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[music] >> Hello, I'm Anthony Okolie, sitting in for Greg Bonnell.
Welcome to MoneyTalk Live, brought to you by TD Direct Investing.
Coming up on today's show, another rate hike by the Bank of Canada. The overnight rate now starts at 5% and Sam Chai of TD Asset Management explains why Tiff Macklem and Company think rates could be higher for longer.we will also look at what those higher rates could mean going forward with Colin Lynch. Also today we will look at the possibility of Chinachallenging the US dollars the world currency reserve. Kevin Hebner of TD Epoque had some interesting data to share.
In today's WebBroker education segment, everything you want to know about inflation protected fixed income funds and research them on the WebBroker platform.
Nugwa Haruna gives us the lowdown. That's coming up.
But first, let's get you an update on the markets.
All right.
We will begin here in Canada where the markets are coming off some solid gains on Thursday.
Right now, the TSX Composite Index is pretty much flat.
It's only about four points.
Of course, it is sitting at Some energy stocks account for roughly 1/5 of the indexes overall weight.
Shares of Suncor energy are moving lower today to the tune of just over 1%.
Of course, again, it's being weighed down by some of the weakness in the energy sector.
Let's turn to the US. The S&P 500 index.
Of course stocks are trading in positive territory.
Wall Street is coming off its fourth straight day of gains and the index is getting a boost from some upbeat results from the US banks. A Susan Prince will be joining us shortly to talk aboutmore about the latest results.
Currently, the S&P 500 index is up nearly 9 points to the tune of .2%.
Turning to the tech heavy NASDAQ, the NASDAQ is up 48 points or .3% again also in positive territory. Shares of United healthcare group are rising after reporting that second-quarter earnings beat expectations.
The healthcare company giant also raised the low end of its 2023 earnings forecast range. Also, Advanced Micro Devices, AMD, shares of this company are moving up in early trading. Some market observers have noted that chip stocks, like AMD, are poised to capitalize on the wave of interest around artificial intelligence.
And that is your market update.
Some of the biggest US banks have reported their results and surprised to the upside.
Susan Prince joins us now to dig into some of those numbers. Susan, some really positive earnings this morning. Talk to us about it.
>> We had two surprise to the upside and one that didn't. If we look at what has been reported so far, overall there were surprises to the upside, they made more money than anticipated. By the same token, what are you going to do for me?
Banks are saying they have concerns as we move into the next quarter.
That is the overall picture.
if we break it down by bank and start with J.P. Morgan Chase, up strongly. They had a 67% jump. And where they are seeing the number strength is a couple of things. One is people are nervous about smaller banks.
So in the United States where the system is different than ours, people are saying, you know what? I'm seeing it banks fail, I'm concerned, I'm going to move to a bank that I feel is more secure. If you combine that with the rescue of First Republic Bank, which J.P. Morgan did, they are getting new clients, new deposits and new branches.
> The clients were worried about their deposits. They want to go where they and their money will be safe.
>> Absolutely.
We have a different system here.
We don't have that sense that your money might not be safe and that makes a difference. That certainly helped J.P.
Morgan. We take a look at Wells Fargo.
They had good numbers as well. They were up, their profit was up 57% from a year ago. Now we are seeing, and you will hear this phrase and this term a lot, we are seeing net interest gains and what that means is the amount that the bank is able to charge for loans and the difference between that and what they pay for deposits is growing, and that's a good profit centre for the bank. We are seeing those numbers and those are the numbers that analysts are going to be paying attention to.
We get to the third bank, we had two wins and this, Citigroup, profit was down 36%.
They had a number of write-downs and their trading business was weak.
IPOs were weak.
Trading was weak. The businesses that did well couldn't offset the stuff that was doing poorly.
Yeah.
>> What do we have coming up in terms of earnings next? I think we are getting to the week of the second quarter earnings.
>> Yeah, and banks always start that. We have next week, continuing the banking theme, is we got on July 18, Bank of America and Morgan Stanley and on July 19, we have Goldman Sachs.
Now, Goldman Sachs will be the one to pay attention to. Analysts are estimating that their profits are going to or their earnings are going to be about half of what they were a year ago.
Basically there, it's because they are anticipated to take some very heavy write-downs on some commercial real estate.
So that will be the one to pay attention to or whether it's good or bad. The other ones, Bank of America estimates, slightly higher than a year ago.
Nothing meaningful. Morgan Stanley at looking at a slight decline in growth and profitability but nothing that would necessarily keep you awake at night.
>> Another busy week in earnings next week.
We look forward to that.
>> Thanks, Anthony.
>> Thanks Susan.
That Susan Prince, editor of MoneyTalk DIY.
The Bank of Canada was busy this week and hiked its key interest rate by 25 basis points to 5%. An earlier, I spoke with Sam Chai, portfolio research manager at TD Asset Management about the latest decision and what stood out for him.
>> Coming into this meeting, the market has priced in roughly 2/3 chance of a hike.
For us, our view-- it doesn't really differ very much from the market view, which is that we think that the hike is also quite a bit more likely than a pause.
Consider that since the last meeting we had the May inflation print, which has basically been very strong. Core inflation, in particular, is above 3.5% and is showing some signs of stickiness there as well.
If you look at our retail sales data, also very stellar. GDP number has also been above the Bank of Canada's forecast back in April.
And finally, last week, we had the stellar job report as well and tripled market expectations.
And so I think all those pieces really help cemented a Bank of Canada hike today.
>> And you mentioned the impressive jobs report that we got last week. Do you think the Bank of Canada is done hikes for the rest of the year?
>> So, I mean, I can see 5% being the peak rate in this hiking cycle.
However, I would say that the risk is skewed to Bank of Canada having to deliver more.
In their latest statement today, they have mentioned that they don't expect inflation to return to target until 2025.
And so they're expecting inflation to remain well above their target from now to the end of next year.
And so the narrative is really rates have to be staying higher for longer.
And if inflation being more sticky than they expected or labor market being more resilient, then the likelihood is that they will have to deliver further tightening.
>> And what has the market reaction been so far? I mean, what are money markets-- what are they pricing it in terms of further moves of the Bank of Canada's overnight rate?
>> Right. So from now to the end of the year, there's roughly around 2/3 of a hike price in. And then obviously, there's no cuts.
The first cut is priced in the first half of next year.
And then in totality, we have roughly two to three cuts priced in 2024.
>> OK. Now, of course, later this month we have the Fed's rate announcement.
And today we had the latest US inflation print. What impact does this report have on the Fed's rate decision?
>> Sure. So core-- US core inflation and headline inflation both surprise to a downside today.
I think it's definitely welcoming news for the Fed.
That being said, I think we need to put this into context, which is that year over year, core inflation is still roughly around 5%. It's way above the Fed's target.
So I don't think today's inflation print will dissuade the Fed from delivering another hike later this month.
That being said, I think if we look at from August onwards, considering leading indicator is showing core inflation may slow down further in the coming months, I think the question is probably not if but how much core inflation is going to slow down.
And so I think the extent of that will determine whether the Fed needs to deliver further tightening from August and onwards.
>> OK. And I'm going to pivot back to Canada.
>> Sure.
>> I'm going to talk a little bit about our population growth and what impact that is having on monetary policy. Because we know that we've brought in over a million new people to Canada, and that's having an impact on spending. So what impact will this have on Bank of Canada's effort to tame inflation?
>> I think there are multiple factors to consider here. Higher population growth I think is definitely helpful for the growth front.
On the other hand, it's also helping to address the imbalance in labor supplies.
For instance, last week we see the unemployment rate rising to 5.4%, and that is also because of increased labor market force.
>> More people are entering the labour market.
>> Exactly. And so I think it's basically a balance factor. And the other thing is that generally with higher population growth is also basically going to be more bullish for housing prices.
So I think there are different factors in play here.
On net, I would think that probably the Bank of Canada may need to deliver a bit more tightening than not.
>> And what are the indicators that you'll be watching closely as the Bank of Canada considers its next move?
>> Sure. I think the Bank of Canada has been very clear in terms of what they watch, and I'll put it into three categories. The first one is inflation, particularly core inflation.
That is very important, and not just a year over year number, but also sequentially every month.
Are we seeing sequential deceleration in month over month prints? That's a very key signal to watch.
Wage growth obviously is also very important to see.
In the last print, we see-- we have seen a moderation in wage growth.
But do we see that trend continue? Also very important.
On the growth front, we want to look at the GDP numbers, retail sales, which shows what's the health and the consumption component in the economy. And also, PMIs, which is a leading indicator to show what the growth outlook could be.
Also, lastly, on the labor market front, we want to see if we see further weakness in labor market, and do we see further rise in unemployment rate-- also a key consideration for Bank of Canada.
>> OK. And finally, where do you see the Canadian dollar going from here?
>> Right. So post-today's announcement, dollar CAD-- US dollar versus Canadian dollar-- have actually fallen. Because today's bank of Canada rate hike is not fully priced in by the market.
And so I think it's intuitive that the dollar CAD has sold off somewhat.
And also, the inflation print today is also weak. So dollar cad sold off a bit more.
But I think my view on dollar CAD is more range-bound.
Because I think the Fed is likely going to deliver further tightening later this month as well.
And so we are still going to have that rate divergence in place.
So the Fed's policy rate will be meaningfully higher than the Bank of Canada policy rate.
And that is a supportive factor for dollar CAD. One other consideration is that if both economies-- the US and Canada-- actually slow down significantly, that should benefit the US dollar as well, just giving the US dollar a safe haven currency status. Just something to consider.
>> That was Sam Chai, portfolio research manager with TD Asset Management.
Right now, let's get you updated on the top stories in the world of business and take a look at how the markets are trading.
J.P. Morgan Chase, the largest US bank, said second order profits from 67% more than $14 billion.
The acquisition of failed lender First Republic Bank in early May helped boost J.P. Morgan's net interest income and deposits.
J.P. Morgan Noah attracted some $50 million in deposits in March alone after the failure of Silicon Valley Bank.
Citigroup, Wells Fargo also reported second-quarter results the top 2023. Telus Corporation cut its annual guidance for 2023, citing demand pressures as the technology sector looks to reduce costs.
The Vancouver-based company says it revised its guidance as a result of Telus internationals updated for your annual outlook. Telus international has faced challenging global pressure, particularly within the text base as clients target cost-cutting measures including through successive layoffs.
Finally, the BC port workers strike has ended after the union and employers are grateful for your tentative deal.
Few details have been shared about the deal which must still be ratified by both sides.
Port workers were pushing for protection against automation, contracting out and for higher wages.
The two weeklong strike began on Canada Day, disrupting billions of dollars of cargo shipments.
And here's the main benchmark index in Canada is trading.
Right now, the TSX Composite Index is up just under one point. Let's take a look at the US as well.
the S&P 500, again, marginally higher, up just over five points or .1%.
Now let's get to today's educational segment.
With inflation sitting where it is, you might want to consider looking at inflation protected fixed income funds.
Nugwa Haruna, Senior client education instructor at TD Direct Investing is here to tell us all about it.
Nugwa, let's start off with what these funds are.
>> Anthony, it's always a pleasure being here. So as we know, we've been having conversations about how the Bank of Canada actually raised rates. A lot of people may not have been expecting it at the start of the year, but gradually expectations are going towards rising rates because inflation has stayed higher than the Bank of Canada anticipated.
So if you think about the impact of inflation on securities, if you use an example of a regular bond, if you have a regular bond whose coupon rate is 5% and let's say you have inflation at 3%, well you are actually earning just 2% in real terms.
And so where inflation protected securities come into play as they take into account inflation that's happening in the economy. So as opposed to a regular bond, the coupon payments will be based off of the face value that is the principle of the bond and none of these terms change. And in inflation protected bond will actually see his principal amount adjusted semiannually based on whatever the CPI numbers are.
So essentially what you might find is, yes, the coupon rate will say 5% but now the principal amount has gone up which means that the coupon payments will also rise.
So investors may consider using these.
They are also known as a real rate of return bonds in Canada.
>> Okay, so now we know what these products are.
How can investors find these funds within WebBroker?
>> Let's hop into WebBroker and I will show investors where you could actually locate these within WebBroker.
We will focus on today on exchange traded funds.
We will focus on ETFs. Once in WebBroker, we are going to click on research. Under investments, we are going to go ETFs.
Now, we do have different tools that you can use to find specific categories in WebBroker. You can search for these using our screeners tool or you can simply come to the shop we have here under categories.
If you will know, I'm under the US category.
This is US traded exchange traded funds and you can always hobble over to Canada but we will stick with the US so far.
We will go categories here. Under these categories, I'm going to scroll down just to find them.
Alright.
So here, we have the inflation protected bond category. There are four. I will click on it.
On this page, one of the nice things about WebBroker is it gives you a definition of each category. Right here, it actually tells you that the securities will adjust their principal values in line with the rate of inflation.
Typically, the securities held in these funds are issued by the United States but you might find other organizations issue inflation protected securities as well.
When investors scroll down, on the left side, you can scroll through all 24, but you can filter through average daily volume.
One important thing to look at when you're looking at a fund is how often it's traded which could determine how easy it is to enter and exit positions. You can also filter by management expense ratio or by distribution yield, so how much that fund is actually paying you Annually. We will stick to the distribution and we will lookat this index fund. I'm going to click on it.
And once you do that, you have the little box and we are going to go summary.
This will bring us to the page where you can do some more research into this ETF itself.
You can use this mini chart here to find out how it's performed in the last year.
You want to see additional information such as the holdings, you could just topple over to this tab that says holdings.
I'm going to click on there. Here you will be able to see the top 10 holdings and, as expected, you will see that its top 10 holdings are actually US securities, US government securities, a few more things that you can see when you scroll down is the asset class diversification and almost 94% of the securities in this fund are actually US bonds.
One more thing I will highlight here though is the credit rating.
It's very important for you to check out the credit ratings of some of these bond funds have and you will notice that this bond fund is focusing on holding AAA rated bonds and these will be, this is the highest rating you can get when it comes to bonds, so that's what this specific bond fund focuses on holding.
Now investors can scroll through the rest of these tabs if you want to see additional information before you decide to make a decision.
>> Nugwa, great information as always.
Thank you.
>> Thanks for having me.
>> That was Nugwa Haruna, senior client education instructor at TD Direct Investing.
On Monday, Nugwa will join us and be our guest taking your questions about how to better utilize the WebBroker platform.
A reminder that you can get a head start.
Just email moneytalklive@td.com.
Here's a look at some of the upcoming master classes the client education team is hosting in the next week.
And as we mentioned, this week, we heard from the Bank of Canada. The Fed is up next later this month and it is widely expected to hike interest rates again.
so what does this all mean for various classes of real estate?
Earlier, Greg Bonnell sat down with Colin Lynch, head of global real estate investment trust TD Asset Management to find out.
> I think we have to look at two parts the question.
First is, again, what's the reason why we're looking at potentially incremental additional hikes from the central banks?
Well, fundamentally, the economy is looking a little bit stronger than people anticipated. So we have more jobs than folks perhaps would have forecasted at the beginning of the year.
We have more buoyancy in the economy. And ultimately, because real estate serves the economy, it is benefiting from those improved economic conditions.
So think, in the retail segment, folks are shopping still more. They're buying more.
Yes, we have higher prices for many goods and services.
But ultimately, that also feeds through in terms of tenancy strength, and that helps the underlying real estate.
So that side of the equation is relatively positive.
Clearly, the side that's challenging is for particularly real estate owners that have leverage.
And so you can think about developers that tend to use variable-rate financing.
You can think about owners of property that may have some variable-rate financing or even owners that have fixed-rate financing coming into renewal.
That higher interest rate environment, which is a derivative of underlying rates from the central banks, can present a bit of challenge.
And so ultimately you've got those two sides that are playing against each other.
On the one side, you have income that is growing quite markedly well across all the different types of real estate, with the caveat of office in certain parts of the world.
And then you have the capital side, meaning, what's the cost of financing?
But also, at the end of the day, real estate gets measured against other investment classes.
And so if you have bonds that yield a higher rate, if you have equities where the dividend yield's gone up, real estate also has to compete against those other asset classes.
And when you have underlying central bank rates that continue to increase, that competition gets a bit more challenging.
So you get pros and cons.
And really depends on the sector within real estate whether the pros outweigh the cons or vice versa.
>> Colin, I recall last fall-- you've been on since then. But last fall, you were one of the first people to tell me that as you were taking a look at research about people re-engaging with the broader economy coming out of COVID, now that we've got that behind us, they were filling sports stadiums. They were filling restaurants.
They were getting on planes, but they weren't necessarily filling up offices.
So it's been quite some time now. How is the situation looking in terms of people going back into the office?
What does it mean for commercial real estate on that end?
>> Yeah, it's a great question. In a nutshell, the same, and just to slightly different degrees.
And of course, the geographic overlay is very important. People are filling up the sports stadiums.
They are traveling a lot. They are going increasingly to shop in person.
And so talking about the retail for a sec, we see a lot more individual shopping, and they're buying more.
But to your question about the office, we've seen a gradual return.
And that's really ticked up incrementally, particularly in Canada, the US, and also, to a degree, the United Kingdom. So in these three markets, plus a couple of cities in Australia, namely Melbourne, we are around the two to three days per week mark.
You have some tenants or companies that are at pushing four.
There are some that are around the one.
But virtually, the broad consensus is we're working in a hybrid environment.
Very few companies are fully remote.
And very few companies are five days a week in the office from an office worker perspective.
So that's part of the story.
The other part, as I mentioned geographically, is continental Europe, the Asia-Pacific, Latin America, where folks are very much towards the four and five day a week model.
And so it's really interesting stepping back, where you have a very gradual re-entry that might have started this year at two days a week, ticking towards three in places like Canada and the US. And then you have other parts of the world, like a Singapore, like a Japan, like South Korea, like France, where you have a much more pronounced return to the office in the four to five days a week.
So in the US and Canada, CBDs, Central Business Districts, are certainly that but also central social districts.
And we've seen a lot more return to the downtowns, particularly on the weekends and in the evenings.
And during the daytimes, we're seeing a phased and incremental return increasingly to the office.
>> You talked about bright spots. You mentioned retail earlier. Obviously, the reason why they're hiking rates is because the economy continues to do well.
We continue to spend money. So retail can be a beneficiary on one end of that equation.
What about industrial warehouse spaces?
What about residential?
Much is said about the dearth of supply in this country.
>> Yeah, that's right. Canada has a very significant dearth of supply across all forms of residential.
So whether it's market-rate housing, whether it's affordable housing, whether it's deep affordable housing or social housing, we are at a significant deficiency across all types of housing.
There is a couple of reasons for that.
One, a lot of demand. So we've had significant immigration.
Whether that's economic immigration, whether that's also refugees, whether that's international students, all three sources have been quite pronounced.
And that has driven demand for housing of all types.
But in this environment, where costs have increased materially, and so whether that is construction costs in terms of labor, supplies, whether that is also financing costs, all of those costs have increased.
Plus, it takes a long time to get projects approved.
What's the net result? We aren't building enough.
And actually, year over year, we're building less because it costs a lot more to build.
And so we have a problem in Canada. We have a lot of demand and not a lot of supply.
From an investment perspective into real estate and residential real estate, that has meant that market rent relative to-- and which is different than in-place rent.
But market rent continues to increase materially, i.e.
if you're moving out of some place and you're looking for a new place to rent, you're paying a lot more this year than you were last year or the year before. And so that increase has been quite profound.
In the warehouse space, we also saw material increases last year.
That's begun to level off a little bit.
Rents still continue to increase.
But ultimately, as folks have returned more to in-person shopping, if you look at e-commerce penetration, we've broadly flattened last year relative to this year at high levels, but flattened.
And so there has been a little bit of, call it, the heat moved off of the industrial warehouse market in Canada, certainly in the US, and also in Europe.
So that's interesting because that's a direct correlation to the retail space.
Still overall positive-- important to know for industrial real estate-- but not as positive as it was last year.
>> That was Colin Lynch, head of global real estate investment at TD Asset Management.
Now for an update on the markets.
we are going to take a look at the Advanced Dashboard and here, of course, that the Advanced Dashboard screens by price and volume.
Here, we are looking at the S&P 100.
A lot of green on the screen.
we will start with AMD. It's up to the tune of about 2%.
They have a lot of interest in AI. Tesla's ability percent.
Amazon also strong. Nvidia another big chipmaker is up 2% right now.
We will also take a look at the SNP 60.
Once it comes appear.
Meanwhile, I will talk a little bit about Amazon, Tesla. Again, a lot of tech related stocks are really strong today.
Let's take a look at the TSX 60.
Read on the board here, Suncor Energy is down to the tune of about 2%. Canadian Natural Resources also down, a lot of the energy names are trading lower on some weaker oil prices today.
Okay.
That was the advanced dashboard.
It is brought to you by TD Direct Investing. As a platform designed for active traders, available through the TD Direct Investing.
Okay, at one time, it might have been unthinkable, the idea that anything other than the US dollar could be the world's preeminent currency.
But some say dedollarization is not only happening but actually accelerating as the global use of China'scurrency rises. Kevin Hebner, managing director of global investment strategist at TD Epoque is the author of a report called dedollarization and the rise of the RMV as a global currency.
My colleague, Kim Parlee, spoke with him about his report.
>> Let's start with the conclusions-- for people watching, impatient investors. We want to know what it all means. Tell me what the conclusions of your report is.
And then we'll get into the reasons why.
>> Well, I think the big picture is that we're moving from a unipolar world that's dominated by the US, the US dollar, and its financial system. And we're moving to something which is more bipolar.
And we're being a world in which the renminbi has a bigger role.
And that's reflecting the bigger economic heft that China has in global trade, global economics, and so forth.
>> Yeah. So the big-- the de-dollarization means that, again, it's this bipolar world.
Another currency gaining acceptance, gaining strength.
You also mentioned, though, that another byproduct of this we could be seeing-- and again, you know, predictions. We have to kind of wait and see how the world unfolds.
We could see stronger gold, and we could see a weaker US dollar.
>> Yes. Certainly, the US has this exorbitant privilege, which means a lot of money goes in the US dollar assets.
That makes the dollar strong and also keeps interest rates lower.
In this new world we envision where it is going to be more difficult for the US to fund their big deficits, interest rates could be higher, say, by 25 to 150 basis points. The US dollar, we think, over the long term will be about 20% cheaper.
And then gold, at least during the transition period, will be viewed as an alternative type of reserve currency.
And we certainly have seen over the last 10 years a real bid from a number of countries for gold for these reasons, until the renminbi is ready and all the different aspects of plumbing to be in a position to challenge the US dollar as the predominant global currency.
>> And just to be clear, we're not talking about this happening tomorrow. This is going to take some time.
>> It takes a very long time. So for example, the US became the largest economy in the world in 1870, just after the Civil War.
But it didn't become the global reserve currency until immediately after World War I. So that was a period of 40 to 50 years.
So these things move very slowly.
>> I want to-- again, we're going to dig into the reasons because you've put together a very detailed report, I think, explaining it. But one thing that is notable to me is that I think a lot of people have been hearing this for a while.
And I think there's a lot of skeptics that this could actually happen.
So maybe you could just start by telling us what has been the US history of getting dollar dominance and why the skeptics maybe are not seeing what could be happening.
>> I think, for a lot of the skeptics, they're looking and they're saying, well, what is a global currency?
And certainly, for everyone who's alive today, they only really know one global currency.
And that's the US dollar. And they say, well, to be a global currency, you need to have a big current account deficit.
So there's lots of money coming in. You have to have enormous capital markets, the treasury market, equity markets, venture capital private equity, all these things.
You need to have an open capital account.
So money can go in and out freely.
So all different aspects of the US dollar financial system.
But that's based on a set of one.
So, one example. And people are extrapolating from that, where we think this new global currency is going to be one with Chinese characteristics.
And it's going to look quite different from what the US dollar has been over the last 50 years or before the US dollar when Sterling was the global currency.
>> It's interesting, too, because you mentioned-- and it's funny, I've never heard it talked about in this context about the network effect that happens with the US dollar, which is part of the reason that it has the strength that it does right now.
Maybe-- and I've heard about it with internet and with viral things on that front.
But how do you see it? And how does it help?
>> Well, I think-- if you don't mind my going on a little bit of a tangent for network effects because they're quite common in digital economies.
So for example, I use Twitter a lot. And Twitter is a place where there's a lot of content.
And there's content providers and content consumers.
And you have this sort of two sided network effect.
And now some people are moving towards Threads.
And Threads doesn't have some of the features that Twitter has, but it also doesn't have an owner who wants to tax or penalize both the consumers and producers of content.
So people are moving to this different platform.
And I think it is similar. The US dollar has all these network effects.
So once you become dominant, you have all these features.
People are issuing US dollar assets.
People are buying US dollar assets.
And then, there's all the different parts of the plumbing that go associated with that, the regulatory parts with the Fed and the Treasury, the interbank payment system, the messaging system, all the different types of markets, offshore markets, onshore markets. It's very complex. And you need both sides coming to it.
And that takes a long time to build up.
And it's only been, I'd say, the last 15 years that Beijing has realized the importance of building up all this infrastructure, all this plumbing, to ensure that they do have the two sided network effects that are necessary to attract both providers and consumers, in this case, not of content but of capital.
>> OK, you set up for us. There's basically two sides or two parts to this argument, strength of China and basically the politicization of the US dollar.
Let's stick with China right now.
We talked about this network effect.
And in your report, you talk about the path to strength of helping create that is actually having a currency that helps-- becomes common with invoicing, and settlement, and those types of things.
So maybe we just kind of talk about that environment that has to be present to allow that to happen.
>> Yeah, there's a natural or sort of logical sequence on how a currency starts to get used beyond its borders.
And this is really the sequence that the United States followed, say, just over 100 years ago. And the UK did, say, 220 years ago or so.
initially, you start with invoicing. So if you're exporting from China electronics or what are they exporting, instead of having it invoiced and settled in dollars, you'd have it settled in renminbi.
And we've seen that share that settled in renminbi go up from roughly 0% a decade ago to about 30% now. So that is something they are doing.
And China is having a lot of discussions with countries, not just Russia.
Russia clearly is being forced to do this.
But also India, Iran, Argentina, Brazil, South Africa.
Well, the BRIC countries plus a few others.
Turkey would be in that group.
So more and more countries for more and more goods are interested in invoicing what they import from China and then settling in renminbi rather than Euros or US dollars.
>> And people might look at 30% and think that's not quite the number one.
But it is the second most used currency, is it not?
>> Yeah, for invoicing for trade, it's now number two to the US dollar and above the Euro. And certainly, the slope is increasing.
>> What about emerging markets? Because this is an interesting piece you highlight as well, too, where I've done my fair share of traveling, too. And you notice sometimes when there are no strings attached when it comes for financing or helping emerging markets.
What-- tell us what's happening.
>> So, certainly, China, when they're looking for their allies-- and there are a lot of people who are sympathetic to China and also are suspicious of the US dollar.
So whether it's Belt and Road lending, or it can be central bank swaps that China set up.
And they've now set up about 39 central bank swap lines.
And they've actually used about 17 of those.
They're becoming more involved as a lender of last resort to countries that get in trouble.
And these are often countries that receive a lot of Chinese FDI. They do trade.
They've been recipients of Belt and Road money and so forth.
And that's beginning to be a long list and includes different countries in Asia, Africa, and quite a few countries in South America as well. So, different EMs.
And that is the process in which the renminbi is becoming used more in China's financial infrastructure, monetary infrastructure, is spreading out.
And countries want to have an alternative to the US dollar system because-- to some extent because they fear sanctions. But also, they're concerned about the, I think, the oversized role of the US dollar in their economic activities.
>> And then, when you layer on top of that China recognizing some of the growing strength as any country would do, putting in some new systems in place to help with this.
And we've heard a lot more about SWIFT. I think a lot of people weren't familiar with SWIFT before, what happened with Russia.
We all became familiar very quickly. And there's something called Chips.
>> Yes. Yeah, and so when we're talking about the US dollar and de-dollarization, it's not really about the US dollar per se. It's about the US dollar financial system.
And part of the US dollar financial system is SWIFT, which is a messaging system.
So it'll tell one bank where the money is supposed to go.
Chips is the clearinghouse interbank payment system.
So it actually is a hub and spoke system like our airline system is to send money from one bank, typically a US bank, a correspondent bank, to another bank either in the United States or globally.
But there's lots of other parts of the US dollar financial system.
There's the regulatory structure with the Fed and the Treasury.
There's the onshore and offshore markets, bonds, equities, private equity. So it's quite big.
And so China knows that they need to build these.
So they have, for example, created Cips.
So it's a China interbank payment system.
So it's modeled on Chips. And that's getting used increasingly.
It still relies on SWIFT for messaging.
But more and more countries and more and more banks are using their financial transactions through the Chinese system rather than the US based Chip system.
>> I thought it was interesting you started your report talking about, not about currency, but more about de-risking and the idea that throughout history, you see these cycles where people decide they have to de-risk, whether energy is power is too concentrated or semiconductor power is too concentrated. This is a parallel to those conversations.
>> Yeah. So as we move from a unipolar world to a bipolar world, we're realizing that there's lots of risk and vulnerabilities, particularly in global supply chains.
So from the position of the US, Canada, Europe, and other sort of Western countries, we realize that there's vulnerabilities in terms of getting your energy from Russia.
There's vulnerabilities in terms of semiconductors if we're very reliant on supplies from Asia.
And so we decided to de-risk those.
Similar, China, Russia, Iran, and other countries have realized they have a real vulnerability or risk exposure to the US dollar financial system, and they need to de-risk, reduce their exposure and vulnerability to that. And I think that's ultimately what this is all about.
>> And then, when you go into that, you start to talk about just all the reasons why, I think, people want to de-risk.
And you alluded to this earlier, but this-- you talk about weaponized interdependence right now.
And you talk about how the Biden administration, what they've been doing compared to previous administrations.
Maybe just take us through how much that has increased, I'd say, the weaponization of the US dollar.
>> Yeah. So weaponized interdependence is a very good term. And clearly that's what Russia had in mind with supplying natural gas and oil to Europe. And I think that's a good way to think about it.
And certainly, with the US dollar, they've decided to weaponize the dependence that Iran, Russia, and other places have to the US dollar.
So I think that's a good way to be thinking about this.
>> And it works until it doesn't, I guess would be probably a good way to think of it, too, right? I mean it works as a weapon until people find alternatives.
So but you have a chart here. I think was looking at the number of, I think, states that are actively targeted by US sanctions.
I think it's four, if I look at it back in 2000, up to just under 25 currently.
So it's becoming more common.
>> Yeah. So the number of states under sanctions has increased six-fold in the last two decades.
And the number of sanctions overall has increased more than 10-fold.
So it is something that the US dollar is using.
And really, they're forcing other countries to come up with an alternative to the US dollar financial system.
And one complexity in this is there's primary sanctions. So if the US decides to put in place sanctions against Iran, that means any US individual or entity cannot interact financially with entities or individuals in Iran. So that's primary.
What they did with Iran in 2018 is they took it another level up, and they introduced secondary transactions. So they said that the US individuals and companies can also not transact with anyone who is transacting with Iran.
And so what that meant, for example, is a European bank who has business in Iran-- and certainly they have a different position on Iran than Americans do-- they had to choose, do I want to be doing business with Iran or with America?
And in the vast majority of cases, they chose America.
And it's interesting that before the Russian invasion of Ukraine last February, the region that was most interested in decoupling from the US dollar was Europe because they realized that there was this potential for financial sanctions, US foreign policy being imposed on them. And they were very unhappy about this.
With the sanctions against Russia, America's decided not to have secondary sanctions.
So for example, India is not signed on to the sanctions, but America could force them through secondary sanctions but realizes there would be a huge backlash to do that.
Really, there's-- countries with 2/3 of the world's population are not on board with the sanctions against Russia.
So there are real limits to the ability of America to push both primary and secondary sanctions.
>> I've only got about three minutes, Kevin. But I do want to mention because it takes up a big piece of this report, too, you talk about the Chinese military industrial complex companies, how they're affected, and Chinese persons who are also affected.
>> Yes. Yeah, so the US has sanctioned a lot of Chinese entities and Chinese individuals over the last couple of years.
And there's for a host of reasons.
One are companies that are linked with the Chinese military who are doing activities outside of China, which could be related to different types of forms of surveillance.
It could be activities that are viewed as anti-democratic protests or human rights abuses in the Uyghur areas, Hong Kong, and so forth.
So there's a lot of entities. And that certainly has gotten China's attention.
So they realize that these sanctions are painful. They can precisely target individuals and entities.
And they can be broadened. And certainly, there's every reason from the discussions that are coming out of the White House to believe that these sanctions against Chinese entities and individuals will be broadened over coming years.
>> We've only got about a minute, Kevin.
But again, my favorite part of your report is when you quote Niall Ferguson stressing that the law of unintended consequences is the only real law of history.
And the thing is it's hard to say how this could unwind, accelerate, change.
But the path of acceleration could be concerning.
>> Yes, absolutely. And so we have-- even if we become a bipolar world, the two worlds are very interconnected in terms of trade, economics, financial. And so as we move to this equilibrium, this transition, I think we really do have to pay attention to Niall Ferguson's warning about the law of unintended consequences, how this is going to play out. We've been surprised so many times over the last couple of years.
And we're continuing to be surprised.
>> Kevin, it was a real pleasure. Thanks for taking the time to take us through this.
>> Thank you very much, Kim.
>> That was Kevin Hebner, global managing Dir. at TD Epoch. That's it for our show today. On Monday, Nugwa Haruna, senior client education instructor with TD Direct Investing will be our guest taking your questions about how to better utilize the WebBroker platform. A reminder that you can get a head start. Just email moneytalklive@td.com. That's all for our show today. Take care and see you next week.
[music]
Welcome to MoneyTalk Live, brought to you by TD Direct Investing.
Coming up on today's show, another rate hike by the Bank of Canada. The overnight rate now starts at 5% and Sam Chai of TD Asset Management explains why Tiff Macklem and Company think rates could be higher for longer.we will also look at what those higher rates could mean going forward with Colin Lynch. Also today we will look at the possibility of Chinachallenging the US dollars the world currency reserve. Kevin Hebner of TD Epoque had some interesting data to share.
In today's WebBroker education segment, everything you want to know about inflation protected fixed income funds and research them on the WebBroker platform.
Nugwa Haruna gives us the lowdown. That's coming up.
But first, let's get you an update on the markets.
All right.
We will begin here in Canada where the markets are coming off some solid gains on Thursday.
Right now, the TSX Composite Index is pretty much flat.
It's only about four points.
Of course, it is sitting at Some energy stocks account for roughly 1/5 of the indexes overall weight.
Shares of Suncor energy are moving lower today to the tune of just over 1%.
Of course, again, it's being weighed down by some of the weakness in the energy sector.
Let's turn to the US. The S&P 500 index.
Of course stocks are trading in positive territory.
Wall Street is coming off its fourth straight day of gains and the index is getting a boost from some upbeat results from the US banks. A Susan Prince will be joining us shortly to talk aboutmore about the latest results.
Currently, the S&P 500 index is up nearly 9 points to the tune of .2%.
Turning to the tech heavy NASDAQ, the NASDAQ is up 48 points or .3% again also in positive territory. Shares of United healthcare group are rising after reporting that second-quarter earnings beat expectations.
The healthcare company giant also raised the low end of its 2023 earnings forecast range. Also, Advanced Micro Devices, AMD, shares of this company are moving up in early trading. Some market observers have noted that chip stocks, like AMD, are poised to capitalize on the wave of interest around artificial intelligence.
And that is your market update.
Some of the biggest US banks have reported their results and surprised to the upside.
Susan Prince joins us now to dig into some of those numbers. Susan, some really positive earnings this morning. Talk to us about it.
>> We had two surprise to the upside and one that didn't. If we look at what has been reported so far, overall there were surprises to the upside, they made more money than anticipated. By the same token, what are you going to do for me?
Banks are saying they have concerns as we move into the next quarter.
That is the overall picture.
if we break it down by bank and start with J.P. Morgan Chase, up strongly. They had a 67% jump. And where they are seeing the number strength is a couple of things. One is people are nervous about smaller banks.
So in the United States where the system is different than ours, people are saying, you know what? I'm seeing it banks fail, I'm concerned, I'm going to move to a bank that I feel is more secure. If you combine that with the rescue of First Republic Bank, which J.P. Morgan did, they are getting new clients, new deposits and new branches.
> The clients were worried about their deposits. They want to go where they and their money will be safe.
>> Absolutely.
We have a different system here.
We don't have that sense that your money might not be safe and that makes a difference. That certainly helped J.P.
Morgan. We take a look at Wells Fargo.
They had good numbers as well. They were up, their profit was up 57% from a year ago. Now we are seeing, and you will hear this phrase and this term a lot, we are seeing net interest gains and what that means is the amount that the bank is able to charge for loans and the difference between that and what they pay for deposits is growing, and that's a good profit centre for the bank. We are seeing those numbers and those are the numbers that analysts are going to be paying attention to.
We get to the third bank, we had two wins and this, Citigroup, profit was down 36%.
They had a number of write-downs and their trading business was weak.
IPOs were weak.
Trading was weak. The businesses that did well couldn't offset the stuff that was doing poorly.
Yeah.
>> What do we have coming up in terms of earnings next? I think we are getting to the week of the second quarter earnings.
>> Yeah, and banks always start that. We have next week, continuing the banking theme, is we got on July 18, Bank of America and Morgan Stanley and on July 19, we have Goldman Sachs.
Now, Goldman Sachs will be the one to pay attention to. Analysts are estimating that their profits are going to or their earnings are going to be about half of what they were a year ago.
Basically there, it's because they are anticipated to take some very heavy write-downs on some commercial real estate.
So that will be the one to pay attention to or whether it's good or bad. The other ones, Bank of America estimates, slightly higher than a year ago.
Nothing meaningful. Morgan Stanley at looking at a slight decline in growth and profitability but nothing that would necessarily keep you awake at night.
>> Another busy week in earnings next week.
We look forward to that.
>> Thanks, Anthony.
>> Thanks Susan.
That Susan Prince, editor of MoneyTalk DIY.
The Bank of Canada was busy this week and hiked its key interest rate by 25 basis points to 5%. An earlier, I spoke with Sam Chai, portfolio research manager at TD Asset Management about the latest decision and what stood out for him.
>> Coming into this meeting, the market has priced in roughly 2/3 chance of a hike.
For us, our view-- it doesn't really differ very much from the market view, which is that we think that the hike is also quite a bit more likely than a pause.
Consider that since the last meeting we had the May inflation print, which has basically been very strong. Core inflation, in particular, is above 3.5% and is showing some signs of stickiness there as well.
If you look at our retail sales data, also very stellar. GDP number has also been above the Bank of Canada's forecast back in April.
And finally, last week, we had the stellar job report as well and tripled market expectations.
And so I think all those pieces really help cemented a Bank of Canada hike today.
>> And you mentioned the impressive jobs report that we got last week. Do you think the Bank of Canada is done hikes for the rest of the year?
>> So, I mean, I can see 5% being the peak rate in this hiking cycle.
However, I would say that the risk is skewed to Bank of Canada having to deliver more.
In their latest statement today, they have mentioned that they don't expect inflation to return to target until 2025.
And so they're expecting inflation to remain well above their target from now to the end of next year.
And so the narrative is really rates have to be staying higher for longer.
And if inflation being more sticky than they expected or labor market being more resilient, then the likelihood is that they will have to deliver further tightening.
>> And what has the market reaction been so far? I mean, what are money markets-- what are they pricing it in terms of further moves of the Bank of Canada's overnight rate?
>> Right. So from now to the end of the year, there's roughly around 2/3 of a hike price in. And then obviously, there's no cuts.
The first cut is priced in the first half of next year.
And then in totality, we have roughly two to three cuts priced in 2024.
>> OK. Now, of course, later this month we have the Fed's rate announcement.
And today we had the latest US inflation print. What impact does this report have on the Fed's rate decision?
>> Sure. So core-- US core inflation and headline inflation both surprise to a downside today.
I think it's definitely welcoming news for the Fed.
That being said, I think we need to put this into context, which is that year over year, core inflation is still roughly around 5%. It's way above the Fed's target.
So I don't think today's inflation print will dissuade the Fed from delivering another hike later this month.
That being said, I think if we look at from August onwards, considering leading indicator is showing core inflation may slow down further in the coming months, I think the question is probably not if but how much core inflation is going to slow down.
And so I think the extent of that will determine whether the Fed needs to deliver further tightening from August and onwards.
>> OK. And I'm going to pivot back to Canada.
>> Sure.
>> I'm going to talk a little bit about our population growth and what impact that is having on monetary policy. Because we know that we've brought in over a million new people to Canada, and that's having an impact on spending. So what impact will this have on Bank of Canada's effort to tame inflation?
>> I think there are multiple factors to consider here. Higher population growth I think is definitely helpful for the growth front.
On the other hand, it's also helping to address the imbalance in labor supplies.
For instance, last week we see the unemployment rate rising to 5.4%, and that is also because of increased labor market force.
>> More people are entering the labour market.
>> Exactly. And so I think it's basically a balance factor. And the other thing is that generally with higher population growth is also basically going to be more bullish for housing prices.
So I think there are different factors in play here.
On net, I would think that probably the Bank of Canada may need to deliver a bit more tightening than not.
>> And what are the indicators that you'll be watching closely as the Bank of Canada considers its next move?
>> Sure. I think the Bank of Canada has been very clear in terms of what they watch, and I'll put it into three categories. The first one is inflation, particularly core inflation.
That is very important, and not just a year over year number, but also sequentially every month.
Are we seeing sequential deceleration in month over month prints? That's a very key signal to watch.
Wage growth obviously is also very important to see.
In the last print, we see-- we have seen a moderation in wage growth.
But do we see that trend continue? Also very important.
On the growth front, we want to look at the GDP numbers, retail sales, which shows what's the health and the consumption component in the economy. And also, PMIs, which is a leading indicator to show what the growth outlook could be.
Also, lastly, on the labor market front, we want to see if we see further weakness in labor market, and do we see further rise in unemployment rate-- also a key consideration for Bank of Canada.
>> OK. And finally, where do you see the Canadian dollar going from here?
>> Right. So post-today's announcement, dollar CAD-- US dollar versus Canadian dollar-- have actually fallen. Because today's bank of Canada rate hike is not fully priced in by the market.
And so I think it's intuitive that the dollar CAD has sold off somewhat.
And also, the inflation print today is also weak. So dollar cad sold off a bit more.
But I think my view on dollar CAD is more range-bound.
Because I think the Fed is likely going to deliver further tightening later this month as well.
And so we are still going to have that rate divergence in place.
So the Fed's policy rate will be meaningfully higher than the Bank of Canada policy rate.
And that is a supportive factor for dollar CAD. One other consideration is that if both economies-- the US and Canada-- actually slow down significantly, that should benefit the US dollar as well, just giving the US dollar a safe haven currency status. Just something to consider.
>> That was Sam Chai, portfolio research manager with TD Asset Management.
Right now, let's get you updated on the top stories in the world of business and take a look at how the markets are trading.
J.P. Morgan Chase, the largest US bank, said second order profits from 67% more than $14 billion.
The acquisition of failed lender First Republic Bank in early May helped boost J.P. Morgan's net interest income and deposits.
J.P. Morgan Noah attracted some $50 million in deposits in March alone after the failure of Silicon Valley Bank.
Citigroup, Wells Fargo also reported second-quarter results the top 2023. Telus Corporation cut its annual guidance for 2023, citing demand pressures as the technology sector looks to reduce costs.
The Vancouver-based company says it revised its guidance as a result of Telus internationals updated for your annual outlook. Telus international has faced challenging global pressure, particularly within the text base as clients target cost-cutting measures including through successive layoffs.
Finally, the BC port workers strike has ended after the union and employers are grateful for your tentative deal.
Few details have been shared about the deal which must still be ratified by both sides.
Port workers were pushing for protection against automation, contracting out and for higher wages.
The two weeklong strike began on Canada Day, disrupting billions of dollars of cargo shipments.
And here's the main benchmark index in Canada is trading.
Right now, the TSX Composite Index is up just under one point. Let's take a look at the US as well.
the S&P 500, again, marginally higher, up just over five points or .1%.
Now let's get to today's educational segment.
With inflation sitting where it is, you might want to consider looking at inflation protected fixed income funds.
Nugwa Haruna, Senior client education instructor at TD Direct Investing is here to tell us all about it.
Nugwa, let's start off with what these funds are.
>> Anthony, it's always a pleasure being here. So as we know, we've been having conversations about how the Bank of Canada actually raised rates. A lot of people may not have been expecting it at the start of the year, but gradually expectations are going towards rising rates because inflation has stayed higher than the Bank of Canada anticipated.
So if you think about the impact of inflation on securities, if you use an example of a regular bond, if you have a regular bond whose coupon rate is 5% and let's say you have inflation at 3%, well you are actually earning just 2% in real terms.
And so where inflation protected securities come into play as they take into account inflation that's happening in the economy. So as opposed to a regular bond, the coupon payments will be based off of the face value that is the principle of the bond and none of these terms change. And in inflation protected bond will actually see his principal amount adjusted semiannually based on whatever the CPI numbers are.
So essentially what you might find is, yes, the coupon rate will say 5% but now the principal amount has gone up which means that the coupon payments will also rise.
So investors may consider using these.
They are also known as a real rate of return bonds in Canada.
>> Okay, so now we know what these products are.
How can investors find these funds within WebBroker?
>> Let's hop into WebBroker and I will show investors where you could actually locate these within WebBroker.
We will focus on today on exchange traded funds.
We will focus on ETFs. Once in WebBroker, we are going to click on research. Under investments, we are going to go ETFs.
Now, we do have different tools that you can use to find specific categories in WebBroker. You can search for these using our screeners tool or you can simply come to the shop we have here under categories.
If you will know, I'm under the US category.
This is US traded exchange traded funds and you can always hobble over to Canada but we will stick with the US so far.
We will go categories here. Under these categories, I'm going to scroll down just to find them.
Alright.
So here, we have the inflation protected bond category. There are four. I will click on it.
On this page, one of the nice things about WebBroker is it gives you a definition of each category. Right here, it actually tells you that the securities will adjust their principal values in line with the rate of inflation.
Typically, the securities held in these funds are issued by the United States but you might find other organizations issue inflation protected securities as well.
When investors scroll down, on the left side, you can scroll through all 24, but you can filter through average daily volume.
One important thing to look at when you're looking at a fund is how often it's traded which could determine how easy it is to enter and exit positions. You can also filter by management expense ratio or by distribution yield, so how much that fund is actually paying you Annually. We will stick to the distribution and we will lookat this index fund. I'm going to click on it.
And once you do that, you have the little box and we are going to go summary.
This will bring us to the page where you can do some more research into this ETF itself.
You can use this mini chart here to find out how it's performed in the last year.
You want to see additional information such as the holdings, you could just topple over to this tab that says holdings.
I'm going to click on there. Here you will be able to see the top 10 holdings and, as expected, you will see that its top 10 holdings are actually US securities, US government securities, a few more things that you can see when you scroll down is the asset class diversification and almost 94% of the securities in this fund are actually US bonds.
One more thing I will highlight here though is the credit rating.
It's very important for you to check out the credit ratings of some of these bond funds have and you will notice that this bond fund is focusing on holding AAA rated bonds and these will be, this is the highest rating you can get when it comes to bonds, so that's what this specific bond fund focuses on holding.
Now investors can scroll through the rest of these tabs if you want to see additional information before you decide to make a decision.
>> Nugwa, great information as always.
Thank you.
>> Thanks for having me.
>> That was Nugwa Haruna, senior client education instructor at TD Direct Investing.
On Monday, Nugwa will join us and be our guest taking your questions about how to better utilize the WebBroker platform.
A reminder that you can get a head start.
Just email moneytalklive@td.com.
Here's a look at some of the upcoming master classes the client education team is hosting in the next week.
And as we mentioned, this week, we heard from the Bank of Canada. The Fed is up next later this month and it is widely expected to hike interest rates again.
so what does this all mean for various classes of real estate?
Earlier, Greg Bonnell sat down with Colin Lynch, head of global real estate investment trust TD Asset Management to find out.
> I think we have to look at two parts the question.
First is, again, what's the reason why we're looking at potentially incremental additional hikes from the central banks?
Well, fundamentally, the economy is looking a little bit stronger than people anticipated. So we have more jobs than folks perhaps would have forecasted at the beginning of the year.
We have more buoyancy in the economy. And ultimately, because real estate serves the economy, it is benefiting from those improved economic conditions.
So think, in the retail segment, folks are shopping still more. They're buying more.
Yes, we have higher prices for many goods and services.
But ultimately, that also feeds through in terms of tenancy strength, and that helps the underlying real estate.
So that side of the equation is relatively positive.
Clearly, the side that's challenging is for particularly real estate owners that have leverage.
And so you can think about developers that tend to use variable-rate financing.
You can think about owners of property that may have some variable-rate financing or even owners that have fixed-rate financing coming into renewal.
That higher interest rate environment, which is a derivative of underlying rates from the central banks, can present a bit of challenge.
And so ultimately you've got those two sides that are playing against each other.
On the one side, you have income that is growing quite markedly well across all the different types of real estate, with the caveat of office in certain parts of the world.
And then you have the capital side, meaning, what's the cost of financing?
But also, at the end of the day, real estate gets measured against other investment classes.
And so if you have bonds that yield a higher rate, if you have equities where the dividend yield's gone up, real estate also has to compete against those other asset classes.
And when you have underlying central bank rates that continue to increase, that competition gets a bit more challenging.
So you get pros and cons.
And really depends on the sector within real estate whether the pros outweigh the cons or vice versa.
>> Colin, I recall last fall-- you've been on since then. But last fall, you were one of the first people to tell me that as you were taking a look at research about people re-engaging with the broader economy coming out of COVID, now that we've got that behind us, they were filling sports stadiums. They were filling restaurants.
They were getting on planes, but they weren't necessarily filling up offices.
So it's been quite some time now. How is the situation looking in terms of people going back into the office?
What does it mean for commercial real estate on that end?
>> Yeah, it's a great question. In a nutshell, the same, and just to slightly different degrees.
And of course, the geographic overlay is very important. People are filling up the sports stadiums.
They are traveling a lot. They are going increasingly to shop in person.
And so talking about the retail for a sec, we see a lot more individual shopping, and they're buying more.
But to your question about the office, we've seen a gradual return.
And that's really ticked up incrementally, particularly in Canada, the US, and also, to a degree, the United Kingdom. So in these three markets, plus a couple of cities in Australia, namely Melbourne, we are around the two to three days per week mark.
You have some tenants or companies that are at pushing four.
There are some that are around the one.
But virtually, the broad consensus is we're working in a hybrid environment.
Very few companies are fully remote.
And very few companies are five days a week in the office from an office worker perspective.
So that's part of the story.
The other part, as I mentioned geographically, is continental Europe, the Asia-Pacific, Latin America, where folks are very much towards the four and five day a week model.
And so it's really interesting stepping back, where you have a very gradual re-entry that might have started this year at two days a week, ticking towards three in places like Canada and the US. And then you have other parts of the world, like a Singapore, like a Japan, like South Korea, like France, where you have a much more pronounced return to the office in the four to five days a week.
So in the US and Canada, CBDs, Central Business Districts, are certainly that but also central social districts.
And we've seen a lot more return to the downtowns, particularly on the weekends and in the evenings.
And during the daytimes, we're seeing a phased and incremental return increasingly to the office.
>> You talked about bright spots. You mentioned retail earlier. Obviously, the reason why they're hiking rates is because the economy continues to do well.
We continue to spend money. So retail can be a beneficiary on one end of that equation.
What about industrial warehouse spaces?
What about residential?
Much is said about the dearth of supply in this country.
>> Yeah, that's right. Canada has a very significant dearth of supply across all forms of residential.
So whether it's market-rate housing, whether it's affordable housing, whether it's deep affordable housing or social housing, we are at a significant deficiency across all types of housing.
There is a couple of reasons for that.
One, a lot of demand. So we've had significant immigration.
Whether that's economic immigration, whether that's also refugees, whether that's international students, all three sources have been quite pronounced.
And that has driven demand for housing of all types.
But in this environment, where costs have increased materially, and so whether that is construction costs in terms of labor, supplies, whether that is also financing costs, all of those costs have increased.
Plus, it takes a long time to get projects approved.
What's the net result? We aren't building enough.
And actually, year over year, we're building less because it costs a lot more to build.
And so we have a problem in Canada. We have a lot of demand and not a lot of supply.
From an investment perspective into real estate and residential real estate, that has meant that market rent relative to-- and which is different than in-place rent.
But market rent continues to increase materially, i.e.
if you're moving out of some place and you're looking for a new place to rent, you're paying a lot more this year than you were last year or the year before. And so that increase has been quite profound.
In the warehouse space, we also saw material increases last year.
That's begun to level off a little bit.
Rents still continue to increase.
But ultimately, as folks have returned more to in-person shopping, if you look at e-commerce penetration, we've broadly flattened last year relative to this year at high levels, but flattened.
And so there has been a little bit of, call it, the heat moved off of the industrial warehouse market in Canada, certainly in the US, and also in Europe.
So that's interesting because that's a direct correlation to the retail space.
Still overall positive-- important to know for industrial real estate-- but not as positive as it was last year.
>> That was Colin Lynch, head of global real estate investment at TD Asset Management.
Now for an update on the markets.
we are going to take a look at the Advanced Dashboard and here, of course, that the Advanced Dashboard screens by price and volume.
Here, we are looking at the S&P 100.
A lot of green on the screen.
we will start with AMD. It's up to the tune of about 2%.
They have a lot of interest in AI. Tesla's ability percent.
Amazon also strong. Nvidia another big chipmaker is up 2% right now.
We will also take a look at the SNP 60.
Once it comes appear.
Meanwhile, I will talk a little bit about Amazon, Tesla. Again, a lot of tech related stocks are really strong today.
Let's take a look at the TSX 60.
Read on the board here, Suncor Energy is down to the tune of about 2%. Canadian Natural Resources also down, a lot of the energy names are trading lower on some weaker oil prices today.
Okay.
That was the advanced dashboard.
It is brought to you by TD Direct Investing. As a platform designed for active traders, available through the TD Direct Investing.
Okay, at one time, it might have been unthinkable, the idea that anything other than the US dollar could be the world's preeminent currency.
But some say dedollarization is not only happening but actually accelerating as the global use of China'scurrency rises. Kevin Hebner, managing director of global investment strategist at TD Epoque is the author of a report called dedollarization and the rise of the RMV as a global currency.
My colleague, Kim Parlee, spoke with him about his report.
>> Let's start with the conclusions-- for people watching, impatient investors. We want to know what it all means. Tell me what the conclusions of your report is.
And then we'll get into the reasons why.
>> Well, I think the big picture is that we're moving from a unipolar world that's dominated by the US, the US dollar, and its financial system. And we're moving to something which is more bipolar.
And we're being a world in which the renminbi has a bigger role.
And that's reflecting the bigger economic heft that China has in global trade, global economics, and so forth.
>> Yeah. So the big-- the de-dollarization means that, again, it's this bipolar world.
Another currency gaining acceptance, gaining strength.
You also mentioned, though, that another byproduct of this we could be seeing-- and again, you know, predictions. We have to kind of wait and see how the world unfolds.
We could see stronger gold, and we could see a weaker US dollar.
>> Yes. Certainly, the US has this exorbitant privilege, which means a lot of money goes in the US dollar assets.
That makes the dollar strong and also keeps interest rates lower.
In this new world we envision where it is going to be more difficult for the US to fund their big deficits, interest rates could be higher, say, by 25 to 150 basis points. The US dollar, we think, over the long term will be about 20% cheaper.
And then gold, at least during the transition period, will be viewed as an alternative type of reserve currency.
And we certainly have seen over the last 10 years a real bid from a number of countries for gold for these reasons, until the renminbi is ready and all the different aspects of plumbing to be in a position to challenge the US dollar as the predominant global currency.
>> And just to be clear, we're not talking about this happening tomorrow. This is going to take some time.
>> It takes a very long time. So for example, the US became the largest economy in the world in 1870, just after the Civil War.
But it didn't become the global reserve currency until immediately after World War I. So that was a period of 40 to 50 years.
So these things move very slowly.
>> I want to-- again, we're going to dig into the reasons because you've put together a very detailed report, I think, explaining it. But one thing that is notable to me is that I think a lot of people have been hearing this for a while.
And I think there's a lot of skeptics that this could actually happen.
So maybe you could just start by telling us what has been the US history of getting dollar dominance and why the skeptics maybe are not seeing what could be happening.
>> I think, for a lot of the skeptics, they're looking and they're saying, well, what is a global currency?
And certainly, for everyone who's alive today, they only really know one global currency.
And that's the US dollar. And they say, well, to be a global currency, you need to have a big current account deficit.
So there's lots of money coming in. You have to have enormous capital markets, the treasury market, equity markets, venture capital private equity, all these things.
You need to have an open capital account.
So money can go in and out freely.
So all different aspects of the US dollar financial system.
But that's based on a set of one.
So, one example. And people are extrapolating from that, where we think this new global currency is going to be one with Chinese characteristics.
And it's going to look quite different from what the US dollar has been over the last 50 years or before the US dollar when Sterling was the global currency.
>> It's interesting, too, because you mentioned-- and it's funny, I've never heard it talked about in this context about the network effect that happens with the US dollar, which is part of the reason that it has the strength that it does right now.
Maybe-- and I've heard about it with internet and with viral things on that front.
But how do you see it? And how does it help?
>> Well, I think-- if you don't mind my going on a little bit of a tangent for network effects because they're quite common in digital economies.
So for example, I use Twitter a lot. And Twitter is a place where there's a lot of content.
And there's content providers and content consumers.
And you have this sort of two sided network effect.
And now some people are moving towards Threads.
And Threads doesn't have some of the features that Twitter has, but it also doesn't have an owner who wants to tax or penalize both the consumers and producers of content.
So people are moving to this different platform.
And I think it is similar. The US dollar has all these network effects.
So once you become dominant, you have all these features.
People are issuing US dollar assets.
People are buying US dollar assets.
And then, there's all the different parts of the plumbing that go associated with that, the regulatory parts with the Fed and the Treasury, the interbank payment system, the messaging system, all the different types of markets, offshore markets, onshore markets. It's very complex. And you need both sides coming to it.
And that takes a long time to build up.
And it's only been, I'd say, the last 15 years that Beijing has realized the importance of building up all this infrastructure, all this plumbing, to ensure that they do have the two sided network effects that are necessary to attract both providers and consumers, in this case, not of content but of capital.
>> OK, you set up for us. There's basically two sides or two parts to this argument, strength of China and basically the politicization of the US dollar.
Let's stick with China right now.
We talked about this network effect.
And in your report, you talk about the path to strength of helping create that is actually having a currency that helps-- becomes common with invoicing, and settlement, and those types of things.
So maybe we just kind of talk about that environment that has to be present to allow that to happen.
>> Yeah, there's a natural or sort of logical sequence on how a currency starts to get used beyond its borders.
And this is really the sequence that the United States followed, say, just over 100 years ago. And the UK did, say, 220 years ago or so.
initially, you start with invoicing. So if you're exporting from China electronics or what are they exporting, instead of having it invoiced and settled in dollars, you'd have it settled in renminbi.
And we've seen that share that settled in renminbi go up from roughly 0% a decade ago to about 30% now. So that is something they are doing.
And China is having a lot of discussions with countries, not just Russia.
Russia clearly is being forced to do this.
But also India, Iran, Argentina, Brazil, South Africa.
Well, the BRIC countries plus a few others.
Turkey would be in that group.
So more and more countries for more and more goods are interested in invoicing what they import from China and then settling in renminbi rather than Euros or US dollars.
>> And people might look at 30% and think that's not quite the number one.
But it is the second most used currency, is it not?
>> Yeah, for invoicing for trade, it's now number two to the US dollar and above the Euro. And certainly, the slope is increasing.
>> What about emerging markets? Because this is an interesting piece you highlight as well, too, where I've done my fair share of traveling, too. And you notice sometimes when there are no strings attached when it comes for financing or helping emerging markets.
What-- tell us what's happening.
>> So, certainly, China, when they're looking for their allies-- and there are a lot of people who are sympathetic to China and also are suspicious of the US dollar.
So whether it's Belt and Road lending, or it can be central bank swaps that China set up.
And they've now set up about 39 central bank swap lines.
And they've actually used about 17 of those.
They're becoming more involved as a lender of last resort to countries that get in trouble.
And these are often countries that receive a lot of Chinese FDI. They do trade.
They've been recipients of Belt and Road money and so forth.
And that's beginning to be a long list and includes different countries in Asia, Africa, and quite a few countries in South America as well. So, different EMs.
And that is the process in which the renminbi is becoming used more in China's financial infrastructure, monetary infrastructure, is spreading out.
And countries want to have an alternative to the US dollar system because-- to some extent because they fear sanctions. But also, they're concerned about the, I think, the oversized role of the US dollar in their economic activities.
>> And then, when you layer on top of that China recognizing some of the growing strength as any country would do, putting in some new systems in place to help with this.
And we've heard a lot more about SWIFT. I think a lot of people weren't familiar with SWIFT before, what happened with Russia.
We all became familiar very quickly. And there's something called Chips.
>> Yes. Yeah, and so when we're talking about the US dollar and de-dollarization, it's not really about the US dollar per se. It's about the US dollar financial system.
And part of the US dollar financial system is SWIFT, which is a messaging system.
So it'll tell one bank where the money is supposed to go.
Chips is the clearinghouse interbank payment system.
So it actually is a hub and spoke system like our airline system is to send money from one bank, typically a US bank, a correspondent bank, to another bank either in the United States or globally.
But there's lots of other parts of the US dollar financial system.
There's the regulatory structure with the Fed and the Treasury.
There's the onshore and offshore markets, bonds, equities, private equity. So it's quite big.
And so China knows that they need to build these.
So they have, for example, created Cips.
So it's a China interbank payment system.
So it's modeled on Chips. And that's getting used increasingly.
It still relies on SWIFT for messaging.
But more and more countries and more and more banks are using their financial transactions through the Chinese system rather than the US based Chip system.
>> I thought it was interesting you started your report talking about, not about currency, but more about de-risking and the idea that throughout history, you see these cycles where people decide they have to de-risk, whether energy is power is too concentrated or semiconductor power is too concentrated. This is a parallel to those conversations.
>> Yeah. So as we move from a unipolar world to a bipolar world, we're realizing that there's lots of risk and vulnerabilities, particularly in global supply chains.
So from the position of the US, Canada, Europe, and other sort of Western countries, we realize that there's vulnerabilities in terms of getting your energy from Russia.
There's vulnerabilities in terms of semiconductors if we're very reliant on supplies from Asia.
And so we decided to de-risk those.
Similar, China, Russia, Iran, and other countries have realized they have a real vulnerability or risk exposure to the US dollar financial system, and they need to de-risk, reduce their exposure and vulnerability to that. And I think that's ultimately what this is all about.
>> And then, when you go into that, you start to talk about just all the reasons why, I think, people want to de-risk.
And you alluded to this earlier, but this-- you talk about weaponized interdependence right now.
And you talk about how the Biden administration, what they've been doing compared to previous administrations.
Maybe just take us through how much that has increased, I'd say, the weaponization of the US dollar.
>> Yeah. So weaponized interdependence is a very good term. And clearly that's what Russia had in mind with supplying natural gas and oil to Europe. And I think that's a good way to think about it.
And certainly, with the US dollar, they've decided to weaponize the dependence that Iran, Russia, and other places have to the US dollar.
So I think that's a good way to be thinking about this.
>> And it works until it doesn't, I guess would be probably a good way to think of it, too, right? I mean it works as a weapon until people find alternatives.
So but you have a chart here. I think was looking at the number of, I think, states that are actively targeted by US sanctions.
I think it's four, if I look at it back in 2000, up to just under 25 currently.
So it's becoming more common.
>> Yeah. So the number of states under sanctions has increased six-fold in the last two decades.
And the number of sanctions overall has increased more than 10-fold.
So it is something that the US dollar is using.
And really, they're forcing other countries to come up with an alternative to the US dollar financial system.
And one complexity in this is there's primary sanctions. So if the US decides to put in place sanctions against Iran, that means any US individual or entity cannot interact financially with entities or individuals in Iran. So that's primary.
What they did with Iran in 2018 is they took it another level up, and they introduced secondary transactions. So they said that the US individuals and companies can also not transact with anyone who is transacting with Iran.
And so what that meant, for example, is a European bank who has business in Iran-- and certainly they have a different position on Iran than Americans do-- they had to choose, do I want to be doing business with Iran or with America?
And in the vast majority of cases, they chose America.
And it's interesting that before the Russian invasion of Ukraine last February, the region that was most interested in decoupling from the US dollar was Europe because they realized that there was this potential for financial sanctions, US foreign policy being imposed on them. And they were very unhappy about this.
With the sanctions against Russia, America's decided not to have secondary sanctions.
So for example, India is not signed on to the sanctions, but America could force them through secondary sanctions but realizes there would be a huge backlash to do that.
Really, there's-- countries with 2/3 of the world's population are not on board with the sanctions against Russia.
So there are real limits to the ability of America to push both primary and secondary sanctions.
>> I've only got about three minutes, Kevin. But I do want to mention because it takes up a big piece of this report, too, you talk about the Chinese military industrial complex companies, how they're affected, and Chinese persons who are also affected.
>> Yes. Yeah, so the US has sanctioned a lot of Chinese entities and Chinese individuals over the last couple of years.
And there's for a host of reasons.
One are companies that are linked with the Chinese military who are doing activities outside of China, which could be related to different types of forms of surveillance.
It could be activities that are viewed as anti-democratic protests or human rights abuses in the Uyghur areas, Hong Kong, and so forth.
So there's a lot of entities. And that certainly has gotten China's attention.
So they realize that these sanctions are painful. They can precisely target individuals and entities.
And they can be broadened. And certainly, there's every reason from the discussions that are coming out of the White House to believe that these sanctions against Chinese entities and individuals will be broadened over coming years.
>> We've only got about a minute, Kevin.
But again, my favorite part of your report is when you quote Niall Ferguson stressing that the law of unintended consequences is the only real law of history.
And the thing is it's hard to say how this could unwind, accelerate, change.
But the path of acceleration could be concerning.
>> Yes, absolutely. And so we have-- even if we become a bipolar world, the two worlds are very interconnected in terms of trade, economics, financial. And so as we move to this equilibrium, this transition, I think we really do have to pay attention to Niall Ferguson's warning about the law of unintended consequences, how this is going to play out. We've been surprised so many times over the last couple of years.
And we're continuing to be surprised.
>> Kevin, it was a real pleasure. Thanks for taking the time to take us through this.
>> Thank you very much, Kim.
>> That was Kevin Hebner, global managing Dir. at TD Epoch. That's it for our show today. On Monday, Nugwa Haruna, senior client education instructor with TD Direct Investing will be our guest taking your questions about how to better utilize the WebBroker platform. A reminder that you can get a head start. Just email moneytalklive@td.com. That's all for our show today. Take care and see you next week.
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