THE AFFORDABILITY GAP

Housing affordability wasn’t just an issue in the recent Toronto election, it is absolutely a matter of national concern. Here are two of the key drivers: interest rates and immigration.

As we all know, interest rates are high after a multi-year campaign by the Bank of Canada to dampen spending and thereby inflation. One critical impact of higher interest rates is that they make mortgage payments, and thus housing, more expensive. Related, many of the multitude of new Canadians, attracted here to fill our labour gap, arrive with money to spend on housing (our national population has grown by a remarkable 1.2 million people in the past 12 months). This adds to demand, which drives prices, and hence inflation, up even further.

One result has been that many of the Canadians already here, whether they are new or not, have been priced out of the market. Here are some solutions: instead of relying so heavily on immigration to fill our labour gap, make high-paying work more enticing for Canadians who are already here – for example, through work arrangements that are more flexible and by expanding daycare. As well, the medical and engineering credentials of immigrants already here could be made more transferable, so they can resume being the doctors and engineers, right here in Canada, that they were in their home countries. Consider, for example, that according to the Ontario Medical Association, 1 million Ontarians do not have a family doctor.

I DON’T THINK THE BOC SHOULD HAVE RAISED RATES

The Bank of Canada raised interest rates in July. I don’t think they should have.

The BOC’s stated inflation target is 2%. Here’s the thing: if you remove from inflation figures the increase in mortgage carrying costs, which were driven by the increase in interest rates, inflation is, in fact, 2%. Their target has been achieved.

SUMMER QUIET

Continuing on the theme established earlier this summer, our trading activity has been quiet, because volatility – which presents opportunities to buy underpriced assets – is the lowest it has been in years. In the June edition of Marche Monthly, I wrote:

“Why has there been low volatility in the market lately? Because things are going as expected, by which I mean we are still on track for a mild recession – as we have been saying for some time, and which the market has already priced in.”

I will make a slight update to that statement, by saying the likelihood of a recession has been slightly reduced. Otherwise, I will reiterate that there will be no change in our investing strategy, which is expanded upon below.

SEVEN STOCKS = 73% OF S&P 500 GAINS

Although volatility is low, the market is going up overall.  But its performance is misleading, because just seven stocks (!) have driven 73% of this year’s gains in the S&P 500, the index we consider to be the authoritative measure of how the markets are doing overall. If we were to remove those seven from the data, the market would essentially be at the same spot it was two years ago.

Those seven stocks are climbing rapidly partly because of their exposure to artificial intelligence (AI). They are: Alphabet, Amazon, Microsoft, Nvidia, Tesla, Meta and Apple. Two of them, Alphabet and Amazon, are core holdings of ours.

We hold them because they are the two that most align with our investment philosophy, which is stated in full at this link, and which has the following highlights:

We look for companies that, among other things:

• Are in regulated industries
• Have strong balance sheets
• Are available for a price we believe is less than intrinsic value, which gives us a margin of safety – versus buying assets that may be accurately priced or overpriced.

Consider Nvidia (which we do not own but is a great business), which is trading at 236 times earnings. Compare that with TD Bank (which we own), and which trades at 10 times earnings. Nvidia costs 23 times more – and if you bought it, it would take you 236 years to make your money back through earnings. TD Bank would pay you back in 10 – and, it would also pay you a dividend of 4.5% along the way.

(For more on our views re what artificial intelligence means to us as wealth managers, see the May edition of Marche Monthly.)

ON TRACK AS USUAL

And so we are much more comfortable with a stock like TD Bank. Our investment philosophy has us on track to deliver another positive year of returns for our clients, well in excess of the returns projected in their financial plans. Our portfolios are trading at a significant discount to the market (providing us with a margin of safety), and have a higher dividend yield. Overall, we feel we are in a much safer position than the market as a whole.

Want to discuss our approach, and why it has been delivering results that outperform the market? We will always welcome hearing from you, or from…

…SOMEONE YOU CARE ABOUT

Is there someone you care about who would appreciate the stringency of our strategy and the way it consistently delivers outperformance with less risk? If you refer them to us, rest assured: we think of it as the greatest compliment we could possibly receive, so we treat them with the utmost care.

Our starting point when receiving a referral from you is to listen very carefully to them and then conduct a complimentary and confidential analysis of their situation. If we believe we are the best positioned to partner with them and their family to manage all of their financial affairs, then we will take them on as a client and do just that. If our analysis shows that they will be best served by another advisor, we will carefully refer them to an advisor that we think will be an ideal fit. Here is the bottom line for anyone you refer to us: they will be very well taken care of. You can get the process started by clicking here.

META “UNFRIENDS” CANADIAN MEDIA

Many Canadians are scratching their heads to understand the battle underway between our federal government, Google and Meta (Meta being the parent company of brands including Facebook and Instagram).

This BBC article provides a good summary. In essence, the Canadian government has enacted a law, the Online News Act, which comes into effect in December of this year and will require social media companies including Google and Meta to pay Canadian news organizations for linking to their content. Currently, the social media giants link to that content for free, something that Canadian media businesses say is unfair.

In response, Google has entered into negotiations with the government, while Meta has declined to do so – and is testing the blocking of Facebook and Instagram users’ access to some Canadian news, something it says it will block completely by end of year. Meta’s position is that Canadian news organizations are already getting value through the “free marketing” these links amount to.

A spokesperson for Meta puts it this way: “The Online News Act is based on the incorrect premise that social media companies benefit unfairly from news content shared on our platforms, but the reverse is true. News outlets voluntarily share content on social media to expand their audiences and help their bottom line. Unfortunately, the only way we can reasonably comply with this legislation is to end news availability for people in Canada in the coming weeks."

It is also true that the federal government and Canadian news organizations have been paying Google and Meta to advertise on their platforms. So in retaliation against Meta, the federal government has pulled all advertising on Facebook and Instagram – which may not have much of an impact on Meta, considering it amounts to just $10-million of Meta’s estimated annual revenues of $116-billion.

Where will this all end up? It is very difficult to say – and regardless, it will not affect our portfolios.

In its fight, the federal government is receiving support from a US Democratic Senator and former presidential candidate, Amy Klobuchar, who is leading the push for a similar bill in the United States.

QUALITY TIME

It is the height of summer, and I hope you are able to spend some quality time with your loved ones, doing the things you love to do.

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We don’t speak jargon. We’re all about uncomplicating your life, so we speak plain English. If there is someone you care about – someone who would appreciate this simple and straightforward approach – please feel free to share this message with them or put us in touch.

Want to discuss any aspect of this month’s blog, or any other issue on your mind? Have a story idea? I am always happy to receive your call or email.

Tyler Marche, MBA, CFP, FCSI

Your life, uncomplicated

tyler.marche@rbc.com

1-416-974-4810

www.tylermarche.com