So we'll start in a couple of minutes and welcome everyone out there. If the Saturday format works, I'd appreciate some feedback because sometimes we don't know. Tentatively, we're planning for Wednesdays at noon, but sometimes Saturdays work.
And thanks for coming in on a Saturday, Shay and Nathan. But it's better than flying to Edmonton now and going to the Mayfair because then you used to fly all the way the Edmonton. That airport's so far from downtown, and then you'd go to the Mayfair. So this way you can save a lot of carbon footprint by not leaving your house.
Yeah. Very true. But happy to do it in any format or forum for you, John. Not a problem.
Well, thanks so much. Yeah, I see in the background how beautiful it is here though. It's hard to see because I'm far, but it's so beautiful up there.
So we wanted to start soon, and I took July and August off for a couple of reasons. Webex-- We've done continuous since March 2020 when COVID started, and I took July and August off because people wanted to golf and go to the cabin and go camping and golf and stuff. And so we took July and August off, but we're back. So that sounds good. We're going to do our normal monthly Webex updates.
And we really appreciate, again, the support of Nathan and people like Shay. Nathan's kind of our one that the clients know really, really well. Same with Shay. You guys have been regulars on the presentation, so sometimes I get a request, well, what about that Shay guy? When is he coming back?
[LAUGHTER]
So you're back. So that's great. And really the game in town really is, and I'll unmute you, Shay. The game in town really is the US to some extent in the global world situation. So I'm going to give you carte blanche on talk about the US, but if you want to talk about other things, that'd be really great.
And so the big question we get, Shay, is a couple of things, the impact of the debt ceiling on the US, and so wanted to talk a little on the debt ceiling. Last time it wasn't very pleasant when they had the debt ceiling conflict.
And remember in the past, Bill Clinton and other presidents have had issues with the Republican or the opposite Democrat Congress or the Senate, et cetera, fighting it, and then they don't pay their workers and stuff. So probably that. Maybe we'll have residual impact of the status of the $3 trillion infrastructure budget. I think that's kind of an issue.
And just general concerns about China going on. So I thought I'd kind of start with that, and the big couple of things we want to do with these presentations is try to make the future a little bit more understandable by going through potential outcomes. And I think our main job isn't to talk about-- I will talk a bit on the past, as you will-- but really the big concern is not what happened last year or the year before or 10 years ago. The big concern is what will happen moving forward.
So a lot of people have really great Monday morning hockey playoff they should have done that. They should have done this. But the key is the game tomorrow night. And I think that's kind of the metaphor I want to go through today. So I'll start with my presentation, and then we'll jump to Shay and certainly go through that. And let me do that. OK.
So on my show is kind of showing you exactly what I was saying. Advisors, I think, that are doing their job, I think our big focus is on what's next. I think it's really great to talk about, you go to A&W, you go to McDonald's, and hear everyone talking about this and this and that. And the big key is it's not helpful if we talk about what should have been done last year.
So we wanted to focus on this year. We learn from the past to make the future better. And that's kind of the use of the past. Focusing on the past and not doing anything isn't any good. And we want to learn from the past. So part of the metaphor, I mean, July 1st, by the way, was my 32nd year with the firm. So I've been doing this for 32 years, and I was a professor prior to that.
And one of the things that I learned over that long period of time is using the past not for regrets, but for better understanding of the future. Because really a lot of the time people go through life regretting the past, anxious about the present, and fearing the future.
So we want to take the fear of the future away somewhat and give you an idea about what's going on. And the main key to why we are in business is to have you have a bigger, better future than you would without us. That's kind of our job really.
If you don't have a better future from dealing with an advisor, then really that's not very successful to me. So you want to have a better future. So we want to talk about the future. So the agenda is what's going on. Shay's talking more in the US, but Shay's also competent to talk about other areas other than the US economy. Just so you're aware.
So that's what you learn about. We want to talk-- I want to talk briefly about negative interest rates, political changes that have happened, COVID impacts, cryptocurrency a little bit, inflation, US infrastructure, Chinese stocks. So kind of a checkerboard but things that I think are current today. And so we want to move forward on that.
So we're in a world of constant change, and forefront is COVID 19. We still have that. And that's a disease that won't go away. Let's face it. So let's start with the election impact a little bit. We know the election happened on Monday. We have a liberal minority. We have prime Minister Trudeau again. So he returns.
And so his being focused is a number of things. Finishing the fight against COVID, and I don't know if they're able to finish that thing. It's hard to say. I'm not a doctor, but it continues to rage.
We want to look at home ownership, real estate, better health care, and a more resilient economy, greener future, and reconciliation, as well. So those are the main areas. OK. OK. Sorry. There you go. Let's go.
So what do we want to look at is looking at some of the promises. Again, they're going to continue to look at jobs and continue to have incentives for employment and getting people back to work. They're going to extend most COVID benefits moving forward. Their job or mandate for energy is to focus on climate change. They're proposing to phase out all fossil fuels, public funding for fossil fuels. A little bit tougher for living in Alberta, Saskatchewan because we do have some dependency on the energy.
The party is also going to help Canadians under 40 for a down payment. They're adding a new tax free home savings account. We have a tax free savings account. This is for the home savings. So that has to still be approved, but certainly a worthwhile cause I think personally. And you know there's proposals still discussed about the new 3% tax on banks and life insurance companies. So that's certainly going to be a bit of an impact on bank shares somewhat and bank profitability. But certainly we want to keep that into consideration, and I do get questions on that.
What the government does is what the government does. We just have to accept if they make that change and make adjustments as well. I'm still, obviously, an advocate of bank and insurance company shares. I think their earnings are very good.
So the other question Shay and I will go through, I think, is what is driving inflation and rising costs? So there's about three things. But you want to be aware that if you're sitting there in a savings account earning 0.35 of 1%, Canadian inflation is 4.1 as of August 20, 2021. That 4.1% means that everything goes up by 4 pennies a year. So what cost $1 today will cost $1.04 in 12 months from not the current rate of inflation.
And the current rate I think in the US is, Shay's, about 4.24 0.5. So the US inflation and Canadian inflation is pretty neck and neck and over 4%. And so I'm a big advocate of continuing to focus on continuing to boost yields and try to beat inflation. So we have really driving inflation-- record low interest rates drive inflation because it encourages borrowing, it encourages spending more. The cost is less to buy a house or car because interest rates are low.
But the other one is actually massive government debt. Printing a lot of money is inflationary. As money continues to grow in supply, it takes more dollars to buy the same thing. It's just supply demand in that case. And then the third one is everyone going back to work, and they're going to be driving up prices again. They're back to work. You're going to start getting traffic jams again.
And as people go back to work they line up to buy their Starbucks coffee in the morning and driving up more demand. Also, that's causing some labor shortages. So people are wanting more higher wages, more increases. And then we have natural disaster risk, which is, again, causing a lot of damage. You think about all the fires and floods that cause demand for natural resources, like iron and lumber and everything, to go up to repair and replace all of this damaged infrastructure.
So everyone knows this, but I wanted to graphically illustrate the growth of our debt since COVID. It is off the chart. Going back 10 years, debt was pretty-- OK, it was a bit high, but in the early 2011 because we had some recession spending, but really our Canadian debt is off the chart. And it's certainly a concern for inflation, and also, how are we going to pay for this?
And then here's our debt again. Continues to rise. 2020 to 2021 was horrible for debt. I'm not against spending money, but certainly at the end of the day we'll have a bit of a debt hangover in Canada.
And then also we're looking at energy rebounding, and so we do have an energy rebound in Canada. And that's really helping the Canadian dollar because we're a petro based somewhat dollar, and so the higher the energy, oil prices particularly, the better our dollar has done.
And also, we're getting people returning driving, and also this summer we had a lot more people driving. Not a lot of gasoline supply. Luckily, we didn't have shortages like in 1973, '74 when we had an oil embargo, but certainly it came close at some point. And I think, Shay, in the news they had people having fistfights at gas pumps in certain parts of the US this summer. So luckily, Canadians don't tend to do that. They kind of just waited in line. But in the US the fist fights started.
So it's really good for Alberta, and you'll probably see again jobs picking up in the oil sector, and they have picked up this year. Construction is off the chart. So things are starting to look good.
The other thing is you'll notice return to work traffic is driving energy higher. It used to take me no time to get to work. Now it takes me a lot longer. There are more traffic jams. And it's around the world that people are getting back to work. They get in their car they drive and, obviously, they use petroleum in a lot of cases.
The other thing is that the Middle East and Russia and OPEC has done a good job on their side for cutting supply. They're not pumping as much oil out on a deliberate scale. They know that they don't want $12 oil, so they want to keep the supply. So they both have smiles on their face because they're both like really, really friendly there because they both know that they control a lot of the world energy.
We've also continuing to see extreme weather damage. The worst fires in the West Coast history happened this summer, and in fact, we've actually seen that when you couldn't walk outside in even Edmonton during the summer because of the smoke. Anyone driving to BC knows that, in Alberta, that there was a lot of smoke. And so it was a lot tougher.
But you think about replacing millions and millions of pieces of wood and lumber burnt in the last year, plus on the flip side, the East Coast hit with tornadoes and hurricane after hurricane. In fact, there's so many I can't even name them.
Used to be you could name Andrew or something. You knew Hurricane Andrew. There've been so many names, I think they're running out of names for hurricanes there because they should kind of a hurricane one, two, and three, or something because they have so many hurricanes, floods.
And so extreme weather damage has hurt the infrastructure and also shut down some of the oil refineries in Texas, and so on. So a lot of that was hurt by that, and that also hurt supply of energy. And again, that's why Alberta was so crazy busy. So we're there right now.
So what's the impact. People say, OK, John, you talk about inflation. I've talked-- By the way, this is the first-- This is like the eighth time I've talked about inflation. And when I first started talking about it, everyone said, are you crazy? There's no inflation. But that was at the beginning of COVID when we went into a bit of a recession with people shutting down and all that. But at the time, you can't print trillions of new money and not have some sort of impact.
And so the impact on inflation is really, if it gets out of control, it's certainly really difficult to phase through. And so the other driver going through is we've got inflation, and normally, you raise interest rates to dampen spending, make it a little bit harder to spend. But because of COVID, we went into negative interest rates globally. So negative interest rates is where the interest rate you get from a term deposit, for example, is lower than the rate of inflation.
So we're actually getting a negative return. You buy a GIC today, it's 0.71 of 1%, and inflation's 4.1. So at the end of the one year term, you're actually negative in real spending, called real return. So you'd be actually down about 3.2% or something. So you lose 3.2% by owning low interest rate GICs.
So that's what, again-- And at one point we thought negative interest rates was the European thing. It's not anymore. It's actually North America too.
So the other thing that borrowing makes you more dependent on foreign debt, foreign debt holders. So here's the thing we're looking at. Who owns, in terms of foreign countries, US national debt? Well, the one that Trump and Biden and et cetera are talking about is a trade war with China. Here's the weird part about the trade war. China owns both a large portion of US debt in terms of foreign. So in a way going to negative interest rates mean that China, Japan, Brazil, Ireland are getting paid back somewhat with inflationary dollars.
So China owns over a trillion dollars of debt. Japan over a trillion dollars. Here's the weird part. No one thought about Brazil number three and Ireland number four. Who thought that Brazil and Ireland would buy a lot of US foreign debt? The US debt, I should say. So just be aware that the more money printed, the more dependent on foreign countries wanting to buy the debt.
So what's happened somewhat, and this is a graph out of RBC, but it's sort of saying that, and Shay may cover this, but it's saying that the lower the bond rate, the lower the GIC rate, the more the temptation to buy stocks. And so if you see on the right side that the movement to stocks is saying as rates are low, it makes total sense to be buying stocks when bonds are low. Why would you want to 0.71 one year term deposit, right?
The other thing that's gone on is low interest rates, money in the bank because you're not traveling as much. So what's happening? People buying homes. Look at the graph here of the new home purchases. It's been massive through 2020 '21. So we're getting that.
And think about it. If your mortgage rate's below inflation, and you're looking for your home, that's kind of what's happening. The other thing is your normal trip to Hawaii got canceled. Your cruises got canceled. Your trip to Europe got canceled. So that money in the bank went to repairs, renovations, and new homes. That's kind of the demand.
So a quick summary. It's not as easy as this, but typically, the load of the yield it drives somewhat the stock market growth we're seeing. The flip side though, if we start seeing rates climbing a lot, that's a bit of a concern for markets. That's a bit of a precursor.
So COVID stimulus packages we had the biggest crisis in my career in 2007 '08 by the way. Prior to the pandemic, obviously, we're in the depth of possibly a depression. We had banks crashing around the world and bailouts. But look at the stimulus package in 2008 in orange. And look at the US and France and all these things. This is the amount of money Canada printed to stimulate the economy back in 2008 '09.
Look at the blue and COVID. It's so much bigger response. Look at Japan. My goodness. But look at Germany. So the money spending has been much bigger for COVID. That's why our debt has grown.
Quick thing, and I don't know if you're going to talk about this a little bit, Shay, but we're getting calls of should I buy synthetic currency, Bitcoin? It's a decentralized, digital currency. And I certainly wanted to talk a little bit about it. Bitcoin is one of the block-chains. There's 13 or 14 that I'm aware of that are fairly large in the cyber currency. And Bitcoin is just one of them.
So everyone talks about owning Bitcoin, but my thoughts are, be careful. If you do, you want a diversified basket of them. It's kind of like a central bank currency somewhat. A lot of the third world nations, for example, are using Bitcoin because their paper is not trusted. So you see an El Salvador or whatever going into more of a Bitcoin use. And it's because of the money supply, the fear of a default on the currency. So we're getting this.
But be careful because you have $6,000 that goes to 70 almost 1,000. Now, it's down to 40,000. Those are huge swings. It becomes almost like getting on a plane and going to Vegas and playing slot. There's a certain thing. So be careful about it. But I wanted to cover that. Is it real-- It could possibly be one of the holdings that normal pension funds will, at some point, add to the mix, but at this stage it's a bit speculative. So just be aware. But we get calls on it. We do have ETFs that do manage it, but be careful on it.
This is kind of blurry, but it wants to show you that compared to World War II, the current response has taken us above World War II levels of debt, and Shay's probably going to cover this. But think about it. They funded the most toughest conflict in the 20th century, World War II, and the debt fell, obviously, after World War II.
But we're kind of fighting, in a way, we are fighting a World War. People don't get COVID. COVID is a World War. It just happens to be we're fighting disease, not a military battle. So you see the spending is similar to World War II. OK.
And again, I don't need to go through this, but continuing [? get ?] where are they spending again? Federal spending is continuing to grow, but they've got a bit of a deficit in terms of the tax revenue isn't equaling the spending right now, so they're going into a bit of a debt. That's kind of this graph.
Anti cryptocurrency changes that happen, in fact, this week is the Chinese central bank declared all cryptocurrencies related transactions illegal. So this is a big impact when the second largest economy in the world does this. So you can see the volatility of it being 65,000 in April, and now it went as low as 30,000 in August, in July, I should say, and back up.
So certainly, again, there's also a lot of cryptocurrency scams, by the way. And cryptocurrency scams are people that look like you're buying the Bitcoin, and it looks like you did a legitimate purchase, and it's actually a fraud site. So be careful when you buy online cryptocurrency.
There are a lot of-- This looks like a legitimate site, doesn't it? But it's just a scam site. So you end up putting on, buying 5, 10, 20 or 30, 50,000 of Bitcoin, and it looks like you're getting a real transaction, but the reality is, when you go to sell it, it's actually vacant. Be careful.
And Shay may cover this more than I am, but I'm getting questions somewhat, and I'll let Shay do most of this. Shay, you probably want to cover this. But the US debt ceiling versus the government shutdown. And it's sort of like a metaphor that you go to the bank, and you have a credit card, and the credit card's maxed out, and you want to buy more things.
So you go and you say, I want to extend my credit. And so the bank can say, yeah, your Visa's now up 10,000 more, and now you can go buy your big screen TV. But it's kind of a metaphor, but in a way, the US government's sort of borrowing more and more, and so they need somewhat to say, OK, we spent all the money we have. Can we have more debt? So that's kind of the big battle that Shay can cover a little bit more.
If they don't get the approval, then no one gets paid on the government payroll. I think that's accurate, Shay? And I don't know if you want to cut in and add anything.
I could talk, make a few comments now or save them for later or whatever.
Yeah, you might as well talk now. I don't want to take your thunder, but maybe just-- Is that kind of what we think could happen?
Yeah. So I think the way you laid it out here is perfect because there are two separate issues. One is the government shutdown and September 30, which is around the corner now, which is next week, which the point when the government would technically shut down because there hasn't been a budget proposed.
And the other issue is with the debt ceiling. There, similarly, officially by the end of the month, the US treasury would run out of money. But now, of course, there's always some massaging that the Treasury could do. So Janet Yellen has indicated-- it's tough to give a precise date, but at some point in October, the Treasury would essentially run out of money. And that's a bigger deal than the shutdown itself because then you can't pay your creditors.
And John, you had a great slide. We've got a lot of creditors, some big nations, also, that we owe money to. And if the debt ceiling remains unresolved, then what happens is you technically default on-- the nation to defaults on its debt.
And that's something that it's really difficult for us to see why policymakers would want to technically default on the debt when it is something that can be prevented. And at the end of the day, there's a lot of political posturing taking place, but it will get through.
And you mentioned earlier on in your presentation that it was a big deal years ago. And I think what often we kind of recall is 2011 is when this whole fiasco came to a head, and there was a similar bickering going on between Republicans and Democrats. And basically, I think maybe like four days or so before, the government would have defaulted on its debt, they came to an agreement and extended it.
But before that, the S&P had already-- Well, sorry. Even though they cleared it, in 2011 we all recall that the S&P actually downgraded US debt in part because of the infighting and in part because of the path of the US government debt. Of course, he's doing what, and you've illustrated, the debt has continued to increase, not only in the US, but everywhere. So there are two separate issues.
On the government shutdown side of things, again, the debt ceiling is the bigger one, but ultimately, we think that it will be worked out because there's just no way we can envision policymakers allowing the government to default on its debt. So although it's creating a bit of stress and anxiety, if you just look at the market action of this week, we did see the volatility early, but the markets continued to improve over the course of the week because I think there's a general sense that something will be worked out.
The government shutdown, on the other hand, you'll be surprised to know that actually the US government has shut down since 1976 when there was a Budget Act that was passed for the current process that we're in, the US government has shut down about 21 times. And from January 2018, I'm sorry, December 2018 into January 2019, the government was shut down for about almost 34, 35 days, which was the longest government shutdown in US history.
And John, what would you think that, considering the length of that time frame, that the government shutdown, the expectation would be that the S&P probably tanked. Well, the S&P actually rose about 10%. So the government shutdown itself it creates a lot of headline news, but I think that's not the big deal. The big deal is the debt ceiling, and there again, we just say that it's hard to see the government actually allowing the government to shut down because it's something that's preventable.
Yes. And the only concern I have, I know my biggest concern was probably '07 '09, that period where they really were broke. There was a concern that US government couldn't bail out all of these banks and so on. It was almost too big to fail. But this one being COVID seems like a self created, in a way, debt because obviously you want to keep people employed.
But it's always something to watch, and these are things that people trading in their basement, though, aren't watching the US debt ceiling, or they're not watching the government shutdowns.
But these macro events are really a red flag to me in that the fiscal, I would say, discipline is missing because if you keep going back to the bank to get your credit card raised, in limits, to some extent you think, OK, we can keep raising your credit card limit forever, or your line of credit forever, but at some point you have to pay it back. And I think that's the inflationary concern.
So I'll jump to the next one, but thanks so much. And it's great having you comment because it's great to have Shay's experience and knowledge.
So one of the issues that possible from the concern about a gain in printing money and debt ceilings and all these things, is the US dollar is one of the most expensive dollars still in the planet. And if you see on the far bottom right, compared to a country like Japan or Great Britain, who the pounds are undervalued somewhat, that the US dollar could come down more. And it could give us an opportunity as Canadians who travel to the US an opportunity to take a strong Canadian dollar and buy more US.
And I started doing that with accounts, working on buying more US securities, using the extra strong Canadian dollar, buying US. When you buy US stock, you buy US dollars. So some of these people think that, OK, you bought me a US ETF. What does that mean? Well, we could do two things with that. We could hedge out the risk by buying a US dollar in denominated hedged Canadian dollars, in other words, in Canadian. Or we can buy it in US. So those are the two decisions.
But think about a year and a half ago. We bought your US ETFs unhedged, which we did not-- we bought them hedged. But if we bought them unhedged, you would see that $0.72 Canadian dollar rose to almost $0.80 Canadian dollar. You would have lost $0.08 every dollar on an exchange rate.
So if the Canadian dollar in the next year goes up from 79 today to $0.91, that would be another 11% increase in the Canadian dollar but an 11% decrease in US securities. So we take currency into consideration. 100,000 in US stocks is 100,000 US dollars. So remember that exchange rate is also important.
So again, here's the US dollar to Canadian terms. Bit of a rally, but certainly a big decline from where it was. And this is what I did say over a year and a half ago is, we buy US stocks but we buy them hedged in Canadian dollars rather than in US dollars. And that's why the returns were better than if you bought them in straight US dollars. Again, how many people trading took currency into consideration a year ago? Probably not this many.
And Shay may want to-- Sorry, I don't take your thunder, Shay, because you probably have this. But this $3 trillion infrastructure plan, Shay, is it is it a solid plan, or do you think it's going to be trapped in Congress or whatever, or debating forever?
Yeah. This is another that we're keeping an eye on. So there's a couple of different things going on. So there's two separate issues. One is the actual infrastructure part of the overall spending that's being proposed is about $1.5 trillion, and that actually has already received bipartisan approval from the Senate. So that's pretty much a check mark. And for the most part, even those in the House of Representatives, they're all comfortable with the plan as it's been constructed in the Senate, and it should get the approval.
The problem right now is that there's quite a bit of dissension amongst Republicans and Democrats, but also within the Democratic party on the $3.5 trillion, you can call it more of a social spending slash climate bill, that President Biden wants to pass. That's where a lot of the tension is because it is something that can get passed through what's called a budget resolution process, which actually doesn't require a super-majority from the Senate. So it can be passed, the three and 1/2 trillion even without the Republicans on side.
The problem is that many within the Democratic party, particularly a Senator from West Virginia, as well as a Senator from Arizona, think that the three and 1/2 trillion price tag is too much at this point in time when the US economy is recovering.
So Senator Manchin, who's from West Virginia, he's actually suggested that we should have a-- He put an op ed piece in the Wall Street Journal that we should actually have a strategic pause, and let's see how things unfold over the course of the next six to 12 months before we decide.
But the progressives on the Democratic Party see the midterm elections next year and think that there's a small window, potentially, before they can get a big bill through. So that's where there's some infighting within the Democratic party that's going on right now. So that remains to be seen. It does seem like to get both of those senators on side, that three and 1/2 trillion package might need to be pared down a bit before it can actually be passed.
So that's currently-- And it's unclear. It's really tough to say. It's really even hard to give a probability around what could pass. What we do know is that infrastructure bill, the pure infrastructure bill, that's $1.5 trillion. That is almost good to go. It's just that because of the infighting on the bigger spending package, the $3.5 trillion spending package, that's holding up the passage of the one and 1/2 trillion as well.
Ultimately, the Democrats, we think, need a win. So that at least the trillion, the infrastructure bill, should get passed. And probably some pared down version of the spending bill might eventually be passed, as well, because come midterm, and if some of the composition changes in Congress, then it might become even more difficult for the Democrats to get something through. So that's how we're sizing things up right now.
Thanks, Shay. That's really helpful. And really a big advocate that really the US, like any nation, needs new roads, utilities, bridges.
100%.
You look at a country like China who has 21st century infrastructure, your economy is only as good as your infrastructure at some point. So I'm really an advocate of that. The US power grid, again, those issues, traffic jams from poor road construction, bridges that are not working. I think this is one of the best bills that Biden put together because, really, infrastructure would be a driver of new jobs, boost the US economy, and take the US in the 21st century.
And I give the US credit. When they decided on doing something, they're crazy about it. Suddenly they're fanatical, and this thing will get fixed and everything will look pretty good.
Some of the winners, possibly, from infrastructure. Canada is a winner. Where are they going to get copper pipe? Where are they going to get iron and steel of quality to build these bridges? Where're they going to get the lumber? So I'm continuing to say to clients that we want to buy infrastructure. Yes, we want to add more infrastructure to your accounts.
We also want to continue to be into the raw material sector, the real assets, is what your colleague, as well, talked about last time.
But really at the end of the day, there's only so much copper you can produce. There's only so much wood and lumber. Even though we had a weakness in prices, I'll show you. You see the rise in lumber and the fall recently, but you've got an infrastructure bill for over a $1 billion plus. You've got the repairs on the West Coast of the fires. You've got three repairs of all the floods. And I don't know if you got affected by the tornadoes this summer, Shay, but that damage is real.
And so, my view is not to run on by Canfor, but I'm saying, we certainly think that these sectors are-- look at the drop recently. Yeah. It's still commodities. There's still a volatility. Look at the recent drop in iron ore Labrador shares, for example, as an example. But we've seen a drop in iron ore. And possibly, it's the Chinese economy is slowing down. We know that. So it's not just the US, but Canada still gets a huge percentage of its money from sales to the US under NAFTA and stuff. So iron ore.
And one of the only areas of weakness this last year has been the Chinese stock market, and we're seeing as low as 30% decrease. So if you think about the Chinese market, my view is we're continuing to buy more. Hang on to China. And China is still the second largest economy in the world. And China could be the number one economy in the world five to 10 years from now.
So you want to still own China. Don't let the short term stock market weakness-- If you could buy the second strongest economy in the world at a negative 30% discount, that may be a thought to look at. The third, of course, Japan fourth, Germany fifth, is the UK. And sixth is, between five and six, is India. So don't count India out that India has an amazing growing power in the world. So China, India as a combination are the two that I really, really think are pretty powerful as well.
Lastly, near the end of my presentation. So here's a weird part. If you watch this movie, almost dread it because it is very, very similar to the COVID experience. So it's really an interesting movie.
And so the continuing story, unfortunately, continues. I went to a restaurant the other day. Had to show a passport. Went to the YMCA. Had to show passport and my driver's license. And the guy eyeballed me for a long time before letting me into the Y. I don't know. Do I look different from my driver's license. I look younger in the driver's license, maybe. But that's how crazy it's gotten. And that's in September 2021. So are we over? No. It continues.
Total cases as of this month, 229 million cases around the world. That is crazy. This month, COVID 19 has killed as many as the 1918 '19 flu epidemic. So this is the part that we don't get. Obviously, the population of the US was much smaller then, but that's crazy. We had 675,000 deaths. It passed the 1918 flu or equaled it, I should say. And that's the worst pandemic in 100 years.
So both are 675 as of September. So we can't underestimate the danger of this thing. So continue to remain prudent on it.
Lastly, there's a parallel. What happened at the end of 1919 was the roaring 20s. And so what is the roaring 20s mean? It meant that as the pandemic in 1919 subsided for people returning back to work, stop wearing masks. There is a real craziness of people saying, I can now go to the bar. I can now do all these things. So the roaring 20s occurred. And to some extent, the stock market went crazy. OK. And move new highs.
So we had the three factors in 1919, 1920, 2020 2021, the global pandemic technology boom in 1920, by the way, they brought in radio, movies, new automobiles. We have that today, technology boom. And then people returning back to work that were quarantined or back at home. They had people staying home in 1919, by the way. So it's kind of a similar human reaction.
And if you look at the adjusted-- This is Robert Shiller, a famous guy who predicted the crash of 2008, by the way, brilliant guy. I met Robert Shiller, Shay, in January 2007. He spoke at the RBC Equity Conference in Toronto, and he talked about how we're heading for one of the greatest bank real estate crisis in history in 2028-- 2008, I should say. And everyone laughed at the guy. I actually flew home. I said-- and we doubled bonds within that one year because I believed Robert Shiller.
So Robert Shiller has done this thing about the two P/E adjusted ratios. And showing these similar graphs, but his one comment was the P/Es in 2020 are a much higher. And so it's not like 1919 where the markets were cheap. We're actually in relatively fairly priced markets today.
So the Dow Jones Industrial average, the US stock market of mainly blue chips, again, we've had a big recovery from April. March 23, actually, of 2020 was the low. We've seen pretty steady returns since then. The TSX-- By the way, do you see these look like different countries? See how close we are to the US? Canada, US?
So the TSX gain paralleling the US. NASDAQ Technology Index with different types of stocks, but your Apples, Starbucks, gained really good pricing. So to finalize some things, and then we'll jump to Shay's presentation.
So with the markets at the current prices, we continue to focus on yield. I think yield-- continue to get yields, and I think yields are really going to help us. And as prices rise due to inflation, a lot of the dividend payer stocks will raise prices and could fare relatively well in inflation.
Second thing, expect higher inflation. You're going to see food, energy, wages, and resources going up. So you have to also get decent returns after the 4.1 inflation yield or it could be higher. I hope it's not higher than 4.1, but could it be five or six? Absolutely. So it can be even higher.
There's also the bill to be paid in the Canada, the US, for all the borrowing. So they're talking about higher capital gain inclusion rates and higher personal income taxes in both countries. So that's just a thought, how they're going to pay for it.
And then, also, markets will remain, may remain, high. I'm not saying will. May. And as long as lower interest rates exists and rising demand, as people go back to work, hopefully, the COVID impact falls. I'm still pretty feeling relatively good about markets still.
And then, the other thing is the roaring 20s thing. Avoid the temptation to chase lower quality, highly speculative quick money. Calls about Bitcoin, calls about some of the more speculative tech stocks, be careful about the roaring 20 effect where your neighbors are talking about how much money they're making of speculative things. Stick to quality. OK.
And lastly, energy's great for Alberta. We're going to see probably more solid energy prices moving into the remaining part of this year. And then our disclaimer. OK. OK. So I'm going to move over to Shay, and sorry if I took longer than I had there, Shay. And so I've got Shay to take over, but thank you so much, Shay.
Awesome. Thank you, John. OK. Give me a second I'll try to get my screen going here.
Can you guys see the presentation? Perfect. Awesome.
Yeah. So thank you, John. And always, you do an excellent job and a very thorough job and hitting on all the key points that are playing out in the markets right now. And so you kind of cover everything from macro to movies even. Wow! This was a new one. You gave a nice movie suggestion with Contagion there. So it's pretty cool.
But no. I have to say, John, listening to your presentation, I think what I really enjoy is the passion that you have about what you do and how thoughtful you actually are when it comes to your client's account, taking into consideration all the different nuances, like currencies and what have you, in terms of your decision making. Where will commodities be in terms of your decision making. So well done, and it's great to see.
So you definitely covered off on a lot of the important points. What I'll try to do is give broader global macro overview with regards to what's going on in the markets, the current market narrative, how it is kind of evolving. And as well as our broader views with regards to your point, John, most importantly, is the outlook. And we see things headed and what could be doing well over the next little while.
Before I actually get into the slides themselves, I'll just go a really quick recap in terms of the market narrative because I think it's important to set the stage in terms of what the market narrative is and having an appreciation and understanding of that when we talk about the path forward. And what's interesting is the market narrative has definitely evolved from where it was at the start of the year to where it is at the moment.
So if you think back at the beginning of the year, there was a tremendous amount of optimism with regards to the outlook, global growth, robust global growth, robust US GDP, Canadian GDP growth. I think in the US, as an example, the forecast for 2021 would be around 7% GDP growth for the US. And if that had been achieved, that would have been the strongest rate of growth for the US economy since 1984.
So we're talking about pretty chunky numbers in terms of expectations to start the year, which were achievable, had certain things not happened, which we'll get to. So really strong growth.
On the policy side of things the expectation was, well, you've got really strong growth, but you also have monetary and fiscal policy going full tilt and not slowing down, and you talked already about the fiscal stimulus. And on the monetary side of things, the expectation was that, whether it be the Fed or the BOC or any central bank, for that matter, no one's really looking to tighten the Fed, specifically, because the Federal Reserve, the US central bank, is obviously very important for the global, worldwide view.
And the expectation was that the Fed won't be raising rates till perhaps 2023, 2024. And again, tapering, which is now obviously looking more likely this year, at the beginning of the year, that wasn't really on the agenda either.
So strong economy very easy policy, and the result was inflation expectations had moved higher, interest rates moved higher as a result of that, as well, over the early part of the year. What has happened since then, and especially over the last, let's call it, three to four months, is there's been a bit of a shift in the narrative, where a couple of things have influenced it. One is the pandemic itself, and John, you talked about that's still with us, and will probably be with us for some time.
But as the Delta variant cases started to rise globally, we started to see a shift in the narrative with regards to the growth outlook itself. So slowing growth, peak growth concerns, concerns about the Chinese economic growth. We'll talk a bit about that. So all of those played into the markets getting slightly less optimistic about the global growth environment relative to where things were at the start of the year.
The other critical point is the Fed itself. So start of the year, the expectation was Fed was going to be super easy way out into the future. But now, clearly, that's changed. The expectation is that the Fed will probably start tapering their quantitative easing, their bond purchase program at some point. This year, probably, by December they'll start tapering their asset purchases, and rate hikes could happen potentially as soon as late 2022, when in the beginning the markets were expecting late 2023.
So all of that has kind of influenced the market. So what does that mean from a market perspective was at the beginning what was really working well was a lot of cyclical names, the reopening trade. So you had energy, financials, industrials, materials really doing well.
But over the last three to four months we started to see an international and value stocks really doing well. And over the last couple of months, we've seen a bit of a shift where it's reverted back to, well, it's more about the quality, but also the larger cap, some of the technology names have started to do better again. We've started as the US perform a little bit better again because of the global growth slowdown view.
And as a result of that, we've also seen yields, which had gone up, in the US a 10 year yield had gone up as high as 175, has obviously come back down to around in the 1.33%, 1.35% level. So a long and short, but gets us to where we are today. So obviously, where do we see things going forward?
And the punch line for us, and I'll get into some of the details in a second, is that we're still positive. Similar to you, John, we're still positive on the global business cycle. And the real simple explanation as to why that is because we don't really see a recession over the next 12 to 18 months.
You talked about valuations. Valuations aren't cheap, they're not .com expensive either, and the business cycle is still positive. So therefore, we still think equities will do well. Will they continue to do 20% per annum? Maybe not.
We need to curb our expectations. But without a recession on the horizon, equities should do well. We could see a bit of a pullback 10% to 15%. That actually would be healthy, and we would welcome that, quite frankly. But we don't really see a long and ingrained bear market taking place any time soon because of our business cycle outlook.
Get the most important slide out of the way. Several of them.
So really quickly on the agenda we'll talk briefly on the markets, but talk more about the equity environment, the fixed income environment, the global outlook, and just some thoughts on real assets as it relates to inflation. And then we'll close up with why diversification is so important. We'll skip couple of these. The returns, we all know, and to John's point, we don't want to spend a ton of time on this, but John, you kind of talked about it already.
Canadian equities have, which is the blue bar here, you're just looking at the one year number, have done exceptionally well, kept pace with the US. Obviously, 2020 that wasn't the story, but we're really starting to see Canadian equities do well.
Real asset space has done well also. Real estate is up 30%. Even infrastructure has started to come back up about 17%. The only thing that really hasn't worked so far this year has been bonds, but that's why you diversify. And bonds being down 1% or 2%, it's all right when your equity has done as well as it has. So essentially, that's why we diversify, and it has worked.
And why-- year to date returns, really quickly, just highlights why Canadian equities have done as well as they have year to date. Canadian equities, this is as of August, but directionally still consistent, up 20%. Commodities have been supercharged, as John already talked about. And that's clearly been the benefit for the Canadian equity markets. The energy sector, year to date, is the top performer. So that all helps the Canadian equities do quite well so far this year.
Broadening market leadership. I think this is an important one because we do know, and John, you talked about how we've seen such a strong rally in US equities, Canadian equities, from the March 23, 2020 lows. In the US, the US equity markets are up over 100% from that time period.
So going forward, we talked about the business cycle being positive. But if we really want to see a healthy bull market, what we really need to see is broadening market participation. And we started to see that. And I think that's clearly been a positive.
So really quickly, if you think about what took place during January 2020 all the way up until October of 2020, which was when a lot of the worries about the pandemic was still front and center, the thing that really did well was a large cap growth, predominantly, the technology companies. Everything else [INAUDIBLE] the numbers speak for themselves.
But what's happened since November, since the optimism around the vaccines came to the forefront, and the outlook for the global economy growing again, we started to see broadening of market participation. And that's really the key. It's not just about large cap growth. Small cap did well. Emerging markets did well. International has done well. And real assets have done well.
So we started to see broadening market participation. And I think if there's one thing that you want to keep an eye on in terms of the health of the bull market, it's we want to see this broadening participation continue. And so far, it has, as I said, the last couple of months we've seen a bit of a step back. And the data will kind of ebb and flow month to month in part because of just the news flow, the Delta scares, or anything like that, will kind of make the data ebb and flow month to month.
But we do think that so long as the business cycle is positive, that we should continue to see broadening market participation. And that generally will be a positive for, not only the Canadian equity markets, but global equity markets and global economy in general.
We'll skip over this one.
This is an important one, and it speaks to the growth outlook going forward for the key regions that we, of course, follow. John, you kind of talked about Canada, and the Canadian situation is very similar in a sense to what we see here for the EU. But the broader point being is this.
If you think about what happened to the economies when we entered into the pandemic recession, the blue bars represent that, the draw downs that we saw in GDP. The most severe were outside of North America. I'm sorry. The UK and the EU, particularly, got hit hard.
What's happened since then? If you think about the change in GDP, once the economy exited the recession up to where we are right now, what you'll notice is the US economy-- Actually, this sets up the first quarter, and we do have the 2Q number as of this point. So the US economy now is actually about 1% or so above its pre-pandemic level. So it's still below where it would have been had we not had a recession, so below its pre-pandemic trend, but at least it's captured what it had lost during the pandemic.
But what you'll notice is, the UK, the EU, Japan, and even Canada, for that sense, are still below even the pre-pandemic level. So on the one hand, when you're looking at this chart first blush, you'll think, well, that's not good. The US has done well, and that can't be-- And the other regions haven't done as well, so that's negative for the other regions.
But in fact, what this suggests to us and tells us is that, when we think about the runway for growth, and we think about above trend GDP growth, so long as you have this gap, and that gap, the output gap, as economists always talk about in terms of where growth should be versus where it is, the wider that gap is, the more above trend growth you could expect.
And the US economy is further along in the recovery. Ex-US, and you can throw Canada into this bucket, which kind of speaks to some of John's enthusiasm towards Canada as well, but also by extension towards some of the international economies. There's a lot more runway. The gap is a lot wider outside of the US. So you can see a lot more above trend growth in those regions.
So we think that makes these regions, not only from a valuation perspective, but from a economic perspective, a bit more attractive. And what's really occurred from a market perspective why US economy-- US equity markets have done as well as they have and outperformed the other regions, is in part because the recovery was much stronger in the US.
And really quickly why that is is in part because of the US not being as restrictive with the lock downs. If you just think about the lock downs in Canada versus the US, the US has been much more loose, very restrictive early on during the pandemic, but once things started to relax, the US economy never really has gone into the tight restrictions that we've seen in Canada or Europe or the UK, for that matter, or even in Japan, which is why those economies have been a little bit slower.
But now, the vaccination rate is a lot further along, and therefore, we do expect a lot more catch up growth and above trend growth. So we do see, not only the economies coming back and trying to catch up, but also we should see improving returns from these regions as well, which again, touched on valuation, but that gets us to the valuation side of the story. And this is where also we think that international markets have a bit of an advantage. So a lot of information on this slide, but let me quickly walk you through some of it.
So the top panel here we're looking at valuations of all the different sectors for the US, which is the blue, as well as the international markets, which is the orange. OK. And the dotted line here is just the broad market. US equity markets versus the international. So let's start with the broad market itself.
And what you'll notice is the US equity markets are trading at a forward P/E, which is slightly different than what the cyclical adjusted Shiller P/E that John talked about. But the point is, US equity markets are trading at around 22 times forward earnings versus the international markets trading at around 15 times.
So what that tells us is that the US is about 40% more expensive than international markets. Now, one thing to note is that international markets typically are somewhere between-- The US equity markets typically trade at about 15% to 20% premium relative to international. So the premium doesn't mean that US equities are expensive, but it's the magnitude of the premium right now, which is double what it would be historically, which is really eye catching in terms of how rich US equity markets are trading relative to international at this point in time.
So that's one reason to just flag, in addition to some of the other things that we talked about. And if we think about the path forward, we do think that there is still a lot more recovery to be had. We think that the whole reopening trade really hasn't benefited to the degree that it should in part because the Delta variant increase, and there were some concerns around growth and what have you.
But now with a broader population, global population, being vaccinated and a lot more expected to be vaccinated by year end, we do think that so long as a variant doesn't come out there that eludes the current vaccines that we do currently have. So long as that's not the case, we do think that the more of the global key regions around the globe get vaccinated, the better protection the global economy is to the COVID itself.
And therefore, we should continue to see spending towards the more cyclical service oriented regions improve, and that means the earning outlook for those regions should be better. And why that's important to note is, if you think about the sector rates now, the grays are highlights.
So you've got the sectoral exposures for all of these sectors for US relative to non-US. And the gray boxes are basically indicating which sector the respective region has a higher exposure to. For instance, something that we already know, technology, the US is almost 30% technology versus non-US has only about 14% in technology, which itself helps to explain why US equities have done as well as they have. As we know, the FAANG names have done so well. And that also means US technology is a lot more expensive than international technology. So that explains what the chart is trying to show you.
But looking ahead, we think that cyclicals will do a lot better, and John touched on a lot of those. So you think about, well, where is a lot of the cyclical exposures? Well, financials, industrials, materials, energy, a lot of the more cyclically oriented exposures, the international markets, have a higher exposure to that relative to the US. So in so much as the recovery continues, and in so much as we have a lot of catch up growth to be had, and cyclical sectors benefit, then we should also see international markets start to play catch up also.
The other hot topic in the markets if you kind of watch CNBC or Bloomberg TV or BNN or what have you, is value versus growth, value versus growth. That plays out quite a bit. We think that the runway for value is probably value also has a bit more runway relative to growth. And this slide helps to give you a historical appreciation as to why that is. So what we're showing you are recessions going all the way back to 1980 to the current one.
And once we hit the recession bottom, how has value performed relative to growth over one year, three year, and five years? OK. Now, what you'll notice is, so the numbers here are how value has performed relative to growth. So every time you see green, that means that value has outperformed growth. Any times you see red, that means growth has done better than value.
So what you'll notice is over one year it's a bit mixed. Yes, value has tended to do better, but you could see where growth does well also. So over the one year, it could be a little bit of hit or miss. But once you start looking out three and five years, you see a much more definitive trend that, coming out of a recession, as the economies are recovering, you'll notice that value does a lot better by a convincing amount. We're not saying that that's going to be repeated, but we do think that these levels will be repeated, but we do think that value should have a bit more runway.
The one exception was the global financial crisis. Now, the GFC was interesting because coming into the GFC, and this slide actually does a good job of illustrating. Blue is when value did well. Orange is when growth did well. Historically, going back all the way from the 1980s, and leading up to the GFC, which is right around 2008 here. What you'll notice is value was the trade. Value did exceptional leading up to the global financial crisis.
So on the one hand, we did have maybe some mean reversion that was to be had, and the GFC was a trigger for that mean reversion where growth started to outperform. So that was one thing. But the other important point why value under-performed over this time period is because of, if you think about the global financial crisis, ground zero for global financial crisis was the real estate sector.
And the real estate sector in the US, obviously in financials, the banks have a very high exposure to real estate. And real estate-- sorry. Financials, the banks in particular, it took them a long time to come out of their funk. And the banking sector tends to, and financials in general, tend to have a higher exposure in the value factor. Banks have a high representation in the value factor.
So it's really the combination of those two things why value actually ended up underperforming over this time period. But typically, what you'll notice, so that really is the exception not the rule. Historically, value tends to do well. So obviously, we've got a couple of question marks here because we haven't headed into the future.
But John talks about, well, the path forward. Well, if you look at if history is any guide, we're not saying these types of numbers will be repeated, but directionally, values should have a bit more runway in addition to international for a lot of the reasons that we talked about.
Really quickly on bonds and interest rates. John talked a lot about interest rates, the low interest rate environments that we're in, and interest rates have clearly bounced around quite a bit from looking at US 10 year yields were about 0.5% to start the year, went all the way up to 1.74% at the end of the first quarter, then bounced lower to about 1.45% as of the end of the second quarter. And they've actually drifted lower since. They were about 1.3 and change currently. And it kind of speaks to what we had talked about.
Initially, it was a lot of growth that was being priced in, inflation being priced in, and things moved forward. And since then, we've seen it drift lower in a large part because of the concerns with regards to the growth outlook. Our view is that, generally speaking, we do think that the growth outlook still is positive. The business cycle is still positive over the next 12 to 18 months.
We don't expect bond yields to go back to where they were during the pandemic lows. We still think that, whether it's Canadian 10-year or US 10 year yield, getting back towards above that 1.5% levels is possible, in part because we do think that growth will also be positive going forward. So modestly higher bond yields, but nothing too dramatic in terms of bond yields going forward. It's sort of our baseline view.
But really quickly, there is a role that bonds play. I think, we talked about in the beginning when I looked at, when I showed you the market returns for bonds were negative, but that's OK, when equities are shooting the lights out. That's why you diversify. Bonds tend to be a diversifier in a portfolio. Historically, when you look at how bonds have performed when markets have trended down, they've tended to give you that offset.
And if you just look at this little table here down at the bottom, you'll notice that during the GFC, equities were down 50%, bonds were up about 6% during the pandemic. Full period of the pandemic downturn equities were down about 20, and bonds are up about 30%.
So that diversification benefits is really why we hold on to bonds. Doesn't mean that you don't want to diversify your bond exposure. You might want to be a bit more creative. But the point is bonds do have a role to play.
So talked a lot about the asset classes and our views there. Really quickly on the growth outlook. Obviously, I mentioned that we are positive on the business cycle outlook. For the US economy, we think that the growth at this point is probably going to come in at around 6%, maybe a little bit before. For Canada, we think about 5% or so is possible for Canadian GDP.
Now, those are a step lower from what they were, but they're still above trend. For 2022, if you think about 2022, next year, the US and Canadian economies are expected to go a little bit closer, and more aligned, at around 4% or so. Those are still really strong rates of growth out of the key North American economies and well above trend, which is why we still stay positive.
Similarly, on the European side of things, we were thinking 5%. That's probably a little bit lower now because, again, because of what's happened with the COVID and the restrictions that were put back into place. But around 4% GDP out of Europe is possible. And even if we get slightly below that, 3.5% to 4%, or maybe 4.5%, and even that is very strong for the European economy.
One thing to note for Europe, oftentimes, we just look at the headline numbers. Well, Europe is at four, and US is at six. Once again, US has outperformed.
But that's really not the lens to look at or assess the respective growth. In part, because trend growth in Europe is actually a lot lower than it is for the US. So if you think about what's trend growth for the US economy going forward, it's probably somewhere around 2%, maybe 2.5% versus Europe, the trend growth is probably somewhere around 1%, maybe 1.5%.
And the reason why US trend growth is stronger than European trend growth, it has a lot to do with demographics. The demographic profile it's a lot more elderly, so therefore, the growth projections are a little bit slower, a little bit less. That's why US trend growth is a little bit higher.
So if the European economy is growing at 4%, while it's trend growth is 1.5%, that's still quite a reasonable rate of out-performance. And that's how we have to kind of think about and assess the European economy. So even 4% or 4.5% growth is very strong for the European economy and a lot more growth to be had there.
China, I'll spend a couple of minutes on China because there's obviously a lot of news flows that has hit the markets, especially as it relates to Evergrande. And I think that one is probably, John, maybe if you wanted me to comment on Evergrande because that was clearly a lot of the news flow this week, and actually contributed to a lot of the downside volatile. Equity markets were down almost 2% over Monday and Tuesday, and it's in large part because of the uncertainty related to Evergrande.
So really quickly, you guys probably have heard about Evergrande. So Evergrande is China's second largest property developer. So a big company. It has about $300 billion in liabilities. And they're having challenges meeting their debt obligations. And the reason for that is because we know that the Chinese government, from a policy perspective, wants to crack down on hugely indebted companies.
They want to be more tighter with their regulatory environment. They've got the goal, the common prosperity goals. And as a result of that, the tighter restrictions that have come into place are having an impact on some companies that are a lot more levered, have a lot more leverage. And Evergrande fits that bill, unfortunately.
So they missed a couple of payments early in the week, and the markets really got concerned about contagion risks, systemic risks. Could this be China's Lehman moment? You might have even heard that being referenced out there. Our view is it really isn't the case. What we've seen, what we do know is the property sector is very important for China. Full stop. It's very important for China.
So the situation with Evergrande is probably a little bit more emblematic of what's going on with the softness in the property markets, as well. And therefore, Chinese growth will probably come down a bit as a result of the impact that the knock on effects that it could have on the property sector, and therefore, the Chinese economy.
But by no means do we think that this is causing a more systemic risk to the Chinese economy, and therefore, the global growth. And there are things that we're monitoring for that, and one thing that we keep a close eye on, it might be a little bit more technical for you guys all, but just to kind of think about bonds and how the spreads of a lot of these higher risk companies are trading relative to these high risk companies and globally, as well as in Chinese investment grade companies.
And what we see is right now the tension really has been limited to the more high risk companies, such as Evergrande. It really hasn't translated into the higher quality companies in China. And therefore, has hardly made an impact on credit companies globally. The credit of-- sorry. The credit of corporations globally.
So therefore, overall, we don't think that these contagion risks are as significant. It's something that we're keeping a close eye on, but it's not something that we think that it's this Lehman moment that's being portrayed it to be. But it could have an impact where the Chinese economy might slow a bit from where things are at the moment.
Now, we do think that the policy could clearly respond if need be, if push comes to shove. The Chinese policymakers could do a lot more. We've seen the PBOC start to do a little bit more to add liquidity, and they could do potentially a lot more if need be. Because there's a couple of things to keep an eye on.
Next year, in 2022, you have the Winter Olympics in China. So the last thing the Chinese government would want is for the Chinese economy to be wobbly when the world will have their eyes on China. So we think that there's probably a floor before policy becomes more aggressive in supporting economic growth. So you've got that coming.
And then the other thing is the Communist Party will have their national Congress, where they will be anointing the leader for the next five years. And we know that President Xi is going after the title of Chairman. So the last thing that he would want is, again, a wobbling Chinese economy heading into that very important event.
So for those reasons, we do think that growth might soften a bit in China, but it's not enough that it will derail the global growth story. But that all said, we've got to keep a close eye on it. But that's our perspective right now. But of course, again, want to keep an eye on.
Sorry, I talked a bit more about China, but I think it's important because it's front and center in the news flow these days. But overall, what we would say is that we're still positive on the outlook for the business cycle. We think the business cycle is positive. We don't think of recession is on the horizon for the next 12 to 18 months.
So that means we continue to prefer equities. Equities will outperform bonds. Will equities keep doing 20% per annum? Probably not. So temper your expectations, but we do think that equities will outperform bonds, and can still produce positive rates of returns.
Real assets should do well. There's a lot of reasons that real assets, particularly infrastructure, should do well. If anything, it probably has a bit more catching up to do. If infrastructure spending does get pushed through, that all of that is positive sentiment for the infrastructure space going forward. So overall, we do remain positive, at least over the next 12 to 18 months.
Well, this is the Canadian slide here, and I think, John, you did an excellent job. You covered on both of these points. I don't really need to spend a lot of time. But here's just another visual that complements what you were talking about, how housing has been such a huge contributor to the Canadian economy. This slide is amazing. This is looking at investment in residential construction.
It generally trends up, ebbs and flows a little bit, but trends up. Obviously, took a big hit during COVID. What's happened? It's a 2x increase. We've never seen this historically. But that speaks to the demand for housing that we've seen, not only in Canada, but we've seen this in US. We've seen it globally.
Actually, there's a blog that I'll be putting on the Canadian housing market. So that's something that'll likely come down maybe next week, as early as next week. So get shared with you all that talks a little bit, gets a little bit, dives a little bit deeper into the Canadian housing market. And we do a-- I do a comparison of Canada versus the US, which I thought was interesting.
In any case though, housing has clearly supported the Canadian economy during this downturn, and from an equity market perspective, it's been really energy, first and foremost, that has really contributed to the strength that we've seen in the Canadian equity markets.
Inflation. So inflation, John, if you want me to spend a couple of times on this. I know you talked about inflation, but really quickly, there's a couple of ways to think about inflation right now. And inflation, to us, I think it's an important one that we're keeping a very, very close eye on. It's probably one of the most important watch points, in part, because it impacts central bank policy, the Federal Reserve. And we know the Fed has now shifted towards tightening, starting with tapering.
And John, you talked about low interest rates are positive for the equity market. So it is really important that, what would the Federal Reserve's thinking be, and when would they get a bit more aggressive on interest rates, and hiking interest rates.
And what we're trying to highlight here is what's going on in inflation. The blue line is what we call a flexible CPI. So these are things like used car prices, airfares, hotels, that sort of thing. And the orange line is what we call sticky. This comes from the Atlanta Fed. So it's not something that we've created. It comes straight from the Atlanta Fed. These are your housing inflation, your rent inflation, those kinds of things, that are a bit more sticky, utilities, things like that.
So we know inflation has shot up. But a lot of that inflation has been due to these sticky, and which is why when you hear the Federal Reserve, oftentimes, they'll use a lot of this inflation is transitory, and to a certain degree, that is the case. So what you'll notice on this slide here is you're looking at inflation by category, and one year ending May 2020, the orange is ending May 2021, and two years, over two years.
So if you just look at the one year ending May 2020, which is when we've really seen these really strong inflation prints. A lot of that has come through-- Well, you look at car and truck rental prices, up 100%. Used car and trucks, 100%. Airfare up 24%. Energy prices up 28%, which has contributed to that 5% CPI print in the US.
And what we've seen over the last couple of months is a lot of these transitory categories have started to come down. So inflation has come down of these more higher or more flexible prices.
Looking ahead, we do think that inflation-- So this is our central view, and obviously, it's one that would continue to evolve. But from the US inflation rate is around 5% right now. We do think that over the course of the next 12 months, in the large part because of base effects, we're going to compare inflation 12 months from now, where inflation will be with really high inflation today. So the rate of change, if you think about that, just mathematically we think that the rate of inflation will come down.
And on top of that, some of these transitory categories are already starting to tick lower. So we do think that inflation from 5% will probably come down towards around 2% or so, maybe a little bit higher. So what that means, and that's important because what that means is that the Federal Reserve doesn't have to be aggressive with rate increases. And that's obviously very important for the financial markets.
Also, so our baseline is that the Federal Reserve will probably start raising rates at some point in 2023, but if inflation is a bit more elevated than we expect right now, then a 2022 rate hike can't be ruled out. So that's, in a sense, our current thinking on inflation.
But if we think about longer term, that's over the next 12 months. But I think, John, a lot of your comments on inflation really were more structural in nature and not short term. And you start thinking about inflation three, five years-- That's-- You kind of put in the big question mark because of all the debt that's out there, John. I think you made some really important points on that.
So when we think about asset allocation as a result of that, well, and you look at how different asset classes outperform in high inflation environments, that's essentially what we're trying to highlight here with this slide. So we're looking at how asset classes have done in above average inflation periods from 1980 all the way through June of this year. Looking at them over one year, three year, and five year period.
So over the one year, what you'll notice is real assets do exceptional. Commodities, real estate, and we don't have infrastructure here, but infrastructure also does quite well during high inflationary periods.
Now, over three and five years things change a little. And I should also add, equities also do just fine. So overall equity exposure does outperform overall inflation, which is important. But over three and five year what will you start to notice is that, and we'll just use the three year because they both are the same directionally.
What you'll notice is the rate of change on commodity starts to ease, but commodities still do well, close to 10%. But you do see performance out of other asset classes do a little bit better. So real estate and, again, we don't have infrastructure, but if it was here, it'd be somewhere around here. So both real estate and infrastructure tends to outperform inflation and do well in a higher inflation environment. So real assets, we think, will continue to do well.
The other thing that's worth noting, is you look at US non-US, what do you notice? Well, over shorter periods, yeah, US could do a little bit better, but over longer time periods, three and five year, you start to see non-US do better than the US in an inflationary environment. And the reason for that is, if you think back to what I was talking about in the slide that we highlighted previously on the sector exposures, what you'll notice is that the international markets have a higher allocation to cyclical sectors, energy, industrial, material.
So if inflation is running hot, those sectors tend to do better than your non cyclical sectors. US is more non cyclical. International is more cyclical. So you also see international doing a little bit better. So overall international real assets tend to benefit in a higher inflationary environment. And I think that's really the most important takeaway.
And my last slide here, John, and you kind of talked about cash, especially right now, this is real return on cash is negative, to your point. I think this is a good way, or maybe is an extension of the point that you were making earlier. What we're looking at here is a diversified portfolio, rolling one year returns.
For a conservative portfolio, that's about 20% in equities, global equities, and 80% in bonds. Or a more balanced 60% in global equities versus 40% in bonds. And the dotted gray line is cash. Cash only briefly, if ever, does well. But more often than not, whether it's a conservative or a balance, or more balance of growth year allocation, tends to outperform.
And you look at performance versus cash, 80% to 90% of the time you're diversified portfolios are going to outperform cash. And that out-performance is quite meaningful, almost 7% to 8.5% out-performance on average over a one year period for a conservative or a balanced portfolio.
And I think this point is doubly important today when interest rates are so low, and you think about your real rate of return going forward. So I think diversification, having a trusted advisor, that's as in tune with the markets like John is, is a phenomenal value add. And because not everyone has the insight that John brings to you all.
So I think we commend him for that. And I think this is really the most important thing. Trust your advisor, and be diversified because at the end of the day, no one can predict the future with a high degree of certainty, which is why you need to have a view, but then again, be diversified.
So with that, I'll pause there, John, and open to take questions or anything else.
I will-- Maybe jump off the sharing, and we'll go to you and I going in a discussion. Yeah. the conclusion somewhat is, if you've got cash sitting around that you don't need, to send it in because really it's earning negative 4% to negative 3.5%. And that's not a short term trend. It'll be a while. You're going to have negative returns for a while.
And so get that money working for you because cash and all those numbers of years, and even with higher interest rates, it showed that last graph, Shay, that cash never made better returns in a lot of those cases.
Cash is OK if you're ever going to buy a car in a year, you get a down payment for your house. That has a purpose. You're going on a cruise somewhere. Hopefully, not where you get caught in COVID. But those type of things, I think you keep it in cash or your daily spending. But when I have GICs rolling at 0.71 of 1% for two year GIC. Get out of those to-- Unless you need it to gain travel, get it working into the markets. And again yields are very, very important.
I had an interesting thing, Shay. I had electrical plug outside my house not working when I tried to plug in my Christmas lights. It was burnt out, and garage one was burnt out. And I called an electrician, and this is in August. Electrician came, and within 40 minutes had solved my problem. All the plugs worked. Everything worked. My garage worked.
I got to use my refrigerator in the garage again. And he gave me a bill, and my wife and I were looking at it, and the bill wasn't for 45 minutes. The bill was for 25 years experience the electrician had. So I paid $471.
But I think that's lost on people. They look at the 45 minutes, and they complain about the fee the electrician had, but it was the 25 years, plus the electrician knew what he was talking about, and whereas I tried to fix my own plugs, and again, two months of Christmas lights not working.
So to some extent, sometimes when you look at some of the managers like we use with Shay and Nathan, that, yeah, we pay a cost for them. But the expertise picked foreign securities is very, very well worth it, especially infrastructure companies. Because most people can pick Royal Bank shares or TELUS shares.
But when it comes to global, that's where a lot of the value added is is getting the right emerging market stock, getting the right Chinese stock. And I'm a big advocate, as you know, about emerging markets. I love the Chinese stock market. I love the Indian stock market as well as the US stock market. But I really think that the future will be to do that. But trying to pick those stocks would be foolhardy, I think.
Say with the infrastructure. Which road builder do you want to buy in the US? Which bridge repair company do you want to buy? These are things that you need an infrastructure manager to pick. So that's kind of the idea. But definitely infrastructure looks very, very positive, I think, doesn't it, Shay?
Yeah. No. I echo all your comments. I think if you think about infrastructure, obviously, we talked a lot about the spending that is necessary in the US and globally, for that matter, which should support the asset class. And from just a valuation perspective, one thing that we've talked about the returns, and real estate has done exceptionally well this past year. Infrastructure hasn't actually kept pace. Probably, part of it could be due to sentiment and what the bill is getting held up, and what have you.
But that also means that there's still a lot more catch up to be had and a lot of these infrastructure names, as well. The valuations probably, relative to real estate, is probably looking a little bit better as well these days. So there's multiple reasons, and I think it's a story that's not going away anytime soon.
I think Darren, you've had Darren in the past, and he might have even referenced this statistic, or not a statistic but this point, about how the civil engineer society of America they grade the American infrastructure. And their latest great is I think something around like a D plus or something like that.
And these are American engineers, so they take pride in the infrastructure of the US, and they're giving it a grade of a D, or a D plus, or whatever. That tells you something. That tells us that 1 and 1/2 trillion, or whatever that amount will be, it's very much needed. So--
Even--
I think--
Even the repair of the damage done by all those hurricanes and fires this year, even that's billions of dollars, I would assume. So just to get back to the status quo where it was before the tornadoes and fires would be expensive, let alone taking it from a D to an A.
But if the US can get to a B-plus, that would be a huge boon to the US stock market and the US GDP. So still excited about the possibilities of a billion or trillion, I should say, going into infrastructure.
The other thing, Nathan, and I forgot to mention is Shay's media experience. I think you've been on CNBC, and I think you've been on BNN news network as well. So much appreciated on Shay's experience too, Shay. That was really, really helpful.
So looking at winding up here. Looking into the future, it looks pretty positive overall. Yet at same time we do think that we're being cautious about the massive changes. And you think about what's happened in the last 18 months, go back 18 months where you could travel, no masks. There was no travel restrictions to today. And that just shows you how rapidly we need to be nimble on today's world, I think.
So the next year and a half we're going to continue to do Webex invitations and continuing, hopefully, we continue to get back a good audience size. But I really think that these education programs I try to work with speakers like Shay, hope that it's been valuable for you this morning to give you an insight into the future because there's so much news, so much information. Some of it isn't necessarily positive information, but I hope that today Shay and I and Nathan, as well, have put together an idea of giving you a pretty positive view of what we think moving forward will be.
Oh, and Nathan, you want to show your little baby girl?
Yeah, I've got a helper now. And she was taking notes while you and Shay were chatting.
OK. Thank you, Nathan, for helping co-host. What's your girl's name again?
Her name is [INAUDIBLE].
She's two. Oh, she's so cute. She likes the little pillow we gave you.
Oh, Yes. It's on the couch right now because that's where we're headed right after this.
OK. Well, thank you all. And again, thanks to all of you. I'm one of the people blessed with some of the best clients and people to work with. So again, have a great Saturday. I hope that it was worth getting up early for all of you to come in this morning to hear us. And we will post this, as well, in about a month. So those that want to follow up on it.
And thanks again, Shay, for taking Saturday off, and I hope you had an OK time today. And thanks again, Nathan, and thanks to all of you for attending today. OK.
Thank you. Bye bye.
Thanks so much, Shay.
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