Transcript

As a longtime investigative journalist, I've become obsessed with details, accuracy, and busting through the misinformation that's out there now. So when my own financial advisor and friend started putting out his newsletter and then talked about wanting to do a short podcast, I took notice. Mike is one of those guys who I know is a critical thinker with a lot of experience, who puts a lot of stock into getting things right. Stock, get it?

I get it.

[LAUGHTER]

It's a little groan-worthy, right? Yeah.

We'll take it.

OK, OK, fine. We decided we wanted to meet regularly to talk about financial issues, especially in this unpredictable time. And Mike promises he's going to do his best to untangle it all and take us into some really significant topics for an easy to listen to 10 minutes. I'm Stephanie Matteis. And this is Michael Yip's Wealth Partners Market Cast.

[MUSIC PLAYING]

Hi.

Hi.

Good morning.

Good morning.

How are you feeling about all this?

Well, I'm feeling nervous because you are a professional investigative journalist.

All the tough questions coming your way actually. I wanted to start with how you decided on today's topic and what it is, how you're going to announce it.

Well, I guess, beginning of the year, most of our clients and prospective clients want to know what we're thinking about with the markets. And most people think about the stock markets. But we think about all the markets, stocks, bonds, currencies, commodities, everything that we got to put together to, as I call it, bake the cake for our clients.

So should we get into it?

Sure.

Do you have any predictions? I think that's what everyone's going to want to know.

My biggest prediction this year, broadly, is that the investment climate is going to improve. And I think despite all the things going on geopolitically, we are as confident as we've been in a couple of years, putting more money into the markets, particularly the stock and bond markets, and holding a much smaller cash position than we have, especially in 2022, as an example.

So I think another key market variable that people watch is the Canadian US dollar because it impacts us every day, and we're traveling. And business owners, of course, need to know where that stands and where it's going to go. But I think generally, the Canadian dollar is probably going to be within a band. Today, it's about 135, and it will probably trade within a band of 130 to 140. And if I had to guess, I would say that the Canadian dollar is going to be caught between rising risk appetite, which tends to strengthen the Canadian dollar.

So as investors get more confident about investing in stocks and other risk assets, the Canadian dollar tends to get stronger against the US dollar. And weighing against that is going to be the diverging policy between the Federal Reserve and the Canadian Central Bank, where we believe that the Bank of Canada is going to have to cut interest rates first, relative to the US Federal Reserve. And that will weaken the currency so.

The other thing that's on my mind and I think that's on everybody's mind is geopolitical instability. I was looking back at newsletters that I wrote in 2017. And I talked about how the trend is actually deglobalization. And we've gone from that to now significant geopolitical instability, where now we have two wars that are being fought right now, obviously, the one with Israel and Hamas and the Ukraine-Russia war. And unfortunately, I have a prediction that we are going to continue to have more geopolitical conflict.

What does that mean for how we feel relative to how markets do? If you look back statistically, markets actually do quite-- they do fine after geopolitical events that are destabilizing. So they tend to quickly recover after wars. So wars don't play as big of a part on asset returns as people would think. Certainly feelings, they're feelings, but not necessarily the outcomes of your portfolio.

If you take all of that, people are really going to want to know where their investments are positioned. How do you answer that?

Yeah. You have to remember that everybody that's listening is going to have, have had separate conversations with our team. And I think you can appreciate that too. So in terms of what those individual conversations mean, it means that everybody in our practice has a range of, generally, stocks, and bonds, and alternative investments, and cash that we have agreed to the families that we work with to hold.

So for example, I'm just going to bring up a random example. We have a client that we've agreed to have a range of 30% to 70% in equities. And so this year, relative to previous years, we will probably be at the top of that range, where again, we have the ability to invest within that range, in other words, put anywhere between 30% of the assets to 70% of the assets into stocks. Given our comfort level, we're at the higher end of that range right now. So that's a relative explanation of how we feel about the markets.

So has there been anything that's changed?

Yeah. I think the biggest change that investors should be aware of is the change between 2001 and 2022 and how that echoes into where we stand in 2024. So this goes back to a world that had interest rates suppressed by the central banks, where central banks were engaging in policies called quantitative easing, where they're buying bonds and forcing rates to artificially low levels, to stimulate the economy. That low interest rate environment created an unhealthy and excessive ability to take risk for people.

And if you remember, NFTs, and cryptocurrency, and all these types of things in real estate, and cottage country, and pretty much every asset went through the roof. And then when inflation reared its ugly head at the end of 2021, beginning of 2022, quite dramatically, where you had a headline inflation 8% or 9% in North America. And the central banks raised rates dramatically. What that did is it caused a massive sell-off in all risk markets, bonds, and stocks, and real estate in particular.

So where we stand in 2024 is that this has actually presented an opportunity for clients to invest in the bond market for the first time, where those yields in the bond market are actually reasonable. So the traditional balanced portfolio that everyone said was dead is actually coming back. So I think that's the biggest change. And we haven't been in that position for 13 years. So it is a big change. And it's actually good because it's a much more straightforward way to put a portfolio together today.

Have you seen anything like all of these elements coming together at the same time before this?

No. No. No, I mean.

And we leave it at that.

No. No, I think-- look, I'm 48. I started my career in the late '90s under, when the internet started taking off. And that was something to witness. Gold was $300 an ounce. Nobody would think about commodities. Then you had the rise of China. And you had the rise of risk-taking and globalization. And I think there was a lot of wealth created, easy wealth, to be honest. I think you had inflation that was very contained because we were able to export that inflation to China and other goods-producing countries.

And that made us actually-- it raised our standard of living generally. But it was a little bit false because there was a price to pay. And I think we're paying that price now. And the price is increased geopolitical instability. We let countries like China rise. And they may be working against our interests, as an example.

So we're seeing a world that's now becoming more protectionist, becoming more combative. We're also seeing inflation, which we haven't had to contend with for 40 years, not in my lifetime. So I've spent a lot of time studying inflation in the 1970s and what that looks like. So we have to deal with a lot of things that are a bit difficult at this time.

You have mentioned on-shoring to me in the past. That's a bit of a movement in all of this, right?

Yeah. So if you really look at decisions, tough decisions that countries have to make for their own geopolitical stability or just protecting the country's infrastructure, do you want to be buying telecommunications equipment from China? That was a contentious issue. Do you want critical minerals being only supplied by countries that may not have our best interests in mind?

So I think there is a movement to think about supply chains and how you can secure them, and onshore them, and bring them into jurisdictions like Mexico, as an example, where it might be more stable. So that is happening today. And that does have some impact.

So how would you bring this all home for us now? And where are we going next?

Yeah, I think that on our side, we are going to, again, be a little bit more confident about the directions of the market this year. We are positioned to take a little bit more risk. And actually that's, an interesting topic because what we consider risky, other people may not. And I think that that's a topic in itself to talk about.

So are you promising that for next time?

Yeah, I think we should talk about that. I think how people talk about risk and perceive risk and how we perceive risk is certainly worthy of at least 10 more minutes.

Excellent. OK. So we'll do that next.

OK, thank you. Thank you.

No, thank you.

No, thank you.

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