Annual Investment Outlook 2021: Making Money in Volatile Markets

January 7, 2021

The Empire Club of Canada Presents

Annual Investment Outlook 2021 Making Money in Volatile Markets

Chairman: Antoinette Tummillo, President, Board of Directors, Empire Club of Canada

Distinguished Guest Speakers
David Rosenberg, Chief Economist & Strategist, Rosenberg Research
Thomas S. Caldwell, C.M., Founder and Chairman, Caldwell Financial Ltd.
Pierre Lassonde, C.M., GOQ, Chairman & CEO, Firelight Investments
Richard Carleton, CEO, Canadian Securities Exchange, Board Member, Empire Club of Canada

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 Antoinette Tummillo, President, Board of Directors, Empire Club of Canada
Good afternoon, fellow directors, past presidents, members, and guests. Welcome to the 117th season of the Empire Club of Canada, and our first event for 2021. So, Happy New Year, everybody! My name is Antoinette Tummillo. I am the President of the Empire Club of Canada, and your host for today's virtual event on the Annual Investment Outlook 2021: Making Money in Volatile Markets. And we have some amazing speakers lined up today to share their views and thoughts.

But before we get started, I want to take a moment to recognize our sponsors, who generously support the Empire Club and make these events possible. Our Lead Event Sponsors are Canadian Securities Exchange, IBK Capital Corp, and BMG Group Inc. And we also have several Supporting Sponsors, so please bear with me: Aurcrest Gold, New Age Metals Inc, Golden Birch Resources, Canada Nickel Company, Matatu Gold Inc, Blue Lagoon Resources, Poet Technologies, Spruce Ridge Resources Limited, Cobalt Blockchain, Watts, Griffis & McQuat, Noble Mineral Exploration Inc, Renforth Resources, Investment Industry Association of Canada, Bold Ventures Inc, and Arc Pacific Resources Corp. I want to thank our Lead Sponsors and Supporting Sponsors for bringing this event to you today. And I also want to thank our Season Sponsors, the Canadian Bankers Association and Waste Connections of Canada, and our Event Partner, VVC and LiveMeeting.ca, for webcasting today's event. So, lots of people to thank today!

So, before we begin, I have a few logistical items to share. If you're finding your internet feed is slow, please see below and click the "Switch Streams" button. If you are experiencing technical difficulties, press the "Request for Help" button available to you, and our team will be happy to assist.

It is now my pleasure to call this virtual meeting to order. It is that time again when we make our fearless predictions for the year ahead. First, let us see how we did in 2020. We had a health crisis that turned into an economic crisis, and then morphed into a financial crisis in March that was ten times worse than anything we saw in the 2008 Great Financial Crisis. US stock markets outperformed Canadian stock markets, technology shares led the way, interest rates hit record lows, and money surged into equities globally due to growing government debt. The price of gold reached a record high of 2070 US Dollars per ounce on August 6, providing a gain of 20 percent for the year. What we did not foresee was the digital currency Bitcoin, which soared 220 percent in 2020 to set a new price record of 23,000 US Dollars per coin. We don't know anyone who actually predicted this global pandemic, a world shutdown, and a subsequent giant stock rally.

We have three notable speakers lined up to share their predictions for 2020-2021. It is now my pleasure to introduce our first speaker, David Rosenberg, President, Chief Economist and Strategist of Rosenberg Research and Associates Inc. David created Rosenberg Research, an economic consulting firm, in January 2020. Prior to Rosenberg Research, David was Chief Economist and Strategist at Gluskin Sheff and Associates from 2009 to 2019. From 2002 to 2009, David was Chief North American Economist at Merrill Lynch in New York. During his time at Merrill Lynch, David consistently ranked in the Institutional Investor All-Star Analyst Rankings. Prior to working at Merrill Lynch in New York, David was Chief Economist and Strategist for Merrill Lynch Canada, where he and his team placed first in the Brendan Wood survey of Canadian economists for 10 years in a row. David, welcome back to the Empire Club. The podium is now yours.

David Rosenberg, Chief Economist & Strategist, Rosenberg Research
Right, well, thank you, Antoinette, and good afternoon, everybody. And at the outset, I want to wish everyone a COVID-free and vaccine-filled 2021. Maybe '21 will prove lucky, but I have to say that I'm not nearly as optimistic as most of my economic and strategy compatriots are at the moment. And that doesn't mean that there are no opportunities to make money. I think you can just look on your Bloomberg screen today to figure that you can almost pin a tail on a donkey to make money today. But I will be the first to say that if equities, corporate credit, commodity markets, the risk-on trade in general. I mean, if they could have the year that they did with so much human misery, 84 million COVID cases, 1.8 million deaths around the world—if financial markets can rally in that environment, you'd have to just say anything is possible.

The only bear market that I saw in 2020 was the bear market in rational thought. This is no country for old fundamentalists. And if you are into prudent investing, you're into the pricing of risk; not a market for you. If you are rational in thought, if you are deep into the weeds in analysis, and you're focused on risk-adjusted returns and capital preservation, you're just completely lost right now, and I share your pain. The real bull market is the belief that stocks can never go down. Nobody has a memory of what happened last February and March, not anymore, or any memory of the fourth quarter of 2018. There's a fundamental belief now that equities and risk assets in general only have one way to go, and that's up. And I would be the first to say, being in this business 35 years, that's a very dangerous proposition. But somehow, somehow, this has all morphed into this view that risk assets are somehow riskless because central banks are there to support your portfolio at all times.

So, throwing caution to the wind—when you think about the theme for 2020, throwing caution to the wind was really the name of the game, and it's continuing into the opening days of 2021. We had the worst recession since the 1930's, and whether it was exogenous or endogenous doesn't really matter—we had the worst economic performance since the 1930's, the deepest economic hole that we're still working our way out of. Of course, you know, we had this recovery, spotty recovery, since early summer. But employment in the United States—and we're going to get a fresh number tomorrow—but we're still negative six percent year-over-year unemployment. Yet get this: personal income is up four percent. Never happened before—incomes up four percent with employment down six percent. And I know you're scratching your head, but it's only because of the massive 18 percent expansion in government benefits to the personal sector, which obviously, given the Senate flip that we just saw, well, that's going to continue like an Energizer Bunny.

But when you look at the data, it's striking that personal income—and this is as true in Canada as it is in the US—personal income in aggregate is 500 billion dollars, or two-and-a-half percent higher with the pandemic than would have been the case without the pandemic. So go figure that. And it comes to the market, even though we lost two-and-a-half years worth of economic growth and we lost two-and-a-half years of profit growth with the pandemic. You see what's happened here is that the Fed's move to cut rates to zero, tell everybody they're gonna stay at zero for the next three years, expand its balance sheet by 75 percent. What that's done is led to an S&P 500—hang on to your hats—that's 20 percent higher than would have been the case had the pandemic never happened. I mean, talk about taking sour cream and creating ice cream all through the actions of the government, principally the central banks. They made the difference between the S&P 500 being 3800, where it is right now, and 3200, which is where it would have been had the pandemic never occurred. And I will say, you cannot make this stuff up.

So, what happens is this—and I know I've been talking about equities—but you're seeing it in the riskiest tranches of the debt markets. Because when, as an investor, you believe that the central bank will backstop your holdings of the junkiest corporate bonds, what happens is, at the discount rate, that you end up discounting future cash flows with—what happens is that the DSF analysis converges on the risk-free rate, which is zero. The discount rate converges on the risk-free rate; the risk-free rate is zero. So, what happens here in this process is this: the equity risk premium gets destroyed, and along with that, any necessity for any investor to have to really do any work. To have to deploy the capital asset pricing mechanism—which for decades was the cornerstone for any MBA or CFA designation—you don't have to do that work anymore.

So, what we have in our hands is a backdrop which has been openly promoted by Jay Powell, where investors are forced, they are compelled to move out of their comfort zone and their natural habitat to the riskiest segments of the investment spectrum. So, historians won't just be writing about the human misery of 2020, but how central bankers blew bubbles everywhere in the name of promoting asset inflation and investor animal spirits and leaving in its wake unprecedented leverage and further extremes in wealth and income inequality with unknown future instability consequences. By the way, just another reason not to trim your gold position, outside of the fact that everybody today seems to think that shifting to Bitcoin is some surrogate. I'll just say for the here and now, Bitcoin is the biggest price bubble I've seen since the dot-com bubble 22 years ago. I'm sure I'll get a lot of hate mail about that.

But look, in the narrow view, the markets are telling us that the new normal will be a reversion to the mean where life goes back to normal. And I say to that, not so fast. People will surely go back to restaurants, hotels, airplane travel in due course, but I don't think for a second that there will not be any residual impacts from this trauma. So, the narrative that's emerging from the recent trading action that you're seeing in the equity market somehow is telling us that we're going to go back to our old lifestyles, and that's what I would actually bet heavily against. I am seeing, and continue to see, secular shifts in behaviour that are going to transcend a couple of quarters of pent-up demand release. And that's going to be seen in a permanently higher equilibrium personal savings rate and a permanently lower labour force participation rate.

And if we do somehow revert to the old normal, remember that the prior 10-year period of what we thought was normal was a decade of what? Low growth, low inflation, low interest rates, despite all the rampant stimulus back then. I don't see that changing. Because the secular forces of aging demographics, massive debt burdens, and these extreme income and wealth inequalities, if anything, have become accentuated by the pandemic and the response to the pandemic. And at some point in 2021, I can see the market being forced to switch from pricing in the light at the end of the tunnel to what life is going to be like once we get past the light at the end of the tunnel. And I'll just say, resolving the massive public sector debts, I can assure you, is going to be every bit of a constraint in the future as it's been in Japan for the better part of the past 30 years. I can tell you as an economic historian, there is no such thing as a free lunch.

Now I'll finish my segment on a less dour note and with something to offer as to how I am investing in this environment. Remembering that, remembering that we are living in a historical financial bubble, but at the same time, you can't be all in cash earning zero. So, what I'm gonna do is lean on the class of scholarly works of my two heroes of the past, Adam Smith and David Ricardo, and focus on something called scarcity value. You want to own what is scarce; you don't want to own what is abundant.

So, I would say point number one: growth is scarce. Growth is scarce globally, notwithstanding the stimulus, which are training wheels on a bicycle. Growth is scarce. So, I would still say that I want to have growth stocks in my portfolio. Not the entire portfolio, but I want to be in the growth narrative, and that means I want to be in big tech—big tech with utility-like characteristics—I want to be in brand-name consumer staples, and I want to be in healthcare.

What else is scarce? Number two: yield. We have 18 trillion dollars of bonds globally trading with a negative yield—that's not going away. So, you want to have income at a reasonable, reasonable price. That means dividend yield; it means dividend growth, stable to higher payout ratios. I'm thinking about the banks, I'm thinking about parts of the telecom space, I'm thinking about pipelines, select residential REITs with quality tenants. In general, I would say assets that spin off a reliable income stream—and also, by the way, include energy assets in there with the natural gas bent.

The third scarce resource is safety. What is safe in your asset mix? That, I always get guffaws when I mention the necessity of having a substantial portion of the portfolio in long-duration high-quality bonds. Yes, yes, even at today's low yields. In fact, the current yield on the US long bond—call it 1.8 percent—is almost treating like a high-yield bond globally against other sovereigns. I mean, German bunds, 30-year bonds, are trading at -14 basis points, JGBs 30 years at 60 basis points, UK gilts at 90 basis points, the US long bond trades at the highest yield among AAA sovereigns in the world. So, you own bonds in the portfolio not just because of the yield—that's not the compelling reason. It's to manage your risk, manage your risk. So, I say ignore those folks who say dump your bonds because yields are too low. They're low because as a price, the bond market's telling you that we are heading into a future of ultra-low expected returns across all asset classes, notwithstanding the action that we've been seeing in the past few weeks and few months.

So, I look at the treasury market as a ballast effort, a stabilizer in the portfolio. And this is what I mean by that. I mean that if you're taking a look at five-year intervals over the past five decades, you're gonna see that the equity market loses you money twelve percent of the time. The bond market has never lost you—the treasury market has never lost you money on a five-year interval, ever, at least going back in the past five decades. So, it's really the unique characteristic of the safety payment characteristics that is the allure—the allure in long-term high-quality government bonds. They should be in your portfolio; they're in mine. They are the only assets where security and certainty of payment is assured and guaranteed. It's the only investment vehicle with no default risk, no call risk, no reinvestment risk. It's the only thing that you can buy where you will know exactly how much money you're going to have 30 years from now. So, they're an insurance policy in the portfolio; they're a great hedge, no matter how bullish you are.

Fourth....

Antoinette Tummillo
I think we have lost Mr. Rosenberg. So, we'll continue, and he can jump in with his closing remarks when he rejoins us. I'd like to introduce our second speaker, Thomas—oh, there's David. Are you back? Nope? Well, okay, Thomas, it's going to be over to you. So, Tom Caldwell, Chairman and Founder, Director of Caldwell Investment Management, CEO and Director of Urbana Corporation. Caldwell Investment Management Limited is a diversified investment company, providing investment management to a broad spectrum of investors throughout Canada. Thomas is also CEO and Director of Urbana Corporation and is Chairman of the Canadian Securities Exchange. He serves on the board of the Conference of Defence Associations Institute in Ottawa and was appointed honourary Lieutenant Colonel of the Lincoln and Welland Regiment in January 2014. Tom is a past Governor of the Toronto Stock Exchange, and one of the leading experts in capital markets, particularly in trading environments. Additionally, Tom was awarded Her Majesty's Golden Jubilee Medal in 2002 for his activities on behalf of Canadian veterans. In 2003, he was appointed a member of the Order of Canada for his work in assisting those in need as well as contributing to institutions working to better the lives of others. In 2012, he received Her Majesty's Diamond Jubilee Medal for his efforts on behalf of the disadvantaged. Welcome back to the Empire Club, Tom. Over to you.

Thomas S. Caldwell, C.M., Founder and Chairman, Caldwell Financial Ltd.
Thank you, Antoinette. I think introductions should be short and sweet, much like myself, but thank you again. Let me give you sort of some background thought process and how my brain works.

First off, I'm an incurable optimist, and my basis for that is I've been trading securities professionally for approximately 57 years. And it's interesting, as I look back on my early days, the DOW was at 800, and the big discussion was, will it ever get through 1000? Well, of course, the DOW was over 30,000, for a 38-fold return over that period of time. Clearly, there were lots of challenges, lots of really difficult times in that time frame. But if you take a look at that simple number over that time frame, what it says to you is every difficult period, every challenge, was an opportunity 100 percent of the time. Now, that doesn't mean to say you can check your brains at the door, because over that period of time, many great companies came and went. Polaroid was one of the great growth companies—doesn't exist anymore. In Canada, [indiscernible] Corporation was a one-decision stock—nobody's even heard of it anymore. And great companies like General Electric, due to creative accounting, put themselves in the ash can. So, it isn't a clear, simple index-type of thing, but that gives you an idea of the growth of an economy and the capital markets surrounding it.

2020 was clearly a year of crisis. There'll be lots of books written about it, lots of analysis. If I had to give you my, my very quick synopsis of 2020, it was the year of expert opinions. I am so tired of hearing the word "experts;" that means unnamed sources who think they know something. Just give one thing to keep in the back of our minds: there are no experts in the middle of a battle. So, it was a tough year. But as David mentioned earlier, equity markets were up. But remember, equity markets are not homogeneous. The internet, the stay-at-home stocks, the tech stocks, the electric vehicles, the crypto—all of these had spectacular moves. I mean, incredible moves, way beyond the Richter scale and, and left—as David had mentioned, and all of us feel, many—tradition was sort of standing at the sideline shaking our heads. But the broader market was relatively mixed. I mean, clearly, energy, travel were, had a very poor year. Financial services, metals, and materials—it was not a great year. And a lot of the small to mid-caps were, were orphans.

The determining factor over this whole period of time, what was really underpinning it, was interest rates. And I'm using this generically, as I think Dr. Rosenberg referred to monetary ease, cash, credit availability, emergency aid, fiscal assistance; but the concept of money being cheap and sloshing around. And it resulted in massive inflation. Not inflation the way governments measure, you know, the two percent more you paid for fuel, et cetera—and where they get those numbers anyway? But inflation in assets, of stuff—not cost of living, but stuff. Inflation. I mean, asset value inflation—houses, stock prices—things all fuelled by lots of cheap money sloshing around. So, investors are looking for returns. You get one or two percent on a government bond, or do I, you know, look for dividend yield or I look for growth? I'm of the opinion this monetary ease will continue, with the caveat being as long as governments can make it happen. And how long that is? That's a little bit of a guessing game, in my mind. But this period of ease will still create an upward bias to markets.

Now, clearly, we're going to still be pandemic and shutdown affected. I mean, when are we going to reopen? What is the structural damage to the enterprise system that we live under as a result of a prolonged and maybe inordinate shutdown? But there is lots of money around, lots of money around, lots of new players, and massive margin debt, too. Retail investors are coming in. I was joking the other day—I was saying, you know, the thing this time around with the shutdown, with the lockdown, is that online trading has become a thing. If this was the case back during the power blackout of 2003, probably we wouldn't have had the bump in the birth rate nine months later. But we've now moved to trading. The shut-in, the tech stocks, in my opinion, are highly vulnerable to profit-taking. And I think your previous speaker spoke to that. And this is something to keep in mind. And this is one of the few truisms of this business in my mind: today's flavour du jour always becomes tomorrow's disaster. And that's the thing I think we have to watch.

So, for me, one of the big questions is when these things pull back, and if, as and when they correct—and I think it's a when—are they going to pull everything down with them, or are we going to have sort of a group rotation where they spread money out and look for something else? Probably both. I'm a value investor, a bargain hunter. My partners have told me to stop using the phrase "I'm a garbage man," but I look for laggards. I look for the stuff that's dragging as investors try to get ahead of the curve, as investors look for the next rotation, the next area of their interest. And I would look at, say, energy prices now. Look at some of the energy stocks. Suncor, for example, is trading exactly where it was 15 years ago. Well, the energy group, as a group, has suffered under, you know, a lot of political pressure, environmental pressures. I mean, travel—forget that; that's been gone. But what it does mean to this industry is you can cut your exploration; you can cut your development expenses. The best way to expand your reserves is just to take over another cheap company. And the companies that are strong with strong balance sheets are in a wonderful position to expand in that area.

Financial services, it's another area I still like. The big banks, the US banks, have massive earnings horsepower, and the Canadian banks are where they are—a protected species. And they have yield, they have growth, and now they're not sexy enough for a lot of the new investors. Everybody's saying, well, you know, they've got a lot of bad debts coming at them. Well, remember the Canadian banks dodged a bullet with the improvement in oil prices. And obviously, they're being squeezed in their net interest margins. But remember, banks make money from all kinds of things. Charges—I think they have a charge for walking too slowly by a branch now.

The other area that was ignored is a lot of the small and mid-caps, the metals and materials area. Building infrastructure, there's going to be a lot of money spent on building economies as we come out of this. Consumer goods are going to be an interesting year, because there's a mountain of savings building up. As was mentioned, there's a lot of money sloshing around out there. The people that have it and need it to spend are going to have it and need it to spend to stay alive, but the people who don't need it, they're creating, they're hanging on to this money.

Some of last year's issues, you know, are still going to be with us. Hopefully, this election soap opera in the States is over with, this cathartic event we've gone through this year. You know, we, no one saw what's happened last year; there's going to be surprises. We don't know what those surprises are going to be. But interest rates, credit availability, new players, and demand for returns overpowered the disaster of last year. And that is not a disconnect; it's the logical result of rational decision-making by people trying to build their assets to get returns. And I believe that will continue.

So, remember, bargains exist in crises. I mean, it took a lot of guts and a lot of nerve to be buying during that March-April mess of 2020. But that was a massive opportunity when you look at it. So, look at it within a historic context that I mentioned first off. So, we're going to have to use the, the things that happen in this world—the next lightweight politician's bizarre inflammatory rhetoric, flawed policy—they all correct with time. Reality will prevail. Pressure groups are still going to be there. Marginal issues will appear like major issues. You know, the key is to ask yourself, what's important? And I believe as I get older, the answer to that is not a heck of a lot at the end of the day, if we really build these big issues.

But time and events roll on, and the beauty with reality is if you don't seek it, sooner or later it'll find you. And that's what comes through this Canada; we have our own bag of snakes, we have our own issues here, we've bizarre policies coming out of why can you imagine increasing taxes during this period of time? You know, the Canada Pension Plan contributions—no, there's a tax on corporations and on individuals, and a carbon tax. And there's Canada, it's the winter, we want to stay warm, let's increase taxes on that. It just shows a disconnect. But we will continue to have growth as long as we have economic and thought freedom and low interest rates. And I'm, again, I'm using low interest rates in that generic sense of pushing money into the system.

Now, what could be a surprise this year is interest rates starting to move back up again. And they don't have to go to high levels to scare people. In 1987, Alan Greenspan increased the Fed funds rate by a quarter of one percent; nobody paid much attention to it. He did it again shortly after that, and everybody ran for the door. I, I believe—I might be wrong, but I think that market came off close to 30 percent in one day. In one day. That caught everybody's attention.

So, as we go into this year, I think there's going to be lots of opportunities still there in the areas that were left behind. And I mentioned financials, I've mentioned consumer goods, I've mentioned energy materials as well. I think it'll not be a bad—it'll be a good year, reasonable year, but there can be surprises. The key for this year is to try to avoid groupthink. We are so heavily propagandized by media and news, et cetera, and expert opinions and the talking heads on television—which, of course, I'm one of them right now. But the key for this year, I think, is bounce your ideas around, be a little bit cynical, try to avoid groupthink, and be prepared to change. You remember, as I've said often to our money managers, there's nothing wrong with being wrong; there is with staying wrong. If you make a mistake, clean it up and drive on. But on balance, I think the tone to this year's market will be relatively positive because of the background interest rate environment that we have. But remember, there's going to be lots of craziness still going on. We're not through it as of last night; there's going to be more stuff. But you've got to look beyond that. So, I think it'll be a time of opportunity again. Again, as I said earlier, I'm an incurable optimist. Have a great 2021.

Antoinette Tummillo
Thank you, Tom. Our final speaker is Pierre Lassonde, and he's the Chairman and CEO of Firelight Investments. Pierre began his career at the engineering firm Bechtel. He then moved to Toronto, joining the mining firm Rio Algome, then joined Butyl Goodman & Company Limited as lead portfolio analyst for precious metals. He founded the Franco-Nevada Corporation in 1982. In 2002, Pierre became president of the world's largest gold mining company when Newmont Mining Corporation acquired Franco-Nevada. Pierre currently serves as Chairman of the Board of the Musée National de Beaux-Arts du Québec. He is Chair of the Board for the Canada Council of the Arts and is Chair Emeritus of Franco-Nevada. In 2011, Pierre donated to York University, creating the Lassonde School of Engineering. Pierre was made a member of the Order of Canada in 2002 and as an Officer of the Order of Québec in 2008 in recognition of his many accomplishments. Pierre, I think this is your first time at the Empire Club, and we are absolutely honoured to have you here today. So over to you, Pierre.

Pierre Lassonde, C.M., GOQ, Chairman & CEO, Firelight Investments
Well, thank you so much, Antoinette. And welcome, everyone, and as well, wishing you a healthy and prosperous New Year. And some of us can think, well, it can't get any worse. Well, during the 1918 pandemic, those were the famous last words of Tsar Nicholas II, who lost his head. And so, hopefully, that's not gonna happen to us. Now, my, my interest is really strictly in gold, and my intention in the next ten minutes is to be able to leave you with a few gold nuggets in terms of investment. So, we'll get to it right away.

You know, first, I'm just gonna put up a chart right now, the gold price chart. As you can see, gold bottomed in 2001 at 250 dollars. I remember that very clearly. And then it went on a ten-year bull market that essentially peaked in 2011, very close to two thousand dollars. And then it went on the sideways to downward kind of trend for a bit until 2019, and it's been up ever since. Gold is the anti-US Dollar. Okay, if the US Dollar is doing well, you don't need gold. But if the dollar is not functioning properly, that's usually when you need gold in your portfolio.

Gold is the only non-fiat currency held by central banks. In fact, central banks have been buying gold since 2012 at the rate of about 500 tons per year. There's been some years where they bought over 700 tons. And it's a reserve asset. And the—as I said, the only non-fiat currency. If you want to have a, you know, kind of good idea of, you know, where the demand for gold comes from, you look at the next chart, then. It's the gold ETF, and you can see the, the ETF is a large, liquid, low-cost way to diversify into gold. And approximately 50 percent of the gold demand today is represented by gold ETFs. And you can clearly see, for example, in the last year, the total demand was over 867 tons. But it's been, you know, quite sustained for the past four or five years—but particularly in the last couple of years. And that's why you're seeing the gold price, you know, like, going up. You can—and if you look at the, the next chart, you have the cumulative, cumulative go back ETF since its, its start. And we're now at almost an all-time high with a value of about 250 billion. So, you know, obviously, a lot of people are looking at gold as a way to diversify. And that's really the message you can take out of that for now.

The back 150 here—not quite that slide yet. You can leave the slide off, please. About 150 years ago, Karl Marx said that democracy is the road to socialism. And if you look at Europe today, particularly the northern countries—they're called, like, you know, social democracies, and it works. But in the US, we have a capitalist system in a, you know, so-called democracy, as we saw last night. So, we live in an era today where the gains are privatized, and the losses are socialized. And that's why you've got the top 10 that have never been wealthier, and yet government deficits have never been higher. And Canada's 2021 deficit is going to be 328 billion, which is 9,000 dollars per person in Canada. In fact, Trudeau Jr. will have the honour of accumulating more debt in two years than Canada has accumulated since its creation. I mean, it's absolutely unbelievable.

But that's just not here; it's in all the OECD countries. And what permits this, you know, the kryptonite of central banks, is fiscal repression—it's zero interest rate. What we are seeing is the Japanification of world finance. If you want to see what's going to happen over the next 5 to 10 years in the US, in Europe, just look at Japan. For 25 years, Japan has held interest rates at near-zero. Its debt-to-GDP has grown from 50 percent to 100 percent, 150 percent, 200 percent, 230 percent, and by 2025, it's going to be over 270 percent. And yet, what happened to the currency? Nothing. What happened to inflation? Nothing. In Europe today, as was mentioned by David, over 18 trillion dollars of bonds are now a negative interest rate. In the US, we have a bond market that's 40 trillion. When that turns around and you have a portion of that going to zero interest or negative interest rates, I really believe that the gold price is going to take off. The annual turnover for gold is 200 billion. The entire gold market, if you add every single gold bar that's existed in the world except for the central banks' bar, it's 8 trillion. It's a fraction of what you're seeing in the bond market. Monetization of the debt is not a question of if; it's only a question of when.

And that's when I'd like to just, you know, go over the DOW Gold Ratio for a minute, if you don't mind putting that chart up. I came up with this chart about 20 years ago when I was rewriting the Franco-Nevada annual report in 1999. What you're really looking at, this ratio is the relationship between financial assets and hard assets over time. And they're timed clearly where hard assets are doing better, and there're, like, long periods of time when financial assets are doing a lot better, such as from 1980 to 2000, or from the 1950's to 1966. And in 1999, the ratio was 42:1. What does that mean? It took 42 ounces of gold to buy one unit of the DOW. And the question I was asking the reader is, what would you rather own a unit of the DOW or a unit of gold? Well, of course, at the time, the answer was, I'd rather buy a unit of gold at 250, and today, of course, it's 1925 dollars.

What I think we're seeing is a repeat of the 1966 to 1980 cycle, 1966 being 2000 today, and 1980 will be somewhere in the next four to six years. And it's quite interesting because, you know, from the peak in 2000 to the bottom in 2015 to 2011, the, the drop of the ratio was about 84. If you go back to '66 to '74, it was 86 percent, very similar. The rebound from '74-'76 was 160. From 2008 to 2018, 130—again, very similar. So, we're at 15, more or less 15.5-unit ratio. Where are we going to be in four to six years' time? Are we going to see one-to-one like we saw in 1980, when gold was 800 dollars, that was 800; or back in 1934 when it was about 1.4 to 1? Now, the difference between the two is that in the 1920s, the DOW lost 90 percent of its value, while in 1980, the DOW actually had gone all the way down from 1,000 to 600 and was on its way back up. So, what would 1:1 look like? What would 2:1 look like? Humour me, what would 3:1 look like?

Well, when you look at the DOW, you know, one thing that is quite incredible, if you take five companies, Amazon, Apple, Facebook, Google, Microsoft, they represent more than 20 percent of the value of all publicly traded US companies. Back 25 years ago, the resource sector was 25 percent of the DOW. Today, you have five companies that represent, essentially, 20, over 20 percent of all the values. Tesla was just added a few weeks ago to the indices. It's got a market cap of 700 billion dollars. It's more than GM, Ford, Toyota, Nissan, Chrysler, Fiat, Hyundai, BMW, Mercedes-Benz combined. And you still have 200 billion dollars in your pocket. Does that make sense? No. There are three prices in the market. You know, I used to say that to my associate, they're wholesale, retail, and fairy tale. The tech stocks are trading at fairy tale level; they're priced to perfection. The market itself is probably retail, but the gold equities are trading at wholesale. So, what I'm really suggesting is that there's room for the DOW to go down. I don't know how much, 10, 20, 30—God knows, I have no idea. But I do know that there's a lot of room for gold to go up. And talking about gold equities, I just want to say that they're undervalued, under-owned, and under-loved. The total market cap of the gold industry today is 320 billion dollars. It's not even half of Tesla yet. The margins have never been higher. The all-in cost of the industry is about 900 dollars, and the gold price is 1900-plus dollars. So, for every ounce the producers are putting out there, they have a margin of over a thousand dollars, and some of them, like 1500 dollars-an-ounce. And money is being returned to shareholders in the form of dividends and internal growth.

So, for now, management has learned a lesson of the past. They're not overpaying for assets. It's a very disciplined environment. And frankly, I think I have to say that, you know, what I'm seeing is that the industry has probably the best management teams that I've ever seen in 30 years in the business. The royalty companies are selling at a 25 percent discount. The mid-cap companies are probably where a lot of the action is going to be, because the industry itself is running out of reserve, as it usually does. And you will have to have a lot more acquisition, and the growth is going to be in the juniors. And I just want to finish with a little story. When I was a, you know, a kid, my allowance was 25 cents a week. I, I could buy a hot dog, a French fry, and a Coke for 25 cents, but I had to return the Coke bottle. Now, there's a restaurant in Toronto that I like to go to. They have hot dogs on the menu, and they also have French fries and Coke, and their cheapest combo is ten dollars. That's a 40-time, you know, shot over my allowance. But one, one particular item on the menu, one hot dog, is five dollars. And it's called, on the menu—I'm just quoting the menu—that item on the menu is called 'The Missionary.' And it says: "hot dog in a bun, you figure it out." Well, what I figured out is that one, we're in a gold bull market. Two, it's got legs just like Tina Turner in her heyday. And three, it's gonna get a lot bigger, and you're gonna need an awful lot of mustard to cover up that baby. Thank you very much.

Antoinette Tummillo
What an ending. Thank you very much. I've just got that visual right now. I have to take a moment to pause and get it out of my mind so we can move to the Q&A. David, good to have you back. So, I'm going to start with you with a question and check to see if you had any closing remarks you wanted to make, because we lost you there for a moment.

David Rosenberg
Yeah, the, the internet connection went down. I don't even know where, where I lost you; I, I just kept on talking, and, and then the screen went blank. So, you have to let me know where I left off, because I have no idea.

Antoinette Tummillo
Well, I think you were winding down with your point number four, right? The fourth point?

David Rosenberg
Well, you know what? And so, I did want to finish off with these with the scarcity theme. Look, the last point was about investing with scarcity. Value is finding cheap assets. I think we've all tried to do that, you know. Financials and energy within the value proposition, that certainly are areas that I'd be looking for. But for global investors, if you're looking for true GARP, where the valuations at least are justified by the growth outlook, Asia is compelling. You know, everybody's so focused on the S&P 500 or the NASDAQ, but the reality is that the Asian stock market had a phenomenal year. It actually outperformed what the S&P did, but nobody really talks about that. So, that's really one of the cornerstones, is the Asia-Pacific market. I think that has more upside with less downside risk than most other equity markets in the world. And that's why all year long, from this big bear, my theme has been "go east, young man and young woman." So, that continues to be a theme. Insofar as you're investing in equities, I'd be moving out of the US, and I'd be moving into the parts of the world where there is organic growth, and it's in Asia.

QUESTION & ANSWER

Antoinette Tummillo
Great, thank you. So, I'm gonna just piggyback on that and combine two questions that came in along the same theme. One is—and you did speak to this—it was on: is inflation going to come back? And also, you know: don't you think US Treasuries have inflation risk, so that the money you get back, it will be worth less? So, that question's from Adrian, the first question's from Bill White. So, David?

David Rosenberg
Right. Well, look, I mean, if we get inflation, then everything is going to be less. So, not just Treasuries, but of course, there is inflation risk in, in government bonds. I mean, there's no default risk, but there, there is inflation risk. You can argue there is duration risk, but, you know, it's a different risk than the risk in other asset classes. I just talked about what made Treasury bonds alluring is their safety payment characteristics. Of course, there's inflation risk—there's risk in everything right now. There's risk in being in cash, earning zero as everything, every other asset class was flying in your face. It's a, it's a matter of the bonds. It was really to me, what if everybody's wrong on the inflation call? I forget the comment that was made earlier about groupthink—everybody's got inflation on the brain. I could take out my slide deck from 12 years ago and show you how, back in 2010, QE, zero rates, negative real rates, Obama's infrastructure package, 600 billion—back when 600 billion meant something—everybody had inflation on the brain. I think that there's certainly a risk we can get some cyclical inflation, yes, from the weaker dollar, from commodities. Is that lasting inflation? No, no. How are you going to get inflation without a normal wage cycle? And how are you going to get a normal wage cycle?

Let's look at the United States, when one out of every eight Americans are either unemployed or underemployed. So, no, I'm not buying into the inflation narrative. I think you can get some commodity pass-through, but I don't think that it's lasting any more than there was in the last cycle. So, I'm not really that worried about inflation. And the reason I'm so bullish on gold has nothing to do with inflation. We didn't get inflation last year. Any. Like, didn't get inflation in 2020. We got more deflation than inflation. Gold went up 20 percent. We didn't get inflation in 2019, you know, gold went up roughly 20 percent. So, I don't know. I think that people always build up this inflation narrative—and it's easy to do, looking at the money supply numbers, and looking at commodities. But if inflation was that easy to create in an environment where there's so much debt and aging demographics, you'd have to ask yourself the question: Why hasn't it shown up in Japan for 30 years now? Why didn't it show up in Canada, United States in the past 10 years? And that's these central banks have realized generating disinflation is a lot easier than generating inflation. So, I'll tell you the truth. I'm a contrarian at heart. But abandoning or not joining the inflation crowd in the past couple of decades, it's held me pretty well. And so, no, I don't think we're going to be getting any big inflation. Maybe a pocket, but nothing sustainable.

Antoinette Tummillo
Thank you, Tom. Question for you: will the stock market be up or down from here at year-end December 31st, 2021? Take out your Crystal ball and tell us.

Thomas S. Caldwell
That's a tough binary question—up or down. Well, I can't go against my earlier comments: up, of course. But with, you know, also having a smattering of studying economics—not at Dr. Rosenberg's level, but I have to use—on the other hand, I think the market's going to be up. But you have to watch interest rates, and as they say, you just need the hint that they're turning on the upside. That could be challenging. The other thing would be, as Pierre mentioned, these stocks, you know, the zooms, everything that zoomed—here it was 300 times earnings. This is insanity. And what happens when those stocks get nailed? And they will at some point in time. There will be a running for the door. Will that pull the market down, as I said, in its totality, or will it result in group rotation, or other groups, or money is being reallocated? And I said, I think there could be both. So, the danger points are the inflation component, not the inflation interest rate component, and what happens when these little darlings turn out to be monsters? And I think Pierre's comment on Tesla as well, as well taken. And they're all of that area. So, that's, those are the vulnerabilities. But if I look at the overall market, the stuff that I'm interested in, I'm, I'm quite positively disposed towards those. But I do worry about these, this pyramid group. And that's, that's sort of pushing the market or the indices upward. But the rest of it, I think it'll be all right.

Antoinette Tummillo
Thank you. Pierre, question for you: will the US Dollar collapse due to the gigantic deficit spending?

Pierre Lassonde
Yeah, the short answer to that is no. No, because at the end of the day, currencies is a relative game—it's how well a currency does against another currency. And also, there's no alternative to the US Dollar. You know, the, there's no other currency in the world that is as freely traded, as large and deep a capital market as the US Dollar. And so, I just don't see the US Dollar collapsing. I do agree with David on pocket inflation coming. I think that we're finding that the supply chain has broken down in many, many areas, and it will be fairly easy for a lot of producers to raise prices because of the supply chain breaking up.

Now, I will add one more thing, one more caution to the whole inflation thing in the US and it, it goes to the US Dollar as well. But the reason Franklin Roosevelt created the New Deal was to put money into people's pockets directly, and building roads, and bridges, and whatnot. If the Biden administration puts out a one, two, or three trillion-dollar infrastructure program, a lot of that money will end up in people's pocket. And that's the difference between what happened last time—the, the money that was created ended up on the banks' balance sheets, never made it into the public, no inflation. But if you put the money directly in people's pocket at that level, I think that you will see, you know, inflation, but—not huge amounts, but, you know, up to four percent. And it's going to be enough to probably give a good scare to the bond market and probably, as well, to the US Dollar. So, could the US Dollar go back down against the Euro to, like, 1.30, 1.35? It went down to 1.40 at some point in the last 10 years. The answer is yes. But, you know, I wouldn't call that a collapse, you know, I think the inflation in Europe is going to be far more managed than it would be in the United States.

Antoinette Tummillo
Thank you. We're kind of running over time, but I want to ask this question of the three of you, because I think it's a terrific question from Sean—and if you can keep your answers brief, even yes or no, maybe. So, David talked about scarcity, and Pierre alluded to that in his case for gold. What are the panel's thoughts on Bitcoin? It seems to have evolved from a very narrowly held asset to an asset that is more widely held. There is no doubt that Bitcoin is a scarce asset. But with the wider adoption, does this create a case for holding Bitcoin? Thomas, Tom, you smiled first, so....

Thomas S. Caldwell
Well, the, the definitive answer is I don't know. I, I must say, I just can't get my brain around cryptocurrency. There's a place for them because people are trying to look for alternatives to the US Dollar, they're using as a geopolitical instrument. But I just can't get my brain around it. I can understand gold as an alternative, but I can't get my brain around cryptocurrency—but maybe that's my age showing. That's more than yes or no, I know.

Antoinette Tummillo
So, Pierre, fairy tale retail?.

Pierre Lassonde
Well, you unplug your computer, where can you get your crypto—okay, you run out of electricity, what's your crypto worth? Zero. Bupkis. All right? One of the firms that I'm in contact with, the, they help companies that have been hacked to get back in business. And what I'm told is that the hackers, now, they don't ask for US Dollars anymore, they ask for cryptocurrency; they ask US Dollars to be, you know, exchanged for cryptocurrency. So, where does that leave the US government on that point? I think at some point, it's going—you know, there's going to be some legislation. And, you know, it's not my bag. So, you know, that's all I can say. I'd rather stay in gold.

Antoinette Tummillo
Your turn, David.

David Rosenberg
Well, as you can probably see, I've been having some internet problems—when I said "go long telecom," I'm going to take that back. So, the question was about Bitcoin? Yeah, is that the question?

Antoinette Tummillo
Yes, yes.

David Rosenberg
What do we think of Bitcoin? Well, I think I said in my remarks that, yeah, it's the biggest price bubble that we've had since—I mean, I could throw other specific stocks in there—it's the biggest price bubble we've had since the late '90s. Pardon me, the question specifically was on holding Bitcoin. So, if it's a bubble, you're saying "yikes." Well, look, I think that—I mean, I don't own Bitcoin. I don't tell people what to do. If you noticed in my remarks, I told people what it is I'm doing. You know, my blended return last year was up 22 percent, and I didn't have a lot of equity risk. I didn't own Bitcoin. But I'll tell you why: I don't need to. I, you know, the blockchain technology, I get it, what, what is it. So, people are basically doing, how are they valuing this thing? How are people coming up with 400,000 dollars as a price target for Bitcoin? They're taking the 20 million-dollar cap, okay, on the units, and then they're dividing it by the market cap of, of gold—which is basically the most ridiculous thing I've ever heard. But if that's what people want to do.

I wouldn't compare gold to Bitcoin. I don't know why people compare gold to Bitcoin. Gold actually has some industrial use that actually—I don't see, I don't see, when I go to the jewellery store, I don't see Bitcoin watches; but I see gold watches. All right? And gold has other—so, the whole concept of, like, you know, that, you know, gold is a currency—that's right. I imagine that people talk about Bitcoin as a currency. I get that as a means of payment. Why is it a store of value? Because people say that it is. I don't see people rushing to Swiss Francs or Japanese Yen or Sterling. They don't go up three percent a day. So, look. I like gold. Maybe it's because of my age. Gold has one-fifth the volatility that Bitcoin does. And I don't want to advise people who read my research to buy something that can be up or down 15 percent in a day. So, not an owner, not a buyer.

Antoinette Tummillo
Okay, well, we've kind of gone over time. And we have more questions, but I think we'll take a pause. And maybe we can send you those questions, and if you'd like to address them for people, that would be terrific. I would like to now introduce Richard Carlton, a fellow board member at the Empire Club and Chief Executive Officer of the Canadian Securities Exchange, to provide the appreciation remarks.

Note of Appreciation by Richard Carlton, CEO, Canadian Securities Exchange, Board Member, Empire Club of Canada
Thank you very much, Antoinette. And is it, it is indeed my pleasure, I believe for the third year running, to thank our distinguished speakers, Tom, David, returning guests from a number of times—and Pierre, your hot dog story, I'm afraid, will probably get you invited back. Well done. But indeed, it's a pleasure to hear the contest of ideas that the capital markets represent, and again, it's always a pleasure to hear from thought leaders. And as members of the Empire Club, we are overjoyed that you've taken the time to share your thoughts and ideas with us. And for everybody watching, Happy New Year, and here's to a much, much better 2021, and investing and in good health. Thank you.

Antoinette Tummillo
Thank you very much, Richard. I'll tell you quickly about our upcoming events. On January 12th, we've got Mayor John Tory coming to talk about ready to restart Toronto's path forward beyond COVID-19. So, that should be an interesting conversation. January 14th, we've got Rick Leary, Chief Executive Officer of Toronto Transit Commission, in conversation with Leslie Wu, Chief Executive Officer of Civic Action. Registration for these events is free, so I hope you can join us. And this meeting is now adjourned. Thank you very much, Tom Caldwell, Pierre Lassonde, and David Rosenberg. Really appreciate your time today and your words. Thanks.