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Slip into something more comfortable and delve into personal finance with Josh Sheluk and Colin White, experienced portfolio managers at Verecan Capital Management. Each episode demystifies complex financial topics, stripping them to their bare essentials. From investment strategies and financial planning to economic headlines and philanthropic giving, delivered with a blend of insight, transparency, and a touch of humour. Perfect for anyone looking to understand and navigate their financial future with confidence. Subscribe now to stay informed, empowered, and entertained.
Verecan Capital Management Inc. is registered as a Portfolio Manager in all provinces in Canada except Manitoba.
Welcome to Barenaked Money, the podcast where we strip down the complex world of finance to its bare essentials with your hosts, Josh Sheluk and Colin White, portfolio managers with Verecan Capital Management Inc.
Colin White:Welcome to the next episode of Barenaked Money. And this is one of my favorite ways to do a podcast. Josh is gonna ambush me with a list of questions I haven't seen yet. And, hopefully, he's not gonna try to make me look dumb, but I think it's interest rates you wanna talk about today, Josh.
Josh Sheluk:Did you hear first question, did you hear that the Bank of Canada cut interest rates this week?
Colin White:Alright. Yes. Yes. I did. Okay.
Josh Sheluk:I was That was the one in
Colin White:the real question. Rock.
Josh Sheluk:Yes. Yes. Yeah. Of course. So we know that the Bank of Canada cut interest rates by a quarter percent earlier this week, and it was very largely expected.
Josh Sheluk:And you can tell that based off the price action of bonds, after that announcement was basically nil. So we know that. So I'm gonna ask you a series of questions about what this means. Does this mean and you're gonna answer what it means.
Colin White:I will do my level best to live up to your high expectations. Plea please commence.
Josh Sheluk:Okay. Just for the record, you could never live up to my expectations, so you're doomed to fail.
Colin White:Well, wow. Okay. Thanks. You really know how to pump a guy out before he's gonna go on stage. Way to go, buddy.
Colin White:Way to go.
Josh Sheluk:I just called you one take call in, so I have to take you out a little bit.
Colin White:Alright. Fair enough.
Josh Sheluk:Alright. First question here. Does this mean interest rates have nowhere to go but down from here?
Colin White:No. That's not how the world works. See, there's one data point, and then there's more information comes in, and then there's more data points. And, you know, people hear commentary like, you know, the bank of, you know, TIF has come out and said that he expects that rates will drop more this year to, oh my God, rates are gonna drop more this year. No, no, no, no.
Colin White:That's the expectation. You know, we're one country being invaded away from, you know, having a whole new direction that we go in here, you know, or we're 1 inflation report away from a whole new direction. So to take anything, this anything other than the rates dropped last week or this week, to to read any more into that, it's like, obviously rates are gonna drop more. No. I mean, it's the same logic that was used because if this started January of last year that the market was pricing in multiple rate cuts last year, and it's halfway through this year.
Colin White:And this is 5050 as to whether we're gonna see one this time in my opinion. And so we finally have seen one now, but this has been 18 months of predicting. Now this is way better than the the job we've done on predicting recessions recently, but, you know, not at the level that people can count on what what we think is gonna happen from here.
Josh Sheluk:Okay. Bonus question. In that case, what's the probability that the next move is a put from the Bank of Canada.
Colin White:That's it. No. Absent any changes in direction of other significant data points. Yes. We are on a path to reducing rates.
Colin White:But that's a big if. Like, we are literally one inflation report away from all of this going on hold or expectations changing.
Josh Sheluk:Do you think that we're one inflation report away from all of this
Colin White:changing? Not minor. Like, a major. Like, if we had a major data point shift that called into question, like, a a real overarching thing, I think that that could change the expectation. Because keep in mind that TIF and other central bankers have gotten this way wrong.
Colin White:They they missed it on the uptake. So I I believe that there's a real concern internally that they don't wanna fuck it up on this side. They don't wanna screw it up on this side because, you know, they already have this blemish. And if they if they had their foot on it and got it under control and let it back off the mat again, I think that that would be very disappointing and cause call for a lot of splaining that have to happen. Because the other thing that they're fighting, and I've said this before, is they do not want to become a political punching bag.
Colin White:And when Rob Ford is announcing what he wants to have happened with interest rates, you know, there's
Josh Sheluk:people out there- You're
Colin White:not asking
Josh Sheluk:for a listen.
Colin White:Well, but no, you do because if enough people, like that's the problem of living in a democracy, if enough people start to think that way or follow that, you lose your independence. Your independence is only given with consent. Like you do not, Bank of Canada governors are not appointed for life. Like this is not a monarchy. So we hope that public opinion doesn't sway them too much.
Colin White:But at a certain point, yes, if there's enough people at the gates with pitchforks on fire, then yes, you have a problem. So I think that is something they have to keep at least half an eye on even if whether they're gonna admit it out loud or not.
Josh Sheluk:Right. Yeah. I one cut and done would be virtually and maybe literally unprecedented in Canadian history. So I think it's it's it's very, very likely that the next move is a cut.
Colin White:Yeah. Yeah. But I but I I would point out that this this this whole arc that we've been on has been an anomaly. Sure.
Josh Sheluk:Yep. That's fair.
Colin White:It's it's it's all been, oh my god. I can't believe this is happening kind of stuff. So, no. I I think that, yeah, if if I was betting, then I'm not. You know, the next is gonna be a cut.
Colin White:You know? But I think it's going to be very suspect on when that happens. You know? We we we could sit here. I mean, again, I'm seeing a reasonable there's not an unreasonable take right now to say this might be where interest rates need to be.
Colin White:You know, growth isn't where it was, but it's still positive. You know? So we're still seeing positive growth. Inflation is, you know, barely under control and barely within the range that's expected. You know, I think that we would need to see a weaker growth situation, you know, on one side of the fence.
Colin White:Yeah, that's probably a weaker growth situation that would call for an another cut. I think that that's really what they're looking for. And the other overlay to put on top of this at some point, currency evaluation is gonna matter. You know, right now it's it's within a range, but it's there's a range it's gonna get to where, okay, that's gonna make the top three things that we're concerned about and potentially start to push interest rate decisions a little bit.
Josh Sheluk:Okay. Next, does this mean? Does this mean borrowers should start getting variable rate mortgages again?
Colin White:Well, as you can clearly see by looking at the last 20 years, variable rate mortgages are absolutely the best thing to do. I hope the sarcasm trend translate well. I don't I'm not sure. No. I I think that the there's a lot of math that says variable rate mortgages are always better, but that math is all skewed because that's you know, it's not forward looking.
Colin White:It's it's not gonna be helpful in predicting what happens next. I think that anybody that is trying to make an interest rate call with their mortgage just should stop. You know, concentrate more on making sure that you've got a payment that's affordable and make sure that it fits within your lifestyle. So if you can if you do not have a lot of financial slack in your world, if you are very, you know, very tight to the bone with accomplishing your goals and meeting your obligations, then more certainty is important in your mortgage payment. You know, so for those people, yes, you should get a fixed you should get a fixed mortgage that you can afford, proper amortization, and don't open yourself up to the opportunity that's happened to a lot of people with our variable rate mortgages recently that are really screwed right now.
Colin White:I'm not saying that that same risk is out there, but that can happen. You know, if you, you know, are are at a point where you have lots of flexibility in your financial world and you wanna take the chance of doing a variable rate mortgage okay. I mean, you know, but realize that this could go against you.
Josh Sheluk:Yeah. Seems like variable rates would still have a long way to travel to get you to an advantage point if you're on variable versus fixed. Like, I think you still probably have about 200 basis points, 2% that you'd have to travel with the variable rates for it to be just a breakeven with the fixed rates. So you gotta think it probably needs to move, what, 3%, maybe more than that for you to Well come out ahead with the variable rate over the next 5 years.
Colin White:Then they would have to do it quickly. Right?
Josh Sheluk:Yeah.
Colin White:Because it you have to have enough time for that to to to actually matter. So I think that I'm not and again, I'm not up to up to speed on that, but there have been historically times when variable mortgage is just paid better to a mortgage worker or to the institution. So the institutions like them more, which means that they're gonna try it out that 20 years of math that tell you that variable rate mortgages always win neglecting to put the disclaimer on it. It's like it might not matter going forward because interest rates are in a way different spot now. Yeah.
Colin White:But, you know, I I I super encourage people to concentrate more on how flexible is your situation. Make sure that you don't put yourself in that situation where a change in interest rates is gonna change your diet.
Josh Sheluk:Yep. Okay. Related. Does this mean I or whoever should buy real estate now before prices start to go up, like right now?
Colin White:No. It doesn't mean that. It's it's just it's just doesn't. I mean, this is positive. You know, it could be positive because again and again, I haven't checked the shape of the the yield curve like as to whether the inversion is changing or or what it's done to longer term rates.
Colin White:But no. No. This this doesn't indicate that you should jump in. Now having said that, best investments are you run to them before anybody else runs to them. But I don't think that you could call real estate something that people haven't been buying.
Colin White:I mean, there's it's not something that's been completely avoided. You know, it the prices have come down, you know, for sure. And it's difficult to comment on real estate because it's not homogeneous across the country. There are pockets that are dramatically different. Toronto is its own ecosystem.
Colin White:It just behaves its own way. And it wasn't that long ago I saw the article where it had the record number of condos were on the market in Toronto, and that's specific to the condo market in Toronto. I don't think that that transposes to Nelson, British Columbia or Halifax Nova Scotia. It's just a different world. But no, this isn't a sign that you have to jump in in a hurry.
Colin White:There's a whole bunch of things that play there. And the other thing to realize in the real estate side is it potentially just became less attractive, you know, with the capital gains inclusion rate changing. You know, that that has put a cap Or
Josh Sheluk:a second property, rental property, cottage, something like that. Yeah.
Colin White:Yeah. For sorry. I'm I'm taking this as an should I you said, should I invest in? So I I I kinda went down that road.
Josh Sheluk:I think I said, should I buy? I could be wrong. I haven't checked the tape.
Colin White:Oh, well, I'll have to go back to Jim excuse, perhaps. I I miss I misanswered the question. But no, it doesn't mean that at all. If interest rates do come down, it makes real estate more attractive for sure. But then that market is going to price things accordingly.
Colin White:I gotta believe well, let me put let me ask you about how efficient do you think the real estate market is now in reflecting current interest rate environments? Do you think that the price elasticity has has been at a level that's high enough to be considered more or less an efficient market?
Josh Sheluk:Well, if you look back at the last few years and say interest rates went up from, let's say, just a standard 5 year fixed mortgage, roughly 2% for a 5 year to 5% for a 5 year, that's a massive can be massive increase in your payments as a borrower. Yet real estate prices didn't really budge a whole lot. So over the last 3 years, we haven't seen, or last couple years, really, we haven't seen a big decrease in real estate prices in my mind as interest rates have come up significantly. So it would be hard to argue that you're gonna see the opposite happen when interest rates go down and a quarter of a base quarter of a percentage point at the moment. So I've I've been very confused and surprised that real estate prices haven't come down more than they have over the past couple years.
Josh Sheluk:And I wonder if that's just because there haven't been enough mortgages to renew with a higher rate or if it's because the real estate market is just somehow so resilient to interest rate changes that none of this even matters at all?
Colin White:Well, I think it's slow to react because people can choose to take things off the market. You know, there's, you know, the the I think there's a an elasticity of demand or less elasticity of supply where people that are super motivated, hey. I'm getting a good price for my property. I should sell it. And then I'll I'll wait I'll wait to put it back on the market till I get that price again.
Colin White:So I think there's some of that is is at play as well. But you're right. I think you you make a very valid point. It hasn't sold off as much as it was expected. So to expect it's a huge upside left in there.
Colin White:Would be optimistic.
Josh Sheluk:Alright. Changing gears a little bit. Does this mean we are closer to a recession?
Colin White:Oh, we're definitely closer to recession because time has passed. You know? So, you know, there's a recession coming at some point and, you know, time has passed, therefore we must be closer to it, then we can't be further away from it. Okay. You win.
Colin White:Is that a good philosophical answer?
Josh Sheluk:You win. Yes.
Colin White:But no, I I I don't think that, you know, this this interest rate cuts ostensibly to in recognition of the economic weakness, which if you wanna extrapolate that means, yes. You know, there's there's a an awareness that we don't wanna go into a recession. And, you know, so I think that it this is understanding well in advance of seeming to need to because we're not seeing I've haven't seen anything that indicates we're close to having a 6 month period of GDP decline. I don't see any underlying things that are kind of pointing in that direction from a momentum perspective. So, you know, you could argue that, hey, this is actually good.
Colin White:They're getting ahead of the game, not letting it get to the point where we are materially seeing a risk of a recession. But, no, I don't think it increases. I think it decreases the chance of us falling into a recession at some point, if anything.
Josh Sheluk:Right. Yeah. I think interest rates are and the Bank of Canada changes. They're more of a symptom than a cause for things. So they're reacting to what they're seeing, and it's not likely to actually directly lead to a recession in it.
Josh Sheluk:So, actually, this is something we did some work on this week. Just looking at historically, has an interest rate cut been a to a recession or not? And sometimes it has been. And this is not to say that it's directly causing the recession. It's not.
Josh Sheluk:It's just a reflection of weaker growth and both those things happening simultaneously. But sometimes it's not. Sometimes it doesn't lead to anything. Sometimes it leads to continued strong growth and strong markets and all that stuff.
Colin White:Yeah. But but I think it's important to understand what an interest rate policy is. You know? So the bank is trying to avoid recessions. So if they're cutting, then in theory, they have a concern over an ex the likelihood of a recession.
Colin White:So, you know, the times that they cut rates and we still get into recession, well, maybe they they screwed up and didn't get out of it fast enough or hard enough. You know? But we would normally Maybe
Josh Sheluk:they are just something that shouldn't exist, period. And we could be don't need them. Maybe they have no bearing.
Colin White:Central bankers. We don't need central bankers. This is that podcast.
Josh Sheluk:I I'm not saying that. I don't believe that, but maybe they have no impact on the stuff, period.
Colin White:Well, you you guy you and I had that conversation when we got into when they were talking about all the industry increases that were gonna come on in order to beat inflation. And there's some argument that inflation was gonna beat itself, and they were just gonna stand there and wave the belt above their head and look and look what we did when it was probably other forces that may have brought it under control. But we need to believe in our institutions. That's an important you need to believe in the system. So the bank, I mean, I'm I'm a bank believer.
Colin White:But they're an instrument that are designed to influence where the economy goes. That's that's part of their mandate. That's all of their mandate. They wanna make sure that we have a good a a stable functioning economy. That's their goal.
Colin White:So an interest rate cut just means that they see weakness, that they and they're trying to provide a little bit of, you know, stimulation in the market. Now does that mean that they think a recession is likely or imminent? You'd have to ask them. I haven't heard anything from them that suggests that. But this industry cut is not gonna cause recession.
Colin White:There's no causal relationship there. If anything, it's going to help prevent
Josh Sheluk:Right.
Colin White:It's gonna help prevent.
Josh Sheluk:Yeah. Fair enough. And for the record, I think, by and large, central banks have evolved to a point where they're not helping us avoid anything, but it seems like they're certainly helping us smooth out some of the the ebbs and flows. So by and large, I think a fairly positive thing. Okay.
Josh Sheluk:So just moving on a bit more on the investment side here. We can probably be quick with some of these answers. Does this mean I should reconsider my bond and stock mix in my portfolio?
Colin White:No. Oh, you want me to keep going? You just have to go into short answers.
Josh Sheluk:Okay. We can move on.
Colin White:This all this at all. This is the overnight rate. And as we discussed, it didn't really change longer term rates at all. And I don't think it's changed the expectation for longer term rates at all. So this is not a material new piece of news.
Colin White:This is something that's already priced into the market. If you're making a change now, you're making a change that's this is already priced in.
Josh Sheluk:Yep. Great point. This one you'll like. Does this mean I should buy dividend stocks?
Colin White:Oh, absolutely. I mean, I've been waiting for that. Okay. I'm not sure if sarcastic is is gonna transit very well. No.
Colin White:I wish people would get off this. I mean, back in the sixties, you know, buying it, buying a stock and cashing the dividend check was a huge thing. And it it just made everybody's socks roll up and then everybody's happy about it. In the modern day, dividends are so manipulated, and, you know, payout ratios vary so widely. And it does not tell you nearly what you think it tells you about the health of a company or the health of an investment.
Colin White:And it is something that has a disproportionate influence on a certain cohort of investors that is very damning because it can go through periods of dramatic underperformance like we've seen. And, you know, it the companies themselves can struggle. So I don't think that this increases the likelihood of dividend paying stocks doing better than anything else. If you're going to buy an equity, buy an equity for the whole basket, buy an equity for not only the dividend, but the health of the business and the price that you need to pay for the stock is way more important than just, you know, what's the top dividend payers? I'm gonna go buy that.
Josh Sheluk:Closest I could get to arguing for this would be that some sectors of the market are more interest rate sensitive. Yep. Declining interest rates are supportive of those sectors, potentially. And those sectors like utilities, like real estate tend to be a little bit more dividend heavy. That's as close as I can get to arguing against what you just said.
Colin White:Yeah. No. And and you're right. That is the the argument to make. But, again, I think the this is an overnight rate change.
Colin White:And that doesn't mean the the the shape of the curve may or may not Yeah.
Josh Sheluk:On yields didn't change. Yeah.
Colin White:Yeah. Right. And I'm not even sure what the future expectation is for yields because yield curves, you know, is going to not shouldn't stay inverted forever unless you need to start calling inverted inverted, but we need to change that. But which end is gonna move the most to actually get it back to a shape that we recognize? I think that's still an open question.
Josh Sheluk:Fair. Alright. Last one on my list here. Does this mean I should cash in my high interest savings account and lock into GICs?
Colin White:Yeah. Yeah. I I guess this is a a good end cap to put on all this. The Bank of Canada lowering rates for 25 basis points doesn't mean you should change anything necessarily. Like this is not the reason to change anything.
Colin White:It's more important what's changed in your personal situation. Has your personal situation changed? Is prior more important? Have your personal goals changed? Has your personal comfort level changed?
Colin White:Those are far more important questions. To talk about moving from a hydro savings account to a GIC means you're giving up liquidity on your money. That's a big frigging deal, and I don't think you're adequately getting paid for that. If you're doing it because you wanna buy, you know, a cottage in 2 years' time and you want to set aside some money for it right now, you know what? Time time sensitive.
Colin White:You lock it in. It's going to come due when you need it. That's not a bad use. But if you think you're locking it into a GIC rate right now in order to preserve your wealth or reduce your risk, the 25 basis point change didn't make that any smarter than it was the day before. And you can read into that.
Colin White:It's not smart.
Josh Sheluk:So Yeah. And GIC rates peaked, I'm gonna say, about maybe 9 months ago, 12 months ago now. Mhmm. So this since it didn't have much impact on longer term bond rates at all, it might not have had an impact on longer term GIC rates at all. So if you weren't considering this before, now is maybe not the time to consider it either.
Colin White:No. This this was not a significant enough change. This change was priced into the market so completely that if you're looking from space, you would not have known that there was an interest rate change unless somebody specifically said there was an interest rate change. So there's nothing you've woken up to today that's so dramatically different than yesterday that it calls for you to take any action despite what the world is telling you.
Josh Sheluk:Yeah. One thing it does maybe emphasize for me, which is nothing new, but maybe now is the time for people to realize it, is that a high interest savings account is not really the ideal long term growth avenue. And the fact that you're getting 5% on a high interest savings account or whatever it was, somewhere in that ballpark over the last year and a half, doesn't mean that that's going to continue. Doesn't mean that that's a good place to to put your your longer term money. And I've had some people suggest to me, well, I could get 5% on a high interest savings account.
Josh Sheluk:Why would I invest in the market that's only returned 5% on average or a balanced portfolio that's returned 5% on average over the last 5 years? It's like, well, just because you could get 5% today on a savings account doesn't mean you could get 5% historically, and it doesn't mean you'll get 5% going forward. So Yep. It's not a good place to build long term wealth if that's your priority.
Colin White:Nope. Oh, absolutely. I mean, everybody's personal portfolio is lined up with what's important to you, what your values are, what your plans are, and what your comfort level is. And this rate change shouldn't shouldn't change the math on any of that.
Josh Sheluk:And that's a great way to end it.
Colin White:Thanks, Josh.
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