Vitali
In terms of signals. I like to look at, you know, there's three and you always want to look at the price signal that a security's giving you the fundamental. Or we can call the earnings or free cash flow signals security of businesses giving you. And then the valuation signal that it's giving you that.
Announcer
I welcome to the Breadth of Experience podcast and part two of our first quarter stock market review. If you missed part one, don't worry, you can still jump in as we continue unpacking the biggest market themes of the year so far. In this episode, we'll dive into what stage of the market we're in, Trump tariffs policy and how we forecast for uncertainty in lieu of this.
Announcer
Let's get started.
Jose
Interestingly, in the markets too, especially with the increasing prevalence of pawn shop and a lot of trading, it seems also when these some of these unwinds happen, the liquidity moves pretty fast and vicious. Kind of like Japan Yen carry trade last year. And even with this, with the crowding. So that was a bit of a blip at some point.
Jose
It was fairly quick. with this, it feels a bit more extended. So, to your point, where do you think, we're still reverberating, but from an innings perspective, where do you think we are with this? kind of like mid stage market is still digesting. We've had a month and a half now to pass that. What's your view here.
Jose
Yeah.
Ben
I don't know if I'm smart enough to know that I, I'm, I'm a take it one day, one shot at a time type of person. So, you know, if it's the third inning or seventh inning, like, I don't know, we'll see as, like, for me, I'm always like, it's okay. I don't need ... there are enough people that are time travelers, like, I'm, I'm happy living in the in the present.
Ben
So, I'll let other people decide what inning. I think what I would say is that this is not happening in isolation. So like, I, like I said, I think people are readjusting their exposure is and they're what they think are winners in the data center and at the same time trying to deal with the uncertainty from the policies in terms of what are we tariff and at what and what is the ultimate goal, the tariffs.
Ben
And at some point, one does this all sort of stop and we move on to the next thing. So, I'd say tariffs are the thing. Now, you know that is the thing that people are most focused about. I think some people even forgot about the data center.
Jose
So that's a that's a pretty interesting thing.
Ben
I mean, I'm curious to see what Vitaly thinks in terms of innings, but Vitaly.
Jose
Yeah, that's. Yeah.
Ben
I'm always like, I'll let other people travel forward or backwards. I'm happy to just be in the president.
Vitali
I do like being a time traveler. Society proposition in the context of baseball. I do think we should have brought Damien back then. And he's.
Jose
Yeah, he's, I know what innings he's calling.
Vitali
Yeah, yeah. You know, it's important at these junctures not to call innings, but all. But I think just to get a lay of the land in terms of signals, I like to look at what are the there's three. And you always want to look at the price signal that a security's giving you the fundamental. Or we can call the earnings or free cash flow signal the security of businesses giving you.
Vitali
And then the valuation signal that it's giving you. And if you look and, and they pick a security that has been caught up in this in a, in a data center, thematic and sell off. Now you could look at some and I won't name names. Just talked to Derek Lee. And you could say that a price signal was very strong.
Vitali
You could make the argument that at a certain point they became extended relative to the fundamental, the fundamentals. Yeah. Presented. That probably drags a valuation signal to the upper end of that spectrum as well. None of those in isolation are going to tell you whether to buy or sell a stock. But I think as you revisit and recalibrate to new market conditions and new information, you can at least begin to get a sense of, well, hold on.
Vitali
Has the adjustment in the price reflected? So, has it anticipated a decline in earnings? And that's a very difficult question. But for a team of analysts, it is also, I think, a key requirement of the job to try to forecast the future and anticipate.
Jose
It being a little bit of a taking.
Vitali
In this information, trying to say, okay, there's been a price signal that's been that's been reset, or it's inflected in a different direction, have we do we anticipate, forecast the change in the, in the fundamental, the earnings signal. And of course, that informs to match that. And then where are we today from a valuation signal which can be measured with, you know, various different techniques.
Vitali
But these things together will not allow you to come into the office on a Monday and perhaps buy or sell them security and get the call correct for the next day or week or month or whatnot. But they, if applied systematically, can give you a toolkit that lets you have a conversation with banner, Damian and another PM and help us make probabilistically better bets.
Jose
So, I like that rather than thinking about where we're at in your framework, as simple as like what is the price is, is what is the price telling me now? Is there a certain value in that stock at this given time, at any given time. Right. Rather than think in that sense.
Vitali
And sometimes there's a lot of value. And sometimes, you know, to take an extreme example, there just may be, no buyers for something. Right. And so, you also you have to be pragmatic. And if you have, you know, you could have, whatever it is, an antique treasure from the Roman Empire. That's a kilo of solid, solid gold.
Vitali
But, you know, if you're, on Mars with no, with no value is with no buyers, then it's worth zero. And so, you can't, you know, you can't go to your PM and say, well, this is this is the deal of the century. You have to make this your biggest position in the portfolio. that's not very that's not astute analysis.
Vitali
Right. So, you want to be careful not to overlay any single factor, but have, mosaic or formula or whatever it is.
Jose
I love that. And with that, that was a perfect segue to the next section, which is it seems the market may have first reacted to Deep Seek, but now, as Ben said, shifted its focus entirely to some sort of policy uncertainty. And I think Trump apparently relegated tariffs to his fourth most favorite word after God, something else and something else.
Jose
So, we don't know. It keeps changing. But it started out, I guess, at first with a post as presidency, the way the markets were calling, in some sense they were it seemed like they were calling his bluff that this is purely a negotiating tool or whatnot. But something has changed with how people view the tariffs at least.
Jose
What is that in your view? And like, what do you think and your opinion of at least what's your take here? Just the word tariffs and whatever this policy uncertainty is.
Ben
From my perspective. Again, if we could see that the market could pick up, there's a high probability that Trump would be president as early as 2023, which when I say that to people, I always get like a raised eyebrow. But, you know, there are some charts that we again, they don't tell us the exact answer, but they were starting to lean into a certain direction.
Ben
and they continue in that direction. Then I would have to then say that how could the market then not also factor in tariffs. So, for a longest time, or for the last couple months, I've been trying to figure out, you know, has that changed or is there something new. Because again, I'm always happy to hear the other side.
Ben
And the other side has been sort of the market's been very complacent as a negotiating tool and it doesn't really mean anything. And so early on we did see sort of tariffs on tariffs were kicked down the road. I think the other thing I think what where we stand right now is that the again, the rationale and the reasoning for the tariffs are we're well far away from where we started.
Ben
And everyone has a different take on what it's for. And I think that's the part that's confusing. So now it just feels like it's tariff for tariff's sake because, you know, everyone apparently has been ripping off the US. The areas that I have been really focused on has been in the financial sectors. So, we'll see if that's the right area to focus on or not.
Ben
But to me, they're sort of the transmission mechanism for all things economic activity. And so, in particular really focused on Canada, because when it comes to negotiating the, you know, there's not much we can do. I mean, we have chosen the US as sort of our biggest trading partner. We have forsaken other sort of policy decisions that we could have done over many years to try to diversify or make investments in productivity.
Ben
but we've chosen not to. And so, there's so much talk and chatter and fear about what these policies could do to Canadian businesses. That's another thing I want people to I, I've had to be more sensitive to. This podcast is just talking about securities and investments. And then there's also the real.
Jose
World, real world were,
Ben
Or people have businesses and maybe they're in the business of copper and having all these tariffs destroys their business and livelihood. And so, I could say I don't think tariffs matter. I just want to make sure it's in the context of stocks and investing. Whereas whether or not, you know, if these tariffs remain in place can have real world implications for their own businesses.
Ben
So, I just want to be keenly sensitive on that. I would imagine that again, at this juncture, if tariffs are going to go through and like literally obliterate our, auto sector or our entire economy, it's just not showing up. That fear is still not showing up into the Canadian banks.
Jose
But price rise, right? Yeah.
Vitali
It's a.
Ben
Price war.
Jose
Yeah. It doesn't it doesn't seem. And I will open up the question to retaliatory. Is it being it simply a question of like, what are your analysts telling you with the conversations with the auto industry? Is it a question of like, some of these wildest fears are just so impractical, like, think about a car that's trans shipped seven times between, Windsor and Detroit.
Jose
Where do you apply the tariffs? Like which midpoint? You know, like how many times are you going to do it? Like what is so is it because of that? Like the market doesn't even know what the tariff is. If it's going to change tomorrow, how do you even forecast. Like what are your analysts telling.
Vitali
Yeah, I think we just had actually our autos analyst in Detroit on an auto tour meeting with, major American automakers and suppliers. And obviously, we were a very important part of the auto supply chain for North America, having a global, tier one supplier as well. But I think you captured you captured it well and not there is a little bit of disbelief which can be dangerous, because something is happening in that nobody believes us have, died back and caused securities prices to, to rebate.
Vitali
but there is this perception, the feedback was that, at least on the American side, that adjustments can be made, and negotiations will succeed. our perspectives also are very different, right. Because it's always stark, I think. I haven't been to the US, this year yet, but the analysts that have been down there, the what's stark is a bit of shock from them.
Vitali
Where they go in, they're thinking, well, this is an existential issue because we're Canadian and it is to some degree, as Ben was describing. And then from the American perspective, it's like it's a big, powerful empire. And many of them can't locate Canada on the map. So, it's like, hey, this is, it's going to be fine.
Vitali
What are you guys so worried about? But I think, you know, this goes back to we've lived through something with Covid that was different, but, you know, it rhymed to some degree. And what rhymed as it was a great degree of change. And as we talk and look at picking securities that and go into Ben's portfolio portfolios, plural adaptability is a word we need to, you know, bring back and really, really emphasize again, because, there's the main street, and Main Street has a collection of companies, some, you know, resilient with, but good capital allocators and great products and, and good industry structure and some not so much.
Vitali
And in the public markets, I think we can sometimes forget that even though these are all large companies that have succeeded to a great degree, to find themselves in a position where we would look at investing in them. So adaptability that not adaptability, but rather differentiation can be a little bit less, a little less visible to an analyst, especially if you think that earlier in their career, all these companies do a great job of putting together beautiful presentation decks, and they've got polished management teams and generally financials that they can at least massage a little bit.
Vitali
Right. And so, our job now is really get to get down to the brass tacks and say, you know what? We are going through a period of change. Again, we're not going to speculate what innings it's and it's a fun intellectual discussion. And we do engage in that as a team. But ultimately figuring out okay, but which industries and companies do we think have underappreciated free cash flow participation and secular themes?
Vitali
Because, you know, you and I talked about this kind of like the, the, the, the era of lights and shadows here. Right. You've got government efficiency with those. And at the same time, you've got potentially layoffs of, of, of, of real people with real children and real families and real obligations. You've got a potential for, for piece to what seem like a never-ending conflict in Ukraine.
Vitali
And that's a good thing. And at the same time, you have a fragmentation of historical alliances. And so, there's all these contradictions. But, you know, to investors, what I think for, for me and Ben and the entire analyst team, it's it does it does make the job more exciting even. Because for everything that's not succeeding now, we can use our brains and find new themes and new parts of the market that are working.
Vitali
And we can get ahead of that. Because just as the data center theme could be, could be around for another decade. But what I think we have to acknowledge is the reason these portfolios have been successful. One of them is the great work of the team and the portfolio manager and identifying it early. Right. But what's next?
Vitali
Where's the work being done? and so this is all tying in a lot of them teams. But no.
Jose
I love it. I think Ben actually accidentally captured it perfectly. It's such a blend of market.
Ben
I accidentally maybe, maybe.
Vitali
Intentionally blender sound effect. Can we do a blender sound?
Jose
If you do a blender.
Vitali
At the beginning, that's like the trademark of the.
Jose
Show. Yes. Yeah, yeah, it's an it's a contradiction market, right. Because there's like stuff that should theoretically bring down the risk premium like a war and, you know, globally, but also at the same time alliances fading. So which one do you choose? same with the government, right. Government efficiency deregulation great. But uncertainty and chaos. Not great.
Jose
which way does, does the ball kind of, fall? Right. So to that extent, I will pull a little deeper on the U.S., especially with all of these government, actions with Doge and whatnot. What? First off, what is the long term view in that sense? Where is this a structural change in in in the way the U.S government funds itself or sets up the U.S government?
Jose
And to what are the short term implications of this, let's say slightly chaotic or, approach, or at least where the messaging is very chaotic in how they're doing this?
Ben
I'd say when I joined this industry and I joined to asset management. So this is going back to 2009. The big thing that people were focused on were the entitlements and the growing. So this is like Social Security, Medicare, and how it wouldn't be very long. Again, I'm talking about in 2009 and you know, last time, which I guess is 2025, but it wouldn't be long that this would be something that could bankrupt.
Jose
Anybody in.
Ben
The United States government. And then I think also, it wasn't too long after that where the US had lost its credit rating, and then we had talked about how, like Microsoft and Johnson had better credit rating than the US government. How can this be? That's not how we wrote the textbooks. And so this is I mean, so there's two things.
Ben
This is where Joe and I, you like you and I like to talk about being right and making money. And so, you know, you could say let's short the US because they have these entitlement issues. You'd be very wrong that trade. This is something that we're getting closer and closer to where this becomes a bigger issue. And I'd say again, I don't know if this is the ultimate aim of this administration, but they're sort of saying like, yeah, we're going to go and try to attack this because this is the biggest existential crisis that we're dealing with.
Ben
The cuts that we're seeing right now. Again, I don't know if that's a bit of political theater, like look at what we're doing, but did they actually do anything? The only thing that I could say, I guess, and again, I don't know if anyone actually wants to tackle these because in the long run, I don't know if. Well, and maybe this is the president to do that because he's not looking for reelection, because if you are trying to attack, you know, entitlements, that's not good.
Ben
No. Most people will probably be like, yeah, we have to deal with our debt. But you're not cutting my Social Security checks and my Medicare because that's what I've been working my entire life for. So we'll see if that's really the ultimate aim. I get the sense right now we want to extend the tax cuts. We might want to put more tax cuts.
Ben
And the sense that I'm getting is that they're short on cash.
Jose
Let's last what.
Ben
It took and I don't I again I'm just floating it out there. I think they all recognize that coming out of Covid, governments have a lot of debt. And in particular a lot of long term debt. And what I've have noticed is that Trump has been particularly silent about the Federal Reserve and Chairman Paul's short term policy agenda.
Ben
And I don't know, again, two cute markets never work this way. But could you could you bring use the tariffs as a way to bring people's expectations on growth. Also in such a way you don't destroy the economy that you can bring it back for midterms. And that is a way an attempt to lower the interest rates. And we have seen the ten year and the five year come down.
Ben
Again, not crazy, but it has come down. So all right. You have interest expenses sort of crowding out the budget and maybe again if you can show people, look, look at how much we've cut the billions and billions, then maybe you could engineer some more, let's say tax cuts in the coming budget or our next two budgets.
Ben
And that's a way to sort of push the agenda. So I don't know. That's I'm slowing it out there. I'm happy for everyone to take it down and laugh at it. I can't imagine that anyone could be, you know, people always talk about there is someone out there, you're pulling the strings and there's that, you know, secret society isn't all that type of stuff.
Ben
Like, I don't know if anyone could actually pull this one off, but so far rates are lower and people's expectations are getting more concern. And it's definitely bearish. Like the temperature is really bears right now. But the fear is you do it so much that you actually have a self induced recession and one that's not easy to fix yourself.
Vitali
I subscribe to your conspiracy. And yeah I that's a it makes sense. No, it makes sense. It's I'm not saying in the negative sir. Sorry. So I'm like the only difference being a theory conspiracy conspiracies are sometimes true, right. Yeah. This I like this is this could be very well true.
Jose
No, this is something that, the Treasury Secretary, Scott Besson, doing this in, in stocks has been saying about the, the funding issue of relying on that short term cable issuance nonstop and how they have 10 trillion of funding that they have to do this year. Right. And obviously, it's better if you term it out at lower cost.
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Thanks for listening to the Breadth of Experience podcast. In the second part of a first quarter breakdown of the stock market, with part three coming shortly. If you enjoyed this episode and want to listen to part one, be sure to follow us on your favorite podcast platform and now on YouTube to share it with friends and colleagues who love staying informed.
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