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Chapter 1: What does the latest Canadian CPI data reveal about inflation?
Investing is simple, but don't confuse that with thinking it's easy. A stock is not just a ticker. At the end of the day, you have to remember that it's a business.
Just my reminder to people who own cyclicals, don't be surprised when there's a cycle.
If there's uncertainty in the markets, there's going to be some great opportunities for investors. This has to be one of the biggest quarters I've seen from this company in quite some time.
All right. Welcome back. I think we're live for the, what is this, our fifth? Friday. Something like that. Yeah. Friday macro lunch. It's funny, like last week we were like, oh yeah, we should just talk about bond yields. I mean, it seems like they're pretty, you know, like it's a story, but it wasn't like, last week it wasn't crazy.
Like this week is absolutely nuts what is happening with bond yields. So talk to me a little bit about what we're going to be going through today.
Yeah. So obviously, speaking of bond yields, we'll touch too on Canadian CPI came out earlier this week. Probably not too long, but I think it fits in well. I also went over a Walmart lows and Home Depot's earnings. So not to go into too much detail for those, but just some big macro takeaways and what they're seeing, especially when it comes to fuel cause.
But for you, obviously, being in real estate, what they're also seeing on the Homeowner spend, do it yourself, renovation projects like that, especially obviously Home Depot and Lowe's. So that's a good indicator. And then looking at the bond market in general. So I think what we'll look at U.S. bond yields probably touch on the Japanese JGBs.
And probably look at the Canadian bond yields as well. See what's going where that's going, what's causing it to rise. I mean, what's most likely causing it to rise. And I don't know if you looked at that recently, but the market's expectation for the Fed's fund rates has changed dramatically over the last couple of weeks or the last week.
Well, isn't it is like more likely to see a hike than a cut? Yeah.
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Chapter 2: How are rising transportation costs affecting consumer spending?
I don't know. Like, what are we, what are we looking at here? This is a, this is from like the 2020, but still like you can see all of the areas where the market was incorrect. Right. Why, why would the market be correct on this today? Like. And what are your thoughts? Is this a credible outcome for what the bond market is thinking?
Should people actually be concerned the rates are going to go up? Or are you sort of still of the opinion that we're going to see a constricted consumption, which seems like it's already taking place. And you could talk a little bit about Walmart, I think, because that's probably the great, great indication of where it's going to show up first. I don't know.
I'm still of the opinion like Fed fund rates are wrong. They have to react to the... today's data but the data is going to change and we will see shrink I think we will see shrink like you know shrinking of consumer spending based on at least all of the data that I would be able to use today for that
Yeah, I mean, just looking at the two-year, right? So the two-year just in the past three months is up, what, roughly like 50, 60 basis point in the last three months. And usually the US two-year is mostly impacted by Fed expectations. So clearly the two-year is saying that they foresee that the Fed will be at least...
A ruling out for the foreseeable future kind of lines up with the CME FedWatchJewel. Some rate cuts, whether it's rate hikes or just staying still, I think it remains to be seen. I still think my base case is that they probably won't do much until the end of the year. just to make sure they have the data, right?
Like even with Kevin Warsh coming in, I would be very surprised if they don't still use the same playbook as Powell and just say, you know what, we want to see the data until we make a move, gives them a bit more time. So that's That's probably my base case of what will happen.
But I think it just shows even with a 10 year and 30 year, I think the market is becoming increasingly nervous on what inflation might look like. It might not be just temporary. Sure, people can say, it's easy to look back and say, okay, well, after COVID, it was temporary because of all the stimulus, the fiscal spending.
And then you saw a bit more inflation happen when the Ukraine, Russia invaded Ukraine. But I think the market's also starting to price. And you know what? These events are happening pretty frequently now. So yes, they may be one-offs, but at some point, these one-offs that they keep happening, it might be- Yeah, exactly. I mean, you might start seeing more structural inflation.
So I think it might just be the market starting to price that in, especially if you factor in how those bond yields, so especially the 10 and 30, how they move just based on optimism or lack thereof for the conflict in the Middle East to be resolved. So I think they're putting a lot of optimism on that. And
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Chapter 3: What is driving the surge in U.S. bond yields?
It's definitely shifting, but overall, even with that drop, because I guess there's been pressure on some countries in the Gulf for the U.S. to not resume strikes and just give a chance to peace talks. But even with that optimism, I think you're just seeing some small drops more on the margins and yields are staying elevated. And then you factor in, you know, longer term concerns about the U.S.
fiscal situation, increased geopolitical uncertainty. So I think we're going to see more conflicts in the years to come. I think we're just kind of seeing the beginning now. What's the next big one, China? And I guess that's... Let's hope not. But I just I think we might not see the next one coming.
My point is, I think we're just simply in the fourth turning and you're starting to say it's all fourth turning stuff. Yeah. And I think the market's starting to realize that this is more likely to to happen. And then you add to the fact that you're seeing increased political uncertainty in the US. Right. Like what is going to happen when the Democrats win?
you know, get into power in two years, which is a lightly outcome. I'm not saying it's going to happen for sure, but the pendulum will probably start swinging way to the socialist side.
Chapter 4: How do changing Fed rate expectations impact the market?
And what kind of impact will that have on your fiscal impulses? Yeah, exactly.
I mean, to be fair, like Trump's not exactly a moderate, right? Like, you know, if you take a libertarian view or like want small, small government, like he has literally done, he spent the most money ever in history in both terms. So I, yeah. And the next president will spend the most money.
We'll spend the most money in history as well. So I guess it just, you know, it's kind of exponential.
So like, I don't, I don't think it matters what, what color their, their lawn signs are.
No, they just, you know, they'll spend on what's going to happen is even the Democrats come in, there's going to be stuff that Trump is spending on that they'll keep spending on. And then there's going to be other things where they will shift some spending where they won't spend as much on where Trump went spending to something else. So they'll just spend differently.
Yeah. Yeah. Totally agree. I introduced the idea on Walmart and all that.
Do you want to give me your thesis on if... Let's talk about maybe before we get to Canadian CPI and what this means for Canadian mortgage consumers, et cetera, on the bond yield side, why I think we're both in agreement that we'll probably still see cuts and a recession based on what we saw from Walmart, Lowe's, Home Depot, et cetera, on their earnings.
Yeah, yeah. So really interesting. So I tried to sum it up as big kind of takeaways from both of them. And it's too bad I had a chart for Lowe's and Home Depot so I can try to build it quickly afterwards while you give your thoughts on this, just to give people a bit of an idea how both retailers are struggling. Walmart's a bit different.
So they're saying essentially that they're feeling the fuel costs and it's definitely starting to become a real margin pressure. They took a roughly 250 basis point price. operating margin hit in the quarter related to fuel-related costs. And that was approximately $175 million. They decided to absorb it. And I'm sure Walmart, for some people, it's not a company that they love. And that's fine.
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Chapter 5: What are the implications of higher bond yields for the housing market?
Yeah. Higher consumers are still spending. They're also able to shift where they spend, right? So higher income consumer might have gone to Target or like a higher end retailer, but now they're like, okay, I still want to buy as much and the same things, but I'll go to Walmart because my dollars will actually stretch further.
So they said they're still spending wide ranging categories while lower income consumers appear to be more pressured by foreclosures. fuel, food, and general living costs. They also said that one thing that definitely helped in the quarter, and they weren't the only ones, Lowe's actually mentioned that as well, that Americans, their tax refunds, I think Trump had the whole tax refund thing where
They would get some bigger tax credits and people saw larger refunds, but they said that that likely helped ease some of the pain. But based on IRS data, Lowe's actually mentioned that on their call, that 20% of refunds have been spent, 50% are sitting in savings, and the rest have essentially been used just to offset higher gas prices. So it's really interesting.
On the home improvement side, it's really weak in terms of do-it-yourself demand. So it's been weak for quite some time for both Home Depot and Lowe's. You're seeing their comp sales basically flat for years now, slightly increasing. So it peaked during COVID, then dropped, and then it's been pretty much flat. And the average ticket size as well is flat. So people are putting off...
big projects in big part because of higher rates, higher fuel costs. The consumer is also very cautious. So people don't really want to do a big project when they don't know if they'll have a job or not or the state of the economy. So it was very interesting to hear what they had to say on that.
Yeah, I think, you know, it is crazy too, because if you actually just look at like what's happening in the mortgage world, like CMHC's Mortgage Consumer Survey came out recently and the data is similar in the US, more people are actually choosing to renovate their homes than to do a transaction.
And even with that, and like, okay, so we can unpack why that is, but even with that, your DIY and consumer spending on residential investment, so Home Depot, et cetera, Home Depot lows is down. What? So at a period of time when we're hitting near record numbers of people choosing to renovate rather than buy because and again, we're thinking about yields and interest rates. I mean, the U.S.
mortgage rate is like 7% again. Canadian mortgages are fixed rate mortgages are rising as a result of the Canada five year bond yield going up. People like are trapped. Everything before that took place before was a result of low rates, right?
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Chapter 6: How are homeowners coping with rising mortgage payments?
People were able to buy these nice houses and all of these things because they had so much more buying power because rates were half of what they are today.
Now rates are double and they can't, if they've outgrown their house, they can't even afford to upsize because even if they sold and realized their equity, if they had any, and it wasn't destroyed over the last couple of years, they can't afford to go and buy a new house to get more space. So what does this tell us? Well, your consumer's trapped on buying and selling the house.
They're actually putting the most money that they have in, again, relative to... historic numbers into renovation and yet renovation numbers are still that low. That to me, combining those two data points is scary for the consumer economy, I think, and residential investment.
Yeah, exactly. Like I'm showing it right now so you can see it. The comp sales have basically been flat or negative for since, let's just say 2022 for both Home Depot and Lowe's. Home Depot is still seeing growth back in 2022, but since 2023, it's been flat or below. And then, like I said, the average ticket size is. as also stalled.
So meaning that people are just not, you know, they're not spending that much or they're not spending more. So it is kind of funny that you said that because, yeah, people are probably looking to renovate, but they're probably reluctant to renovate at the same time. So it is it's pretty it was just very fascinating just to hear what they were saying.
And again, same for Lowe's and Home Depot, at least Lowe's, they were a bit trying to hide it, but it felt like the wording they were using, I think consumers should expect some rising prices because of fuel prices being higher. So that is something like they're seeing it, they're trying to mitigate it with their suppliers and try to mitigate the prices increase.
But I think same kind of wording, I think Q2 and beyond, they'll probably be forced to pass that on a bit more to the consumer.
Yeah. Yeah. A hundred percent. I, so then the question becomes, can the consumer absorb it? And that's where I think we start running into trouble. Like if, if, if Walmart is seeing margins compressed massively, cause they're absorbing it, it would tell me, I mean, like, let's think about like during COVID, right? Like there were all these supply chain disruptions and whatever.
And it was like, yeah, we'll just pass those on to the consumer. Cause they're all like, they're, you know, they're all hopped up on cheap debt and they're getting stimmy checks from the government and whatever. that's not what's happening.
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Chapter 7: What trends are emerging in consumer behavior amidst inflation?
businesses, they probably wanted to see whether this is, you know, it will kind of stay elevated for a while or not. I think, is this going to be just temporary? And keep in mind too, a lot of their purchasing probably was done, it is always done, you know, several quarters in advance. So yes, there is the transportation cause.
They may, you still have to move the goods closer to when you need them. And Walmart has a huge online business now. So that's something to factor in. So they were probably able to offset it because, you know, I'm sure some of those products were closer to their end point than, you know, the ones that they're probably purchasing right now for the quarters to come.
So I think it's probably a mix of things. You might be right. And kind of what you're saying is they're probably scared that the consumers can't even buy. handle those increases, but I think there was probably just a part that, you know, it's, they were thinking it was more potentially temporary as well.
I don't know if you got my text, but we're the YouTube live didn't work. I got to reset it. Do you want to, do you want to jump off for a sec or do you want to just keep going? I'm easy, but.
I think we can just keep going. Yeah.
Sounds good. Yeah. Okay.
Yeah.
Just keep it easy and apologies. We'll just upload it to YouTube after. Yeah, exactly. We'll upload it. Okay. Sounds good. What do you want to jump into now? Do you want to talk about a CPI and then just like bond markets in general? Should we go through Canadian CPI quickly?
Yeah, yeah, let's do it. And I mean, I think I guess the last point to tie in from, you know, those retailers and also looking at CPI. So CPI was what, 3.8% in the US and now you're seeing Canada hit 2.8%. That's without probably the retail inflation fully increasing.
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Chapter 8: What potential risks does the bond market face in the current climate?
Okay. So why is Canadian CPI so much less drastic than U.S. CPI in response to the oil price shock?
I'm not quite sure. What's your best guess? I mean, the different ways of calculating.
Yeah, yeah. If you go back to COVID, like a Canadian CPI, it took longer to get higher. It did peak higher though. I think it peaked higher than the US, right? Like I was at 8.4 here or no, we were in sevens and they were in the eights. So I think our basket reads, yeah, our basket reads like, I don't know, a hundred bips lower or like, you know, so I don't know, that might just be it.
I think it's composition probably. Like I built that like real flation tool just to like, it was funny, like the true flation guys actually connected with me on Twitter about it. I use Truflation all the time to see, because in the blow off from COVID, when people were still like, oh, inflation's crazy.
People always talk about inflation as if it's like, consumers don't think in a one-year term, right? They think about whatever they benchmarked there. spending to in the past, right? Like, Oh, I think a banana costs a dollar. Okay, well now it's two. And so even though it hasn't changed in a year, I still think it's way higher than before. You know what I mean?
People think about like price levels, not the increase.
Yeah, exactly. Yeah, exactly. And, and I think, you know, It's funny because Canadians have like a really high consumer sentiment or inflation. What's it called? Inflation. I think it's inflation sentiment, but like they have a higher intensity to spend if they are fearful of inflation and not spend if they're going to see, if they think they're going to see deflation. Yeah. I don't know, man.
It's like, I, I think it's, it's a weird setup right now. Like the other thing that I've noticed in Canada, I don't know. Did you see CMHC's mortgage industry report? You're actually seeing Canadians piling. Give me a sec. I'll pull it up. This is like one of my favorite charts to pull up. Residential mortgage industry report. Let me pull it up here. The trends.
It's basically like Canadians are piling back into variable rates. So Canadians, I think, would illustrate that. Isn't that crazy?
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