Annual Investment Outlook 2022: Making Money in Volatile Markets
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13 January, 2022 Annual Investment Outlook 2022: Making Money in Volatile Markets
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January 2022
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January 13, 2022

The Empire Club of Canada Presents

Annual Investment Outlook 2022: Making Money in Volatile Markets

Chairman: Kelly Jackson, President, The Empire Club of Canada; Vice-President, External Affairs & Professional Learning, Humber College

Distinguished Guest Speakers
David Rosenberg, Chief Economist & Strategist, Rosenberg Research & Associates Inc.
Thomas Caldwell, Chairman, Caldwell Financial Ltd.
Pierre Lassonde, Chairman & CEO, Firelight Investments
Richard Carlton, CEO, Canadian Securities Exchange
Mike White, President & CEO, IBK Capital Corp.

It is a great honour for me to be here at the Empire Club of Canada today, which is arguably the most famous and historically relevant speaker’s podium to have ever existed in Canada. It has offered its podium to such international luminaries as Winston Churchill, Ronald Reagan, Audrey Hepburn, the Dalai Lama, Indira Gandhi, and closer to home, from Pierre Trudeau to Justin Trudeau. Literally generations of our great nation's leaders, alongside with those of the world's top international diplomats, heads of state, and business and thought leaders.

It is a real honour and distinct privilege to be invited to speak to the Empire Club of Canada, which has been welcoming international diplomats, leaders in business, and in science, and in politics. When they stand at that podium, they speak not only to the entire country, but they can speak to the entire world.

Welcome Address by Kelly Jackson, President, The Empire Club of Canada
Good afternoon fellow directors, past presidents, members, and guests. Welcome to the 118th season of the Empire Club of Canada. My name is Kelly Jackson. I am the President of the Board of Directors of the Empire Club of Canada, and Vice-President, External Affairs and Professional Learning at Humber College. I'm your host for our “2022 Annual Investment Outlook: Making Money in Volatile Markets.”

I'd like to begin this afternoon with an acknowledgement that I'm hosting this event within the Traditional and Treaty Lands of the Mississaugas of the Credit, and the homelands of the Anishinaabe, the Haudenosaunee, and the Wyandot Peoples. In acknowledging Traditional Territories, I do so from a place of understanding the privilege my ancestors and I have had in this country, since they first arrived here in the 1830’s. As farmers in Southwestern Ontario, I imagine they felt a deep connection to the land, and yet likely did not recognize how that connection was built on the displacement of others. Delivering a land acknowledgement, for me, it's always an important opportunity to reflect on our human connection, and responsibility to care for the land; and to recognize that to do so, we must always respect each other, and acknowledge our histories. We encourage everyone tuning in today to learn more about the Traditional Territory on which you work and live.

The Empire Club of Canada is a non-profit organization. So, I would like to take a moment now to recognize our sponsors, because they generously support the Club, and they make these events possible, and complimentary, for our supporters to attend. Thank you to our lead event sponsors, IBK Capital Corp. AurCrest Gold, Big Tree Carbon Corp, the Canadian Securities Exchange, Enerev5 Metals, Noble Mineral Exploration Inc, POET Technologies, and Spruce Ridge Resources Ltd. Thank you as well to today's supporting sponsors; they include: ArcPacific Resources Corp, Aviso Wealth Inc, AMG Group Inc, Kreative Ventures Ltd, Manitou Gold Inc, Newrange Gold Corp, Providential Pictures Inc, Watts, Griffis and McOuat Ltd, and WeirFoulds LLP. And of course, a big thank you to our season sponsors: Canadian Bankers Association, LiUNA, Waste Connections of Canada, and Bruce Power.

Before we get started, a couple of quick housekeeping notes: if you require technical assistance, please start a conversation with our team, using the chat button on the right-hand side of your screen, and we invite you to share your thoughts on social media, using the hashtags displayed on-screen throughout the event. To those watching on-demand later, those tuning in on the podcast, welcome. It is now my pleasure to call this virtual meeting order.

I am honoured to welcome our presenters David Rosenberg, Thomas Caldwell, and Pierre Lassonde back to the Empire Club of Canada's virtual stage once again for our Annual Investment Outlook events. Before we hear from them, I'd like to invite Richard Carlton, CEO of the Canadian Securities Exchange to deliver some opening remarks and introduce our guests. Richard, welcome and over to you.

Opening Remarks by Richard Carlton, CEO, Canadian Securities Exchange
Thank you very much Kelly. It is again my privilege to provide the introductory remarks for the Empire Club of Canada's “Annual Investment Outlook Luncheon,” a virtual event for only one more year, I promise. This year's event is subtitled, “Making Money in Volatile Markets.” The event has become a fixture on the business calendar for many thanks to the tireless work of Bill and Mike White in particular, at IBK Capital, and our team of enthusiastic sponsors again. Now, if I can be permitted to make two predictions before we get underway: first is, you will hear thought provoking ideas and commentary today from three of Canada's leading investment professionals, and one of the speakers will suggest a tremendously profitable investment strategy and the year to come and perhaps beyond (just don't ask me which one). And before I formally introduce this afternoon's speakers, I remind you that their full biographies are provided on the event page, which is located below the video player.

Now, our first speaker, David Rosenberg, is the Chief Economist and Strategist of Rosenberg Research and Associates. Known in some circles on Bay Street as the ‘perma-bear,’ David is particularly adept at turning the noise generated by the world's debt markets into actionable signals for investors across multiple asset classes. And even though I'm a simple cash equities market guy, I'm aware that the debt markets have recently been generating more noise than a temper tantrum throwing three-year-old, or a certain recent US President. I'm eager to find out what it all means.

Following David, our next speaker will be Tom Caldwell. Tom, among many business and philanthropic activities, chairs a self-titled independent brokerage firm, a similarly named investment management firm, and a publicly listed investment firm, Urbana Corporation. As it as a matter of public record that Urbana is the major shareholder in the Canadian Securities Exchange, suffice to say that, in my view, Tom is a saint of Canadian business, and an all-around righteous fellow.

Finally, this afternoon, we'll hear from Pierre Lassonde. This will be Pierre's second year running at the lunch, and, having had a quick look at the returns from the gold sector over the last 12 months recently, it may be the case we had him on a year too soon. That said, through Pierre's work at Franco-Nevada, and the gold mining sector in general, his team pioneered financing techniques that have supported mine development in Canada and around the world for decades, while providing billions in investment returns for his shareholders over the years. With inflation returning with a vengeance, government debt rising throughout the world, interest rates perhaps likely headed higher, and the US dollar showing weakness, maybe this is the year, Pierre, no? Finally, thank you to our sponsors, without whom we would not be able to present such a noteworthy group to you today; and thanks to you, our audience. Over to you David Rosenberg.

David Rosenberg, Chief Economist & Strategist, Rosenberg Research & Associates Inc.
Well, thanks very much, Richard, and good afternoon, everyone, and a Happy New Year to all good things to you and your families for 2022; 2022 being the Chinese Year of the Tiger, the animal of all 12 within the Zodiac with the most unpredictable characteristics. And that's how I would describe the financial market outlook for the coming year, which I think promises to be one of heightened volatility—which is an entire investment theme right there, because at the root is going to be an environment of expanded risk premia across the various asset classes, but with a more generally uncertain climate.

Let's talk about the things that we do have some conviction on, the areas where we have a certain high level of certainty. We know for a fact that we're heading into 2022 with valuations, equity ownership, market concentration, sentiment, and leverage completely off the charts—we're talking between two and three standard deviation events. And as for market concentration, the top five stocks in the S&P 1200 continue to represent roughly 25% of the entire market cap. That takes out the 17% share of concentration in the 1999 Tech Mania, and it's basically where we were in 1969 during the Nifty Fifty craze; and what we know is that the following year or years after 1970 and after 1999 wasn't exactly a pretty picture. Nobody saw it coming back then—because everybody thinks they can time the exit—and nobody seems to really even acknowledge or care about this unhealthy market backdrop that we have on our hands today.

You know, over the past three years, the S&P has surged at a 20% annual rate. That's only happened a handful of times in the past 70 years, and what we find is that on year 4, on average, it's either a pause or a down year for the stock market. Not to mention, that in these three powerful years that we've come off of, 80%—in the past three years, 80%—of the market move has been multiple expansion. Only 20% has been actual earnings growth, and when you look at history, it's usually earnings that do the heavy lifting. Seventy% of a typical bull market as earnings, 30% as multiples; it's almost been reversed in the past three years. That, again, is not a very healthy or sustainable backdrop, so, the question really is for 2022, is the extent to which this becomes the year of mean reversion, and the risk is that nobody seems prepared, because when you're looking at the US household balance sheet, their exposure—household exposure to equities, and the overall asset mix has never been higher than it is today at 40%. Forty% of the total asset mix on household balance sheets in the United States is in equities. The historical mean is 14%, not 40, so you see what's happened here in this rampant bull market that we've seen, there's been no rebalancing; there's only been performance chasing to the highs because everybody believes in FOMO, the fear of missing out.

And it's not just individual investors that are more exposed to the equity market than they've ever been before in the post-WWII era, but portfolio managers themselves. They have thrown an equal amount of caution to the wind. They are sitting, collectively, on a record-low Cash to Asset Ratio of under two%. We know that in 2021, 85% of active fund managers lag the index, and as I said, the index is more concentrated now than it's been since the .com craze of the late 1990s. And so, if memory serves me correctly, the next few years didn't turn out so well, because mean reversion took over.

And so, we go into 2022 looking at valuations—you know, people say to me, ‘well valuations only matter when they matter,’ and the problem with that is that the valuations at least give you an inkling as to what your future expected return is going to be. And we have a CAPE multiple today, and that is a 10-year multiple, and the most appropriate multiple is a long duration multiple for long duration asset. I never knew why people looked at when you're trailing, when you're forward—the CAPE is the best multiple indicator for the stock market, and it goes back more than a century, so that's the longest time series. The CAPE multiple is pressing against 40 right now, and again, that last happened when, in 1999 heading into 2000? Before that, try 1929. And so, whenever we've been at these nosebleed valuation levels in the past, if you're looking at one, three, five-year returns—and we've looked at this—the returns are flat to negative in the broad stock market. And so, it's not just, you know, the CAPE multiple being what is actually a three standard deviation event. I don't know why people would be throwing money at stock indices with multiples that have only been here in the past century two% of the time; it's insanity. We got S&P price-to-sales north of three—that's a record high, higher than it was during the .coms price—a tangible book over 15...these are unprecedented levels. And then you go to the market for corporate credit; what are you going to do? I mean, high yield spreads at just over 300 basis points. Historically, high yield spreads are over 500 basis points. They are neither high, nor they’re spread, and they've only been here, again, 10% of the time in the past. That is what you're investing in if you're investing in equities and corporate credit right now. The level of the high yield spread right now only makes sense in the context of an accelerating economic boom, which the flatter yield curve says is a near impossibility.

And we know what else; we know that in 2021, it was an epic year. We had a combined $2 trillion of economic and risk appetite support from fiscal and monetary policy combined; $2 trillion of fiscal and monetary in the context of a $23 trillion US economy. And what we don't know—especially in the context of a pandemic that’s ongoing—is how the economy and investor risk appetite is going to respond to what is truly going to be this year, an epic withdrawal of policy stimulus. We only know how the markets can live with a pandemic with gobs of stimulus from the government, but policy is about to shift, and the old, ‘the Fed has your back’ rules are not going to apply now for some time to come; and at a time when the fiscal spigots are being turned off, thanks to Joe Manchin. And so, when you're taking a look at fiscal policy, it's a four-percentage point drag on GDP growth this coming year, the underlying trend in GDP right now is around four%. I don't know where the Fed gets four% growth next year—I have close to zero, when you consider the extent of the policy stimulus withdrawal that we're going to be seeing. So, it's not just about the lack of appreciation for the drag that we're going to be seeing; it's also how the markets are going to respond, because we've never seen this before. Going back to 1980, we've never seen a year where the monetary and fiscal policy withdraw altogether. Like I mentioned, four%age points to GDP just out of no more fiscal stimulus, and the Fed wants to raise rates 100 basis points: that's almost a 500-basis point combined drag from policy stimulus withdrawal. People have no clue how everything has been held together by all the stimulus. And now that’s going to be subsiding, and I think the Fed now is going to be rolling the dice because it's fighting inflation that it really has very little control over. And I think the only way you're going to generate the disinflation they want is by crushing demand, which means that we're probably going to end up having a recession on our hands before long.

And in fact, I published a report last week that analyzed the collective performance of 13 different market and macro variables, and their pattern of behaviour through all the cycles of the past six decades. I'm trying to get a gauge here as to their pattern this time, relating it to the past, to give me a signal as to where are we in this business cycle, and where are we in this market cycle? And it's telling me that we're 80% of the way through, and the cycle is only 20 months long. You know, then again, we had a two-month recession, a 20-month expansion as of today, and even with a 20-month expansion being very short, all the indicators are screaming to me: late cycle. And you know what this reminds me of? Reminds me of the Double Dip we had in 1980, and again, the Fed fighting a supply side inflation situation under Volcker—what do you know? We had a short recession in 1980, a short recovery, and then a long-drawn-out recession 1981, ’82—I think everybody on the panel remembers that episode. And so, that's the comparison we have, there's 20% left in the tank from our work in this economic expansion. The markets will lead the expansion with three to six months in advance, so it might be starting already, this topping formation we're seeing in the stock market, but from our lens, if our model is accurate, the next recession—God forbid I should under the R word, but—the next recession starts in June or July, so I would suggest now it's time to start preparing for it.

Remembering the old proviso from my hero and mentor Bob Farrell, ‘bubbles always go further than you think.’ We are in a gigantic asset bubble across all the asset classes: corporate credit, equities, residential real estate, crypto; this was an epic, you could say, central banking, government-induced bubble formation that we've had. And what we know about bubbles is this: bubbles do not correct by going sideways. And as the policy stimulus is withdrawn—remember, this hasn't started yet, it's just about to start—that's going to be the dominant macro market feature. This year is when you take the training wheels off from all the government support, hence my recommendation in this confusing year, the Year of the Tiger; the tiger inherently meaning a very unpredictable animal. That's the year we’re going to have. De-risk the portfolio, shift up on quality, move towards a more defensive and lower beta investment strategy in general.

So, I would recommend taking chips off the table, taking your profits when you can, and if you have to be a long-only manager, if you have to be in the stock market, I would recommend being in dividend and recurring cash flow stream thematics, and especially in what I consider to be areas of the market that are released relatively undervalued: I'd be talking pipelines; I'd be talking utilities; I'd be talking industrial REITs; I'd be talking about drugmakers; I'd be talking about food producers; I'd be talking about telecom; and I’d probably be adding in pharma. I’d be adding in definitely this year global defence stocks; self-storage ETFs are in a bonafide bull market; mobile and manufactured homes, they also have solid, secular tailwinds. And from a global perspective, I would continue to say that emerging market Asia Pac Equities trade at P multiple discounts to the developed world that are two standard deviation events. And so, while there's clear Chinese-related risks here, I would suggest that the emerging markets and most of Asia Pac already have them priced in.

Let me just add one more thing before I wrap up. I believe that inflation is transitory; and it was transitory during the Spanish Flu of 1918 - ‘19, when inflation actually got to 16%—never mind, 7%; and everybody's going hyper over 7%. We have a massive global supply shock that we haven't worked through; the demand side is going to be—the demand contraction is going to be one of the key reasons why inflation is going to fall, I think precipitously, in the second half of the year. Our bottom-up and top-down research is telling us that inflation is going to come down, not immediately, but in the second half of next year. And so, if I'm gonna buy something on price dips, I'm gonna be buying the long bond, I'd be buying the long bond on price dips. And if you have any kind of contrarian streak, you’ve gotta keep in mind: the Treasury market is the enemy; it is the most detested asset class on the planet, and it's also the most under-owned. And I said before that the household sector has never been so exposed to equities. Forty% of their asset mix in aggregate; in equities, only three%. People always say, ‘who will buy the bonds?’ Well, when the stock market goes down, you'll want to buy the bonds. The household sector is only sitting on a three% share of the assets and Treasury securities, and you're not buying them for the yield. You're not buying Treasuries for the yield, you're buying it for the price and the capital gain you're going to get once yields start to move down again, which I think they will move down forcefully, if I'm right, on the recession call starting in the second half of the year, because whether we have inflation or stagflation, bond yields have always gone down. And bonds have all always made you money in an economic downturn, and the crystal ball is saying that that's going to be starting this summer. So, protect the portfolio. That's my message. And I'll leave it there. And Kelly, over to you.

Kelly Jackson
Thanks so much, David. And so, starting with the Year of the Tiger reference point is a great one, because that is a zodiac sign that is associated—especially in 2022—with unforeseen changes and surprising developments. So, right on theme with the volatility discussion in terms of the markets. I'd like now to ask Thomas Caldwell to give us some of his insights and perspectives. Thomas, over to you.

Thomas Caldwell
Well, thank you. I'm just removing sharp things from my desk right now, but I think we—I love these conversations. I love listening to people talking around me because I really pick up something, and particularly from David, and Pierre later, of course. I invest from on a strategic basis. I run a separate pool, and strategic meaning I look at causes versus symptoms. My focus is North American equities. I've invested internationally over the years and exchanges, and I find there's a lot to do in the North American economy; innovative great companies that can keep you fully occupied.

Last year at this conversation, I pointed out I was positive on equities for the year 2021, or the year just ended. I would say that's also the case looking into 2022. So, I would be a little bit at variance of our previous speaker there, but remember, markets are not homogeneous. I mean, we have insanely valued companies within the markets, but underneath that there's still some value.

So, let me let me give you some of my logic, my assumptions and sort of set a stage. First off, looking at all the numbers and statistics that we're getting these days, all of them are suspect in my mind. We're in an anomalous period. We're coming through a new territory in many ways. Some of it is precedent, but we're coming through new territory, and the numbers are all out of whack, in my opinion. First off, let me look at Omicron. Possibly—you know, you can't pick up the television or watch the television or anything without having inundated—let me just put it this way: possibly Omicron may be the real vaccine. It seems to be spread quickly, but not that serious. Of the five people I know with COVID recently, four didn't know they had until they had a test, and one had a bad cold. Now, I'm not saying that's a good sample to work with, but if this thing does fade out, if we are fortunate, lucky, whatever, this could provide an economic tailwind, despite government, health experts and media panic vendors.

Geopolitical, that's always something that's affects the mood. You know, the two items that seem to be on stage these days are China, Russia—that is Taiwan and Ukraine. I don't think, if I look at China, President Xi’s position is kind of tentative at this point. He's going for a third term, and there is quite a significant division. He's trying to get rid of it within the party, but I don't think he's going to risk a war at this point in time. He wants to keep Taiwan as a slow-burn chip on the table to negotiate. Russia—you know, one of the things on Russia that’s kind of interesting to me is, you have 164 million people, give or take, but a Gross Domestic Product less than Canada's; that makes them quite vulnerable to real economic sanctions. We talk about economic sanctions, but they really are Mickey Mouse stuff. But if you really wanted to do stuff, they would be quite vulnerable. So, I think I would doubt major Bull-ops on that front despite the media. I think the real geopolitical problem facing us is a decline in the calibre of Western leadership. We don't have a Reagan, a Thatcher, or a Mulroney on stage anymore, but I think with all these geopolitical things, don't get spooked by the media.

Interest rates. First off, let me talk about central bankers a little bit. Central bankers are not a royal priesthood. They are complicit in Canada and in America’s spending binge. They've had low rates, flush the system with cash, they have been very much involved in this and, despite being apolitical, they are very political. Mr. Powell will be talking to Congress today, and he has to answer to them, and that's also the case here. I think when we come to interest rates, I think central bankers—well, I know this—they all study the predecessors. And Alan Greenspan, in 1987, decided he was going to tighten the system with interest rate increases, and he did two in very short order, and the second one absolutely spooked everybody. The market went down 40% or thereabouts in one day, and that's an attention getter, let me tell you that. I think if they're going to increase rates, which they will, or a change in liquidity, that is, pulling reserves out of the system, they're going to be very measured in this. No one wants to pull a Greenspan. What does concern me about central bankers that they're shoving in asks or mandates to them—full employment, climate change, all these things, they're now voting into central banking; I think that's very wrongheaded. There's only one job with central bankers, and that's to protect the integrity of a currency as far as I'm concerned.

Inflation. Well, I put a subtitle here, what did you expect? They got the US and Canadian government spending right out of control, flooding the economy with liquidity, low interest rates, subsidising not working—whether that's valid or not, that's another question, but—money is being paid to not work. We've seen massive asset value inflation, and it was in houses--all over people are doing whatever they can to hedge against what they're seeing as inflation; but first of it was asset value. And that's been again, houses, stock markets, wine collections, art—I’m not participating in the latter, but that’s what I hear. Now, it has, of course, spread to cost of living.

You know, one of our clients is a wonderful person; she's an immigrant whose English as a second language, but she has an incisive way of putting things. And she came back from a grocery store recently, and I just had to be chatting to her, and her comment was, ‘money is garbage, it’s just paper.’ And, you know, I thought she should be put on the board of the Bank of Canada, just to remind them of what the job is, for Pete's sake. Anyway, I'm just not sure a significant rate increase is going to particularly help; it just adds to the cost of capital at this point in time. The real problem areas have been fiscal and political, and they still are. And my best guess—and I would go with David a little bit on this—that I think inflation will moderate, but expectations can tend to push it along a little bit further.

Now, let me talk about governments briefly. Warren Buffett—I think it was him that said it—had a great comment. He would invest in companies that could be run by idiots, because eventually they were going to be run by idiots. This is also true of governments, because governments are in the same business. They're in competition with others for industry investment dollars, innovators. And frankly, if I looked at the leaders in the Western World—I don't mean to be arrogant about this, but there's not any I would hire in my business. And I think this says something; but we hire them to run the whole store in both countries.

So, let's talk about Canada, and our facts of life in Canada. And I want to just—I will enter more of a positive note when we get there, but we’ve got to see the game that we're involved in. First off, Canada has to recognize one inherent fact: the United States is not our friend. They are tough, they are competitive, they are isolationist, and they play dirty, and no amount of hugging is going to change that. We don't have any economic policies to encourage growth, job creation or innovation. We throw money at special interest groups to buy votes, a recent $40 billion bribe—that's enough to equip an Air Force or a Navy for Pete's sake. We're focused on popular pressure groups, our ideological adversaries. A lot of the West focus on climate change, because they make the same noises, and go and build monster coal-fired generating plants. We are debasing ourselves, and, frankly, we have no say in the world stage. Canada is an embarrassment on the world stage. So, I don't see a change in sight for Canada. Our Conservative opposition has the skill of selecting leaders that are just not winnable. But the big foreign exchange generators for us, of course, our autos and energy. And both of those are under threat by either our Prime Minster, or outside forces, such as the United States and autos. So, we will possibly have a reprieve in our dollar, I think. You know, Trudeau the first got our dollar to 65 cents; Trudeau the second could do basically the same thing, but as far as I'm concerned, oil and gas may bail him out, because we are a petrocurrency.

So, let's talk about the US just briefly. They're the same, and they have massive ideological divisions in America. But America has some advantages, and one is it has checks and balances, with some reference to Senator Manchin, but whether you agree with the man or not, he's standing in opposition to his party, for what he believes is right. We don't have that here, but that is a terrific check—and there are other checks and balances. The other thing, unlike Canada, America has the ability to renew itself. And I believe, in the elections coming up 2022 and ‘24, both parties are going to become a little bit more centrist. We've seen reactions on both sides, and I think there is a desire to return to what might be mentioned as normal. So, despite all of that, they have a strong, diverse, innovative economy. There have been massive share buybacks, robust and increased dividends. So, in terms of my weightings, the US gets the nod. And also, remember in this background that I've sort of portrayed to you, a cliche, and it's true: bull markets ignore bad news, and bear markets ignore good news. And we've gone through a year where the market has just ignored bad news. That was the story then, and I think that will continue.

Now, my job managing money is, it's in great measure of betting against governments. And that's generally a safe bet. You know, you look at policies and rhetoric that we're seeing out of our political masters, they don't connect with reality. When you look at, first, a government in Canada, slamming the energy sector; that was a big win for us last year, a huge win. Energy did extremely well, because guess what? If you took economics one-on-one, if you've cut supply or impact supply, and the demand stays the same, or increases, guess what? Prices go up. This is not a not a surprise to anybody here, and I think that will continue to be the case in 2022 in the energy area. Now, we have had significant success in some of the more intermediate oils and energy area, or we will move to some of the bigger companies. So, I think that's one where we still feel relatively confident. Electrification is going to happen, but it still ignores the mathematics; it doesn't work yet. We don't have the capacity required, and nobody wants a nuclear reactor or generating plant in their backyard. So, I still like that sector, and as I say, we will be doing a rollout.

Another focus that we kind of like in markets is the financial services sector on both sides of the border. While we're going through this talk, many corporations are right now discussing, how do we shorten this supply chain? How do we deal with these interruptions? There's going to be, I think, significant amount of capital investing in the United States to do just that. And I think that's going to be a positive, sort of a fuel. And I wonder whether that even undercuts the need of the “build back better” baloney. But at any rate, we're going to see, I think, capital spending improve. Mergers and acquisitions are also going to continue on, and you're going to see slightly improved margins for the financial sector, banks, and particularly with interest rate increases.

So, I think the main thing I think about when I look at markets is, there's so much cash sloshing around. In Canada, we like the Canadian banks. They're nurtured and a protected species, often to the detriment of other members of the financial services industry, but you got dividends at 4 or 5%. All you need is to pick up another 4 or 5% of the upside, and you're into your 10% area. The US banks, an area where we have a very strong representation, tremendous earnings horsepower, because they're present in every economic and market sector. And I think it's going to be a good year in capital markets, and in these sectors, mergers, acquisitions, and even financing. So, given our view of Canada, we tend to tend to focus here on financial services, and also the resource area, because if there is a decline in the US dollar, they're selling at world prices, and paying their costs and Canadian dollars. But again, oil is the flipside to that.

The tech area, it's not a sector, it's individual companies. I mean, frankly, I don't understand half of it, I mean, we're not a major factor. And many of the popular companies that have done extremely well, but it is an individual company sector, so you’ve got to, I think, do your own company hunting in that area. We've tended to stay with Applied Technology. Who benefits from technology? It can be exchanges, getting a handle on blockchain technology for clearing, and a lot of the playing or investing that we're doing is in the private area. In fact, Canadian Securities Exchange is one of those, to put in a plug. Technology is benefiting the exchange sector.

Cryptocurrency, I don't understand it—I've been trying to issue “Tommy Toonies,” but nobody's taking me up on it—but the crypto area is one where we're interested in from a custodial point of view, and we have investments in private areas. Tetra Trust has been one of them, but the value of underlying basic industries in both markets is not wildly out of whack. The sectors are the popular, the meme sectors, of course, are.

So, the early part of this year, you're going to see volatility. People are taking tax gains sellings, and our concern—we've had a good run up, and you know, it's prudent for many investors to take money off the table; and you're going to see some of that in the first part of this year, but if I had to give you my prognostication on this year, I would say overall—and again, I have to try to qualify it with, I wonder about the Teslas, and that sort of thing—but I think basically, the market will do quite well. I think this can be a 10% plus year as we go through it. There's going to be bumps—and I mentioned the Omicron thing, first off when I said it—so, that's something we need to get away from that, we’ve got to get away from the panic stuff. We have got to get on with the rest of our lives. So, I think we're going to see double-digit growth in the equity sector. And it's based on economic growth, inflation, hedging, people wanting to get out of money—because as the lady said, it's garbage—and getting returned to some new normal, and I think we're going to get there this year; and that would be quite a relief factor in markets, I think. So, we're going back I think to a normal. It'll be a new normal, it'll be different from what we've experienced, but I think it's going to be overall positive. So, I'm gonna stick with my prediction one more year, and push my luck into 2022. So, thank you so much. Back to you, Kelly.

Kelly Jackson
So, much, Thomas. So, much covered in a short period of time, that was excellent. And last but not least, I'd like to invite Pierre Lassonde to offer his insights and perspectives for us. Pierre?

Pierre Lassonde
Thank you very much, Kelly, and welcome, everyone. The great thing about having three speakers, is you can end up with three different opinions. So, I'd like to start with the cover of magazine from a few years back—if you can just throw up the second slide here—this is the Business Week of April 2019. And the inflation narrative right now in the US is that inflation for this year, ’22, will be 3.5%, and that's a consensus from all the big banks, to 3% for this next year, and then it goes to 2.7% in ’24, and 2.3% in ’25. Nice, steady decline numbers that, frankly, have nothing to do with reality. Some commentators blame the Fed statistics measurement; they think that they're created by the same writers of Fantasy Island series. You look at the labour market composition, last year 4.2 million Americans quit their job. The pandemic has transformed the labour market, and that is not captured at all in the way the Fed looks at the labour market.

It's also true that, for example, in the 1970s, the Fed dropped housing price from the shelter costs and replaced it with an imputed rent that was calculated on hypothetical, notional, imagined, putative cost of shelter, because back then, just like today, housing price was going up 10 to 15% per year. I'll just give you a quick example. Two friends of mine, Fred and Beverly, they got married in 1958. They bought their first house in 1960, in the boonies; it was a three-bedroom bungalow and-a-half an acre around the corner of Bayview and Steeles in Thornhill, and they paid $18,000. In the 1980s, when the real estate prices were going crazy, they finished the basement and added a two-bedroom addition. Fred is 90 today and Bev is 88, and they are thinking maybe it's time for them to move, so they've kind of solicited a few offers. And they were told that the House has negative value, but the land they were offered 2.5 million—that's a compounded rate of return of over 8% per year, over the 60 years they've been in that house. Oh yeah, inflation in Toronto was 2%, yeah, and that is why government statistics are suspicious to an awful lot of people.

When you talk about inflation, I'd like to talk about energy, because I think that energy prices are not going to go down, they're gonna keep going up. You know, energy is life. Forty% of all CO2 emission is for heating, ventilation, air conditioning, it's to keep us humans functioning; only 20% is transportation. So, what we have today in the world is a big disconnect between political pronouncement, public policies, perception, and science. The fact is, the carbon molecule is the most energy efficient, easily transportable and storable, cheapest form of energy that we have today. Nothing that we have, nothing else comes remotely close to the carbon molecule. Until science comes up with a cheaper, better alternative, I predict that it will be impossible to achieve any of the targets set out in the various green conferences. And when you think Bank of America last week came out and estimated that to achieve net-zero emissions globally by 2050, will cost us $150 trillion over 30 years: that's twice the combined GDP of every country on earth. You think that's going to happen? I don't think so. And when you look at the policies, for example, of Germany, they rely for 40% of their energy on wind and solar. Well, last summer, the wind didn't blow, and the sun didn't shine. Okay, so, what happened? They got into a crisis, and they have to fire back all their old coal-powered, and they've had to fire as much as they can anywhere and buy energy from other countries. The result? Huge energy prices going through the roof. The country in Europe that fared much better: France. Why? Eighty% of its electricity comes from nuclear power. They are smiling.

So, when you look at the next slide, the reason why I like oil and gas, is that for the last 10-15 years, governments have been browbeating the oil companies, saying, “we don't need you anymore, we don't want you.” Well, the investments of oil and gas have been going down, and they have created a situation today where demand is going to outstrip supply for the next five years. And my conclusion is, be prepared for $100 oil, if not more, and that will feed into every component of the CPI. Do I believe the CPI is gonna stay down at 3, 2%? Absolutely not. Not for one second.

And then when you look at the greening of the world, I'll give you another paradox. To get the world greener, you're going to need a lot more metals; you're going to need a lot more mines to decarbonize our energy production. Essentially, today, 76% of in-use energy is hydrocarbon, and 24% is electricity. To go green, you got to reverse that. You’ve got to end up with 76% electrical. Now, our entire civilization rests on one metal, copper. Without copper, we have no transportation; we have no cars, no trucks, no buses, no aeroplanes, no chips, no elevators, no building over four storeys, we have no air conditioning, no heating, no dishwasher, no dryer, no lights, no garage doors opener or no heated driveways. We have no communications, no phone, no internet, no TV, no computers, no tablets, no Apple, no Amazon, no Netflix, and certainly not no Cryptos. Pull the plug on your computer and what do you own? Nothing.

Where will all these metals come from? Copper production will have to increase by 50% per year, just to get there over the next 20 years. Where are you going to find those deposits? We haven't got them yet. Cobre Panama, which is a mine that Franco-Nevada helped put in production at a cost of 6.4 billion, was founded in 1966. It started production in 2000. The length of time required to find these deposits, to assess them, to permit them, to build them, is anywhere from 12 to 20 years. And yet, the demand is now. You know, you look at Tesla, you look at all those electric cars, you know, they require three times as much copper as a petrol car. Where were all that copper come from? So, when you look at the greening of the world, you're going to need more, not only more copper, but you're going to need more nickel, more zinc, more precious metals, and we're going to need a lot more mines.

Now, if we want to talk about gold, gold is first and foremost a commodity with a deep and worldwide physical market. India and China by themselves consume more than half of all the production every year—that's in jewellery; that's like, physical market. Gold only becomes money when the US dollar does not play its role as a reserve currency; that happens when the US actively wants to devalue its currency. And if you go to the next slide, I just want to show you, for example, the value of gold. To my mind, the value of gold is tied 80% to the value of the US dollar, vis-à-vis a basket of currencies, and the other 20% is the real rate of interest. So, the fate of all reserve currency is to depreciate over time. But when you look at when the reserve currency was let loose in 1971, to this day, it's been depreciating, for the past essentially 60 years, 50-some years. Over the last 5 years, the US dollar has been, I wouldn't say defying gravity—because in ‘82 it was a lot higher, and same in the like the late ‘80s—but it what you look at the chart, it does seem to peak every 15 years (plus or minus 2 years), like ’85, 2000, 2017. And the trough, same thing: ‘79, ’92, and the next trough is some time between ‘24 and ‘26. The US Dollar is clearly overvalued vis-à-vis the Asian currencies, and it's also overvalued against the Euro—but specifically Germany, which provides essentially 90% of all the export from the Euro.

So, I'm betting on a reversion to the mean, for a number of reasons. One of them is, if you look at the money supply, it's up 5.9 trillion to 21 trillion over a 20-month period; that's a 38% increase in money supply. And if Milton Friedman is right, that inflation is primarily a monetary phenomenon, he must be turning in his grave, because it's positively scary. And then as for interest rates, I wouldn't waste any time thinking about what the Fed will or won't do for a simple reason: they’re boxed in. They have nowhere to go. The level of debt in the economy at the government, the financial, the private, is such that anything more than one and-a-half% will just throw the economy into a depression. I tell you, if I was Mr. Powell, I'd be as nervous as a porcupine in a balloon factory, all right? This guy has got a problem. Bottom line: real rates are going to be higher for longer, and that's good for gold.

Now, crypto I mentioned a bit of earlier. That's a world, if you know nothing, it makes sense; if you know anything, it's nonsense. You know, I used to say that the art market was the last Wild West market. The art market 20 years ago was totally opaque. Dealers and whales—you know, the big guys—would front-end anything. They did wash trading to create the illusion of a vibrant market, they colluded at auctions, there was no real price discovery mechanism. The so-called whales controlled 80% of the market. Does that sound like the crypto world today? Their regulators are like five years behind on this one, but I'll tell you who's up on this—and that's the next slide—it's the bad guys. They know a good thing when they see it. If you look at who's using the crypto, it's all these guys who are essentially taking over your computer, and then they charge a ransom—ransomware, okay? If you haven't been touched by them, you're very lucky, because I gotta tell you, they're everywhere. So, as for crypto being a store of value, my prediction is that crypto will join the 17th century Tulip Bulb Mania as the greatest speculative mania in financial history.

Now, last slide, I have to finish with something you've seen before: the Dow to gold ratio. And to use a line from Warlock of the Guardians of the Galaxy—just to show that I'm still contemporary here a little bit—"history doesn't repeat itself Gomorrah, but sometimes it rhymes;” and that it does in spades. If you look at the gold chart from 1929, ’67, 2001, you’ve got peaks that are 34 to 38 years apart. If you look at the bottom, about 47 years, which would say that the next one will be 2027, maybe a bit earlier. All I'm saying is that this cycle is getting old, even by my standards. So, sometime in the next five years, I see the ratio in the low single digit 1, 2, 3 number, type of thing. As for the gold equities, can you feel the indifference? The gold miners have never had it so good. At $1,800 gold, they're making 50% margins. They're building cash piles, they're paying dividends, they're creating value, and they are at the lowest valuations I've seen them in 45 years in the business. My recommendation? Buy them until it hurts. And if I'm wrong, and I die, I hope there is such a thing as reincarnation, because I deserve another chance. With that, thank you so much. Over to you, Kelly.

Kelly Jackson
Thank you, Pierre. And thank you to all of our commentators today. I'd like to take the opportunity to now welcome Mike White, President and CEO, IBK Capital Corp. to deliver some appreciation remarks.

Note of Appreciation by Mike White, President & CEO, IBK Capital Corp.
Thanks, Kelly. Madame President, distinguished head table guests, fellow members, and guests of the Empire Club of Canada, I have the distinct pleasure to express our formal thanks to our three key speakers of this year's Annual Investment Outlook event. Gentlemen, what you did today, why you did it, and how you did it, helps each of us better understand and embrace the capital markets for this new year. Your presentations pointed out how attractive this recent cycle has been, as well as some challenges and opportunities available to all of us as Canadian investors in 2022. Please join me now in a warm and special thank you to all that have made today possible, including the sponsors, those at the Empire Club—both present here today and behind the scenes—and of course, today's three speakers. Thank you, David; thank you, Tom; thank you, Pierre. I wish you all God's richest blessings in 2022. Thank you. Back to you, Kelly.

Concluding Remarks by Kelly Jackson

Thanks again to IBK Capital Corp, and to all of our sponsors for their support. Thanks to our guests and everyone joining us today or participating later on-demand. Our next virtual event is on January 19th, at noon Eastern Time. Join us for a panel discussion with Indigenous leaders on, “The Power of Education in Advancing Reconciliation.” More details, and complimentary registration are available at This meeting is now adjourned. I wish you a great afternoon. Take care and stay safe.

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Annual Investment Outlook 2022: Making Money in Volatile Markets

13 January, 2022 Annual Investment Outlook 2022: Making Money in Volatile Markets