Annual Investment Outlook 2023

January 12, 2023

The Empire Club of Canada Presents

Annual Investment Outlook 2023

Chairman: Sal Rabbani, President, Board of Directors, Empire Club of Canada

Distinguished Guest Speakers
Richard Carleton, Director, CEO, CSE
Thomas Caldwell, C.M., Founder & Chairman, Caldwell Financial Ltd
Genevieve Roch-Decter, CEO & Founder, GRIT
David Rosenberg, Founder & President, Rosenberg Research

Head Table Guests
Gary Kalaci, CEO, Alexa Translations and Alexa Translations AI
Saleema Khimji, President, Struqta Global
Mary Anne Palangio, CFO, CSE
Rob Pulkys, Senior Vice-President, Waratah Capital Advisors
Sal Rabbani, President, Board of Directors, Empire Club of Canada
Tracey Stern, Chief Legal Officer, CSE

Introduction
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 Sal Rabbani, President, Board of Directors, Empire Club of Canada
Good afternoon. Welcome to the 119th season of the Empire Club of Canada. To our in-person attendees joining us at the Arcadian Court in Toronto, I'm delighted to be here with you and to our virtual audience joining us live or on demand. Thank you for your participation and support. Our role at the Empire Club is to inspire thought leadership and learning. As a trusted forum for conversations that matter, we provide a platform for professionals in the community, to profile their expertise. We hope to spark meaningful connections and productive dialogue by giving you, our incredible colleagues and peers, access to this nation's diverse wealth of knowledge. Welcome. My name is Sal Rabbani, and I'm the President of the Board of Directors of the Empire Club of Canada.

To formally begin this afternoon, I want to acknowledge that we are gathering today on the traditional and treaty lands of the Mississaugas of the Credit, and the homelands of the Anishinaabe, the Haudenosaunee, and the Wyandot Peoples. We encourage everyone to learn more about the traditional territory on which you work and live.

This year, the Empire Club strives to bring your divergent and thought-provoking perspectives. Opening 2023 with themes of economic literacy and lessons passed on by global unrest, we continue to learn how to lay the foundation, or the groundwork, for financial resilience and prosperous times. I hope today's conversation will give you a positive perspective on what is possible to achieve when we look for opportunities in these challenges.

Turning to today's program, I want to recognize the Empire Club's distinguished past presidents, board of directors, staff, and volunteers. Thank you for your contributions to making this event a success.

The Empire Club of Canada is a not-for-profit organization, and we'd like to recognize our sponsors, who generously support the club and make these events possible and complimentary for our online viewers to attend. Thank you to our lead and VIP reception sponsor, the Canadian Securities Exchange; thank you to our lead sponsor, Waratah Capital Advisors; thank you to our supporting sponsors, Dealmaker, NewsFile, OCI Groups, Purves Redmond Ltd, Urbana Corporation; and thank you to our season sponsors, Bruce Power, Hydro One, and TELUS.

For those joining us joining us online, if you require technical assistance, please start a conversation with our team using that chat button on the right-hand side of your screen. It is now my pleasure to invite my friend Richard Carlton, the CEO of the Canadian Securities Exchange, to introduce our speakers. Richard, welcome.

Opening Remarks by Richard Carleton, Director, CEO, CSE
Thank you very much, Sal. And good afternoon, ladies, and gentlemen. It's again my pleasure to welcome you to the Empire Club of Canada's Annual Market Outlook Luncheon; this is one of my favourite days of the year. Now, not to brag, but last year, I hosted this event from my upper man cave, located just outside of Collingwood, Ontario. I predicted that the 2023 Annual Market Outlook Luncheon would be an in-person event. So, in a forecasting perspective, I am batting a thousand.

So, again, we have three distinguished speakers joining us this year, to give their views on the state of markets in Canada and around the world, provide us with some investment ideas, and the state of play that we're going to expect this year. Our first panellist, Tom Caldwell, is a returning forecaster. Tom is the founder of Caldwell Securities, Caldwell Investment Management, and Urbana Corporation and Investment Company, which is listed on the Canadian Securities Exchange. Entirely coincidentally, he's also the past chair of the Canadian Securities Exchange. Tom is known for his blunt talk, general level of optimism, and his investment acumen. Tom is a frequent guest in both traditional broadcast outlets, and—you know, don't believe me, you can look him up—increasingly, on social media outlets. Search him on YouTube, you won't regret it.

Next, we have a newcomer to the to the outlook panel. When I asked Genevieve Roch-Decter last summer whether she'd be interested in speaking at the event, I explained we're looking to break up the pale, male, and stale makeup of the panel. Gen actually claimed she hadn't heard that before, and immediately agreed, to my great pleasure. Gen was headed for a career in traditional finance, but she perceived a need with the new generation of investors coming into the market—especially, during the pandemic—that there was a specific gap in investment education for investors in the Canadian marketplace. She founded GRIT, a financial media company, to meet this demand. In a few short years—basically, over the course of the pandemic—she has 213,000 newsletter subscribers, and has the number one free finance newsletter on Substack globally, an online following of more than 600,000 investors. You also find her a lot on Fox, Bloomberg, and Vice Media. She's also a great Instagram follower. Follow. And if I can be a little bit indiscreet, she's a great hang in Vegas, too.

Our final speaker—and he is returning for a victory lap, finally, after all these years—is David Rosenberg, founder, Chief Economist and Strategist at Rosenberg Research. Although teased in some quarters for being based REITs perma-bear, David has successfully guided his clients through all kinds of market conditions over the course of his distinguished career. And with Central Bank policies leading the new cycles around the world, interest rate volatility for the first time in years, inverted yield curves in most of the markets around the world, and recessionary pressures lurking everywhere, it's fair to say that David is in his element.
Lastly, I'd like to thank our sponsors today. Sal mentioned them; they're up on the on the monitor. Without the sponsors, we just simply wouldn't be able to host conversations that matter. With the preliminaries concluded, we begin with Mr. Caldwell. Thank you.

Thomas Caldwell, C.M., Founder & Chairman, Caldwell Financial Ltd
Well, hello, all—I think that's politically correct. I always seem to be the opening act for David Rosenberg, but I don't mind. There were a couple of key factors looking at last year, and a couple of wildcards. And I look at markets, I look at the world, through the lens of equity markets; I'm an equity portfolio manager. One of the key factors last year was inflation; and lots of contributors to that. Energy policies from the parts of government—one of the things I've noticed, having mastered economics 101, is if you cut supply, the price goes up. Second was supply chain issues, shipping choke points, labor shortages, China policies, COVID measures, shutdowns, working from home—which is not working, call the passport office—fiscal government's throwing money in every direction, monetary policies, zero interest rates flushing the system with cash. The question is, what did we expect? What did you think was coming when you did this?

Second item, interest rates. Now here's where irony comes in—we don't have irony anymore, you notice there's no humor—the central bankers, the causers, have now become the curers. I don't even know if that's grammatically correct, but central banks were definitely complicit in this inflation. There's some question, even now, as to the appropriateness of current policies. Because remember, a lot of this—not all of it, but part of this is supply side. Interest rates are not the tool you deal with, if you want to add to supply side and bring, again, more goods and services onto the market. But spending on the part of governments is definitely a part of it. And now we have wage pressures also joining in this exercise. I think central banks have now got religion, but they haven't got credibility, as far as I'm concerned. The question here is, how far are they going to go? How far are they going to go in terms of pushing rates?

The third factor of last year was recessionary fears; and I think that's real. Central banks have a history of adding to economic swings with inappropriate or draconian policies, which are really compounded by flawed information, timing lags, et cetera. Economies generally self-correct without their help. But central banks, bankers, they have jobs to keep, like the rest of us. Media and pundits spent a great deal of time really pounding the negatives last year, and then we had the wildcards thrown in. Russia-Ukraine war, the Taiwan threats—and wars, by the way, are terribly wasteful, not only in human lives, but everything else; they are inflationary. And this one may be a long grind, the Russian-Ukrainian war. I think one of the good news out of the Ukrainian war is that it may have caused Premier Xi to double think his thinking about Taiwan. But that still is a great diversion from that COVID catastrophe that he's had.

So, if I look at equity markets in 2022, there's only one word in my mind that capsulize it. And that word is, resilience. Resilience, in spite of all the negativity. The Dow Jones dropped about 6.86 percent in the year. Given what had gone on for years before, that's a rounding error. Toronto went 5.84 percent, its total return on the downside. So, the resilience was quite amazing. Now, I pick those two indices because there's one standout negative group that impacted S&P and NASDAQ, and that is, of course, the technology sector, the social media, the new economy groups. But really, for them, it was falling back to Earth. You know, hundreds of times price earnings multiples just don't stand. Eventually, all the shiny things fall back to Earth. And they'll be evaluated as businesses now, because you reach a point when growth companies become value companies. You know, you get so big; how much growth can you have here? You can't, you know, if dominate the economy like a Google or an Amazon, you know, if you dominate, how much bigger can you get, and how fast can you get there?

So, okay, enough of last year. Looking into this year, Barbara Gray, she's out of BC—she's one of the better futurists around here, by the way, she's really quite good and quite challenging, you might want to check her out—she uses the metaphor of a hurricane. You know, hurricanes have this swirl going on, and you get really hit, and then there's the calm, the center of the storm, and then you get hit with the outside wall as it moves past you. Her view is, we are part of the, in that calm in the center of the storm, with that trailing wall still about to come. So, we're in the eye. Interest rates have started to have an impact on real economy—which by the way, has held up fairly well to date. If you look at economic numbers, it hasn't been that bad, given the rhetoric out of the bank, or central bank, bankers, and interest rates. We're starting to see some layoffs; some expansion plans are being curtailed. You're seeing consumer pain and altered spending programs as well; people cutting back on spending. Inflation, probably going to ease off a little bit this year. Interest rates, we're probably nearer the end than the beginning of the interest rate march upward.

The real question, though, is slowdown or recession? My guess—underlying that scientific word, guess—is probably the former. I would think more of a slowdown. Because there's lots of rebuilding to do in the economy in North America. And I think North America. I've invested internationally around the world and exchanges, and, you know, I really started to think there's lots of great stuff to do in North America—just get back, because people are semi-normal, a little bit easier to work with—but in North America, there's been lots of rebuilding. Supply chains are going to be shortened; technologies are developing; electrification, this is, if we're all going to go to electric cars and electric everything else, we're going to need more on that area as well. Defense spending, I gotta tell you, in my very casual knowledge of the topic, wars have been totally redefined in the last year. If the Canadian Army went to war with their tactics of two years ago, they'd be slaughtered. But there's everybody in the world—even, by the way, with Canada, this is a big surprise—are running out and buying new kit for the military, because the dynamic of precision has affected absolutely everything. Defense spending, CHIP spending. So, I think there's going to be an awful lot of money being spent out there.

Now, the way I tend to think, or our team tends to think, we match market analysis with market sentiment, or momentum; and the momentum was fairly strong last year. The beauty of checking with sentiment is that to check on your flawed or disconnected analysis. When I was an analyst, I could prove anything I wanted to do. But we have to check it with the reality. What's the market telling us? What is it saying to us, kind of thing. And that combination has served our clients very, very well.

So, let's look at equity markets, as I see it right now. And I'm giving you macro points. Don't get worried about, or get sidetracked with, recession talk. Because one of the things I've known is the recessions and slowdowns, they come, and they go. There is only one constant—looking back in my career of 107 years—inflation. That's the one constant: inflation. It will always be with us in some level. Because, you know, let me put it this way—what does it say—governments that can stay elected by robbing Peter to pay Paul can always count on Paul's votes. And that's what we're seeing, governments are still kind of doing that. And two percent inflation, I think that's an unrealistic target. And it never was two percent, even when they said it was two percent. Many of us who were doing shopping, when there's "oh, interest rates are only two percent." Well, wait a second. What about my house price—I know that's not in the basket—what about the car? What about gasoline? What about on and on and on? Yeah, that was the number, if you didn't want to eat, stay warm, or travel anywhere. That was the correct number. But it's like a head game. It was never two percent when they told us it was two percent. And they're not going to be able to get back there. Always have inflation, I have to always think about that.

The best protection from inflation is owning stuff—that's a scientific word, owning stuff. And I think, usually, one of the best stuff things to own is equities, that is solid, profitable, dividend-paying companies. When I came into the securities industry, the Dow Jones was at 600. There was even a play then called, "How Now, Dow Jones;" will the Dow ever get to a thousand, was it ever possible, kind of thing. The Dow was at 600. It's at what, 33,400 now? What that's telling you is, every setback in my business career was an opportunity. Every setback in the economy, every "oh my god, the world is ending," that's when you should getting your buying boots on, and start to look for opportunities. And right now, we have governments still trying to buy votes, despite central bank policies. You see in the States that 1.7 trillion dollars spending bill, authorized by Congress, to ease the pain. At the same time, the Fed is trying to increase the pain. Now, we don't have those authorized spending bills in Canada, but our spending is just as robust. So, we have governments with the foot on the gas and the foot on the brake at the same time.

In 2022, my focus in public markets—at least for the pools that I was responsible—was energy and financial services. The former did really well. I mean, it was a very good year, as Frank Sinatra said. People don't even know who Frank Sinatra is anymore, but all my references are dated. I even refer to Seinfeld; nobody knows what I'm talking about. The energy sector did extremely well, and the latter did not do well—but the energy more than accounted. So, the pool I was responsible for closed out the year with about an eight-and-a-half percent after tax return. And I'm looking forward to going into 2023 with roughly the same mix, with some slight changes. I still like the energy area, the energy sector. And because we have these flawed government strategies—and we'll come back to that. China's coming back on stream, and that's going to start to affect energy markets as well. You know, it's interesting, the Russian reality intruded into climate ideology. I mean, the uncomfortable truth—if I may borrow that phrase—is not all doable yet. We're jumping ahead of ourselves, and that's why we're creating this dislodgement, these imbalances in markets. But we do have to do things better. We do have to clean up the joint—that's, again, a scientific term referring to the world. We do have to do things better. But there's a pace at which we can, there's what's doable. And the Russian reality showed us that we were way ahead of our skis when it came to dealing with that. I look forward to the first quarter of 2023—it still could be bumpy—and then improvement in the latter part of '23, when we've adjusted this high interest rate level, and we start to see some economic rebuilding. I think merger activity will probably increase.

One of the things we look for is we look for really strong companies in a given industry, because they can be the predators. When an industry is ratty, they can take over the weak sisters. And so, if you have a strong balance sheet going into it, you can find opportunities. And that's what our investment management team thinks about.

The Russian Ukraine war, it could grind on for a long time. But you know, if I could quote the Israeli general, very successful general, Ariel Sharon, had a great line. He said, "sooner or later, you've got to talk to your enemies, and sooner or later, they're going to have to talk." But between here and there, there's pain, and suffering, and stupidity. But sooner or later, as Ariel Sharon said, you're going to have to talk to your enemies.

Canada, unfortunately, is no longer considered a serious investment destination. It's not considered as anything right now, frankly. You know, you hear lines out of the government saying there's no business case for liquid natural gas; and Japan's, saying we'll pay you what you want, send us the stuff. I'm sorry, we've been talking about it for the last 25 years, but we're thinking about doing it soon. But there's the same, there's no other development. Ring of Fire, I think we've been talking about that for 20 years, and there's still some environmental nonsense about the road, or stuff like this. You can't get stuff done here. Schröder, Chancellor Schröder, comes from Germany. They're freezing over there, trying to get LNG from Canada—we got to get some help here. And what we've said is, well, we're not going to do LNG because there's no business case for that. How about hydrogen? You know, the stuff you powered the Hindenburg with? We can give you some of that in about 10 years, would that help? Just burn your furniture until we get online. You know, my point is—it would be pathetic, if it wasn't so funny—but we are in the post-development phase of history in Canada. Post-development. There's no—if you don't have leadership, Canada is simply a tyranny of special interests and minorities. We're not a country, we're tyranny of minorities. Now, that having been said, to show you my level of my hypocrisy, I still am making some investments in Canada. So, I have Canadian energy. And I started to look at some of the Canadian big five banks, you know, they're down 35 percent. Two of them are yielding well over six percent dividend yields. And, you know, they don't cut dividends in Canadian banks, that's a career interrupter. You know, six percent plus, that's like an eight percent bond. All the stock has to do is move a few bucks, and I'm over 10 percent again.

So, some of the stuff, but my greater focus is in the US. The US financial services is one of my focuses; that group's down about 25 percent. And I've owned a good chunk of those, Morgan Stanley, the big banks in the States. I still like that position; I'm going to stay with that. But there's so much down there to start chipping away at, whether it be medical, pharmaceuticals, defense, media, technology. A vibrant market, and it's on our doorstep. And to some degree, there's a for sale sign. Forget the—some of these big techs, if you're really smart to pick the bottom and the bounce. I'm not that smart. I look for basic companies, where technology is going to improve their business. I don't go for the technology itself. I want to see how technology is going to make this business—I don't care if it's a steel plant—how it's going to make it better. That's where my brain is at when I look at these things.

The interesting thing, when I mentioned resiliency, why was the market resilient? Because there is so much money around. Everybody keeps missing that. You know, I look at scientific indicators, such as some guy with a Harpo Marx hairdo and cargo shorts in the Bahamas attracts billions of dollars, for Pete's sake. I mean, that gives you a rough indication of how much money there is roaming around, looking for a reasonable home. And that stuff I think does, to some degree, underpin things.

So, equity markets, unbalanced. I look for a positive 2023. And I'll tell you why, too. Has anybody here ever been really afraid of something? The answer is yes, and it's one hundred percent of you, because all of us have been afraid of something at some point in time. But do you notice, our fear was always worse than the event? Unless of course you've died, but you're not here. But for most people, the fear is bigger than the event. What that means is, now is probably the time to start committing funds, because the fear level is still there. I look for great opportunities in the coming year for us non-indexers. I am an optimist, not that I look at the world through rose coloured glasses. I look for the opportunities in adversity.

I'm going to give you one long-term concern, and I'm going off—I was trying to stay within my hour. I'll give you something a little bit more serious. My long-term concern, if I look at Canada, look at markets, is the increasing intrusion of governments and pressure groups into our lives. That's the biggest concern I have. There is no, quote, "safe place" for diversity of thought, or ideas, or even debate. People are attacked, ideas are not attacked, people are attacked now. We are forced to think and to say what many, if not most of us, simply don't believe. These new secular religions that are pressuring on us, demand total adherence. And we must remember that Western success has been based on individual thinking, ideas, and initiatives, and innovation. And we have to preserve the freedom of thought and discussion, no matter what, no matter what. And that takes courage, to stand up against things. You've seen the people that do, they get publicly pilloried. Leadership is about preserving and nurturing a host environment for progress. And we have to have our leaders thinking in there, and we have to demand that of them. Thank you.

Sal Rabbani
Thank you. Thank you very much, Tom. Our next speaker is Genevieve Roch-Decter, CEO and founder of GRIT. Genevieve, welcome.

Genevieve Roch-Decter, CEO & Founder, GRIT
Pleasure to be here, everybody. I was so excited when Richard Carlton of the CSC invited me to speak, and said, we need a non-pale male. And I said, well, I'm a pale female, I hope that'll do. But I said that I couldn't speak about bonds, or fixed income, or anything like that. I'm going to talk about some more innovating, exciting things. Like, I'm going to tell you exactly where I think the S&P is going to close in 2023, wouldn't you like to know that. But before I tell you that, we're gonna play this little video.

[VIDEO IS SHOWN]

All right. So, I'm not going to tell you where the S&P is going to close at the end of 2023, because people much smarter than me can't figure it out. On the left hand of this slide, you'll see the forecast for the top banks in the United States, and where they thought the S&P was going to close last year. And you know, estimates were anywhere from 4400 to 5300—we all know that the S&P had the worst year since 2008—and closed somewhere about 3800. On the right-hand side of the slide, this is data points going back over many, many, many years, to determine, you know, does Wall Street ever get it right? Turns out, only four percent of the time are Wall Street analysts right, in terms of their 12-month target for the S&P. Ninety-six percent of the time, they're wrong. So, I thought today I would talk to you about something that I think is going to impact not just your investments, but your lives to come.

The video I played looked like Tom Cruise. Not Tom Cruise at all. This is an actor by the name of Miles Fisher. He grew up with a lot of charm and charisma, but this guy had one problem: he looked just like Tom Cruise. So, you think that would be an asset, but it's not an asset. He would go out to auditions, and he never got picked. It was always down to him and another guy, and people said, we're not going to take the guy that looks like Tom Cruise, like, it's just not going to fly. So, Miles had a really hard time, he got quite depressed. Again, he tried to go out to all these auditions, tried to change his look, his demeanor, his tone of voice, everything, and nothing worked. He even tried social media, and that didn't work. Until one day, about a year-and-a-half ago—so, not that long ago—a video popped up on social media. And he looked at it, and he like, wait, that's me, but it's not me. It looks really like Tom Cruise. Turns out, there was a creative artist, who was also quite technically inclined, in Belgium, who had taken Miles' videos that were on social media, used artificial intelligence, and superimposed Tom Cruise's face and body on his, and created this, like, really, really, really good deepfake. And Miles contacted this artist and said, hey, like, this is really awesome, can we do more of this? And the artist said, you know what? We can. We've mapped out Tom Cruise's face and body, and your face and your body, and we turn around these videos really quickly. And so, Miles had an idea. He's like, why don't I start a TikTok account? So, he started a TikTok account, and started putting these videos up every day. And in a year-and-a-half, he now has almost 5 million followers. He's become a celebrity in his own right. People land on this account and actually think it's Tom Cruise. They're like, this guy's more Tom Cruise than Tom Cruise. And he's done cameos with the likes of Paris Hilton, and Mariah Carey, and a whole bunch of celebrities.

So, what's my point? My point is that artificial intelligence is at a point that we all need to pay attention to this. This is the most disruptive technology of our lifetime. The adoption rate over the last five years in AI is double. The amount of money flowing into this space in the VC world is huge, as you can see from this slide. And recently, in the last two months alone, there's a technology that was launched by a company called OpenAI; it's called ChatGPT. And I'm going to talk about it in a second, but it's a game changer. Quick history lesson on artificial intelligence: this is nothing new, it's been around for 65 years. But the last 20 years have been critical for the changes that are happening before our eyes. These changes—as many of you would be familiar with—Moore's law, right? The concept that processing power basically doubles every two years. So, the sophistication of technology goes through the roof as the cost drops. On this chart, you have experts in artificial intelligence trying to determine, based on the best knowledge that they have, where we would be in terms of intelligence with this processing power. So, as you can see, in 2005, they said it would have the intelligence of an insect brain; in 2010, a mouse brain; and 2023, which we are now here today, they said a human brain. And here we are. We actually have reached this level.

This technology, ChatGPT, was founded by a company called OpenAI, set up in 2015—not that long ago—by a man named Sam Altman, who is a founder of Y Combinator, which is one of the most successful incubators in the world. They've spat out companies like Stripe, Instacart, Airbnb; you'd be familiar with them. So, Sam and Elon Musk started up OpenAI. And over the last few years, Microsoft has invested a billion dollars into this company. And just two months ago, at the end of November, they went live with ChatGPT, which is their best product so far. In five days, this technology got one million users. It took Netflix three years to get one million users. This technology is going viral. It's super user-friendly, it's, you go on there and it looks exactly like a Google search bar. You can ask it anything. The technology that it's using is general language processing. Okay, what does this mean? This means that, just like as humans, it can take in a huge data set and predict what is likely to come next in a word sequence. And so, you can ask this ChatGPT anything. I saw somebody asked, can you explain that the fractional banking system in the United States, in the words of a surfer? And this thing spat it out in three seconds.

It's scary and exciting technology. And I'm gonna get to a couple of examples in a few seconds here, just to drive the point home, but it's really expensive. This technology is costing 3 million dollars a day. It's free to the average user right now. They are selling b2b, they're doing about 10 million dollars, a little bit more than 10 million dollars in revenue, doing b2b. But they predict that by next year, 2024, this technology will be generating a billion dollars in revenue. And I saw an interview recently with the founder, and they asked him, how is it going to generate a billion dollars in revenue? And he said, well, we're just going to ask the technology what's the best way to monetize, and it's going to tell us—which I thought was brilliant. Today, this company OpenAI is valued at about 20 billion dollars, but they're in talks with Microsoft to invest a further 10 billion dollars at about a 29-billion-dollar valuation met. Microsoft wants to immediately implement this across their Windows Suite of products. So, you would see this in PowerPoint, Excel, Word. It's going to be incredible.

So, who doesn't think this is incredible right now? Google. Google's very scared, they're sounding alarm bells internally; executive management there are saying that this could be the biggest competitor to their search engine, which is their biggest money-maker that they've ever seen. So, let's get into some fun examples here, because I think this will really, really drive the point home. University professors have gotten a hold of this technology and are like, write me a university-style essay. Fine, no big deal. This thing can spit out any style university essay in three seconds. Okay, they asked it if it can replace the students, can it also replace the professors? And in fact, it can. So, they asked ChatGPT write me an essay, but then analyze it at the level of a university professor and grade it. Boom, it did that. Then they take it to Hollywood, and they had Hollywood producers ask ChatGPT, please write the next billion-dollar screenplay, with full character development. And boom, ChatGPT spat that out. They took the character development, put it in another AI, that thing spat out the whole digital rendering of what these actors should look like, so they would know which actors to hire to play these roles. Pretty impressive. The legal sector. I saw a tweet from a lawyer in the United States, who tweeted, "someone go to Congress and ban this technology immediately." There was a video of a lawyer asking ChatGPT, can you please spit out a commercial lease agreement in South Carolina for two years, with eight one-year extensions. ChatGPT has to go in the county, state laws—all the stuff that would take a human hours to do, spat it out in three seconds.

Content creators, academics. Jordan Peterson—love him or hate him, I happen to be a fan—he wrote an international bestseller called 12 Rules of Life. He asked ChatGPT, can you please write me the 13th rule of life? But please do it in the style of the King James Bible, mixed with the Tao Te Ching. And, you know, doing any one of those three things is difficult on its own. The intersection of all three is pretty damn complicated, and nearly impossible. Jordan Peterson claims that what ChatGPT spat out was indistinguishable from something that he could have written. So, that was also very telling of the technology. An engineer who works for Elon Musk asked ChatGPT, hey, I haven't really been doing anything for the last week, could you please tell me, if I was an engineer at Twitter, what would I have done for the last week? But not only that, can you spit out the code for what I would have done? ChatGPT spat out the code, tested the code, the engineer said the code works. Pretty impressive.

Lastly, I'm cognizant that I'm sitting in front of a room of two hundred finance professionals who are probably going, you know, this is not going to disrupt my life or impact my life. And I would say, not yet. But just a few parting thoughts. Ray Dalio—who's one of the most successful investors of our lifetime, a hundred billion dollars under management—he pioneered the use of big data, and machine learning and AI, to basically go back in history and look at every event that's ever happened, in macroeconomic terms, to help determine what will happen today in those same conditions. He was able to beat the market for decades using this type of technology, but very expensive, right? Huge team, lots of money. My question—and this is not immediate, but over the long run—what happens when this type of technology is in the hands of everybody? And not just, you know, wealthy finance professionals. What happens to this industry?

And then just lastly—this is more of an immediate kind of impact—I saw this video on TikTok that went viral. And I think this could actually really help or hurt Wall Street in a way, but basically, a lot of what Wall Street does is, you know, earnings reports. Companies report earnings, they have to go in, digest the information, and spit out these reports almost immediately—once they get past compliance, of course. But now ChatGPT can do this for these Wall Street analysts. So, it makes me wonder, what's the immediate impact here? So, we'll play this video. But if you liked this content, my name is Genevieve Roch-Decter, and I'm the CEO of GRIT Capital, disrupting financial media. I was a money manager for 10 years; I didn't really fit the traditional mold of Bay Street and Wall Street. So, I decided to break out and do something different. And it seems to be working. We have, you know, a lot of people that read our content, and yeah, having a good time doing it. So, I'll leave you with this video. And thank you so much. It was a pleasure speaking here today.

[VIDEO IS SHOWN]

Sal Rabbani
Thank you, Genevieve. It's now my pleasure to welcome David Rosenberg, founder of Rosenberg Research.

David Rosenberg Founder & President, Rosenberg Research
Testing, testing. I'm not gonna hide behind the lectern, although I feel I might have to at some point. Happy New Year, everybody. And before I get going, I've just got to address something that Tom said about living in fear. I live in fear all the time, from bear hunters and fur trappers, okay, just to let you know. And, Richard, you know, you mentioned about some sort of victory lap. In the forecasting business, there ain't no such thing, okay. And so, I know that all you folks are here to hear forecasts, but there are only two types of forecasters, okay. There are those who don't know, and those who don't know they don't know, okay, just for pure full disclosure purposes.

Now, look, I'm gonna disagree with, quite a bit, from what Richard had to say. Then again, he's not an economist; don't hold that against him. Now, you see this title here. Do you see this title? You see this title here? I actually had this title when I was at Merrill in New York, back in '07, okay. And I was very comfortable with that title. And I'm very comfortable with it now. Now, I had this title up for about four months in 2007, and then Barb Fagan Baum, head of Merrill Compliance, made me remove it. And when she called me into her office, I said, why are you making me remove it? She says, I don't like the sexual innuendo. I said, you know, soft landing, you know, soft now, hard later; why is your head in the gutter? She says, well then, answer me one thing. I go, sure. Why in your presentations am I hearing from people that you're always saying, "don't worry, I'm not the Pfizer analyst." Busted. Okay. So, I forget, I replaced it with something else; I just called it hard landing.

So, let's talk about that. Because look, this is a big call. Timing is always very difficult, obviously. But a recession is actually a really big deal, right? A soft landing is like you're working, and a tough year, and your bonus goes from 100,000 dollars down to 60, okay. That's a soft landing. A hard landing, or recession, is when your salary gets cut, okay. It is a completely different animal. So, let's get into what's going on here, okay, because this is something I think that Tom was talking about, which is recession soft landing, I mean, who knows? But, you know, if you're an economist, you really you have to tell people where we in the business cycle are. Expansion, recession, somewhere in between, transitioning—and the transitioning is what we've been doing for the past year. The past year, we've been transitioning from the economic expansion to the economic recession. And here we have Jay Powell. Now, we have to forgive Jay Powell, because, of course, he's not economist either; he's a lawyer. Now, you know, there's an old story about, you know, what do you call an economist and a lawyer at the bottom of the ocean? And the answer is a good start. So, anyway, he's a lawyer, don't hold it against him. But what's he saying here? He's saying, what, I don't think anyone knows whether we're going to have a recession or not. Dude, you're running the Fed. You're coming out and telling everybody, "I have no clue." And then if it's a recession, is it gonna be deep, is it going to be brief? It's not knowable. Okay, why isn't it knowable? And why should we really be listening to the Fed?

You know, the other day, the markets were on tenterhooks because Powell was about to be on a panel in Sweden, as part of a central bank independence forum. And everybody's wondering, what's he going to say about '25 or '50 at the next meeting? We've turned collectively insane over what the Fed is going to do or not do. And I actually am going to agree with Tom on this, like, why do we spend so much time on the Fed? Like, I'll tell you, I can't run, I don't run away from my bad forecasts. I've had my fair share. But I just don't know a group with 350 PhD economists, they get it wrong at the most important time. Like, there's getting calls wrong, and then there's getting calls really wrong. So, to show you what I do for fun, to show you what a fun-loving guy I am, on the tarmac, on an Air Canada flight, waiting six hours—I actually have all the FOMC transcripts going back in time. And there's something at the FOMC meetings called the Green Book, which is what the economists prepare for the FOMC. This is the economic brain trust at the Federal Reserve, I would argue perhaps the most important financial institution in the world—I guess Goldman Sachs might have a problem with that, or maybe Bridgewater, but let's face it, they pull the monetary levers. Do you see the numbers on the left-hand side? Do you see, on the eve of the recession—not a year later, not a quarter later, like a month later—there's always, there's no negative sign there. On the eve of the recession, they never see a recession. And we're supposed to pay attention to the Fed? They don't even get the Fed Funds Rate call right that often. Take a look at their success rate in calling the Fed Funds Rate over the next year. The one thing they can control. Oh, Dave, what's the Fed gonna do? What's Powell gonna say? And then these people are all over the place, of course, they're all uniform right now. I mean, Jay Powell two years ago was America's resident social worker, targeting demographic unemployment rates for minority groups. And now, he's gone from Bambi to Godzilla. And he's gonna go to Bambi again, because that's the nature of the beast, and as Tom Caldwell said, that's what we're talking about here. All these cycles are just centrifugal forces over time. Sine waves, interest rate cycles, market cycles, economic cycles, and they intersect with each other.

So, I'm going to say like, you know, you call for recession, in all my—I got clients, they're all portfolio managers, and like, nobody wants to, like, when I talk about a recession, it's like I'm looking him in the eye, and I'm saying, "your kid is ugly." That's like, that's, you know, it's not a medical diagnosis; it's part of the business cycle. Are we so scared—so, Tom Caldwell doesn't want to say it's gonna be slow, okay. Say it's gonna be slow. It makes people feel better. It's part of this—thank God recessions are short and brief. Even the Great Recession, six quarters, okay, and expansions along and strong. But the thing is that you get paid to manage money, you get paid to make sure your clients are staying out of trouble. You don't want to spend all those years trying to claw your way out of recession bear markets, so you do want to pay The Economist to tell you where we in the business cycle are. Well, it just so happens that it does come down to the Fed. And you're right, they make mistakes in both directions. That's why we have the business cycle. So, I don't know. I play the odds. I play the odds all the time. And so do you folks because it's all about probabilities. I'm willing to say, yeah, a lot of things are unknowable. I don't deal in a world of zero or a hundred, at least not most of the time. I don't deal in zero or a hundred, a hundred percent of the time—you saw what I did there.

So, you'll take a look, and it comes down interest rates. So, we have recessions, and they tend to follow Fed tightening cycles. And I don't want to sound condescending, but what is so difficult to understand about interest rates? That we get recessions, and they don't come out of the blue. They're not caused by tax hikes; they're not caused by oil shocks. They're caused by interest rates. So, it just so happens, if you're playing the odds, we have had 14 Fed-hiking cycles in the post-World War Two experience. And 11, oh, just by happenstance, landed the economy in recession. Well, go figure that out. So, I was saying, when the Fed started hiking rates in March of last year, caveat emptor. Now look, can't be so arrogant as to say that we can't have a soft landing, which is, your bonus gets cut, but your salary is saved. We did have a soft landing in the mid '60s in the context of a Fed tightening cycle. It does happen. It did happen three times, historically. But there was some offsetting exogenous positive shock that caused it. What was it back then? Well, it was LBJ's guns-and-butter fiscal policy, and the fiscal deficit doubled over a three-year span. Good luck that happening, now that Kevin McCarthy has sold his soul to the hard-right wing of the Republican Party. There's nothing happening in fiscal policy in the US. You can talk about the 1.7 trillion adds 50 basis points to growth for this year. Not enough to offset what the Fed's already done. And that's it for fiscal policy until the next election.

We had a soft landing when else? We had a soft landing in the mid-1980s. What happened there? What happened there was that the Saudis massively primed the pump on oil, and WTI collapsed 70 percent. And back then, the US was a huge net oil importer, massive de facto tax cut for consumer, Erica, which is 20 percent of global GDP, the US consumer, okay, mid 1990s. Remember, that's when Greenspan doubled the funds rate from three to six percent. Oh, there was no recession. But just tell that the people in Orange County or Mexico where a lot of mortgage funds that went under in that period, but there was no economic recession in 1995. Why? Because Netscape went public that summer, and then ushered in the next five years of unrelenting wealth creation and productivity growth.

So, I want them to keep an open mind that what is the exogenous shock, that's going to happen that's going to offset what the Fed has already done. To me, this is basically les jeux sont faits. It is basically baked in the cake. The real question is whether it is going to be brief, or whether it's going to be longer and more severe. About interest rates. It's about interest rates. There's nothing more important than interest rates. As my favourite economist of all time—who was a Nobel Laureate prize winner in physics—Albert Einstein, who famously said, "the power of compound interest is the eighth wonder of the world." And of course, those mortgage borrowers and Canada that funded their home purchase at the front of the curve are finding out big time today what that's feeling like. But this is what the rate cycle looks like, and the current one is on the left, in red. I can't populate this chart with every cycle; but let me just say that the last time we had the red line look like that—because we've slipped out quickly, we've stuffed in over 400 basis points of rate hikes—Volcker in 1981 was the last time we had a tightening cycle this severe in a short period of time.

Now, I don't even know if the term soft landing existed back then. But if you noticed, at every opportunity, Powell is comparing himself to Paul Volcker. He does not compare himself to Arthur Burns, McChesney Martin, Ben Bernanke, Janet Yellen. It's always about Paul Volcker, who is revered today for destroying inflation because he destroyed demand. Back-to-back recessions, back in 1980, then '81, '82. He's comparing himself to Paul Volcker. Paul Volcker was detested in the early '80s for doubling the unemployment rate, for daring to cause the recession to kill supply side-inflation. But that is who he's comparing himself today.

And look at this chart of the Fed Funds Futures contract. You know, this time last year, short-term rates were zero. Short-term rates are zero. Do you know, we're talking back about the Fed. Do you know, in the Feds dot plots? The feds dot plots last year, the median dot plot for the end of 2022. Do you know what it was? Do you know what it was? Well, I have to know, 0.9 percent, 0.9. And we finished last year at four, to four-and-a-quarter. And now we're gonna go—or four-and-a-quarter, I should say, to four-and-a-half, on our way now above five. Nobody—all these clowns. Is this on tape? I hope not. Nobody, they're below one percent-for the Funds Rate. That was their forecast for now. And now they're all five, five-plus, maybe six. You know, like I said, remember their forecasting record, and remember how things can play out in both directions.

But at least Powell was transparent. Back at Jackson Hole, he says, I'm gonna bring a whole lot of pain to households and businesses. Well, good grief, has he ever. One of my favourite behavioral statistics is the University of Michigan Consumer Sentiment Survey, and it goes back 70 years. So, here's buying, here—we're going in. I'm hearing, like, there's no recession. The consumer is telling you what's going to happen. The resilient consumer, the formerly resilient consumer, is telling you what they're going to be doing in terms of the big ticket purchasing in the coming year. These things are off the charts. These are two-to-three standard deviation events. Buying intentions for homes and for cars, of course, the two most interest-sensitive parts of the economy. But there are huge multiplier impacts to the rest of the economy.

And what are they complaining about? You see, I know. I know that Tom talked a lot about the inflation, the inflation—we got the, we got the numbers today. Inflation. You know, come on, inflation, it's like a race. It's so exciting. It's a race between watching grass grow and paint dry. But it's in the rear-view mirror. The Fed has looked after that. No matter what you think of how sclerotic or inelastic the supply curve is, and, oh, my God, we can't find workers. He's done a Paul Volcker. People are still talking about inflation throughout the early 1980s. It's done. And so, a few months ago, these charts that said, why are you not buying a home or a car? Why? Mr. And Mrs. Household, they were telling you a few months ago, inflation. This chart was inflation. Prices are too high. I don't have those charts anymore. Now it's what interest rates. Interest rates are too high. And what's really interesting is, when you think about it, people are lamenting today's interest rates. I get all the time, you know, the Funds Rate is four percent. You know, big deal. The level—it's not about the level, it's about the change. Do you see that people are complaining about interest rates and how it's affecting their spending behavior for the coming year, as if it was the early '80s, when the Funds Rate was 15 percent. And the reason for that is that you can't just look at interest rates—I hear it all the time. But rates are still so low. The rates are still so low.

But here's the problem: the debt on the consumer balance sheet isn't the same level today than it was back in the early '80s. People are behaving as though interest rates are only 15 percent. Do you know why? Well, we know what the story is in Canada. But in the United States, the bullshit about people saying, the pristine shape of the consumer balance sheet, because they go and compare today's debt-to-disposable-income ratios to where it was in '07and '08. Yeah. The biggest credit bubble peak of all time. But household debt, when you, when you hear, when I hear about the pristine balance sheets in the United States, I'm thinking, like, do actually look at the data? Because, outside of '07, '08—which was a disaster—it's the highest peak of debt-to-income we've ever had. So, back in the early '80s, debt-to-income was at 60 percent. Today, it's a hundred percent. Okay, thankfully, it's not 135 percent anymore, which is where it was at the debt bubble peak, back when I was at Merrill. So, interest rates are not a constant. And you have to weigh it against, well, anybody that follows cash flow interest coverage, what it means off the shape of the balance sheet.

And it's not just anymore about the cost of credit, but also the availability of credit. Because now—and we saw this as well in the NFIB Survey for Small Businesses that came out earlier this week, that the banks are starting to notice something happening. Not showing up here all the time, oh, oh, default rates are low. Yeah, yeah, yeah. But the 30-day late payment rates—I'm sorry, that was someone's loan just got called in. You know, autos, subprime models, mortgages, credit cards, are in really big trouble. But you're seeing 30-day late payment rates starting to go up, and that's fodder for default rates—just so that you know, the leading indicators are pointing in the wrong direction.

As I digress, the yield curve. One of my favourite leading indicators. When I get asked, if I was on a desert island—and a lot of people wish I was—and I just had one tool, it would be the yield curve. And it's always, everybody's always got a reason why the yield curve doesn't matter this time. But the SanFran Fed actually put out a report a few years ago, saying that the power of the term spread—which is Central Bank colloquial for the yield curve—that the power remains intact. So, all of a sudden—I said before—11 of 14 Fed rate-hiking cycles lands the economy in a recession, remember with a lag, with a lag. You see, the thing is that 2022 was the year of the rate hikes. And 2023 is the year where the rate hikes percolate through the real economy. If you're managing equities, understand that 2022 was all about what interest rates did to the market multiple, five-point contraction; 2023 will be where it percolates in terms of an earnings recession.

So, the bear market will continue for a while, and the contours will change. It won't be about multiple contraction as much as the earnings recession, but here I look at the yield curve, and the—what do we got here? Like, basically six out of seven. That when the yield curve inverts, you get a recession with a bit of a lag. Remember, there's a lag in terms of how the economy responds, right? The economy. The economy is a slow-moving beast. The economy is not the S&P 500. And it resets with a lag to interest rate changes—by the way, in both directions. How do you think we finally got the recovery in 2009? How do you think we ultimately got the recovery in 2003? The yield curve is basically, as we all know, when long-term interest rates go below short-term interest rates, which violates the time value of money. And it doesn't happen that often, but it's a signal. It is a signal. It is the bond market's way of saying to Jay Powell, "uncle, uncle." This is actually very powerful. The yield curve? Very powerful, forward-looking tool. For anybody managing a credit book and equity book, a commodity book, there is no better leading indicator than the yield curve.

And then it comes down to my friend Greg Ip, a few months ago at The Journal, says that the Fed is not following any formula, and they are bound to make a policy mistake. And I think that Tom was right, that they made a policy mistake about direction; they'll make it another direction. But we've seen this before. So, I get this all the time about how well the economy is doing, the resilient economy. Because people—and I would include the Fed—are looking at the chart on the left. The index of lagging indicators, like the unemployment rate, it's hitting a new high. The coincident, the one that the middle. The Conference Board puts out this data, they have it back to 1959. The coincident indicator, like you saw nonfarm payrolls on Friday, it hit a new high. So, people say to me, what is your problem? You're so bearish. And I'm saying, well, because I am driving the bus by looking through the front window. So, I'm looking at the leading indicator. And the yield curve happens to be one of them.

So, what do you folks want to do? Focus on the leading indicators, or the lagging coincident? And here's the deal: nine months in a row of declining LEI. Hardly ever happens. Negative six-and-a-half percent at an annual rate? Wow. I am going to go back to what I said earlier when I said there's no such thing as one hundred percent, because this is nine-for-nine. When the LEI is down nine months in a row, it is—I hate to say it, a fait accompli. But as my grandmother told me as a young child, forewarned is forearmed. I just want people to stay out of trouble.

So, here's what it looks like from a market standpoint. Before the recession starts, the S&P is down, call it 9, 10 percent, first installment. Next installment's down 20. The overall recession bear market is down 30 percent, with a fairly decent size standard deviation. But that's the average, that's the norm. And here's what it looks like in terms of timing—and we indexed all the cycles. So, you could see that the stock market is a leading indicator too. It peaks before the recession, like it did this time last year, when it sees the whites of the eyes of the recession, and then at bottoms, call it three-quarters of the way through the recession, when it sees the whites of the eyes of the recovery. But you can see in the shaded region that the stock market bottoms deep into the recession, which is only now starting. So, how can anybody really rightfully say we've hit bottom yet, from a time perspective?

And bond yields? Well, they peak before the recession, and then they actually go down, and they stay low, because we still have a deflationary output gap after the recession ends. And bond yields, as we know—we had a bad bear market; it's true. Rear-view mirror. But bond yields peaked in October. So, what do you want to do? Well, in a recession, stock markets go down. There's never been a recession where stock markets didn't go down. That's just a fact, not an opinion. And bond yields go down too. And the 10 Year Treasury Note Yield goes down to 150 basis points in a recession. So, with all deference to the view that I'm some sort of radical perma-bear, I've been, I've been a bull on bonds. But I guess bonds are always the enemy if you're risk on; I get that. Anyway, in a recession, in a recession, here's how you want to be positioned in your portfolio. You see all the stuff, basically the down bars on the left. You see that? Do you see that? So, for the outlook, I suggest that the stuff on the left is forbidden to all of you, okay?

You know, I get asked about—emerging markets have had a nice little bounce for the year, for sure. As my friend Don Cox famously said, "emerging markets are markets that you can't emerge from in an emergency." So, remember that one. But the stock market, you know, high yield. And you can argue there's structural changes in high yield. But they're all things are all cyclical. And the problem, even though that, you know, corporate credit, so on and so forth, they've trimmed out their debt, so on and so forth. The reality is that a profits recession is coming that's going to impede cash flows. And I'm going to say you have to be, just like in your equity book, be very selective in your credit book.

The stuff on the right, I'm no, I'm no radical bear. I'm just saying, where you want to put your money? Well, you're getting paid to be in cash, and government bonds typically do well in a recession. And I don't mind what Tom had to say, you know. In the stock market, the dividend aristocrats, which had a pretty good year last year? Well, dividend growth, consistent dividend payout ratios, Blue Chip companies with strong balance sheets that have low correlations, GDP—and I've written on this—you can own that part of the stock market. And understand we're going to be in tremendous volatility. Volatility increases in recessions, which means that it's a trader's market. Look what happened last year, we had eight bear market rallies, the S&P is down 20 percent, just about. Eight bear market rallies. So, you're gonna have—if you're a trader, if you think of Paul Tudor Jones, just make sure you have your hedging strategies and your exit plan. But it's gonna be a fun market to trade, if you have that ice in your veins. Wall Street Journal said, you can't predict when a bear market ends, so don't try. But I'll tell you, I'm gonna try.

And so, what we know, as I said before, is the necessary condition is that the market does not bottom when the Fed is raising rates into an inverted yield curve. How insane is that? And people, I saw, like, some of my pals, like Ed Yardeni, who's talking soft landing, Paul Krugman wrote an article last week, I'm reverting to—how can you have a soft-landing view? These guys are raising rates, they're not talking about pausing; 25 or 50. And the yield curve has not been this inverted since 1981. And I thinking like, am I, what planet am I on right now? We're gonna get a soft landing out of this? How is that even possible? Well, we know that the markets bottom deep into the recession and deep into the easing cycle. And you could see that what has to happen is that the Fed has got the start to cut interest rates. And we're gonna get a pause at some point. In the first half of the year, they're gonna pause, and the markets are gonna freak. They're gonna pause, and we're gonna have a huge rally. Just think of what happens already. Even the mere thought of a pause, and a Dow's up 700 points. You know how many of those? We had 11 of those last year. Can you imagine the real deal, the real time they pause? Don't leave your desk. But it's a fake. It's a fake. Look at what happened. They paused in July of '06, and the market bottoms in March of '09. And in fact, they started cutting rates in September '07, market bottoms March of '09. They paused in May of '00, low's October '02. They pause in November '89, the low's October '90, on and on and on and on.

So, trade the market. I am not going to own it probably for this year, but maybe for 2024. And let's just talk about the arithmetic of the equity risk premium, which at the lows is usually 425 basis points. We're now where? Call it roughly two hundred. So, this is a different combination. So, I'm here thinking, 10 Year Note Yield's two-and-a-half to three percent. S&P call it a range of thirty-two to thirty-four hundred. I'm not calling for the end of the world, but it makes me more bullish on bonds than bullish on stocks. But we need to have bond yields go down alongside lower stock prices—depending on your assumptions—to re-establish what makes sense. Like, what makes sense? What is the equity risk premium that you're dealing with, that you're comfortable with? What is the multiple? What is the multiple? Are you—do you know, the multiple's back to 17.3. Does that make you comfortable, looking where the risk-free interest rate is right now? I'd be thinking more 15-multiple on recession earnings leaves with a view that we're probably, we're going to get somewhere close to 3000 on the S&P. That's just basic math.

But I'll just leave you with this last slide, which is that, actually, people say there's no alarm bells at the bottom. Well, I say maybe there are. We know that the market bottoms in the sixth or seventh inning of the recession, and the sixth or seventh inning of the Fed easing cycle. Recession hasn't even started yet. And the Fed has even started to ease yet. So, if you're timing this thing, it's probably sometime, earliest, fourth quarter of this year. It might be next year, okay.

The ERP gets to 425 basis points. But not just that. The Fed has to cut rates and cut rates aggressively. And that's why I bolded the yield curve. Oh, the fabled yield curve. At the lows, my friends, at the lows, if you're buying equities right now, at the lows, the yield curve is never inverted, capisce paisan? It's not inverted. We've got to get the Fed to get off their high horse—now we'll have to wait, unemployment's got to go up, yes. More of like today's sort of inflation numbers. Second half of the year, we're going to be there. Interest rates are cyclical. They will be cutting rates like it's nobody's business. You know what I said before, he compares himself to Volcker, Volcker, Volcker. All we ever think about is that Volcker was the greatest inflation dragon slayer of all time. But I got news for you, that the greatest inflation dragon-slayer of all time, Paul Volcker, was also the biggest interest rate cutter of all time. Because once all the cost pressures, supply pressures, commodities, oil, all that stuff was in the rear-view mirror, he cut rates in '81 and '82 by 1200 basis points. Paul Volcker.

So, get prepared for a bull steepening in bonds this year. It has to happen. The curve has to steepen. They've got to cut rates, curve's got to steepen, and then the green light comes on. The question, admittedly, is gonna be one of timing. But what I'm trying to say here is that if you're turning bullish on equities, I'm going to tell you, this time next year, if this comes to fruition, I will be a perma-bull, okay? And I will be more scared of Matadors than I will have for trappers, okay. But that's the point that I'm making right now is that, if you're turning bullish in equities, you have to turn bullish on government bonds first. Yeah, you're gonna have to choke yourself, blindfold yourself, block your nose, because there is not a snowball's chance in hell if we're going to arithmetically take the ERP where it has to go. Bond yields have to come down in advance of the bottom of the stock market. And outside of this, last slide, you know, when I was at Merrill, the disclaimer was 15 pages. So, I'm really proud of this one. Hey, thanks very much, folks.

Concluding Remarks by Sal Rabbani
Thank you. Thank you very much, David, Genevieve, and Tom, for sharing your insights with us today. Thank you to the Canadian Securities Exchange, and thanks to Waratah Capital Advisors, and all our sponsors for their support, and everyone joining us today in person or online. As a club of record, all Empire Club of Canada events are available to watch and listen to on demand on our website. The recording of this event will be available shortly, and everyone registered will receive an email with the link.

Join us on January 30th at 11am for the 2022 "Nation Builder of the Year Award" celebration, where we'll honour the accomplishments and contributions of notable Canadian Hayley Wickenheiser, Canadian Olympic ice hockey player, Assistant General Manager, the Toronto Maple Leafs, and resident physician. Thanks again for joining us today. We invite you to stay join us in the lobby for continued networking. Have a great afternoon. This meeting is now adjourned.