:53.840 something. Um, especially when it comes to some of the anti, uh, uh, small business policy that we've

00:23:01.360 seen implemented with calling them tax cheats and, and not allowing for intergenerational transfers,

00:23:08.960 not allowing for dividends and to flow through to spouses who are both putting capital in. Um, and

00:23:15.280 so there's been an attack on small business and then, you know, the, the nail in the coffin was

00:23:20.560 COVID and the lockdown that really impacted these small businesses. At the same time, Costco was

00:23:27.280 allowed to, and Walmart were allowed to have open doors and, and that's very troubling. And so, and

00:23:34.720 immigrants typically have come in and started businesses that have, have grown tremendously and,

00:23:40.160 and hired lots of people and, and, and that's going to be a challenge going forward. And so we need to

00:23:45.760 find ways to, um, increase the level, the opportunities for, especially now where you've

00:23:53.200 got work from home and technology like Shopify, that's done phenomenal. We need to find ways to

00:23:58.320 encourage more of that. Um, so that, um, young people and, and, and new people to this country can,

00:24:04.560 can really, uh, innovate and grow and, and, and, and transform this country. And that's a real

00:24:11.040 challenge when you don't have that opportunity to, to get out of break that poverty cycle.

00:24:16.720 And I'll add to this is that, um, typically in the past, you would go to university, uh, to break

00:24:23.280 that or send your kids to university to break that cycle. Now kids are graduating from university and

00:24:28.720 there's no jobs. And, and so we need to address that as well. How, which, how are we going to

00:24:35.360 deal with poverty? How are we going to create opportunities for young people to, to get out of

00:24:40.880 their situation? Martin, I remember over a year ago during the first lockdown, or as we were coming

00:24:45.120 out of the first lockdown, there's a lot of questions about, okay, our small businesses,

00:24:48.320 they're going to be decimated, but then some people pushed back and they said, well, look, no,

00:24:51.520 really the companies that are going to go under the stores that are going to close,

00:24:54.960 those are the ones they were just hanging on anyway. I mean,

00:24:57.600 this is really just what's pushing them over the edge. We're going to see a period of,

00:25:00.800 of really, this is a period of creative destruction where yes, unfortunately people are going to lose

00:25:05.520 out, but then there's all these opportunities, these empty, you know, empty physical, uh, store

00:25:10.400 fronts and locations. And there's going to be all this money that's lying dormant and people are just

00:25:14.320 going to get out and they're going to start doing amazing, creative things. And we're going to see

00:25:17.360 this boom, unlike never before. And there was a lot of talk about that a year ago. And, and yes,

00:25:22.640 you're seeing some things open, but I got to say, by and large, Martin, that's not happening right now.

00:25:28.000 No, it isn't. And it's actually quite cruel to say that because, um, you know, if you have

00:25:32.960 businesses and I was a business owner and we sold, uh, our firm into Wellington Altus, uh,

00:25:38.800 which has been really good for us. Um, and you need size and scale in this market environment,

00:25:44.880 um, because the regulatory and the, and the compliance and all of the red tape, uh, has increased

00:25:51.920 dramatically, not just, not just in the financial industry and it's across the board.

00:25:55.920 And so we've become a nation of oligopolies. And, and so all we're going to do is further,

00:26:01.440 uh, increase the level of consolidation. And we're seeing that in oil and gas. We've seen

00:26:06.160 that in the financial services. We've seen that in telecom and that's terrible because,

00:26:10.480 um, from the innovator standpoint, cause I mean, and the small business standpoint, because that's,

00:26:16.400 that's the future. They like to say, we're going to challenge the status quo

00:26:19.920 to see businesses shut down because of lockdowns is not, uh, uh, uh, cleaning out of inefficiencies.

00:26:27.280 It's just pure outright awfulness. It's the word I only think to describe it. And so, um,

00:26:34.800 looking at, at, is that going to change? Well, okay. You've got massive increases in labor costs

00:26:41.680 and labor shortages. So if you're a restaurant and you want to start up a creative restaurant,

00:26:45.840 you can't find workers to work in that restaurant. Right. And you don't know if you're 0.67

00:26:49.680 going to get shut down again. Then you've got supply chain issues. You can't even buy a mountain

00:26:53.680 bike. So like, for example, there was in Banff, uh, like boots in the ground examples, there's a

00:26:59.040 neat little bike store out there and they're not a bike store anymore. They're doing bike servicing

00:27:03.280 because they can't get bikes because the big bike stores in Calgary have them all. And that's terrible

00:27:08.240 because now you've got a small business guy or a woman that, that, that was, you know, uh,

00:27:14.640 doing a, um, uh, a unique service to local residents in Banff. And then you've got the cost of those,

00:27:20.800 of all of these, uh, supply chain issues and are going to get it passed along. They can only pass it

00:27:26.240 along to the consumer so much because they can't compete against the big, uh, box outlets like Costco,

00:27:31.760 whose model is to, um, to provide, uh, these, uh, provide the, these goods at, or at, at their cost

00:27:41.120 and to make other money off of memberships. And so how are you going to compete against that?

00:27:44.960 And so, no, I don't think we're going to see that transformation like you just described.

00:27:49.920 In what way do you think the response to whatever is going on right now is going to be an organic one?

00:27:54.960 And in which way is it going to be a managed one? One when government attempts to direct it,

00:28:00.480 take it by the horns, lead it in a direction because, you know, to get edgy here, I know we're

00:28:04.400 not supposed to use these phrases, but the bank of Canada, they put out a couple of documents

00:28:08.080 talking about the great reset and how they see that, you know, now is an opportunity to

00:28:12.240 sort of harness what's going on. Just before the election, the liberal government quietly

00:28:15.760 announced something called a just transition, which is their program to, well, yeah, to phase

00:28:20.720 out the oil sands, to do what you were talking about, to basically micromanage, uh, the phasing

00:28:25.120 out of oil and gas and the introduction of, of their more favored, uh, green companies and technologies.

00:28:31.120 I mean, how do we, how do we make these things happen in a way that is, is consistent with

00:28:36.320 what the businesses, with the consumers, with the people want?

00:28:39.920 Yeah. I mean, I I'm, I'm in favor of, I like open source. I like it led from, from, from people on

00:28:47.200 the ground. Um, that's, that's where you're going to get the most efficient change, right. Rather than

00:28:54.160 top down, um, in our company, Wellington, um, Altus, uh, everything is open source. The best ideas come

00:29:01.120 from those in the front lines. And it, and it works its way up to the top. And as a result, we could

00:29:06.400 be highly disruptive and, and, and we're seeing that in our growth and the same thing in, in any other

00:29:12.800 industry. Um, I mean, you want to encourage that you want to, uh, remove the barriers for that rather

00:29:20.240 than saying, we're going to tell you where we're going to go. And so we've got this whole build back, better

00:29:25.120 agenda that, Hey, we're going to transform our economies based on the way we see it going.

00:29:30.800 Right. And that's going to be a really tough thing to do. And you're going to get a whole

00:29:34.560 bunch of unintended consequences. Whereas if you say, Hey, our main goal is to increase

00:29:40.800 innovation, disruption, and to increase the level of productivity. So we can compete on a global scale.

00:29:47.200 How do we do that? And consult with those on the front lines and get their ideas and then make it

00:29:53.440 really easy for them to do it themselves rather than spending trillion printing money and spending

00:29:58.720 billions of dollars or trillions in the U S to direct it a certain way. You're going to get a

00:30:03.360 lot of inefficiencies. You look at Canada, we had this massive infrastructure fund and it's been a

00:30:08.320 complete gong show. They haven't, they haven't spent anywhere near the money that they were going to

00:30:12.480 spend and where they spent it. We have no idea what it looks like because there's been no transparency.

00:30:16.800 And so, um, there's a balance between free market and, and government intervention.

00:30:22.400 Absolutely. We have to strike that balance, but having a top down lead is going to lead to all

00:30:29.040 kinds of unintended consequences. And we saw that in 2008 financial crisis in the U S.

00:30:34.080 And I think that there's a potential to see something, uh, along the same lines along with

00:30:38.480 an energy crisis. If we continue down this path. Well, again, let me use extreme examples here,

00:30:43.040 just how things can go when you, you know, in an exaggerated way. I mean, that is the history of

00:30:47.600 the 20th century. That's why that stuff they did in Eastern Europe from, you know,

00:30:52.160 the sort of early and middle part of it, they don't do it anymore because that stuff basically

00:30:57.440 led to poverty for most people, aside from the few people who did actually flourish from it.

00:31:02.080 So I find there's a Supreme arrogance from, you know, however smart the bank of Canada governor

00:31:06.240 is, or the deputy minister, the finance minister, what have you, how can they micromanage

00:31:10.720 the transportation logistics industry when there are people who have 30 years experience in

00:31:15.920 transportation logistics and the people in government do not?

00:31:21.040 You need to start listening more than talking. And, and, and we're just, we're seeing more of that,

00:31:27.120 of that level of, of parenting where we know, and we're going to tell you exactly how things are.

00:31:33.280 And the more they've gone down that path and the more removed they are from society. And so,

00:31:38.160 unfortunately, I mean, there's a lot of really good people in academic academia doing some good

00:31:44.080 things, but there are also some not so many good things happening because you have, you're being

00:31:50.080 very polite. Yeah. Well, you know, you've got a nice tenured position and your pension plan is

00:31:57.600 indexed against inflation. You're kind of living in a vacuum and, and then you're advising government

00:32:02.800 on policy that has nothing to do. It has no impact on your own life. And so, so what I'm talking about

00:32:11.680 government is they should be listening to a whole wide range of sources and not just confirmation

00:32:16.560 bias. So, you know, I'm not, I mean, there's, there are extremes. You've got the Fraser Institute on the

00:32:22.800 other side. Why not listen to them? Why not listen and listen to both sides and, and gather as much

00:32:30.080 information as possible and start by asking, how am I wrong? That's some, that's the best way of

00:32:36.640 dealing with these things. I'm always asking myself as a portfolio manager, how am I wrong?

00:32:42.240 Tell me how I'm wrong. And I'm going to seek out information that's going to tell me if I'm wrong.

00:32:47.040 And I'm trying to objectively as much as possible, try and take that side and say, okay, does it have

00:32:53.520 merit? Is there facts or is it just the narrative? Right. And people like narratives and narratives

00:32:59.760 are okay in the near term, but they'd be catastrophic in the longer term. Speaking of narratives though,

00:33:03.920 I want to lay out a scenario for you, get your thoughts on it. Cause you talked about the

00:33:07.200 intergenerational wealth transfer and how some people are able to get support from their parents.

00:33:11.920 When I think of, of that generation of parents, those baby boomers, you know, you had people who entered

00:33:16.800 the workforce post-1945 and, and what they were able to do, many of them was you work a job.

00:33:23.280 Generally, you didn't need a university education for it. Some had, some did not. They worked that job

00:33:28.000 for, for 30 years. That job enabled one person working, one parent to work to both buy a home

00:33:34.400 and then a little later on buy a cottage. Some of them could retire in their late fifties after

00:33:39.440 getting their 30 years in and had to define benefit pension. Every single thing that I just said there,

00:33:45.760 that's done. That's not happening anymore. I mean, we have here in Toronto, as you noted,

00:33:50.000 you'll have two individuals, you'll have two spouses who are both professionals. Uh, they've

00:33:55.600 gone to university. They're probably still paying off some of their student loans. They cannot afford

00:34:00.080 a house. They're not buying a cottage. And when are they retiring? They don't have a set pension.

00:34:05.440 What's going on here with this, with this incredible generational difference?

00:34:10.000 Yeah. So, um, we have to adapt. Um, we have to look at different ways of doing things

00:34:17.680 than the way of the past because, and this is where as a parent, um, we, we have to do,

00:34:23.600 we have to learn different parenting skills that we, that we, we were taught from our parents

00:34:28.400 when it comes to new technology primarily. And so, for example, um, I have no problem with my kids if

00:34:36.320 they want to go into the trades, for example. Um, I mean, plumbers and electricians make more

00:34:41.280 than lawyers now. Trust me. I know I just got some work done on plumbing work done in my basement.

00:34:47.040 And, and so you can't disrupt the plumber. How are you going to have that automated? It's not going

00:34:52.480 to happen. Right. And so, um, there's, you know, looking at your career path is, is the first place

00:34:58.400 that you want to start to, to, to, to evaluate. Um, Google, for example, has a six month program

00:35:05.360 where you pay 50 bucks a month. And when you're done, they count an equivalent to a four years

00:35:10.720 undergrad and competing science degree and Apple and others. Sorry, what? Say that again. I've never

00:35:15.520 heard of that before. Spell that out again. Yeah. Google has a six month course you can take,

00:35:20.800 I think it's 50 or $60 us a month at the end of that four months, Google. And I think Microsoft and

00:35:27.120 others will consider that equivalent to a four year undergrad in computing science for you to work

00:35:32.480 for Google. They will basically recognize that as a BA. Yeah. Yeah. And yet there are other people

00:35:38.640 who are paying, I don't know what it is in Canada. It's a lot less in the U S there's people paying

00:35:42.080 $6,000 a year for that. And they're doing it for four years. Well, or more than that. Um, when you

00:35:47.520 count your everything else, you're not making an income. And I mean, you can get out of school at

00:35:52.160 $40,000 in debt and you know, somebody who's taken a six month course gets the job ahead of you.

00:35:58.720 And, and so, I mean, again, I'm think we've got to think differently. We've got to think about,

00:36:03.120 and people say, well, my kid's not going to take a six month course. It's ridiculous. You need to get 0.96

00:36:07.600 that undergrad degree. And, and that's a whole different mindset. And then you have to take a

00:36:12.880 look at the living and mobility of living and work from home and, and, and starting your own

00:36:17.920 business, like, you know, using tools like Shopify and getting out and hustling and, and, you know,

00:36:24.000 these looking at things like, uh, NFTs and, and, you know, I have a client that is a, uh, a world-class

00:36:31.360 artist and she's just done some phenomenal work and she's getting done a lot of research on NFTs and

00:36:37.920 she's NFT-ing her non-fungible tokens, um, some of her artwork and she gets a royalty on that artwork as

00:36:44.480 it gets purchased indefinitely. And so we have to think about how we're going to make our money.

00:36:50.640 And then we also think, have to think differently, how we're going to live our lives and where we're

00:36:54.800 going to live. And so with mobility of labor, I wouldn't live in, I mean, I love Toronto, great

00:36:59.520 city. Um, I wouldn't live there. Um, I would move to, I love Calgary because I love outdoor living.

00:37:05.840 But, um, if I wanted to find a similar city in the U S I could do so and make, you know, twice,

00:37:11.600 or 50% more money and be able to buy a house and work from there and maybe even work for a Canadian

00:37:18.720 company down there. And so we have to think differently and take advantage of the connectivity

00:37:23.280 and the ecosystem that's been developed. The old style of working for the same company for 30 years

00:37:27.680 and buying that house and cottage, that's no longer the case. Okay. You're, you're talking about really,

00:37:33.440 when you say doing these innovative ways, uh, to make your income, you're talking predominantly

00:37:38.240 about the knowledge economy, about the creative class. And there's a lot of questions about

00:37:42.960 how do we strike the balance there? Because, you know, we still need, we still need the food. We

00:37:47.440 still need the clothes. You mentioned the plumber who's actually doing pretty well, uh, with their

00:37:51.040 income. Then there's conversations about onshoring, whether or not it's more in the bombastic way,

00:37:56.000 Donald Trump talked about it, just bringing back, uh, manufacturing by hook or crook or, or tariffs

00:38:00.880 against China or what have you, or doing more, you know, more nuanced approaches to onshoring,

00:38:05.600 bringing manufacturing back to Ontario. Let's start making those cars here again. 0.51

00:38:10.400 Is there still a conversation to be had there or are those days numbered? Are they gone?

00:38:15.440 No, we're thinking in the past. We're thinking, we're thinking, I mean, China, for example, is,

00:38:22.560 is reshaping its whole economy and it's going through some troubles now, but it's, I mean, that's,

00:38:28.560 that's the benefit of being a state control is that it can direct it the way it wants to. And if

00:38:33.040 anybody who disagrees, well, we'll leave it at that, but, but, but, you know, they're going to

00:38:39.840 try and focus on their own internal economy rather than servicing other countries. Now,

00:38:44.480 do we want to create that kind of environment? Um, maybe in some areas, if we can implement

00:38:51.920 artificial intelligence and robotics, can we do that? Do we have the ability to do that? No. I mean,

00:38:58.320 we have university of Alberta, which is ranked top five or top three in the world for artificial

00:39:04.400 intelligence research and name an AI company in Edmonton, Alberta. There's none. So we need to

00:39:09.520 start looking at ways of capturing the R and D that we've done. Unfortunately, we've been in, 1.00

00:39:14.800 we've under invested in the last five years and R and D dramatically, but you know, how do we kickstart

00:39:19.520 that and how do we leverage that? And, and instead of trying to focus on onshore and let's just focus

00:39:24.720 on R and D and converting that into a manufacturing from automation. And that's not going to create

00:39:30.800 union jobs. It's going to create technology and efficiency and enable us to, to, to generate cash

00:39:37.840 loan growth that will drive our economy. Um, but we need to find other ways of offsetting labor

00:39:44.800 and helping transform people. Some of the same things that I just told you about is redirecting

00:39:50.320 labor towards areas that are going to be in demand. Okay. Let me try and I'll move away from the cars,

00:39:56.720 but you earlier pointed out that there is a great demand for bicycles in Banff right now and other

00:40:02.240 communities and cities in that part of Canada. And actually I've heard similar stories in Toronto.

00:40:06.480 So we've got this demand. Okay. I want this. I want this thing that needs to be built to be

00:40:11.040 manufactured. I know you're saying China is saying, okay, well let's not continually be the supplier of

00:40:15.840 cheap goods for the world. Let's find different ways to service our own economy. Where do we build

00:40:20.320 these bicycles or do we just build them at such a high price point that it's a boutique, uh, uh,

00:40:24.960 manufacturer. It's a thousand dollar bicycle built in Banff. I mean, how, how, how do you solve that,

00:40:29.200 uh, supply demand issue? Oh, I have no idea. 30 seconds. Answer the bicycle supply chain question. Go.

00:40:38.080 Yeah. I have no idea. I mean, that, that's a, that's a tough one. It really is. Um, you know,

00:40:45.360 you need to source materials and you know, it's, it's, it's, that one's going to be really tough and

00:40:52.240 in any industry, but again, we have to think about it from a scale and convenience. And so you have to be

00:40:59.840 able to have size in order to, and efficiencies and, and, um, and utilize those efficiencies so that

00:41:08.640 you can scale it out and you need cost and convenience. And so you need to have lower costs.

00:41:13.440 And how are we going to do that? Um, if we're not, uh, uh, uh, we're have a lower productivity

00:41:19.120 rate than the U S for example, we need to maybe start there and then we need to, um, make it convenient.

00:41:26.320 And, and, and so those, those are the, that's in any sort of focus in any business, it's cost and

00:41:32.320 convenience are, are the two biggest things and people will pay more if they get more convenience.

00:41:38.880 Right. And, and, and you get away from, um, you get away from, uh, many low cost manufacturing,

00:41:46.000 which is democratized and commoditized. And then you're a price taker. Whereas if you can offer

00:41:50.960 something that's unique and very convenient, um, then people will pay more money. And so I think

00:41:56.080 people are going back to the holistic, especially with COVID and you look, go back to your bike

00:42:00.480 example, people pay a little bit more. They get that nice personal level of service. And you seeing

00:42:06.240 that in bike shops here in Calgary, for example, where people are extremely loyal to a bike shop

00:42:10.640 because not necessarily because of the pricing, but more so on the convenience and the level of

00:42:15.440 service that they're offering. And I think Canadians, uh, are, are known for our great personalities.

00:42:21.200 So why don't we leverage that and offer world-class service?

00:42:24.320 And there you go. Great point. Martin, this has been such a great conversation. So wide reaching

00:42:28.720 before we go, I got to ask you in your capacity as a portfolio manager, as a columnist, people reach

00:42:34.720 out, they ask you for advice. You get a regular guy, come up to you, regular income, regular line of

00:42:39.680 work, regular amount of savings. And he says, Martin, what's going on right now? What do I do now?

00:42:45.600 Um, there's a time and a place for leverage and, um, and make sure there's good, good leverage and

00:42:53.680 bad leverage. Um, make sure you've got your, a financial plan that, you know, the inflows and

00:42:58.960 outflows of your money. That's very important. And there are some tools online and even some of the

00:43:04.880 banks will implement that into your own banking, but get a good picture, overall financial picture

00:43:11.440 of your cashflow, what's going in and what's going out and make sure there's more coming

00:43:16.160 in than going out. And if you do want to lock in some of these low rates and deploy that leverage

00:43:21.520 effectively, um, be careful about that, but there are opportunities for that. Um, and, and just,

00:43:28.640 you know, take that diversified approach, uh, to everything and, and try not to swing for the fence.

00:43:33.920 When you try and make a quick buck, uh, it tends to be a quick loss. So keep that in mind.

00:43:40.400 And so just getting a good picture of where you're at. And then if there is, uh, from a lifestyle

00:43:46.080 change, uh, opportunities to increase the cash flows in versus out by moving and looking at

00:43:52.800 opportunities, then think differently. Uh, think outside the box. Don't be scared of taking risk,

00:43:59.040 um, when it can improve your financial situation. Martin Pelletier, your portfolio manager with

00:44:03.360 TriVest Wealth, regular columnist and Financial Post. Great conversation. Thanks for stopping by.

00:44:08.000 You betcha. Take care.

00:44:10.400 Full Common is a post-media podcast. I'm Anthony Fury. This episode was produced by Andre Proulx with

00:44:16.880 theme music by Bryce Hall. Kevin Libin is the executive producer. You can subscribe to Full

00:44:21.600 Common on Apple Podcasts, Google, Spotify, or wherever you get your podcasts. You can help us

00:44:26.560 by giving us a rating or a review and by telling your friends about us. Thanks for listening.

00:44:31.920 Thank you.

00:44:38.400 Thank you.

Full Comment - October 04, 2021

The end of affordability in Canada—and what to do about it

Episode Stats

Summary

Transcript