Economic Expert: Precious Metals are Canada’s Final Lifeline
Summary
Canadian Economy: Danielle Park highlights the fragility of the Canadian economy, emphasizing its lack of diversification and heavy reliance on the housing market, which is now facing significant challenges.
Housing Market Concerns: The Canadian housing market is under pressure with falling prices and high debt levels, leading to refinancing issues as many mortgages taken during low-interest periods are now due for renewal at higher rates.
Debt and Consumption: Rising household debt in Canada, exacerbated by pandemic-era borrowing, is creating financial strain as consumers face higher interest rates and declining home equity.
Precious Metals Sector: The precious metals sector is a bright spot in the Canadian economy, with high prices boosting the TSX, but it remains one of the few positive areas amidst broader economic weakness.
Investment Risks: Park warns against the dangers of overconcentration in tech stocks and the lack of diversification in portfolios, drawing parallels to past bubbles and emphasizing the importance of valuation and risk management.
Generational Financial Challenges: The conversation touches on the financial challenges faced by different generations, with baby boomers heavily invested in equities and real estate, while younger generations face affordability issues and a lack of investment opportunities.
Global Economic Dynamics: The discussion includes the impact of global trade tensions and the strategic economic maneuvers by countries like China, which affect the competitive landscape for Canadian and American companies.
Future Outlook: Park suggests that Canada needs innovative policy solutions and investment in infrastructure to address its economic challenges, while cautioning about the potential for significant market corrections.
Transcript
Why is the Canadian housing market about to implode? And why are Canadian equity investors sabotaging their own retirement? Why do Canadians now have the highest debt to GDP ratio of any the G7 nations? If you thought the last 10 years were bad for the Canadian economy, you have no idea what's coming. Most people don't understand that Canada skipped through the 2008 great financial crisis, but that bill is about to come due. My guest today is Danielle Park, portfolio manager and principal at Vanal Park Investment Council. And today is a sobering conversation on the Canadian and American economies. Welcome to the J Martin show where we dissect the greatest minds in geopolitics and finance so that we can better understand the world. Here's Danielle Park. Enjoy. This is Jay Martin. All right, here I am with Danielle Park. Danielle, it's so great to have you back on the program again. Thank you for making the time. Thank you, Jay. Always a pleasure. So, here's where I want to start with you today. I get a lot of questions at present about the Canadian economy. I have American friends who are asking me about the street value of the tariffs, like what's actually happening on the street and the real economy as a consequence of the tariffs. I have Canadians asking me about the health of the Canadian housing market and more importantly what they can expect over the coming year or two. And in addition, I know you look at a ton of portfolios, so you see how people are actually allocated from a portfolio standpoint. And I'm sure you have some thoughts on that. So, first question for you, you know, how would you rate the Canadian economy right now specifically in those three buckets? What's your take, Danielle? I think it's quite weak. Um, it's weaker than the American economy, I would say, at this point because we do not have all the artificial intelligence companies here that are really driving the lion share of capex spending, which is driving the lion share of US GDP growth. Right now we have you know Shopify but we don't have a lot of of other companies in that sector and so we have haven't got that going for us. I mean if you look at the American economy that's pretty much all they have going for them. You know all of the uh GDP growth is coming from that one sector of those big tech companies. And so uh as far as Canada goes we're really lacking there. Uh and then we're also lacking of course in terms of diversification of our economy in general. Something I've been complaining about for the last decade just pointing out that we were heavily concentrated in housing and we really blew a big bubble there which was not improving productivity was not improving affordability was not helping our birth rate. I mean all of the things that we have really uh weighing on us now an aging demographic you know now we have negative immigration expected over the next couple of years. So we have really the hangover from the pandemic inflation in the cost of living is is weighing on the population. We have had rising unemployment for already a couple of years. We have a work week that is flat. uh you know we have household debt to GDP uh the highest of the G7 nations Jay Yay Canada um we have you know just a lot of struggling people if you take the pulse of the uh I would say not just the average bear I would say of the you know 7 or 80% of the population is really struggling right now to uh pay their bills to deal with uh debt that is coming up for refinancing. You know, we took out a lot 70% of uh existing of the mortgages in Canada were taken out during that pandemic era when housing prices were at all-time cycle highs and interest rates were at all-time lows. So, this was a horrible combination as it turns out because now that debt is coming up for renewal and the housing market, as you know, has already been falling. The prices have been falling in major centers like in BC and Ontario where the bulk of the population lives have been falling since 2022 already and uh average prices nationally are down 25%. So you've got all these mortgages coming up for renewal not just having to deal with higher interest rates than pre- pandemic or during the pandemic but also housing prices that are coming down. So equity that is actually collapsing. So to the extent that Canadian consumers have continued to spend, they've done so increasingly on debt and these, you know, buy now pay later loans. Uh, you know, my kids are in their late 20s and their friends are have been using this to finance things like takeout meals. Like it's, you know, it's just um a a very dangerous scenario. So the bulk of the asset inflation that's happened uh you know over the last decade really accred to baby boomers. But baby boomers are now finding themselves wanting you know uh we have about the last 30% of them coming into retirement over the next uh you know few years and they are expecting to downsize their overhead. on my street, neighbors are are listing very expensive properties for sale in the hopes of downsizing to condos in smaller, you know, places or getting rid of the cottage and the chalet and going just to, you know, a more simplified life and they are not finding buyers. Uh, so we've got that big, you know, the major driver of Canadian economic growth was the housing boom which became a bubble which has now burst. So that is a negative weight on the economy in terms of growth and momentum. Um we've still got the overhang of the unaffordability which is weighing on our ability to consume and save. Um and we have you know uh I mean it's it I guess the thing is what do we have going for us right now? We have precious metal prices at all-time highs and you know the a lot of the top 25 Canadian companies that have really boosted the TSX in the last year are in the precious metals space. So that's the one sort of bright light that we've had um in terms of the economy and uh investment dollars coming in and in terms of the stock market. But everything else is really pretty weak. Thank you for that. So, a couple things I want to pull on there. First of all, you mentioned um debt coming up for refinancing in the housing market. So, this was the flurry of buyers that bought homes in 2020 2021, early 2022 when rates were at near zero, but home prices were at all-time highs. Now, why not borrow the money? Because the money is free to borrow. That was the mindset. Um, what American viewers might not realize is that in Canada you typically lock in a rate for 5 years. I know in the US you can lock in a rate for 30, but what that means is that everybody who locked in a rate in 2020, 2021, 2022, that renewal is coming due and rates are a lot higher than they were when you initially bought that house. But you mentioned something else that average prices across the country are down 25%. So you're now refinancing an asset that's come down in value at a higher rate in an environment where household debt to GDP in Canada is already at an all-time high and as you mentioned leading the the G7 uh nations which uh I mean I'm not surprised. It's I don't love that news but I'm also not surprised to hear it. Did I capture that picture sufficiently, Danielle? And and what you know what's around the corner, I guess, in this scenario? Well, it's and also I'd just like to mention it's not just people that bought houses in the peak of the bubble, but a lot of people refinanced. So, they may have had the house a long time and, you know, they sort of looked and said, "Oh, great. The value's gone up a lot. Let's harvest some of that equity." It's one of my my pet peeves is this notion of harvesting your home equity. Um, and the reason that I I don't think it's a good idea is because rainy days come, Jay, as you know, and here we are in a very rainy day period right now. And there's not a lot of resilience in the economy because people were overspending and overlevering. Businesses were doing that too. Uh, governments were handing out money. Um, you know, they often say that the worst loans are made in the best of times. that was the scenario. In other words, when no one's concerned about uh repayment risk or credit risk or any of these things, um they loan the most money and the most money is borrowed and that is the seeds of a credit crisis ultimately because um now we're in the default phase, you know. So, sure enough, mortgages that are 90 days and later um in terms of delinquencies on payments has skyrocketed. Um, we're seeing the trustees in bankruptcy all reporting record volumes of people coming to see them. And importantly, it used to be the people that didn't own houses that were going to see the trustees because people who did could refinance and bail themselves out, so to speak. But now it is increasingly homeowners, property owners, and they're talking about the incredibly foolish things that were done, multigenerational things, you know, on the opaces of helping young people get into the property ladder where again boomers were harvesting some of their equity to give it to some of the younger people and everyone was levering up to get in and you know that's turned out to be a very painful experience and I don't think we're through it yet. I know there's a lot of people that have even taken properties off the market recently in the hopes that they can relist in the spring. But the amount of listings is just, you know, even in America is not just happening in Canada, of course, although Americans came into this with less household debt relative to things like income and GDP. Um, but there, you know, you're also seeing a like a three times the amount of listings to the amount of sales. Uh, so the data is just brutal. I think I saw a chart today that 72% there's an increase of 72% of condos for sale versus people buying condos right now in the United States. So, we really did overbuild that sector in North America um in the last few years. And um now they have a long pipeline. A lot of product is still to come to market. So the I think the inventory overhang is going to continue to get worse. And that's why I think um you know again this hope that by the spring everyone will be back to buying $2 million homes, which is where the bulk of this inventory that's owned by boomers is in the very expensive well over a million dollar range. I don't think there's going to be the buyers that everyone hopes. uh at even you know mortgage rates have come down. They were sixish. They're around fourish. Uh you know by the spring they could be down a bit more. We'll see what the bond market has to say about that. As you know central banks only control the overnight rate, not the bond not the actual mortgage rates that's set by the bond market. Um but we'll see. But I just I I fear that that is a bigger secular story for Canada in terms of a headwind here than the tariff file. There's a bit of a the tariffs aren't good, right? Yeah. Well, I want to talk to you about that as well. When it comes to real estate, there's been a bit of a mantra that's been alive at least like as long as I've been paying attention most of my life, that the best time to buy real estate was 20 years ago. The second best time is today. And a primary goal of every young couple and every young person should be to buy a house. And therefore, when rates were at all-time lows and your home equity was at all-time highs, refinancing to buy that rental condo probably seemed like a great idea because it fits perfectly into that mantra. This is good financial stewardship, right? I'm investing in my future. And so I'm refinancing my home equity at all-time highs to buy a condo that's priced at all-time highs, but you know, the long term this is going to play out. You also mentioned the uh the sort of you used the word helping uh which made me chuckle a little bit because you know there's there's one generation that's helping the next generation get into this asset class, but the way that you've described it, it's sort of like is that help if you're helping somebody get into an asset class that's already priced at all-time highs? like is that that doesn't sound very helpful. You should help them find the undervalued asset class. That would be helpful. But the mantra says real estate's good 20 years ago, real estate's good today, real estate's good in 20 years. Yeah, I understand the thinking, but unfortunately people forget price. Price matters. So price relative to income. You know, the fact is that in 1990 when interest rates were coming down from 12% on mortgages, uh our I bought our f we bought our first home at two times our household income. Um and so mortgage rates were high, but affordability was still reasonable because the price you had to pay was two times your household income. Fast forward to during the pandemic at the peak of all the craziness in 2022, people were paying 8 to 12 times their household income. So, um, that was not affordable. And, you know, old-fashioned as it may sound, those are historically, uh, durable statistics. The price times rent is another one that has historically held up as a valuation technique to say, you know, what can you rent this property for and how much are you paying for it? And that will uh greatly tell you what your financial risk on that transaction is because there's always going to be something that comes up that's unexpected in many cases. And again, I was writing about this with a lot of passion at the time because I was just so convinced it was a very self-destructive preoccupation. And I didn't like to see people doing these things that they thought were helping, which I had a terrible feeling was going to be a great negative for their financial progress. And indeed, that's the case, right? So, yes, you know, Jay, over a 30-year time horizon, all kinds of mistakes can be forgiven, right? like 30 years is a long time. The trouble is that most people can't stay that course for 30 years and wait for it to work out. And you know, this is why I talk about valuations and price that people pay for all kinds of assets. It's all if it's especially if it's supposed to be an an investment. Now, I've argued for a long time that housing should be your shelter and it's not really an investment. And if you pay, you know, 2 million for a shelter versus 1 million, really, you've just paid a million more for consumption. That's really what that is. It's not more of a shelter. It's just still your shelter, but you put more of your life savings from other pursuits or other activities or longer term goals into your shelter. So, that's what people were doing. They thought it was, you know, a g get-richqu scheme. And baby boomers had really, again, saw this huge, you know, appreciation in the price of their homes. and they felt like millionaires like they just were like, "Oh, you know, but I've seen this before." I remember visiting the uh Silicon Valley in 2000 in the tech peak and our bus driver was telling us at the time that his home that he'd owned for 20 years was now worth a million dollars. And he was a bus driver who had ridden that appreciation. But in fact that was directly connected to the tech boom in that area at that time where tech workers were being paid huge premiums over regular working wages and they were driving up the price of housing. And then of course what you see is that when the tech bubble burst in 2000 and a bunch of people were laid off suddenly the demand for that insatiable demand for really expensive housing evaporated and the Bay Area pricing in the housing market came off sharply. So these things are very interconnected and today especially back to my earth my first point about you know where the bulk of the money that has been funding consumption has come from in the last couple of years in particular it's not from wage growth it's from you know gains in financial assets. So either you know it's riding the benefits of the ballooning and if you had a big gain in equity uh during the pre previous period um and also in the stock market because as we know the stock market has really taken off uh to all-time highs again in the last year in particular since October of 23 really it's about two years now that other than the crash in April of 25 which was very short-lived it's really gone to all-time highs again. So the boomers again own the bulk of that. They own the bulk of the stock market wealth. They own the bulk bulk of the housing wealth. So they're feeling, you know, quite well off so to speak right now. But the issue is that they need to cash some of that out in order to pay for their life. Especially since, as I say, twothirds of them are already retired. The last concentrated 30% is moving into the 65% 65 age range. and 92% of them expect to be retired at 65. So this is really a a huge dynamic of who's got the assets, who's planning to sell the assets, and to whom. And I would submit there's a big gap there between the price of who buyers are prepared or able to take those assets off their hands and what boomers are hoping to divest themselves uh at. And the market will have to find the equilibrium in the middle. Yes. Yeah, it will because as you've described this, you're sitting on the house asset, you you need to sell it. But unless you find a buyer who's coming in with an allcash offer, as you described with current interest rates, which which aren't incredibly high, 4%'s not high relative to history, but the housing price is. So that 4% on a very expensive asset still a lot of money and you have to hold that up against the potential rental income and those two things don't um don't add up right now which just limits the the pool of buyers, right? Because unless you're coming in with an allcash offer, you don't see an income generating prof uh property there, right? You just see a liability on a monthly basis. And a lot of people uh are wanting to sell their existing property. Whether it's to downsize or to upsize, they still need someone to buy their existing property for the most part cuz the theme is downsizing. The theme, you know, is not like a few years ago it was add properties because they just thought why not just add properties, you know, and during the pandemic people wanted recreational properties and all kinds of properties. But now, as the age cohort gets that much older and closer to retirement and those that are already in retirement, they're wanting to get more income and lower their output and their expenses. And that theme is really butdding up against this demographic deficit of the younger population who just don't have the resources or the job stability or the savings. Um, another interesting thing I've I saw recently is that you know there was a lot of people talking about how US mortgage rates where um, you know, because as you mentioned the long-term uh, you know, people can lock in for 30 years at a at a certain rate there. There was a lot of people saying you know well it won't matter in in America because people are all sitting with sub 3% mortgages. So even though the central bank was raising rates and the bond yields went up and mortgage rates went up, you know, people will just stay put. Well, actually that's not what we're seeing. And this goes back to this, especially for Americans, there is this sort of generational obsession with harvesting home equity to pay bills, to pay consumption. This is a theme I've been tracking for a long time. But basically, they if you look now, there is more 6% mortgages today than 3%. those lines have been converging. So the amount of people who either have moved and therefore had to get a new mortgage or refinanced because they that is their habit of how they pay for their life is to refi, you know, take out cash and pay for things for consumption. And that's been really keeping up uh consumer spending um to the extent that it is. It's still weaker uh but it has sustained itself relatively and that has been primarily on harvesting home equity but in doing so they go for current rates. So there imagine you're you're so cash strapped you need to harvest equity so badly to pay off other debts or pay for your your consumption your life that you're trading in a 3% mortgage rate for a 6% mortgage rate. And you're doing that because oh well that's the going rates now. And if you refinance or or sell your house typically you you lose that prior low rate in America. So it's not that portable typically. So anyway that's just something I noticed too. So it goes back to this idea that you know oh well if you have a a house you'll just stay there 30 years and you won't worry about it. Most people don't though, right? They move much more frequently than that for many many reasons. And so that's why um you know again back to the price that they paid and how much debt and leverage they have. It really comes home to roost. Let me ask you a question about something you said at the very beginning of this conversation. You were comparing the Canadian and US economy and said well Canada doesn't have the tech sector going for it. They don't have the tech sector driving their GDP like the United States does. And when you were talking about that, I I thought, you know, reflected on previous discussions that you and I have had where we talked about the consolidation of that S&P 500 value into like 30% into five companies only, all tech, 40% into 10 companies only, carry 40% of the value of the S&P 500. Nine of those 10 are tech companies, the exception being Birkshshire Hathaway. Um, and I see a behavior right now both in Canada and the United States that strikes me as similar to the housing behavior in 2021, which is just you can't make a wrong decision. Throw money at it and you'll be okay. And I'm seeing that investor mindset with the triple Q with broad equities in the US. Just put your money there and you'll be fine because the market eventually always goes up. are you look at a lot of portfolios. Are you seeing that too? Is that a fair comparison? And what's your take? Yes. So, um people have not rebalanced. People don't appreciate how concentrated they they are. They think they're holding a diversified basket of assets when in fact, by the way, the NASDAQ top nine stocks are now the same as the S&P top nine stocks. Those tech companies are now exactly the same in both of those indices. So it's just speaking to the fact that diversification has been greatly diminished. The um the other smaller companies, you know, if you look at the um the SM600, the S&P 600, which is the the medium caps uh small to medium cap, whether it's the Russell or whatever index you want to look at, none of those have benefited. That's sort of the main street um index have not benefited to the same extent. They're barely positive over the last since the peak in 2022. Um nothing like what's happened in these large cap indices and people have not reweed or sold or rebalanced primarily and this is one of the things that human nature comes back to bite us. Jay, I've seen this so many times when you have these really outlandish out unusual winds and let's call them that because anything that goes up 10 30 40% in a matter of months is a win. It's a wow. It's not anything that people, you know, bank on or put into their expected return calculator. It's a wow, great timing. We just won the lottery. But very often people double down on more of it because they think, oh well, if we've won with that amount, we should, you know, put more chips on that. The other reason that people don't rebalance or reweight is often tax liability. They say, oh, if we sell some, we're going to have to pay the tax. I've heard if I had a dollar for every time people have said that to me, you know, as an excuse for not selling something, that's had a really extraordinary move. And um you're seeing that today um not just in the tech sector, I would submit to you even in the precious metals sector in Canada because we've had this really extraordinary kaboom right in in the price of gold and silver. the mining companies, you know, as you know, the gold miners are up over 100% in a very short period of time. This is like tech 2000 style gains, you know, in in a particular sector. Um, and that's great. People should rebalance, rewe, you know, take some of that profit, but very often they're not doing that. Um, and again, I thought I saw a similar behavior in past episodes like in 2011 when the silver price also went to $48. And you know, people were not downsizing because they kept wanting to run that table, right? They didn't want to think that that was just good luck or they'd won the lottery. They wanted to think it was like, I'm going to keep winning forever. And then, of course, the price crashed. and they do things like they quit their jobs and they think that they're full-time investors or they're not realizing they're in a bubble. I mean, pick your pick your poison. Whether it's real estate, whether it's tech, whether it's precious metals, whatever it is, it doesn't matter. If it's had an extraordinarily quick run or big pop, people kind of lose their mind, don't realize how rare that is, don't realize that mean reversion will often take back a huge part of that progress in a short period of time. Again, even if 20 years from now it works out like you say, well, what what if 20 years from now it's worth more than it's worth right now? Yes, great. But you know, again, do you have that amount of time to have something go down significantly and spend years trying to recover? And that is just the pattern that we see after these episodes repeatedly. You know, whether you know stock prices come down uh significantly and take 10 to 15 years to recover. Um, everyone says, you know, and they've been programmed that valuations don't matter. I've heard this so many times. I'm a I'm a fundamental analyst. So, I talk about valuations and I was told valuations didn't matter in housing. Uh, three years ago, I was told that's old school. That's old models. Nobody cares. That's totally irrelevant. You don't understand. We have new immigration. We have a place everyone wants in Canada. Like, you know, I heard it all. Anyway, back to just humble basics. Those rules were not repealed. They still apply. And I would submit that they still apply with respect to valuations. We have the highest equity valuations today that we have seen in some cases ever in history. In other cases about as high as in the peak of 21 before the market took a big dump uh or in the peak of 20, you know, two 2000. We're way above 2007's highs at this point. So, um, the reality is that valuations tell you everything about risk. So, this is my point. Yes, they're not great at telling you the timing. I can't tell you when these, you know, mean reversion per periods will take back big chunks of what was won, but they tell you the financial risk you're exposed to. That's what evaluation is. That's why I knew that if you're buying a house for 8 to 12 times your household income, it was a bad investment back then. And that's how I know that these equities at these valuations, you know, five times book, three times sales for indices, um, the lowest dividend yields like 1.2% for the S&P just like at the all-time, you know, peak of the market in 2000. So, it's paying you very little if anything. The the TSX uh yield right now is 2.4. Um, so you can get more in a government bond or in a GIC than in these equities. And people are still holding them because they say, "Well, if I sell now, I'll have to pay some capital gains. I don't want to do that. I don't want to pay the tax." Okay. Or I think it's going to go higher. Okay, it might go higher and then what? Do you ever have a sell rule? And I think I think the thing you should ask people, you know, because we all come to this with our sort of experience. um mistakes, wins, psychology, uh temperament, beliefs, and at some point all money is a type of belief, right? So whether you're a crypto person and you're you're you're crazy about crypto, great. Um but you still have to have risk management around how much of your money is in that bet. you know, how much it's gone up, uh, pairing back your position size, do you have any liquidity, how is your leverage? Because all these things increase the inability of you to wait out a downturn, right? So you're not like you say everyone talks about the long term but if you don't have these things correctly sized with enough liquidity with your enough income to pay your bills you will not have the ability to wait over the long run and you'll be distress selling with the masses because the masses do this wrong and they turn around and start selling in a liquidation mode which creates these big downdrafts. Right? So it's just it's timeless truths. It's boring and blaszeé when risk appetite is on fire and no one wants to hear about what could go wrong. But it is just one of the ways that you survive and thrive over full market cycles and you know end up with you know a very important point is people talk about compound returns over time. You can't get a compound return from an asset that crashes by a huge amount uh and then doesn't and takes years to recover. There's no comp compounding only works if you take the income and constantly roll it back in so that you buy more units at whatever price. So if you know if you're 20 or 30 years old and you're saving $300 a month and you want to put it into an a an index product or a you know a unit of something, um by all means do that and keep steadily adding. And you know, if it goes down a lot, don't stop adding. Keep adding, right? And if it goes up a lot, don't add a bunch more. Keep just, you know, steadily putting in. Um, and you can do well over 30 years or 20 years in that environment. But that's not what most people do. Most people are paying fees out of the dividends uh or out of the cash flow or they're not getting cash flow at all. And then, as I say, you've got this whole cohort of people who are trying to retire. So they're not reinvesting the cash flow. They're trying to extract the cash flow to live on it. So now they've got a really long duration asset. Right now it's a function of how long the price takes to go up or down over time. And one other factor, I was writing about it in our recent client letter, but it's this notion of sequence risk, which has been documented in studies to show that basically the decade before and after retirement, they call it the fragile decade, Jay. And in that period they showed um numerically that if you have a big capital draw down during the decade before and after your retirement because you are taking withdrawals it can have a catastrophic impact on your capital. In other words, it can totally derail your retirement plan because retirement plans assume compound gains continually going over time. And if you are dealing with a downdraft in an asset class or several asset classes at once, which in a highly correlated environment like we are today, I think if one sector like tech goes or housing continues to struggle or gets worse and unemployment continues to rise, you know, you've got this feedback loop where everything is really closely correlated and not nearly as diversified as people think. So in that environment, that's where these loss cycles make such a huge negative impact. And so that's why it can't be just chasing returns. It has to be always with a mind to what your risk exposure is and managing that for the long term. That fragile decade concept really hit me. I read I read that client letter by the way and um it it one one way that it hit me was that FOMO is not age restrictive. And in fact some of the folks I know at this point in my life that are most impacted by FOMO are those that are looking towards retirement inside of 10 years and they're looking at what they've got in the bank and the net worth. They're considering the lifestyle they want to have and they're seeing a bit of a gap and that's putting them in a situation of I need to swing big right now. I need to be exposed to the market right now to make sure I make up that ground that I don't have. Um, which after reflecting on your letter, what a colossal red flag. And in a recent conversation you had with Adam Tagart, I think you quoted Warren Buffett, don't risk what you have so that you might gain what you don't need. And that's a transaction that a lot of folks and a mistake that a lot of folks make. Um, and you mentioned, do you have a sell rule? Right. If you're up 30% on a position and you're not de-risking, why not? Well, cuz I'm so right. I'm 30% more right than I thought I was. Right? Your conviction grows. And I see this all through the precious metal sector right now. um gold and silver equity speculators that are up 50, 100, 200% on a position, but and it's a speculation and they don't want to sell now because they're like, "But the gold tailwind is just heating up. I'm 100% up today. I'll be 500% up in a couple months." But that's that's the market's just given you a gift. The gift, it's the opportunity to derisk. If you have that opportunity, take it all day long. You can withdraw some of your principle. Take it. Take it. Take it. Um especially in the speculative sectors. I mean it's crazy to me that people treat speculations and investments the same way when the market heats up. It's like oh it's a buy and hold thing. Uh but no, it's not a cash flowing company. And in the gold sector you could look at like a new mantra ag uh you know catalyst needing speculation and people put them in the same bucket and they hold them both. It's it's disastrous. But that fragile decade concept and I'm seeing that right now with many friends of mine who are looking at the gap between what they have, what they think they need, and they're swinging for the fences trying to make up that ground. And I'm sure you see that too. You actually reminded me of something great in your Sunday letter this week because you talked about how um they put catfish in the um tanks uh to keep cod invigorated so that they become they keep muscular and lively and fit on in transit. And you used that that notion of comparing that to what China has done with western companies and entrepreneurs, inviting them in repeatedly over the past 20 years and basically learning their trade secrets and it's made uh competition in the Chinese companies so much better because they've had this, you know, uh worthy opponent. They've had this template of how to do it successfully and it's made them all up their game. So what it occurred to me about these asset bubbles is that they actually have the opposite effect on humans. So we you know uh what happens in the periods where you get outsized gains for doing nothing really you know like again your your expectation is that over time perhaps you'll make six or 7% and that would be a great compound return over 30 years. That's kind of like what you know regular retirement planning looks at and most people don't get that by the way but that is the goal sort of thing penciled in. But what happens is we get these periods and we've had them so through my whole career and you've been through a few of them now too Jay as young as you are. Um because you remember the 20078 cycle when Chinese demand was insatiable and all the rhetoric and stories were that you know the commodity boom would never turn down and there'd never be enough rocks and trees and all this stuff. And basically what people do is they stop um muscular things. They stop doing intelligent financial things. They stop even their work. They they throw away businesses that are making good money because they think well that's chump change to compared to this. I can speculate here or they call it investing which makes it very dangerous because again a speculator should just say yes I'm speculating. There's no income. There's no reason for me to think this is going to work except I want to just take a flyer and see if 10 or 20 years from now or five years from now it goes up in value. Okay, great. But do it with a percentage. And what people have done is really went lock, stock, and barrel. We've got, you know, 70% of boomer assets now in equitybased products. You've got a president in America right now who is doing things like writing executive orders to get private equity and private credit pushed into the retirement fund system. This is like throwing sharks in with the minnows is what this is. This is like, you know, because private equity and private credit are not sustainable. They're very highly speculative. And what have they done? They've tried to package themselves as liquid, conservative, uh, viable investment um, asset classes for retirement savings. And they've been successful. They've made a big inroad, but they have run out of uh buyers in this environment because the the interest of the public has all gone over to, you know, precious metals and and uh you know, it's leaving real estate. And Canadians that were doubling down on real estate at all-time highs are now doubling down on US stocks at all-time highs. And so now they're trying to get new fools in, right? They need new fools to come in and buy up these illquid assets. The biggest thing that private uh equity and private credit places are doing right now is selling their own their funds to continuation funds of the same thing to try and you know keep the asset price thing going like not have any actual price discovery but just make it all look like it's still going up. And they've done things like frozen redemptions and frozen distributions. Certainly in the real estate sector in Canada, there's several uh funds and equity that attracted people thinking they were getting some above, you know, above average return product and they've in fact had it frozen where they can't even take redemptions. So, you've got to be be aware that this is all designed to foil you, to undermine your your rationality, to to take your eye, to attract you to the dangerous things, right? the shiny things and to take your focus away from doing really intelligent, disciplined things, right? So, so that that's the kind of the analogy that I have. Um, the asset bubbles have I say asset bubbles cost us a fortune in the end. They really do. And we're seeing that in Canada now in spades. I believe we're going to see it when the when the current stock market bubble bursts. And yes, I don't know when it will happen, but I'm quite sure that based on all the historical precedents and all the reasons that I can see in real time um that it's going to be a painful episode. And so what you know I look at you asked if I look at portfolios and what I see I see 70 year olds with 70 and 80% of their money in equities with people who who used to have think 10% in things like precious metals was an insurance policy that made them feel better now with 20% and institutions coming out with recommendations because now they can sell lots of these products right they're all doubling down on let's bring out funds and ETFs Whether it's in the crypto space because that's on fire again, whether it's in precious metals, what private equity, whatever these sort of things that were typically considered fringe have now become mainstream obsession and people are wanting to, you know, boom up their uh I think it was Goldman Sach uh no Morgan Stanley who recommends now that 30% of portfolios go into precious metals. It's like where were you guys when it was uh you know spent 15 years going nowhere? Where were you then? Now that it's gone up from a,000 to 4,000, you think everyone should have 30%. And this is because they can sell that idea because they know the public's gullible. They know the public does everything at the wrong time. So they're like, "Oh, this is hot right now. This is what we can sell the people, so let's go." It's so important to think about those incentives when a firm like Morgan Stanley comes out and says something like that. 30% of portfolios should be in precious metals. What is their incentive there? It's obviously fees on the sale of products. It's not stewardship of other people's capital. And it's just important to remember that, right? That doesn't make anybody evil. It's not a it's just incentive structures. It's just plain and simple, right? Uh very key. And as you described this, I just found myself thinking, you know, you talked about the the the discipline and decision-m, how that's altered at the peak of a bubble when people are making money and just, you know, uh good decisions go out the window and you kind of, you know, it's almost like it's a direct parallel to just getting super drunk. And people are drunk at the top of a bubble. They're drunk on housing in 2021. They're drunk on US equities today. and they'll have some buyers remorse when they wake up in the morning. I think everybody's familiar with that. Uh let me ask you, I wasn't aware about the private equity and private credit being contributed to did you say the pension funds in the United States and my question there is back to the concept of incentives. What is the incentive of the president or of private equity to get these products included in public pension funds of the everyday you know tradesmen and retiree? Oh, because it's an ex like I said they've run out of greater fools in their own because they sold it to all the pension funds. This was like in the last decade they you know we had very low interest rates. Uh we had flat equity markets for like 15 years really. It took from, you know, 2000 to 2015 for the S&P to recover. The TSX really has only made all the gains in the TSX since 2007 have really happened in the last couple of years. So, equities were not doing great for considerable period of time there. And so, people were looking for how do I keep hitting my my, you know, my return bogey? How do I get it? Um, and so they were, you know, they thought, okay, real estate, well, that's a there's a lot of private investment that goes into real estate. So, the private equity companies, they're very opaque. Uh, they they um basically there's a lot of people throwing around money because it's other people's money and they don't really have a great discipline or a great track record. Uh, and the fees are very rich because it's considered alternative. they can charge fees that are, you know, two and 3% plus a portion of any upside they make, like a lot more than a traditional portfolio approach. So, they're like, let's sell this to the public. And so, what they came to the end of because their returns were terrible uh in in most cases, and the fees were very high, which was related to why they weren't doing great. Um, and then they had to freeze distributions, as I said, because people wanted their money back in the last couple years, and they couldn't. they were all holding the same commercial real estate properties as an example and they couldn't just sell. It's like you it's like what everyone's discovering now with expensive Canadian real estate. It's like great it you have it. Who's going to buy it? Like who can buy that? Who who's willing to give you that price? And in the commercial space the answer was nobody. So they were writing down huge now they don't want to admit that their unit value is down by a huge amount. So they have been doing as I say these continuation maneuvers. Meanwhile, pensions have been realizing that they overallocated to this illquid asset class, that it wasn't worth all the risk and fees that they put money into. And so, they've pulled back from this sector. And now they're looking for new new victims essentially is what it is. And so, they're like, "Oh, look at all the uh you know, the target date funds for example in America are huge, right? there's a huge amount of passive investment going into things like ETFs uh and sector funds and uh that sort of thing. And so they're they're they're eyeing that and saying, gosh, if we could get 20% of that market to switch out of these more traditional instruments into our funds, wow, you know, we'll make billions and billions of dollars. And that's that's the incentive straight up. They need more buyers. They've run out of greater fools and and so these poor I think it's just repulsive. I think it there's no fiduciary obligation here apparently because they're lobbying the hell out of the gatekeepers of these retirement funds to get them to let them in. Let the you know the Trojan horse inside the gates and then they're going to uh you know sell it as sophisticated and savvy but it's not liquid and they're going to try and make it look liquid. In other words, you know how mutual funds right now, you have to have a closing price that if a person asks for their money back, the market price, they get that at the end of the day. They're having to do all this great opacity to try and make it so that something that's illquid will look like it's liquid on a daily basis. I just think it's a it's a set it's a recipe for more of the same that we've seen so many times. Um, you know, we've got this great tradition now of of whether it was uh carbon credits being sold the same forest four or five times to all these different people buying carbon credits, the greenwashing thing. We had that. We had, you know, um we have now uh revelations of certain um uh car companies that are going bankrupt because they were lending um one that came out this week, but they basically were getting loans from banks based on the same inventory, counting it two and three times over the same inventory and going to different lenders and and that kind of rehypothecation. We've seen that in the asset markets. We see it um you know uh even in you know things like uh in in gold holdings you know there's this all about let's audit you know Fort Knox and all that. Why? Because there's a tradition of people uh of institutions double counting uh rehypothecating the same assets and increasing leverage that way. Uh we saw that we've seen that repeatedly. So, you know, I think it it all goes back to how the system has been allowed to run wild. Fiduciary duty out the window. Everybody's on the take. Referral fees left and right. All the professionals are in bed with the sales side. It's it's become a complete disaster. Um, so it's it's very hard because individuals don't have the time or the like I said this fragile decade notion. If they lose big, it's not something they're going to recover from. It's going to set them back years. And you know what? Go back to work in your 70s. I mean, these are these are challenging things. So, um, this is why I am so focused on trying to give individuals heads up. And I say people are hard to help because sometimes you give them the heads up, you point out the real weaknesses in what they're doing, the great vulnerabilities that could cost them a lot and harm them, harm their plans, and they're just sort of like, well, you know, my my stock broker said it's good or, you know, well, it went up a lot last year. I I you know and they start ratcheting up their spending expectations or their return expectations as if it's a mountain from which it only goes up from there and that's there in lies the demise. Let me ask you a question actually about the essay that I published on Sunday because I was and am trying to work through a thesis and just understand something and a lot of what you've shared today has sort of triggered some additional thoughts. So, you know, where I came from was a place of having many friends near or at retirement age who are swigging for the fences in the broad equities market because they see that gap that we've discussed before. And my intention with last week's letter was to look at the consolidation of value in the S&P and and what what kind of vulnerability that is. And then I use the catfish analogy as an example of you know how what or to ask the question how vulnerable is American tech. I mean we opened up this conversation by saying you know US technology is driving GDP right now. Well what if that stops? What if a new threat enters the room and and what happens? And the catfish analogy as you mentioned is yeah you bring in a foreign competitor to make domestic uh participants stronger against that competition. Right. they have uh have to build a new hedge against the foreign competitor and the the strategy in China has been create some incentives to lure in a foreign competitor or company and in the past we've seen this happen with uh LinkedIn, Google, eBay, Amazon, most recently Tesla and they're lured into the country with tax incentives, subsidies, JV opportunities, all this stuff. uh and after a couple years when they gain market share and the domestic competitors have learned from this policy changes and suddenly those tax incentives disappear, the subsidies dry up, new demands are put on how they can access the supply chain and they're sort of squeezed out and sent back out to sea and the domestic fish are stronger as a consequence and they take that local market. Uh this has been a very successful strategy and it's it's not propaganda. It's just intelligent strategy by the simple fact that it's worked very well. Um, you know, and other countries have done the same thing. Other countries did the same thing. Japan did the same thing. Germany did the same thing. You know, um, the foreign the uh, American car makers went over and showed the German car makers how to get started. I mean, this is this is what's happened. So, it's it's very typical. Thank you for that. Yes, absolutely. So, um, you know, is that how much of a threat to I guess where I'm going is that as I listen to you, I I'm sort of gaining conviction that the bubble in US equity is is not sustainable and probably near-term not sustainable. Simultaneously in Canada at least, we've got the equity bubble that a lot of people are betting on and 70% exposure to in many cases as you mentioned in the baby boomer uh portfolios, but we've also got the housing bubble happening simultaneously. And as I've heard you discuss in the past, we've seen one of those things occur at a time. 2000 was the equity bubble, 2008 was the housing bubble. Today we have both. And and that's that's a first, right? which is which is I don't know what to make of that but what do you what do you make of that? I think it's it's bad. It's bad because like I said we don't have a very diversified economy. Uh oil prices are still you know much lower than they were in 2007 and even when the Ukraine invasion happened. oil is not, you know, oil trends are not as robust as they were and it's very common to see the price of oil fall further when you get into rising unemployment and you know uh uh alternatives like this whole thing electricity is the new oil but you don't necessarily need oil to get electricity these days. So this is a this is a headwind. This is a headwind for Canada because we had a lot of our chips on that one horse. And so now we have to our largest trading partner is is being uh you know difficult. They don't want to just subsidize everything that we're doing. They want they want to throw catfish in the mix domestically in their economy and in Canada. It will no doubt force us to be more resilient. I think in the end it's more positive, but I'm not I'm not naive to suggest it's going to be easy or economically accurative, you know, right away out of the gate. I mean, we our prime minister is down there trying to negotiate a deal. They're holding press conferences to say they want to have one, but we don't have one yet. So, we're seeing, you know, things like our data came out this week on our uh exports and they're they're down not just to America, they're down internationally year-over-year. Why? Because global demand is down. Uh consumption is falling. Uh the UK has an asset bubble in its real estate market as well. Uh they also like it this happened in New Zealand and Australia. I mean because it was the add debt and stir trick that people tried. So uh also we have the demographic weight. So we have something like you know I was look I think I wrote about this in the recent letter too. We know again about the boomers. We know about their age. We know about the burden on the health care system the sick care system I like to call it. We know that you know it goes it it it goes from like 10,000 a year when you're 70 to 36,000 a year when you're 90. So we've got and only about I think the estimate is 12% of the boomer health care costs are already in our system. In other words, we've got 88% of that cost to come. We've got things like social security in America as well as the old age pension system here in in Canada not funded. Luckily CPP was actually restructured a few decades ago and it's now an actual fund that we pay into that is there to to fund pensions. Everything else is just general coffers, right? So the, as I say, old age security, the health care stuff is not funded. There's no money sitting there in the provinces to fund all that. And that's all stuff we can see. What I can't see clearly right now or very readily is where our revenue is coming from in this brave new world. And and that's what we have to we have to figure out. We've got to it's got to be policydriven. It's got to be new creative thinking. Uh it's gota we've got to have liquidity to do it. We need to have, you know, we can't just have all of our money spoken for in consumption and expenses. We have to have investment dollars. Um there's a huge infrastructure need here. Canada has that too. It's not just America. It's just that those are the big tech companies that are taking out whole towns and turning them into electricity generating areas, right? So um I mean efficiency is great. There's there's there's AI is here to help in some ways that you know the the the energy revolution the technology revolution all those things are definitely helping but right now the revenue piece is still it's more about how do we waste less and bring down cost structure but there's a huge upfront investment for that first and you know that's as as as the MIT study recently pointed out the the even the big tech AI stuff. We know that they spent they you know they've got like a trillion dollars of spending they intend to do but there's a very 5% of it is actually adding revenue at this point. So we've got this hiatus this this valley between you know we can see where the future can be improved. We can see what kind of investment that makes sense. But we've got this big gap right now between how do we fund all this, you know, uh and with with a workforce uh that is increasingly aging and there's not enough young workers to support the the boomers moving through. So it, you know, we could have planned so much better for this, but instead we took the lazy cod in the barrel, uh, you know, riding the asset bubbles, throwing more debt in, you know, thinking we were wealthy because our house kept going up in value. But in fact, we became, you know, uh, not not as fit. We became lazier, weaker, uh, not as resilient. And so I haven't given up hope. I know we can learn from this experience. Indeed. Uh perhaps we only ever do learn from really painful experiences. It seems that is the way. Um but I do think it's it's a big challenge right now uh for Canada and for most of the world. Frankly, I I want to I want to pull in a couple threads there. And you know, it's it's interesting when I think about the psychology and the investor psychology of uh different generations, you know, and and I'm, you know, I fall in the millennial category. And uh I I'm hiring a lot of folks right now from generation zed, I think it's called. It's the the earlier one. They're like 20 years old, right? And honestly, I am so impressed with the work ethic, the dedication, the um the very reasonable expectations. Um and I am just floored. Like I'm finding talent that I I haven't found in in 10 years. Um but I'd looked one generation earlier and I'm finding it, right? And there's there's it's a shift in entitlement is how I'm sort of interpreting it in the mindset. What I deserve for showing up, right? what I'm willing to do to get ahead. Interesting. You're seeing this, too. I was just saying I was just saying to someone, and no offense to boomers, I'm actually two years behind. I'm I'm technically an X. I'm right behind the boomers, but most of my friends are boomers. No offense to them, but they're the most entitled generation of all time. And perhaps millennials are right next in line. And again, I believe it's because they had it too easy. They had it to they didn't have to develop their their muscles enough. It was they rode these asset bubbles. They they got to drive demand cycles, you know, they were the marketing was all to them. Uh, you know, they got in positions of power. They were calling all the shots, but they were bad financial managers. They were bad managers of resources to in general. They did. You could see all this stuff coming. Nobody wanted to pay. Nobody wanted to set aside reserve funds for condo buildings, as an example, when now they're coming up with huge special assessments because guess what, guys? Those windows we bought 30 years ago that we knew had to be replaced in 30 years, we didn't set aside the money because, you know, we didn't feel like it. So, a lot of bad stuff has gone on. Uh, and I I So, that's that. And I think that younger generations, listen, I was on a at a place this summer in BC at a camp where students, young people from all over the world were there working for room and board. Why? To learn skills. And there is a a concept that boomers and and you know probably a lot of ex people could hardly ever get their minds around that people have to work for free. You can't even give them minimum wage. really like there's been, you know, a a dir of of um um enterp um apprenticeships. So, the younger generations have really got this whole okay, so I don't I'm never going to own a home. They really think like I'm never going to own a mill multi-million dollar house, so I'm going to have to figure out a way to and no one wants to invest in me. very few people want to actually give me a pension, give me benefits, you know, so they're very much about I'm going to have to figure this out from scratch. And so again, this is typically what makes the best swimmers. This is typically what makes the best sailors is rough weather, rough seas, you know, and and they will I think they will learn great skills and habits that will actually serve them for the rest of time. Uh but we've got still much of the decision-m right now being made by that cohort of entitled people who think that everything should just be provided and their their perspective is we worked all our lives. it's our turn to what do they our time or whatever all those ads. Um and I get it and I don't mean there aren't hardworking boomers in the class but as a cohort I think that they're unrealistic and entitled in general those Gen Z bunch of catfish coming into the pool. That's it. That's it. Go. I love it. Um look Danielle, been so great chatting with you. Uh, I love I love reconnecting and I'm really excited that you're coming back to Vancouver January 25th and 26th for my conference, the Vancouver Resource Investment Conference. So, you want to catch Danielle live uh on stage. We're going to be uh jamming on a bunch of very exciting panels. Check out vicia.com for tickets January 25, 26. Vancouver is beautiful in January. You guys are going to love it. So, come out. Stunning. Yeah, totally. Thanks so much. Listen, from Ontario, I look I look forward to coming to Vancouver in January from Ontario. It's a great time. I love it. I go walking around the bay and it's green. I'm like, this is awesome. So, everything's perspective. Do you see that? It's awesome. I love what you did there. Awesome. Awesome. Well, I can't wait. I can't wait. Thanks for coming back. It's going to be an awesome show. Thanks for today. Super enlightening. I I always find your take, you know, sobering and pragmatic, right? And I I don't want to use the analogy, it's like you're like cold water on a party, but you know, because I I don't think about your perspective that way. I think it's just like it's um since I've connected with you, you know, it's been over a decade now. It's just been consistently pragmatic, sound financial stewardship, right? Like this shouldn't be easy. It shouldn't be necessarily fun. It should be thoughtful, right? That's how it that's how we should approach this. I really appreciate your take. Yeah. Hey, thank you, Jay. It's always a pleasure to talk to you. All right, till next time.
Economic Expert: Precious Metals are Canada’s Final Lifeline
Summary
Transcript
Why is the Canadian housing market about to implode? And why are Canadian equity investors sabotaging their own retirement? Why do Canadians now have the highest debt to GDP ratio of any the G7 nations? If you thought the last 10 years were bad for the Canadian economy, you have no idea what's coming. Most people don't understand that Canada skipped through the 2008 great financial crisis, but that bill is about to come due. My guest today is Danielle Park, portfolio manager and principal at Vanal Park Investment Council. And today is a sobering conversation on the Canadian and American economies. Welcome to the J Martin show where we dissect the greatest minds in geopolitics and finance so that we can better understand the world. Here's Danielle Park. Enjoy. This is Jay Martin. All right, here I am with Danielle Park. Danielle, it's so great to have you back on the program again. Thank you for making the time. Thank you, Jay. Always a pleasure. So, here's where I want to start with you today. I get a lot of questions at present about the Canadian economy. I have American friends who are asking me about the street value of the tariffs, like what's actually happening on the street and the real economy as a consequence of the tariffs. I have Canadians asking me about the health of the Canadian housing market and more importantly what they can expect over the coming year or two. And in addition, I know you look at a ton of portfolios, so you see how people are actually allocated from a portfolio standpoint. And I'm sure you have some thoughts on that. So, first question for you, you know, how would you rate the Canadian economy right now specifically in those three buckets? What's your take, Danielle? I think it's quite weak. Um, it's weaker than the American economy, I would say, at this point because we do not have all the artificial intelligence companies here that are really driving the lion share of capex spending, which is driving the lion share of US GDP growth. Right now we have you know Shopify but we don't have a lot of of other companies in that sector and so we have haven't got that going for us. I mean if you look at the American economy that's pretty much all they have going for them. You know all of the uh GDP growth is coming from that one sector of those big tech companies. And so uh as far as Canada goes we're really lacking there. Uh and then we're also lacking of course in terms of diversification of our economy in general. Something I've been complaining about for the last decade just pointing out that we were heavily concentrated in housing and we really blew a big bubble there which was not improving productivity was not improving affordability was not helping our birth rate. I mean all of the things that we have really uh weighing on us now an aging demographic you know now we have negative immigration expected over the next couple of years. So we have really the hangover from the pandemic inflation in the cost of living is is weighing on the population. We have had rising unemployment for already a couple of years. We have a work week that is flat. uh you know we have household debt to GDP uh the highest of the G7 nations Jay Yay Canada um we have you know just a lot of struggling people if you take the pulse of the uh I would say not just the average bear I would say of the you know 7 or 80% of the population is really struggling right now to uh pay their bills to deal with uh debt that is coming up for refinancing. You know, we took out a lot 70% of uh existing of the mortgages in Canada were taken out during that pandemic era when housing prices were at all-time cycle highs and interest rates were at all-time lows. So, this was a horrible combination as it turns out because now that debt is coming up for renewal and the housing market, as you know, has already been falling. The prices have been falling in major centers like in BC and Ontario where the bulk of the population lives have been falling since 2022 already and uh average prices nationally are down 25%. So you've got all these mortgages coming up for renewal not just having to deal with higher interest rates than pre- pandemic or during the pandemic but also housing prices that are coming down. So equity that is actually collapsing. So to the extent that Canadian consumers have continued to spend, they've done so increasingly on debt and these, you know, buy now pay later loans. Uh, you know, my kids are in their late 20s and their friends are have been using this to finance things like takeout meals. Like it's, you know, it's just um a a very dangerous scenario. So the bulk of the asset inflation that's happened uh you know over the last decade really accred to baby boomers. But baby boomers are now finding themselves wanting you know uh we have about the last 30% of them coming into retirement over the next uh you know few years and they are expecting to downsize their overhead. on my street, neighbors are are listing very expensive properties for sale in the hopes of downsizing to condos in smaller, you know, places or getting rid of the cottage and the chalet and going just to, you know, a more simplified life and they are not finding buyers. Uh, so we've got that big, you know, the major driver of Canadian economic growth was the housing boom which became a bubble which has now burst. So that is a negative weight on the economy in terms of growth and momentum. Um we've still got the overhang of the unaffordability which is weighing on our ability to consume and save. Um and we have you know uh I mean it's it I guess the thing is what do we have going for us right now? We have precious metal prices at all-time highs and you know the a lot of the top 25 Canadian companies that have really boosted the TSX in the last year are in the precious metals space. So that's the one sort of bright light that we've had um in terms of the economy and uh investment dollars coming in and in terms of the stock market. But everything else is really pretty weak. Thank you for that. So, a couple things I want to pull on there. First of all, you mentioned um debt coming up for refinancing in the housing market. So, this was the flurry of buyers that bought homes in 2020 2021, early 2022 when rates were at near zero, but home prices were at all-time highs. Now, why not borrow the money? Because the money is free to borrow. That was the mindset. Um, what American viewers might not realize is that in Canada you typically lock in a rate for 5 years. I know in the US you can lock in a rate for 30, but what that means is that everybody who locked in a rate in 2020, 2021, 2022, that renewal is coming due and rates are a lot higher than they were when you initially bought that house. But you mentioned something else that average prices across the country are down 25%. So you're now refinancing an asset that's come down in value at a higher rate in an environment where household debt to GDP in Canada is already at an all-time high and as you mentioned leading the the G7 uh nations which uh I mean I'm not surprised. It's I don't love that news but I'm also not surprised to hear it. Did I capture that picture sufficiently, Danielle? And and what you know what's around the corner, I guess, in this scenario? Well, it's and also I'd just like to mention it's not just people that bought houses in the peak of the bubble, but a lot of people refinanced. So, they may have had the house a long time and, you know, they sort of looked and said, "Oh, great. The value's gone up a lot. Let's harvest some of that equity." It's one of my my pet peeves is this notion of harvesting your home equity. Um, and the reason that I I don't think it's a good idea is because rainy days come, Jay, as you know, and here we are in a very rainy day period right now. And there's not a lot of resilience in the economy because people were overspending and overlevering. Businesses were doing that too. Uh, governments were handing out money. Um, you know, they often say that the worst loans are made in the best of times. that was the scenario. In other words, when no one's concerned about uh repayment risk or credit risk or any of these things, um they loan the most money and the most money is borrowed and that is the seeds of a credit crisis ultimately because um now we're in the default phase, you know. So, sure enough, mortgages that are 90 days and later um in terms of delinquencies on payments has skyrocketed. Um, we're seeing the trustees in bankruptcy all reporting record volumes of people coming to see them. And importantly, it used to be the people that didn't own houses that were going to see the trustees because people who did could refinance and bail themselves out, so to speak. But now it is increasingly homeowners, property owners, and they're talking about the incredibly foolish things that were done, multigenerational things, you know, on the opaces of helping young people get into the property ladder where again boomers were harvesting some of their equity to give it to some of the younger people and everyone was levering up to get in and you know that's turned out to be a very painful experience and I don't think we're through it yet. I know there's a lot of people that have even taken properties off the market recently in the hopes that they can relist in the spring. But the amount of listings is just, you know, even in America is not just happening in Canada, of course, although Americans came into this with less household debt relative to things like income and GDP. Um, but there, you know, you're also seeing a like a three times the amount of listings to the amount of sales. Uh, so the data is just brutal. I think I saw a chart today that 72% there's an increase of 72% of condos for sale versus people buying condos right now in the United States. So, we really did overbuild that sector in North America um in the last few years. And um now they have a long pipeline. A lot of product is still to come to market. So the I think the inventory overhang is going to continue to get worse. And that's why I think um you know again this hope that by the spring everyone will be back to buying $2 million homes, which is where the bulk of this inventory that's owned by boomers is in the very expensive well over a million dollar range. I don't think there's going to be the buyers that everyone hopes. uh at even you know mortgage rates have come down. They were sixish. They're around fourish. Uh you know by the spring they could be down a bit more. We'll see what the bond market has to say about that. As you know central banks only control the overnight rate, not the bond not the actual mortgage rates that's set by the bond market. Um but we'll see. But I just I I fear that that is a bigger secular story for Canada in terms of a headwind here than the tariff file. There's a bit of a the tariffs aren't good, right? Yeah. Well, I want to talk to you about that as well. When it comes to real estate, there's been a bit of a mantra that's been alive at least like as long as I've been paying attention most of my life, that the best time to buy real estate was 20 years ago. The second best time is today. And a primary goal of every young couple and every young person should be to buy a house. And therefore, when rates were at all-time lows and your home equity was at all-time highs, refinancing to buy that rental condo probably seemed like a great idea because it fits perfectly into that mantra. This is good financial stewardship, right? I'm investing in my future. And so I'm refinancing my home equity at all-time highs to buy a condo that's priced at all-time highs, but you know, the long term this is going to play out. You also mentioned the uh the sort of you used the word helping uh which made me chuckle a little bit because you know there's there's one generation that's helping the next generation get into this asset class, but the way that you've described it, it's sort of like is that help if you're helping somebody get into an asset class that's already priced at all-time highs? like is that that doesn't sound very helpful. You should help them find the undervalued asset class. That would be helpful. But the mantra says real estate's good 20 years ago, real estate's good today, real estate's good in 20 years. Yeah, I understand the thinking, but unfortunately people forget price. Price matters. So price relative to income. You know, the fact is that in 1990 when interest rates were coming down from 12% on mortgages, uh our I bought our f we bought our first home at two times our household income. Um and so mortgage rates were high, but affordability was still reasonable because the price you had to pay was two times your household income. Fast forward to during the pandemic at the peak of all the craziness in 2022, people were paying 8 to 12 times their household income. So, um, that was not affordable. And, you know, old-fashioned as it may sound, those are historically, uh, durable statistics. The price times rent is another one that has historically held up as a valuation technique to say, you know, what can you rent this property for and how much are you paying for it? And that will uh greatly tell you what your financial risk on that transaction is because there's always going to be something that comes up that's unexpected in many cases. And again, I was writing about this with a lot of passion at the time because I was just so convinced it was a very self-destructive preoccupation. And I didn't like to see people doing these things that they thought were helping, which I had a terrible feeling was going to be a great negative for their financial progress. And indeed, that's the case, right? So, yes, you know, Jay, over a 30-year time horizon, all kinds of mistakes can be forgiven, right? like 30 years is a long time. The trouble is that most people can't stay that course for 30 years and wait for it to work out. And you know, this is why I talk about valuations and price that people pay for all kinds of assets. It's all if it's especially if it's supposed to be an an investment. Now, I've argued for a long time that housing should be your shelter and it's not really an investment. And if you pay, you know, 2 million for a shelter versus 1 million, really, you've just paid a million more for consumption. That's really what that is. It's not more of a shelter. It's just still your shelter, but you put more of your life savings from other pursuits or other activities or longer term goals into your shelter. So, that's what people were doing. They thought it was, you know, a g get-richqu scheme. And baby boomers had really, again, saw this huge, you know, appreciation in the price of their homes. and they felt like millionaires like they just were like, "Oh, you know, but I've seen this before." I remember visiting the uh Silicon Valley in 2000 in the tech peak and our bus driver was telling us at the time that his home that he'd owned for 20 years was now worth a million dollars. And he was a bus driver who had ridden that appreciation. But in fact that was directly connected to the tech boom in that area at that time where tech workers were being paid huge premiums over regular working wages and they were driving up the price of housing. And then of course what you see is that when the tech bubble burst in 2000 and a bunch of people were laid off suddenly the demand for that insatiable demand for really expensive housing evaporated and the Bay Area pricing in the housing market came off sharply. So these things are very interconnected and today especially back to my earth my first point about you know where the bulk of the money that has been funding consumption has come from in the last couple of years in particular it's not from wage growth it's from you know gains in financial assets. So either you know it's riding the benefits of the ballooning and if you had a big gain in equity uh during the pre previous period um and also in the stock market because as we know the stock market has really taken off uh to all-time highs again in the last year in particular since October of 23 really it's about two years now that other than the crash in April of 25 which was very short-lived it's really gone to all-time highs again. So the boomers again own the bulk of that. They own the bulk of the stock market wealth. They own the bulk bulk of the housing wealth. So they're feeling, you know, quite well off so to speak right now. But the issue is that they need to cash some of that out in order to pay for their life. Especially since, as I say, twothirds of them are already retired. The last concentrated 30% is moving into the 65% 65 age range. and 92% of them expect to be retired at 65. So this is really a a huge dynamic of who's got the assets, who's planning to sell the assets, and to whom. And I would submit there's a big gap there between the price of who buyers are prepared or able to take those assets off their hands and what boomers are hoping to divest themselves uh at. And the market will have to find the equilibrium in the middle. Yes. Yeah, it will because as you've described this, you're sitting on the house asset, you you need to sell it. But unless you find a buyer who's coming in with an allcash offer, as you described with current interest rates, which which aren't incredibly high, 4%'s not high relative to history, but the housing price is. So that 4% on a very expensive asset still a lot of money and you have to hold that up against the potential rental income and those two things don't um don't add up right now which just limits the the pool of buyers, right? Because unless you're coming in with an allcash offer, you don't see an income generating prof uh property there, right? You just see a liability on a monthly basis. And a lot of people uh are wanting to sell their existing property. Whether it's to downsize or to upsize, they still need someone to buy their existing property for the most part cuz the theme is downsizing. The theme, you know, is not like a few years ago it was add properties because they just thought why not just add properties, you know, and during the pandemic people wanted recreational properties and all kinds of properties. But now, as the age cohort gets that much older and closer to retirement and those that are already in retirement, they're wanting to get more income and lower their output and their expenses. And that theme is really butdding up against this demographic deficit of the younger population who just don't have the resources or the job stability or the savings. Um, another interesting thing I've I saw recently is that you know there was a lot of people talking about how US mortgage rates where um, you know, because as you mentioned the long-term uh, you know, people can lock in for 30 years at a at a certain rate there. There was a lot of people saying you know well it won't matter in in America because people are all sitting with sub 3% mortgages. So even though the central bank was raising rates and the bond yields went up and mortgage rates went up, you know, people will just stay put. Well, actually that's not what we're seeing. And this goes back to this, especially for Americans, there is this sort of generational obsession with harvesting home equity to pay bills, to pay consumption. This is a theme I've been tracking for a long time. But basically, they if you look now, there is more 6% mortgages today than 3%. those lines have been converging. So the amount of people who either have moved and therefore had to get a new mortgage or refinanced because they that is their habit of how they pay for their life is to refi, you know, take out cash and pay for things for consumption. And that's been really keeping up uh consumer spending um to the extent that it is. It's still weaker uh but it has sustained itself relatively and that has been primarily on harvesting home equity but in doing so they go for current rates. So there imagine you're you're so cash strapped you need to harvest equity so badly to pay off other debts or pay for your your consumption your life that you're trading in a 3% mortgage rate for a 6% mortgage rate. And you're doing that because oh well that's the going rates now. And if you refinance or or sell your house typically you you lose that prior low rate in America. So it's not that portable typically. So anyway that's just something I noticed too. So it goes back to this idea that you know oh well if you have a a house you'll just stay there 30 years and you won't worry about it. Most people don't though, right? They move much more frequently than that for many many reasons. And so that's why um you know again back to the price that they paid and how much debt and leverage they have. It really comes home to roost. Let me ask you a question about something you said at the very beginning of this conversation. You were comparing the Canadian and US economy and said well Canada doesn't have the tech sector going for it. They don't have the tech sector driving their GDP like the United States does. And when you were talking about that, I I thought, you know, reflected on previous discussions that you and I have had where we talked about the consolidation of that S&P 500 value into like 30% into five companies only, all tech, 40% into 10 companies only, carry 40% of the value of the S&P 500. Nine of those 10 are tech companies, the exception being Birkshshire Hathaway. Um, and I see a behavior right now both in Canada and the United States that strikes me as similar to the housing behavior in 2021, which is just you can't make a wrong decision. Throw money at it and you'll be okay. And I'm seeing that investor mindset with the triple Q with broad equities in the US. Just put your money there and you'll be fine because the market eventually always goes up. are you look at a lot of portfolios. Are you seeing that too? Is that a fair comparison? And what's your take? Yes. So, um people have not rebalanced. People don't appreciate how concentrated they they are. They think they're holding a diversified basket of assets when in fact, by the way, the NASDAQ top nine stocks are now the same as the S&P top nine stocks. Those tech companies are now exactly the same in both of those indices. So it's just speaking to the fact that diversification has been greatly diminished. The um the other smaller companies, you know, if you look at the um the SM600, the S&P 600, which is the the medium caps uh small to medium cap, whether it's the Russell or whatever index you want to look at, none of those have benefited. That's sort of the main street um index have not benefited to the same extent. They're barely positive over the last since the peak in 2022. Um nothing like what's happened in these large cap indices and people have not reweed or sold or rebalanced primarily and this is one of the things that human nature comes back to bite us. Jay, I've seen this so many times when you have these really outlandish out unusual winds and let's call them that because anything that goes up 10 30 40% in a matter of months is a win. It's a wow. It's not anything that people, you know, bank on or put into their expected return calculator. It's a wow, great timing. We just won the lottery. But very often people double down on more of it because they think, oh well, if we've won with that amount, we should, you know, put more chips on that. The other reason that people don't rebalance or reweight is often tax liability. They say, oh, if we sell some, we're going to have to pay the tax. I've heard if I had a dollar for every time people have said that to me, you know, as an excuse for not selling something, that's had a really extraordinary move. And um you're seeing that today um not just in the tech sector, I would submit to you even in the precious metals sector in Canada because we've had this really extraordinary kaboom right in in the price of gold and silver. the mining companies, you know, as you know, the gold miners are up over 100% in a very short period of time. This is like tech 2000 style gains, you know, in in a particular sector. Um, and that's great. People should rebalance, rewe, you know, take some of that profit, but very often they're not doing that. Um, and again, I thought I saw a similar behavior in past episodes like in 2011 when the silver price also went to $48. And you know, people were not downsizing because they kept wanting to run that table, right? They didn't want to think that that was just good luck or they'd won the lottery. They wanted to think it was like, I'm going to keep winning forever. And then, of course, the price crashed. and they do things like they quit their jobs and they think that they're full-time investors or they're not realizing they're in a bubble. I mean, pick your pick your poison. Whether it's real estate, whether it's tech, whether it's precious metals, whatever it is, it doesn't matter. If it's had an extraordinarily quick run or big pop, people kind of lose their mind, don't realize how rare that is, don't realize that mean reversion will often take back a huge part of that progress in a short period of time. Again, even if 20 years from now it works out like you say, well, what what if 20 years from now it's worth more than it's worth right now? Yes, great. But you know, again, do you have that amount of time to have something go down significantly and spend years trying to recover? And that is just the pattern that we see after these episodes repeatedly. You know, whether you know stock prices come down uh significantly and take 10 to 15 years to recover. Um, everyone says, you know, and they've been programmed that valuations don't matter. I've heard this so many times. I'm a I'm a fundamental analyst. So, I talk about valuations and I was told valuations didn't matter in housing. Uh, three years ago, I was told that's old school. That's old models. Nobody cares. That's totally irrelevant. You don't understand. We have new immigration. We have a place everyone wants in Canada. Like, you know, I heard it all. Anyway, back to just humble basics. Those rules were not repealed. They still apply. And I would submit that they still apply with respect to valuations. We have the highest equity valuations today that we have seen in some cases ever in history. In other cases about as high as in the peak of 21 before the market took a big dump uh or in the peak of 20, you know, two 2000. We're way above 2007's highs at this point. So, um, the reality is that valuations tell you everything about risk. So, this is my point. Yes, they're not great at telling you the timing. I can't tell you when these, you know, mean reversion per periods will take back big chunks of what was won, but they tell you the financial risk you're exposed to. That's what evaluation is. That's why I knew that if you're buying a house for 8 to 12 times your household income, it was a bad investment back then. And that's how I know that these equities at these valuations, you know, five times book, three times sales for indices, um, the lowest dividend yields like 1.2% for the S&P just like at the all-time, you know, peak of the market in 2000. So, it's paying you very little if anything. The the TSX uh yield right now is 2.4. Um, so you can get more in a government bond or in a GIC than in these equities. And people are still holding them because they say, "Well, if I sell now, I'll have to pay some capital gains. I don't want to do that. I don't want to pay the tax." Okay. Or I think it's going to go higher. Okay, it might go higher and then what? Do you ever have a sell rule? And I think I think the thing you should ask people, you know, because we all come to this with our sort of experience. um mistakes, wins, psychology, uh temperament, beliefs, and at some point all money is a type of belief, right? So whether you're a crypto person and you're you're you're crazy about crypto, great. Um but you still have to have risk management around how much of your money is in that bet. you know, how much it's gone up, uh, pairing back your position size, do you have any liquidity, how is your leverage? Because all these things increase the inability of you to wait out a downturn, right? So you're not like you say everyone talks about the long term but if you don't have these things correctly sized with enough liquidity with your enough income to pay your bills you will not have the ability to wait over the long run and you'll be distress selling with the masses because the masses do this wrong and they turn around and start selling in a liquidation mode which creates these big downdrafts. Right? So it's just it's timeless truths. It's boring and blaszeé when risk appetite is on fire and no one wants to hear about what could go wrong. But it is just one of the ways that you survive and thrive over full market cycles and you know end up with you know a very important point is people talk about compound returns over time. You can't get a compound return from an asset that crashes by a huge amount uh and then doesn't and takes years to recover. There's no comp compounding only works if you take the income and constantly roll it back in so that you buy more units at whatever price. So if you know if you're 20 or 30 years old and you're saving $300 a month and you want to put it into an a an index product or a you know a unit of something, um by all means do that and keep steadily adding. And you know, if it goes down a lot, don't stop adding. Keep adding, right? And if it goes up a lot, don't add a bunch more. Keep just, you know, steadily putting in. Um, and you can do well over 30 years or 20 years in that environment. But that's not what most people do. Most people are paying fees out of the dividends uh or out of the cash flow or they're not getting cash flow at all. And then, as I say, you've got this whole cohort of people who are trying to retire. So they're not reinvesting the cash flow. They're trying to extract the cash flow to live on it. So now they've got a really long duration asset. Right now it's a function of how long the price takes to go up or down over time. And one other factor, I was writing about it in our recent client letter, but it's this notion of sequence risk, which has been documented in studies to show that basically the decade before and after retirement, they call it the fragile decade, Jay. And in that period they showed um numerically that if you have a big capital draw down during the decade before and after your retirement because you are taking withdrawals it can have a catastrophic impact on your capital. In other words, it can totally derail your retirement plan because retirement plans assume compound gains continually going over time. And if you are dealing with a downdraft in an asset class or several asset classes at once, which in a highly correlated environment like we are today, I think if one sector like tech goes or housing continues to struggle or gets worse and unemployment continues to rise, you know, you've got this feedback loop where everything is really closely correlated and not nearly as diversified as people think. So in that environment, that's where these loss cycles make such a huge negative impact. And so that's why it can't be just chasing returns. It has to be always with a mind to what your risk exposure is and managing that for the long term. That fragile decade concept really hit me. I read I read that client letter by the way and um it it one one way that it hit me was that FOMO is not age restrictive. And in fact some of the folks I know at this point in my life that are most impacted by FOMO are those that are looking towards retirement inside of 10 years and they're looking at what they've got in the bank and the net worth. They're considering the lifestyle they want to have and they're seeing a bit of a gap and that's putting them in a situation of I need to swing big right now. I need to be exposed to the market right now to make sure I make up that ground that I don't have. Um, which after reflecting on your letter, what a colossal red flag. And in a recent conversation you had with Adam Tagart, I think you quoted Warren Buffett, don't risk what you have so that you might gain what you don't need. And that's a transaction that a lot of folks and a mistake that a lot of folks make. Um, and you mentioned, do you have a sell rule? Right. If you're up 30% on a position and you're not de-risking, why not? Well, cuz I'm so right. I'm 30% more right than I thought I was. Right? Your conviction grows. And I see this all through the precious metal sector right now. um gold and silver equity speculators that are up 50, 100, 200% on a position, but and it's a speculation and they don't want to sell now because they're like, "But the gold tailwind is just heating up. I'm 100% up today. I'll be 500% up in a couple months." But that's that's the market's just given you a gift. The gift, it's the opportunity to derisk. If you have that opportunity, take it all day long. You can withdraw some of your principle. Take it. Take it. Take it. Um especially in the speculative sectors. I mean it's crazy to me that people treat speculations and investments the same way when the market heats up. It's like oh it's a buy and hold thing. Uh but no, it's not a cash flowing company. And in the gold sector you could look at like a new mantra ag uh you know catalyst needing speculation and people put them in the same bucket and they hold them both. It's it's disastrous. But that fragile decade concept and I'm seeing that right now with many friends of mine who are looking at the gap between what they have, what they think they need, and they're swinging for the fences trying to make up that ground. And I'm sure you see that too. You actually reminded me of something great in your Sunday letter this week because you talked about how um they put catfish in the um tanks uh to keep cod invigorated so that they become they keep muscular and lively and fit on in transit. And you used that that notion of comparing that to what China has done with western companies and entrepreneurs, inviting them in repeatedly over the past 20 years and basically learning their trade secrets and it's made uh competition in the Chinese companies so much better because they've had this, you know, uh worthy opponent. They've had this template of how to do it successfully and it's made them all up their game. So what it occurred to me about these asset bubbles is that they actually have the opposite effect on humans. So we you know uh what happens in the periods where you get outsized gains for doing nothing really you know like again your your expectation is that over time perhaps you'll make six or 7% and that would be a great compound return over 30 years. That's kind of like what you know regular retirement planning looks at and most people don't get that by the way but that is the goal sort of thing penciled in. But what happens is we get these periods and we've had them so through my whole career and you've been through a few of them now too Jay as young as you are. Um because you remember the 20078 cycle when Chinese demand was insatiable and all the rhetoric and stories were that you know the commodity boom would never turn down and there'd never be enough rocks and trees and all this stuff. And basically what people do is they stop um muscular things. They stop doing intelligent financial things. They stop even their work. They they throw away businesses that are making good money because they think well that's chump change to compared to this. I can speculate here or they call it investing which makes it very dangerous because again a speculator should just say yes I'm speculating. There's no income. There's no reason for me to think this is going to work except I want to just take a flyer and see if 10 or 20 years from now or five years from now it goes up in value. Okay, great. But do it with a percentage. And what people have done is really went lock, stock, and barrel. We've got, you know, 70% of boomer assets now in equitybased products. You've got a president in America right now who is doing things like writing executive orders to get private equity and private credit pushed into the retirement fund system. This is like throwing sharks in with the minnows is what this is. This is like, you know, because private equity and private credit are not sustainable. They're very highly speculative. And what have they done? They've tried to package themselves as liquid, conservative, uh, viable investment um, asset classes for retirement savings. And they've been successful. They've made a big inroad, but they have run out of uh buyers in this environment because the the interest of the public has all gone over to, you know, precious metals and and uh you know, it's leaving real estate. And Canadians that were doubling down on real estate at all-time highs are now doubling down on US stocks at all-time highs. And so now they're trying to get new fools in, right? They need new fools to come in and buy up these illquid assets. The biggest thing that private uh equity and private credit places are doing right now is selling their own their funds to continuation funds of the same thing to try and you know keep the asset price thing going like not have any actual price discovery but just make it all look like it's still going up. And they've done things like frozen redemptions and frozen distributions. Certainly in the real estate sector in Canada, there's several uh funds and equity that attracted people thinking they were getting some above, you know, above average return product and they've in fact had it frozen where they can't even take redemptions. So, you've got to be be aware that this is all designed to foil you, to undermine your your rationality, to to take your eye, to attract you to the dangerous things, right? the shiny things and to take your focus away from doing really intelligent, disciplined things, right? So, so that that's the kind of the analogy that I have. Um, the asset bubbles have I say asset bubbles cost us a fortune in the end. They really do. And we're seeing that in Canada now in spades. I believe we're going to see it when the when the current stock market bubble bursts. And yes, I don't know when it will happen, but I'm quite sure that based on all the historical precedents and all the reasons that I can see in real time um that it's going to be a painful episode. And so what you know I look at you asked if I look at portfolios and what I see I see 70 year olds with 70 and 80% of their money in equities with people who who used to have think 10% in things like precious metals was an insurance policy that made them feel better now with 20% and institutions coming out with recommendations because now they can sell lots of these products right they're all doubling down on let's bring out funds and ETFs Whether it's in the crypto space because that's on fire again, whether it's in precious metals, what private equity, whatever these sort of things that were typically considered fringe have now become mainstream obsession and people are wanting to, you know, boom up their uh I think it was Goldman Sach uh no Morgan Stanley who recommends now that 30% of portfolios go into precious metals. It's like where were you guys when it was uh you know spent 15 years going nowhere? Where were you then? Now that it's gone up from a,000 to 4,000, you think everyone should have 30%. And this is because they can sell that idea because they know the public's gullible. They know the public does everything at the wrong time. So they're like, "Oh, this is hot right now. This is what we can sell the people, so let's go." It's so important to think about those incentives when a firm like Morgan Stanley comes out and says something like that. 30% of portfolios should be in precious metals. What is their incentive there? It's obviously fees on the sale of products. It's not stewardship of other people's capital. And it's just important to remember that, right? That doesn't make anybody evil. It's not a it's just incentive structures. It's just plain and simple, right? Uh very key. And as you described this, I just found myself thinking, you know, you talked about the the the discipline and decision-m, how that's altered at the peak of a bubble when people are making money and just, you know, uh good decisions go out the window and you kind of, you know, it's almost like it's a direct parallel to just getting super drunk. And people are drunk at the top of a bubble. They're drunk on housing in 2021. They're drunk on US equities today. and they'll have some buyers remorse when they wake up in the morning. I think everybody's familiar with that. Uh let me ask you, I wasn't aware about the private equity and private credit being contributed to did you say the pension funds in the United States and my question there is back to the concept of incentives. What is the incentive of the president or of private equity to get these products included in public pension funds of the everyday you know tradesmen and retiree? Oh, because it's an ex like I said they've run out of greater fools in their own because they sold it to all the pension funds. This was like in the last decade they you know we had very low interest rates. Uh we had flat equity markets for like 15 years really. It took from, you know, 2000 to 2015 for the S&P to recover. The TSX really has only made all the gains in the TSX since 2007 have really happened in the last couple of years. So, equities were not doing great for considerable period of time there. And so, people were looking for how do I keep hitting my my, you know, my return bogey? How do I get it? Um, and so they were, you know, they thought, okay, real estate, well, that's a there's a lot of private investment that goes into real estate. So, the private equity companies, they're very opaque. Uh, they they um basically there's a lot of people throwing around money because it's other people's money and they don't really have a great discipline or a great track record. Uh, and the fees are very rich because it's considered alternative. they can charge fees that are, you know, two and 3% plus a portion of any upside they make, like a lot more than a traditional portfolio approach. So, they're like, let's sell this to the public. And so, what they came to the end of because their returns were terrible uh in in most cases, and the fees were very high, which was related to why they weren't doing great. Um, and then they had to freeze distributions, as I said, because people wanted their money back in the last couple years, and they couldn't. they were all holding the same commercial real estate properties as an example and they couldn't just sell. It's like you it's like what everyone's discovering now with expensive Canadian real estate. It's like great it you have it. Who's going to buy it? Like who can buy that? Who who's willing to give you that price? And in the commercial space the answer was nobody. So they were writing down huge now they don't want to admit that their unit value is down by a huge amount. So they have been doing as I say these continuation maneuvers. Meanwhile, pensions have been realizing that they overallocated to this illquid asset class, that it wasn't worth all the risk and fees that they put money into. And so, they've pulled back from this sector. And now they're looking for new new victims essentially is what it is. And so, they're like, "Oh, look at all the uh you know, the target date funds for example in America are huge, right? there's a huge amount of passive investment going into things like ETFs uh and sector funds and uh that sort of thing. And so they're they're they're eyeing that and saying, gosh, if we could get 20% of that market to switch out of these more traditional instruments into our funds, wow, you know, we'll make billions and billions of dollars. And that's that's the incentive straight up. They need more buyers. They've run out of greater fools and and so these poor I think it's just repulsive. I think it there's no fiduciary obligation here apparently because they're lobbying the hell out of the gatekeepers of these retirement funds to get them to let them in. Let the you know the Trojan horse inside the gates and then they're going to uh you know sell it as sophisticated and savvy but it's not liquid and they're going to try and make it look liquid. In other words, you know how mutual funds right now, you have to have a closing price that if a person asks for their money back, the market price, they get that at the end of the day. They're having to do all this great opacity to try and make it so that something that's illquid will look like it's liquid on a daily basis. I just think it's a it's a set it's a recipe for more of the same that we've seen so many times. Um, you know, we've got this great tradition now of of whether it was uh carbon credits being sold the same forest four or five times to all these different people buying carbon credits, the greenwashing thing. We had that. We had, you know, um we have now uh revelations of certain um uh car companies that are going bankrupt because they were lending um one that came out this week, but they basically were getting loans from banks based on the same inventory, counting it two and three times over the same inventory and going to different lenders and and that kind of rehypothecation. We've seen that in the asset markets. We see it um you know uh even in you know things like uh in in gold holdings you know there's this all about let's audit you know Fort Knox and all that. Why? Because there's a tradition of people uh of institutions double counting uh rehypothecating the same assets and increasing leverage that way. Uh we saw that we've seen that repeatedly. So, you know, I think it it all goes back to how the system has been allowed to run wild. Fiduciary duty out the window. Everybody's on the take. Referral fees left and right. All the professionals are in bed with the sales side. It's it's become a complete disaster. Um, so it's it's very hard because individuals don't have the time or the like I said this fragile decade notion. If they lose big, it's not something they're going to recover from. It's going to set them back years. And you know what? Go back to work in your 70s. I mean, these are these are challenging things. So, um, this is why I am so focused on trying to give individuals heads up. And I say people are hard to help because sometimes you give them the heads up, you point out the real weaknesses in what they're doing, the great vulnerabilities that could cost them a lot and harm them, harm their plans, and they're just sort of like, well, you know, my my stock broker said it's good or, you know, well, it went up a lot last year. I I you know and they start ratcheting up their spending expectations or their return expectations as if it's a mountain from which it only goes up from there and that's there in lies the demise. Let me ask you a question actually about the essay that I published on Sunday because I was and am trying to work through a thesis and just understand something and a lot of what you've shared today has sort of triggered some additional thoughts. So, you know, where I came from was a place of having many friends near or at retirement age who are swigging for the fences in the broad equities market because they see that gap that we've discussed before. And my intention with last week's letter was to look at the consolidation of value in the S&P and and what what kind of vulnerability that is. And then I use the catfish analogy as an example of you know how what or to ask the question how vulnerable is American tech. I mean we opened up this conversation by saying you know US technology is driving GDP right now. Well what if that stops? What if a new threat enters the room and and what happens? And the catfish analogy as you mentioned is yeah you bring in a foreign competitor to make domestic uh participants stronger against that competition. Right. they have uh have to build a new hedge against the foreign competitor and the the strategy in China has been create some incentives to lure in a foreign competitor or company and in the past we've seen this happen with uh LinkedIn, Google, eBay, Amazon, most recently Tesla and they're lured into the country with tax incentives, subsidies, JV opportunities, all this stuff. uh and after a couple years when they gain market share and the domestic competitors have learned from this policy changes and suddenly those tax incentives disappear, the subsidies dry up, new demands are put on how they can access the supply chain and they're sort of squeezed out and sent back out to sea and the domestic fish are stronger as a consequence and they take that local market. Uh this has been a very successful strategy and it's it's not propaganda. It's just intelligent strategy by the simple fact that it's worked very well. Um, you know, and other countries have done the same thing. Other countries did the same thing. Japan did the same thing. Germany did the same thing. You know, um, the foreign the uh, American car makers went over and showed the German car makers how to get started. I mean, this is this is what's happened. So, it's it's very typical. Thank you for that. Yes, absolutely. So, um, you know, is that how much of a threat to I guess where I'm going is that as I listen to you, I I'm sort of gaining conviction that the bubble in US equity is is not sustainable and probably near-term not sustainable. Simultaneously in Canada at least, we've got the equity bubble that a lot of people are betting on and 70% exposure to in many cases as you mentioned in the baby boomer uh portfolios, but we've also got the housing bubble happening simultaneously. And as I've heard you discuss in the past, we've seen one of those things occur at a time. 2000 was the equity bubble, 2008 was the housing bubble. Today we have both. And and that's that's a first, right? which is which is I don't know what to make of that but what do you what do you make of that? I think it's it's bad. It's bad because like I said we don't have a very diversified economy. Uh oil prices are still you know much lower than they were in 2007 and even when the Ukraine invasion happened. oil is not, you know, oil trends are not as robust as they were and it's very common to see the price of oil fall further when you get into rising unemployment and you know uh uh alternatives like this whole thing electricity is the new oil but you don't necessarily need oil to get electricity these days. So this is a this is a headwind. This is a headwind for Canada because we had a lot of our chips on that one horse. And so now we have to our largest trading partner is is being uh you know difficult. They don't want to just subsidize everything that we're doing. They want they want to throw catfish in the mix domestically in their economy and in Canada. It will no doubt force us to be more resilient. I think in the end it's more positive, but I'm not I'm not naive to suggest it's going to be easy or economically accurative, you know, right away out of the gate. I mean, we our prime minister is down there trying to negotiate a deal. They're holding press conferences to say they want to have one, but we don't have one yet. So, we're seeing, you know, things like our data came out this week on our uh exports and they're they're down not just to America, they're down internationally year-over-year. Why? Because global demand is down. Uh consumption is falling. Uh the UK has an asset bubble in its real estate market as well. Uh they also like it this happened in New Zealand and Australia. I mean because it was the add debt and stir trick that people tried. So uh also we have the demographic weight. So we have something like you know I was look I think I wrote about this in the recent letter too. We know again about the boomers. We know about their age. We know about the burden on the health care system the sick care system I like to call it. We know that you know it goes it it it goes from like 10,000 a year when you're 70 to 36,000 a year when you're 90. So we've got and only about I think the estimate is 12% of the boomer health care costs are already in our system. In other words, we've got 88% of that cost to come. We've got things like social security in America as well as the old age pension system here in in Canada not funded. Luckily CPP was actually restructured a few decades ago and it's now an actual fund that we pay into that is there to to fund pensions. Everything else is just general coffers, right? So the, as I say, old age security, the health care stuff is not funded. There's no money sitting there in the provinces to fund all that. And that's all stuff we can see. What I can't see clearly right now or very readily is where our revenue is coming from in this brave new world. And and that's what we have to we have to figure out. We've got to it's got to be policydriven. It's got to be new creative thinking. Uh it's gota we've got to have liquidity to do it. We need to have, you know, we can't just have all of our money spoken for in consumption and expenses. We have to have investment dollars. Um there's a huge infrastructure need here. Canada has that too. It's not just America. It's just that those are the big tech companies that are taking out whole towns and turning them into electricity generating areas, right? So um I mean efficiency is great. There's there's there's AI is here to help in some ways that you know the the the energy revolution the technology revolution all those things are definitely helping but right now the revenue piece is still it's more about how do we waste less and bring down cost structure but there's a huge upfront investment for that first and you know that's as as as the MIT study recently pointed out the the even the big tech AI stuff. We know that they spent they you know they've got like a trillion dollars of spending they intend to do but there's a very 5% of it is actually adding revenue at this point. So we've got this hiatus this this valley between you know we can see where the future can be improved. We can see what kind of investment that makes sense. But we've got this big gap right now between how do we fund all this, you know, uh and with with a workforce uh that is increasingly aging and there's not enough young workers to support the the boomers moving through. So it, you know, we could have planned so much better for this, but instead we took the lazy cod in the barrel, uh, you know, riding the asset bubbles, throwing more debt in, you know, thinking we were wealthy because our house kept going up in value. But in fact, we became, you know, uh, not not as fit. We became lazier, weaker, uh, not as resilient. And so I haven't given up hope. I know we can learn from this experience. Indeed. Uh perhaps we only ever do learn from really painful experiences. It seems that is the way. Um but I do think it's it's a big challenge right now uh for Canada and for most of the world. Frankly, I I want to I want to pull in a couple threads there. And you know, it's it's interesting when I think about the psychology and the investor psychology of uh different generations, you know, and and I'm, you know, I fall in the millennial category. And uh I I'm hiring a lot of folks right now from generation zed, I think it's called. It's the the earlier one. They're like 20 years old, right? And honestly, I am so impressed with the work ethic, the dedication, the um the very reasonable expectations. Um and I am just floored. Like I'm finding talent that I I haven't found in in 10 years. Um but I'd looked one generation earlier and I'm finding it, right? And there's there's it's a shift in entitlement is how I'm sort of interpreting it in the mindset. What I deserve for showing up, right? what I'm willing to do to get ahead. Interesting. You're seeing this, too. I was just saying I was just saying to someone, and no offense to boomers, I'm actually two years behind. I'm I'm technically an X. I'm right behind the boomers, but most of my friends are boomers. No offense to them, but they're the most entitled generation of all time. And perhaps millennials are right next in line. And again, I believe it's because they had it too easy. They had it to they didn't have to develop their their muscles enough. It was they rode these asset bubbles. They they got to drive demand cycles, you know, they were the marketing was all to them. Uh, you know, they got in positions of power. They were calling all the shots, but they were bad financial managers. They were bad managers of resources to in general. They did. You could see all this stuff coming. Nobody wanted to pay. Nobody wanted to set aside reserve funds for condo buildings, as an example, when now they're coming up with huge special assessments because guess what, guys? Those windows we bought 30 years ago that we knew had to be replaced in 30 years, we didn't set aside the money because, you know, we didn't feel like it. So, a lot of bad stuff has gone on. Uh, and I I So, that's that. And I think that younger generations, listen, I was on a at a place this summer in BC at a camp where students, young people from all over the world were there working for room and board. Why? To learn skills. And there is a a concept that boomers and and you know probably a lot of ex people could hardly ever get their minds around that people have to work for free. You can't even give them minimum wage. really like there's been, you know, a a dir of of um um enterp um apprenticeships. So, the younger generations have really got this whole okay, so I don't I'm never going to own a home. They really think like I'm never going to own a mill multi-million dollar house, so I'm going to have to figure out a way to and no one wants to invest in me. very few people want to actually give me a pension, give me benefits, you know, so they're very much about I'm going to have to figure this out from scratch. And so again, this is typically what makes the best swimmers. This is typically what makes the best sailors is rough weather, rough seas, you know, and and they will I think they will learn great skills and habits that will actually serve them for the rest of time. Uh but we've got still much of the decision-m right now being made by that cohort of entitled people who think that everything should just be provided and their their perspective is we worked all our lives. it's our turn to what do they our time or whatever all those ads. Um and I get it and I don't mean there aren't hardworking boomers in the class but as a cohort I think that they're unrealistic and entitled in general those Gen Z bunch of catfish coming into the pool. That's it. That's it. Go. I love it. Um look Danielle, been so great chatting with you. Uh, I love I love reconnecting and I'm really excited that you're coming back to Vancouver January 25th and 26th for my conference, the Vancouver Resource Investment Conference. So, you want to catch Danielle live uh on stage. We're going to be uh jamming on a bunch of very exciting panels. Check out vicia.com for tickets January 25, 26. Vancouver is beautiful in January. You guys are going to love it. So, come out. Stunning. Yeah, totally. Thanks so much. Listen, from Ontario, I look I look forward to coming to Vancouver in January from Ontario. It's a great time. I love it. I go walking around the bay and it's green. I'm like, this is awesome. So, everything's perspective. Do you see that? It's awesome. I love what you did there. Awesome. Awesome. Well, I can't wait. I can't wait. Thanks for coming back. It's going to be an awesome show. Thanks for today. Super enlightening. I I always find your take, you know, sobering and pragmatic, right? And I I don't want to use the analogy, it's like you're like cold water on a party, but you know, because I I don't think about your perspective that way. I think it's just like it's um since I've connected with you, you know, it's been over a decade now. It's just been consistently pragmatic, sound financial stewardship, right? Like this shouldn't be easy. It shouldn't be necessarily fun. It should be thoughtful, right? That's how it that's how we should approach this. I really appreciate your take. Yeah. Hey, thank you, Jay. It's always a pleasure to talk to you. All right, till next time.