Hello and welcome to the Download. I'm your host, Dave Richardson, and it is Stu’s day… on a Tuesday! And we're both in the office, too. Stu, what's going on?

This is the new era, Dave.

Back to work.

That's right. At the grindstone.

At the grindstone. Wow. Well, I mean, you've been doing it for a while. I'm flying. I'm kind of the Jetsetter of the pair. I'm all over the place doing exciting stuff.

You're omnipresent, Dave.

Wow, you're using big words already. Don't throw that at me, Stu Kedwell. Fancy guy. So, Stu, you can probably see behind me in my office, they're cleaning my office window right now. And it made me think, I bet Stu Kedwell's house has really clean windows. How often do you clean your windows at home? Or you hire someone? Actually, you would do it yourself because you're going to do a better job, right?

Well, it's a bit of both. I was a window washer back in the day. That was my university job, so I'm a skilled tradesman when it comes to doing it, but I also have a soft spot when the university kids knock on the door and want to wash the windows. But I know all the lingo. We get right into it. How many sides are we going to do? We're going to take the storms off. I like to sit and talk shop with the students as they're washing the windows.

Get a little bit into that ratio of the vinegar to water kind of thing? Any other secret tips around the fluid you're using to wash the windows?

I'm a Sunlight soap guy. A little squirt of Sunlight soap and some warm water, and then you got your applicator and your squeegee, and then it's really how to make sure that you don't get streaks. That's the whole ball of wax: no streaks.

Yeah. I would expect you to, like I say, to do a really good window. I have no doubt that you're not missing a spot and there's no streaks.

Yeah, well, it was a great job, but you used to wash windows for basically ten weeks straight because everyone wanted them washed from the end of April to maybe the first week of July. But then if you didn't get them done by then, people are like, nah, let’s wait till next year.

Wow. But then you're always walking around with dirty glasses. So how does that fit? Well, let's get into it, Stu, because as much as I think people like to track your fastidiousness around the house, we do like to get into what's going on in markets. And we've started earning season in the US. And this is always an important earnings season because you come out of the summer and people are back to work, as we say, back in the office, really paying attention to what's going on, and you start to get a really good view on next year when companies are talking about not just what's happened in the past quarter, but looking forward and what's going to happen next year. Any trends you're picking up thus far, anything that you're reading out of the reports you've seen thus far that are particularly interesting?

Well, I would say earnings of themselves are a bit of a backward-looking feature. So it's a lot of the management commentary about what's coming. I'd say it's pretty consistent with a lot of the stuff that we've talked about. There's a little bit of unease about a slowdown that feels like it's coming but hasn't totally presented itself. Banks are talking about some higher provisions for credit, some aspects of business slowing. You get into the consumer areas, a little bit of discussion around Ozempic. We had that discussion a month or so ago. The US dollar has been quite strong. For a lot of the companies that we follow, that's a bit of a headwind. I would say the one thing we are seeing— other than maybe Netflix today— we aren't seeing these big monster moves around earnings that we've seen in the past. So even if it's a strong report, it tends to be digested and discounted as people wait to see what's to come next. And I expect that to continue. It's a bit more volatile. It's been in a tight range. There's a circularity to markets right now. Interest rates move up a little bit in the longer end of the yield curve, and then the Federal Reserve comes out and says, if rates in the longer end of the yield curve stay higher, then we may not have to do as much with shorter term interest rates, because those longer-term rates are tightening monetary conditions. So then the stock market reads that and says, maybe we're done with tightening. So the stock market does a little bit better and then the bond market sells off a bit. But this is like a lot of spinning of wheels without really making too much progress. And it's in days like this where you have to remind yourself it's a long game, and it's played in lots of short-term increments, but it's this ongoing churning of the discussion that we've been having for some time.

You're focused on the long term and that's critical. So Stu, we've been talking about recession, no recession, soft landing, etc. And we look back. In the middle of the summer, the market was pricing in more of a soft landing than a recession. We've seen the market pull back a little bit from there. What do you think the market is telling us right now about where we’ll likely finish in the economy?

Well, in the middle of the summer, we were probably down to around a 0% chance of recession being priced into the stock market. And what we've seen in recent weeks is that percentage that's priced in has risen. To what level? It's always hard to say. Maybe back to 30%. And certainly, in some of the industrial areas of the stock market in the last couple of days, they've put it in aggressively. I think that's one of the messages you just made, which is that you have a long-term time horizon around how a business will develop, and then something in the very short term will take place. And maybe some of these securities, in the very near term, some of their ownership is crowded, and it only takes one person to change their mind, and you can get a larger price reaction. And then when someone sees the price reaction, they go, well, what am I thinking? Maybe I should sell too. What does this person know that I don't? And you get a little bit of a somersault and snowballing effect until you find new levels that try and reflect everything we know about the economy, which is that things are slowing. In all likelihood, there will be a slowdown whether or not it's a soft landing or a recession. The movement between those two lines, a soft landing and a recession— a soft landing and a modest recession, even, if you want to say that— the movement between those probably is, on a given day, 3 to 5% of the stock market. And the stock market is a pricing mechanism that attempts to take all known information and factor it in in real time. A good analogy might be if you owed me money and you're going to pay me in a year. So I know, generally speaking, I might in my head think, oh, you're good for it. And then you might show up with a cold the next day. And I would say, oh boy, what if that cold somersaults away on him and he has to miss a month of work and he doesn't get paid for that work? If I'm not pricing that, if you just owe me the dollar and you're going to give it back to me in a month, I know you're good for it, then you don't have to worry. But if there was a little indicator that priced that possibility, when you're sitting there in your jammies at home with a stuffed nose, that's going to go from maybe a dollar down to $0.95, because you never know what could happen, right? So the volatility that we see in the market is the market's way of trying to sort through all this information that it takes in.

And then maybe if I got a big raise too, you'd think that maybe I could even pay you a little bit more just because I'm so happy and thankful that you lent me the money.

Well, that would be true, Dave, although that's not in my current scenario analysis.

But I guess what I'm getting at is that it goes both ways, right? So we got Netflix, for example. Netflix this morning releases their earnings. The stock pops because there's news in there that says, wow, people are sitting at home and they're watching lots of stuff. And hey, they're watching old stuff, so they don't even have to pay to make new stuff anymore. Their costs are down and they're making more money and wow, we didn't think it was going to be that big a deal. And now the news is out there. So boom, it moves. It revalues the price of the stock immediately.

That's right. And the way that you marry the short term with the longer term on some of those discussions. There is a thesis out there about the streaming, how we all watch television. The types of ads that we'll begin to see in streaming will match the types of ads we see in our Instagram reels and all sorts of things where they're unbelievably tailored. So the way that television is changing— I think we talked about this before—, you can get a big price reaction because it can go quickly back to the long term thesis that might also be in place,

Like maybe your favorite dishwashing detergent. There we go. So Stu, then, the last question. We've probably beaten this horse a little bit too much, but it keeps coming back. You look around, everything says recession. And when we talk to Eric Lascelles, who comes on the podcast regularly, he's at about a 65% chance that there's a recession. You mentioned markets probably pricing in around 25 to 30%. A lot of analysts are at 20%. Why is there such a disparity? Normally, you see groups of economists are kind of in the same line, particularly at least on one side of 50%, right? Why do you think there's so much disparity right now on that view?

Well, I think there's two reasons for that. The first is unemployment is still extremely low. So at turns, it's very hard to judge the last gas of a move. When unemployment is very low and people have cash coming in, they've got all these options available to themselves. They can recharacterize how they spend their money, they can reprioritize, they can do all sorts of things. It's a lot easier a situation to deal with any type of challenge when money is still coming into one pocket, even if it's leaving the other. So that continues to be quite strong. And we've seen it in things like US retail sales and what have you, where they're still chugging along. So the timing around that change becomes pretty important. Every week, we look at unemployment claims, all sorts of things like leading indicators of unemployment, and there's been a few false starts along the way where you say, okay, we're going to start to have some layoffs. We've had them in technology. We've had them in a variety of industries. But it just hasn't really caught. So unemployment's remained pretty good, which is maybe a reason that the interest rates, in addition to how mortgages and what have you work in the United States, they haven't quite had the impact that people might have predicted yet. But that doesn't mean that they won't have the impact. It's more of a timing delay, I think, at this juncture.

Yeah. And you were mentioning Chairman Powell, he was talking this morning or yesterday, and he was kind of saying the same thing about how hard it's been to slow the economy down, which is ultimately what they want to do.

Yeah, because they want to get inflation back to that 2% goal. And I think the camp that they're in now is, have we gone far enough on rates? Likely, it'll be the time that rates kind of remain here. That's been a big discussion point in recent months.

Okay, well, that's a great update. Very crystal clear, like looking through the front window on your house that you've carefully cleaned, as always. Thanks, Stu. Great to catch up. And we'll be able to do next week, right?

Oh, yeah.

See you then.

Thanks, Dave.