In this episode, we have Andrew Ruland from Integrated Wealth Management join us to talk about the impact of geopolitical events like the Ukraine crisis and the ongoing conflict between Russia and Ukraine and the EU, as well as what to do about it. We also talk about how to prepare for inflation and stagflation.
00:00:18.920We've got currencies going up and down.
00:00:21.620I guess the key point with investment is stability, and we're not seeing a lot of that right now.
00:00:26.280Right. Well, ultimately, we're in probably, for our lifetime, it's one of the most chaotic periods of investing.
00:00:33.760There's always been volatility, but it always seems to be the worst when we're close to retirement or in retirement.
00:00:40.460And right now, of course, we've got a lot of geopolitical events that are driving the agenda.
00:00:44.800And that's, of course, in addition to the economic factors that are behind the geopolitical events and things like that.
00:00:52.560Yeah. Well, I mean, it's almost impossible to predict.
00:00:56.400I think, you know, I mean, we've saw warnings and so on.
00:00:58.300But the situation that unfolded in Russia and Ukraine with what's going on over there.
00:01:03.220But now that it is happening, trying to forecast and look ahead and how that's going to impact things is kind of where we're sitting.
00:01:08.620And a lot of people might not realize it's going to have a very strong impact on the agricultural sector in general, or at least agricultural commodities.
00:01:15.400I would think that that is actually going to be the single biggest effect of this war in Ukraine, and especially if it leaks a little bit further out from Ukraine, which NATO seems to be poking the bear, so to speak, to try and get to happen.
00:01:28.640But the secondary and the tertiary effects from the supply disruptions that come out of Ukraine and Russia are really, really significant.
00:01:37.440And I think, yes, we're going to see the worst of them in the food supply area.
00:01:42.600Yeah. And I mean, that gets into things that are critical needs, foodstuffs, when inflation starts hitting there, and that's what will happen.
00:01:49.360And how do we start preparing for that?
00:01:50.980What do we do ourselves as, I mean, on this part of the world to at least try to shield ourselves from some of those impacts?
00:01:56.380Well, on a personal level, we have to think about what does our own food security look like?
00:02:01.120So there's a big trend towards homesteading for a lot of people, or like I do, grow a lot of vegetables in the backyard.
00:02:07.820I've done that for years just because I like gardening.
00:02:10.420But on the financial level, really what we need to focus on is investing in things that are actually going to go up because of the chaos.
00:02:18.700Now, some people don't like the thought of that because they feel bad that they're profiting off of the…
00:02:24.000It feels like you're taking advantage of a bad situation.
00:02:25.820Correct. But I mean, unless you're actually someone who's actually helping to create the situation, you're just responding to what other bad actors are doing.
00:02:33.140So really, it's just about following trends that are going to work to your advantage.
00:02:36.460And right now, we're in the beginning of what I think is more or less a stagflation environment, where the economy is not really expanding, but we have so many supply chain disruptions that prices are going up.
00:02:49.660So the economy is stagnant, but prices are inflating.
00:02:53.000And that's a very dangerous place to be.
00:02:54.940The last time we were there was in the 70s.
00:02:57.460So would it help with some of the economic development, though?
00:03:00.660I mean, we are kind of well-placed as a parallel to Russia and Ukraine.
00:03:04.740I mean, Central Canada is a big agricultural producer.
00:03:07.860Potash as well, which is another commodity.
00:03:20.920However, we have some factors that play into it, like there's wage inflation, which is pushing up prices at the grocery store.
00:03:26.960So if you work in an industry that doesn't benefit from inflation, you're going to be in trouble because your income is not going to go up.
00:03:35.440But if you live or if you work in an industry that does benefit from inflation, you're going to be positively affected by it.
00:03:42.240And it's not just things like potash and wheat, which are essential, but it's also in things like uranium.
00:03:51.460Well, people are starting to move towards zero emission targets and goals and things such as that and expanding their nuclear generating capacities.
00:03:57.700Again, Canada is well-placed to supply, hopefully, on those sorts of things with northern Saskatchewan and areas and deposits.
00:04:04.440The Athabasca Basin is one of the best areas in the world for actually for mining of uranium and Cameco in particular is, well, they're a world-class operator.
00:04:16.460So suddenly looking at another area of hedges and so on, the interest rates are low, but then the bond markets are starting to get forgotten.
00:04:24.020How does that tie into things right now?
00:04:26.280I mean, it's a complex area of monetary policy.
00:04:29.460But when we've got a government trying to deal with inflation, then often the banks, we're talking about issuing bonds to try and, that's where I'm now hoping for your expertise to expand on it.
00:04:40.800Well, actually, the biggest worries that we have, the biggest risks that we have in the financial markets going forward are actually not in the stock markets because stock markets are really about equity, right?
00:04:51.180And so they're companies and they adapt very quickly to the environment that they're operating in.
00:04:57.780The biggest problem we actually have is that we've gone through basically a 34 or 35-year decline in interest rates supported by central banks monetizing debt or what we call quantitative easing.
00:05:09.580But we're actually past the bottom of the interest rate market.
00:05:14.540I'll remember this well because the bond market actually peaked on my 53rd birthday, which was August 4th of 2020.
00:05:21.820And so when interest rates start to rise, that's when we get big problems in bond markets because the price of bonds is inversed to the rate of interest that's prevailing in the markets.
00:05:34.740And interest rates can go up for a couple of reasons.
00:05:37.160One is inflation, cost push inflation from a growing economy.
00:05:40.780But the other reason, which is actually much more worrying, is when we have a declining confidence in government as a borrower.
00:05:47.740And that is what we are on the precipice of seeing.
00:05:50.440So people don't think that bonds can really go down in value and that that's always the safest part of their portfolio.
00:05:57.560But what we've seen recently is that bonds can go down pretty quickly in value.
00:06:02.480In fact, the first quarter of 2022 was the worst quarter ever in the bond markets.
00:06:08.120Most people don't realize that, right?
00:06:09.880And if that's supposed to be the safe part of your portfolio, you need to come in with alternatives to traditional bonds, which is a big part of what we do.
00:06:32.860So when it comes to investing in things that are safer, there's dividend-paying stocks, and dividends typically go up faster than inflation, so that's a good thing.
00:06:43.320But on the part that isn't in stocks, in your portfolio, you have to have things that are alternatives to government bonds.
00:06:50.380So we look at corporate bonds, which tend to be shorter-term in nature, and there's actual physical security for corporate bonds, unlike government bonds.
00:06:58.980Because when you buy a U.S. Treasury, you don't get, you know, the left arm of the Statue of Liberty.
00:07:04.400It's just based on the full faith and credit of the borrower.
00:07:07.420But with corporate bonds, there is actually physical security behind it.
00:07:10.640The other part of it is to actually look at what we call private alternatives, which would be private lending, the secondary market, or what we call our business-to-business lending primarily, and also in real estate, because real estate is also an inflation hedge.
00:07:26.500Okay, and then real estate, yeah, well, that's something that's really been, well, I would say almost disrupted as well.
00:07:32.980I mean, we've got some markets like Vancouver and Toronto are superheated, and in Calgary, for a while, it was kind of flat.
00:07:38.160I think it's kind of rising a bit now, but it's unpredictable as many these days.
00:07:42.580It is, and longer term, inflation, or sorry, real estate, even including principal residence housing, is an inflation hedge.
00:07:51.540But we also have to recognize that over time, the value of real estate has been driven by declining interest rates.
00:07:57.900And so as interest rates continue to rise, people will not be able to afford to pay as much for a home because their income hasn't gone up.
00:08:05.280And people, the price of real estate is usually based on how much payment people can afford who are still working.
00:08:12.060So that's going to be a little bit of a counterbalance, right?
00:08:14.700It's going to be a little bit of a headwind on the real estate market.
00:08:18.720Yeah, well, and people with a fixed income, I mean, there's people with a very tight budget, and interest rates, I mean, even a small rise could really put them under a lot of financial strain if they don't have a fixed mortgage or if they're carrying a lot of personal debt.
00:08:30.540Absolutely. About 25% of outstanding mortgages in Canada are variable rate, which we think is quite a trap.
00:08:38.600If people are in a situation where they have, you know, 5, 10, 15 years left on their mortgage and they're on a variable rate, we'd strongly suggest that they look at locking in for the longer term.
00:08:48.980Because interest rates can go up a whole lot faster than people think.
00:08:52.440Okay. There's something called availability bias. It's one of the cognitive biases in investing.
00:08:58.860And if we haven't experienced something before, it's not available in our memory.
00:09:03.680And so the vast majority of people today who are borrowing money for housing or for anything else, they've never had the experience of 10%, 12%, 14% mortgage rates.
00:09:22.360Yeah. And it wasn't that long ago, but for a lot of younger homeowners, it certainly wouldn't remember the 80s and the 90s with some crazy double-digit interest rates.
00:09:32.940And things are secular. It tends to come back to those.
00:09:36.940It does. And actually, those people of that age would do well to actually talk to their parents about how they dealt with the incredibly high mortgage rates because their parents would have been in that situation.
00:09:46.680Well, in Alberta, I mean, just to tie in a little politics, but there was the national energy program.
00:09:50.880That was coupled with those double-digit interest rates, massive inflation going on.
00:09:55.340And people literally had to walk away from their homes because they couldn't make the payments.
00:10:07.160Hopefully, it's going to be a while before we get there.
00:10:09.220But the reality is that the longer that governments go on with spending out of control, making drunken sailors look like they could pass a sobriety test, the fact is that governments are spending public finances into a high interest rate trap.
00:10:25.680Because the more that they spend, the less they have from their government revenues to actually go towards interest payments.
00:10:33.700And then you get trapped into increasing taxes, and yet you have interest payments on your new debt that go up and up and up.
00:10:41.920So you get into a very, very dangerous corner.
00:11:00.280Something I guess that's been interesting is the world hasn't been eager to jump in and get in on a ground war with Ukraine and Russia, which is good.
00:11:07.740I mean, we didn't have to live through that, but our parents and grandparents, you know, dealt with World War II and massive things.
00:11:30.760But the reality is that if you look at different places around the world that have incredible dependence on the supply chains coming out of Ukraine and Russia, so this would be, you know, areas like Turkey and Egypt, you know, in particular for wheat and different things like that.
00:11:46.720But the entire world is really dependent on the use of fertilizers in agriculture production.
00:11:52.540You've got, you know, non-hydrous ammonia, and you've got, you know, potassium.
00:11:58.420You've got all kinds of nitrogen, different things like that, that are incredibly important inputs to create fertilizer.
00:12:04.300And without fertilizer, the world's food supply gets unstable and unreliable.
00:12:10.040And if, so if you consider what happens thereafter, what happens when people get hungry?
00:12:20.520You know, if a person misses a meal, they might get hangry.
00:12:23.160But what happens when your food supply is genuinely compromised?
00:12:27.600And when people think that they have nothing to lose, they lose it.
00:12:31.160Well, and again, getting back to people who don't remember, but that was a huge thing in the 80s and 90s.
00:12:36.560Northern Africa, I mean, they were suffering under a horrific famine.
00:12:39.680Ethiopia, Somalia, I mean, it was terrible.
00:12:42.060And that instability through the famine, you know, carried over for decades afterwards.
00:12:48.020And when we're starting to, yeah, impose sanctions or cut off of world's bread baskets, that's going to have long-term repercussions.
00:12:55.000Yeah, and I mean, there are going to be some winners out of this.
00:12:57.540You know, wheat growers in particular, if you can get your hands on it, and if you can manage to carry the cost of higher fertilizer prices.
00:13:06.100You know, Saskatchewan and Alberta wheat farmers, and to a certain extent in Manitoba as well, are going to do well.
00:13:40.360Yeah, speeding up at least the ones we've got.
00:13:42.820You know, it's just been agonizingly slow.
00:13:45.120But we're not seeing many indications on our federal front that they're eager to facilitate this any further than they have, unfortunately, yet.
00:13:53.740And I mean, you mentioned right at the beginning of the interview that, you know, Canada is well positioned with agriculture and energy.
00:14:00.040Well, that's true, but we actually have to be in a position where there is a regulatory environment that actually encourages the harvesting, not just of agriculture, but of energy.
00:14:22.360But we have to remember, too, we've been making up for the lack of pipelines through shipping oil through rail.
00:14:27.300But that's putting pressure on our agricultural producers because they bring in their fertilizers by rail and they export their produce through rail as well.
00:14:34.720And it's just punishing ourselves all over the map.
00:14:44.780No, I mean, I guess just morally, you know, if people could keep that in mind when it comes to calling for economic sanctions is it's not going to hurt Putin, but it's certainly going to hurt a lot of people on the ground.
00:14:53.980The common people who really wanted no part of this whole mess in the first place.
00:14:58.060Well, it's not the people that ever make war.
00:15:07.020So, I mean, again, I guess just kind of bringing things back to home.
00:15:09.620You know, how can that's your job and role is helping us navigate those waters or try to at least make sure we can weather this current, the latest storm is as efficiently and safely as possible.
00:15:21.080What tools do you guys offer for that sort of thing?
00:15:23.220Well, we have a great website with a great video library that we've built up over the last four or five years.
00:15:29.080And this Saturday, we're actually doing a live webinar at noon.