Episode 8: What this election is really all about

 

[The Wealth Tracks show with Darren Luck]

 

[Headshot of Ben Tal]

 

[Guest: Ben Tal]

 

[What this election is really all about]

 

[The crisis has exposed the vulnerability of the Canadian health system]

 

Wealth Tracks Episode 8: Ben Tal

Ben Tal: The crisis has exposed the vulnerability of the Canadian health system. And that's why all parties right, left, center, call for more money going to health. This will come. This is big money and you will have to find a way to finance it.

Stephanie Senteris: Welcome to Wealth Tracks hosted by one of Canada's leading investment advisors, Darren Luck. Over the past 30 years, he has traveled the world to search out the best ways to help clients save, grow, and protect their wealth. On the show he'll be speaking to various thought leaders, getting their insights, sharing stories, and cool ideas about health, wealth, and happiness. Because there's more to wealth than just money.

Darren Luck: I am very pleased to be joined by my friend and esteemed colleague, Mr. Benjamin Tal in Toronto. As a brief introduction, Mr. Tal is the deputy chief economist for CIBC bank and probably one of the most familiar people on TV, radio, and print on all things related to the economy.

In addition to advising the CIBC bank and the Bank of Canada, he's also one of my go-to experts I rely on to help me help my clients make money. What I really enjoy about my interactions with Ben are his common sense approach and the humor he uses to help us understand the complex topics and come up with solutions to capitalize on market opportunities.

Ben, we have a federal election on September 20th and I've asked you to comment on the various political platforms and help us make a more objective decision at the ballot box, at least from an economic perspective. I know you're busy. You've got lots of people talk to you today, Ben, but could you just give us a quick couple of soundbites on each one of the parties and maybe the election in general?

Ben Tal: Yes, it's going to be a very close one. I think that Mr. Trudeau took a risk calling this election. Maybe assuming that providing government money in this environment will help. We know that it's a very close election. It's going to be a minority government. For sure. We are not going to get a majority government. It might be Liberals, NDP or Conservative block, whatever it is, it's going to be a minority government.

When it comes to the proposals, I think that because of the fact that it's going to be a minority government, we really have to pay attention, not only to what the Liberals are saying, but also to what the NDP is saying. Same goes conservatives clearly the block. So small parties will have a lot of say in determining where we are going in the future. Whatever it is, it's going to be big. We are going to see a situation in which the fiscal deficit will continue to be elevated. And even the conservatives are not in such a rush to shrink the deficit and you will see taxes rising. The big thing, I think regardless who is going to win the elections. We are going to see a permanent increase, I believe, in government spending as a share of GDP. There will be a lot of money going to health given the crisis and the lessons we have learned. We have to see a situation in which so much money will be going to daycare, clearly green activities, the environment. So you will need to find a way to raise money. And therefore, I believe that regardless who is going to win, we are going to see some increase in taxes and higher cost of energy.

Darren Luck: I think that you echo my sentiments exactly. And it seems like we've got MMT modern monetary theory happening in real time now. Ben do you see anytime in I guess our lifetimes where we don't run deficits and we actually do start paying off debt, or is that just not going to happen ever again?

Ben Tal: Yes. I think that it will be a long time before we see a balanced budget, quite frankly, even under a conservative government. We realize that we are under-investing in a big way when it comes to some elements of the economy, clearly when it comes to the environment and now health. Just to put things in perspective how the health situation is being translated into economic growth.

You see, for a given level of infection, the Canadian economy was much more closed than the US economy since the beginning of this crisis. Why? Because of the fact that we reach our maximum capacity, when it comes to hospitalization rate much faster than any other OECD country. You look at the chart in the second wave, for example, and the number of people in the hospital relative to the population, it was much lower than in any other country. It was much lower in Canada. But we reached the peak much faster, which means that our capacity is much lower than any other when it comes to health. 2.5 beds per 1000 people in Canada, we are the lowest in the OECD in terms of the number of beds available. The lowest with the exception of Mexico. Which means that when you have a fourth wave and it's coming, we are going to reach this threshold much quicker than any other country, which means that you have to shut down the economy much faster. And that's the reason why the US is outperforming Canada economically speaking, and will continue to do so because of the fact that we will be shutting down the economy faster the minute we see more cases because the number of people in the hospital will rise and our capacity is lower. That's very important to understand. This means that the crisis has exposed the vulnerability of the Canadian health system. And that's why all parties right, left, center, call for more money going to health. This will come. This is big money and you will have to find a way to finance it.

Darren Luck: OK. So I think any party, even if the science dictated it. Talking about austerity, as far as the pandemic is concerned, there's just no way anybody would have patience for that message.

Ben Tal: Absolutely not. I don't think that you will win elections now by cutting. You will win elections by spending and even the conservatives realize that.

And that's why they are talking about balancing the budget in 10 years, not tomorrow. So we are talking about a totally different environment.

The vulnerability of the Canadian economy was exposed. And especially when interest rates are very, very low, people will tolerate this kind of debt at least for now.

Darren Luck: OK So just to, summarize what you're saying about the hospitalizations and hitting capacity. We had less, wiggle room, or room for error. So as soon as the cases spiked, we hit capacity right away. I think that makes a lot of sense. Would there also be sort of a geographic argument to be made there too, just cause we're a Northern climate, you tend to get more cases quicker.

And you know, the US half of the population is in a Southern climate.

Ben Tal: Yes to an extent, but I think it's more investment in health. Even if you compare states that are basically similar to Ontario in terms of climate, you get a totally different story when it comes to the hospitalization rate and our capacity. Clearly you compare by any measure. And there are many measures to test the level of readiness of the health system.

And we are not there. We are not there. This is not new. This has been before the crisis. The crisis simply exposed that. And if you look at the spare capacity in hospitals, we are not even close to the US, or clearly the OECD, which is in a much better situation. So we have to do something about that because now we know that this has major implications beyond health, economically speaking, we are losing because of it.

Darren Luck: Now, do you think there could be now an argument for privatization of some degree of healthcare that would create a little bit more capacity.

Ben Tal: That's a very interesting story. I don't think that people will be talking about it now, but a few years from now as we detach ourselves from the current situation and think about the vulnerabilities of the health system, this kind of argument will clearly appeal and people will be discussing it. Absolutely.

Darren Luck: Right. So I think we've identified now some of the weaknesses in supply chain and some of the weaknesses in our healthcare system. And then it kind of concerns me the NDPs, pledged to, only have public funded, nursing homes. That could really exacerbate the problem if I'm understanding this correctly.

Ben Tal: Yes, we do need much more supply there and I'm not sure that the current system is optimal. You need much more than that. There is a limit to how much you can tax and therefore you need some private activity there, again, all this is premature and I will not get too much into the solutions, but what I know is that the system, as we know it now will not last and things will have to change. This crisis exposed a lot of vulnerabilities that were hidden under the mattress there. So I think that that's something that we have to realize, and that's extremely, extremely important.

Darren Luck: OK. So that segues into the 3 soundbites I'm looking for to pass on to clients. There's so many platform promises and so on that it becomes overwhelming to try to put it all together. And we're not in a position to do that. And we certainly don't have the time today to do that.

So I'd just like to focus on fiscal policy and tax in particular. If we look at the tax platform of the liberals under Justin Trudeau, he wants to raise taxes on banks and insurance companies with excess profits over a billion dollars. He wants to raise taxes on what he calls the wealthiest Canadians.

And there are rumors, I haven't seen any verification of this, that they also are considering taxing people's principal residence. What are your comments on the liberals tax platform?

Ben Tal: Yes, I will not get too much into commenting whether or not it's a positive thing or a negative thing. I don't think that they will go with taxing principal residence. I think that it's misunderstood. They are going to tax, say, flipping. Basically, if you sell the residence after just a year, then you are a speculator and they will tax you.

But beyond that, I don't think they will go for it. It will not be politically smart as far as they're concerned to do so. Overall, I think that you will see taxes rising and again, regardless who is going to lead, if you want to look at what the post election situation will be you will see higher taxes, regardless with winning. You will see a higher cost of energy due to environmental initiatives, and you will see a bigger government and that's the three themes that you will see regardless of who is going to win.

Darren Luck: So there is no sort of austerity, regardless of who as far right as any, of the parties might be so. Looking at the NDP platform now and under leader Jagmeet Singh. He talks about a temporary 15% COVID tax on corporations. And it reminds me of I think it was Milton Friedman once said there's nothing more permanent than a temporary government tax. So he's proposing a 15% temporary tax.

He wants to increase the inclusion rate on capital gains to 75%, raise taxes on anyone earning over $214,000 which they deem as wealthy, as well as have a 1% wealth tax on fortunes over $10 million dollars. I don't recall Ben if any country has ever successfully enacted a wealth tax, but what are your comments on the NDP platform?

Ben Tal: Well, the only thing I will say is that we have to pay attention to what they're saying, because they might be in a position to influence policy in Canada, if there is a minority government. So I won't get again into whether or not it's a good thing or a bad thing. I don't want to get into the politics of it, but I do believe that there is a limit to how much you can tax Canadians. And we have to be careful with that. Tax is not the only solution. We have to find a way to grow the economy, not just to tax it. We have to grow the pies as opposed to just keep it constant and tax more often. So again, without getting too much into it, into the specific proposals, I will suggest that we have to pay attention to those proposals because they might be in a position to influence decisions.

Darren Luck: It's halftime and I hope you're enjoying the show. Low interest rates are making it tough on conservative investors. Are you retired or close to retirement? If you're looking for safe, predictable growing cash income, that's what we do. And we are the experts. Please visit us at luckfinancialgroup.com to learn more.

We are here to help. Now back to the show.

Now, Ben, I want to put you on the spot a little bit here, thinking back in economic history a little bit. And I remember studying the Laffer curve that essentially says the more you raise taxes, tax rates, the less collect. There's just a certain sort of tax that the economy can actually pay.

More you raise taxes. The less people will work. The more you encourage people to hide and so on and so forth. So with that being said and trying to think of the biggest extreme, I think it was the 1970s didn't the US have a tax rate of something like 90%? What was the actual effective tax rate that they collected on economic growth? Do you know what that number is?

Ben Tal: Yeah, I don't know the number, but we do know that the revenues actually went down. And the reason is that people find a way to avoid taxes. When you raise taxes too high, especially on people that can manipulate the system, they will find a way to do it legally. And there are many ways of doing it. There is a point where the tax rate, which is a point in which it is too high and it's becoming counterproductive. Again without getting into the specific proposals of any leader, I would just say, we have to think twice before we just tax and tax and tax. We have to find ways to grow the pie, to grow this economy, to increase productivity.

Productivity is down, not up during this pandemic. We have to find a way to lift productivity, grow the economy and basically make sure that everybody else is participating in it. By taxing, you're not going to reach this point. You're just going to get money from one side to give to the other side, but this money will not be as available as you think, given that people will find creative ways to avoid.

Darren Luck: Right. And I think history shows us time and time again that's exactly what has happened. It concerns me that we've got now a little bit of an entitlement society where people are more than happy just to sit home and collect CERB. It's not their concern, what tax rates are. Their just sort of a what's in it for me mentality.

And it takes a majority of people voting. And if the majority of people are getting free handouts. Whether it's the right thing to do or wrong thing to do. These kind of measures could be enacted and then ultimately they will fail and break down. Do you have any comments on that? Or Is the general mood of people let's just get back to work? Let's be productive. Let's do the right thing or are people more inclined to be a little bit more self-serving and say, I don't care. This is what's good for me.

Ben Tal: Yeah. Well, what we are seeing now is very interesting and we're seeing it in the US and we are seeing it in Canada. Is that the people who get government assistance, especially at the low end of the wage interval, don't want to go back. Why, because you collect money on a monthly basis to stay home. And again, I'm not criticizing the decision to provide the CERB and other types of support because we needed it. But at this point , we need to be more targeted when it comes to providing this support, because ask every business in Canada, they will tell you, we cannot find people.

The job vacancy rate is at record high. You cannot find people go to the restaurant, go to hotels. You cannot find people to work there. Why? Because they collect. And as long as they collect, they will not come back. And that's why wages are rising. That's one of the reasons why we have inflation. So again, we are entering a fourth wave. There will be a need for more assistance, but these assistance must be well-targeted.

We see a situation in the US that the states that ended their support, their unemployment rate went down dramatically. States that still have their support, their unemployment rate is still elevated. It's very clear correlation. Support means people stay home because they get the money. So we have to be careful here.

We have to make sure that people get the support, but at the same time, we don't want to waste money and send it to people that don't need it.

Darren Luck: Right. Have we created a whole new level of structural unemployment? Thinking back 20 years ago, there was always 3 to 5% of the population were just unemployable. Is that number now 10% because of this? Like we've created this entitlement mentality? We've created this unequal economy, this inequality that everybody wants to talk about, you know, let the rich pay more and let's just create a whole new level of people that won't have to work.

Ben Tal: Well we are not there. You see, we are not talking about the permanent increase in government spending in terms of transfer payments, at least not in any significant way. This will at one point.

Darren Luck: But don't you think this could lead into like a whole new round of universal, basic income that we will never be able to reverse.

Ben Tal: People have been talking about the universal, basic income. It's an interesting idea. It will not happen in this environment. I doubt it. I don't see any Party, including the NDP, talking about it in a very serious way with the exception maybe of the green party. So this is not going to happen. Are we going to see a more generous social assistance program?

Absolutely. And we are putting together the infrastructure for it now, and that's why I see government spending rising, but I doubt that it will increase the structural unemployment rate dramatically. This is a temporary situation. All those goodies will stop coming and we see it in the US already. And the minute the pandemic is over, let's hope by the next spring or something all this money will disappear and therefore you will see people going back to work. We have seen it in many other countries that are ahead of us, like Israel, like the UK, and now even in the US, the minute you end the support, people go back to work.

Darren Luck: That makes sense.

So let's just switch gears a little bit. We've talked about the liberals. We've talked about the NDP. Looking at the conservative platform under Erin O'Toole. He proposes a GST holiday for the month of December I believe. Wants to bring down tax rates, he wants to simplify the rules. You know, I would have to say bringing down tax rates, simplifying the rules makes perfect sense.

What do you think of this GST holiday? Is that realistic and could that do more damage? We don't have a demand problem here. We have a supply problem and it would further even exacerbate the shortages we have if we incent people to spend all sorts of money, more money on even fewer goods and then potentially front load, a lot of spending that would normally be happening in the following year. I mean, it sounds good. And I would just worry about the unintended consequences.

Ben Tal: I agree with you. First of all, this is not a macro story because you cannot have a temporary change. If you want a significant change it should be permanent. That's one thing. Second is that you're right. This is not 2008. This is not 2000 or 1991. When you are the demand driven recession, this is a supply driven recession.

In fact, all of us want to spend more and we have the money to spend, especially people that were able to raise their savings rate. And many of them did. We simply can't because everything is closed or will be closed during the next wave. So I suggest that this is not something that will change the trajectory of the economy in any significant way.

This is not a macro story that I focus on.

Darren Luck: Okay. All right. Well that's great Ben. I think just to wrap things up from a market investment perspective, regardless of whoever the party gets in, there will be more spending coming. The more spending is going to potentially lead to tax increases in one way, shape or form. And from a investment perspective, it would be hard to think that interest rates would go up significantly higher in such an environment.

And we have a high potential for inflation going forward. And I think we've got to structure portfolios and investments in our lives accordingly. Would you agree?

Ben Tal: Yeah. There are a few things here. One is that, we have Delta now and we have all kinds of variants that maybe will be showing out of Greek letters soon when it comes to the variants. And this means that the trajectory to the promise land will not be as smooth as believed a few months ago, because a few months ago you got the shot. Everything is good. It's coming to an end. That's not going to be the case, unfortunately, because we have the complexity. So that's one thing. It means that the target is the same target. The destination will be longer. The trip will be longer to reach that point.

And I think that that's something that might suggest that the winners of the pandemic will remain winners for longer before we see the transition to the laggers. So that's one thing. The other is absolutely interest rates will not be rising as quickly. I believe that the Bank of Canada will raise interest rates only once in late 2022.

If we didn't have Delta, it would have been two or three times. So clearly Delta is making it less likely that the Bank of Canada will be aggressive. Same goes by the way for the fed. And another factor is that I believe that inflation Is still an issue to think about. And therefore I would like to see the Bank of Canada raising faster than what the market is expecting just to buy insurance against potential inflation. Again, I don't see inflation as a major issue, but just as an insurance to deal with that risk. I would like to see interest rates rising and maybe that's what the Bank of Canada and the fed would be doing in the second half of 2022. So overall I agree, some increase in inflation in the short term, you can play this game.

I will see situation, which from an interests rates perspective, the market is still very, very muted on the fed. Everybody's expecting the Bank of Canada to be much more aggressive than the fed in 2022 and in 2023. I don't buy it. I think that the fed will be even more aggressive because as we discussed earlier, the US economy will outperform Canada for many reasons, including our limited health care capacity.

So all this means that the fed might be more aggressive. Exactly the opposite of what the market is expecting. I will trade that

Darren Luck: Okay. So there is a light at the end of the tunnel, but the tunnel is now longer than we originally thought. We're going to bump along for the next probably three years until we have to ultimately pay the Piper and the way markets are, three years, anything can happen.

So you don't anticipate much big changes. The status quo. Things are gonna be maintained as they are and just stay the course, I guess. Is that what your saying?

Ben Tal: Yes and I think that eventually we will have to coexist with the virus.

The virus will be there and we will coexist with it. With vaccines. And the good thing is that every time that we have a wave. We are more equipped to deal with that wave. So economically speaking, we are able to perform and therefore profitability, the stock market can take it.

So in this sense, when it comes to the ability of the economy to grow, and that's very, very important, the potential growth of the economy, I believe that still COVID is an event. not a condition.

Darren Luck: It's not a condition.

Okay, good. Well, Ben, as always, you've done a great job. We started out talking about the election and then we brought in a much bigger topic, which was COVID. But again, I guess they go in the same. We probably wouldn't be having this election, if not for COVID. And, I guess we all look forward to the results the night of September 20th.

And I thank you for your time and your wisdom as always.

Ben Tal: Thank you and good luck.

Darren Luck: Okay.

Thanks for listening. If you know somebody that would like to hear this interview, please share with them. And if you are retired, nearing retirement or interested in learning about investment strategies that provide safe, predictable growing cash income, that's what we do. We are investment income experts.

Please visit our website at LuckFinancialGroup.com or email us at LuckFinancialGroup@cibc.com for more details. Because we're here to help.

Stephanie Senteris: The CIBC logo and CIBC Private Wealth Management are registered trademarks of CIBC. CIBC Private Wealth Management consists of services provided by CIBC and certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. CIBC Private Wealth Management is a registered trademark of CIBC used under license. Wood Gundy is a registered trademark of CIBC World Markets Inc.

Darren Luck is an investment advisor with CIBC Wood Gundy in Windsor, Ontario. The views of Darren Luck do not necessarily reflect those of CIBC World Markets Inc. If you are currently a CIBC Wood Gundy client, please contact your investment advisor. The views of Ben Tal do not necessarily reflect those of CIBC World Markets Inc.

This information, including any opinion is based on various sources believed to be reliable, but its accuracy cannot be guaranteed in a subject to change. CIBC and CIBC World Markets Inc., their affiliates directors, officers, and employees may buy, sell, or hold the position and securities of a company mentioned here and its affiliates or subsidiaries, and may also perform financial advisory services investment banking or other services for, or of lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions, or a spread between bid and ask prices that they purchase, sell, or hold the securities referred to above. CIBC World Markets Inc. 2021.

Episode 7: How Technology is Transforming the Future with Dr. Pippa Malmgren

 

[The Wealth Tracks show with Darren Luck]

 

[Headshot of Dr. Pippa Malmgren]

 

[Guest: Dr. Pippa Malmgren]

 

[How Technology is Transforming the Future]

 

[www.LuckFinancialGroup.com]

 

Pippa Malmgren: We're right at the cusp of an extraordinary shift from physical paper money to digital electronic money, and I think there are many implications of this jump. It's not as simple as a converting the piece of paper into an electronic signal. It's actually the creation of an entirely new kind of money.

 

Stephanie Senteris: Welcome to Wealth Tracks hosted by one of Canada's leading investment advisers, Darren Luck. Over the past 30 years, he has traveled the world to search out the best ways to help clients save, grow and protect their wealth. On the show, he'll be speaking to various thought leaders, getting their insights, sharing stories and cool ideas about health, wealth and happiness because there's more to life than just money.

 

Darren Luck: This Episode 2.0 is part of the disruptors series. Topics that relate to new trends or technologies that will change our lives in the future. This is a continuation of the Bitcoin for Dummies episode 1.0. Dr. Pippa Malmgren is an economist and an award winning author who served President George W. Bush in the White House on the National Economic Council, where she was the point person on Enron and terrorism risks to the economy after 9/11. She was a negotiator on Sarbanes Oxley and the Patriot Act and was in the president's working group on corporate governance in financial markets. She also advised the UK government on Brexit as well. Pippa is ranked one of the top twenty five most influential economists in the world, one of the top ten experts on geopolitics. And she was ranked one of the top five most powerful women in finance as well. She's lectured at the University of Texas, Austin, Tsinghua University in China, the London School of Economics, the INSEAD School, and the Duke Fuqua Global Executive MBA program as well. She's a regular on CNBC, Bloomberg and the BBC. She earned her Ph.D. from the London School of Economics in 1991 and gave the commencement speech there in 2013 and 2016.

 

Darren Luck: But she's not some ivory tower academic. She's also an entrepreneur, putting a dent in the universe in more ways than one. She's involved with a company called Data Fly Drones, a company that makes commercial use, aerial platform drones. She's also a partner at Monaco Foundry, an incubator accelerator that helps startups grow and scale quickly and correctly with a goal to make the world healthier and more sustainable, one founder at a time. As an economist she's focused on innovation and is skilled at explaining how new technologies can solve old problems. She's a trend spotter who advises investors and governments about macro policy and investment strategy. She has a unique gift of making sense of the complexities of the world economy and explaining things in a way a layman can understand. A skill that got her the job in the White House initially. I can't think of a better person to help us understand what's going on in the world today. I'm very honored to be joined from London, England by Dr. Pippa Malmgren. Pippa your super busy person. Thanks so much for joining us today.

 

Pippa Malmgren: Oh, Darren, thank you so much for having me. Especially for the subject matter we're going to cover.

 

Darren Luck: Yeah, I'm so excited and so many people get worried when things are changing. And I guess change goes both ways. Right. And change could be perceived as a negative or can be perceived as a positive. And I think you've had a good knack of figuring out the positive ways to capitalize things. And I'm excited to sort of get your take on a lot of things. So I want to start with a big news item that seems to be on everybody's lips today, and that's Bitcoin. Everybody's heard of Bitcoin. Everybody knows Bitcoin. I don't think anybody really knows what Bitcoin is. So at a very basic level Pippa, you've advised many governments, the U.K. government included. And if the 95 year old queen mom calls up and says, Pippa, would you please explain Bitcoin to me? How would you explain it to her?

 

Pippa Malmgren: I love this. This is the right level of a question. This is what always gets policymakers stuck there, like Ahhh because they're making complex policy about some things that they can't explain, simply. Look, it's digital money. It's literally money that consists of bits of data rather than pieces of paper. But it's only one brand name, like there are a whole bunch. I think last time I looked there were over 1,500 digital currencies. It's just the one with the biggest brand name. So it's a bit like when you go to buy a vacuum cleaner or if you were to use your vacuum cleaner and you say I have to Hoover the living room. Hoover is a brand name and Bitcoin is brand name. And now governments are entering the digital currency space like the Chinese DCEP, which we're going to hear a lot more about. And so it's not just privately constructed digital currencies. It's also governments are creating a whole new species of money, which is just made of electronic bits of information.

 

Darren Luck: OK anything new, people tend to not trust it. Would you say it's something that should be trusted?

 

Pippa Malmgren: Ahh yeah, I think that, look, money is always innovating. And I know people don't think of it that way because they think money is that stays the same. Right. It's a dollar in my pocket. Like it's not changing. But in fact, throughout human history, we've had many forms of money, many different types of accounting systems money was connected to, and it's constantly innovating. And we're right at the cusp of an extraordinary shift from physical paper money to digital electronic money. And I think there are many implications of this jump. It's not as simple as a converting the piece of paper into an electronic signal. It's actually the creation of an entirely new kind of money.

 

Darren Luck: Right, and I guess my way of thinking this, too, is our minds are generally accustomed and wired to think two dimensionally. This is three dimensional thinking and I think this is where most people really get thrown off and really get worried and going through the history of money a little bit. We had salt, from what I understand, was one of the earliest forms of currencies and hence where the word salary comes from. Followed up by gold and silver coins, and from there, it's a very interesting concept that you introduced me to, which is why I started reading some of your work and it was the whole idea of Tally sticks and as crazy as the idea of crypto is, and the fact that we're accustomed to paper money prior to that was a form of these Tally sticks. Can you help us understand sort of what the stick was, how it began, how it sort of went away and then its evolution into paper money as we know it today?

 

Pippa Malmgren: Yeah, sure. So up until 1834 in Britain, they use literally wooden boards that were cracked in half to be the record of every transaction in your life. So it's more about the accounting system than money, but nonetheless, the shorter end of the stick, which is where we get that phrase, the short end of the stick, that would your personal record and the longer end of the stick would be sent to the chancellor for a record of what you had paid in taxes or what you owed. And it worked literally perfectly well for a thousand years. And then the British government, for a variety of reasons, decided to implement a really fancy new fangled technology that nobody had heard of before for individuals, which was the use of paper money. Now the Chinese have introduced paper money. In fact, Genghis Khan established his whole Empire using printed money, importing the Chinese idea. But it hadn't been put into popular circulation. And that was partly because you can't inflate if you're using Tally sticks, it takes too long for the tree to grow, to cut the tree down to like, keep the record of your whole life so paper money you can inflate.

 

Pippa Malmgren: And why did they want to inflate? Because they just had like 200 years of massive war and massive debt and the French were still at the barricades with the French Revolution. So guess what the public said? They all went, are you out of your mind? I'm not going to use these pieces of paper that don't even have my name on it. Right. I'm sticking with my Tally sticks. And so what the government did was to confiscate them and take them down to parliament and burn them so they couldn't be used. And in fact, they miscalculated how much heat would be thrown off by the burning process. And that's what caused parliament to burn to the ground in 1834. It was literally the destruction of one system of money and accounting and the beginning of a new system. And today, I would say the shift from paper money to digital money is equally dramatic. It's just there's no smoke and fire.

 

Darren Luck: Well, not yet anyway. What a great story and a segue into the concept of creative destruction that we'll get into later. I mean, literally burning down the old form, creating a new one from there. So and it's funny to the way old concepts, you know, the Tally sticks may have died, but the terminology around it. So the short end of the stick, I mean, that's hundreds of years old. We still use that.

 

Pippa Malmgren: Yeah.

 

Darren Luck: The term tally is still used by accountants today.

 

Pippa Malmgren: We say we tally things up, right? That's right.

 

Darren Luck: And even as I understand the equity side was called the stock, as I understand. Is that accurate?

 

Pippa Malmgren: Totally. So the short end of the stick was also called the stock end of the stick.

 

Darren Luck: Ok, the stock end was the short.

 

Pippa Malmgren: And you could trade the stock end of the stick and that's where we get the term stock market.

 

Darren Luck: Ok, isn't that great? So the early forms of paper money, were they also backed by anything tangibly other than the faith of the government itself?

 

Pippa Malmgren: So different answer for different parts of the world, but the concept that it should be tied to some underlying real wealth, in my opinion, that develops slowly over time and typically in association with Empire. So part of the reason that everything got quoted against the British pound was because they had so much wealth from Empire. So it was assumed that the Bank of England was always good for the underlying money. But there are many periods of history where you had printed paper money, like in the US during the American Revolutionary War and the Civil War, lots of paper money was printed that all ended up being completely worthless. It wasn't backed by anything.

 

Darren Luck: And then hence the gold standard had to come in to give people, I guess, confidence that there would be actually something backing these worthless pieces of paper. And also, as I understand, ushered in the whole idea of modern banking and the idea of fractional banking. So with Tally sticks, you could never have fractional banking. With fiat currencies, you can have fractional banking that then expands the entire economy and allowed for the the funding and the financing of the industrial revolution, as I understand it.

 

Pippa Malmgren: Well, yeah, in fact. And that's why when I say to people, we have so much debt around the world that there virtually isn't a major nation that doesn't have a massive debt problem. I mean, to the degree that even if you were to confiscate all the assets of every single citizen, it still wouldn't be enough to pay that debt off. That's how bad it is.

 

Darren Luck: That's a problem.

 

Pippa Malmgren: That's a problem. Right.

 

Darren Luck: It works till it doesn't work.

 

Pippa Malmgren: Exactly. So in that situation, one option is you just abandon the whole system of money in accounting and you introduce a new one. And that's what happened in 1834. And today, I think the equivalent is digital money is the new money and block chain is the new accounting. And when you put the two together, you get a very robust new system. And if we look at what happened in 1834, far from destroying the prospects for the economy that shift, that abandonment of the old system and the introduction of a new one actually allowed the industrial revolution to happen. It allowed financing to flourish. And today, I would argue the same thing is true. In fact, it's even more so because with digital money, especially if it's sovereign digital, and now that's a new concept you have to think about for a second, because most people think crypto is private. But I'm talking about digital money that is public, like the digital dollar, or we're hearing more and more about Britcoin, the potential British version or the DCEP that I mentioned from China. Well, one of the board members of the Federal Reserve described to me this situation. He says it's like heroin. It's like digital heroin for central bankers because you can literally double or have the money supply with a single keystroke. You can literally direct money into a person's bank account because they voted with you on a subject or tax them if they voted against you. So it's a level of invasiveness and then add to that once block chain is involved, I have to say, I describe this new form of money as effectively a surveillance system that's disguised to look like money. Right. It's a tracking logging system. But taken together, could it mean that we have just invented an entirely new way to expand the finances of the world economy and cause it to flourish? Yes, I would say yes.

 

Darren Luck: Right. And I find it interesting, too, given that preamble, that there's the perception that digital currencies are going to be popular with criminals and for criminal activity. And we saw exactly in practice what happened with the Colonial Pipeline where the ransom was paid, but it was very quickly returned. So it really is a contradiction because it's unregulated, but because it's so transparent, it's impossible to really, I guess, break the law in a lot of ways that that people think it's possible. So in a world of decentralized finance or defi, everybody is not going to be worried about ransoms, a million dollar ransoms and terrorism and so on. How is it going to affect the average person as far as how they invest their money, how they get paid, how they save their money? What do you see in a world of defi for the average person in terms of day to day banking?

 

Pippa Malmgren: Oh, lots of different things. Some of them are good and some of them not so good. As an example, the good news is disintermediation, the banks. And so you lose a whole layer of costs.

 

Darren Luck: Do we still need banking? Would we still need traditional banking? That's the question I've got.

 

Pippa Malmgren: Yeah, it's a really good question, and I think the answer is in the real world, traditional banks provide you with FDIC and various forms of insurance. In the digital world, it's literally the Wild West. We have not yet established the constitution of that space, the legal frameworks, what is allowed and not allowed. So you and I already and everyone listening to the podcast, we already have a digital twin and that digital twin of ourselves, of the institutions we work for, of the community we live in, like every single person, place, thing, will have a digital version that exists in this kind of holographic space that you can't see. Now, why is this important? Well, as I said, it's in a sense a surveillance system that tracks everything you do. And it's not just what you're spending on. It's also what does facial recognition tell you as you look into your iPhone and you watch certain things, it can gather information about what's your state of mind and your voice the way you walk. Generally, smartphones are retrieval devices for this kind of data. So when you add all that up together, let me give you a practical example of what's happening today. What's happening today is that let's say you're a couple and you both bank with the same bank. Well, today, the bank can buy all this data, which is constantly auctioned off every single day on the Internet. And what they do is run the algorithms over the data. And what they see is a divorce is coming before, you know, a divorce is coming.

 

Darren Luck: Oh my goodness.

 

Pippa Malmgren: Yeah, because they're looking at spending patterns of both parties and they're like, this is definitely ending in divorce.

 

Darren Luck: There's no secrets.

 

Pippa Malmgren: It's yeah, there are no secrets. Well, secrets from yourself because you haven't clocked it yet. Right. So what they will then do is draw down the credit limit of the lower earning partner in anticipation of the coming financial catastrophe. And so usually that's the woman, but not always. So then that person has to go get a job and then when they apply, they don't ever get called back. Why? Because they also buy, the H.R. departments buy the same data. So if you buy a Ben and Jerry's ice cream at midnight with your MasterCard and all that data automatically goes to Google now. So that shows up and the algorithm judges this means you're emotionally unstable. Then what your digital twin is showing is a very different aspect of yourself than you might recognize. And I think this is the bit where being in the Wild West and having no law, no rule, no universal understanding of what's appropriate. Yeah, this is the tricky part of entering this new kind of money. Definitely.

 

Darren Luck: And it's funny that we voluntarily put ourselves out there in social media and Google tracks sort of everything that we do. And I've always wondered, like, what are they going to do with all of this? And sort of what you're saying is like Brave New World. It makes sense. Is anybody actually on an experimental basis doing this stuff, or is this just sort of your conjecture that you've sort of come up with this? Is there any real world things happening here?

 

Pippa Malmgren: So that's the crazy thing. You're giving away all this data all the time. And then I tell you the story and you go, oh my God, you mean they're using the data and they're using it against me?

 

We're so naïve, right?

 

Pippa Malmgren: Yeah. Surprise. You are the product.

 

Darren Luck: Yeah, we are the product.

 

Pippa Malmgren: You are the product. Yeah. So this shouldn't be a surprise, but it's really interesting that it is a surprise. And clearly I think most people have an emotional reaction to that and they will want to have rules and policy and some kind of protections for real humans. But I'm actually not conjecturing, that's an actual real truth. I was sitting with the head of one of the largest banks in the world and he said, oh, we're already doing this. And in fact, Citigroup, for example, knows they could do it and they've made an active decision not to do it so they could easily assess the divorce risk in families. They just decided it's unethical to do so.

 

Darren Luck: I heard a story about I think it was Domino's Pizza in the state of Texas, had all this data and they didn't know what to do with it. And they approached one of these data companies and they literally put together a program where they could predict the pizzas that people would order before they ordered them to the point where they actually made the pizzas, put them in the delivery cars. And a vast number, like over 90 percent of them were actually delivered without even proactively getting the phone call from the customer. They had very, very little waste. It really is frightening.

 

Pippa Malmgren: You know, there's a wonderful neuroscientist who I know, called Moran Cerf, CERF, and he was the technical consultant to Christopher Nolan on a lot of his films, Inception and I think Limitless. And he's very big on this whole issue that it's very clear that human beings think that they walk into a restaurant and decide, will I have the meat or the fish, but in fact, they've made the decision literally years in advance.

 

Darren Luck: Isn't that crazy.

 

Pippa Malmgren: That we have on almost everything because we're creatures of habit and we make decisions that then create a kind of architecture of future responses. And so, yeah, this is just a fact that that's utterly true.

 

Darren Luck: And you think about the applications in stock trading. I mean, if we've got that level of predictability with ordering pizzas or going in a restaurant, we can certainly predict what markets could do with this kind of powerful data to work. Have you heard of anybody that's actually capitalizing on this to make money yet?

 

Pippa Malmgren: Oh, sure. I mean, yeah, major corporations are absolutely in the world of finance. Absolutely. The Chinese are super on this because of their social credit system where bad behaviors are penalized. So if you hang out with the wrong people, if you express a view the government doesn't like, if you buy things that the government doesn't want you to have, then basically your social credit score will go down to the point that there are a whole bunch of people in China that literally can't take a train because they are only able to pay with a digital payment mechanism. And it basically says you're not permitted.

 

Darren Luck: Is that right? That's frightening.

 

Pippa Malmgren: Yeah.

 

Darren Luck: I know Jack Ma got himself in trouble with the government, but I haven't heard about the average person that's actually put in the penalty box for behavior that the government doesn't agree with.

 

Pippa Malmgren: Definitely. In fact, I would go so far as to say you're effectively watching the digitization of prison itself and so you could be locked into a physical space where your digital money won't work at the grocery store, it won't work. So you're locked in four blocks or whatever. Now, I don't imply that that's the way it'll be used in the context of the United States or Britain or Western Europe. I'm just saying that is one way the Chinese are deploying this technology now. But, you know, in the West, we still go through a kind of social credit scoring exercise. It's just that Google does it and Amazon does it. And so it's individual private companies that are scoring you. So a typical in a capitalist economy. Right? We privatize the scoring function. And I just personally think that as a citizen, just as you're entitled to see your credit score, you should be entitled to see your social credit score.

 

Darren Luck: Right. So these things are moving faster than any government could ever hope to regulate. Absolutely. I guess it's incumbent on individuals to be aware of these trends and protect themselves proactively rather than assume somebody will look out for them.

 

Pippa Malmgren: Well, you know, there are a number of people who are very brilliant working on this issue, like Sir Tim Berners Lee, the inventor of the Internet who's currently building a structure. That's partly why he's selling the NFTE of the original code of the Internet, which I actually went to see here in London at Sotheby's the other day. They have it on display. Last time I looked, the bids were getting many millions.

 

Darren Luck: I'm going to cash in Tally sticks to try to put a bid on that.

 

Pippa Malmgren: But the reason he's doing it is because he's trying to create a new kind of Internet where you control your own data. Not other organizations, and I think there's some merit in that, so people are working on this issue.

 

Darren Luck: Yeah, I guess it doesn't make sense to sort of get worried about Big Brother because things are evolving and things will change. To try to triangulate and figure out where this is going is next to impossible. There's too many things happening, too many moving pieces and don't get too worked up and have to save bottled water and duct tape in a bunker in your backyard because we will adapt as people.

 

Darren Luck: It's halftime and I hope you're enjoying the show. Low interest rates are making it tough on conservative investors. Are you retired or close to retirement? If you're looking for safe, predictable, growing cash income? That's what we do. And we are the experts. Please visit us at LuckFinancialGroup.com to learn more. We are here to help. Now back to the show.

 

Darren Luck: I want to go back a little bit and talk about Bitcoin. And I guess Bitcoin is maybe not the best label to put on it, but crypto currencies as the ultimate defense against governments printing money and accumulating more and more and more debt that then creates inflation and currency issues. Would you agree that crypto could be the answer to these problems where Tally sticks ra coarse fiat now maybe has run its course and now crypto could be the answer to all the problems of unending money printing?

 

Pippa Malmgren: Yeah, no. In fact, quite the opposite. I think that the governments are definitely going to be regulating crypto and you won't be able to interface with it without government being aware of it. Able to track it. I mean, I keep trying to point out to people that you still have to use some kind of a keyboard, whether it's on your phone or your computer. And if they announce that it's illegal to use certain crypto mechanisms, then it'll be clear you're trying to enter those systems through your keyboard and then government will see and then either know or prohibit you or whatever. So in other words, it's not so simple that you can just escape fiat currency by going private. So what I think will happen and what is happening is certain crypto currencies will work closely with government and be part of the system that government puts in place. But the new thing that's really important is governments themselves are introducing digital money and they will have a preference for the public using their money, not a private crypto, a private digital, except for the ones that are really closely aligned with them and their interests. And that is why I mentioned Britcoin in the UK, the digital dollar in the states, the DCEP in China. We're just going to see that Fiat is still very real. It's just electronic, that's all.

 

Darren Luck: So it's like crack cocaine for government authorities, really. It takes what they can do and it just expands it to a new level.

 

Pippa Malmgren: It does. And so I have real questions about the inflation consequences. You know I'm a little bit known for being a little bit of an inflationesta. I always worry a little bit more about it than most people. But we've had several decades now where everyone said it's dead. We never have to worry about that again. But that was based on a certain set of assumptions. Like China would always drive the price of making anything down. That there was always someone new in emerging markets to push the prices lower. That competition would always keep prices down. But we've seen a massive reversal of these circumstances. And I'm not surprised that inflation is now picking up. If you add to that already existing trend of rising inflation, this record sum of money that's been thrown into the world economy by virtually every government in response to COVID and then overlay it with the creation of digital money where, like I said, you can double or have the money supply in a keystroke, it does to my mind, really raise the risk of inflation even more. And just to be clear, I'm not talking about hyperinflation like in the interwar period. If we go from one percent inflation to three percent inflation, that sounds really small. Everybody goes, oh, well, that's no big deal. It's a massive deal.

 

Darren Luck: It's three X. It's a big deal.

 

Pippa Malmgren: It's huge if you're a pensioner, if you're relying on a pension, if you are a poor person and a poor family, that is a radical change in your lifestyle. And I do think that that's the kind of thing that will create social pressures that we'll have to address just as we did in the seventies.

 

Darren Luck: Absolutely. And what would you say is gold? Is that still I mean, it worked 2,000 years ago, and is gold and tangible money still going to be the safeguard against inflation? Traditionally oil as well.

 

Pippa Malmgren: Yeah, but, you know, remember that it became the way government dealt with the gold issue after the First World War was to say that it's illegal to transact it except on an acceptable exchange. And so that's where a government would basically tax it at whatever rate they liked, which meant you didn't get the full benefit you thought you would get of being in gold. And at the end of the day, gold is just it's physically hard to move. Yeah. In wartime, when you see people trying to move a lot of wealth around, it's not gold. It's always diamonds and pockets and things like that. But the reality is that you hope that things never come to a point where people are trying to figure out a store of value in that way because that means societies become highly unstable. So this is not where you want to go. And the other thing is, does gold do, what does it actually do? Does it preserve, does it really protect or does it also go down? It just doesn't go down as much as everything else.

 

Darren Luck: Right.

 

Pippa Malmgren: The thing that really protects you from inflation, to be perfectly honest, is I agree with Warren Buffett on this. The most important thing is that you invest in yourself. Absolutely. And you improve your own skill and ability to earn. And if you do that, that will protect you better than gold or any other physical item.

 

Darren Luck: Right. Excellent. That's the start of some optimism that I'd like to inject into the conversation here. You know, there's a lot of confusing things happening. And I tend to think if you can sort of look back in history and figure out an analogy what's going on today, it sort of helps you get a better sense of what's happening. So looking through history, the 1700's was a creation of iron and water power. Late 1800's, we saw railways, steel and steam power enter into the world economy. The early 1900's saw electricity and autos, the 1950's we saw the advent of petrochemicals and air travel and it doesn't seem like it was that long ago but just in the 1990's was the advent of the Internet. And here we are in the 2020's we'll call it 2021 and we've got all of these new things that are happening that are I guess competing. Is it good? Is it bad? It's going to be certainly different and there's going to be opportunities. And like Joseph Schumpeter famously coined the term creative destruction, old ways of doing things are replaced with new, better ways of doing things. So Pippa you're regarded as a world expert on identifying future trends and opportunities. Do you see this as the sixth wave of the industrial revolution that started in the 1700's?

 

Pippa Malmgren: I do, and I'm very optimistic about it. And I think there are a whole bunch of things that we're right on the cusp of. Let me give you a little background. There was a famous engineer called Buckminster Fuller who invented the Geodesic Dome and was just an incredibly brilliant polymath. And he identified something called the knowledge doubling curve, which was to say that the amount of information that we're having to process was doubling I think he said by 1900 it was doubling every 250 years and by 2020 it's doubling every 12 hours.

 

Darren Luck: Wow.

 

Pippa Malmgren: It's literally just incredible. But this is important because the speed, the pace and the magnitude of change is genuinely accelerating. So how we think is affected by this, at any rate, one of the big changes that's coming, which Tim Cook at Apple has repeatedly hinted at, is the shift from using a mobile phone, a smart device in your pocket to using glasses. And because the Google glasses didn't really work so well, everyone thinks, well, that's not going to work. So that's not coming. But I disagree. I think that there's going to be a radical transformation and that means we move away from words and sentences and letters more into the realm of image, symbol and icon, which is actually an incredibly efficient way of conveying information. We already do it because you pick up your phone and you already don't use words. You look at icons, right? You're already using visual symbols of meaning.

 

Darren Luck: A little happy face or a little sort of smirking face as a way to answer a question as well as convey emotion.

 

Pippa Malmgren: It's efficient.

 

Darren Luck: Yeah. Isn't that incredible?

 

Pippa Malmgren: Yeah. I think we're about to be in some extraordinary radical change. Plus, because of the code breaking, not just the breaking of nuclear codes, but the breaking of genetic codes, of behavioral codes and the incredible processing power that computers now offer us with supercomputing, quantum computing. We could do two hundred quadrillion equations in a second. We're going to get many really good high quality answers to ancient problems. So I think the future is definitely going to deliver some amazingly good things. But as always, technology, it's a double edged sword with the good. You also get some difficulties. You have to manage as well.

 

Darren Luck: Yeah. So it's going to be potentially more invasive because and we've got a digital twin out there that everybody's going to know who we are and there's going to be like a delta between the real you and the digital you and trying to figure out, OK, what's going on here and consistently cloning that digital person with predictive algorithms so they know exactly what everybody on the planet is going to do before they even know they're going to do it, as I understand.

 

Pippa Malmgren: Exactly.

 

Darren Luck: But to that end, it could help us avoid accidents, sicknesses, other problems that perhaps our own I guess heuristics might lead us down a path that might not be in our best interest. If I could make that assertion.

 

Pippa Malmgren: Completely. Completely. Yeah. Like I said, technology is a phenomena. It's like a car is a technology. You can use it to transport the kids to school and you can use it to kill someone. It's equally deadly and helpful.

 

Darren Luck: Absolutely.

 

Pippa Malmgren: All technology is like that.

 

Darren Luck: Right. It's the same car. It can have two different outcomes.

 

Pippa Malmgren: Definitely.

 

Darren Luck: So Pippa you put your money where your mouth is. You've got a company that you're associated with called Datifly working in the drone space. Talk about that. Using all of this new world technology, what do you see being the real world applications with that?

 

Pippa Malmgren: Yeah, I made a decision a few years ago to get involved in building the real economy and getting involved in the manufacturing of drones and understanding the interface between hardware and software in real things. And so drones have been a fascinating area because there's so much adoption occurring so quickly in that space. And it brings together so many different things because it's really about deploying sensors and gathering data. It's not about delivering. You know, people are like, oh, drones are about delivering a pizza on a golf course or a beer in a field. No, it's literally like prosthetics. It extends your sensory perception to far, far away places in highly accurate ways. And I'm now, I haven't announced it yet, but I'm about to be involved with a new tech venture and I just really take this area seriously to be involved with because, again, the innovation is happening so quickly. You can do so many cooler things, many more cooler things now than you could in the past. So I love that. You could just basically do ever more with ever less. And this is exciting.

 

Darren Luck: It's efficiency's yeah. So as we wrap up the conversation Pippa, is there anything the average person should be looking towards? Any opportunities, maybe things they even tell their children or nephews? You know, these are some areas to look towards the future as potential careers, investment opportunities, whatever they might be. Do you see anything on the horizon that excites you to be part of?

 

Pippa Malmgren: Yeah, well, I'm actually very excited about the future. I know we've touched on some dark elements, but I really do think that we're at the beginning of a period of extraordinary growth. I think this will be the end of a period of history where you're on LinkedIn and that's your name. And then you get one word that labels you like Pippa Economist.

 

Darren Luck: Right?

 

Pippa Malmgren: In fact we'll have portfolio careers. We're going to do a lot of different things in the course of one lifetime. It'll become much easier to have fluidity and to do multiple things simultaneously as well. And we'll all learn a lot from that. And actually, I think markets are going to become even more accessible and more profitable for real investors. I remember when somebody published a book called Dow 10,000, which really dates me and people, was like, no, it'll never go to 10,000. And then somebody wrote a 36,000, like, it'll never go that high. The point is actually with the amount of money we've thrown into the world economy, you have to understand all these asset prices will rise commensurately. So I think that we're not at the top. We're at the beginning of a new ascent and there's going to be loads of jobs and loads of work to do, loads of things to learn and loads of things to invest in profitably.

 

Darren Luck: Excellent. I guess that's what keeps me up at night, is looking for those opportunities and making sure that we've got our clients in those areas. And it's with people like you that I'm very, very pleased that I can lean on you and try to identify some of these things.

 

Pippa Malmgren: Well, thank you so much for having me and for getting into all this. It's such an interesting subject.

 

Darren Luck: I know this has been a super busy week for you. You've had a lot going on. We've had trouble connecting. And here we are on a Friday evening. The only thing between the pub and you is me. So you've had a busy week and know you've had a couple of great things go through. You want to celebrate, and I'm going to let you get to that. And with that Pippa, on behalf of myself, my clients and our listeners out there, I want to thank you so much for the great work you do and sharing some of that with us today.

 

Pippa Malmgren: Oh, thank you so much. Speak soon.

 

Darren Luck: Thank you. OK, bye bye.

 

Pippa Malmgren: Bye.

 

Darren Luck: Thanks for listening. If you know somebody that would like to hear this interview, please share with them. And if you are retired, nearing retirement or interested in learning about investment strategies that provide safe, predictable, growing cash income, that's what we do. We are investment income experts. Please visit our website, LuckFinancialGroup.com, or email us at LuckFinancialGroup@CIBC.com for more details, because we're here to help.

 

Stephanie Senteris: The CIBC logo and CIBC Private Wealth Management are registered trademarks of CIBC. CIBC Private Wealth Management consists of services provided by CIBC in certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. CIBC Private Wealth Management is a registered trademark of CIBC use under license. Wood Gundy is a registered trademark of CIBC World Markets Inc. Darren Luck is an investment advisor with CIBC Wood Gundy in Windsor, Ontario. The views of Darren Luck do not necessarily reflect those of CIBC World Markets Inc. If you are currently a CIBC Wood Gundy client, please contact your investment advisor. The views of Pippa Malmgren do not necessarily reflect those of Darren Luck or CIBC World Markets Inc. This information, including any opinion, is based on various sources believed to be reliable. But its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell or hold the position and securities of a company mentioned here and its affiliates or subsidiaries. It may also perform financial advisory services, investment banking or other services for or of lending or other credit relationships with the same. CIBC World Markets Inc and its representatives will receive sales commissions or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. CIBC World Markets Inc., 2021.

 

Episode 6: Fundamentals of Cryptocurrency with Som Seif

 

[Wealth Tracks]

 

[There is more to Wealth than just Money]

 

[Episode 6: Fundamentals of Cryptocurrency with Som Seif]

 

[Headshot of Som Seif]

 

Som Seif: You can actually start to envision the future of the Internet, the future of commerce and business and finance, because you can actually have a block chain that has the same principles of security, truth, lack of agency. But now you can actually do really interesting things on it.

 

Stephanie Senteris: Welcome to Wealth Tracks hosted by one of Canada's leading investment advisors, Darren Luck. Over the past 30 years, he has traveled the world to search out the best ways to help clients save, grow and protect their wealth. On the show, he'll be speaking to various thought leaders, getting their insights, sharing stories and cool ideas about health, wealth and happiness. Because there's more to wealth than just money.

 

Darren Luck: It's not a stretch to say cryptocurrency is the biggest issue facing global finance today and into the future as well. Jack Dorsey, co-founder of Twitter, recently said there's nothing more important over the rest of his lifetime to work on than Bitcoin and other aspects of digital commerce. This episode is part of the disrupter series, topics that will relate to new trends or technologies that will change our lives in the future. This episode, we're going to keep things very basic and we're going to call it Bitcoin for Dummies. I'm very pleased to be joined today by Mr. Som Seif, an innovator, a disruptor and an expert in Canadian finance and cryptocurrency in particular. His firm Purpose Investments out of Toronto accomplished something no other company on Earth could do. Bring a Bitcoin ETF to market. Som, you're a super busy guy. Thanks for joining me today and sharing your insights on the world of crypto currencies.

 

Som Seif: Thanks, Darren, it's great to be here and looking forward to the conversation.

 

Darren Luck: Yeah, and normally when I do these, I've got some background or some experience in some of these things, and I guess I'm not embarrassed to say I don't know a whole lot about crypto currencies. I don't think a lot of people out there do. And I find a lot of people that say they do really don't. So with that, I'm going to ask you to bring the level down to the most basic narrative. And if you're eighty year old aunt asked you, what is Bitcoin? How would you explain Bitcoin to her?

 

Som Seif: It's a tough question. I always try to simplify it this way. You know, I think Bitcoin I mean, a lot of people have very different emotional and perspectives of these things. But in its simplest form, it's a software system that enables two parties to transfer value between them without any intermediary agent inside it. And so effectively, it's a system that enables you to transfer value. But what's unique about it is, of course, it's done in a very secure, structured way such that you can trust the system that has been developed because it's all done based on this software that underlines it, that it would be impossible to break. That's kind of the uniqueness of it. And when it was first developed, it sort of solved one of the most complex problems of transfer value between two parties in a trusted way without agency. But it did it while securing that network so that no one could ever come back and change the truth of the transactions that occurred. So it's kind of very cool. So, I mean, I always explain the simplest way, which is just if you want to get something from one person to the next person, you can do it now without anybody in between you, which is actually most of society and most of finance actually is not true. I mean, there's all these agents and in between elements and pipes that somebody controls. And this was the first that actually allowed it not to happen.

 

Darren Luck: Ok, so and again, in my very rudimentary sense I'll be your eighty year old aunt, I'm going to buy one of these software codes. I guess we'll call it. It's going to cost me thirty thousand dollars today. And it's sort of been in freefall recently. So it's down from sixty thousand was the high, something like that.

 

Som Seif: So it got to a high of about sixty five thousand and a low of like ten cents.

 

Darren Luck: So it's a big range. Yeah. I wish you would have told me to buy it at ten cents. I would have backed up the truck.

 

Som Seif: I think lots of people would like to have known even at one dollar had been fine too.

 

Darren Luck: Yeah, well and who knows. What's the old saying is the best time to have planted a tree was ten years ago. The next best time is today. So who knows what the future is going to bring? Is it going to be thirty thousand back to ten cents or thirty thousand, two hundred thousand?

 

Som Seif: That's right.

 

Darren Luck: And that's, I guess, the allure of our business. But again, so your aunt now she's going to invest thirty thousand dollars. What is she getting? What is it exactly she's buying?

 

Som Seif: Yeah. So you are buying. So in the case of, let's say something like Bitcoin, Bitcoin, what's confusing always about Bitcoin is that when you buy a Bitcoin, you're buying the token and you're also buying a piece of the underlying protocol, the actual system, the software system. Right. And so.

 

Darren Luck: So you're buying part of the machine.

 

Som Seif: Exactly.

 

Darren Luck: As well as the widgets the machine puts out.

 

Som Seif: Exactly. And so when you buy one Bitcoin, you're effectively buying one of the shares of the entire network. Now, what makes Bitcoin so unique was that when the founders, the group that developed it, whether that be one person or one hundred people, we don't know all the details. But effectively, it's a community now that controls and developed it. But when they developed this, they also coded into the system a very important principle. And that was the amount of Bitcoin that could be ever produced in total. So that being twenty one million Bitcoin to ever be produced and the number of bitcoins that would be produced on an annual basis. So the kind of inflation rate of kind of Bitcoin up to that cap. And so when you buy one Bitcoin today, you are effectively buying one of this ex maximum twenty one million bitcoins. And that is a fact. The truth that's actually going back to my earlier comment. It's embedded in the system. It's irrevocable. It's a fact. Right. And so what's ultimately now happened is that when you buy a Bitcoin, you're effectively buying a, you know, a store of value based on a knowledge that it is impossible to ever increase that capacity of numbers. And that's ultimately where Bitcoin is ultimately now gravitated to, which is you get thrown out this concept of digital gold, you know, because it effectively playing as more of a store of value than it is, you know, its original principle of being a more payments kind of transfer of value concept between two parties.

 

Darren Luck: Ok, so going back to my early economic days, any assets got to have two things. It has got to have scarcity. I guess what you're referring to, the other one is utility. So scarcity means there can only be so much of it. If you can continually created it, it conceivably isn't worth anything. And the irony is, is fiat currency or the money that we use today and we trust today has no scarcity. Our officials just continually print money, which I think is open the door for things like crypto currencies. But the other one is utility. And to the point and we're talking to your aunt again. What utility what can you actually do with it?

 

Som Seif: Yeah, no, I mean, it's a really important point. So going back to currencies in general, I mean, you know what they have high utility because you can use it to spend money and buy things. Now, you know, we live in a world where the utility has more stability to it. So Canadian dollar, if you're in the US dollar in the euro, you generally look at currency and feel that it has relative stability, although it can move 10, 20 percent or whatever, like we've seen, for example, in the last year with the US dollar and Canadian dollar. But if you lived in, you know, certain parts of the world where, say, South America, you know, your currency could move by, you know, a significant by hundreds percent deflation, you know, devaluation. And so in many ways, Bitcoin actually can have lots of utility in those places as a currency. Now, I've kind of moved away from that principle. I look at what Bitcoin really has is it has, you know, this principle store of value, supply and demand. So going back to your economics 101, you need to make sure that there's supply constraints or scarcity. So, yes, there's a maximum number. And two is you want to see excess and growing demand. And so if you have those two fundamental elements, prices generally will go up. And so as a result of that, actually Bitcoin has fundamentally become less of a vehicle for good payment structure. I can use this as tender to buy a car or to buy, you know, goods or whatever it be because if I believe that this asset theoretically is going to have increasing demand, but we have a set number of supply, then theoretically the price is going to keep going higher. And so why would you ever want to use it to buy for anything?

 

Darren Luck: Right. It can't be a currency if it's going up right. Who would ever give it up?

 

Som Seif: Exactly.

 

Darren Luck: It's almost like what's happening in the real estate market today. Who's going to sell their house when they buy a new one, when their existing house continues to appreciate in value and it disrupts the entire market.

 

Som Seif: And the best example of it is gold, which is what many people have historically considered as the store of value in history, which is that, you know, it's an asset that has scarcity to some degree. You have to mine gold and all the rest of it to increase it. The production is is set at, I mean, annual inflation rate that ultimately comes out of the ground. And it had utility a long time ago as a store of value linked to currency. So the US dollar, of course, with Bretton Woods was basically, you know, linked to the gold. And so there was this kind of understanding that you could basically take gold anywhere in the world and people would accept it. But the reality is, is that gold has very little utility outside of that store of value. And because most people say, well, I'm going to own it and it's going to keep going up in value, maybe it's going to go better than inflation. And so why would I ever want to spend it? And so Bitcoin effectively has taken over in a similar vein as the more digital gold in the same principle. But the one thing you know with gold is that it can continue to produce it, whereas bitcoin, you know, at some point it never can be produced any further.

 

Darren Luck: Right. So the whole idea, I guess, with dollars backed by gold and as you pointed out, Bretton Woods. And then fast forward 1971 when Nixon took the US off the gold standard, I mean, they just ran the printing presses and we saw the inflation that followed shortly after that. And some people are fearful we could be in the early stages of a replay of that.

 

Som Seif: Yeah, absolutely.

 

Darren Luck: So now we've got this concept, this electronic currency, we'll call it. And I try to compare this to my early days of the Internet. I could not understand the Internet when it first came out because it was so different from what we were used to. And humans were used to thinking in two dimensions. And this is almost three dimensional thinking. And I think that that's probably one of the problems we've got with understanding of crypto and so on. But my other understanding is the cryptocurrencies transact or I guess the practicality of it is they run on a block chain or the Internet, as I understand it. So now your aunt says, OK, Som, I'm going to buy some of this. And how does this Bitcoin operate in the block chain? What happens there?

 

Som Seif: Yeah, so this goes back to my comment that unfortunately, Bitcoin and the Bitcoin block chain are named the same thing Bitcoin. But, you know, Bitcoin is the token that ultimately owns a piece of this underlying protocol, which is what we call the block chain. And all the block chain really is is a ledger. It's a spreadsheet, and it's a spreadsheet that is linked together all the transactions that have occurred in Bitcoin block chain. And so it's sort of secured. Call it transactions that effectively ensure that, like when something is bonded, you know a a transaction is bonded. It's kind of like embedded and ingrained into the cell of the ledger. This block chain. It ultimately is now structured as a moment and it's secured and it's truth. So in a basic way, when you look at Bitcoin, you know, which is a very linear its concept was really profound, but it had very little utility, as we've just talked about over time, other than it's like a calculator allows you to kind of do one transaction at a time. You know, you have to kind of do them in a very linear way. But the principle of it was profound because it now allowed for you to do this without anybody in between you, nobody else's pipes and the transaction to be secured.

 

Som Seif: What's really amazing, though, is that the principle of this then spawned further innovation, where the block chain now said, well, what if you had multiple nodes going on and you could actually code each of the nodes, each of the block chain points to actually have, you know, kind of more coded structuring to them. So you could in fact, you know kind of do multiple things. So, for example, you could say, hey, if something happens, do this instead of just, hey, do this. You could say if something happens, let's say, you know, if Darren sends me a thousand dollars, then send him back X, Y and Z. If he doesn't send me a thousand dollars, then don't send him back X, Y and Z or like. I mean, there's all these really cool things. And so you started to create these new ideas of the block chain that could actually be used in multidimensional kind of more call it decentralized computing. And it actually this is where Ethereum came from. And it's a really interesting issue because these systems actually, if you know the kind of governance of them, they get developed by a group of people and then a community ultimately starts to take it over.

 

Som Seif: And the Bitcoin community at the outset was really, really stubborn and really wanted Bitcoin only to stay as this digital gold store of value concept. They did not want to evolve into this kind of more supercomputer, multidimensional, do some really cool things on top of it. And so what happened was that community that wanted that to happen, state of Bitcoin and the community that wanted to do some more interesting stuff and build really interesting stuff around that moved to things like Ethereum. And today you're seeing some of the most exciting stuff happening in this space on the Ethereum network and where you can actually start to envision the future of the Internet, the future of, you know, commerce and business and finance, because you can actually have a block chain that has the same principles of security, truth, lack of agency. But now you can actually do really interesting things on it. You have high utility, which Bitcoin doesn't have, unfortunately. But what Bitcoin still has and always will is that truth, that it will never have more than twenty one million bitcoins that ever issued. So it still has that store of value benefit.

 

Darren Luck: Ok, I certainly want to follow up on that, but I want to go back. So I guess you've changed my concept of what I thought block chain and Bitcoin was, I always thought block chain was like the highway and Bitcoin and Ethereum and all the other ones are driving up and down the highway. It sounds like, and please correct me if I'm wrong, is they are the same thing. There is no block chain without Bitcoin and there is no Bitcoin without block chain. It's almost like a bunch of Lego that get put together from point A to point B and they become something. And there there's different, I guess, utilities or types of pieces that go together and the pieces will form, I guess, the business behind it that you want. Does that make sense?

 

Som Seif: Yeah, I mean, think about it much more simply. A Bitcoin or in the case of Ethereum an ether are kind of like the token that is a fractional piece of the block chain. And now each block chain. So Bitcoin is one block chain. And Ethereum is its own block chain, it's kind of like two different block chains. And they actually, you know, people try to make them talk to each other and work together, but they are they're not the same. And so it's not like you have one underlying block chain and then all these different tokens on top. It's actually a different system. And so when you own a Bitcoin, you own a piece of the Bitcoin block chain protocol, the actual underlying software there, if you own an ether block chain, you own a piece of the Ethereum block chain. And what's happened, though, is that because Bitcoin was not something that you adapted well, you know, people haven't built their businesses or ideas on top of Bitcoin that well because it didn't adapt to their capability. It was kind of like, you know, I'm working off of a calculator in the case of Bitcoin and then on Ethereum, I'm working off of a supercomputer.

 

Darren Luck: OK.

 

Som Seif: And so people when they start to think of their ideas that they could kind of use the block chain for because bitcoin or ether are ultimately the fuel, they're like the token the access token to this utility. This block chain is a utility. The business leaders and the business ideas and the developers started to say, you know, I can do more on Ethereum. I can develop these new ideas and these new platform products. And the next Amazon or the next Google can be built on top of Ethereum. And they started to build there. And to do that, they needed to be able to interact with the token of ether and utilize that to have access to the block chain that was underlying it.

 

Som Seif: So, you know, the way to liken these are when the Internet was being developed in the 70s and 80s. You know, it was an open source underlying protocol that people could build on when company and developers and entrepreneurs started to build their businesses on the Internet in the 80s and 90s, they started to build and use that underlying open source to build their ideas. When Jeff Bezos created Amazon, you know, he had this idea to kind of use the Internet to be able to transfer information and sell things and such.

 

Som Seif: But he had this open source that he had to interact with. And there was no you know, there was no call it token, but it effectively there was a concept of you had to interact with it and all the value that they created was built for their business on top of the system. And the protocol got very little value. In the case of block chains. When you interact with the system, you actually have to interact with the tokens and in fact, the utility goes to the protocol more so the next Amazon or the next businesses that will be built on top of these. In fact, more of the value will be, you know, accruing to the utility of the platform itself versus necessarily to the to the entrepreneur or the business on top of it. But it's so profound. There's so many elements to this. I mean, when you get into the technical components of it, it's really exciting to start to reimagine how these platforms will enable better businesses in the future and a lot of good examples that we can get into.

 

Darren Luck: Ok, so the value and again, I'm trying to keep this at a very basic level of the value is when you're buying a Bitcoin or an Ethereum or whatever it might be, is almost like a toll or a cover charge to sort of get into that space. And the big controversy now is the amount of energy that they use. So it's just maintaining that network to keep it alive, to keep the lights on. That's the issue. And if for whatever reason, you pull the plug on that the whole thing goes worthless, would that be accurate?

 

Som Seif: No, no, no. So let me kind of get a little more clear on that one. So, yes, the concept that you want to interact with a token when you have a transaction, let's say take Bitcoin and let's say, Darren, I'm sending you, you know, some value using my Bitcoin. When I do that, there is now a transaction occurs to know that that transaction occurred, like to get this kind of confirmation that said transaction complete. You know, when you buy something on Amazon or you buy something or do something online, it says transaction complete. Well, to get that there's a third party validators that actually do it. You don't do it for me and I don't do it for you. Third parties come in and say, OK, Darren says he's going to receive one hundred dollars. And so he says he's going to send one hundred dollars. Well, to confirm that there's third parties that come in and confirm it on our behalf. And what that is, is that third parties, agencies, the community, they're what we call Miners. They are compensated to do that with a transaction fee. So just like a normal if I paid a transaction fee to the bank or whatever it be. They are compensated to do that with a transaction fee. And that transaction fee is earned by doing the validation. Now, this is a really important point. When the Bitcoin network was built, it was built on this concept that, OK, so to ensure security and to ensure that that transaction was done and that third party actor who comes in and confirms it is a good actor, someone that doesn't come in and say, you know what? Yes, Som sent one hundred dollars to Darren, but I'm going to say, no, he didn't.

 

Som Seif: You don't want that to occur. You want that person to say no, no, like the truth happened. I'm going to confirm it.

 

Darren Luck: Right.

 

Som Seif: So what they did was they said to do that and to earn the reward of confirming it, you have to do something called proof of work. And proof of work is that you're going to burn a lot of energy to run this algorithm and this code to confirm that you're right. Now, if you're a bad actor, the cost of the energy is something that you don't want to burn. You don't want to burn that. You know, it's not worth your time to make something that you don't get a reward for because it can be very expensive. So because you don't get the reward if you don't tell the truth, like if the transaction doesn't go through. So you just going to keep burning energy and you don't do it.

 

Som Seif: So they want only people who are actually focused on earning the reward and telling the truth. So they burn this energy. And theoretically, the amount of energy you burn relative to the reward is attractive. The reward is more attractive than the energy. But this is what we call proof of work. And the system of Bitcoin was built on this premise. The community felt that you can only be a trusted actor if you work really hard and waste a lot of energy. And that's why it's getting a lot of criticism now. A lot of energy has gone into it. And when I say that is a lot of electricity, a lot of energy, power, but it's also built this phenomenal security infrastructure that is now undoable. You actually have to put all the same amount of energy. So they have secured this amazing network. What's happening now is you're actually on things like Ethereum and some other block chains, these kind of things that are evolving the system and the technology innovation is they're moving to something called proof of stake. And so what this does is says instead of burning electricity, we're going to get you to put up the fact that you own tokens. So if you own ether tokens, you can now be a validator. You can come in.

 

Som Seif: But if you do nefarious activities like don't say, the right part of it, you don't approve this properly because it's a truth, meaning that if I actually sent money, the hundred dollars to Darren and Darren received that hundred dollars, then you will lose your token. You don't waste energy, you just lose your token. And so again, the reward is attractive, but the loss is really hurtful if you are acting not in the best interest of the system. So this is a really powerful innovation. And what's happening today is, of course, Bitcoin. The community has not decided to move away from proof of work and other networks are moving to prove a stake that are not utilizing energy. Actually, Ethereums proof of stake model would be like ninety nine point nine percent less energy utilization. So it's a very powerful system, but it's a transition to get there. And it's going to be interesting to see. Because the criticism that, you know, I think block chain and Bitcoin are getting around its energy usage is something that's going to have to deal with. And its community is really stubborn about this, but they're going to have to deal with it. I do think there are going to be things that will come out of that in the future. But when we talk about crypto or, you know, this block chain community broadly, there's some really fascinating innovations happening around energy conservation in new system technologies like Proof of Stake, which I am a big believer in. And we have really had a view that that's where the future will ultimately drive towards.

 

Darren Luck: And who are these people? I mean, we're so used to everything being top down. You've a government regulator, a banking regulator, a securities commission that's sort of watching the hen house, so to speak. This is bottom up. There is no regulator. This is the community that's regulating almost like a Wikipedia.

 

Som Seif: That's exactly right.

 

Darren Luck: That you would never think Wikipedia could work, but there's just so many people out there that are keeping it honest and relevant. It becomes the best source of information. So in a sense, is that would that be a good analogy?

 

Som Seif: It's an excellent analogy. Wikipedia is an excellent analogy, and it's been proven to be the most accurate source of information because, you know, if somebody went on to the community and tried to act poorly in their own best interest or against the communities, then the community in general on average governs that. And so you see the same thing and block chains. And it's actually, you know, Darren, it's what makes this so unique is that if you think about the principal agent model, like the systems that we've all built networks on and you made a comment at the outset around kind of innovation in financial services and many different transactional kind of industries. This is a quite a powerful idea that there's no central actor. That, in fact, the governance of the system is done by its community. It's kind of like their true democracy in many ways. And if the community on average wants to do one thing, and that's actually why I use the word community. And for example, when I talk about Bitcoin community, the average Bitcoin community member wanted something. And so it geared towards that community's goals and other community members wanted something else. And so they went to another network. And so this really matters. And if you don't see the network governed properly, in fact, it will have its challenges. And so what's so powerful here is, you know, central actions and so much of society is central actions today, whether you're talking about a central bank and the decisions of monetary policy, like putting out currency, the actions of regulatory, the actions of Apple, I mean, all these things, you know, these are central actors. Now, Facebook is getting a lot of criticism because of central decisions that they make who can post what information. And it all roots up to Mark Zuckerberg.

 

Darren Luck: Right.

 

Som Seif: And so there's all this criticism of these things. But the reality is that what block chains are doing is trying to disintermediate that central action and really say, you know what, we're building a network that in fact, the community is making decisions based on its governance model versus a single person or a group of people.

 

Darren Luck: Right. I guess there is no perfect solution. There's no perfect model. And I think the top down and the government authority model we're seeing certainly isn't perfect. And if you believe in democracy and finance this and capitalism, this is, I guess, closer to that spectrum. You know I also think it's like the inmates are running the asylum to an extent right now as well and mob rules. So I get very concerned when I think that, you know, this thing is allowed to run amok. But again, if we relate it back to the Wikipedia model, you know, in the end, it's a self-correcting mechanism. Ultimately, the ecosystem will fix it.

 

Som Seif: Yeah, that's why it's so important to understand what the community is like, what do they want?

 

Darren Luck: Like who are these people?

 

Som Seif: That's actually really quite fascinating. So for me, like, if you look at the Bitcoin community, what these are developers. These are individuals. These are people like. But if you look at the Ethereum community, what's really unique there and what I get excited about is that it was actually developed by an individual, actually, Canadian from southwestern Ontario. And his name is Vitalik Buterin. Amazing individual, young kid like a young kid who kind of was a part of the Bitcoin community, saw that it wasn't going in the direction that it could and said, you know what, let's go and create this really unique new platform that had the more kind of broader, wider utility. And what you ended up seeing was because this individual actually had a really strong sense of direction, very good Democratic thinker and all the rest of it, a lot of the community of developers, those who are going to be the people who have some of the smartest minds today, young kids and such, started to gravitate to this. And you actually saw the difference in the clarity of a community that was very clear on where it was going, the direction of it and the opportunity. And then, of course, you put amazing smart people around the table. You never know what you're going to get out of it.

 

Som Seif: It's pretty cool. And so what I always look at now is, are there communities that are being built outside of Ethereum that you sort of say, well, that's inspiring. That's a group of people that also is thinking really uniquely and I haven't seen it yet, really. Frankly, what you're rather seeing is now within the community of Ethereum, smaller subgroups that are building on top of it and building the next great idea and going deeper into kind of business opportunities or new network protocol ideas and things of that and scaling opportunities. It all establishes, just like any other element, like based on what is this community's values, what do they care about, what do they want? And they are honestly 18 year olds to 80 year olds that they care about what they're doing. They really want to see this really unique vision and they're building it. And if anyone tries to act outside of what the values of the community are, they actually end up leaving or sort of minimized in terms of become the minority. And that's what you care about. And so I actually find it quite inspiring. And, you know, as an entrepreneur, as an operator, as someone who wants to kind of be a visionary in many ways, I always look at this stuff and see where can I be inspired by groups? And, you know, look, I mean, there's some always bad actors in many parts of society, but you got to look at these things and find the really interesting, unique parts of it.

 

Som Seif: And unfortunately, you know, look something like Bitcoin, which kind of got a lot of bad rap early on because of its community of, you know, some people were using it for nefarious activities, like things that, by the way, most technologies generally start with a group of nefarious activities, like the Internet was the printing press. All these things were done that way, too. But the reality is that, you know, it got a bad rap. I think it's unfortunate it got that bad rap. But like some of it also has to do with its community of people that are rallied around it. But I just find that you really care about what the community is. And Wikipedias community is the same thing. Like you look at Wikipedia, it's worked so well because it's got a set of values that are governed and that the community governs. And you believe in those values more than you believe in anything else.

 

Darren Luck: Ok, excellent.

 

Darren Luck: It's halftime, and I hope you're enjoying the show. Low interest rates are making it tough on conservative investors. Are you retired or close to retirement if you're looking for safe, predictable, growing cash income? That's what we do. And we are the experts. Please visit us at LuckFinancialGroup.com to learn more. We are here to help. Now back to the show.

 

Darren Luck: I'm going to give you some credit here. As far as some of these participants early on, I mean, you were able to bring a Bitcoin ETF to market when no one else could. How were you able to do that? What differentiated you and your background and your firm to be able to do what no other company on the planet was able to do?

 

Som Seif: Yeah, I mean, look, this is a really important conversation. I mean, it starts with we had a vision for this. I got involved, you know, so the Bitcoin White Paper came out 2008. It started to really develop in 2009, 2010. The Ethereum White Paper came out in 2013, 2014 and started to build out in 2015. And I got involved in this in around twenty sixteen where I started to actually say, look, I need to really deep dive into this to understand it better because I was a bit of like others, I was a naysayer, I was kind of talking about on the side about how I didn't really think this was anything special and kind of made some stupid comments, like we might have been a fraud or whatever, just like a lot of people do at the early stage. And I said, well, sort of silly, I shouldn't say those things until I actually go and learn. So I spent the time to learn. And frankly, I found it profound and mind blowing. What the potential is actually gave me the least to be able to now open my mind up to things that I was finding blocks on in traditional finance and such and start to get involved. And so 2017, 2018, we created a vehicle to say, let's go on this journey called Ether Capital. And that gave us the ability to say, let's be around the table some smart people and figure it out because it's still so early. And that gave us the insights to be able to say when the right time came, when we saw the infrastructure changing around, you know, the ability to create more investment product linked to Bitcoin and Ethereum. Let's be there. And so we started a dialogue in 2020 with the regulator, with the Ontario Securities Commission, the Canadian regulators.

 

Som Seif: And the first couple of months was really around education because like most people, the regulator was kind of of the view that, you know, this is still a space that maybe, you know, do we want to give people access? But more importantly, can access be done. Could you put, you know, an exchange traded fund, which is a very elegant and important structure at that, but provides daily liquidity all through the day, has to be really efficient. Can you use that structure to invest into something like Bitcoin? And we had to go and say, actually, guys, yes, like here is what's happened in the last couple of years. Here is the infrastructure. Here's the security of custody. Here is the ability for market makers to ensure that the price of the ETF trades in line with the underlying asset very efficiently and consistently. And here's the ability to absorb lots of demand if there was that. And so we were working with the regulator to do so. And frankly, it took a long time. We were with them for eight months before they gave us the approval to move forward. And that work, you know, we were one of the first in the world to do that with the regulators. Others had kind of gone at it a different approach, you know, threw things at the regulator, pushed them, you know, kind of yelled at them from the side to say, why don't you let us do it? But no one went in and actually educated them. And I think that's something that we can all learn from.

 

Darren Luck: OK.

 

Som Seif: You know, sometimes the other side is actually wanting to do the right thing but just doesn't have all the right tools or the information to make the decision.

 

Darren Luck: And so far in the US, I don't believe the SEC has provided a similar approval. Is that correct?

 

Som Seif: Yeah, no, not yet. But I think that I would anticipate that they will. I mean, the SEC generally will move slower around innovation in the United States. It's one of their challenges on that when it comes to structured kind of products like this. So they're a little slower, they're a little bit more cautious about things. But also they've been going through a transition, as you know, from one regime to the next. They have a new SEC chair. And so all these things play a factor into the politics of it. I'd anticipate that SEC will allow a US ETF to launch either later this year or early next year in 2022. But I think one of the really great things is that what we did in Canada has actually pushed them. You know, the message has been we'll look at what happened in Canada, look at what these guys did. So in the US, what we've seen is that the SEC is actually using the fact that we have built a template here that has working so well as an example of the fact that, hey, maybe we should be thinking about this. They've talked about it. The commissioners have talked about it publicly, and I think it's a really great thing to show, you know, that innovation can happen and that it's been efficient in doing so. And I'm proud of that. The global acceptance and awareness we've seen towards this has been really positive, not only for the Canadian regulatory system, but also for purpose broadly. And I'm excited about it.

 

Darren Luck: Now that supercool and I'm proud that I guess a fellow Canadian was able to do something that the so-called big boys couldn't get done. And it looks like politics, again, got in the way of doing the right thing. Into the next thing that we want to talk about, because the concept of Bitcoin and crypto is at the end of the day, these are actually currencies. And arguably, the most influential economist in the last hundred years, Milton Friedman, once said, you allow people to issue a currency. Eventually everybody will have their own currency. And that just seems to be the case now with crypto. So in addition to Bitcoin and Ethereum that are the big recognized ones on the block, there are currently 10,389 other smaller coins out there. Ones like Dogecoin that started as a joke, Ripple, and my favorite pirate, which is called ARRR. So with that being said, what are your thoughts on some of these fringe currencies, are they to be avoided or are these great opportunities to be had?

 

Som Seif: So it's really it's interesting. One of the really important parts to understand where there's excitement and where there isn't is to understand what they're trying to accomplish. So, again, I look at Bitcoin and Ethereum. Remember, they are actually competing platforms. They, yes, have a similar mindset in terms of what they were based on the block change things that but they're competing mindsets in the end, like they're competing against each other. You either are a Bitcoin developer, you know, on top of it, or you're a developer on Ethereum or whatever it be. And so there's a number of others that have been built, like Ripple and things like that that are competing against Polkadot, things of that are competing against, you know, to be the next Ethereum or whatever it be. I find in owning those tokens, it's all about the utility of the underlying. And in the case of Bitcoin, look, I mean, the reason Bitcoin will be valuable because you can't say crypto without saying bitcoin and you know, there's twenty one million ever be issued and it will always have value by virtue of that supply and demand. But when you start moving away from that, whether it's Ethereum, Ripple, Polkadot, you know, all these other Stellar things like these are all names of competing platforms that are trying to win to become the main platform. And I actually think that there will be one or two or three maybe that really win. But when you get outside of that, we're the unique thing is crypto currencies. It's unfortunate name, right? It's it really is these tokens.

 

Som Seif: And the token is kind of replacing kind of like the share of a company or an asset. And so, you know, there's thousands and thousands and thousands of companies that have shares and you own shares in. Right. So we don't look at it like each of those as a currency. But in fact, if I own a share of Amazon, it's kind of like a currency. I can use that to buy other things. I can sell it. Someone will buy it for me at some price and I can use it. So oftentimes people look at it. But do you call that a currency? No, it's a share. Well, when I own a token of a unique idea, I have to assess, is that unique idea going to create value or is there some reason? And I actually believe there's some really exciting things happening. It's still very early. I get excited about some of these tokens out there that are being built. Again, some people called currencies, but I call them tokens that are fascinating. And, you know, whether they be something like MakerDao, which is basically building kind of a decentralized central bank, or if it's something like Uniswap, which is effectively building a really unique platform for kind of algorithmic trading of liquidity of assets. Again, these are things that like, you know, you see, whether it's RBC or CIBC who does these things. And, you know, they have thousands of people who do them and build infrastructure around it.

 

Som Seif: And then you have things like Uniswap who goes and does it with, you know, 13 people that effectively, if they decide to walk away, it would keep going because it's all embedded in the code. And when you own a Uniswap a Uni, you own a token of the network of that platform. It's really cool. So, you know, I get excited about those things because they themselves have lots of value upside if they get this right, if it builds and keeps going, just like some companies do. So there's some really interesting things. But there's also a lot of, you know, I hate to use the word crap out there, too, right?

 

Darren Luck: Right.

 

Som Seif: So just like any other, you know, investment decision, you know, when an individual is saying, OK, there's ten thousand token or currencies, I would say, well, there's ten thousand company shares out there which ones do you want to buy. And there's a lot of value in taking the time to understand and analyzing. Being someone who just buys everything, like there are people out there just buy anything that they put in front of me, I think is a waste. It's a silly, silly game because there's going to be lots of things that'll be worth zero.

 

Darren Luck: Right.

 

Som Seif: And so you have to be very cautious as an investor. You have to understand. If you don't understand, I wouldn't recommend you playing in the space the same way. If you didn't understand the public markets or stock market, I wouldn't recommend you being investor without an advisor around you.

 

Darren Luck: That's like Warren Buffett says, too much diversification is the antidote for laziness in the lack of homework. So I think it's the same thing is just buying everything certainly isn't the best solution. So when I'm sort of confronted with something like this where I'm overwhelmed, then I'm not exactly sure how to capitalize on it. I always like to think back to the gold rush days where we had a lot of people that were going west trying to hit their fortune and hit a gold mine. Not everybody did. But Levi's certainly made a nice fortune by selling Levi's to everybody that went there. So as long as you sold picks, axes and Levi's, you did really well. But not all the gold miners made money. In that same vein, and following up on your last comment, would buying something like a coin base be a way to participate in the transactions going on? Would that be a good proxy for making money in this environment?

 

Som Seif: It's a great question. And I think, you know, logically, everyone always says, where's the utility in the short term, who's going to make the profits? And so really importantly, you know coin bases of the world and where the profit pools have been so far in crypto outside of buying the tokens themselves like Ethereum and Bitcoin has been in the minors. The exchanges. The custodians. So you know Coinbase is an exchange and makes lots of money by charging a very wide spread to buy Bitcoin, which is the actual very thing that this whole industry is trying to avoid. Right. It's kind of ironic. But my personal view is that Coinbase will be commoditized over time. And so, yes, there's maybe some upside in buying it. You know, in the short term, that's good, continued growth and demand for people who want to get access to this and that will be the easiest and best way to do so. But I believe that their core business will be commoditized over time.

 

Darren Luck: OK

 

Som Seif: You know, if I look at something like Uniswap, it does the same amount of volume now as Coinbase does. But effectively, it's not it doesn't have the same principle, like it doesn't do it with the same profit model. So I just think that you're going to see commoditization in the core business. Now, the question is, just like any other business, can they, as one part of their business, commoditize this. Can they transition or pivot to other components like becoming a crypto bank or whatever it be? And those are the bets you have to make.

 

Som Seif: So whenever you get into businesses that have a business model, you have to think, OK, 5, 10 years from now, is this a sustainable business model? And I don't believe that the exchanges, the miners and the the custodians have a sustainable business model for the next 5 or 10 years. Where I continue to go back to is I just believe that right now the most value will accrue to the network infrastructure. So the core utility and then you want the utility tokens. And so I continue to believe that Ethereum ether tokens Bitcoin because of supply and demand will continue to accrue the greatest amount of early value before the really unique businesses over time will start to create, you know, their opportunity set. And so we're still in such an early stage in this technology and people always want to gravitate to what's the operating company, what's the where's the profit center was. And that's not where this space is at yet. You just have to be very patient. And remember, you know, I've been fighting this concept for a number of years because, you know, when I launched either capital with the first reaction was, well, what's the business you're going to build like? Well, right now, the most value continues to be in owning the token. And I think that that continues to be the right place to be. And I think you're starting to see a really exciting stuff develop. But it's still early,

 

Darren Luck: So it's still early. And I guess this is a good way to wrap up our conversation because well, first off, just as a caveat, we're very careful not to, in a contrived way, try to recommend or sell anything. We're here to we're here to dispense knowledge and information. But just so happens that your company does this. So with the very, I guess, objective hat on, if somebody wanted to invest money to let's say that they're saying, I kind of get it, I'd like to invest. I don't know how to do it. What are one or two things someone can invest in with your company or something else is the way to participate in this new growing, incredibly dynamic industry that we're still in the very early stages of?

 

Som Seif: Yeah, I mean, I try to always be as objective as possible and the way I try to do it is that as an individual, I'm still on a journey as myself and I just try to do things that I would be looking to do myself. And that's how I position things. Look, I continue to believe that, you know, at this stage, it is an area that people should actually take the time to dig in themselves. I don't believe that people should listen to other people. You know, they should build their own research, their own kind of thesis on it. And because there's a lot of people with different views on it but get their own thesis, that's what I do. I continue to believe that buying something like an ether asset, like ether ETF is a very unique and powerful space to be over the next number of years. Like I wouldn't put 30 percent of my wealth in this or 50 percent of my wealth in these things. I mean, there are some young people who do that. Good for them, if that's the way they think. But like for a regular investor having half a percent, one percent, one and a half percent of their portfolio in these types of unique kind of technological platforms is very unique. And I think this is a time to do so. So I'm a big believer in that.

 

Som Seif: Outside of that, then you kind of want to find, I think, where are some interesting roadmaps happening? Who's participating in those roadmaps? And so whether that is buying something like we have this other capital that is trying to do things over and above, that is a public company that people can buy. But we're even looking at them like Galaxy Digital and things like that that are businesses that are trying to find ways to evolve over time in the space. And so if you look at an Ether Capital or a Galaxy, those are all just trying to say, I've got a bunch of smart people who are deeply embedded in this and they're going to continue to sort of figure things out as time goes on, as the next good opportunity comes, they're going to try to be a part of it. And I think those are interesting roadmap plays, kind of long term bets that you sort of say, I just want to see how this plays out. But it's really unless you are deeply embedded in it, it's very hard to figure out, OK, should I go by this token or that token? Who's doing this in that network? Like, you have to really have a deep understanding to get to that level. And so that's where you want to leave it to somebody who's probably doing it for you.

 

Darren Luck: Ok, so there's no one easy solution for this. This isn't like just buying a balanced mutual fund or an index fund, an S&P 500 index fund that you can just easily go into and set it and forget it.

 

Som Seif: Indexes work when you've got a very broadly developed space, you know, lots of good companies, you're diversifying risk of any one name. That's what you do. This is like venture capital, like even earlier. And so you're buying, you know, companies that, you know, the venture capital structure is you buy 10 companies. One or two of them are going to really make it. You know, two or three of them are going to maybe get your money back and then the rest are going to be zeros. And so the reality is, is that that's sort of where you're at today in this space, is that like there's going to be lots of interesting stories and lots of interesting kind of platforms are being built and lots of ideas, lots of developers trying things, some of which could be massive, some of which could just be OK, and some of which are just going to be flat out zeros. If you end up just trying to pick the one or two and it may end up being in the big plays or you might end up at the zero. So you have to be very careful here. And so my view is you want to be around people who are making those broad enough bets in the proper way, or you want to be, you know, doing the real deep research yourself or frankly, just staying back and saying, look, I don't think that I'm going to make that bet yet. I'm going to let that play out. I'll just stay with the token of ether or Bitcoin and that's it.

 

Darren Luck: Ok, so with that being said, it's a little bit of, I guess, a plug for your company. Could you call out your website? And I'm sure there's some information on your website that people could at least start the process of learning more about cryptocurrency?

 

Som Seif: Yeah, no. So we have a great educational section on our site. So its PurposeInvest.com. And if you go to the digital asset space where we have our Bitcoin and our Ether ETFs, we have some really good details on what is the asset? How does it work? How does the ETF structure work? And some really good educational for those are looking to deep dive into it.

 

Darren Luck: Ok, that's great. So we're way, way over our allotted time. I really appreciate you letting us go into overtime here. What I'm going to do is also reach out. And if anybody listening has any specific questions, they want it for them to us. With your permission, hopefully we can have a follow up call and dig a little bit deeper into the nuances that come back through the feedback. Would that be OK?

 

Som Seif: I would love that. Will make it crypto for not so dummies. I always hated the for dummies.

 

Darren Luck: Intermediate for dummies.

 

Som Seif: Yeah intermediate steps. Exactly. No, I would love to do that Darren. And you know, maybe even to get into specific questions that some of your audience have.

 

Darren Luck: They will be fantastic. Again, thanks so much Som. Your a credit to the industry. Proud to sit beside you as a Canadian in this business and keep fighting the good fight for us. Thanks so much.

 

Som Seif: Thanks, Darren. It's great to be here with you.

 

Darren Luck: Take care.

 

Darren Luck: Thanks for listening. If you know somebody that would like to hear this interview, please share with them. And if you are retired, nearing retirement or interested in learning about investment strategies that provide safe, predictable, growing cash income, that's what we do. We are investment income experts. Please visit our website, at LuckFinancialGroup.com or email us at LuckFinancialGroup@cibc.com for more details, because we're here to help.

 

Stephanie Senteris: The CIBC logo and CIBC Private Wealth Management are registered trademarks of CIBC. CIBC Private Wealth Management consists of services provided by CIBC in certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. CIBC Private Wealth Management is a registered trademark of CIBC use under license. Wood Gundy is a registered trademark of CIBC World Marketing. Darren Luck is an investment advisor with CIBC Wood Gundy in Windsor, Ontario. The views of Darren Luck do not necessarily reflect those of CIBC World Markets Inc. If you are currently a CIBC Wood Gundy client, please contact your investment advisor. The views of Som Seif do not necessarily reflect those of Darren Luck or CIBC World Markets Inc. This information, including any opinion, is based on various sources believed to be reliable. But its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell or hold the position and securities of a company mentioned here and its affiliates or subsidiaries. It may also perform financial advisory services, investment banking or other services for or of lending or other credit relationships with the same. CIBC World Markets Inc and its representatives will receive sales commissions or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. CIBC World Markets Inc. 2021

 

Episode 5 If your dream job is working with rock stars, this podcast is for you.

[Wealth Tracks]

[There is more to Wealth than just Money]

[Episode 5: Joe Bozzi and his dream job working with Rock Stars]

[Picture of Joe Bozzi bent over a synthesizer]

Joe Bozzi: I think you're going to start seeing that's easier for talented people to be discovered as ever, and maybe that'll open up opportunities for people that never could have had opportunities before.

Stephanie Senteris: Welcome to Wealth Tracks hosted by one of Canada's leading investment advisers, Darren Luck. Over the past 30 years, he has traveled the world to search out the best ways to help clients save, grow and protect their wealth. On the show, he'll be speaking to various thought leaders, getting their insights, sharing stories and cool ideas about health, wealth and happiness. Because there's more to wealth than just money.

Darren Luck: For 30 years, I've traveled the world and literally obsessed over the best ways to help my clients save, grow and protect their wealth. Along the way, I've met some cool and interesting people and learned living a truly great life encompasses health, wealth and happiness. Because after all these years, I've learned there's more to wealth than just money. I'm your host, Darren Luck, and I'm very excited with today's show, which is going to be very different from our previous episodes that covered primarily money and health. Today, I've literally got a rock star as a guest. I'm joined all the way from Los Angeles, California, my old friend, Music Master Joe Bozzi. I invited Joe on the podcast after seeing his Instagram post last month about him working on the latest Prince album. After seeing that, I thought he could provide a pretty cool story and hopefully inspire somebody out there. As a bit of background, Joe began his mastering career in nineteen ninety three, apprenticing under his mentor, multi Grammy Award winning mastering engineer Bernie Grundman. Over his career, Joe has mastered almost every genre that exists and perhaps some that don't even exist anymore. Joe has mastered or assisted on many multi platinum and Grammy Award winning albums, including U2's "How to Dismantle an Atomic Bomb", Outkast's "Speakerboxxx", and Fleetwood Mac's "Say You Will". Joe has mastered songs for artists such as Will.I.Am, Britney Spears, the Afghan Whigs, Miley Cyrus, Van Halen, Gwen Stefani, Imagine Dragons, Selena Gomez, Faith Hill, Ellie Goulding, BORNS, Carly Rae Jepsen, the X-Ambassadors. And we just found out he also worked with Justin Bieber as well. Joe, I know you're a busy guy. Thanks for taking time to hang out today.

 

Joe Bozzi: Thanks for having me.

 

Darren Luck: Absolutely. Now, you said in your bio you worked with Van Halen, is that your voice in Unchained where they say, Dave, give me a break?

 

Joe Bozzi: No, I'm pretty sure that's Michael Anthony's voice.

 

Darren Luck: There's a bit before our time.

 

Joe Bozzi: A little bit.

 

Darren Luck: Joe, I don't know if you remember this, but back in the 1980s, I was in L.A. working my car importing business and you just recently moved to Los Angeles and you're kind enough to get me some tickets to a show. And you couldn't come with me, but you promised one of these days we'll get together. I didn't expect to be thirty, thirty five years before we got together again. I guess we've got some catching up to do. But in the meantime, how did you get involved with Prince, the artist formerly known as Prince or I guess the artist that is no longer prince? How did you get involved with him?

 

Joe Bozzi: I've been in the music business since I was a kid, really, my father was the program director at CKLW, so I was always around music, I was always in studios. I was always at the radio station. It was only normal for me to get into it once I moved out here to Los Angeles. It was really the only thing I was interested in. So I just worked my way up within this company. I knew I wanted to be in a studio somewhere. I was lucky enough to be hired here because Bernie Grundman is my uncle.

 

Darren Luck: Oh, that helps.

 

Joe Bozzi: Yes, it does. Nepotism never hurts.

 

Darren Luck: Never hurts.

 

Joe Bozzi: So he hired my brother and I and trained us and said, this is how we shine these songs and make them sound all they can. And I listened because it was fascinating. I loved coming to work. Still do. And that leads me to Prince, because you start off with the little things like you imagine getting coffee and putting tapes in a library and changing light bulbs. And if you pay attention and do your due diligence, you learn how to actually do the mastering.

 

Darren Luck: So the Prince album in particular, Prince died, was it five, six, seven years ago?

 

Joe Bozzi: Something like that.

 

Darren Luck: And the tapes are sitting somewhere and eventually somebody says we should release these. How does that end up on your desk?

 

Joe Bozzi: Well, I don't know all the particulars of why they're releasing what they're releasing now, I'm sure somebody has purchased the rights to some of this unreleased material. But Bernie and this studio and myself have been working on all of Prince's recordings for decades. Prince has been in the studio sitting on the couch right behind me several times. And we're just so lucky to get to continue working on his music now that he's gone.

 

Joe Bozzi: And that's a joint collaboration. Bernie does most of the mastering. I've worked on a couple of those albums and done some of the live stuff, but we're both mastering the new Prince releases. He's also reissuing all of his older albums. Nineteen ninety nine came out, I think, maybe three years ago, and that was a complete remaster. So we'll go through his whole catalog over the next couple of years and everything will be redone.

 

Darren Luck: So is that stuff all done analog and now you've got to digitize it? Is that what happens?

 

Joe Bozzi: It's half and half. We do get analog reels in here and we take that analog signal and we change it to digital. And some of these recordings have already been transferred on to digital. And we're working on digital recordings that were captured from the original analog masters. And we're mastering the digital files, not the original analog masters.

 

Darren Luck: I can imagine because you worked personally with Prince, it gives you sort of a better perspective to master his stuff now because you have a sense of what's important to him, what to emphasize. Would that be accurate?

 

Joe Bozzi: Absolutely. No doubt. He wasn't interested in being the loudest or having the fattest sounding bottom end or base. He wanted everything to be clear. He wanted everybody to hear everything that he put into his recording. And you can tell if you listen to a Prince album that it's not super loud, it's not overly compressed, it's more musical. And that's, you know, genius is genius. And a lot of the older artists that really cared about the quality of their sound don't push their recordings to be super loud or super compressed. And you could tell.

 

Darren Luck: So what makes a prince a prince? So somebody like him in club, could you see somebody like that, like this guy is or this girl is going to be big one day.

 

Joe Bozzi: Ah, not like that.

 

Darren Luck: It's not like that.

 

Joe Bozzi: You know, there's maybe a handful of people that you can think of where they're like everything they release can be almost genius level kind of. Prince was one of those guys. Michael Jackson was one of those guys. We do have some artists today that put out recordings and then like you mentioned, Justin Bieber. Go on YouTube and see how many views his videos get. He releases an album and it sells and sells and sells and sells and doesn't stop until he releases a new one. I don't know if that makes him a musical genius, but he's definitely a marketing genius. There's no doubt about it.

 

Darren Luck: Absolutely. And when you say mastering an album, what exactly is that? Are you taking out all the the messy noise or is there sort of an art and a science to it, I guess, is the question?

 

Joe Bozzi: Sure. Well, there's no one definition for mastering because it kind of depends on what the client hands you and what they expect you to give them back at the end. But to simplify it, it's the final step before what's been recorded in a recording studio gets put out for mass consumption, whether it's streaming or you buy the downloads off of iTunes or you buy a CD. It needs to all be put together in a package and sequenced and spaced and sound like it goes together. And that's what we do. We put a final EQ on everything so that it sounds the way the producers or the clients want it to sound. We put all the ducks in a row. We make sure everything sounds as good as it possibly can, and then we release it to the world.

 

Darren Luck: Is your business coming under attack from self publishing, the way writing and news and so on and so forth would be?

 

Joe Bozzi: Yes, I'm very lucky because the studio I work in, if you were a rocket scientist, it would be NASA or JPL. This is good as it gets. And the gear that I work with, I don't have to make any decisions about outboard gear. It's all been custom built for me by Bernie and the people that he worked with twenty five years ago to design the studio or maybe even more, actually forty five years ago. And he changes with the technology. But I don't have to make any of those calls. I just get to come in here and drive a Ferrari every day.

 

Darren Luck: Yeah.

 

Joe Bozzi: I mean it's pretty fantastic.

 

Darren Luck: That is pretty cool.

 

Joe Bozzi: Yeah.

 

Darren Luck: So just to back it up a little bit, you said your dad worked for CKLW.

 

Joe Bozzi: He did.

 

Darren Luck: A lot of people might not remember and correct me if I'm wrong, it was the biggest radio station in North America, I believe, at one time, was it not?

 

Joe Bozzi: Yeah, it was. There were people who were catching the AM eight hundred, if I remember correctly.

 

Darren Luck: AM 800 the big eight.

 

Joe Bozzi: Yep. You could get that signal in Russia.

 

Darren Luck: In Russia. I remember driving to Florida as a kid and picking up the station all the way past Cincinnati.

 

Joe Bozzi: Yeah. If you had a strong enough antenna that signal carried.

 

Joe Bozzi: I kind of think it was the strongest radio station on the globe.

 

Darren Luck: Yeah.

 

Joe Bozzi: Really. I think it was, yes.

 

Joe Bozzi: And as far as AM radio goes, I don't think there was a better radio station anywhere.

 

Darren Luck: Interestingly too, one of the engineers, and you may have remembered him from CKLW was Ed Buterbaugh, and he designed the towers that NASA then came to him to figure out how to protect them from lightning strikes and so on.

 

Joe Bozzi: I know the name very well. I probably had him at my dinner table.

 

Darren Luck: I'm sure you did.

 

Joe Bozzi: Yeah.

 

Darren Luck: So let's back it up a little bit, have a bit of a history lesson. So you and I are playing road hockey back when we were kids, you know, who would have ever thought that where our paths would end up. So how do you go from playing street hockey in Windsor, Ontario, to working with Grammy Award winning artists? Fill in the Gap? How does that happen? Aside from the nepotism? I mean, it's one thing.

 

Darren Luck: You know, it's the intersection of hard work and opportunity that gets you to where you are. Did you have any specific schooling? What did you do to sort of make your mark and again, end up working with Van Halen and Prince?

 

Joe Bozzi: I think this goes back to when I first moved to Windsor because I was born in California and we moved to Windsor so my father could take that job at CKLW when I was seven. So those formative years from seven to seventeen, which is my whole existence in Windsor, Ontario. That's the best time of a boy's life. That's the street hockey time. That's the high school time. That's the AKO football. That's all the things that Windsor had to offer. And I took full advantage of that, knowing that I was always going to end up back in California because my dad had a plan. He did want to come back to California after he had finished what he had started.

 

Darren Luck: Didn't your dad, sorry to interrupt work with Bryan Adams at the time too?

 

Joe Bozzi: He did. I don't remember if he was working with Bryan Adams while he was at CKLW or if he was working with Bryan Adams when he started working for A&M Records right around the time we moved, because that's where the transition happened. So for about six months to a year, which would have been my senior year at Riverside, he was working at A&M Records and I was traveling back and forth to Detroit to see Styx and Bryan Adams and Supertramp and anything that hit I was there. So, yes, he did work with Bryan Adams for sure. So I came out to L.A. and tried real hard to make it as a musician for at least, gosh, I didn't stop that until I was probably around thirty three.

 

Darren Luck: What did you play?

 

Joe Bozzi: I played guitar and sang in many different bands. I had had record deals, tours, West Coast tours and tour offers. But nothing really. It's impossible to make it as a musician unless you tour constantly. And I got married and had babies and I would read these contracts and it would say, you're going to be all over the Midwest for three months, playing every other night, living out of a bus. And I said, no, thank you. So all that time I was planning my next move, I started working, like I said, in ninety three here at the studio and just started working and learning from Bernie and coming in on weekends and watching him cut lacquer. And like I said, sitting in the room next to Bernie while Prince was on the couch telling Bernie what he wanted to do. And I just soaked all that up. And obviously I've got a knack for this or I wouldn't be able to do what I'm doing. But it was pretty easy to learn from. Bernie is a fantastic teacher. He's a very generous man. And he had a vested interest in my future.

 

Darren Luck: Is it an ear that you've got to have for music?

 

Joe Bozzi: Yes, no doubt.

 

Joe Bozzi: It's a different way of listening. Mastering, I'm not in here trying to make things sound like you have an equalizer in your car and you're trying to make things sound great. I mean, it's a very different thing. Often times I have to make something sound the way somebody else wants it to sound, not the way I think it should sound. And that's one of the harder things that I have to do. But I digress. It's a fantastic job. I love coming to work every day. It felt natural the whole way through.

 

Joe Bozzi: I just was around music my whole life. Once I got in the doors here, I just ran with it.

 

Darren Luck: One of my mentors, Sim Stogell, who started my predecessor company, worked till he was one hundred and five years old. And I remember saying to him, Mr. Stogell, he was one hundred, I was twenty nine. And I was so shocked he was coming to work every day. And I said, "Why are you still coming into work?" And he said, "Darren, if a man loves his job, he doesn't work a day in his life".

 

Joe Bozzi: That's absolutely true. There's no doubt. Yeah, I love coming here. Absolutely.

 

Darren Luck: Yeah. So you talked about sitting at the knee of Bernie and you said, what was it pressing vinyl?

 

Joe Bozzi: Oh, yeah.

 

Darren Luck: So what does that mean exactly?

 

Joe Bozzi: Well, there's two kinds of mastering. You can master for digital or for mass consumption. CD, downloads, streaming, that kind of thing. And then there's mastering for vinyl. It takes place in a whole different studio within the studio. And we take the recordings or the files that are given to us. And they go through the same kind of an equalization board that I use in this room or in Bernie's main room. Only instead of capturing it digitally, it gets captured onto acetate.

 

Joe Bozzi: So we put it directly onto the vinyl and we make a master disk and that gets sent to a factory where they print LPs for the vinyl industry, which is booming right now.

 

Darren Luck: Yeah it's coming back, isn't it?

 

Joe Bozzi: It's been strong now for probably about six, seven years. Super strong. I would say the studio probably does as much business with vinyl as new releasing music for sure.

 

Darren Luck: Isn't that interesting?

 

Darren Luck: It's halftime and I hope you're enjoying the show. Low interest rates are making it tough on conservative investors. Are you retired or close to retirement? If you're looking for safe, predictable, growing cash income, that's what we do. And we are the experts. Please visit us at LuckFinancialGroup.com to learn more. We are here to help. Now back to the show.

 

Darren Luck: We're not that old, at least I don't think we are, but in our short careers, I mean, we've experienced vinyl, we've experienced eight tracks and cassettes, CDs, now online producing. Do you see anything? Do you anticipate any new trends coming out or is it sort of just some of the old trends that are coming back?

 

Joe Bozzi: Well, I don't know if CDs and cassettes will make a big comeback. I think they're novelty. You know if somebody were to release an album on cassette, you'd have to fight to find a tape player. I bet you you have one in your garage. I know I do.

 

Darren Luck: I'd need a pencil to rewind it though.

 

Joe Bozzi: Right. Totally.

 

Joe Bozzi: But everything's going to be streaming and everything is going to be digital from now on. I think that the future is just going to be higher quality.

 

Joe Bozzi: The players that you purchase or the way that you listen in your car, you're listening to the basic capture, which would be a 16 bit 44.1k sampling frequency recording. There are capabilities if you have the right machinery or the right gear where you can listen to much higher quality digital recordings with way more detail. And once those become affordable to the average Joe, the sky's the limit. You're going to hear some recordings like some of those old Pink Floyd recordings that are in quad sound.

 

Darren Luck: Quadraphonic.

 

Joe Bozzi: Yeah, the bus travels through your headphones from left to right. You'll hear that with a kind of clarity that it will just blow your mind.

 

Darren Luck: Now, this would be remastering old work.

 

Joe Bozzi: We've already done this. Like there have been artists that have come through here. I can off the top of my head. We remastered all the Eagles catalog. And when we remastered the whole Eagles catalog, we did it at every different quality level so that when the time comes where people can buy these super high quality, super detailed recordings, it'll be done. We did it for the Eagles. We did it for Crosby, Stills and Nash. Anything that's done now, like you mentioned with the Prince record, we did it for the new prince record. So anything that's happening now gets done two or three different ways. We do it at the standard quality that everybody can do in their car or on their phone. And then we do it at a super high quality for the hi fi enthusiasts. Right. So the hi fi enthusiasts can get a hold of that gear and buy it, but it's very expensive. And listen to the super high quality recordings, which, you know, for marketing purposes, they cost more.

 

Darren Luck: Right. And we see a lot of these artists are now selling their catalogs.

 

Joe Bozzi: Yes.

 

Darren Luck: Are you seeing, I guess, from a standpoint of new technology, any of this stuff getting released in the form of NFTs? Non fungible tokens are the new cryptocurrency craze or.

 

Joe Bozzi: Oh man, that's way over my head. I don't. Every time I hear a conversation about cryptocurrency, I feel very uneducated.

 

Darren Luck: Well, don't worry, I do as well. Anybody that says otherwise isn't telling you the truth. But the NFTs they are releasing a lot of art specifically in the form of NFT because it supposedly can't be pirated and you get a royalty every single time it gets sold.

 

Joe Bozzi: Well I like the way that sounds.

 

Darren Luck: Yeah, it would just seem natural. So instead of having to collect royalties any time it gets sold or listened to or produced, the artists would get a small little piece of the revenue from it.

 

Joe Bozzi: Well, I love that idea because Spotify and all these services, they don't pay artists anything.

 

Joe Bozzi: It's very difficult for artists to make money these days unless they license their music in a movie or on television. So that sounds great.

 

Darren Luck: Yeah. Now, I don't want to get you in trouble with any of your clients here, but you said that the quality of the technology is going to be second to none. In my experience, the quality of the content isn't anything near what it used to be. Or am I just an old boomer that doesn't get it?

 

Joe Bozzi: Well, I guess it depends on what you're listening to, what you're exposed to, one of the, kind of the strangest things I realized since COVID, I started paying attention to my daughter's Tik Tok watching.

 

Darren Luck: OK

 

Joe Bozzi: And I realized that there are thousands of super, super talented people out there singing songs and showing you their process on Tik Tok. And my daughter started showing me these things. I was blown away at the talent. So I don't think the quality of product is going down. I think it's actually going to be the opposite. I think you're going to start seeing that it's easier for talented people to be discovered as ever.

 

Joe Bozzi: And maybe that'll open up opportunities for people that never could have had opportunities before. If you're looking towards the things that you've been listening to for the past 20 years and wondering why those haven't gotten any better. I think that's just a matter of needing to roll over to a new generation of listening, because I know. I'm not going to name any artists off the top of my head, but artists that I loved 15 years ago who have released something in the past, say, five years that I don't love, that's happened more often than not.

 

Darren Luck: Is that right? OK, so I just got to um.

 

Joe Bozzi: Maybe we just need to widen our listening.

 

Darren Luck: Right.

 

Darren Luck: That could very well be. OK, so, Joe, you've clearly worked with all sorts of people over your years in the industry. Aside from your father and your uncle, who else would you say has been a great influence or taught you the most in the industry?

 

Joe Bozzi: If I'm going to choose somebody I've worked with, it would have to be Quincy Jones.

 

Darren Luck: Quincy Jones.

 

Joe Bozzi: Absolutely. When you work with Quincy Jones on a project, he's a natural teacher and he likes to appeal to the nonmusical side of the relationship you're having while you're working on music. I don't know if it's a way of disarming people, but he talks about quality of person and how fantastic it was to work with X, Y, Z, because they really cared about what they were doing. And you'll find that if you work with people who really care, like he just gives you nuggets regardless of their talent, the end product will always be better because it comes from their heart. Like he gives you stories like this, that stuff soaks in. So then when you're moving on and you're working on your next project, your spectrum of things you're looking for or listening for gets a little bit wider because you're not just thinking about the ones and zeros or what you're going to be running into the computer. You're thinking about the process as well. So I would say more than any other working with him, and I've probably worked with him 10 or 15 times in the past however many years.

 

Darren Luck: Does he do movie scores or regular?

 

Joe Bozzi: He's had his fingers in everything, does everything. He still has a record label or a production company that he runs. And I don't think he's necessarily personally involved with a lot of the projects anymore because he's quite old now. I think he's close to 90.

 

Joe Bozzi: But I mean, he hasn't missed a beat. His brain is sharp as a tack. He's fantastic to listen to. He does tell Frank Sinatra stories and he does tell some crazy jazz stories because, I mean, he's been a legend since the minute he stepped into that orchestra with Frank Sinatra. He's just he's a legend.

 

Darren Luck: And that's pretty cool. So then he can translate some of that to you and then you can translate that to the next generation as well, right?

 

Joe Bozzi: I'd like to think so.

 

Darren Luck: Yeah.

 

Joe Bozzi: Yeah.

 

Darren Luck: So, I mean, I don't want to get you in trouble by talking about some of the people that might have been a pain in the butt to work with and clearly if you had some great stories to share them, but who would be some artists that would be really fun to have worked with and maybe people wouldn't have expected?

 

Joe Bozzi: Well, I will tell you, I feel OK telling you this story about Prince because we were talking about him so it fits in perfectly. I've had two experiences with Prince that couldn't have been more different. When he was working with Warner Brothers and he changed his name to the symbol and he didn't want to be known as a prince. He sat in the corner of the couch and wouldn't look directly at anybody. He would talk to the person sitting next to him who would translate or orate his wishes to Bernie or myself up at the counter like he didn't want to be here. That's what it felt like.

 

Joe Bozzi: And then I've sat in a room with him maybe five or six years later when he probably wasn't feeling like a repressed artist. And he was the friendliest, kindest, nicest, most generous. Let me go grab a bottle of water kind of guy, you know, so that's an interesting dichotomy of hanging out in the room with Prince. I mean, they're human beings.

 

Darren Luck: Sure.

 

Joe Bozzi: And I know that his relationship with Warner Brothers, when he was under there and signed a deal and they were running his career was horrible. He talked about it all the time. So there's one. But most people, by the time they get to this process and because Bernie is so well respected in the industry, I don't see a whole lot of trouble. People come here, it's a nice time. They're finishing up their project.

 

Joe Bozzi: They're almost done. You know, they could see the finish line by the time they're in here. And I think they're quite excited to be here.

 

Darren Luck: Now would they ever get upset with you when they say, no, no, no, you missed the mark. It should have never been more sound, bigger sound.

 

Joe Bozzi: No, I've never had anybody ever get upset. I've had people be upset at the timing of things like, oh, I'm sorry, we're very busy. It's going to take me five days instead of two days. You know, that can mess with people's release date sometimes. If I don't hit a home run the first time I go up to the plate with something, it's a give and take. And they know that. So they can say, sounds great, but this is what I don't like and we'll just fix it. And then that's that.

 

Darren Luck: So what we're going to finish up with here is like the memoirs that we've laid out here, and if we've got any aspiring musicians or recording engineers, anybody, I guess in the music industry or aspiring to be in the music industry, do you have any advice for them? What are some things that they should do? Not do? Any realistic advice for them?

 

Joe Bozzi: Well, considering I'm in the technical part of things, I think my advice would be best suited to anybody who wanted to get into engineering or mixing or mastering. And my advice would be invest your money in your home studio or wherever it is that you will be doing your own studying. If you can get to a school, go to a school, pay for the education, collaborate with as many people as you can. Because one of the things that's definite is I can't say, hey, I only want to master rock and roll. Send me your Van Halen tracks. Well, here's a Mariah Carey. Will you work on this? Of course, I'm going to work on that.

 

Darren Luck: Right.

 

Joe Bozzi: So the more people you collaborate with, the more ideas you can get from as many people that you can work with, the better. And I notice a huge difference with artists that I work with when they come to me and they're green and artists that I work with 10 years later. And the difference to me that I see is that they've worked with so many more people between starting out and, say, 10 years later. Like my Quincy Jones story, you absorb from everybody you work with. You learn little tricks that they know. And I don't think you can put a price on that. I think the more people you work with, the more you're going to absorb from them and the better off you'll be in the end.

 

Darren Luck: So collaboration and that's interesting. That's almost verbatim. And I'm sure you've never attended a Berkshire Hathaway annual meeting. It's almost verbatim the same advice that Warren Buffett gives to young people.

 

Joe Bozzi: That's great.

 

Darren Luck: Yeah, through collaboration, you learn from other people and through connections. You know, you look at any successful person, they can always count on other people that have helped them get to where they are. And I think that you certainly were very gracious in giving your father and your uncle credit, despite all the hard work that you certainly did to get to where you are. And I want to thank you for your time. I know you're busy a guy. I guess, actually, before we close out, are you working on anything interesting right now?

 

Joe Bozzi: Most of the stuff I've been working on today since I've been in the studio has been jazz, but it's been good jazz. It's been Art Blakey. And I'm going to be working on that after. Oh, yesterday we did a Jimi Hendrix album as well. A remastering of a Jimi Hendrix record. The remasterings are my favorite. Absolute favorite.

 

Darren Luck: What Hendrix are you playing?

 

Joe Bozzi: Its previously unreleased stuff.

 

Joe Bozzi: So its recordings from Electric Lady studio. He didn't record very much actually. There's a lot of live recordings, but he only put out like three or four records. So everything from Electric Lady Studios. They have a bunch of outtakes and some of the stuff that you can actually hear them working out some of the progressions of some of the songs that you have come to love by Jimi Hendrix. It's just all of these recordings that haven't been released yet.

 

Darren Luck: So you get that you got to clean it up and now they're going to rerelease it under a box set?

 

Joe Bozzi: Yes, that's exactly what they do. They'll put together a package. They'll call it Jimi Hendrix, previously unheard recordings or electric lady sessions. For big fans, this stuff is gold.

 

Darren Luck: Yeah.

 

Joe Bozzi: It's hard to hear something from Prince that you've never heard or something from Jimi Hendrix that has never come out before.

 

Darren Luck: Have you ever read the book When God's Walked the Earth?

 

Joe Bozzi: I don't think so.

 

Darren Luck: It was the story of Led Zeppelin when they came out in the late 60s.

 

Joe Bozzi: I read a Zeppelin book. It was called Hammer of the Gods, though,

 

Darren Luck: Was it Hammer of the Gods or When Gods Walked the Earth?

 

Joe Bozzi: Is it where it tells the story of them coming to the Los Angeles, living in the hotel? Oh, yeah.

 

Darren Luck: Being heartbroken. But the one story I thought was interesting is they couldn't put the band together. They couldn't get a drummer and I forget if it was Carmine Appice I think was supposed to be their drummer. And and this is when Jimmy Page, left the Yardbirds and they couldn't get anybody because everybody wanted to be a studio musician. They didn't want to travel. They didn't want to tour. They just wanted to make money that way. And they pulled everybody together. And thank goodness that he did, because it's my favorite band of all times.

 

Joe Bozzi: Sure. A lot of peoples favorite band of all times.

 

Darren Luck: Yeah.

 

Joe Bozzi: Yeah, for sure. I have a question for you.

 

Darren Luck: Sure.

 

Joe Bozzi: Is there a connection with Roy Orbison and your family?

 

Darren Luck: That is too funny. Yes, there is.

 

Joe Bozzi: Ok, so I remember hearing in high school that he wrote Pretty Woman about your mom.

 

Darren Luck: That's true.

 

Joe Bozzi: Is that true?

 

Darren Luck: That is a true story. That is a true story

 

Joe Bozzi: That made my whole week.

 

Joe Bozzi: I love that.

 

Joe Bozzi: I love that.

 

Darren Luck: Now, here's the story is when my mother was younger and again, back in the day, all the big acts came to Windsor. Led Zeppelin included. They all went to Windsor to release their stuff on CKLW. So my mother was in one of the stores on Ouellette. Roy Orbison's walking by and he was quite a bit older than her. Spots her and tries to pick her up. So chats her up. And they ended up actually going out on a date and she wasn't interested in him. And he said, I'm going to be writing a song about this experience and you're going to be hearing it sometime soon. Pretty Woman comes out not too long after that.

 

Joe Bozzi: That is so cool.

 

Darren Luck: So Pretty Woman comes out and now she tells everybody that this is the story.

 

Joe Bozzi: Right.

 

Darren Luck: Yeah, right Anne. I'm sure Roy Orbison wrote that song about you. Now, fast forward this to 1985.

 

Darren Luck: I'm working at General Motors, going to school, working on the line. Just like how you brought it up right now some guy comes up to me out of the blue and says, Are you Darren Luck? And I said, yes I am.

 

Darren Luck: Is your mother Anne Luck? And I said, yes she is. How do you know that? He goes, Do you know the song Pretty Woman was written about your mother? And I said, oh my God, she's been telling me that my whole life. That's bull. And he goes, no, I was there. I was there in the store. There's an entourage of people. I was part of it. He spotted your mother. Went up to her. The exact story that I heard my whole life is exactly what he said. And I went, well, OK, Mom, I guess that story is true after all.

 

Joe Bozzi: Isn't that something. I love that. That's fantastic. Especially because, as you probably did, I spent hours on that street trying to pick up a pretty woman. In the car with my buddies going up and down. Oh, yeah.

 

Darren Luck: Yeah. We were a bit better looking than Roy Orbison, but I guess we didn't have the game that he had.

 

Joe Bozzi: He probably had some swagger.

 

Darren Luck: He certainly did.

 

Joe Bozzi: Well, isn't that something. I'm glad I asked you that. That's great.

 

Darren Luck: Yeah I'm glad you did, too. OK, Joe. Thanks so much, buddy.

 

Joe Bozzi: Hey, my pleasure. Is great to see you. Great to talk to you.

 

Darren Luck: Ok, thanks so much. Have a great night.

 

Joe Bozzi: Thank you. You too.

 

Darren Luck: Thanks for listening. If you know somebody that would like to hear this interview, please share with them. And if you are retired, nearing retirement or interested in learning about investment strategies that provide safe, predictable, growing cash income, that's what we do. We are investment income experts. Please visit our Web site, at LuckFinancialGroup.com, or email us at LuckFinancialGroup@cibc.com for more details. Because we're here to help.

Stephanie Senteris: The CIBC logo and CIBC Private Wealth Management are registered trademarks of CIBC. CIBC Private Wealth Management consists of services provided by CIBC and certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. CIBC Private Wealth Management is a registered trademark of CIBC Use Under License. Wood Gundy is a registered trademark of CIBC World Markets Inc. Darren Luck is an investment advisor with CIBC Wood Gundy in Windsor, Ontario. The views of Darren Luck do not necessarily reflect those of CIBC World Markets Inc. If you are currently a CIBC Wood Gundy client, please contact your investment advisor. The views of Joe Bozzi do not necessarily reflect those of CIBC World Markets Inc. This information, including any opinion is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell or hold the position and securities of a company mentioned here and its affiliates or subsidiaries. They may also perform financial advisory services, investment banking or other services for or of lending or other credit relationships with the same. CIBC World Markets Inc and its representatives will receive sales commissions or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. CIBC World Markets Inc. 2021.

Episode 4: How to Maintain a Healthy Back with Dave Forrest

[Wealth Tracks]

[There is more to Wealth than just Money]

[Episode 4: How to Maintain a Healthy Back with Dave Forrest]

[Headshot of Dave Forrest]

How to Maintain a Healthy Back with Dave Forrest

Dave Forrest: The body is constantly remodeling itself. You can always make changes, albeit as we get older, those changes don't happen as quickly as we want, but changes can be made, whether it's strength, flexibility, joint mobility, cardiovascular health, everything can change.

Stephanie Senteris: Welcome to Wealth Tracks hosted by one of Canada's leading investment advisers, Darren Luck. Over the past 30 years, he has traveled the world to search out the best ways to help clients save, grow and protect their wealth. On the show, he'll be speaking to various thought leaders, getting their insights, sharing stories and cool ideas about health, wealth and happiness, because there's more to wealth than just money.

Darren Luck: I am your host, Darren Luck, and I'm very excited with today's show, which is going to be very different from the previous episodes. My guests so far have been in the area of money and finance, but there's more to wealth than money.

Darren Luck: And as the saying goes, the most valuable wealth is having good health. With that being said, I'd like to discuss what we need to do today to improve our physical health, specifically back health. And ways to alleviate or better yet avoid back pain altogether. Just like compounding builds wealth over time, compounding habits build up or tear down our bodies over time as well. And in both cases, the sooner you start, the better the results. With that as a preamble, today I'm joined by David Forrest. He is the president of PhysioFit Prevention, Rehab and Performance Center in Windsor, Ontario.

Darren Luck: David earned degrees in physiotherapy and kinesiology from McMaster University and has been practicing physiotherapy for over 22 years with a primary focus in manual therapy and corrective exercise. David is a registered physiotherapist, a Kinesiologist, a certified manual therapist and a certified strength and conditioning specialist as well. He focuses on finding the true origin of a client's symptoms, treating them hands on followed up with a neuromuscular training and corrective exercise program. Along with physiotherapy and helping clients rehab, David's other passion is training athletes of all ages. David became a certified strength and conditioning specialist with the National Strength and Conditioning Association in the US. And he's a firm believer when it comes to training young athletes.

Darren Luck: The priority is to develop proper movement and age appropriate strength training early to prevent injuries early on. His advice for most of our audience will be what we need to be aware of every day to allow us to participate in the game of life at age 80, 90 and beyond, because that's what it's all about. I hope you enjoy the show. Hey, Dave, thanks for joining me today, Darren.

Dave Forrest: Thanks for having me.

Darren Luck: Yeah, that's quite an intro. You've got quite a background and we're really excited to have you today.

 

Dave Forrest: I'm excited to be here.

 

Darren Luck: Excellent. Now, a lot of our listeners may know Dave through the clinic, but they also may be familiar with him as he started his career treating the onsite Chrysler rehabilitation clinic from 1998 to 2010. And Dave, we've estimated that you've treated 3000 to 4000 orthopedic clients over those years. What did you learn about the human body and how to treat and prevent problems through that?

 

Dave Forrest: Yeah, that was an interesting time in my career. I was freshly out of school. And so, you know, you learn a set of skills at a school. They teach you about a joint, they teach you about the anatomy, the physiology and how to treat that joint. And so I went into it. Here's a joint. It's in pain. I'm going to treat it. And I wasn't necessarily getting the outcomes I wanted as a new physio. You know, you're always taking courses to better yourself, just like yourself. You're always trying to improve. And so when I started learning some of these things about different treatment techniques and I'm thinking I had tools in my toolbox, how do I use these tools to effectively manage people's pain? And what I learned was that pain is a liar, right? Pain isn't always where the problem is. And so throughout the years of learning and dedicating time to establish the understanding of how things are, systems work with each other.

Dave Forrest: In order to do this, to treat people properly, to find the driver having an intricate knowledge of human anatomy, physiology and biomechanics and the injured mechanisms we are able to treat the cause and not just the symptoms. So what we were finding is people were having better treatment outcomes because we were actually treating the cause.

Darren Luck: Through that time, have you seen, you know, a handful of things that you see consistently all the time that are easily identified

Dave Forrest: As far as injuries? Yeah, the most common ones we've seen over the 22 years I've been a physio back pain is the big one. And all the causes of back pain. Neck is another one that we see a lot of.

 

Dave Forrest: And all the fallout from neck injuries, including shoulder elbow, wrist injuries, specifically at Chrysler. There was a lot of hand injuries from a lot of repetitive strain. But at the end of the day, it's a why are these tissues in strain? Is it because of what they do or is because the body's forced to use them repetitively?

Darren Luck: Excellent.

Darren Luck: That's an excellent segway into what we want to talk about is back pain. Back pain is one of the leading causes of missed work, costs the economy billions of dollars. And finances aside, I can attest that back pain makes life miserable for anyone afflicted with back pain. I could be wrong, but I'm guessing not all back pain is the same. Would you agree?

Dave Forrest: You're absolutely right. There's lots of different structures, obviously, that can cause pain. And, you know, I thought I would just list a few of the more common ones and some of your listeners may have been diagnosed with these things.

Dave Forrest: So the idea is to sort of give a little background on it and maybe tell about why they're there and how they can be prevented or treated.

Darren Luck: Excellent.

Dave Forrest: So the most common type, you know your strains and sprains, A strain is a muscular type injury, so anything where the muscles can't overcome the load or if they're stressed beyond their strength limit will cause a strain. So that includes your muscles and your ligaments. A sprain would be when you pull a ligament or stretch it beyond its strength capacity or the joint capsule could be involved in that as well. And we'll talk about that in a little bit. And those injuries are typical. There's a mechanism of injury, a lifting, an odd twisting maneuver, maybe tried to lower something that was too heavy and you feel an immediate impact on the back, maybe in sports injuries, sudden falls, those types of things. There's something that you remember doing that caused it and they're pretty sore. And generally those ones take two to three weeks to heal once they go through their inflammatory process and you will see some gradual improvement as they go. The second sort of classification of injuries you see in the back are discogenic injuries, so there's different types of disc injuries and probably the most common some of your listeners have heard or been diagnosed with is disc herniation. So the disc, if people don't understand or know what it is, it's like a jelly doughnut that sits in between the vertebral bodies and a jelly doughnut is not a great analogy, but it will work for these purposes. So the inside that gel, it's called the Nucleus Polyposis. And when it protrudes out through the outer surface, the annulus fibrosis, that's when you have that herniation that kind of breaks through. Now, when we have those types of injuries, people think right away it's sciatica.

Darren Luck: Everything's sciatica.

Dave Forrest: Everything's sciatica. If it goes down the leg, it's sciatica and not necessarily so. The disc itself can produce pain down the leg, even though it hasn't protrude it far enough out to be on a nerve. But in some cases, they can go up far enough so that it actually does touch a nerve and then you will experience those symptoms down the leg.

Dave Forrest: The other disk type of injury or diagnosis that is common that we hear a lot is degenerative disc disease. And, you know, simply put, that is just the disc's answer to gray hair and wrinkles. You know, it's the discs have gone through some wear and tear over the years. It's given a terrible name disease. You know, when someone comes in, they think it's over. I've got a disease, I've got degenerative disc disease. And so we shouldn't get too upset about that. It just tells us as physios, just like osteoarthritis, it tells us that there's been a little too much wear and tear on the spine over the years and sometimes it's just normal based on what you've done. I'll tell you this. We've had people come in with horrible looking X-rays and they have no pain, degenerative disease, all sorts of osteoarthritis and have no pain. So just because the one test says it doesn't actually mean that's what's causing your pain. So, you know, we talked about osteoarthritis, similar to the disc's osteoarthritis is where the bones have moved too much, right? So if there's too much wear and tear on a bone, it creates more bone. It's called Wolf Slote. So when we look at backs that move too much, we can probably surmise that they have this osteoarthritis going up because of that.

Darren Luck: Now, why would that be, Dave? Is that just from habits? That's congenital. Like what would cause an individual to end up that way?

Dave Forrest: Great question. So, joint laxity. So too much mobility. Someone has too much laxity in their joints. They have a lot of range. Those are your gymnasts, your Cirque de Soleil. It's great for those things. But they have too much motion in between the bones. Basically, ligaments protect joints. Right. But give them stability. If someone has too much mobility, then the bones, there's too much wear and tear, abnormally wear and tear. So when that happens and joints, remember, need to be smooth surfaces. So if there's wear and tear causing this extra bone buildup, then we start to see irregular surfaces. And that's what shows up on X-rays. Right. We'll see those boney spurs. What they call osteophytes show up, they'll be diagnosed with osteoarthritis. But outside of congenital, you're looking at old injuries. Wear and tear may be job related type, repetitive movements, prolonged sitting positions that put those structures under stress for long periods of time over many years.

Darren Luck: So too much movement and not enough movement can be equally harmful to the back.

Dave Forrest: Absolutely, yeah. Without control.

Darren Luck: So of all of these issues, we went from strain's, sprains, to arthritis to boney spurs. What parts of these are reversible or are they reversible or can we just sort of halt the damage?

Dave Forrest: Yes, so people come in all the time with different types of injuries, right, whether it's a disc herniation, postop surgeries, ligamentous muscle injuries, they're definitely reversible in terms of preventing it from returning. If someone's gotten to a point where there's something on a nerve, whether it's a disc or a fracture. That needs other intervention, but at the end of the day, if that noxious stimuli is removed. Then, yes, it can be reversed through proper mobility of the surrounding areas, which we'll talk about and stability of that actual area, which in this case is the lumbar spine.

Darren Luck: OK. Ok, so what are some other causes of back pain than Dave?

Dave Forrest: So we have what's called Forsett joint dysfunction. There are two joints in the back of each vertebrae and we have all the way through the spine, and basically when you bend forward, they open up and when you bend yourself backwards or extend your back, they close down on one another. So if you have a bending type of an injury, it can cause a stretch of the surrounding caps around that facet joint. That capsule is richly innervated with nerves. So when you stress that you're going to feel it and that, again, there's a mechanism there. Conversely, some of hyperextended typically that's what the sporting type thing, if you're walking overhead for a long period of time, you can compress those joints and cause pain in the joint. Again, these should heal within two to three weeks as long as the stress is removed and alleviated. Otherwise, if the inflammation is there and you keep irritating it, it's tough to heal when a joint's in an inflamed state. Another area is S.I. joint dysfunction. And a lot of people talk about S.I. joint, the S and the I stand for Sacro Iliac. So it's a joint between the sacrum and the ilium, the bones on the side or the hips.

Darren Luck: So that's in your lower back.

 

Dave Forrest: Yeah.

 

Darren Luck: Leading into your hips.

 

Dave Forrest: It's in the lower back.

 

Dave Forrest: And people will experience pain in the lower back and off to the right or off to the left. Its that small little spot. People point to it all the time.

 

Darren Luck: And that's sciatica that people refer to.

 

Dave Forrest: People will say, I got SADIC right here.

 

Dave Forrest: And lot of times it's not.

 

Dave Forrest: As an aside, when someone comes in with the symptoms or a diagnosis of sciatica, we always do a neurological workup to make sure that it isn't before we start treating, we always make sure we do a neuro screen with reflexes and power testing and such a nerve test. So when that's all cleared, if that point is still a tender spot we usually look at as an SI joint and we have tasks, obviously, to rule that out.

 

Dave Forrest: But SI joint is interesting because it's a transition joint between the upper and the lower body. So people will typically have symptoms in this case with transition movements sit to stand, stand to sit. Changing positions, trouble standing up straight, so those are some of the ones we'll see when it's an S.I. joint, and then the last one is spinal stenosis. It's more common with people in the later decades of life. So spinal stenosis is a narrowing of the holes or foramen on the side of the vertebrae.

 

Dave Forrest: So we have the spinal column and inside the column we have the spinal cord. So those nerves that end up down the rest of the body exit the spinal column through those foramen, if there's any sort of compromise to the size of that hole, it's called stenosis. So it could be just structural where someone has osteophytes, boney spurs built up, it's compromised the size of that hole. Or it could be a movement dysfunction, someone has too much movement and they move a certain direction and that hole narrows, such as a spondylolisthesis. And that's where a vertebrae blow slides forward on one above and that will narrow that hole. At the end of the day, the symptoms are the same. It's a nerve pain, not from a disk, but from this narrowing of the hole.

 

Darren Luck: Ok, so we've covered a lot of highly technical terms for the layman, maybe not for you. If we could just take it down into average layman's terms, if we can just sort of talk about each one of these afflictions and maybe what would be the signs and when they should go for treatment or whether they should just sort of let it rest.

 

Dave Forrest: Yeah. So what I would say, first off, is most people know when they've had an injury.

 

Dave Forrest: Like they say, hey, I did this and I felt the pain. I think I might have done this and I had the pain. They'll come in and I'll be able to reproduce it through questioning. Or testing, if you have pain that has come out of nowhere, if you have pain that doesn't go away, if it gets worse at night and it's not making any sense, you should see your physician for testing. That's where we start. We want to rule out some of the red flags. And at the end of the day, there's always something that can make the pain worse and something that made the pain better or help a positional whether it's a stretch or anything. That's what we're looking for. If nothing changes and has been going on for a prolonged period of time, there's no mechanism of injury. And some other red flags, night pain, it's just there's something needs to be checked first, so let's just throw that out there, because some people do come in and they do need to be checked out further. However, if it's not any of that, any type of pain that we'll see will be local pain in the back, pain that runs into the buttocks, down the legs.

 

Dave Forrest: Again, many causes for that. Anyone who's got numbness and tingling into the buttocks, down the legs, we can definitely assess and treat that. So some of the more common types of injuries, like we talk about the strains and sprains that would come in generally in those cases, we're trying to, you know, alleviate the pressure from the area, protect the muscle or the ligament. And give you some strategies to avoid flaring up anymore, or increasing the inflammation. Those are typical. We actually treat the symptoms in those cases, once the person's out of that phase, then it's, you know, let's look at what might be causing it. For disc herniation's those types of symptoms, if it's a true disc herniation, the person is going to experience pain. There are seven different types of disc herniations, so you'll feel pain from the lower back to the buttock to the upper thigh, all the way down into the foot with numbness. And so if you have experienced any of those types of symptoms, that's more of a Savaria, but that's something that we can treat and sooner the better. In those cases, if we can reduce the size of that disk early before it has a chance to scar up, we have a better chance of alleviating the symptoms. When it comes to degenerative stuff degenerative in osteoarthritis. Those typically tell us there's been a lot of motion, so our goal here is to really stabilized and control the spine and teach the person how to move or mobilize areas around the spine. Someone comes in with an SI joint dysfunction, it's treat the dysfunction, correct it so everything's in a neutral position and then provide that person with corrective exercises, neuromuscular strategies to prevent it from coming back. If it's spinal stenosis, we definitely have to do specific types of treatment in terms of spinal stenosis because there's certain types of treatments that are just considered back exercises that are actually deleterious to that.

 

Darren Luck: What would be some typical back exercises that people should avoid, like the plague.

 

Dave Forrest: It's a difficult question because every back person that comes in isn't the same. So one exercise is good for one person, isn't necessarily good for another person. I don't know if there's one that I would say is horrible.

 

Darren Luck: Like I once heard, crunches are the worst thing for your back is that true.

Dave Forrest: Yeah, it's a really good example. So crunches are going to flex your spine, right. When we talk about stabilizing the back, a good stabilization exercise, maximumly contracts, the muscles around the spine without translating it or torsioning it.

Darren Luck: What does that mean? Torsioning it.

Dave Forrest: So adding excessive rotational forces through the site, the vertebral segments, translation forces forward and backwards. There's a lot of really good exercises, but if the control of the spine isn't there, you're actually moving the segments of the spine versus stabilizing them. So, if someone comes in and they have a stenosis. We don't want their back to go into extension because that is going to flare.

Darren Luck: And what is the extension?

Dave Forrest: Extension is a backwards bend, but excessive arching of the lower back.

Darren Luck: OK, so you're not curving it your arching it.

Dave Forrest: Right. A crunch in this case, which would be considered a really good stabilization exercise because it's working your rectus abdominis, which is not a stabilizing muscle.

Darren Luck: And your rectus abdominis is?

Dave Forrest: Six pack muscle. So that exercise would flex the spine, which would actually at some point be beneficial for stenosis because it's actually opening up the vertebrae. So it depends really on what the flexion is or what the problem is. I wouldn't go give a crunch right away with that type of scenario. We'd have to make sure intersegmental control. Like control of each segment before we give a global crunch.

Dave Forrest: But that's a good example of, you know, crunch. I wouldn't say it's a great core exercise. Its not even a core exercise.

Darren Luck: Right.

Dave Forrest: But in terms of a specific condition, it would definitely help potentially alleviate some of those symptoms. And we can modify that exercise, obviously.

Darren Luck: Ok, now, what about something like a plank, for instance? Would that be advantageous for anybody, even with back issues or could even be a problem?

Dave Forrest: Plank's are great exercises solely because you're contracting deep muscles, but you're not moving the spine. And that's in terms of the definition of a good spinal stabilization exercise. Before I would give a plank, I would make sure they were able to effectively stabilize some of those deep deep muscles, as you know, the plank is going to involve not just those deep muscles, but bigger ones on the outside, but the plank is a great exercise in terms of its safety and its efficacy.

Darren Luck: It's halftime and I hope you're enjoying the show. Low interest rates are making it tough on conservative investors. Are you retired or close to retirement if you're looking for safe, predictable, growing cash income? That's what we do. And we are the experts. Please visit us at LuckFinancialGroup.com to learn more. We are here to help. Now back to the show.

Darren Luck: Is there a good resource say where people could look up, you know, beneficial and not so beneficial exercises?

Dave Forrest: Stuart McGill. He's a leader in back pain. And resolving back pain through exercise. He's the University of Waterloo, but world renowned in terms of back stabilization, back fitness.

Darren Luck: And that's actually how you and I originally got together. When I first put my back out, I went online and I did my research and Stu McGill kept coming up. And I would argue he's probably the world authority on this. And from what I understand, you did take his course. What are some of the Stu McGill things that you use with patients to this day so people don't have to travel all the way to, I don't know if he's in Muskoka or where his clinic is.

Dave Forrest: Yeah, he's gone off the grid.

Darren Luck: Yeah, he's off the grid.

Dave Forrest: I would say some of the biggest pointers or takeaways from the course, I've taken a couple of his courses, are number one, that the back, a stiff back, isn't locked up, it's probably overstressed and that the big muscles have come in and say, hey, enough, we're going to stop this. You know, we have two different types of muscles in our body, phasic and tonic.

Darren Luck: Can you explain that?

Dave Forrest: I will, yeah.

Dave Forrest: So tonic muscles are slow, oxidative muscles. They are our endurance muscles. They don't produce a lot of force, but they can do it for a long time. And generally speaking, tonic muscles are closer to the skeleton.

Darren Luck: So the ones that you would work out in the gym would be?

Dave Forrest: The phasic muscle. Those are your big power muscles right. They're your sprinter's of the world versus your marathon runners. So the tonic muscles after an injury, after a surgery shut off and they don't automatically come back on.

Darren Luck: Can you build those muscles?

Dave Forrest: You can turn them back on. Yes.

But can you build them in the gym?

Dave Forrest: They're not designed to be big based on their function. 50 percent of the fibers of those tonic, the deep ones around the spine, are designed to give feedback to the brain. And they tell the brain what's going on. And the brain can make better decisions as to what muscles should contract.

Darren Luck: So this is unconscious?

Dave Forrest: Yes, this happens unconsciously. Now, when we have an injury or surgery, they don't automatically come back. So we need to retrain those. So we can talk about strengthening activation patterning. But we also need to work on timing of when those muscles come on. So. What tends to happen, we've learned with Stu McGill is that the big muscles tend to jump in and protect because tonic muscles, the deep control muscles aren't doing their job. The big muscles being on all the time can fatigue quicker, can cause pain and spasm, as a lot of people have witnessed. And then what happens is we go somewhere, and we're taught this in school, there's the area, treat it.

Dave Forrest: The problem is that the back's doing its part to stop it and we're going in against what the backs already doing.

Darren Luck: So unintended consequences, not what you think it is. There's another cause underlying. Right. So without treating the underlying cause, you're never going to get it right.

Correct.

Dave Forrest: So that was one takeaway from Stuart McGill courses. Another takeaway was to start moving areas above and below. The hips are a great example, the thoracic spine, just because simply they're above and below the lumbar spine. Those are two areas that don't move well on a lot of people as we get older and so what happens? We end up just moving or blowing through the back again.

 

Dave Forrest: It becomes our strategy of movement. Then we go and treat that back again without even addressing the probable cause being the hips and or the thoracic spine, so that was another take away. A third take away from Stuart McGill is the timing mechanism I spoke about earlier. So we have deep phasic stabilizing muscles. We can learn to activate them.

Darren Luck: How do you activate a dormant muscle?

Dave Forrest: So that's a great question. It's probably the million dollar answer. There's a lot of different cues a therapist has at their disposal to teach a person how to bring those muscles on. Once those are engaged, that's just the start. The second part of it is that there's a timing mechanism to those deep muscles. So those muscles are classified as feed forward muscles and we have other ones throughout the body. But their job is to contract before any other muscle in the body. So if you're about to stand up in a normal situation, in a normal back functioning back, those muscles will contract 30 to 50 milliseconds before other muscles contract to actually move you. So it's a protective mechanism. So we don't have that. So you would see that in someone who goes to move, but they're very cautious and guarded in how they move because that timing mechanism isn't there. It's not protected. So we teach that and eventually that becomes an automatic process, like blinking your eyes, but it will take time to develop.

Darren Luck: So if I could understand this and I can appreciate that, because when you do have back pain and even see people walking very labored, it's almost like the two mechanisms are fighting against each other and you've got to get them to work together, not against each other. Would that be accurate?

Dave Forrest: Correct. And I guess the one is there's a lot of education involved when we're teaching people these things, obviously. But it's also what to expect when you've left. What are you doing throughout the day?

Dave Forrest: There's certain things you need to be able to bring on throughout the day on your own. Spending an hour in the clinic learning these things is fine. But if the other 23 hours, you're not focusing on it with neuromuscular rehabilitation, there's a lot of frequency of exercise is good, controlled exercise is frequently over time, you'll learn it quicker. And then it becomes automatic. What you would see now is now that you have control of that spine or control of the joint in any case really, the feedback to the brain is such that things are normalized, then the tone from the big muscles, the protective muscles, calms down. So now you're not fighting each other.

Darren Luck: Right, and I guess segway into that, it's been my experience that I guess less proficient people in your profession, they attack these problems head on. They'll crack your back, they'll do something very aggressive to alleviate the pain, and invariably they could make the problem worse if I'm not mistaken.

 

Dave Forrest: If you're trying to overcome something that's guarded, it can be very uncomfortable for the client and could cause some pain for sure. I don't think irreparable damage in certain cases depending on the situation. But I believe there's a time and a place for certain techniques. We use them all at our clinic. But its knowing your client. When to use the small hammer, when to use the big hammer and so in an inflammatory and acute state sometimes its not the best technique.

Dave Forrest: And like I said, if something's being protected, let's look around those areas and treat those areas that aren't moving to take stress off that area that's working harder than it has to. And in most cases, that's something at that stage when the person comes in can handle. Right. So. To me, if someone has done a proper evaluation on you, looked at your history, asked you questions, what makes it better? What makes it worse? And does all the screening tests.

Darren Luck: That brings up a great point Dave. How is someone to know that they're being treated by a conscientious provider to that point? I mean, if you just go in there and five minutes later they're doing some sort of a procedure on you that would tell me they're, you know, the old saying is to the man with just a hammer, every problem is a nail.

Dave Forrest: Right.

Darren Luck: And to that end, how do you know that you're being treated by somebody who does know what they're talking about?

Dave Forrest: That's a fantastic question, honestly, because I have that asked of me many times a week in the clinic, you know, hey, what's the difference being a physio and a chiropractor? An osteopath? Massage? What's the difference? And, you know, my answer is always we all treat the same types of injuries and sometimes we have different techniques, sometimes overlapping techniques. But at the end of the day, if you've gone to a person who has listened to you and you're taking a detailed history, asks you pointed questions as to what makes it better, what makes it worse, maybe, you know, provoke some other questions that you may have based on his interview. Explains what they're finding during their objective testing and then treats those things he's finding or she's finding and it seems to make some sense. It seems to be helping you found the right person regardless of the profession.

Darren Luck: Right.

Dave Forrest: Because there's good and bad in every profession. And so as a consumer or someone who's going in with pain and wants some help, they need to know that those are the things you should be looking for. Versus the hammer now?

 

Darren Luck: Yeah.

Dave Forrest: Because it may work for the one off, but at the end of the day, are you getting what you really need?

Darren Luck: Yeah and I wonder, too, I mean, back pain, joint pain, body pain is so universal. And I guess the problem you've got is when there's a universal problem, there's a lot of charlatans out there that try to sell these snake oil type cures. Are there any supplements or some of these contraptions that maybe do work, that don't work or can actually do harm that you're aware of?

Dave Forrest: You know, there's a lot of different treatment approaches out there, some that have been tested and some that have not. And all probably claim to make some sort of sense in terms of what they're doing, whether or not they've been tested. So there are different types of things that can help someone during an acute phase. You know, like the different topical rubs, there's analgesic rubs or anti-inflammatory rubs, and they're fine during the acute phase. When you're in pain, you want to control some of inflammation. You want to get rid some of the pain to the analgesics. That's fine. But it wouldn't be a fix, right? Because we're just going after the symptoms. After that phase is ended and they're out of information, then the real work begins. The investigative work, where you look at stuff. Tens machines, such as the Doctor Ho, as pain control measures, right, and yeah you can get increased blood flow to the area through electrical stimulation, but the most tens machines are designed to block pain from getting to the brain. And so, again, it's a temporary measure honed in on treating the symptoms and not necessarily the problem? Again, like I said earlier, as long as you're getting a good evaluation, you're going to get the right treatment at the right time.

Darren Luck: Right.

Dave Forrest: Which is what we're all kind of looking for. It's just sometimes it's not delivered.

Darren Luck: Right. Now, this isn't the best thing for your business necessarily. But what are some things people can do to stay out of your clinic and to stay healthy and avoid back pain, neck pain, knee pain, hip pain, whatever it might be? Are there any surefire things that will wind somebody up in a clinic that they should avoid doing that may or may not be obvious?

Dave Forrest: Well, the one big thing we talk about is and it's big in the news right now is sitting is the new smoking. And sitting is hard on the back just because it put your disks in a compromised position right when you're sit for a long time. Five or 10 minutes after you've been sitting muscle shut off, you start hanging off ligaments and the disks and you put pressure on the front of that jelly donut. We talked about earlier and that pushes that gel towards the back. And over time, that gel starts to break through that wall. It's almost like a repetitive bending, but you're just static.

Dave Forrest: The discs don't have a great blood supply. And so it needs and requires movement to get his nutrition. So sitting for long periods of time goes against that. And so now you've put your back in a compromised position. Its health is dwindling, deteriorating, if you will. And so sitting just becomes a bad thing for the back. So now we've got the sit to stand tables and stuff. Right. To ameliorate that. But it's getting up more frequently, changing positions, not sitting as long when you don't have to. Are ways to alleviate that. Fitness, your cardiovascular fitness is so important, as you know, it's great for the heart and the lungs. Bit it also supplies the tissues with oxygen and essential nutrients, right for this thing to stay healthy. So, you know, cardiovascular fitness can take many forms.

Dave Forrest: You know, everyone has their own way, walking, running, treadmill, all those types. Elliptical, rowing machines, they all have their place, whatever one you prefer. But doing it for a 20 minute period will help increase your VO2 Max. VO2 Max is a it's a term they use in physiology, exercise, physiology. But basically it's your body's ability to take in oxygen, deliver it to the structures and the structures, ability to utilize it. Right. So the better you are at that, more preventative, you're going to be for the back. Two big ones we see a lot of and I alluded to it earlier, was hip and thoracic mobility. So our hip joints are a ball and socket joint and their multidirectional right. Three different planes of movement. People who sit a lot, right, don't get any hip extension.

Dave Forrest: People who stand a lot don't get a lot of hip flexion. When we as physios or any other practitioner that works with people do what we call mobilizations, where we take a joint and we move it through these accessory motions, motions that happen in the joint that we don't have to think about. They just happen when we go in and try to restore those. We do it for 4 reasons we do it to gain more range. We do it to decrease pain. But I feel the most important things we do when we do mobilizations is we improve release of synovial fluid from the cartilage to improve lubrication and nutrition. And the reason I say that is when I do a mobilization on someone in the clinic and we can increase their range by 20 degrees, I didn't increase their joint capsule, I likely lubricate the joint. Synovial fluid is housed in the Highland Cartilage. So you know, on the end of a chicken bone, that shiny cartilage. That's Highland or articular cartilage, the synovial fluid is housed inside that cartilage. It doesn't automatically come out. It has to be drawn out through compression and distraction of the joint. So we go in and do joint mobilizations and we get a really good effect after likely that's what's happening.

Dave Forrest: But what's important to know is that when we establish that we establish more range, the brain receives that input from many receptors in the joint and the brain says things are normal I don't have to turn that muscle on. I don't have to keep that other one shut off. And then any exercises you want to do going forward are not to be held back by the brain. The brain won't intervene. Thoracic spine mobility is super important, as you know, with lots of sitting look at our lifestyles. None of us are an extension. We're always flex forward. It is typically you see it as we get older people's posture and they lose height. Thoracic spine mobility, extension rotation are super important for not just your lower back, your neck for your rib expansion.

Darren Luck: So what do you have to do to maintain that health.

Dave Forrest: Yeah.

Dave Forrest: So that's where cardiovascular exercise is great because now you're getting rib expansion, which is going to influence the thoracic spine into extension. We have other things we do at that clinic to increase mobility and that's always followed up with corrective exercise so that it's maintained.

Darren Luck: And it goes without saying that anybody that's going to attempt any of these things should consult with their own physician first just to make sure they're physically able to tax their bodies to the amount that's required to stay healthy.

Dave Forrest: For sure. And if you're concerned about that, like if you're in the older ages and you want to embark on something like this, you definitely want to be checked out.

Darren Luck: So, Dave, we kicked off the conversation by saying, you know, we want to remain independent to age 80, 90, 100. What are some things that we just need to keep in mind that we can do on a daily basis when we're 50, 70, 80, so that we do maintain some level of fitness into our 90s and to 100 if God willing.

Dave Forrest: Yeah. The first thing I tell people in that age bracket, don't succumb to your age.

Darren Luck: OK.

Dave Forrest: We have.

Darren Luck: What does that mean? Don't succumb to your age.

Dave Forrest: We have people that come in in their 50s and say, oh, it's because I'm old. I'm getting this way because I'm old.

Darren Luck: Age isn't an excuse.

Dave Forrest: Yes. So don't succumb to that.

Darren Luck: Don't let what you can't do get in the way. What you can do.

Dave Forrest: A hundred percent. What I tell people is the body is constantly remodeling itself. You can always make changes, albeit as we get older, those changes don't happen as quickly and as we want, but changes can be made, whether it's strength, flexibility, joint mobility, cardiovascular health, everything can change. Like I said, the body is constantly remodeling itself. So if we put ourselves into positions that's different than we're doing now, it's going to adapt and change. And so that's the worst I can say is don't think I'm too old to start this because you're not.

Dave Forrest: One of them. And we didn't touch on it yet. But I want you just because if we're looking at, you know, sort of the six, seven decade of life, seven, eight, ninth, hundredth is balance and agility. What we see a lot, and again, having poor balance, poor agility, that's one of the things that does happen with age. We lose motor control, muscle fiber loss, our ability to control receptors don't fire as quickly. So, that can lead to falls and that can lead to all sorts of other problems, hip fractures and such.

Darren Luck: How do you build balance?

Dave Forrest: There's a lot of stuff on balance. We put people in safe, dynamic positions to challenge them in a safe environment. We put them on surfaces that stimulate receptors in the feet to wake up the rest of the body. There's a lot of different techniques we use to help with that. We do testing first on someone to get a baseline. The other thing too is that you can't have good stability without mobility, and what I mean by that is let's say someone can't stand on one foot for very long or they have balance issues when they're walking. We may find that there's an issue with their knee, with their ankle, in terms of it doesn't move properly, that joint now because it's not moving properly isn't giving proper feedback to the brain. So the brain isn't able to fire muscles properly. In fact, it may be time muscles to say shut off or inhibited. So we need to as physios look at that first. Right. Look at all the different reasons why this person may have balance issues. So. Before we do any of that, we would check that. The balance and agility is important for us to train because you're going to be seeing these things in life. Uneven terrain, stepping up over a curb. But one of the reasons why I want to talk about balance and agility is because it's one of the things that prevents people from getting out. People don't want to get out because they're afraid to fall, people to want to get out, because they're embarrassed how they might look or they don't feel comfortable in these spaces.

Darren Luck: So you see people that come in to you with this apprehension or anxiety. Something can be done about it.

Dave Forrest: For sure. And there are extreme cases where there are you know central nervous system disorders that can cause balance issues. That's outside the realm of what we would do. All the other things first before we got to that. You know, that's one of the things I feel is there's a lot of things people can do, but their fear of things outside that is preventing them from getting out and moving would be the balance and the control through different things that they encounter in life.

Darren Luck: Excellent. Well, Dave, I got to say, you've got me off my back and back on my feet a number of times. I appreciate the times you've done that.

Darren Luck: I appreciate your time you spent with us today. And I'm sure that people have appreciated the message you brought. If anybody wants to get a hold of you, what's the best way to get a hold of you. What's the best way to reach your clinic?

Dave Forrest: So our website is www.physiofit-rehab.com, and you can request an appointment and someone will get back to you within a day and call the clinic at 519 256-4646

Dave Forrest: Or you can drop by. We're at 4510 Rhodes Drive Unit 940. Any of our clinical care specialists will be there to assist you at the front desk for any need you have if you want to book something. We'd be happy to talk.

Darren Luck: Ok, good stuff. Well, thanks, Dave. Thanks for your time today and let's have a great weekend.

Darren Luck: Appreciate it Darren. Thank you. Thanks for having me.

Darren Luck: Thanks for listening. If you know somebody that would like to hear this interview, please share with them. And if you are retired, nearing retirement or interested in learning about investment strategies that provide safe, predictable, growing cash income, that's what we do. We are investment income experts. Please visit our website at LuckFinancialGroup.com or email us LuckFinancialGroup@cibc.com for more details, because we're here to help

Stephanie Senteris: The CIBC logo and CIBC Private Wealth Management are registered trademarks of CIBC. CIBC Private Wealth Management consists of services provided by CIBC in certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. CIBC Private Wealth Management is a registered trademark of CIBC use under license. Wood Gundy is a registered trademark of CIBC World Markets Inc. Darren Luck is an investment advisor with CIBC Wood Gundy in Windsor, Ontario. The views of Darren Luck do not necessarily reflect those of CIBC World Markets Inc. If you are currently a CIBC Wood Gundy client, please contact your investment advisor. The views of Dave Forrest do not necessarily reflect those of Darren Luck or CIBC World Markets Inc. This information, including any opinion, is based on various sources believed to be reliable. But its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc, their affiliates, directors, officers and employees may buy, sell or hold the position and securities of a company mentioned here and its affiliates or subsidiaries. They may also perform financial advisory services, investment banking or other services for or of lending or other credit relationships with the same. CIBC World Markets Inc and its representatives will receive sales commissions or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above CIBC World Markets Inc. 2021.

Episode 3: Outlook for Canadian Banks with Rob Wessel

[Wealth Tracks]

[There is more to Wealth than just Money]

[Episode 3: Outlook for Canadian Banks with Rob Wessel]

Rob Wessel: It's rare to have this kind of market environment where all of the most important drivers of bank stocks are moving strongly positive, whether it's GDP, whether it's credit, whether it's capital or whether it's margins.

Stephanie Senteris: Welcome to Wealth Tracks hosted by one of Canada's leading investment advisers, Darren Luck, over the past 30 years, he has traveled the world to search out the best ways to help clients save, grow and protect their wealth on the show. He'll be speaking to various thought leaders, getting their insights, sharing stories and cool ideas about health, wealth and happiness, because there's more to wealth than just money.

Darren Luck: Well thanks for joining us guys. On today's Wealth Tracks, we've got Rob Wessel. Rob happens to be the managing partner, co-founder of Hamilton Funds. And Rob, if you could just explain to me a little bit about your firm and why did you happen to call it Hamilton?

Rob Wessel: Yeah, well, thanks for the interview. So, our firm is Hamilton ETFs. We specialize in the global financials. The firm is just over 10 years old. The idea for us is to do one thing very well, albeit one very big thing. And we named the firm after Alexander Hamilton. This was before the musical. So before he was cool, I was reading his biography when I had the idea to start our own firm and we wanted something that spoke to our financial services emphasis in the first Treasury secretary and creator of the first central bank seemed apt.

Darren Luck: That makes sense to me. And why would you build a firm around financials?

Rob Wessel: Well, it's an extremely large sector, number one, number two, it's quite complicated, so there is room for stock selection. Number three, most Canadian investors are significantly overweight, the Canadian banks. So, while we have Canadian bank ETFs, which we think are quite good, and we also wanted to offer what we thought were good ETFs that were complements to core Canadian bank positions. Basically, we wanted to bring global diversification to your average Canadian investor whose core holdings are Canadian banks, but also probably don't want one hundred percent Canadian banks.

Darren Luck: OK, so what would your ETFs, HCA and HCAL specifically have outside of the diversification from the banks?

Rob Wessel: Oh. So sorry, we do have core Canadian bank ETFs. Our modestly levered Canadian bank ETF, the Hamilton Canadian Bank one point two five times leverage ETF. We have a mean reversion ETF underneath that. It's our other ETF that we offer, which we hope provides investors with access to the most attractive global themes and countries and companies that the average Canadian bank investor or the Canadian sales analysts, for that matter, wouldn't really be able to offer any sort of value.

Darren Luck: Ok, so let me give you a little bit of background myself. How I got invested in Canadian banks. I've been doing this for 30 years, and I like to think that I've figured every way not to make money. And I sort of landed on Canadian banks probably back in about 2005. And held them through the housing crisis that worked out really well for us 2009, with the advent of the tax-free savings account, was a relatively modest amount of money that clients could invest. And it was pretty easy at that time just to pick the highest yielding Canadian bank, which back then was Bank Montreal, as I recall, yielding about nine percent. That worked out really well, and from there, I fine-tuned our philosophy and process quite a bit more to the point where I make that a core part of my investment process with clients. Now, I said, I've been doing this now for about 30 years and roughly 20 years in the Canadian banks, in my experience, I don't give a lot of credit to what some of the bank analysts or the analysts say as far as forecasts and so on are concerned. What I always look at is just the dividend yield. When the dividend yield is very high, it tells you you're getting a bargain. As I said in 2009, we've got a real bargain with yields close to nine percent. And in my experience, when we get close to that three percent range, we're getting fully valued. Well, we're getting close to three percent range with a couple of stocks right now, namely national and I think Royal Bank, what are your thoughts right now, given the run they've had? Are the banks fully valued or are we just going to shift gears here?

Rob Wessel: On the Canadian banks, there's a couple of things. One is we have a Hamilton County Bank Mean Reversion Index ETF, which is I guess, conceptually similar to what you're referring to, which is the banks that are oversold go to 80 percent. The banks that are overbought go to 20 percent. So, we have a strategy which I guess in principle or in theory, in concept is similar to what you're talking about, albeit with a shorter-term time horizon and more frequent rebalancing. In terms of valuations, the first thing I would say is National and Royal are three point three- and three-point seven percent dividend yield and the whole sector is four. So that's not too bad. But I'm not sure I would think of it quite that way today, if only because nobody has raised dividends for a while and they're likely to all raise dividends in the next quarter. So, you're likely to see a boost there in the dividend yield, to what degree we're not sure. But no, I mean, the Canadian banks right now traded about ten point two times forward earnings. That's a pretty low number relative to where it's been over the past.

Rob Wessel: So, I've been involved in the Canadian banking sector for over twenty-five years, including as an analyst and a portfolio manager. I agree with you that the analysts are often wrong. In particular, they're wrong in credit cycles. They underestimate the increase in loan losses during recessions, which they did last year, but they also underestimate the recovery. So, while it's true the Canadian banks traded about ten point two times next year's earnings, it's also true that the E is probably too low. History would suggest it's too low. History would suggest the analysts have underestimated the degree of the decline in loan losses. Chances are they've underestimated margin expansion from a steepening yield curve. And it's also indeed likely that they haven't considered any additional buybacks from reserve releases that are coming. So, there's an awful lot of positive news coming for the sector in the next 12 months or so it would seem, and they only trade at ten point two times. And I think that number, if history holds, which it does every single cycle, that ten point two is probably something like nine point eight in real terms because the E is too low.

Darren Luck: OK I'm going to challenge you a little bit on the E side of it. Sure. Would you say that earnings were actually in a recession or were they just sandbagging earnings because it wouldn't be politically wise to report big earnings in the middle of a pandemic? It just seems to me the mortgage market is on wheels. The real estate market is on wheels. People are spending money for the most part. It's not necessarily a consumer company. So, to me, I don't see how earnings would have been impaired or am I missing something?

Rob Wessel: When the global economy effectively shut down in March of last year, there was no question that they were going to absorb higher loan losses and more people would default. Lots of commercial loans of small businesses, restaurants.

Darren Luck: Did they get hit on those fronts?

Rob Wessel: Absolutely. But the direction of the question isn't wrong in that, what I would say, is they over reserved. So, yes, did they have rising loan losses? For sure. But they were deliberately conservative. And we believe that you are likely to see very large reserve releases, which is to say the money that they've set aside to deal with these losses, they intentionally or they were very, very conservative that came out of earnings and out of capital in the other side of the credit cycle. Now that we're in the recovery, probably four to six billion at least is going back through earnings and into capital, which will fund buybacks, capital deployment, and things like that. So real losses overestimated it. And now you're on the recovery side.

Darren Luck: And how exposed would they be to real estate in the event that we've got a stealthy bubble that's being inflated right now? And if, in fact it's true, which I don't necessarily buy into, we've got to consider everything. If we do have a housing bubble that bursts, how exposed would the banks be?

Rob Wessel: Yeah, so this has been an issue that people have talked about with varying degrees of ardor over the last 10 years. Here's what I would say. Canada and same with Australia, for example, they've basically structured their mortgage market so that the banks generate almost no losses in residential mortgages regardless of the credit environments. So, they do that in a number of ways. But if you think about it, for everyone hundred dollars a Canadian bank has in residential mortgages, they have two hundred dollars’ worth of collateral. And the most stressed customers that they have have to basically pay mortgage insurance to insure against their own creditors. So, what that means is that in the worst environments that you've seen over the past 30 years, provision ratios or credit costs as a percentage of loans is extremely low and close to zero in almost all environments. Now, if home prices do fall, that doesn't mean nothing happens, but it generally means, is it puts stress on GDP growth, put stress on credit in construction loans, and put stress on credit in commercial real estate, possibly business loans. And you have lower GDP as a result, and it puts pressure on volume growth. And so, it's not like the United States. Either Canada or Australia are near perfect twins. They both have the same powerful credit profile for the residential mortgages based on the structure of how they're done and mortgage insurance. So, if home prices fell, let's say twenty five percent for the sake of discussion, it would be a negative, but you wouldn't see the negative in the form of rising loan losses on residential mortgages. You would see it in the form of lower revenue growth and rising loan losses and other related categories.

Darren Luck: Now do they syndicate all of these loans or do they carry them on the books?

Stephanie Senteris: No, these are on the balance sheet.

Darren Luck: Ok, and even the CMHC. And outside of that, on the balance sheet.

Rob Wessel: So, I'm referring to residential mortgages.

Darren Luck: Right.

Rob Wessel: The insured part obviously get zero losses, the uninsured component is the wealthy half and they have a loan to value that's so low that the collateral protection is so high that generally speaking have no losses. I was referring to corporate loans to, say, construction companies, homebuilders, any sort of related businesses, just not in the category of residential mortgages.

Darren Luck: Ok, so in your estimation, they can absorb a housing crash if it should happen? Outside of that, what are the biggest risks to a bank investor?

Rob Wessel: Well, I mean, you just saw it. I guess in terms of a near immediate shutdown and economic activity, I don't know that you can get much more severe than that. But I think what we've seen over the past is bank stocks globally, Canada included, if you see some sort of global events, macro risk, whether it's a central bank, acting in a way where people are worried about the withdrawal of liquidity, whether it was the European sovereign debt crisis, whether it's an asset bubble, a real true asset bubble in China, anything that affects the global banking sector and/or central banks and/or the interaction between them and the bond markets are the things that tend to move multiples. And then just in general, they are very diversified. So, we have a universal bank model here. So, they have a lot of different businesses that help absorb losses when you know generally something is going right in all environments. And one thing I didn't mention, which is important, is they have very large investment banks. So, when there's a lot of market turbulence, like you saw, for example, with Covid, the investment banks tend to generate more trading revenues, which is countercyclical. So, they generate a lot of excess training revenues, which they can use to absorb loss. So, they're very durable companies for sure.

Darren Luck: Ok. And one of the biggest risks I'm concerned with is the massive debt that we're accumulating. As a globe right now.

Rob Wessel: Yes.

Darren Luck: With the potential that this ultimately leads, if it gets monetized to inflation. How have banks traditionally done in inflationary environments?

Rob Wessel: Well, I mean, there's inflation and then there's inflation. Generally, inflation is the enemy financial assets, which is the balance sheet of a financial intermediary, but I'm talking about when inflation is 13, 14, 15 percent or eight or nine. Right now, going from one and a half to three and a half is likely in the short term to be more of a positive than a negative because the yield curve is likely to steepen, which we've seen recently, which would give you margin expansion. I think the risk is a disorderly move in the bond market. So, the long end of the curve or long rates rose significantly in a short period of time. That would be very disruptive. If it rises gradually and the yield curve steepens. You know that's an environment the banks live with. But obviously there's always an inflection point. I'm talking about if inflation is between one and a half to three. If it got to five or six, well, then that would be a problem.

Darren Luck: It would be inflation expectations and a prolonged instead of a one print number.

Rob Wessel: Yeah. I mean, this is a whole other conversation about whether or not the governments can correctly calculate inflation. I mean, China has been exporting global deflation for 20 years. Technology is obviously weighed on inflation as well. And so, there's some pretty powerful deflationary forces, which is why I think when you see higher inflation expectations, the financials rallied because you're removing or making more remote deflation risk rather than people worried about inflation risk.

Darren Luck: Right.

Darren Luck: It's halftime. And I hope you're enjoying the show. Low interest rates are making it tough on conservative investors. Are you retired or close to retirement? If you're looking for safe, predictable, growing cash income? That's what we do. And we are the experts. Please visit us at LuckFinancialGroup.com to learn more. We are here to help. Now back to the show.

Darren Luck: So the last time I listened in on one of your webcast, I believe it was in October or November, and you talked about the three catalysts to look forward to, which was very insightful, very helpful to me. And I would have to say that the banks performances probably even exceeded your expectations. They certainly exceeded my expectations. Would you say they've exceeded your expectations, or do you think we're par for the course right now?

Rob Wessel: No. Well, so in October we did a webcast where we said the credit cycle was over and the banks have rallied dramatically since then. So, we did think that they were going to go up a lot and they did. So, I think the banks are, if I may, I think they're where we thought they would be right now. The three catalysts, if you want me to just quickly mention them, was normalized earnings and forward estimates. Was Catullus number one? You got that in Q1. So, post Q1 reporting, that's been informing the rally that you've seen in the last couple of weeks. Catullus number two, which is reserve releases, funding buybacks and higher capital that's in front of you. And Catullus number three was some outsized GDP quarters from reopening, combined with this massive fiscal and monetary fiscal stimulus in Canada and the US that you alluded to, just underpinning sentiment and steepening the yield curve, which would lead to margin expansion. So, you've got Catullus number one, that's out of the way. In front of you is catalyst number two and Catullus number three. It's possible that the full effect of them is more back ended this year. But it's rare to have this kind of market environment where all of the most important drivers of bank stocks are moving strongly positive, whether it's GDP, whether it's credit, whether it's capital or whether it's margins.

Darren Luck: Ok, and that's propelled bank stocks to, well, with the exception of Bank, Nova Scotia, CIBC, all of them to all time new highs. Last time Scotia was at a high was eighty-five dollars in twenty seventeen. And CIBC has bounced up against one hundred and twenty-five dollars three times now. And we're bumping up against that. So now are we going to shift gears into like a new paradigm to new higher levels, or is this sort of an area we're going to consolidate and sort of get a sense of where we are before anything further?

Rob Wessel: Yeah, I mean, it depends on your timing. You think of the next two months or three months. It wouldn't surprise me if they consolidate here for a while until get new information, which would be Q2. But I think if you're looking out 12 months, I think things look very good. Recall that there's been some pretty big months, but really all they were doing is getting you back to what you lost in March, April, May, June, July, August, September and October. And then you have the big November, December and the January. Only until recently you started to build on you prepend ever highs. And so, I think you got a way to go.

Darren Luck: Ok, and I would expect a little bit of a steepening yield curve where we are in the economic cycle. Things look actually pretty favorable for our banks at this point.

Rob Wessel: Knock on wood. Yes, I think so. This, as I said, this is a rare environment where all of the important drivers of bank stocks and profitability and they are all individually important, are moving not just positively but strongly, positively.

Darren Luck: And are global investors looking to Canadian banks? And CIBC in particular doesn't get a lot of attention from the global sovereign funds, pension funds and so on and so forth. But with a bearish outlook on the US dollar, a relatively constructive outlook on the Canadian dollar and a four and change dividend yield, are other global investors even looking to that? Could that even be catalyst number four?

Rob Wessel: Probably not. I mean, I've been following the banks, including as an analyst for over twenty-five years. Generally speaking, foreign ownership for the Canadian banks has been relatively low. It's a bit of an art versus a science in terms of trying to figure out what the actual percentage is, the investor relations departments and banks will tell you. I will differ a little bit on your own bank. We predicted that CIBC would do better than the market expected going in and then coming out. And I think that's broadly speaking, been correct. They definitely did well. And so, I would say that would not surprise me if they multiple expansion in front of them. But to your point about foreign investment, it's always a bit of a mug's game. I actually think it's a good thing that there are very few foreigners investing in the Canadian banks or the Australian banks. A good example, because they're less volatile and they're more priced by fundamental investors. When you get to the US and Europe, quant trading and algorithmic trading and just these massive pools of capital create huge volatility in the stocks that aren't matched by the underlying fundamental performance of the companies. Whereas in Canada or Australia is another good example where, you know, bank investors in those markets are pricing those banks and they're a lot less volatile. And I think that's a really big positive. So, yes. So, I don't think it's a catalyst that you're going to get big foreign inflows. But I would say, generally speaking, one of the biggest positives is that Canadian bank stocks are priced by Canadians and sovereign funds and quant trading and all those crazy pools of capital are basically nowhere to be seen in Canada.

Darren Luck: OK And could you just comment bank by bank? I know you don't want to give any recommendations of specific, and I'm not looking for that. But if you had to sort of talk about each individual bank and what makes them unique and maybe a little about each one, what we can expect.

 

Rob Wessel: Well, you are right, we normally don't offer individual stock recommendations. Here's what I would say. I don't know that there's big differences in terms of earnings growth in front of you right now for any of the banks. We did say going into the downturn, the three banks would be advantaged, and they were National and Royal in particular, because they had higher capital, higher capital markets and higher RWE. So, they were better prepared to front load credit losses. And then we said CIBC not that far behind. The one bank, it wasn't clear was BMO. And the two banks that were likely to lag were TD and Scotia. And they did fundamentally. But we also said maybe the other banks take two quarters to get through this and they take three. We're more than three quarters in. I would say going forward, there's not much to choose from in terms of who's going to grow EPS faster. And what I would say is the things you would look for right now would probably be where the market reassesses after the fact and changes the PE multiple. So, CIBC would be the candidate, the most likely candidate for a higher multiple, given that they did well and they're so inexpensive. I personally think it's too much. The discount is too great, and I just don't think it's sustainable, which means I think CIBC will probably outperform. After that, I think it's a mug's game. I don't know that there's any big winners or losers to be had. The only bank, I think that is highly likely to outperform in two years of CIBC.

Darren Luck: Is that right. That's good to hear. In my experience, any given year, you can have a mean reversion where you can sort of trade back and forth, but buy all five or buy six. And then in five years they all end up in the same place.

Rob Wessel: Yeah, or even better, you can buy our modestly levered Canadian bank ETF.

Darren Luck: That's a good commercial.

Rob Wessel: And have a twenty five percent higher yield.

Darren Luck: So, with that ETF, what sort of an alpha historically does that provide versus just buying and holding a static basket.

Rob Wessel: Well, so we only launched in October, we launched it because we were very bullish on the banks, so we wanted to just give a modest amount of leverage, what we consider a Goldilocks amount of leverage, enough to matter, but not so much to fundamentally alter the risk profile of your portfolio.

Darren Luck: That's twenty five percent.

Rob Wessel: It's a good number and its cash leverage, no derivatives, nothing exotic about it, just a simple margin balance provided by major Canadian bank. And it is done exactly as we would have hoped since it was started it has basically had one hundred twenty five percent of the return of the group. And so, we've been pretty happy about that. And at the same time, we also pay a higher dividend yield. So, the dividend yield is, I don't know what is exactly, I'd say it is about five point three paid monthly. And if you're a long-term investor or you have income needs like a trust or something like that, we think it's an ideal product. The key is if you're a long-term investor, but, you know, if the banks are up 10 percent, it should be up about twelve point four.

Darren Luck: Right.

Rob Wessel: And if the banks are down 10, it should be down twelve point six.

Darren Luck: Right. So, you get twenty five percent cuts both ways.

Rob Wessel: Yeah, it does.

 

Darren Luck: As long as we get a positive carry, meaning the margin rate is lower than the dividend rate, it should conceivably add Alpha.

Rob Wessel: Oh, without question. We borrow at institutional rates so our cost to finance is extremely low. And then on the underlying it's a modestly levered version of our mean reversion ETF. So, if you believe the Canadian banks will continue to mean revert and that strategy alone will give you Alpha, then hopefully, ideally, we get leverage on the alpha of the underlying mean reversion plus the extra twenty five percent.

Darren Luck: So, the index would be what, the Solactive would that be?

Rob Wessel: Yeah, we just designed our own. Solactive is one that maintains it. So, it's their index, but we're the ones who designed it and then they took it. Yeah. The three banks that are oversold go to 80 percent of the fund and the three banks that overbought go to 20 and that rebalancing happens monthly.

Darren Luck: Ok, so you take the Solactive as a base case and then HCA, which will give you a bit of a boost on top of it, and then your HCAL, which would again give you the leverage. So, a little bit more of an alpha.

Rob Wessel: So, HCA is the mean reversion ETF. And HCAL, the L standing for leverage is just a modestly levered version.

Darren Luck: Excellent.

Darren Luck: And then just a little bit of a history lesson, too, so. We've got roughly two hundred years of history of our Canadian bank stocks, and my understanding is, is over 200 years and I think Bank of Montreal's got the longest track record. We've got consistent dividend, payment dividend, fairly predictable dividend growth over that period. The only time there's been a dividend cut was National Bank in the nineties, I believe. Can you add any color to that or any clarification on that concept?

Rob Wessel: Yeah. So, I don't know how far we can go back. When I was a bank analyst for many years, nobody had a particular year. In the late eighteen hundred, there was a lot of bank mergers. So, you can't really go back and say there's a few banks like Bank of Montreal, which State Bank of Montreal from like 1815 until now. But I think I would probably think more to the last, say, 50 years. And yeah, it's true that for anybody's record period there's been no reduction in dividends. But I would say that is usually a positive, but it's not the overwhelming positive that it's portrayed to be because the Canadian banks will issue equity if they need capital, they won't reduce dividends. So, use Australia, for example. Australia has outperformed Canada for twenty-five years. One of the reasons they have outperformed Canada is because at certain points in time, they have reduced their dividend in lieu of raising equity at low prices. And so, yes, is it a great thing that you can buy Canadian banks and over time you can feel very confident the distribution is going to not be reduced? Yes, and National Bank, it was more the Olympian York issue in the early 90s for commercial real estate, and that was unique. But from a total return perspective, they're quick to raise equity, which is dilutive and negative for shareholders. On the whole, it's an overwhelming positive for sure. It's just not quite unquestionably one hundred percent of the time a positive.

Darren Luck: So, there could be a dilution in order to pay that dividend, which isn't necessarily the best thing.

Rob Wessel: So, I don't want to be on the side of saying not reducing your dividend is bad. I'm just giving it a fuller context of saying that it's true they don't cut their dividend, but it's also true because of that when there is times of stress, they will raise equity. Now, they did not during Covid. So that was good. And that's why you got the big leverage. But during the global financial crisis four out of the six did raise equity. The ones that didn't was Scotia and National.

Darren Luck: And if you look at the history of National, actually the share price went up while they cut the dividend, so.

Rob Wessel: But we wrote a note in twenty sixteen on our website on National Bank saying that they were likely to be the best performing bank and they've done an amazing job. That is a very, very well-run company.

Darren Luck: So, any sort of a political tailwind there, or it's just well run?

Rob Wessel: No, it was taking a bank that was poorly run and turning it into the highest ROE bank.

Darren Luck: And CIBC, I think Victor's done a great job the same way.

Rob Wessel: Yeah, so would I. Yeah CIBC, I would say, is quite well managed. I think the idea that, yes, they've had bumps along the way over the past twenty-five thirty years, but I think those are in the past. And so, my guess is coming out of this downturn, CIBC looks very well, which is why I said I think they're more likely to get revalued.

Darren Luck: OK Good. Any other snippets that you want to leave with us.

Rob Wessel: I think right now things look very good. The only thing I would flag is. We always recommend investors who love the Canadian banks to look at Australia because the two are fraternal twins. The Canadian banks are highly correlated, which is why mean reversion works, which is what you alluded to, but they're not correlated, and they have higher dividend yields. So for those people have their three Canadian banks, or they own HCAL, or they own something like that, it's a way to sort of synthetically mimic Canadian bank exposure, but at the same time giving you diversification benefits, which should give you higher returns and lower volatility over time.

Darren Luck: And again, the theme of the podcast is health, wealth and happiness, because there's more to wealth than just money. And it reminds me of the JD Rockefeller quote. That the only thing that gives him joy in life is cashing his dividends.

Rob Wessel: Right.

Darren Luck: And nothing better than the Canadian banks when it comes to getting those dividends on a regular basis and I'm glad to have you as an authority in the area. So, I appreciate your time. And keep us apprised of any updates that we can pass on to our clients.

Rob Wessel: Will do so. Thank you for having me.

Darren Luck: Thanks so much.

Darren Luck: Thanks for listening. If you know somebody that would like to hear this interview, please share with them. And if you are retired, nearing retirement or interested in learning about investment strategies that provide safe, predictable, growing cash income, that's what we do. We are investment income experts. Please visit our website, at LuckFinancialGroup.com or email us at LuckFinancialGroup@cibc.com for more details because we're here to help.

Stephanie Senteris: The CIBC logo and CIBC Private Wealth Management are registered trademarks of CIBC. CIBC Private Wealth Management consists of services provided by CIBC in certain of its subsidiaries, including CIBC Would Gundy, a division of CIBC World Markets Inc. CIBC Private Wealth Management is a registered trademark of CIBC used under license. Wood Gundy is a registered trademark of CIBC World Markets Inc. Darren Luck is an investment advisor with CIBC Wood Gundy in Windsor, Ontario. The views of Darren Luck do not necessarily reflect those of CIBC World Markets Inc. If you are currently a CIBC Wood Gundy client, please contact your investment advisor. Rob Wessel is the managing partner and co-founder of Hamilton ETFs. The views of Rob Wessel do not necessarily reflect those of Darren Luck or CIBC World Markets Inc.

Stephanie Senteris: The Bank of Nova Scotia, Royal Bank, the Bank of Montreal, National Bank, TD and CIBC are all clients for which the following apply. For which a CIBC World Markets Company has performed investment banking services in the past twelve months. CIBC World Markets Inc has managed or co-managed a public offering of securities for this company in the past twelve months. CIBC World Markets Inc. has received compensation for investment banking services from this company in the past twelve months. CIBC World Markets Inc expects to receive or intends to seek compensation for investment banking services from this company in the next three months. This company is a client for which CIBC World Markets Company has performed noninvestment banking, securities related services in the past twelve months. CIBC World Markets Inc has received compensation for non-investment banking, securities related services from this company in the past twelve months. CIBC World Markets Corp., CIBC World Markets Inc and their affiliates in aggregate beneficially own one percent or more of a class of equity securities issued by this company.

Stephanie Senteris: There are ongoing fees and expenses associated with owning shares of an Exchange-Traded Fund (ETF). An ETF must prepare disclosure documents that contain key information about the fund. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated.

Stephanie Senteris: This information, including any opinion, is based on various sources believed to be reliable. But its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell or hold a position and securities of a company mentioned here and its affiliates or subsidiaries. They may also perform financial advisory services, investment banking or other services for or of lending or other credit relationships with the same. CIBC World Markets Inc and its representatives will receive sales commissions or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above CIBC World Markets Inc. 2021

Episode 2: Implication of Low Interest Rates with Ben Tal

[Wealth Tracks]

[There is more to Wealth than just Money]

[Episode 2: Implication of Low Interest Rates with Ben Tal]

 

Benjamin Tal: The higher level of debt will impact the potential growth of the economy, what it means that our sensitivity to higher interest rates has risen dramatically, namely, if for some reason, interest rates rise. We will feel the pain.

 

Stephanie Senteris: Welcome to Wealth Tracks hosted by one of Canada's leading investment advisers, Darren Luck. Over the past 30 years, he has traveled the world to search out the best ways to help clients save, grow and protect their wealth. On the show, he'll be speaking to various thought leaders, getting their insights, sharing stories and cool ideas about health, wealth and happiness because there's more to wealth than just money.

 

Darren Luck: Welcome to Wealth tracks the show about all things that impact your health, wealth and happiness. I'm your host, Darren Luck. On today's show, I'm very pleased to have Benjamin Tal as our guest to discuss how markets could impact wealth, which could in turn affect your overall happiness. Ben is the deputy chief economist at CIBC Bank. He's responsible for analyzing economic developments and their implications for North American fixed income, equity and foreign exchange in commodity markets. Ben advises the bank on issues related to wealth management, household and corporate debt and helps identify any areas of risk for the bank and its clients. And I'm very fortunate to have him on my team and I rely on him and his insights to help me help my clients. So the current backdrop of low interest rates has created a very strong tailwind for many good and some questionable assets. So today we're going to get his insights on four topics in particular, real estate, debt, bitcoin and the stock market. So with that, Ben, how are you doing?

 

Benjamin Tal: I'm doing very well, thank you. How are you?

 

Darren Luck: I'm doing pretty good. How how's the current condition, pandemic, treating you and your family?

 

Benjamin Tal: No issues. I must tell you, I don't miss the airports. I don't miss the hotel rooms. So in this sense, it's OK. Last week I was in Vancouver, Hong Kong, Chicago, in New York from my basement. So no complaints here. However, the kids are eager to go back to school in a normal way. So I can imagine that.

 

Darren Luck: No kidding. You're a little bit more casually dressed then I'm used to seeing you. Yes. And last time we got together, Ben, I guess it was one of your travels. You spoke at a dinner I hosted. It was November of twenty nineteen just before COVID hit. I'm not sure if that rings a bell or not, but speaking of your family, I thought it was kind of interesting that you had to excuse yourself early to go help your son with his math homework. Most kids are struggling. How's he doing with all of this?

 

Benjamin Tal: Actually doing well, they are doing well. No complaints. I know that some kids that do struggle with it because the social aspect is important. Fortunately, at this point, for them, it's OK.

 

Darren Luck: Good. Wish them well for us. Since our dinner, I guess you could say we hit a speed bump in twenty twenty. But very surprisingly, despite the fact that we are in the middle of a pandemic, it's been off to the races ever since and exceeded even your optimistic forecasts back in twenty nineteen. One of my favorite Ben Tal quotes is the sign of real intelligence is knowing what to do when you don't know what to do. This is clearly the craziest market I've ever seen in my 30 years. So let's get started. The first thing I want to talk about is real estate. And you are clearly one of the foremost experts in the area of real estate. In your report titled The Canadian Housing Market No Distance Too Far, you conclude that the pandemic has increased. The ability to work from home in Windsor in particular, has really benefited from whatever is driving house prices right now. I look at this and thinking about my kids and your kids. How do you think the next generation is going to afford a house, given the rapid ascent we've seen in real estate? And how do you see things playing out?

 

Benjamin Tal: Yes, that's a very good question and a difficult one. So first, we have to figure out why this housing market is doing so wonderfully in a recession. Usually when you have a recession, the market goes down. We have seen it in 2008 and 1991. This time, it's more than a sharp recovery and prices are rising by 15, 20 percent on a year over year rate. So the question is why? And of course, the narrative is interest rates are very, very low, which is true. However, we have to remember that today interest rates are not the interest rates that you pay. You have to be qualified at higher interest rates. We have a stress test. So today, if you want to take a mortgage, you have to be qualified at four percent, seventy nine four point seven nine percent. That's not low. It means that in the past, in 2008, when the market was down, the actual rate was the qualifying rate. So from a qualification perspective, interest rates today are actually higher than they were in 2008. Back then, the market went down. Today, it's not going down. So the question is why it's more than interest rates. It's the composition of the damage in the labor market that is really telling you the story. What I mean by that is that all the jobs, not some all the jobs that were lost during this recession were low paying jobs. In fact, high paying jobs, their number went up by 350,000.

 

Benjamin Tal: Something that we have never seen before, usually all jobs go down. This has two implications. One, most of the people that lost their job, they were low income / renters. That's why the rental market is down. It also means that a very large segment of the population was untouched financially by this crisis. Their job is there. Their income is there. In fact, it is rising. And interest rates are in the basement. That's the opportunity that they were looking for. And that's why we have seen so much demand in the market. In addition, people want to live in a bigger house now, for obvious reasons, the crisis led to a situation in which many people decided that a high rise condo is not going to do. Therefore, you need something bigger and you need more space. You need your office, your home office. You know the story. So the demand was mostly for low rise, detached houses, they are more expensive. So more activity was happening in the more expensive segment of the market. We call it the compositional factor, which was maybe 30, 40 percent of home price inflation. Because you substitute a relatively cheap unit, a condo with an expensive unit at the touch, that's inflationary. And while you can do that because you can drive two hours away from Toronto and still work in Toronto because you work from home, that's exactly what you see in Kitchener. That's exactly what you see in places like Barrie and other areas around Toronto.

 

Darren Luck: Even Windsor. Windsor's even benefiting to a great extent.

 

Benjamin Tal: Absolutely. Windsor is definitely benefiting from that. So that's something that we have seen all over the GTA, all over Vancouver. So now the question is how sustainable is it? We have to remember that people were doing it before. We talked about it two, three, four years ago. However, this trend has accelerated during the crisis. Because let's face it, every crisis is a trend accelerator and this crisis is not very different. So this trend of moving away from the city back then I was calling it Toronto refugees leaving Toronto, going to other units, other areas. At the same time, nobody can guarantee that you will be able to work full time from home. In fact, we interviewed CEOs and they are telling us, you know what, the minute we have the green light, we want our people back, maybe not five days a week, nine to five, but it will be something in between, which means that you will have to commute back to Toronto a few times a week. That's a challenge, and we suggest that some people actually will be renting properties in Toronto like apartments, exactly how people do in Manhattan, Berlin or London. Another factor to remember here is that. Maybe your current employer is OK with you working from home. What about your next one? Which means that that can impact the labour market mobility, so it's not as simple, what I suggest is that the trend will continue. People will continue to go to Windsor and Kitchener and Barrie, but at a slower rate. And I believe that some people will be coming back to Toronto. And that's one of the reasons, not the only one. Why are we actually bullish on the condo space in Toronto? Because we see demand coming back and it's starting already.

 

Darren Luck: Are there any demographic issues, especially with the baby boomers moving out and then potentially the millennials moving in? Will there be an equilibrium? Do we see there's a supply shortage? Surplus? What do you see happening there?

 

Benjamin Tal: Yes, the narrative is that at one point all the baby boomers and their parents will leave their houses and that will provide some supply in the market, which I believe it will happen. However, it's not going to happen anytime soon. We did a survey and we found that the age at which people actually move away from their houses is much higher than it used to be 10, 15, 20 years ago. So people take their time, they are healthier, they are OK financially. So they are not moving out, not going anywhere. So to me, that's something that will postpone the eventual transfer of assets. However, we are in the midst of the largest transfer of wealth in Canadian history. It's not only the baby boomers, it's the parents of the baby boomers. And what we are seeing now, given the fact that the baby boomers are well-to-do. This kind of transfer is keeping a generation. And that's why you have 25 percent of home buyers. Getting help from the parents. To buy a house,

 

Darren Luck: I'd like to throw a bit of a curveball at you there to Ben because, you know, I get it. There's this trend where the stereotypical millennial living in his parents basement far too long and postponing starting his own family and household formation and so on. But given the market that we've had, we know it's expectations that drive markets and the phenomena of FOMO, fear of missing out. Do you think that the fear of missing out, that these kids normally, that we're more than happy to sit and wait, might be incented to get out sooner so that they don't completely miss out on this real estate market that's gone crazy?

 

Benjamin Tal: Absolutely. That we love to do so if they have the support, if they have the money. And what I'm saying here is something very important. What I'm saying is that the income gap is widening. If your parents have the money or your grandparents have the money, you get the house. If you don't, you're stuck.

 

Darren Luck: And now I see a real inequality. There's always been a certain degree of inequality. This is almost a social commentary where we've got to worry about our capitalist system that we've got. And with all the activism right now against wealth inequality, could this really cause a powder keg where a very small component of the economy could actually afford the American Canadian dream of a house and two kids and a swimming pool and a boat and go to Florida? Is that almost becoming impossible? And there will be some sort of an equality experiment beyond what we're seeing with CERB and some of these other economic experiments?

 

Benjamin Tal: Yeah, I think that there was, of course, an income gap before the crisis and now there is even a wider income gap because as I suggested, the labor market outcome was asymmetrical. All the job lost were low paying jobs. So the income gap is actually widening. And then you have a situation in which you have interest rates going down and that's helping the stock market, helping the housing market, people that are in the housing market or able to get into it. So clearly, the income gap is widening. And that's why I believe that we have to think differently in terms of the housing market. I believe that not everybody has to own a house. I think that this obsession with owning a house is not something that we should see for everybody. I believe that we have to increase the supply of rental housing in all areas, including Windsor. So if you are 35 years old, you are married, you have two kids and you are renting. Nothing is wrong with you. That's the way we should go. So the minute you have two possibilities, you have a young family, you have the possibility of renting or the option of buying. If many of them will go towards renting, that will impact the price of houses because the demand for new houses or existing houses will go down and that will bring the market equilibrium. So a healthy rental solution must be part of the ultimate solution.

 

Darren Luck: But isn't rent tied into the value of housing. We know rent control doesn't work, and if the value of the asset continues to go higher, well, then this is a component of that the rents are going to go up. I'm just wondering, from a social standpoint, do we go to where two and three generations live in the same house and we look at one hundred year mortgages as a way to sustain housing? Because I've got to tell you, I'm looking at reasonable houses now in the city that are selling for seven, eight, nine hundred thousand dollars, and I just don't see the young kids even coming close to being afford that. And we talk about the income income gap. It's the wealth gap into housing that just doesn't make sense to me.

 

Benjamin Tal: But that's the way it is. So we have to fix it. And I totally agree that if house prices continue to rise all the time, then you will have a situation which rent will continue to rise. But if you increase the supply of rent sufficiently by Purpose-build actually provide builders with incentives to increase supply of rental units, high quality rental units, big enough that that will fit a family, not the closets that they are building now, but rather two or three bedrooms. If you provide the supply, a channel that will allow young families to rent and still live in a nice apartment. I think that will put a cap on past inflation and that will allow everybody down the road to even buy a house if they want. If we don't do it, then you have the supply pressure that will continue to elevate prices. Toronto, Kitchener, Windsor they will not be affordable in the future. We have to find a way to allow people to find other alternatives, and those alternatives actually will find a way to lower prices.

 

Darren Luck: So they will fill that void, stabilize the equilibrium a little bit just so that we can have a better continuum from starting homes to these great big monster mansions that seem to be getting built everywhere.

 

Benjamin Tal: Exactly, I think that's what direction we should be going.

 

Darren Luck: It's halftime, and I hope you're enjoying the show. Low interest rates are making it tough on conservative investors. Are you retired or close to retirement if you're looking for safe, predictable, growing cash income, that's what we do. And we are the experts. Please visit us at LuckFinancialGroup.com to learn more. We are here to help. Now back to the show.

 

Darren Luck: OK, so this is a great segue into the next topic, which is debt. This real estate people aren't buying with money they've got to say this is all debt fueled. And with interest rates at literally the lowest levels in seven hundred years, it's made buying anything on credit very easy and wouldn't be a financial talk without throwing a Warren Buffett quote in there. So I'm going to say Warren Buffett once said the less prudence with which others conduct their affairs, the greater prudence with which we must conduct our own affairs. So global debt is now at two hundred seventy seven trillion dollars. That's with a T. And Canada might not be the biggest debtor, but we lead the pack. Growing our balance sheet as a mind boggling four hundred and fifty six percent of GDP, five times more than any other country on the planet.

 

Darren Luck: If we put this into perspective, in just one year, the federal government under Prime Minister Trudeau is more than double the national debt. It took a hundred and fifty three years in the existence of a country to amass. So our feds are now on track to have a one point trillion dollar debt by the end of March, posting another three hundred eighty five billion dollar deficit and adding another trillion to the debt yet. Everybody I talk to is concerned about this, and you think about the short term nature of politics and using history as a guide and thinking about the experiences of Greece and recently Lebanon as a backdrop. How do you think Canadian investors should conduct their own affairs? We talk about real estate, but just how should we think about all of this debt and what should we do in regards to the overall debt picture, both in terms of actual debt as well as the Canadian dollar?

 

Benjamin Tal: Yes, that's the ultimate question. When people talk about debt, what they picture is a cliff, some sort of a smoke, at one time something will explode. Nothing will explode. Debt is not about a date in the calendar. It's not a cliff. So it means that we have a situation in which the higher level of debt will impact the potential growth of the economy. What it also means is that our sensitivity to higher interest rates has risen dramatically, namely, if for some reason, inflation or no inflation, interest rates rise, we will feel the pain. And until now, the issue was household debt. Now it's also government debt. So clearly, as a society, we are much more sensitive to the risk of higher interest rates, which also means that when interest rates start rising, the impact of higher interest rates will be much more significant than in any other time in history. I estimate that rising interest rates now by one percent is equivalent to raising interest rates by two percent just five or six years ago. So we have a situation in which the effectiveness of monetary policy is very, very high and that will have an impact on the economy. The minute the Bank of Canada starts raising rates, the economy will respond. So in many ways, maybe the disease is also the cure. Maybe the increased sensitivity to higher rates will prevent interest rates from rising to the sky because of the effectiveness. Now, some people say it is true that interest rates are rising, but I remember when they were 12 percent. Meaningless because all debt that was taken in Canada at this point was taken in a low interest rate environment, which means that every small increase in interest rates today can have a significant impact on the market and the ability of the economy to grow. And that's, I think, the way to look at it. It's not an explosion. It's not smoke. It's not a cliff. It's basically increased sensitivity to high rates, which means that maybe the next recession could be more significant, which means that the ability of the economy to grow, the potential growth of the economy will be reduced. And that's a negative.

 

Darren Luck: So I guess the fear with all the debt and now with the printing press, the government's just printing money with reckless abandon is leading into another new phenomenon that really doesn't make sense, which is bitcoin and crypto currencies. And I'm going to throw another quote to sort of had this conversation off. It was a Walter Cronkite once said, if you're not confused, you don't really understand what's going on. And I find it funny that people they pretend like they really get it. And I talk to other people that are expert in the area and they really have no clue. So the one thing that really doesn't make sense, if you really think about it, is paper money. People have faith that the money in their wallet is worth something when really it's just a meaningless piece of paper. Which one time was gold and really, what is that worth? Gold has some value because it's got finite value. Prior to gold, we had salt that had value and had a utility, but really it wasn't very finite. And we've ended up with fiat currencies as we know them. And people will make the argument that Bitcoin is valuable because it's supply constrained. And I look at it, I go, well, so what if it's supply constrained? What can you really do with it? I'm having trouble with the whole concept of cryptocurrency is trying to figure, is this something we should be paying attention to or is it just another fad like Beanie Babies?

 

Benjamin Tal: Yes, that's a very important question, and I suggest that no. In economics 101 they tell you what money is. Money should be an exchange of value. And none of it is Bitcoin. Bitcoin is not money according to the definition of money. Now, you can redefine money if you wish, but that's a totally different story. I tell you the way I look at it. I'm very interested in Crypto. As an idea, as the technology, I think is very interesting, because I think it would be part of the future financial system. I have zero interest in the coin itself.

 

Darren Luck: Right.

 

Benjamin Tal: In Bitcoin, I think it's above it. I think it's crazy, I think it doesn't make any sense. I think that what we are seeing now is just people playing games. And I'm not participating in this game and I'm not even pretending to understand this game because it's meaningless to me.

 

Darren Luck: And I thought I got it Ben until these NFTs came out. I understand that a baseball card is just a piece of paper, but it's got some sort of intrinsic value to people. But now, literally, you have a digital picture of a baseball card that they're saying has value, which in itself I thought was crazy enough until the next iteration was NFT pictures of running shoes. You don't even get a running shoe. It's a picture of a running shoe that people are paying ridiculous amounts of money. Is this just because interest rates are at zero? Money is being thrown at us there's no value to money anymore. People don't respect what money is, so they just throw it at anything.

 

Benjamin Tal: I agree, and that's a game that I don't want to participate in because I think it's a very dangerous game. I think that this market will be regulated, that like there is no tomorrow. Listen, the technology is there. Cryptocurrency will be there. Central banks will be part of the game. Commercial banks will be part of the game. They will not fight it. They will join. It will be part of the asset. However, can you imagine a bank, like CIBC putting crypto on their balance sheets? Can you imagine the volatility if it goes up by 50 percent a day and then goes down by 50 percent a day? You cannot run a bank or a government or central bank like that. Therefore, a precondition for the Bank of Canada or any other bank to get involved with that is to regulate that. You look at what Yellen is telling you. She's telling you. That's exactly what I'm going to do. So I suggest that the number one risk for cryptocurrency is at this point is a very massive wave of regulations that's coming.

 

Darren Luck: Right. I think the real risk is mass Ponzi schemes. You know, it's something that everybody wants to jump in on. And really with no regulation, people not really understanding it, I think it's conceivable that we have a whole new wave of Bernie Madoffs that claim you've just purchased this crypto investment when really there's nothing I mean, it's hard to say there's anything there to begin with.

 

Benjamin Tal: In between it can double in value. And that's the issue. And that's the definition of a bubble.

 

Darren Luck: Well, let's just say it's not even tied into the actual asset just because it's such an obscure thing to begin with. Just create some A.B.C. crypto ink and you'll collect their money and you give them a false statement. They're watching Bitcoin on TV and they're thinking that their investments is going up. Nothing's been invested. And because there's no regulation and it's caveat emptor on steroids, I just really worry there's going to be a lot of people hurt.

 

Benjamin Tal: I agree with you on this one.

 

Darren Luck: So we've touched on Bitcoin. We've touched on real estate. On debt. Last thing we want to wrap it up is on the stock market in general. So I kicked it off by saying my Ben quote is knowing what to do when you don't know what to do. And I also like to think that there's two types of forecaster's. Those who don't know and those that don't know, they don't even know. And it's frightening to think that this whole world has got a lot of relatively young people running big portfolios, central banks, et cetera, all over the world, and they really think they've got it figured out. It's really hard to know what is going on because of the flawed and I guess untested data. So it's fairly smart people on both sides of the debate. Nobody seems to take a balanced approach. So let's stand back a little bit, Ben. Let's look at the big picture. And if you had a brand new client with a million dollars that came to you and said, OK, Ben, what should I do with this money? What advice would you give them?

 

Benjamin Tal: Yeah, that's a tough one, because it's a very tricky market, the stock market is expensive and the bond market was extremely expensive. Now it's becoming cheaper, which is the right thing to see. I think that if I have to make a decision a few weeks ago, I would say don't touch the bond market. But now I think that the bond market is offering some value. It's not going to be great, but you can collect the coupon. And that's something. We have seen the significant increase in the long end of the curve in terms of yields reflecting the fact that the market is expecting the Fed to start moving, although the Fed is trying to resist this temptation to. They are saying we are not moving until twenty, twenty three. The market is expecting twenty twenty two. The number one issue is inflation. The Fed is telling you that they are willing to tolerate inflation above the target of two percent for a year or two. And the market says, you know what, we don't believe you. We think that inflation is an issue and you will change your mind. And that's basically the tug of war between the stock market, the bond market and the Fed. And the stock market is in the middle. So that's the background. And clearly the number one factor impacting the psyche of the stock market. If you ask me what is the number one reason why the stock market went up when the economy experienced a recession? Clearly, it was extremely low interest rates that elevated valuations in the equity market. Now, I do believe that the second half of the year would be extremely strong economically speaking. I think that the market is starting to price it in. I think you will get more upside surprise because there is so much cash in the system that will be utilized. Therefore, I believe that if you have a cyclical stock or a cyclical sector, I will be there. I will not go with the winners of the recession. I will go with the lagers of the recession, because I think that's where you find value. To me, that makes sense.

 

Darren Luck: You still like the cyclicals in this level just because the economic balance.

 

Benjamin Tal: Absolutely. I think that the economy would surprise on the upside. I see the U.S. and the Canadian economy expanding by five, six, seven percent in the second half of the year. I see a situation in which the Fed will be sitting on low interest rates for a while that will help those sectors. And remember, there is so much pent up demand so you can actually utilize this pent up demand for your purposes.

 

Darren Luck: And related to that, what do you see with the energy markets, the pipelines, the oil companies in particular? It just seems that there's been underinvestment in that area. When everybody comes out, there could be, again, a shock to the system. What do you think in this world of ESG and governance and so on? What do you see happening in the energy industry, in markets?

 

Benjamin Tal: Yes, I think that Biden is positive for Canadian energy. Why? Because he's got to regulate US energy like there's no tomorrow. So, yes, you kill the pipeline. But you know what? Keystone today is not as important as it was ten years ago. Our capacity in terms of pipelines is up by 15, 20 percent. Line five is much more important. And I hope that will not be an issue.

 

Darren Luck: Especially to our area.

 

Benjamin Tal: Exactly, that's a major issue. But I believe that that would be resolved. So of the whole I look at the Canadian energy and I see actually a positive sign. I think that with prices at about six to sixty five bucks for WTI and you have a situation in which the supply issue is not as significant as it was before. I see a situation in which the energy sector can actually outperform. However, in order to outperform this energy sector has to be smaller. I see a wave of M&A activity happening in the energy sector and that's where I see a lot of valuation opportunities.

 

Darren Luck: Ok, good stuff. So I agree too. That echoes my feelings. And last, I guess, one of my favorite areas, Canadian financials and banks. How do you feel about that sector? Its had a real run in twenty twenty one so far. What do you see the banks doing over the balance of the year?

 

Benjamin Tal: Yes, I've been very bullish on banks early in the year. The reason was basically the steepening in the yield curve. We got that. Another reason was that banks put a lot of money aside for bad loans and none of it actually happened. All the people who defend the mortgages are not common, but we haven't seen any increase in delinquencies there. So that's amount of money that was put aside that can come back and soon may also will allow banks to buy dividends, buy back or to increase dividends and buy back stocks. So all those forces to me suggest the banks are fairly valued. But if there is a potential upside, it probably will be because of regulations and the economy would continue to do well. So overall, I think that we have seen a significant run in banks. Financials, due to the steepening in the yield curve. Any other steepening would be positive. And clearly the bad loan story is a very important part. So I'm still constructive, although not as constructive as I was a few months ago.

 

Darren Luck: Yeah the easy money has been made, but it's not like we're going to have any sort of a major correction or anything like that. They're fairly valued at this point.

 

Benjamin Tal: Yes. And meanwhile, you collect the dividend, which is relatively healthy.

 

Darren Luck: I love my dividends. Like JD Rockefeller said, the only thing that gives me joy is cashing my dividend checks.

 

Benjamin Tal: Yeah.

 

Darren Luck: OK, Ben, I really appreciate your time today. This has been fantastic. Good luck over the balance of the year. Thanks.

 

Benjamin Tal: OK. Bye bye.

 

Darren Luck: Bye bye now.

 

Darren Luck: Thanks for listening. If you know somebody that would like to hear this interview, please share with them. And if you are retired, nearing retirement or interested in learning about investment strategies that provide safe, predictable, growing cash income, that's what we do. We are investment income experts. Please visit our website at LuckFinancialGroup.com or e-mail us at LuckFinancialGroup@cibc.com for more detail because we're here to help.

 

Stephanie Senteris: The CIBC logo and CIBC Private Wealth Management are registered trademarks of CIBC. CIBC Private Wealth Management consists of services provided by CIBC in certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. CIBC Private Wealth Management is a registered trademark of CIBC Use Under License. Wood Gundy is a registered trademark of CIBC World Markets Inc. Darren Luck is an investment advisor with CIBC Wood Gundy in Windsor, Ontario. The views of Darren Luck do not necessarily reflect those of CIBC World Markets Inc. If you are currently a CIBC Wood Gundy client, please contact your investment advisor. This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc. Their affiliates, directors, officers and employees may buy, sell or hold the position and securities of a company mentioned here in its affiliates or subsidiaries. They may also perform financial advisory services, investment banking or other services for or of lending or other credit relationships with the same. CIBC World Markets Inc and its representatives will receive sales commissions or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. CIBC World Markets Inc. 2021.