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We welcome you to “Bare With Us,” the podcast where we Bare Out the latest economic and financial questions that matter to you. Mike Robinson, a Chartered Investment Manager (CIM) from Calgary, Scott Richardson, a Certified Financial Planner (CFP) from Edmonton, and Finn McKay, a Chartered Financial Analyst (CFA) from Winnipeg, engage in an unstructured discussion, bringing you a wealth of knowledge and a diverse experience from the world of finance.
Each episode features an unstructured, unscripted and entertaining discussion where we pursue ideas and concepts as they arise naturally through our conversation. We tackle a broad range of timely topics, from economic or market trends and financial planning strategies.
Whether you’re one of our valued clients, or someone new to our insights, our goal is to provide you with valuable information, from diverse perspectives, that can help you navigate the complex world of finance.
We are experts in our field, but we are new to podcasting, so we invite you to Bare With Us, while we learn, grow and share! Please feel free to reach out to us with any feedback, to suggest any topics, or to learn how to work with us. You don’t have to, but you can!
Welcome, everybody. Thank you for joining us on the Bear With Us podcast. This is our first time doing it virtual, so bear with us while we figure out the technology behind virtual recording. My name is Scott Richardson, and I am joined as always by Mike Robinson, chartered investment manager and financial adviser like myself, from Calgary. Hello.
Scott:He's like my he's like my brother from another mother, only, he got the brains and I got the brawn Or maybe maybe at least the hair. I have lots of I've known I've known Mike I've known Mike for well over a decade. Met him at at conferences. He was always the guy who who asked the most intelligent questions, could do the best analysis, and and usually answered the questions the best. And so I always gravitated to him.
Scott:And when I found out that he had, an amazing love for food, or, I guess, amazing love for cooking food, I'm not gonna accuse you of loving food, that, it it it formed a great So so, welcome, Mike. And, also with me today is the, Finn McKay, the prince of portfolio managers, and also a fabulous foodie. I met Finn, well over a decade ago when he was a research analyst with Value Partners. And, I remember thinking to myself when I heard him speak, wow. This guy really knows his stuff for being a young, skinny, little kid.
Scott:And, when I sat down and finally got to know him, it really reaffirmed how knowledgeable he was. And and when we were talking and he said, I used to work in a kitchen and I love cooking, I was like, oh, you had me. And so, since then, that's formed an amazing friendship, around, a love of tacos and, knowledge for passion and business and learning. So welcome to the two of
Finn:you. Thanks, Scott.
Mike:It just reaffirms that he's still a skinny little kid.
Finn:Right. Despite all the food I eat.
Scott:Thanks Awesome.
Mike:Well for the introduction, Scott. But we we should introduce you as well. You're sort of our host, but there's an introduction, which I not a formal introduction, but I appreciate what you said about about me and meeting at at investment conference meetings. And I agree we did start gravitating. And one of the reasons that I I also think we gravitated, at least from my perspective, is that while we do the same job, I find that we come from a slightly different orientation, which is very complementary in terms of skill set.
Mike:Like, you're really good at grounding me to bring things back to the financial planning aspects of things. I tend to come from an orientation of the investment planning, making sure investment plans are meeting financial objectives and asset allocation, and you're really good at making sure we are, but let's make sure we're looking at the overall financial plan. And I find that good complimentary skill and appreciate that. Thank you. Okay, so what are
Scott:we doing here today? Well,
Mike:we are going to tackle a topic that I initially was a little bit hesitant to tackle, but we need to. We would be remiss if we did not discuss, what I'm calling the shenanigans that are going on, you know, politically, geopolitically, particularly out of The United States and how it's impacting the world and the particularly the capital markets. I say reluctantly tackling this because my initial reaction was, I I don't wanna talk about this because whenever I talk about it in social settings or even in professional settings too, but it's always very casual and it's always like, everything gets dismissed by, oh, well, that guy's an idiot or that guy's just crazy. And I'm kind of tired of that for multiple reasons. And I'm not saying he is or isn't crazy or stupid, but it's way too dismissive, and it doesn't allow you to think through some of the bigger issues.
Mike:Or more importantly, what do we actually do about this, whether he's crazy or not. And, of course, we all know who I'm talking about when I say he. Right? We're supposed to use each other's names, but I think he, we all know. You know, I wanna get past the issue of, well, he's just crazy or he's just stupid because there are reasons that the Trump administration is doing what they're doing.
Mike:Whether they're right or not or whether we agree with them or not is obviously a different a different discussion. There are reasons that they're doing it. We should understand as best we can what they might be, how it's impacting us, and what to do about it. And I think we would be failing as leaders if we didn't talk about this.
Finn:Yeah. And I think I think that it's important in these situations, like, you know, not to look you don't wanna look at it. You wanna look through it. And, if you just look at what's exactly happening right now and sort of, like, the news releases and all the different, you know, things that are happening, coming out of the White House, you know, you can kinda throw up your hands and just say, well, I don't know. And I think that it's important to think about, you know, what are the goals, what could happen, how could this change the investment environment?
Finn:How could this change the business environment? And all of these other aspects that, of course, affect people's financial plans.
Mike:Yeah. And, Scott, you made a good point off off air that maybe you could elaborate on. Like I tend to look at things from a very analytical standpoint, but a lot of the reaction that we're getting out there is because of some of the inflammatory rhetoric that is out there.
Scott:Yeah. I think I think it's really important before we sit down and analyze and try and justify or or figure out what's going on and or or take the emotion out of it like, you know, typically we try and do as financial advisers to take the emotion out of investing. I think it's important that we also acknowledge the emotion that this has all been that that this is causing. I think it's it's very, you know, from my experience with talking with clients and just everything that I've been reading, it's very highly emotional for people. And I think from from what I've been able to kinda deduce is I think it's all these things that people kinda always knew to be true.
Scott:You know, kind of the guiding light, the the the guiding force or the North Star, you always knew that your leaders would, you know, conduct themselves a certain way. They would talk a certain way. They would,
Finn:you
Scott:know, do speeches a certain way. They wouldn't discriminate. They would conduct international relations with decorum. There there's all these things that always happened, and now none of that is happening. And it it charges people emotionally.
Scott:It's rude. It's it's not how things always were. And I think that sets people off. And, you know, I was I was speaking with a client yesterday and the the analogy that I gave him is I kinda likened it to to buying a house. So, you know, Finn, if you owned a house and said you were going to sell it and Mike, you wanted to buy a house, the two of you could could come to the table.
Scott:Finn, you would have listed the house. Mike, you would then make an offer. Then there would be a counter offer. Then you would agree, and then there would be some conditions, and you would have an agreement. And and that's traditionally how everything's done.
Scott:But I said, right now, what it feels like is, Mike, you're buying Finn's house, but Finn didn't even know he was selling. And it's it's it's almost like a, you know, expropriation. Like there's an emotionally charged transaction now because you didn't know that you were entering into the transaction or they created an environment around you that was so horrible that it forced you to have to sell. And and that's the type of transaction that I feel that's going on right now. And I think all of us are trying to find some way to justify what's going on and to understand it.
Scott:You know, I I think, you know, for leaders, we always heard things like agreements and negotiations and everything we're hearing right now is the deal. And Right. And that's very different. And so I think that's emotionally charging and I think we just have to acknowledge that, yeah, it's emotionally charging, I think, for everyone. But we have to try and cut through that emotion, like you said, Fin.
Scott:And and just get to some of the underlying potential causes or whatever. I I don't know if any of us really know. Unfortunately, my direct line to the White House was disconnected. So You were part
Finn:of the reporters are the line. Scott, I'm sorry. I'm sorry. But you don't you don't subscribe to our our views. So
Scott:So, like it's all speculation now. So that's just the piece that I wanted to make sure we said.
Mike:Yeah. And I agree. And so as a lead in, I'll just add an additional comment, and then that can lead probably right into some more technical discussion. The other part that's disrupting is, I'm 49 years old. The original Canada US free trade agreement was, if you can believe it, have hard time believing it was over forty years ago that the original free trade agreement, led to NAFTA, which led to, you know, on and on.
Mike:Like, our entire adult life or my entire adult life, we have had a free trade agreement. We have felt that it's for very good reasons. And and I think it's clear in the business world anyways, if you look at it, that the business has made very effective use of that free trade agreement, and it's being disrupted. And it's something that we've known basically our whole life is being pushed back in our face and saying this isn't working. And so I'm also finding out there that you know, I'm not convinced that everyone fully understand what tariffs are.
Mike:And one of the reasons is because we've never really had to talk much about it. Occasionally, it's come up about softwood lumber or this or it comes up in discussions about supply management out of dairy in Quebec. But generally, we don't talk a lot about tariffs in Canada because we have this we've we've had some form of NAFTA for for forty years. So I was thinking it might be helpful maybe it's briefly because we, you know, we don't wanna have an economic class here or anything. But if we could back up, Fin, maybe we're gonna lean on you a little bit for some of the technical aspect of, you know, what are tariffs exactly, and what does this do to businesses that do business, around North America or around the world.
Mike:And just start with that, and we'll and we'll take it from there. Does that make sense?
Finn:Yeah. Yeah. Totally. I think, you know, if I can also just kind of add a little bit to, like, the emotional side of it. I think as a Canadian too, you know, it feels like like like like you you both basically said, like, there was, like, a set of, you know, rules and and things that we all kind of took for granted as existing, and we were partners.
Finn:And it feels like as a Canadian, it it it's it is a bit more emotional for sure. So that's that's obviously quite quite difficult. Yeah. So so what what exactly is it? And I think also another thing too that's an interesting thought is, you know, there are and I there's this is a quote from someone.
Finn:I can't remember who it's attributed to, but there's decades where nothing happens, and then there's, like, weeks where decades happen. And that's what it kinda feels like in the last couple weeks. And and I should say, for the purpose of this episode, we are recording this at ten well, central time central time, ten thirty five, April 17. Things could change very quickly, but I just wanna make sure that's on the on the record.
Scott:I don't know how many Yeah.
Mike:There could be an announcement during this podcast.
Finn:Literally, during the podcast, it completely changes. I don't know how many podcasts I've listened to where they were like, we're recording this Saturday at 9AM, and then, like, yeah, like an hour or something changed. Anyway okay. So so, yeah, what what is tariff? How does it work?
Finn:So so pretty much how it works is, you know, if you are importing something into The US, you will have to pay the tariff if you have if they have tariffs on, for example, China. So we can use an example of, let's say, like, an iPhone, right, which is being assembled and, you know, from which has parts from many different countries being put together and assembled potentially at, like, a Foxconn factory in in China. So and it's it's based on the monetary value of the item. Right? So if you import a $1,000, like, ticket price that you sell it for, $1,000 iPhone, and your cost from China is, like, $500, that's how much you're paying Foxconn for it.
Finn:And then there's a 50 percent tariff on that. Right? $500. So you're gonna have to pay 50% of that cost as a tariff. Apple will.
Mike:So does
Finn:that make sense? Who's
Mike:yeah. But we need to back this up a little bit. You know, importing versus exporting. So who who's who's who here? So do the same example, but say, I am am I a Canadian?
Mike:Am American? Like, who am I, and what am I doing?
Finn:Yeah. K. So I'm Apple. And how I get that from and I think a US company. Well and this is actually a really interesting point, and maybe I should back up even further kind of what's happened over the last, like, well, it it hasn't been a huge change in the last little bit, but over the last, like, forty, fifty years, there has been this transition.
Finn:Yes. Since free trade, you know, you can think of a lot of the big American companies that have been wildly successful over the last forty to fifty years. You can think of Nike. You can think of Apple. You can think of other, you know, computer hardware businesses, clothing businesses, even companies like NVIDIA.
Finn:They don't actually manufacture anything. Right? They have become design, branding, and supply chain businesses. Right? So if you're if you're Apple, you have people in in California who are doing design work on an iPhone, on AirPods, all these different types of stuff.
Finn:And then you're working with suppliers throughout Asia, and those companies in Asia are then, you know, sending stuff between each other to actually create the final product. You're doing the brand work on trying to, you know, advertise and create the brand around Apple, and you're designing it, and you're doing the supply chain work, and then all of the manufacturing is actually being done in another country. And so and they've they've done estimates on how much it would cost to bring all that manufacturing over to America and how much an iPhone would cost. So I think I think Forbes did this work. And how much do you think it would cost to manufacture an iPhone, the estimate, rather than doing a $300?
Finn:K. $300. Like, how much do you think the iPhone would cost, I should say?
Scott:Oh, okay. Okay.
Finn:Yeah. The price
Mike:of the iPhone.
Finn:So right now, it's thousand bucks. 20 4 hundred bucks. K, Mike?
Mike:So this is if if we manufacture if it was manufactured in The United States instead of in China? Is that your question?
Finn:Yeah. How much would the price have to change?
Mike:Yeah. I would say probably about, 250% more.
Finn:Yeah. So the Forbes Forbes estimates it's gonna be 30 to a hundred thousand dollars per phone is the price that you would have to pay, if it was manufactured in America. And that's that's What? I mean yeah. Yeah.
Finn:And that's and that's no. Well and think about, like, the dramatically huge ecosystem that they've built in in Asia. Right? It's not just it's not like there's people just screwing phones together. I know that that's, like, the example that, some some folks in The US like to use that we can just screw phones together in in America.
Finn:It's like no. Like, it's the materials. It's, you know, hundreds of different components from all over the place, and it's also just this massive scale beast that just can't really be replicated in The US. And that's that's actually assuming that it can even be done. There's a lot of people who think that, like, literally, it just couldn't be done.
Finn:It would cost trillions of dollars to move that whole ecosystem over. So your Apple, you've done a design on an iPhone. You've got the new iPhone coming out. You've done all the brand work, meaning that you've got a bunch of marketing and stuff like that. And then, you know, you've talked to your suppliers in Asia, and that would be companies like Taiwan Semiconductor, which does the semiconductor chips in it.
Finn:It would be companies, like I mean, well, Texas Instruments, which is in The US, which does a bunch of other different semiconductors in it. It would be Sony. Right? Sony does the, the camera sensors on the iPhone. There's a whole list of, you know, thirty, forty companies or something like that that that make all the components that go into the iPhone, and then they get assembled in China.
Finn:And then they start, you know, sending the the phones over into into America, and you've got all these orders for phones that you're going to buy, that Apple's gonna buy from these suppliers, that you've designed. And, yeah, like the math I was saying before, like, if you're if, you know, if you're gonna sell the phone for a thousand bucks and as Apple, you have a 50% margin on that, that means that your cost would be about $500 per phone. That's the cost of materials, buying the phone from, all of the manufacturers in in Asia. So, you know, if you put if you put a % tariff on that, for example, then your the cost that Apple will pay will just be a % of the cost of the price that you're paying to the Chinese manufacturers or the Asian, you know, other other different types of Asian manufacturers. Manufacturers.
Finn:So, you know, if your if your phone was a thousand bucks to sell and you bought it for $500 from the Asian manufacturers and it's a % tariff, that means that you you have to pay $500. You as in Apple have to pay that. So Apple is
Scott:a company which that to, Fin?
Finn:Right. They have to pay that to the the well, to customs, to the to the to to the US government Okay. As a tax. And so now you have a choice. Right?
Finn:If you are Apple, what do you do? Right? Your cost has increased, dramatically. Right? And so now you'll notice a few things here.
Finn:One is, you know, if you have a % tariff on a thousand dollar phone, that doesn't mean that the phone just doubles. It's depending on the cost. So if the cost is really low from out of out of Asia and there's, you know, a lot of work being done in The US, that means that the impact won't be as much. If you're if you're importing stuff and it has a lower margin so let's say you're buying stuff as an example, let's say you're buying stuff off, like, Timu or something like that where, you know, things are really cheap, margins are super low. You know, you buy something for, like, $3, and the cost from China is, like, $2.90.
Finn:You you are you will have to double the price for it to make sense. Right? So so there's different impacts depending on the different products that you're buying and and the cost of those products from from Asia. And that money does go to The US. And and, well, one of the arguments that they make right now is that they're doing that for the purpose of raising, tax revenue.
Finn:And I think that the most recent estimate was that they've they've raised about $500,000,000. That's as of today. I saw an article this morning, suggesting that they had raised $500,000,000 through the tariff increases. That is way below, what the administration's estimate was gonna be, which was, I think, 2,000,000,000 per day. So, you know, the impacts are obviously not not what, a lot of people might expect.
Finn:But, I mean, iPhones are a really good example of this. Yeah.
Scott:Just to dive in on that, is that because he's he's paused, put them on, paused, put them on. Is is that because while he's sorting all this out, they haven't been on the whole time? Is that why the number is lower, or are we just speculating?
Finn:No. No. Not not really. I so yeah. And then this is another thing to kinda back up on is where are we on the tariffs, right, at this moment?
Finn:Because they've they've announced a lot of things, and the only way to kinda get a handle on what the tariffs are actually like is to go into, like, you know, a ChatGPT or an a Gemini thing and be like, you know, give me the timeline because it's, like, you know, 30% tariffs here, then now it's 10. Then we're gonna put 40% tariffs on the penguins and, you know, all that kind of stuff. Right? Because, of course, they're they're tariffing everyone, including islands with just penguins, which, of course, has been in the news a lot. Yeah.
Finn:Yeah. So current currently, I believe it's it's 10% tariffs on nearly everything. But China China that that doesn't include China. China's tariffs have been have gone from, you know, the original 20% to 50% to a % to a 45. And I think I feel like they might have even increased it recently.
Finn:So you know? And and and today, as it stands today, these are effectively the highest tariffs that America has ever had on a trade weighted basis. Trade weighted meaning, you know, how much are they actually buying across the world. So so that is that is quite significant. Last year, there was about $440,000,000,000 of goods bought from from China.
Finn:And I the you know, iPhones are actually a really good thing to to look at because about of that $440,000,000,000, about 40,000,000,000 ish was was iPhones actually that were brought in from from America. So it's a pretty high value good.
Mike:So, you know, as I sit back, I'm trying to listen to this as as a consumer. Mhmm. But, you know, obviously, we can't take our business hat off. So when I hear that you know, you gave the example of $500 on an iPhone, so now Apple needs to pay a thousand dollars. So if they are going to come anywhere close to maintaining their margins, they're gonna have to increase the price of the phone.
Mike:To what degree, we don't know. And as you said earlier too, there's a lot of things manufactured in China that are, you know, low margin items. So Mhmm. Like, what is the impact do you think going to be on businesses? And obviously, we can't discuss every business that that exists in North America.
Mike:So but maybe even in the businesses that are in your professional realm, like, is the expected impact to these businesses if these tariffs that are currently in place are maintained?
Finn:That's a great question. Yeah. So I think I think that there's a few ways to look at this. One is that this is the debate going on right now is to what degree will businesses want or be able to pass on these these the the impact of these taxes on American consumers. And it's so and also what's actually happening on the ground, right, like, right now?
Finn:So this is where I think that there is a lot of in a lot of importance to trying to find businesses that have higher margins because they have much bit greater ability to pass on the cost increases. Right? Like, if your if your cost of goods sold out of China is, like, 10% of the price and the you've you have to double that that cost because of tariffs, you don't have to raise your price nearly as much as if the cost out of China was 90% of the price. So, you know, margins do have a very big impact on your ability to to pass along price increases. What we're seeing on the ground for businesses, you know, we don't own Walmart at in in any of our strategies, I believe.
Finn:But, you know, they had a capital markets day last week, and this was really interesting to listen to because they were talking about, of course, you know, the impact of tariffs on their business. I think that something like 20 to 30% of all of their purchasing comes out of China, and that's obviously gonna have a huge impact on them. And they said, they basically said, we're raising our our revenue guidance for the year and but we're not gonna raise our profit guidance. And what that tells you is that they are going to eat some of the cost increase from them. And they're gonna also go to their to their suppliers in China, right, and say, like, I'm going to ask my suppliers in China to to to take some of the hit as well.
Finn:And we're gonna take some of the hit, and then we're gonna raise our prices a bit. So we're gonna kinda share impact across all of the people involved in this in this transaction. So it does mean higher prices for American consumers, but one of the things that they get to do is they get to say, well, we're gonna because we're eating some of the the cost increase, we think that we're gonna actually really increase our market share. And this is where the discussion really goes on to, you know, who actually gets impacted by this the most. And I I I think that it's probably gonna be, you know, small and medium businesses get hit the most out of this, and also low income consumers who have been relying on, low cost goods out of China for a long time.
Finn:Because if you go to, like, a dollar store and the dollar store is selling things for, like, a few bucks each, and you can really lower your grocery bill by going there, and your costs double, like, that has a really significant impact on you. Yeah. And, and then for the small and medium business, like, you know, Walmart can go to their suppliers in China and say, like, we're gonna just stop ordering from you unless you eat some of this. If you're a small medium business, you don't have that ability to do that. So that's gonna really hurt it.
Finn:And they basically said there's no situation under which they don't exit this whole scenario with without being a more dominant, larger market share, more profitable business.
Scott:So, Fin, just kind of
Mike:question guy gets pushed out.
Finn:Exactly. Yeah. Yeah. So they they think, you know, this will like, they have a lot of, you know, small medium business competitors in store in locations all across America, and they think, you know, most can't survive this, but they can. And that's for them, that's what matters the most.
Finn:But it is a brutal scenario for a lot of the small medium businesses.
Mike:Hey, Scott, you had a question, but I kind of beat you to it. Go ahead.
Scott:Yeah. That's all good. I'm just
Finn:curious That's
Mike:part of this online delay thing. So let's we're we're gonna have a little bit more of that. Go ahead.
Scott:That's all good. Because I've been listening trying to because that's my concern is this effect on businesses and this effect on consumers. And essentially this has a potential to be grossly inflationary.
Finn:Hugely. Yes.
Scott:Yeah. And so some of what I've been trying to search and search for any sort of justification from the administration saying this is how we're gonna offset. And and the only thing that I've been able to find so far is, tax cuts that they're going to be pushing tax cuts for low income, medium, middle income families in The US and tax cuts for businesses, small and medium businesses. Is is that enough? Do you think that's enough to actually offset it?
Finn:I don't I don't think so. I mean, if you're if you're a low income consumer and you're you're buying stuff and it's like your prices double on things, that I don't know how you can cut taxes enough for that to even make sense for you. And it and and what it what it it yeah. It can't be. Yeah.
Mike:It can't be. Like, even on a business, if you have you know, if your costs of goods doubles, you know, and your income tax rate goes down by 5%, like, normally, we would say a 5% in in income tax cut is a good thing, but that comes nowhere close. And, of course, you you we always deal in percentages, but if you look at actual dollars, if you're a low if you're a low income person, you know, in dollars, what do you pay in personal income tax? And if you reduce it by 5%, like, we're not talking about very many dollars.
Finn:Right.
Mike:So there's no way it can offset
Scott:increase cost a significant tax cuts.
Mike:Extremely significant. In my opinion. I'm not an economist, but that's, you know, that's what I see.
Finn:I think that people maybe they started to recognize this during the pandemic that, you know, we always talk about supply chains. Right? And it's not a chain. It's not like a, you know, oh, I get this from this place, and then I get this, and then I get this. And, you know, and it's it's a web.
Finn:Right? It's all of these companies are so integrated into each other, and that has increased exponentially. Like, trade has increased exponentially over the last hundred years, and it's been because you can lower your costs. You can specialize. You can you know, all of these different types of things that really help create a more efficient system for for
Mike:Yeah. No. I just wanted to say it. Like, I agree with you completely. And the but the reason that they have done that is because of free trade.
Mike:That's Yes. Like Yes. There's a lot of rhetoric out there, particularly in Canada saying, you know, we've become too dependent on The US or for or to China for all these things. Well, it's Mhmm.
Scott:It's not
Mike:necessarily dependency. It's businesses using the efficiency of a trade agreement that was put in place or has been in place in various forms or another since 1990. It it's not a dependency. It's an efficiency. Like, why do why do car parts cross the border five times before it's assembled?
Mike:Because it's more efficient to do it that way because of free training. Yeah.
Finn:Well and and it's, I mean, it's been a huge part of what has led to a massive deflationary impact on the cost of goods, like, buying goods. Like, you know, think about how much a TV cost. Like like, a big TV would have cost twenty years ago. Like, that's just gone down in price so much.
Mike:It's tremendous. So
Scott:I was just gonna say on the supply chain thing, I don't think it's everything. I think a lot of the stuff that I'm reading and seeing about it is I don't think there's a desire to screw together iPhones like you already said or or the desire to make clothing out of there. I think there's a desire. I I don't think it's it's changing the entire supply chain system. I think what it was, and I think this was realized a lot during COVID, is there are a few critical supply chains that I think they want to make sure that they control.
Scott:Again, I'm just speculating, this isn't my guess from my readings, I don't know. But I think it's energy. I think it's anything relating to chips, semiconductors, AI, whatever. I think pharma is one of them. What are they called?
Scott:APIs for pharma, is that what it is? I think they wanna control some of that so that if if again, one of the things we noticed and we talked about it in our in our food episode about getting flour from Italy. Kneading these and shut down, a critical good for bread. If you're needing these things
Finn:And we need Italian flour in Canada.
Scott:If you need these things to to keep your country going, then I I think that's what it's more about it. Or at least that's how I'm rationalizing it to myself. And I I maybe you can correct me if I'm wrong.
Finn:No. No. I think I think that that's that's like a very yeah. Like like, during the the pandemic really highlighted the the, you know, how how dependent everyone is on each other. And there's there's good things and bad things with that.
Finn:Right? Because there is a bit of the obviously, the bad things is that, you know, if if if China decided to say, like, you know, trade embargo, we're not sending anything to you, a lot of the world would just fall apart. That's obviously not a good thing, and there's a lot of things that we need that are essential from other countries. But the, I mean, the positive thing that I think gets a little bit overlooked is is the the mutually assured destruction that, global trade has created. Like, countries going to war with each other, big, huge wars between major powers.
Finn:I think that the the odds of that have not to say that there's zero like, that there's zero, but the odds of that have decreased quite a bit because of the interdependence between countries on, because of trade. So and that's, I think, generally, the need for everyone to rely on each other is is is a really big part of that. So that is That is an
Mike:excellent point. That's an excellent point I did not
Finn:consider. Yeah. Like like, think about a hundred and fifty years ago. Like, how much of how how much were we getting from other countries? Like, we were completely on our own in a lot of ways.
Finn:There was obviously still, like, quite a bit of trade with with, and those are those are great businesses. But today, the amount of dependence that we have on every other country in the world like, there's there's examples of, like, a pen like, how many countries it takes to make a pencil, and it's just a pencil. You know? You look at the semiconductor industry, like, those cross, like, 50 borders before they actually end up being completely completed. So that's that's an important thing.
Finn:And and by trying to create more trade barriers, you're kind of pulling all of that back, which is a little bit scary. You know? And and it's like, it's important that we have control over things that we need, especially when things like pandemics happen and then people prioritize their own country. So, you know, that that so there are there are positives and negatives. I think, you know, one example of a country like, which which country in the world, relies the least on other countries?
Mike:The one with penguins Korea. Only.
Finn:Oh, I guess the it was penguins. Yeah. They don't they don't need anything else. They're pretty good.
Scott:Did you say North Korea, Finn?
Finn:Yeah. Yeah. That's the most that's the country that's the most self reliant in the world. And, like, I don't I'm not trying to say that to be, like, you know, trying to, you know, get a headline or anything like that. But it's it's like, you know, there is there is importance to trade, and it I think that it's it's it's very valuable for for everyone.
Finn:Yeah.
Mike:It's an interesting change in the world. You know, when I was entering the industry and entering adulthood and whatnot, there was it was in that era of the nineties of globalization and free trade, and it really it really did blossom. We manufacturing went off offshore. Just as you said at the beginning, you know, we've become a design or a retail country or North America is more retail than it is manufacturing. Whereas when I was a kid in the seventies and eighties, it wasn't it like, we did make things here.
Mike:We excuse me. We did make things here. And we went with globalization because there was a a great deal of efficiency. Products are cheaper. We get things out of China or Mexico or India that that are very inexpensive, and we all like it.
Mike:But there is a flip side to that, which is when you don't make anything, you don't have factories and it's this discussion of how we have we decimated the middle class because we don't have people making middle incomes, making things on the ground anymore? And Mhmm. Might this be part of the motivation for these tariffs to try and bring manufacturing back to North America? And if so, how much are people willing to pay for products because it will cost more?
Finn:Yeah. Those are I mean, that's that's the reality is that I think, like, the share there was a lot of graphs showing, like, the share of employment in America that was in manufacturing and how much that's decreased over the last, like, forty years, and it is it is pretty staggering. And American companies have done a really they've they've been very focused on holding on to the higher margin, higher return on capital business areas of the business. And, they aren't really interested in trying to build out their manufacturing areas because, generally, it's a low margin, dirty, difficult business, and all the supply chains are already built up in in Asia. You know?
Finn:Because like I said, it's not like you can stir up a fact. Like, this the I mean, one of the problems that tariffs have specifically with actually trying to create a more competitive, American manufacturing base is that if you are an American manufacturer, all of the components that you need now cost more money. If you want to import the machinery that you need to automate a facility so that you can make your manufacturing facility more efficient, that costs more money because of tariffs. If you want to bring in components, right, like you wanna bring in different types of materials or electromagnetic components or semiconductors or resins or whatever you need to manufacture, you are now at a competitive disadvantage because the tariffs have kind of wrecked that. So I I yeah.
Finn:So I think I think you're completely right, Mike. Like like, there's there's a one of the things that's happened in in America is that American businesses have kind of hollowed out, you know, those those typically pretty decent blue collar jobs that is, you know, historically known as Middle America. And that that is a problem.
Scott:I I think that's the ones that he's trying to bring back. Like, I don't think this is, you know, trying to bring back the old Nike shoe factory or something like that. I think, you know, I The American dream
Finn:of having your kids manufactured shoes for $5. Right? So Yeah.
Scott:Yeah. But I think, you know, they talk about what do they call the nickname? The rust belt. The rust belt, All those manufacturing jobs around steel and automobiles and that type of stuff like more heavy. That I think is more of their focus.
Scott:It's not whether they're making shirts for Timu or anything. That's not the focus.
Mike:So I agree and I think that there's, that is some of the motivation. Although, honestly, I don't think anyone I think there's only about five people on planet Earth that can really speak to what the motivation is. But I do think that is one of them. And part of me, at least on an emotional level, of which, you know, I have very little, but what emotions I
Finn:have, like, I I tend to like, man. Like, we have this Emotions are reserved for Italian flour. Sorry. That's right. That's okay.
Mike:That's true. I was gonna come back to the flour because that was me. But we have this idyllic view of manufacture you know, America in the fifties postwar. Mhmm. And we've gotten away from that, and I understand a vision to bring some of that back.
Mike:But is it realistic because we as consumers, as an entire society, have quite frankly enjoyed the efficiencies that have come from the trade, both in terms of buying inexpensive goods, which has clearly seen our standard of living in North America increase tremendously in terms of, you just mentioned, big screen TVs, computers, devices, trips, travel. You know, our standard of living in North America is substantially higher than it was then. But not only that, our mutual funds and RSPs and four zero one k's and and Canada Pension have also benefited tremendously from the efficiency in these businesses and making more and more money. So, like, is it even realistic to think this way?
Scott:Well, actually
Mike:And if it is, to what extent are we prepared to pay more for products or accept lower profitability from the businesses that we invest in? Scott? Yeah. Agreed.
Scott:Agreed. And also, is it realistic that that will come to fruition when The US has 4% unemployment, like the lowest unemployment they've had in a long time. Who's gonna be looking for these jobs?
Finn:Yeah. These are these are such important points. Like, I think and and something that a lot of people aren't really aware of is, like, right before so the last, the last ten years or so leading up to just before just after the pandemic, you know, investment in manufacturing facilities in America was basically flat. And the inflation reduction act, a whole bunch of other reindustrialization policies, tons of fiscal spending from the Biden administration led to a dramatic rapid increase in investment in manufacturing in America. This was happening going into the election, and something that a lot of people aren't aren't aware of, that it was actually like, it was working.
Finn:Like, he was actually doing what, you know, the current administration is trying to do. And if and, and since and since the, all the tariff stuff has come on online, everyone's now pulling back. They're like, I don't know if I'm competitive anymore because I can't I can't import the things that I need at a cost that's appropriate to be able to be competitive. And so I think that it can happen. I think that there's certain industries that, like like both of you have said, like, you know, the the dream the dream in America isn't having you know, making t shirt isn't probably making t shirts and socks and small trinkets and stuff like that.
Finn:Like, the dream in America is, you know, high-tech manufacturing, high value goods, that are important to the world, and, using the automation technology that, of course, America has some very good automation technology to be able to create, you know, a really strong manufacturing base. And that was happening leading into this. And and the other thing too to remember as well is one of the reasons why, the cost of importing stuff from China is a lot lower is because they do a lot of fiscal spending, a lot of a lot of subsidies into their manufacturing base, which makes things artificially cheaper than they probably should be. And there's a lot of, you know, a lot of you know, I don't wanna use central plan. Well, maybe central planning into saying, you know, we are going to be building a whole bunch of different manufacturing facilities for something specific.
Finn:And you do not wanna be, like, in the eye of Sauron of an industry that, that they are interested in, that they're trying to that they're trying to build out. Like Alcoa, which is one of the largest steel and aluminum producers in America, they've really struggled the last, like, fifteen years because China decided that they were gonna become one of the biggest steel and aluminum producers in the world, and that's a big problem. Right? And now, you know, people are saying, like, what's what's Alcoa gonna do with these with these tariffs? And they're saying, like, well, we're not gonna be building more because we don't know if these tariffs are gonna be around a while, and we make twenty, thirty year decisions.
Finn:Yeah.
Mike:K. So that that's a great that's a really good point. We've been leaning hard on you, Fin, but I'm gonna I'm gonna lean on you a little bit more here. K. And then Scott and I are gonna jump in maybe a little more from from our perspective.
Mike:But the so the question on everyone's mind outside of all the political rhetoric, but when we are when we are in our business, when we are talking to our clientele about what's going on, inevitably, question is, what are our portfolio managers doing about this? And I know we need to stay away from some specifics, but you are a portfolio manager. You are buying and selling shares of businesses. You are analyzing businesses on a daily basis. So maybe with a without, you know, crossing any compliance boundaries or anything, or disclosure issues, like, can you talk about as a portfolio manager looking at investing in the shares of businesses on behalf of thousands of other people, has your perspective changed?
Mike:What are you thinking about, or what are you actually doing different, if anything? That's probably a lot. Yeah. So than I.
Finn:So yeah. Yeah. Well, it's been a busy last couple of weeks. Yeah. So it's it's been chaotic last couple of weeks.
Finn:So so a few things. One is we we conduct, on on my team, we conduct now regular, what we call black swan meetings. And this is basically looking at because people people always think kind of, like, oh, well, you know, there could be a recession. The economy could not do well, whatever it But people don't really spend that much time stress testing their portfolios against very specific, you know, huge right tail, very unlikely risks that do happen and can be quite destructive to portfolios at least over a short term period of time. So we've started doing these black swan meetings where we go through the portfolio and we stress test it against various different types of high like, quite disastrous things.
Finn:You can think wars, pandemics, interest rate spikes, trade wars, and among among a whole bunch of other different types of things that we think, you know, could happen at some point. Making sure that we have the right businesses in the portfolio so that we can that they can manage through that and that we're not overexposed to one specific area should something happen. So so we've been doing that. The other the other thing that we've been doing as well is, going through every single holding with a fine tooth comb, and making sure that we don't have anyone that is, you know, that if it should this get materially worse, we're at the very least aware of how it could get worse and what the what the, you know, different goalposts would have to be in order to to kind of track what is happening within the business and the impacts that they have. So we're going through every single holding.
Finn:What is the impact from these tariffs? Where could the tariffs go? What could be the impact for them? And and, of course, the other the other piece too is one thing that has been changing is there has been a a change in sentiment around The US. There's been sort of a a bigger discussion around, you know, is this the end of US exceptionalism?
Finn:Right? And, you know, you can talk about US exceptionalism from a business perspective, which is maybe a bit a bit shaky, but from a stock market perspective, it is no question that The US, especially US tech, has been a phenomenal place to be over the last fifteen years. And now people are starting to say things like, well, you know, The US is pulling back. They're increasing taxes on their consumers. They're talking about, you know, strip stripping down the the federal government and fiscal spending stuff.
Finn:There's obviously they're also planning to do a bunch of tax cuts, which haven't happened yet and a couple of you know, some deregulation. But, you know, in the current situation, The US is very focused on creating more disruptive things. And, meanwhile, in Germany, they've announced, I believe, it's, a trillion dollar spending plan on manufacturing, military spending, all these other types of things. Canada is now one of the most I think it's more unified than it's been in a long time. South Korea, China, and Japan have been talking about expanding their trade as well, which I, you know, I don't I think the last time that those three were were working together was when the Mongols were involved.
Finn:So, you know, this is this is this is is a big change. Right? And so there's there's exciting there's exciting things happening outside of The US. And, yeah, like like, you know, there's also incredible businesses in The US, and we're making sure that the businesses we do own have you know, they've got good margins. They've got good returns on capital.
Finn:They've got a plan around tariffs. You know, I've read read, like, so many different transcripts from recent conference calls from companies talking about, you know, the intricacies of the tariffs to their business. You know, companies saying that they you know, for example, we have a company where, you know, they do a lot of manufacturing in Canada, they say, like, well, we aren't actually pulling any parts across the border. The customer comes to us, picks up the parts, and then brings it back across the border. So the customer has to pay the tariff impact.
Finn:So, you know, our margins won't be hit from that perspective, but the demand will be obviously, could be different. But they you know, seeing what's happening on the ground, seeing how they're managing through the tariffs, seeing their ability to raise prices through this. So those are the things that we're doing, and it's about, you know, taking a balanced approach to building the portfolio. Yes. Great.
Finn:You're gonna say
Mike:You did make you made a couple of portfolio transactions recently. And, again, I think we should stay away from names and stuff at this point. And this isn't meant to be a PM interview. This is meant to be a discussion. But it's very it's just very prescient right now.
Mike:Yep. When you made portfolio transactions in the last little bit Mhmm. Did it have anything to do with what's going on, or was it just way more company specific, or is it that all the same thing?
Scott:Or was it a massive opportunity?
Finn:So one thing that's actually quite exciting as a portfolio manager during these crises is that, you know, crisis favors the prepared. Right? And so, for example, the way that I run my portfolios, I've got 200 companies in a universe list that I watch very closely of businesses that I want to own. These are businesses that I think are exceptional, that have exceptional management, that seem to be able to pull rabbits out of a hat when things go wrong, businesses that, you know, it in a crisis, bad companies. I think I think it was one of the one of the founders of Intel, I think, said this ironically, but, he said that, you know, bad companies in a crisis go bankrupt, good companies make it through, and great companies get better.
Finn:Like, these are the types of companies that we wanna own. Right? The great companies that get better through these types of of of environment. And, so in a crisis, in a market sell off, one of the beautiful things that happens for a portfolio manager is it can be very indiscriminate what's getting sold off. And so this gives you an opportunity to make changes in the portfolio and, you know, remove companies that you might have had a half conviction on, you know, reassess the environment and see what's being sold off, what do you think the impacts would actually be for the businesses that are being sold off, and then you can start adding to companies where you've where it appears that it was just indiscriminate selling, and, therefore, it's a tremendous opportunity.
Finn:And so that was kind of the approach that that I took was looking for businesses where, they were getting sold off indiscriminately, where they are exceptional business models, and where we don't see the tariff impact as being a meaningful long term issue for the business, and that their market position allows them to be able to pass cost increases on very easily. Awesome. And that's the beautiful thing. Right? You have companies that are down 30 to 40%, and these are beautiful businesses.
Finn:Right? And you rarely get a chance to buy these companies at those prices. And and it's this type of environment where you can really start to add value by doing that.
Mike:I think it's underestimated or under discussed how how innovative and adaptive strong businesses can be that have strong balance sheets and strong management. And, you know, one of the examples I use that has nothing to do with the trade war. Okay? This is not a trade you know, free trade issue. But being in Alberta, you know, we talk a lot about energy.
Mike:And for the last ten years, you know, all the talk has been, you know, it's gotta be brutal to be a Canadian energy company when your own federal government is trying to put you out of business. Like, hear that I hear that weekly, if not more. And there's legitimacy to that discussion. But I don't know if anyone's noticed lately. Like, Canadian energy companies have been doing really well for the last ten years.
Mike:In this environment where we're being told they're that it's a disaster, they're actually doing quite well. And the reason they're doing quite well is because they have strong balance sheets and good management Mhmm. And they've been efficient and done what they've had to do. And really good companies can do that, including a trade war. It's Yes.
Mike:Is opportunity that is out there.
Scott:Mhmm. Actually, Mike, that that's one of the things if I look at if I try and be optimistic about this, because I I just brought up to you, Finn, like opportunity.
Mike:Mhmm.
Scott:And maybe I'm taking it in a different direction. But one of my hopes is I try and be optimistic of what comes out of all of this turmoil is My hope is that this puts Canada in a position where we really start to refocus on being good at things. And the question I always ask people about that is, you know, post World War II, how was it that Canada was able to join the G seven? Any idea?
Finn:I don't know.
Scott:In my in my opinion, it's it's you think about it, we had an extremely strong and talented military who had just helped defeat Hitler. We had wheat to feed the world.
Finn:Mhmm.
Scott:We had lumber to help the world rebuild. We had coal to heat the world. We had oil and gas to help the world drive and fly. And then since then, we've been spending so much energy almost shutting all of those businesses down, all of those industries down. We've shifted our focus away from being good at all of those.
Scott:And so maybe it's something where we we take a step back and go, well, this is these are all the industries that got us into the g seven. Let's get really good at them.
Finn:Mhmm. That's my hope. Yeah. Well, I I even saw, like, today that I think China's reaching out to to Canada to start buying more energy from us even though you know? And and specifically citing that they wanna, you know, invest trade obviously with The US.
Finn:Well
Scott:and I think it was three weeks ago. I think it was three weeks ago, four weeks ago, I remember hearing the premier of Quebec saying like, oh, maybe we should start reconsidering a pipeline running through our province. You know, we haven't heard that
Finn:for a long That's a big change in the narrative. Yeah.
Scott:It's a it's a big change in narrative. And so, you know, maybe some of those interprovincial barriers come down. Maybe, you know, you mentioned it. We're we're becoming more unified as a country. Like, there could be some hopefully, there's some positives that come out of this as a country, which again is kind of that same concept of great businesses get better.
Scott:Well, I think Mhmm. We could take a great country and make it better too, hopefully. That's my optimism. There's a of a side
Finn:I agree.
Scott:Sorry about that.
Mike:Yeah. It's okay. Sidebars are good. That's part of the I I I feel like I'm keeping us on track and I don't wanna be too militant. I want to like, I love the deep flowing discussion.
Mike:Yeah. I love the discussion, but I'm gonna do it again just be because we're, you know, quote unquote possibly in a crisis. I wanna make sure we're addressing, you know, questions that people have of of us. And so I'm gonna shift it a bit more to Scott. If I can put you on the spot and say, like, k.
Mike:We're in a crisis. A lot of the norms that we are used to in our entire adult life, we've been used to a certain way of doing business and trade.