Best Of – 07/14/2022

[theme music] >>Hello, I'm Greg Bonnell. Welcome to MoneyTalk Live, brought to you by TD Direct Investing. On today's program, we will get three perspectives on what rising rates and recession fears mean for investors. As well, we will take you through what's moving the markets today. Coming up, we are going to hear from TD Economics to James Orlando on what's next for the Bank of Canada after yesterday's historic rate hike. Michael Craig, head of asset allocation at TD Asset Management will take us through the two storms he says are facing investors right now. Also we are going to hear from energy analyst Andriy Yastreb and why declining oil prices aren't doing much to ease that pain we are seeing at the gas pump. Plus on today's WebBroker education segment, Nugwa Haruna is going to take us to the tools that WebBroker has for researching preferred shares. Before he gets all that, let's give you an update on the markets. we are still underwater. We will start with the TSX Composite Index, down1.22%, 227 points to the downside. We are seeing weakness across the sectors including a substantial pullback in a lot of the big energy names as American benchmark crude continues to pull back. Let's check in on one of them. Crescent Point Energy. At this hour,it's down 4 1/2%, a box and $0.23 per share. Barrick Gold down note to $20.54 per share. South of the border, the S&P 500 isunderwater but off of the lows of the session. Of course, it's the start of earnings season. We are going to have more to say about that. The banks are sounding some warnings. the S&P 500 down a little less than 30% to the downside. Let's check out the NASDAQ.the energy names are down on both sides of the border. Let's look at how Exxon is trading. 82 bucks and $0.92 a share, it is on a full 3%. That is your market update. Joining me now for more on what's weighing all the markets today,MoneyTalk's Anthony Okolie. It's the start of earnings season. we were already concerned heading into earnings season about downward revision from corporations and then the big banks coming at the gate with some stern warnings for us. >> That's right. If we start off with J.P. Morgan,it just reported a drop in earnings. Their bellwether. they talked about, in the report, they released… They actually increased the low reserves this quarter. That's a bit of a… Showing they are really sour on the economic outlook going forward. >> One of those signs the banks are saying we have to get ready for the possibility that if we see an economic downturn, we could see an increase in those sour loans. Jamie Dimon coming up with a laundry list of every saying at that we have been concerned about, geopolitical conflict, the chance of a recession,who knows what happens with interest rates next, they really have to get a little more cautious all this. as you said, this is a big one for this bank to come out with this warning. Get ready for rough times ahead if they come. > Keep in mind, your ago, loan reserves are releasing them. That was a key tale about a year ago. That is reversing now and we are seeing that would not just this bank but we are going to be getting some other earnings coming up as well. When you dig deeper into the earnings, you are getting a bit of a mix. When you look at the markets, the markets have been very volatile. That has helped the revenue for fixed income and equity trading. On the downside is with the markets being down, their earnings and advisory fees, I think it's IPOs and big deals, that's been down, given the market downturn, so it's been a double-edged sword for markets, for the banks with regards to the volatility of the market. >> J.P. Morgan, Jamie Demon speaks, Wall Street listens. Also the fact that after the Bank of Canada lit delivered that historical 100 basis point height, it seemed like increased odds the US Federal Reserve is going to do the same, especially after that hot inflation print this week that they are going to come up with 100 next week. >> That's right. Before the US inflation print, the markets are expecting a 75 basis point rate hike but after that, all bets are off the table. More markets are pricing in a 100 point rate hikes. The Bank of Canada hadA 100 basis point rate hike yesterday. That's what the markets are focused on now. Federal officials didn't say the 1% increase is going to happen but they didn't rule it out. That something that we are going to have to continue following closely. >> Trying to figure out where inflation is going next. I would like to see at this point, is this the P, is it the worst to come, I just want to see an arm wrestle. Whoever wins, that's the narrative we follow. >> Absolutely. One of the things central bank so worried about is that increasingly, consumers and businesses are accepting higher inflation. That's a big concern. They don't want to have to act more aggressively down the road. That's a big risk for the central bank going forward. >> We are definitely living in interesting times. Thanks. >> My pleasure. >> Anthony Okolie, he's going to come back later on. Some fresh commentary from TD Securities on what's happening in energy markets today. The markets are digestingthe Bank of Canada rate hike. Earlier we heard from James Orlando, senior economist at TD Economics discussing his future outlook on rates. >> Hiking interest rates by 1% is uncommon. The last time we had it happen wasin 1998. If you think about what's happening right now in the waythe Bank of Canada is describing things, they are using this to frontload and try to get ahead of inflation. >>TIFF Macklem, as he was holding court, the Bank of Canada after the announcement came out, to try to achieve that soft landing. Is this like trying to land a rocketship on the head of a pin? >> That's one of the analogies going around. For sure. it's very hard. If we look back in history,it's littered with time periods where those things go up in recession. The issue that we are facing right now is that everyone is hoping we are going to get a soft landing. [video repeating] Go as far. So when you see something go up in price for one thing, you have to adjust your spending on other things. What ends up happening for Canadians is we purchase less. As you purchase less, that means less economic growth. That feeds through to businesses and everyone. Rising interest rates, what does that mean? You're going to be paying more money on any loans you have. Whether it be your car payment, if you have a HELOC, if you are resetting your mortgage on your house. All of this has a really big impact. So the idea that we are going to go through this time. And get a soft landing, it certainly possible but given the fact that it's been so hard for that to happen in the past is a big problem for the Bank of Canada. They are, as you mentioned, forecasting a soft landing so they are not forecasting recession, even with everything we're talking about right now. Whether or not that happens, we are going to find out, but it's going to be a tough task for the Bank of Canada to achieve that goal. >> After the decision, TIFF Macklem giving his opening remarks before taking questions on the decision they made today, he basically said he recognizes that it might sound counterintuitive. Canadian households, we know you are struggling with soaring costs, so what we're going to do is raise the cost of borrowing. He says the short-term pain is pretty key so that things don't get out of control. How hard is that a sell to the Canadian public at this point who are dealing with rising prices across the board? >> I think everyone's feeling the tension right now. As you mentioned, inflation is not just a few things. When inflation started ramping up, we started seeing it in energy prices. That's one thing. Then you start seeing it in everything we are buying these days. You're absolutely right. If you have inflation broad, everywhere, with the Bank of Canada is doing is raising interest rates which is going to raise prices on what you're spending on your home most likely. So it is a problem. The thing is, the way the Bank of Canada is phrasing it and that we should know it, is that when you are trying to maintain stable prices, like the Bank of Canada wants to avoid this from happening anymore, if they want to stop inflation from going up, if they don't raise rates, inflation is just going to rise. anyone who lived through the 80s and 90s when there was double-digit inflation, knows we want to avoid this. People have come up to me and talk to me about how their mortgage rates were 17 and 18% in the 70s and 80s. They knew what was going on and the threat of what it means if Canada can't break this inflation cycle which keeps going up. >>of course, we don't have our latest inflation but what we have is a bit backward -looking. We have the Americans today coming in, their CPI print coming in at 9. 1%, hotter than expected. This whole idea is, have we seen at peak inflation yet? It doesn't seem like a from the American experience. >> It hasn't shown any signs of peeking. In Canada, we are expecting another increase in inflation as well when that data come out. It's one of those things where you look at the American inflation, some people comment on the fact that core measures of inflation, food, energy, money, that's been steady for a bit of time now, but if you look at the overall headline inflation,gas prices haven't followed what has happened with international oil prices to the same extent, and the other factor is is that all these good prices that are still increasing at pretty high clips right now, we are now seeing it shifting into services. So for a long period of time, we were only buying goods. Everything that was a physical thing, we always said if you dropped on your plate, is going to hurt. Anything like that was going up in prices. Supply chains are still bottlenecked. We have seen some reprieve but there is still a lot of supply disruptions going on right now. As we shift into services, there is so much demand for all the services we have in the economy right now that demand for that is causing inflation in that area and one thing that you will probably know from history is that even if you get a peek in goods inflation, service inflation peaks much later. In Canada, for example, if you look at what happened in the 70s and 80s, we had to peaks in goods inflation, but service inflation only peaked about a year after that. >> When it comes, I imagine a happy dream for a central banker, you go to sleep and you dream about the supply chain issues being resolved, the conflict in your being resolved, inflation comes down and you don't have to punish us with these high borrowing costs. Obviously, that would put a smile on their face. If that doesn't happen, is all that is left, and what we are seeing right now, is that to crush that demand and push us into recession even though they want that soft landing? >> For the Bank of Canada, it's a tougher decision. Canada is a small but open economy. We are tuned into what's happening around the world. We really do, there's a little bit of inflation that is demand driven from Canada. We know that our economy is in excess demand. But as the Bank of Canada mentioned today, the majority of the inflation relative to their forecast is due to external supply driven stuff. So you actually need that to turn. So if that is in turn, the ability for the Bank of Canada to get inflation to come back down to target, it's incredibly challenging to do that. Because if you don't have that, most of our inflation right now is coming from abroad. See you actually need that global slowdown. So it's not just energy, with happening in Russia and Ukraine, but it's also what's the coordination of central banks? The good news is that we are seeing coordination with lots of central banks, specifically the Fed resolving bottlenecks, commodity price issues. But what we really do need to see is a slowing of demand globally. We are getting a little bit of that right now. US growth hasn't been very impressive in the last two quarters. Chinese demand has fallen given that the COVID lockdowns have been severe. but you need to see much more that going forward before you actually get inflation back down to target and if you look at what the Bank of Canada forecasted showing, they don't think inflation is going to get back down to target this year, not next year, but 2024. That's a long time to wait for inflation to come back down to what we call comfortable levels or back down to target. >> That's a great lead into another question I have on my mind. What about the suggestion, and it seems to be coming from the bond market, that yes, we are going to see these rapid hikes and they are going to come fast and furious, they are going to be supersized, but in short order, we are going to be talking about rate cuts again. Is that a little too optimistic perhaps for an investor to say, okay, there's gonna be some pain in the short-term, but not too long we are going to be talking about cats? >> I think that's exactly what the Bank of Canada and the Fed are doing. If you look at the OAS curve for future interest rate hikes, any time a central bank says they are going to raise rates to a level to restrict economic growth, that means they are going to get rates higher than they typically would in the future and then once they actually get that turn in inflation they are looking for, they can bring rates back down to what we call a neutral level, a level that's not going to stoke nor choke… And that causes a yield curve inversion, which is inversion where the two-year yield is higher than a 10 year yield and that's a pretty big harbinger for recession. People are watching that. That's why recession Dr. happening a lot. They are exciting they're going to go too far, there which restrict economic growth and they're going to have to pull back from that. >> That was James Orlando, senior economist at TD Economics. Here's an update on the top stories in the world of business and a look at how the markets are trading. Earnings season kicking off with words of caution from some of Wall Street's biggest banks. J.P. Morgan building is reserved for potential bad loans and spending share buyback. CEO Jamie Demon says that geopolitical tensions, high inflation and uncertainty about future interest rates are going to hit the global economy sometime down the road. That building up reserves at J.P. Morgan's profit fall 20% compared to a year earlier. At Morgan Stanley, they are reporting market revenue decline and Wells Fargo and Citigroup are on deck to report tomorrow. The price of crude oil is falling back to levels not seen since. . . Betting that the US Federal Reserve will deliver a full percentage point rate hike next week. While Central bankers are saying they are not trying to engineer recession to tame inflation, fears are going in the market that theinflation is going to take the economy into a retraction. American benchmark crude is down some 25% from its March highs. The demand for crude being muddied by covert outbreaks in China. Amazon says more than 300 million items were purchased during its prime day event this week. That translates into roughly 100,000 items a minute. E-commerce giants as cosmetics, consumer electronics and diapers were among the best selling items worldwide. The prime day event is a key one for Amazon. That is a return to in-store shopping is raising concerns about a slowdown in e-commerce sales following the pandemic search. Amazon shares down almost 40% since the start of the year. Let's check in on how the main benchmark indices are trading. We will start here at home on Bay Street with the TSX Composite Index out 206 he points at this hour,About 1.4%. Energy, mining names and financial names are having a tough day across the sectors. South of the border, the S&P 500, the broader read of the American market, it is off the lows of the session but still data percent right now with some of the biggest banks on Wall Street reporting lowered earnings. We will see more in the next couple of days. Investors have been grappling with red-hot inflation and what it means for their portfolios. Earlier this week, we heard from Michael Craig, head of asset allocation at TD Asset Management. He says another storm is making its way to the market. Here's our conversation. > We have seen tremendously aggressive hiking policy at the Bank of Canada, Fed, other central banks. Hikes that we haven't really seen in about 40 years in terms of magnitude. And that's going to have a material impact on growth. Certainly, you are already seeing the interest rate sensitive parts of the economy slow. And I don't think central banks are anywhere near finished. And that is really, now we are kind of seeing these two things. It's of Fujiwara effect, where two cyclones collide. My sense is, though, that while inflation is really kind of the topic du jour, it's the growth and/or recession story that's going to be on people's minds over the next six to nine months. And, arguably, we might already be in technical recession in the US right now. >> Now, the way you frame it, it might be one thing to see one storm pass and the new storm, which is slowing growth, as you say, come in. But you're talking about two storms colliding. That doesn't sound good at all. >> The challenge is that you want see inflation fall quickly because then central banks can take a foot off the gas in terms of hiking rates. The challenges, and so it's a bit of a race now to see, on one hand, you've got materially slowing economies. On the other hand, you have inflation that is still quite sticky, and some aspects of inflation aren't really going to roll over. The red aspect is going to roll over anytime soon. So for investors, the key thing or decision right now, is which one is falling quicker? I think will have a better idea by the fall. It takes a few quarters, diddly, for policy to start to tame inflation. I think we'll have a better idea of it then. Until then, I think days like today, days last week, the markets were quite jubilant, today not so much. So continuing to see quite a bit of volatility across equities, fixed income and currency. >> That something I've particularly been courteous about because I've done so much central bank coverage over my career, the fact that when you get used to either 25 basis points to the upside or downside, depending on what part of a rate hike or cut cycle that their own, but targeting these jumbo hikes, 50 basis points, 75, does that have a quicker effect, even if it's just psychological, a country? Because we do know that it takes time for monetary policyto work through an economy, but the jumbo heights, does that pull forward some of that reaction? >> Yeah, so the economist's textbook answer on the slower hikes-- about seven quarters before you see it come up. That's how long it takes to work its way through the economy. And then previously, you did have those 25 basis points move because they were just trying to tilt it a little bit. They weren't trying to shock it. They were just trying to gradually slow the economy down without causing a recession. this time around, look, when economic history and look back at this time, they will say that central banks made a mistake by being too slow and had to catch up. Right now, it's a court ability issue. The challenges, I think that inflation is going to fall materially. But at what cost? How deep a recession will they need to create to see that happen? And I would say, certainly, parts of the economy that have done very well in a low rate world are tremendous and vulnerable. Housing and-- they call it FIRE-- finance insurance real estate-- those parts of the economy are quite vulnerable because quite frankly, people are seeingmoves. And particularly, those are on floating rate. When they start to reset those, they are going to see materially higher cost and that ultimately is like a tax on your livelihood. It's like paying another tax because you're paying a materially higher rate against your mortgage. >> Now, given that, there are some, I guess, participants in the market-- and even maybe the bond market is sending a signal that, yes, we're going to get these aggressive rate hikes, whether it's the Bank of Canada, the Fed, or other central banks. But it won't be long before they're cutting again. I mean, is that a bit of an overoptimistic dream, saying it and get back for a while but easy again real soon? >> Yeah, so, if you ever have a dinner party and you want someone with a really dark sense of humor, invite a bond person because they tend to have a very cynical view of the world. and yeah, you do see it. You see it in the euro-dollars markets where-- the back 1/2 of '23, you see about 80 basis points of cuts. And what the bond market is telling you is that the Fed is going to shift the economy into recession to raise unemployment and create enough slack in order to bring down wage and other forms of inflation. And look, if you're out of work, you're not going to go on a trip. You're going to spend less. And you can't really do much about supply. Supply is being affected by the war in Ukraine and by COVID policy in China. That will take time to adjust. And there's no monetary cure to solve that. the monetary policy does affect demand. And what the bond market is telling you is that it's going to slow sharply into the end of this year and early 23. And the expectation is that we'll see cut. That's an expectation, it i doesn't mean it's going to happen. But it's a bit ironic, as we see these rapid rate rises, that the forward-looking nature of the market is telling youposes a lot of volatility ahead. Again, if inflation stays sticky, I don't think it will, but this is an industry adjusting to information. It could be quite a challenging. Freight stay high for a longer period of time. >> Is there any chance, I guess there's always a chance, is there any chance that central bankers can achieve this soft landing? The perfect point, we've slowed things just to bring everything back in balance without triggering a massive recession, big job losses. I think they would want to be there. Can they get there? >> Empirically, it happen. Based on what they're trying to achieve today, I think the real question is kind of a run-of-the-mill soft recession oris it a deep one? To me, that's the right question. if unemployment accept of 1/2%, that's not the end of the world. That would technically be a recession, but I think central banks would take that outcome. The question though is is it more of a six or 7% unemployment rate, do we see a real material slowdown? That is what we are kind of weighing now. Anytime we see rates move historically, particularly in our consumption heavy economy, have huge impacts. I struggled to see… Is it possible? Sure. Is it possible that I can get my weight and health and check in the next six months? Possibly, but unlikely. Yeah, unlikely. >> I know what you're talking about on that front. Before we finish our chat, I want to ask you just about entering another corporate earnings season. A lot of the discussions we've had on the show and discussion behind on the market seem to be we are going to start hearing about earnings revisions to the downside. Is that too dour a forecast? >> So we actually, within our asset allocation team, we do a lot of… We call it top-down analysis. So we will use purchasing manager indices, macro data to gauge where earnings are going. Our models are saying that we might be facing an earningsrecession next year, at best zero to negative. Remember, analysts don't like to move in huge lock steps. In 21, actual earnings were way ahead of analyst expectations because as an analyst, it's hard to make a call and say earnings are going up 5% and then come back the next week with new information and then say actually, 25%. It's hard to keep your credibility doing that. The industry tends to be at slower in adjusting. I think you're in for the shoe to drop. The sell off this year has been all valuation. So the markets traded at 21 times in January. Now they trade at 16 times earnings. So there's been a derating on the valuation front. I think the latter innings of this equity bear market will be a rerating of lower earnings. And I think that is absolutely likely. Energy probably does OK. But other parts of the market, I think you're going to see major earnings-- negative revisions over the next six to 12 months. >> That was Michael Craig, head of asset allocation at TD Asset Management. Now let's get to today's educational segment. Investors seeking opportunity in the markets may be considering preferred shares. Well, WebBroker has tools that can help you better research of this part of the market. Joining us now is Nugwa Haruna, Senior client education instructor at TD Direct Investing. Always a pleasure to have you with us. Let's talk about finding preferred shares on the platform. >> Right, so it's always a pleasure being here, Greg. It when it comes to investing, investors have different investments available to them that could potentially give thema predictable source of income. Investors could consider using preferred shares. I will talk a little bit about what preferred shares are just before we go screen for them within WebBroker. So preferred shares, as their name implies, means that shareholders wouldhold these, get preference in dividendspayments instead of regular shareholders. In exchange for the senior position when it comes to the capital structure, they may not be able to vote when it comes to different issues for the company and they may not be able to participate in growth for that company. Once an WebBroker, an investor is able to filter for preferred shares. Once an WebBroker, you would click on research. And under research, an investor is able to go under tools and click on screeners. So once here, I will mention a few things about preferred shares. We've been talking about rising interest rate economy and preferred shares, some of them may be susceptible to changes in interest rate. Preferred shares such as floating-rate preferred shares tend to actually have their dividends adjusted based on prime. You may also have things like the fixed rate reset. Now, those ones would be reset every five years based off of the spread of a five-year Canadian bond yield. Then you do have some preferred shares like the fixed rate perpetual. Those ones have a fixed rate when it comes to their dividend payments. Finally, there's things like the retractable's where the holder of that security can return that to the issuer. In WebBroker, we are going to go under screening and once we are here, we are going to clear all the filters that we do have already and we are going to start from scratch. I'm going to click on more criteria. Under company basics, I will click on share type. This investor is able to say, show me preferred shares. To make things more manageable, let's just make this preferred shares for companies in Canada. Some going to change the exchange to Canada. So right now, we have just over 300 companies to filter things a little more, let's click on a specific industry. So under company basics, I'm going to go sector and industry. I'm just going to clear all the sectors, and we will click on the sector that is talked about the most. We are going to go energy here. So once I do that, this investor now is able to review the 48 different matches when it comes to preferred shares, and they can check out things like dividend yields to help them make better decisions. >> Very interesting stuff. Now would that we've seen how we can get the preferred shares screen, what if you want to see how they were performed if they had been purchased? >> I will mention that the majority of investors who use preferred shares will get the majority of the returns from the dividends as opposed to from any capital gains. There is the risk of capital losses. There is also the potential of an investor having capital gain when it comes to preferred shares, but if an investor does want to analyse and see how the shares have performed over time, once in WebBroker, we are able to look and see how these matches that we will filter for how performed. What I'm going to do is I'm just going to scroll down and once I come here, I have the ability now to almost create a fake portfolio based off of the 10 top securities that we filter for. So I'm going to narrow this down to let's say five years and I'm going to click on calculate. So what this is going to do, I'm just going to name this energy because we did filter for energy stocks there, what this is going to do right now is it going to calculate the performance of the top 10 companies on my screento see how they have performed compared to a specific index. In this case, we are comparing this to the TSX 60. We are able to see that the TSX 60 had a return in the last three years of 17% in the top 10 companies in my preferred shares list had a return of 12% and this would be besides the dividend payments that the stocks would have received. So once again, investors can do a little more analysis and make a decision on if preferred shares are right for them. >> Interesting as always. Thanks. >> Thank you so much. >> Nugwa Haruna is a senior client education instructor at TD Direct Investing. You want to make sure to check out the learning centre on WebBroker for live videos, interactive master classes and webinars including the five step process for valuated growth stocks with Tracy Ma. Let's take a look at some cautionary notes about the possible path ahead. You got the TSX down right now 370 points today, sorry, 307 point. A bit deeper into the red again, almost 1.7%. The energy names are among those weighing on the tray, but is not the only space. We will start with Cenovus here at $20.43 a share, down 4%. Financials are getting hit as well, let's look at Manulife. It down to 1/2% to $21.88 per share. South of the border, there is some talk now in the markets about the US Federal Reserve next week falling of the Bank of Canada with its own 100 basis point rate hike. US inflation coming in at 9. 1%. Sometimes you get used to the numbers. Think about that, the sweet spot is two. 9.1% on the headline number out of the United States last month. We've got the S&P 500 it down right now want 1/4%. Let's check out the NASDAQ 100, the tech sector, more than half percent. J.P. Morgan, the company talked about off the top of the show coming out with its disappointing earnings report, talking about putting more money aside for the potential of loans going sour if there is an economic downturn, right out $107 and change per share, down a little over 4%. The price of oil has come off its highs as recession fears are increasing on investor raters but it hasn't translated to big price declines at the gas pumps. Andriy Yastreb, energy analyst with TD Asset Management joined us to discuss what's driving that differential. > The energy prices are always volatile and if you think about the market right now,it's basically a tug-of-war between the fundamentals in energy industry overall, which is pretty tight, we have numbers that are very low, we have spare capacity that's also very low. We don't have as much supply. We are also in the midst of driving season, so a lot of people are finally taking their vacation, going out of town. So we see a lot of demand seasonally, and all of that is driving demand for crude and for oil and for gasoline up. At the same time, as you mentioned, there's always this concern about recession, right? What's going to happen next? And I think that's what's happening in the markets, because on the one hand, you have very tight industry fundamentals. But at the same time, the financial markets have to think forward and think what will happen in six, 12 months. And that's why we see this volatility. >> All right. You brought us in charge to help us illustrate what we see in the movement of gasoline, diesel prices and the American benchmark crude. Let's start showing the audience who are props. Woka so this one right here. What is this one telling us? >> So when people talk about energy and oil, they are talking about different things. So what this chart is showing three lines. The bottom line, the grey one, is the price of oil. And when people talk at $100 oil, they talk about it in terms of dollars per barrel and that's what the chart shows. But as you know, when we talk about gasoline, we talk about gallons in US or leaders here in Canada, and we talk about five dollars or two dollars. So this chart is basically putting diesel, gasoline and oil prices at the same metric in terms of dollars per barrel. And was interesting here, if you look at just the grey bar, which is the oil, $100 oil, it's expensive. It's definitely increased a lot from where it was in COVID times and shortly it was in negative territory. But if you look historically, we are not that far from her oil was in 2011, 2014, for almost 4 years. But what's interesting here and what's different that those green and yellow lines, they are pretty close to all-time highs here. And that's interesting because what it tells you is that it's not the oil price itself that is so high, it's the refined product, the diesel and gasoline, that is really in short demand. And we can go through a number of reasons that's right now. >> So that chart was showing nominal prices, I think. You have another one with the same three variables, but in real terms. What's the difference there? >> So when we talk about $100 oil being expensive, I think there's a difference here because $100 in 2012 is different from $100 today. Even if you think about 2% inflation per year, over 10 years, that's 20%, right? So for $100 oil in 2012 equivalent today should be $120 or even about that. So if we adjust for inflation, oil prices are actually below $100. And they look not that high compared to that. That I was mentioning, 2011, 2014. But if you look at the green line, that 1 Is Really Way about that. And it's close to the peaks that we saw in the summer of 2008. And what's driving that is there's a lot of demand for diesel globally, there was a lot of demand for diesel as the economy recovered from COVID. But there are also supply issues on that side. So in North American particular… there were several refineries that were shut down after COVID, around the last couple of years. In Europe, there is the situation with Russian supply, because Europe was getting some of the diesel from Russia and because of sanctions, they lost some of that supply. And on top of all of that, there is one country globally that has excess capacity on refining side and could ease the shortage. It's China, but Chinese diesel and gas experts are down 40% year on year. They have quotas from the government on how much they can export. The reason for that is that Chinese government is committed to ESG targets. They want to reduce carbon emissions. And to get to those targets, they need to reduce how much they process oil and how much they exported. And so far, at least, they are committed to those targets. >> So we take all these factors together, what you been illustrating with us in terms of the relationship of diesel and gasoline to the American benchmark crude. And we know those investors that the energy sector has outperformed the TSX index overall. I think we can show the audience just how much. And I guess the question becomes, moving forward, what are we expected out of the market? >> Obviously, energy had a really good run here. And if you look at the prices basically since COVID recovery started, the energy sector doubled and was driving a lot of performance in TSX and obviously, recently, last month or so, some of that outperformance has reversed as people started to get more concerned about recession. >> However the S&P 500? I mean, Beasley, we know that energy has performed well as we are taking a look at the picture of the relationship your own baster. What about Wall Street? I think we can show the audience a picture of that as well and walk them through. >> So here we go into a bit more detail in terms of what the energy is. It we see the same kind of strong performance and recovery after COVID. What's interesting here is if you break down the sector into subsectors, most volatile part is ENTs, which is expiration and production companies. So that's your shale companies, that's your Permian companies. And those outperform when oil goes up and that's what they've done. But they also underperform on the way down. If you look at the middle, the yellow line is integrated companies. That's your large-cap companies like Exxon and Chevron. They also have a lot of Torx oil, but because they are more diversified, they are not as volatile. And the last line, the blue line here, is transportation and storage. And those companies are basically your pipelines, companies that have long-term contracts, they are more stable pricing and they underperform on the way up in the outperform on the way down because they have more stability. >> In this kind of environment right now, we were showing the earlier charts and the relationships of the end product for a user and the crude oil, the integrated names, did they start to make more sense to investors if they want to be in the energy space? >> In the short term, yes. If you look atthis quarter, maybe next quarter when we are going through driving season and demand is so high and those crack spreads, the difference between oil and product prices are so high. I think all the companies that have exposure to refining will have strong results. A more tricky question is how much of that is already expected by markets, because anybody in the market can see where the crack spreads are and how those differentials behave. And secondly, depending on what happens with the economy in recession, we'll see what happens to those spreads going forward. So I do expect these companies to post really strong results in the short term. The big question for investors is what's going to happen six, 12 months down the road? >> You talked about summer driving season a couple of times. Obvious the, we are all very anxious to get out, explore the world, experience the world after everything we've been through in the past couple years. Is there price though a gasoline at the pump is going to stop us from taking a trip or is a market sort of saying, you know what, people are so anxious to get into the world, they're going to sort of just eat those high prices for a while? >> Well, that's an interesting question. When you look at different sources and talk to different people within the industry, we get different answers. So it's really hard to see if we actually see demand destruction right now. I would say that on the margin, probably yes, but the thing is, it's really hard to tell because we have seasonality, which is during the summer, people want to go on vacation, to drive more, that happens every year. And on top of that, we had COVID. So after COVID, a lot of people didn't take that vacation because of lockdowns and health concerns. Now, it's time everybody wants to get out and we see that pent up demand materializing. So I think, my view is that if it didn't have this high prices, probably demand would be even stronger. That's my take. But it will be really interesting to see what happens in the fall when seasonality comes down, people not taking vacations anymore and see if there is actual demand destruction. >>that was Andriy Yastreb, energy analyst with TD Asset Management. Of course, we are seeing more selling pressure in crude prices today. MoneyTalk's Anthony Okolie joins us now with more. Welcome back. >> Thank you very much. Yes, the US benchmark for crude, West Texas intermediate, fell to the lowest price since the Russian invasion of Ukraine. This morning, TD Economics but a report where they see greater downside risk to the WTI prices in 2023. Now, TDSI points to this deep capitulation for broad commodity funds that's been experienced since the COVID 19 crisis and the outflows, they say, or were furthering at the collapse of the energy markets, according to TD Securities. The weakness of energy markets disc disregards the increase in risk. They highlight the fact that the world continues to erode the remaining barrels of spare capacity. Now, TDSI does note that recessions consistent with slowing growth demand, but bearing any extraordinarily hard landing, energy demand growth is likely to remain positive on a year-over-year basis. Now, they conclude in the report that they don't fear a change in the oil market trends as little progress has been made towards meeting or solving destruction of the supply chain. They point to the fact that their analytics suggests that prices above $87 per barrel mark are still consistent with an uptrend in oil prices was about 75% confidence. >> Break down the mechanics of the market. What happens in terms of buying and selling, it when you put up against with the actual supply needs are of the world? What are they saying about gas? >> We will start in the US. Right now, there is a Texas heat wave that is boosting the price of Henry gas. In the US, they are seeing some disruptions in supply from Norway and they are experiencing disruptions in pipeline flows from Russia and that is keeping European gas prices high. >> Great stuff. Thanks. >> My pleasure. >> MoneyTalk's Anthony Okolie. Stay tuned tomorrow. Brad Simpson, chief wealth strategist will be here from TD Wealth. We are going to discuss asset allocation and the market. You don't have to wait until the show hits at noon Eastern time tomorrow. You can get a head start on sending those questions into us. Send your email to moneytalklive@td.com. That's all the time we have for the show today. Thanks for watching, and we will see you tomorrow. [theme music]