Hello and welcome to The Download. I'm your host, Dave Richardson, and it is Stu's Days. And this is a pretty exciting Stu's Days because we actually let Stu out of Toronto this past week. We flew him down to a big conference in New York City, and this sets up something that I know people love, especially as the weather is getting colder. We get into fall. You know what's nice, what my mom used to make? I'm home from school. I’ve got a football practice. Actually, this time of year, I'd be playing football, and she would have a nice stew. A nice stew with some dumpling. You take the Bisquick, you mix it up and you drop it on top and they bubble up. And so you get the stew and dumpling. So it's an investment stew today because you've got lots of hot information coming out of this conference you attended last week.

That's right. Yeah, it was a good one. It's always great to go down to New York. Frank Sinatra was in line when he said, if you can make it there, you can make it anywhere. It is bustling.

Wow. So you made it?

I made it. I made it there and back. So I'm okay.

So, Stu, what was this conference about? And was it a big one? Was it a little one?

It wasn't huge. About twenty Canadians went down to spend a day and a half at one of the big brokers. And you get wheeled through economists, strategists, different sector views, that type of thing. And yeah, it was great. It was really educational.

And you got a few takeaways. We've been talking about different buckets of stocks. We're going to continue on this theme as we go through this period right now. This morning, I was with a group of real estate professionals — actually a huge group of real estate professionals — just talking about where the economy is going. Where are interest rates going? Soft landing versus recession. The Fed reserve started lowering rates last month, and we got a first employment report. As we've talked about on this podcast with Eric and others, once the Fed starts cutting rates, well, then we look to the job market, and we want to see some signs that the job market strengthens from where it bottomed out. And sure enough, we got a first jobs report. It's pretty good. We're going to get another one this Friday. So tune in to listen to Eric and his view on that. We get the US jobs report Friday. But as Jerome Powell, the chair of the Federal Reserve, has talked about, the job market is still good. We're not seeing acceleration in the job market. You go down to New York. I've been down in the US a couple of times in the last month. It seems like things are booming. And are we passed even the point where we're worried about soft landing versus recession, and we're looking at longer term bond yields, which are bouncing around. They're up about probably 70 basis points from where they bottomed out on the 10 year. Are we at a point where we're less worried about a recession and more worried that we get a re-acceleration with some inflation, and we never get the much lower interest rates that the markets anticipate? How do you put all this together, Stu?

Yeah, well, it's a great point, and it contrasts a little bit between the two countries. In the United States, these three bigger themes — decarbonization, digitization and de-globalization — are front and center, because the companies are multinational. And those three themes are not big friends of inflation. Those themes require capital. They require investment. They put strains on resources that otherwise would have been a little bit more dormant in the old world. So you do walk away with this notion of, yes, inflation has come down, and there's lots of reasons for it to remain benign, but that analogy that we're coming down towards 2% rather than trying to get it up towards 2%. And I would say through all the discussions, I think there is confidence that the Fed is going to continue to lower interest rates, and there still is some weakness in the unemployment market and what have you. But a couple of the people were pressed. If you had to pick the risk between re-acceleration and further slowdown, people threw their hat on the side of re-acceleration. So that is different than what's going on in Canada. In the United States, you still have the idea that rates could come down to the mid-3s, which is still lower, but that's what was factored into the bond market to some degree. Versus in Canada, you have some unemployment data that is still concerning in terms of the number of current unemployed going up and the length of time you're spending unemployed also not being great. And so there's a little bit more of a malaise in the Canadian economy relative to the United States. And that's why you saw the 50 basis points. You've seen the Canadian dollar weaken in a little bit as people try and figure out how long and how different is the Canadian economic experience going to be in the United States. And all that's really notwithstanding the election. There were a bazillion hours of discussion around what's in, what's not, what's going to happen. Obviously, it's difficult to handicap. But I think there was an underlying strength in many of the US discussions that regardless whether or not it's the status quo — with a Democratic administration and maybe a divided government or the Republican side — there was a lot of stuff that was in motion. We've talked about capital markets, the number of IPOs that might be in the pipeline for next year. Mergers and acquisition activity, if you took a percentage to the economy, running well below. So maybe there's room for that to get better. There's nothing really too sanguine in many of the discussions on the United States versus Canada. I think the lower interest rates are doing a lot of assistance on mortgages and current spending, but it's providing relief rather than a stimulus. So maybe that's a good way to frame the difference.

And then we were talking before about the change in immigration policy as well. As we've talked to Eric, really, the boost that immigration gives the economy, if you take that out, Canada's growth performance has been abysmal, really, relative to the US, at least. And if you change policy and you cut back on your target for immigration, that has an impact, too. You mentioned the mortgage rates — and again, I'm with the realtors this morning, and they're concerned about affordability — and for affordability to improve, you don't just need the lower rates, you need the growth so that you can get income growth as well so people can afford more. And then you've got that next headwind, if we talk about real estate, of all those low interest mortgages that have started to come due and really peak through 2025 and into 2026, coming off 1.5 to 2% interest rates and maturing to, hopefully, 2.5 or 3%. But if you re-accelerate, maybe it's not that and that becomes another drag for Canada.

I think that's all valid. There are ingredients for recovery in Canada. And investment would be great to see it stimulated. And productivity has been a challenge. There's lots of things that can improve. But in the very near term, people are having a little bit more trouble seeing it versus in the United States. Whether or not it's artificial intelligence or data center growth, we need more utilities, we need more this, we need to focus on this, we're going to change our power supply, we're going to restart nuclear, etc. There's just a long list of things going on from a country standpoint. And that was definitely a big difference. This is one thing that struck me around the AI, the discussion from a technology standpoint around the productivity and enhancements that came from the Internet. And most of technology has been very focused on the consumer in the last decade. Your handheld device, your entertainment, your this and that, and the other thing. And the next leg of technology improvement is likely to be another productivity enabler. Of course, our phones have made us more productive, but they haven't necessarily found their way through to profits and things like this. Versus the next leg of AI. There was this thematic discussion around switching focus from the AI enablers to the AI adopters. There's been a lot of discussion around call centers and these types of things where there's room for a productivity improvement using artificial intelligence. Even things like documents. If you have a function where you need to verify that one document says the same thing as the other, that can be done by AI. Productivity, searching, all sorts of things. So the companies that have been the leaders have been the hyperscalers — the people allowing this, enabling it — but the movement now might be towards the ones that are going to reap some of the productivity benefits. The analogy was back to the Internet. Big companies were not the first beneficiaries, but once they got their sales function, they got everything oriented around the Internet, it really set off a boost to productivity.

So that's one area that came up thematically. Any other big themes that the group was talking about when you were down in New York last week?

The subtle switch from enablers to adopters on AI. We've talked about some of it, but there was a lot of discussion around the financial markets. And a couple of things there was the Fed has been doing some quantitative tightening that has maybe held back some deposit growth inside of the banking system that might mature into next year, which would allow for deposit growth, which is good for the banking system. And as we just talked about before, a lot of focus on some of the embedded capital markets activity that is a little bit pent up in markets as well. Financial stocks have been quite strong, so that's not entirely news to them, but just to hear some of the illustration as to what still might be to come.

Now, when you start to get that activity in markets, does that tend to be positive for markets or not have much of an impact? When we see mergers and acquisitions and IPOs start to pick up, that's generally a sign of a healthier market or an overvalued market?

Mergers and acquisitions all depend on the stage of the cycle. But normally in a good, vibrant market, if M&A is being done and it's strategic, and one company is taking out another, it frees up capital to then reinvest elsewhere in the market. So it's generally bullish. And the early phases of an IPO market are the best of what's available come public, usually at, again, pretty reasonable valuations. There was a discussion around the gains that some of these IPOs had seen, and they've been pretty healthy. So the early stages of both of these can be pretty productive. And that is like anything, when you get into the later stages and the IPO quality may start to decelerate and M&A becomes building huge empires and things like that where returns maybe have fallen by the wayside. Now, that tends to be more of a subject of being pretty late cycle. But I don't think we're quite there yet.

And then the other thing as we go down to the US — we talked to Dave Lambert about this when he was on a couple of months ago — the GLPs and the big various companies involved in this. You look at the use of it in the US, it's still a small percentage of the population that are using these drugs. They very clearly help people lose weight. And we know that there's a significant number of the US population that is overweight and would like to lose some weight. These drugs help. You do a little review of the potential of the GLPs and where we're at with that and where we go from here?

It does seem like a pretty long runway, but it's also a good example of how the stock market works. You drop a pebble in the pond and then it ripples away. So very quickly, the discussion then goes to: how does your diet change? And all sorts of things. And one of the aspects that came up is you need to build muscle mass because it can degenerate a little bit under the GLPs, and you need more protein and more exercise. So new industries spawn off of these big changes. So when you're listening, you're not just sitting there saying, well, you take Eli Lilly or whoever the company might be that's making this and trying to say, well, there to be enough sold for its valuation. But there's also going to be shifts that go on behind the scenes in terms of where money is going to flow and new products are going to be born. And you want to make sure you understand. Do the companies I own have some positive exposure or in fact, do they have some negative exposure? And those can be multi-year trends. We had a session on demographics, which you always feel like, why do I make money on demographics on any given day? And it's very hard on any given day. But when you look out over long periods of time, it has big implications for where things are going. So that was also pretty helpful as well.

As we talk about the GLPs, we talk about AI, these are two areas of the stock market where you've got some stocks that have benefited from still relatively early stages. But they get to stretch valuations, and you start to go back to something we've talked about a lot over the years on the podcast, the difference between a good company and a good stock. You had another example of something you were looking at. Again, we only use any company we talk about here for illustrative purposes. But you look at some of the AI companies. We've talked about an NVIDIA, we've talked about an Eli Lilly, Novo Nordisk, on the GLP side, that get to a point where the valuations are such that the growth targets that they need to meet are really challenging. And some of them continue to do it for a while, but it's hard to keep going. It's a great company, it’s still a great business, but the stock is not as good as it was before. Anything else you were looking at or talking about that skills that example?

It's a great point. So this particular company we're talking about was Costco. Anyone who’s ever been there on a Saturday morning says this is a successful business, but it approached 50 times its next year's earnings. And valuation in and of itself does not make a stock go down, but what it indicates to you is that the range of outcomes that are required to make it a successful stock from here are beginning to narrow. So one of the things that I like to do in Bloomberg is I like to look at long-term margin profiles to see how stable the business is, and then look at long-term valuation. And the interesting thing about a company like Costco is it's basically been in business for 45 years. And in its 45th year, its valuation is the highest it's been. So for all the opportunity that stood in front of it historically, oddly at 50 times earnings, the stock market is saying that either the earnings are so bulletproof that they're worth 50 times earnings, which could be true, or that there's still a tremendous amount of more growth in front of the business than has existed in the past. I think Walmart, Amazon, and Costco are taking 60 cents out of every dollar of increase in US retail sales. So there's evidence of that. But the stock market, the weighing machine of the stock market, when it takes valuation to these levels, it's another way of saying, boy, the range of outcomes for that company is beginning to narrow. And do I have to think about that?

Yeah, well, as a bulky guy I really do like Costco because I can bulk up even more. And with the family, it's fantastic. But like you say, you would expect, generally for a company to hit its peak in P/E to be more in the earlier stages or in an environment where we have really low interest rates or unusually low interest rates. Probably not the case for Costco right now. So it's an interesting one to pluck out. I think of it as a big grocery store, and you don't think of a big grocery store or electronics dealer or clothing retailer as something that's going to have a massive P/E attached to it. But there it is.

Yeah. And if you look back in time, when it went public, you likely would have happily played 50 times earnings because the earnings would have more than grown into that valuation. And it's not to say that they won't today. In the past, you've had all these store openings, all sorts of things in front of you. It gets a little bit tougher — not that it's mature, there's still opportunity—but it is a pretty big company to trade at 50 times earnings.

And so, Stu, you walk away with the somewhat higher yields again. I mean, we're still in a period of a little bit of uncertainty. And we've seen volatility pick up, even though we're hitting new highs in the market. Volatility is up from six months ago, and that's not insignificant. There is more uncertainty out there, right?

Yeah, I think on the yield front, the first was the likelihood of soft landing has increased a little bit. And then when the central bank went 50 basis points in the United States, it did cause some angst in the longer end of the curve. We do have budget deficit. It's some mixture of all three of those things between just the absence of recession. That option goes away, so that's going to make yields be a little bit higher. The possibility for inflation re-accelerating. I wouldn't say we're overly worried about inflation, but that possibility needs to get priced into some degree. Some of the budget deficit projections are pretty robust. So this notion of the 10-year bond and it feels violent when it goes from 4% to, whatever we're at now, 4.30% — or 3.75 to 4.30%. It's just the market's way of finding its way. Longer term, we're not far from the numbers that we would think are fair value. And that's based on 2 to 2.5% inflation. 1 to 2% on the real yield, that's 4.5%. That's a rule of thumb type investment. Some people would say similar to nominal growth, which might be around 5%. But we're in that neighborhood. It's just bouncing around a little bit more than it had for a while.

Well, we get the jobs report in the US on Friday. Again, join us for Eric. We'll have that posted up over the weekend. And then the election next Tuesday, probably get a firm view of who's going to be the next president and who controls the Senate and the House of Representatives by, I don't know, nine o'clock that evening. It'll be all done. We'll have complete certainty. And on we go for the remainder of this year and into 2025, right?

It may be a little different than that. It could take a bit of time. I know you're being facetious.

I'm showing my overly optimistic view of the world, which generally works, but has got me bitten a couple of times through my life.

It'll definitely be an interesting week.

It is going to be an interesting week, and you'll be back next Tuesday. For those of you who enjoy the podcast, we'd love you to click «like» or «subscribe». We have lots of new people joining the podcast, and of course, everyone's favorite, Stu's Days. You never want to miss a Stu's Days because you get this wisdom on a regular basis. Stu always has something interesting to say. And again, if you're listening to this every week — and Eric Lascelles and all the different guests we have on — again, continue to like and subscribe. Give us a five-star rating. Other than our parents, that is probably few and far between. But as more people subscribe, then maybe it will be more than just our parents.

We didn't even get to talk about the World Series and Freddie Freeman, Grand Salami, whom both parents are Canadians. So we got lots for next week already.

I didn't know that. You know who the next great Canadian baseball star might be? Eric Lascelle's son.

That's right.

Yeah, he's a star. We'll catch up on him on Friday. Stu, thank you so much. That was fantastic. And we'll catch up with you next week.

Great. Thanks, Dave.