Podcast Episode 38: Current Events | It’s a Little Spicy Out There

It’s been a spicy start to 2022. Josh & Colin are going to talk about some current events, what’s been happening in the markets, and address some of the headlines that might be keeping you up at night

Episode Transcript

BARENAKED MONEY PODCAST: EPISODE 38

Current Events | It’s a Little Spicy Out There

Announcer:
You’re about to get lucky with the Barenaked Money podcast. The show that gives you the naked truth about personal finance with your hosts, Josh Sheluk and Colin White, portfolio managers with WLWP Wealth Planners, iA Private Wealth.

Colin White:
Welcome to the next edition of Barenaked Money. And Josh and I are here ready to take off our clothes one more time. Josh, are you all wound up? You’re ready?

Josh Sheluk:
Oh, I’m wound up. It’s been a spicy start to the year, so yeah, I’m ready to go.

Colin White:
You like spicy. So just for the record, we are recording this at the end of January 1st of February 2022. So the markets have people’s attention and we decided to be topical timely, relevant, and discuss some of the things that are out there. And maybe tie them back into decision making in general, see if there’s anything to learn from the current lot of things to worry about. So, Josh where do you want to take it from here?

Josh Sheluk:
Well, I know what we want to talk about is some of the current events, what we’re seeing in the market and potentially some of the impacts for them and try to unpack whether these are actually relevant or informative or useful data points, or as we tend to do, maybe we poo poo a lot of the information that’s out there and it’s usefulness for decision making.

Josh Sheluk:
So obviously we sit here today, end of January, start of Feb and it was a tough month for stock markets. Global stock markets at one point were down about 10%, top to bottom throughout the month. So that’s noticeable and people are probably noticing it on their statements or noticing it on the news. And so what are the reasons or some of the perceived reasons for this downturn? Well, I think first and foremost, it comes down to an interest rate story. Do you think that’s the most front of mind for people?

Colin White:
Well, I guess it depends on the day because you’re seeing some pretty spectacular headlines come out of Russia and the European situation, specifically the Ukraine, and everybody’s trying to figure out what’s going to happen there. So I think there’s a couple of things that have caught people’s attention.

Colin White:
Now drawing the line from interest rates or bank policy or threat of war to market moves is difficult and best done by historians at some point way in the future. But I think those are the kinds of things that people are reading about. Then to me, that’s what our responsibility is. Let’s address specifically what’s out there. But I think if we go through the central bank policy, interest rates and Russia, and give our 2 cents worth, is probably, but I just want to put this a little bit in context, because do you remember being all that panicked October, November last year? Like, were you really distraught over the level of the markets?

Josh Sheluk:
I don’t ever remember being that panicked about markets, I’m probably not a representative sample of our audience.

Colin White:
Okay. But when you’re in show business, Josh, you have to play along every once in a while and go, oh my God, yes.

Josh Sheluk:
This podcast is about [inaudible 00:03:20]. That’s not what this is about. It’s not how we do things.

Colin White:
I’ll talk to our producer. My point is that the US markets have roughly gone back to where they were last October, November. So I think if everybody tried to remember back to their emotional state, October, November had a similar market level, compared to today. It becomes a little bit more difficult to justify feeling distraught today, because we’re not looking at a huge backtracking in the market. But anyway, I’m just from time to time going to insert little pearls of wisdom maybe or perspective to help the conversation with Josh. But I’m sorry I interrupted your point.

Josh Sheluk:
No, this is a good point because I always like to think of it as what happens if you hibernated for the winter, fell asleep on October 1st and woke up today, like how are you going to feel about things? You’ll probably wake up and be like, oh, market’s flat. Not a lot happened over the last three months, but because we saw things go higher and then pull back, it’s a lot more uncomfortable for people.

Colin White:
It’s based on anchoring, the behavioral finance term that would be applied here’s anchoring. Like as soon as your account hits a certain level, you anchor on that number, and anything less than that number is terrible. And that’s a very powerful, common emotional tie in anything. And there’s another way of framing it called the endowment effect. Once you have something, it becomes more valuable to you and you want a cling to it at all costs. Not to point out to somebody’s like who’s averaged 7% or 8% or 9% or 10% return for the last three years. Well, that doesn’t matter. My account’s down $5,000. I’ve lost $5,000. That’s a powerful, emotional reaction and not all that instructive as to good decision making, I would suggest.

Josh Sheluk:
Right. Yeah. The anchoring one so interesting that one of the most interesting studies for me on this effect was they asked people, what is your phone number? So something really basic, really trivial. What is your phone number? And then they asked them to predict the number of jelly beans in this jar. So one, what’s your phone number? Two, how many jelly beans are in this jar? And the people that had a phone number that started with a higher digit, they systematically estimated a higher number of jelly beans in that jar. Two things completely unrelated, completely trivial to one another. And actually one is influencing your thinking on the other.

Josh Sheluk:
So this is why when people say, well, Dow 30,000 or Dow’s down 1,000 points, all of this is completely just exactly what you say. It’s anchoring, you’re focusing on something that’s recent for you that’s in your mind, that may not be that relevant really in the grand scheme of things.

Josh Sheluk:
But tying this back to interest rates, and this is where we’re coming at this from is one of the reasons for the potential market pullback here, interest rates are coming up pretty much for sure. Interest rates have been going up. Central banks haven’t really moved their interest rates in north America yet, but basically the writing is on the wall at this point. They’re going to start, likely in March, raising interest rates from extremely low levels. And I think that’s important for people to keep in mind. Interest rates are at extremely low levels. Before the pandemic, did you think interest rates were high, and was that catastrophic number for you? If the answer is no, then seeing interest rates go from 0% to 0.25%, which is what we’re talking about here probably shouldn’t be a catastrophe either.

Colin White:
Well, let’s remember Josh, I think probably for your entire career and for the last decade or more, the conversation about higher interest rates has been pervasive. And there’s always been a reason that it’s about to happen and it’s imminent, and look, if this is just a narrative that amuses you while you’re drinking a glass of scotch at night, then you know what, if this is your entertainment, you should enjoy yourself. The challenge comes is when you start making decisions based on it, when you start allocating capital based on anticipation, because, Josh, you put it well. It’s like it’s probable, the bank’s likely going to raise interest rates a little bit in March. So that’s probably a fair statement.

Colin White:
Now, what do you do with that? Do you go out and buy more canned goods? Do you buy toilet paper? I’m not sure when I’m supposed to buy toilet paper. I look for the media to give me my queue there. What do you do with that information? And I think our message is going to be probably not a lot. There’s not a whole lot of action that you can take based on anticipating these things. It’s entertaining. It can be fun to talk about depending on the party you’re at, maybe it’s going to be part of the conversation, but it’s not all that instructive or valuable for detailed, aggressive decision making. Because again, we’re one missile out of North Korea hitting something away from things making a left turn and going another direction. So you got to be careful about these statements of the future.

Josh Sheluk:
Yeah, well, I guess the aggressive decision making not warranted, maybe investment decision making based at the margins based off of what is the likely path forward does make some sense. And that’s where we’ve been doing in investment portfolios up to now. But I think one of points to make is interest rates increasing is not a negative thing for markets, in the early stages of interest rates increasing historically we’ve seen markets go higher. So this seems to me to be a bit of a knee jerk reaction to a bit of a narrative that has come up from usually the media as things do. And there’s not actually a lot of statistical evidence to support that you should be getting extremely cautious right now just because interest rates are going up a couple quarters of a percent.

Colin White:
Well, and keep in mind, the media is a slave to its audience, so they’re going to tell the stories that get attention. So it’s what people want to consume for sure. Again, it can be a compelling story. It could be used, if you want to use that frame, you can use it to motivate people to do things. You can use it as, because fear is a motivator. So you can use it to motivate people to do things. But Josh, to your point, portfolio wise, we’ve been making little tweaks around the edges, but we’ve got a considerable number of barriers between us and getting caught up in some of the typical mistakes that people make, because we’re hyper aware of our predisposition to do things a certain way and processes in place to make sure we’re making decisions based on facts and data rather than feelings or emotions or anchoring or any of the other things we’ve talked about, because you have to concentrate if you’re going, it takes a lot of effort to be honest, to concentrate, to overcome your actual knee jerk reaction as Josh puts it.

Colin White:
Look, when I go do groceries, it’s a box that’s at eye level that catches my eye. If it’s a new brand of spaghetti, now that’s going to make it into my cart. No, I’m not going to do a detailed calculation on its cost per gram or it’s nutritional content or something. Because you know what, it’s the end of the day, I’m just buying spaghetti. I’m not going to put much effort into it.

Colin White:
So there’s all kinds of ways in our life that these little mental shortcuts are necessity, I’ve made all the decisions I’m going to make in my day. I’m not going to get that wound up and what kind of spaghetti I’m going to buy. And at the end of the day, you could argue that my life is no worse off for not having to optimize my spaghetti purchase decision.

Josh Sheluk:
Are you saying it’s not normal to do a cost per gram calculation at the grocery store?

Colin White:
All right, Josh, I wasn’t looking directly at you when I said that, but not everybody has the mental capacity you do to do the number of calculations that you do. So I’m saying it’s okay if you don’t pay attention to things. In the financial world the cost is huge or can be huge if you fall prey to these little mental shortcuts, and for the love of God, Josh, give me a break, let me buy my spaghetti.

Josh Sheluk:
So if you’re not making a knee jerk reaction on interest rates, Colin, surely you must be making a knee jerk reaction on Ukraine, Russia, right?

Colin White:
Oh, man. I remember back, and this is back one of the previous wars, and I thought George Bush or one of the US presidents said, we’re going to stay in the Baldwins until we achieve a sustainable peace, is like, holy crap, you just sentence those people to death. I mean, there’s been more fights in that region through history and more persistent strife. And you’re going to try to tell me that you’re going to understand the nuance of the outcome here and then have something you can make a decision on. It’s like holy crap. I have an absolute quarter inch deep understanding. I know enough to know that’s a complete mass from a geopolitical standpoint, and there is no clear path forward.

Colin White:
They’re talking about oil supply. Well, Saudi Arabia’s sitting off to one cycle while we could turn on the tap. I mean you have all of these decisions that can get made that could dramatically move the markets one way or the other, this could all be [inaudible 00:13:04]. There could be an agreement signed tomorrow when this all goes away, or somebody could detonate a thermal nuclear device or there could be a cyber hack that takes down all the hydroelectric power of the Midwest. Sure. So what does Ukraine mean to you, Josh? Do you think there’s anything near worth making decisions on

Josh Sheluk:
Maybe not. I guess to make decisions on, the answer is no, because it’s too hard to know in advance what is going to happen and what that actually means. Like you said, maybe Russia invades and oil exports from Russia dry up. And I think oil exports from Russia are around 11% of the world’s total oil exports. So a noticeable material amount for sure.

Josh Sheluk:
But what happens if OPEC automatically turns around and then turns on the taps because they can certainly do that. They have capacity. Does that mean that the oil prices going up or down or staying somewhere in between? You don’t know? So there’s just too many variables to predict that. I think we talk about hindsight bias a lot, and the idea that at some point you think that knew exactly what was going to happen, just like we knew that Trump was going to be elected in hindsight. And we knew that the Brexit was going to happen in hindsight.

Josh Sheluk:
And if we go back and actually look at things before that, we didn’t actually know what was going to happen. We were actually surprised. And that doesn’t mean that there wasn’t a chance of it happening there certainly was, but it was a bit of a surprise. So to sit here today and say, we know it’s going to happen. No we don’t. We’re probably going to sit here a year from now and say, oh yeah, that was completely obvious in hindsight, but it wasn’t. And we can go back to this podcast as a reference.

Josh Sheluk:
So what does it actually mean, a frustrated base? Well, it probably does mean a little bit of market turmoil in some areas of the market. Is that a good thing or bad thing? Don’t really know. Is it a short term or long term thing? Hard to say. So that’s why you’re hinting at not really making any knee jerk reactions. I think the information that we do look at probably energy markets are going to be a little bit disrupted, for us in north America, how much does that matter? We don’t really import any oil from Russia. We don’t import any natural gas from Russia. Does it have spill over effects to the rest of the world, Europe specifically? Probably because that’s a pretty significant importer of European oil and natural gas.

Josh Sheluk:
So, so many variables. And I think with geopolitics, generally, our opinion is do not make any investment decisions based off of geopolitics because, one, it’s impossible to predict what’s actually going to happen. And two, it’s impossible to predict if it does happen. Even if you do in advance exactly what was going to happen, what impact is that going to have on the markets? Who knows?

Colin White:
Yeah. And don’t get caught up in the anticipation. But look, if your time horizon is 7, 8, 9, 10 years, this is noise. And again, the market has moved enough in the month January, we have had a spattering of phone calls or conversations with clients. Some of them are newer clients, haven’t worked with us for a while or their own situation. There’s a lot of anxiety over other things, and they’re concerned with what’s going on.

Colin White:
So it’s like, oh my God, this is terrible. It’s like, what do you mean? It’s like, well, my account’s down. Are you going to retire this year? No. I’m going to retire 10 years from now. I was like, okay. So they’ll walk me through. Well, if my account keeps going like this is going to go to zero. That’s that’s not the way it works. Your account’s not going to go to zero. It’s like, well I have this money. I’d like to make my [inaudible 00:16:50] contribution, but I don’t want to do it. Well, things are down. It’s like, pardon? Oh yeah, things are down. I don’t want to put any money in. I want to wait for it to go back up. So you’re going to go with the buy high plan. Interesting.

Josh Sheluk:
Unconventional. I like it.

Colin White:
Yeah. Contrary it would be another sexier way to put it. But seriously, these little tribulations in the market, number one, we get to go to work and we apply rigor to decision making and we can find things to take advantage of because we’re not caught up in a lot of the emotion of what’s going on. Number two, if you’ve been slow to put some money to work, put it in. Now this isn’t market timing. This is just it’s today was better than it’s been since last October. But to your market timers out there, the market’s only gone back to where it was last October. People I’ve been sitting on cash for two years, you need the market to fall a lot more before it goes back to where it makes sense for you to put your money in. Just say it, I’m not calling you wrong. I’ll let you do your own math. But I’m just saying.

Josh Sheluk:
So moving right along, Colin, I think common argument that markets have fallen here and reasons why is the valuations of stocks are high. What do you think?

Colin White:
Well, again, it’s in context. The problem is you start to get into the nuance. Valuations can be measured. There’s number of ways to do it. But if you’re measuring an off recent results have been lumpy, and recent results don’t necessarily reflect the status quo. I mean again, if you’re supply chain disruptions are causing inventory levels to fluctuate widely, and that would just cause odd numbers to show up, and all pieces of the metrics of all the different ways you value the market. So to conclusively say things are expensive, we could probably argue about that for an hour, but is it cheap? No. But just because it’s expensive doesn’t mean that you shouldn’t invest. I guess I’ll put that back to you, Josh. Just because the markets seem expensive should you not invest in the markets?

Josh Sheluk:
Well, valuations of stocks specifically have been above average for the better part of 20 years. So if few thought that you shouldn’t invest when valuations were stretched or a little bit above average historically, and when we say average, we’re talking about history going back 50 to 100 years. So if you thought you shouldn’t invest when things are above average with that historical view, then you would’ve been sitting on the sidelines for the last 20 years for the most part. And you would’ve been way worse off for it. So valuations are terrible timing tool for investment decisions.

Colin White:
And if you want to put a label on it, we’ll call that availability bias. People tend to make decisions on what’s available to them. So you read an article talk about how expensive the stock market is, that information’s available. It’s recent. Seems compelling. I want to use it to make the decision. So again, it’s the whole, people have a limited amount of brain power to make decisions. And these are some of the shortcuts that get taken.

Colin White:
And listen, it is a wonderful debate topic. This is something you could run a university course on, all the different ways to value the stock market, individual companies, historic ranges, things that have influenced historic ranges, changing an accounting policy that has led to different numbers. There’s all kinds of nuance to get in. And there can be some stuff to learn deep in the weeds. But just with a big brush, say, you know what? Things are expensive, so I’m not going to invest. That’s not likely going to do any good.

Josh Sheluk:
Investing to me is always a relative decision. And we’re talking about absolutes here, to invest in stocks or not to invest in stocks, but it’s always relative. So if you’re not investing in stocks, you can invest in bonds. Guess what? They’re expensive too. Interest rates are just about at the lowest level that they’ve ever been. You could invest in real estate. I don’t need to rehash our thoughts on the valuation of real estate right now. I’m sure everybody can draw their own conclusion. You could invest in just cash, or plain old bank account. But if you’re looking for something that’s expensive, consider what your interest rate is on your savings, your GIC, your bank account right now. It’s extremely low, which in a way is saying that the valuation of holding that cash is extremely high. So all of these things are “expensive” through a relative lens. But everything’s expensive, then isn’t everything fairly priced as well?

Colin White:
Ooh, you philosopher king Josh. Look, this is where I’m going to drift back to my final word on these kind of things, which is investor your long term money long term, invest your short term money short term, and learn how to speak another language or paint or spend time with your family, trying to get caught up in any of these nuances. But if it’s entertaining, if you enjoy it, if a glass of scotch, talking about markets with your buddies makes you feel good yourself, you find it interesting, fabulous have at it. If your phone is beside you and you’re placing traits while you’re doing it, maybe not so much.

Josh Sheluk:
Now we couldn’t get away from any market downturn, Colin, without talking about, COVID is still here. What do you say to the folks or the media or anybody out there that says that the markets are down because of COVID?

Colin White:
Well, I just say [inaudible 00:22:39]. Every day that goes by we’re getting better at dealing with this on a number of fronts. We’re getting better on the treatment side of it. There’s new drugs being approved for treating. The vaccines, they keep making progress with those and things. Is it a thing? Yeah. As it wiped, I heard to figure that it’s wiped out 160,000 small businesses in Canada since the beginning of the pandemic. Now I don’t know how many businesses would normally fail over that same time period. So I’m not sure how remarkable that number is. And see what I did there, I took a headline, I took it in, then I asked a follow up question that would maybe make that a little bit more impactful or not. But the guy who was using the number was the head of the Canadian Federation of Independent Business. So he needed the number to be big. But I digress.

Colin White:
I don’t know exactly the total net effect of COVID because are businesses that are flourishing because of this. There are businesses who are super busy because of this. But I do think that the COVID impact, as we learn to live with it, is going to wane and gradually fall into the system reliably. I don’t think that the rest of my existence is going to be shadowed by the annual cycle of COVID. And what if it is? I think that we’re going to learn how to live with it way better than we’re living with it today. And the economy is going to get back to doing what the economy does.

Josh Sheluk:
I think, just purely observationally, I have no data or evidence statistically to support this, but it doesn’t seem to me that the stock market has traded based off of COVID numbers or news for the better part of the last year. And again, it’s purely my observation. It seems to have decoupled a little bit from the COVID news and is relying on other things like the global economy, for example. And really, that’s what the market always has relied on. But earlier on COVID cases were a thing and the economy was really suffering. Now COVID cases are still a thing, but the economy’s actually doing quite well. The US economy in Q4 put in its best GDP growth numbers in 37 years. So that is material. That is what really matters to stocks and to investing at the end of the day.

Josh Sheluk:
And it’s interesting you mentioned that article about Canadian businesses, Colin, this comes down to framing things a little bit, and the media does a wonderful job at this. And there is another behavioral bias called framing bias. And the way that an argument is posed to you or a question’s posed to you can actually really frame how you respond or answer to that question. And a great example is also from the medical field. And if a doctor is to ask a patient about an elective surgery and say, “Hey, do you want to do this surgery? There’s a 90% success rate.” The patient is much more likely to elect to go forward with that than if the doctor says, “Hey, do you want to go forward with this surgery? There’s a 10% failure rate.” So just asking exactly the same questions, statistically, both true, but the way that you frame it makes somebody respond one way versus another. And that is I think very much how the media tends to act, and it can influence your mood and your decision making. So it’s something to be aware of.

Colin White:
The other one example I heard is I think it was probably the same book, because we do a lot of the same reading, was you have a 50% chance of survival or a 50% chance of dying. Those invoke two very different emotions and lead to predictably different decision making. But Josh, you’re being too modest. You are probably one of the best red guys I hang out with and I hang out with some good geeks. And if you haven’t really noticed a correlation between the COVID numbers and the markets over the last little while, I’m willing to bet my, well, I can’t even bet my house anymore. Can’t bet my kids, I’m willing to bet all the body and my genes that there’s probably not a statistical correlation there that’s discernible.

Josh Sheluk:
And why can’t you bet your kids?

Colin White:
I don’t live at home anymore. So I guess I’ve given up ownership a little bit, so.

Josh Sheluk:
Okay. Well, it was good to know you’ve owned it them before.

Colin White:
Well, possession’s nine tenths of the law.

Josh Sheluk:
Fair enough. So I guess if I were to wrap up, yes, markets are down. Yes. It’s noticeable. Yes. It’s a fairly big dip. This type of thing happens roughly every two out of every three years. So is it shocking? No. Will it happen again? Yes. Do we try to ascribe a whole bunch of different reasons to it? Absolutely, we try our best to ascribe a whole bunch of different reasons to it. Most of this is noise. Focus on a process, focus on discipline, focus on goals, focus on the long term, and you will be successful.

Colin White:
Yes. And just to add for the caveat, we reserve the right to come back here next month and go, holy crap. It’s still going. That’s within the realm of possibility as well. It’s funny we always walked the line between trying not to be glib about things, because people have very serious emotional reactions to these things and we have to be somewhat empathetic for sure. But at the end of the day, you have us in your world to do math, and we feel that’s what we’re trying to bring forward, is this is what the math is telling us, and try to take emotion off the equation. But we could be back here next month and go, holy crap. That may happen.

Josh Sheluk:
Nowhere in this podcast did we predict what’s going to happen over the next one month in the markets. I say that with conviction, nowhere in there, you can go back and listen to the tapes. Nowhere in there did we say that?

Colin White:
And if somehow you think we did because it in code or something, you’re wrong. Stop. You’re listening to it too closely. If you play this backwards and you find some prediction somewhere, stop it. Again, go learn a language, learn how to paint, do something else. You got to stop spending time on this.

Josh Sheluk:
But that would be cool. So let us know, because [inaudible 00:29:04] said something backwards.

Colin White:
Quick Antidote was my favorite comments back when they were concerned there were Satan messages and rock and roll albums and they had the congressional hearings in the state, and they had Alice Cooper was on the stand and they were accusing him of putting backward messages in his records, and he [inaudible 00:29:22] to the microphone and he goes, oh, if was going to put backward messages on my records, that’d be bye more records.

Josh Sheluk:
Totally self serving.

Colin White:
Absolutely.

Josh Sheluk:
Thanks, Col.

Colin White:
Nice, Josh.

Announcer:
This information has been prepared by White Leblanc Wealth Planners, who is a portfolio manager for iA Private Wealth. Opinions expressed in this podcast are those of the portfolio manager only and do not necessarily reflect those of iA Private Wealth, Inc. iA Private Wealth Inc is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc operates.

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