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Client Reception


2023-11-17, Mathew Hermary

Last week we held our annual client appreciation event. Below is an abridged version of the market outlook shared with our clients that night.


It’s difficult to discuss the current market environment without the perspective of the last few years. From a historical context, very little has been normal. As one market commentator aptly summed up, “the use of the word unprecedented has become unprecedented.” Here are a few statistics which highlight just how unusual the last three years have been:

  • US GDP declined 28% in the second quarter of 2020, 2.8x worse than any quarterly decline since WW2.
  • Fiscal stimulus drove a roughly $9 trillion (40%) surge in US Federal debt.
  • Deficits spiked to ~15% of GDP, dwarfing the ~10% height from 2009.
  • The Federal Reserve increased the money supply by ~40% as its balance sheet ballooned over ~110% at its peak.
  • Bond yields hit all-time lows.
  • In 2021, GDP rose the most since 1984 on the back of record stimulus.
  • Stock valuations subsequently surged to two-decade highs, which included a mania in meme stocks, money-losing IPOs and cryptocurrencies.
  • US housing prices skyrocketed ~45%.
  • A consumer spending bonanza ensued, with a ~40% increase in durable consumption.
  • Inflation soared above 40-year highs.

Cumulatively, the events of the last few years have fundamentally altered the trajectory of asset prices, interest rates and inflation. The long-term implications are many; the handbook of the last decade is no longer a guide.


Today the distortions of the past few years continue to cause unusual signals in the economy and a violent, compressed market cycle. Unsurprisingly, most economists and stock market pundits are unable to agree on whether it is dusk or dawn for the economic cycle, whether it’s a bull or a bear market.

If we look to the US, the latest GDP number was very strong at 4.9%. Unemployment remains very low, and inflation is falling. Many economists say it’s a goldilocks economy – and what’s not to like?

Flies in the Proverbial Porridge

A strong economy is at odds with the current trend in money supply and bank credit growth, both of which are in outright contraction. For context, money supply has never contracted in the last six decades, and in data going back to the 1970’s, bank credit has only contracted in the wake of the financial crisis. If credit, the lifeblood of an economy, isn’t flowing well, how can the host be healthy?

Consumer spending is supporting current GDP growth, but at the expense of a negative national savings rate. Meanwhile, credit card, consumer loan and auto loan delinquencies have risen to the highest levels in many years. New US mortgage applications are at three-decade lows as 30-year mortgage rates have approached 8%, and rates on small business loans in the US more than doubled within a few short years to nearly 10%. None of this suggests strength.

This is all occurring alongside unabated fiscal profligacy, with the US deficit continuing to run at 5% of GDP, a level of spending historically reserved for jump-starting the economy in recession, rather than when unemployment is near historical lows. In some ways it feels like running a marathon as a warm-up for the big race. Bond investors are clearly frustrated by all this spending, as shown by wild daily swings in the 10-year bond yield that have become commonplace. We genuinely wonder who will absorb the coming wall of Treasury issuance in coming years. Foreigners seem much less willing than they have in the past. As the benchmark rate that determines the price of most other assets, undue volatility in the 10-year bond courts the risk of unexpected outcomes.

Meanwhile, in Canada

The Canadian economy hasn’t grown since May and is probably already in a soft recession. The trifecta of high consumer debt levels, the pull forward of spending, and the wave of mortgage re-financing at much higher rates suggest a debt hangover and a path of lower growth ahead. Record immigration offers a demographic tailwind but risks exacerbating underlying inflationary pressures and sky-high housing prices in the meantime.


The broader economic events and policy responses of the last few years have set forces in motion that are likely to re-define the coming decade. The big themes that significantly influence the arc of the next 5-10 years can be simplified to 2 R’s and an O.

Regime Shift – There has been a secular regime change in interest rates, inflation and stability. The implications are significant.

Reversion (to the mean) – This is the often quoted, less often understood phenomenon of economic forces tending to fluctuate back toward average levels over the long term. Not unlike the chains of habit – too light to be felt until they are too heavy to be broken – the forces of mean reversion are often too subtle to be noticed until they become too powerful to be ignored. Many of the forces that drove markets in the prior decade are moving in reverse today. Investors would do well to consider past regimes of inflation and high interest rates, long-term averages that extend beyond the past decade, and the potential for the sum of smaller forces to culminate in larger themes.

Opportunities – The opportunity set is shifting, even if it doesn’t look like it when seven companies have been driving all of the return in the S&P 500. Investors looking to the recent past for sources of future success may find it a lot like using the rear-view mirror to drive down the interstate.


After falling for 40 years, the downward trend in interest rates has been forcefully broken. While rates are still likely to decline temporarily in a recession, higher structural inflation and higher government debt and deficit levels mean that the era of extremely low rates is over.

The implications remain underappreciated.

  • Many areas of the stock market have yet to reflect the impact of higher rates, particularly in the US.
  • Housing prices have rarely been so unaffordable. In 2018, the median house in the US cost $253,000. At a 4% 30-year rate, the monthly payment was $1,086/month with a 10% downpayment. That same house today costs $399,000 and the mortgage payment is 134% higher at $2,547/month. Prices will have to fall or incomes will have to rise to drive a resurgence in transactions. Strong economies require strong housing markets.
  • Consumers are learning to adjust; it will take time.

Businesses will have to learn to live with less consumption. Profit margins will be pressured as debts are refinanced at higher rates. Stock buybacks, a meaningful source of earnings growth in the past, may wane as capital is diverted to debt reduction.


There’s a strong record of inflation following money supply with a lag. With money supply in decline, don’t be surprised if inflation continues to fall in the near term. But the sticker shock of recent years is still likely to have lasting effects on consumer behavior. Belts will continue to tighten.

What will happen in the next recession? Will fiscal largess and money printing come quickly to the rescue once again and risk yet another surge in inflation? We remain skeptical that elected officials will be quick to put the stimulus genie back in the lamp, now that’s it out.

The inflation experience of the 1970’s was only possible with the oil crises of the Yom Kippur War and the Iranian Revolution. The geopolitical landscape is different today, but parallels to today’s tensions in the Middle East shouldn’t go unnoticed. Neither should the fact that Western energy companies have chosen to give capital back to shareholders rather than invest in future production. This runs the risk of supply constraints in future years – and with it, the potential for higher oil prices, more inflation.

The broader poles of supply & demand have shifted in the global economy. The last decade has been characterized by a persistent lack of demand to drive economic growth in the wake of the financial crisis as balance sheets were repaired. As the economist Mohammed El Erian has suggested, the coming challenge this decade may well be a lack of supply:

  • As manufacturers in Europe have acutely witnessed in the last year, regional conflicts create shortages and inflation in many facets of commodities and input prices.
  • The pandemic exposed the weakness of long supply chains while rising geopolitical tensions are exposing the risks of globalization, a force which had been so beneficial for multi-national corporations in prior decades. The rise of near-shoring and on-shoring are inherently inflationary and will reverse some of these deflationary benefits of past decades. Domestically, an associated increase in capital expenditure to support this should create opportunities for the providers of picks & shovels. The US’s $550 billion infrastructure bill will as well.
  • The shock to the cost of living has driven employees to hunger for wage increases. Inflation adjusted wages have languished for decades. In 2023, labor strikes have risen to two-decade highs and salary concessions from businesses have been significant. Wage growth is the reciprocal of corporate profit margin. Expect wage growth to be passed through via higher prices to consumers. In the 1970’s similar dynamics fueled an inflationary wage price spiral.

Of course, inflation is the friend of the debtor. It reduces the value of liabilities, silently robbing lenders and lowering the burden to debtors. There is a long, sullied history of governments alleviating their burdens through inflation. For many years the Federal Reserve has stuck to its 2% inflation target. It will be telling in coming years if the Fed decides to step back from this target. All of these factors suggest persistent inflation above 3% may not be a surprising outcome.


Global stability is no longer underwritten by the sole dominance of the US. Greater regional instability provides a welcome distraction for bad actors to entertain unchallenged conflicts in other theaters. With today’s regional powers and allegiances, the world is a much more unstable place than it has been in some time.

Historically, isolated conflicts have tended to be flashes in the pan for stock market indices. However, the historical data set also suggested that pandemics had limited impact on stock markets. Clearly, there is no clairvoyancy in the past. All else equal, this reinforces our process of owning stable franchises that operate in stable jurisdictions.


Be careful looking to the winners of the last decade: As the Queen of Hearts in Alice in Wonderland said, “It’s a poor sort of memory that only works backwards.” Stock market performance and the factors that drive it tend to shift around from decade to decade. The starting point for valuations, revenue growth and profit margin matter. Investors have to be open to where the opportunities are versus where they were.

In past decades where inflation was persistent and interest rates were higher, hard assets and businesses with pricing power benefited disproportionately. An attractive valuation can also go a long way to supporting reasonable outcomes in an environment where interest rates may pressure the market P/E.

Geography: US stocks have had their best decade versus the rest of the world. They are also historically expensive. Canada looks particularly cheap; attractive dividend yields can be had in stable franchises, and it is an economy that benefits from inflationary pressures given its exposure to hard assets and commodities. These factors lower the barrier to satisfactory outcomes in coming years.

Opportunity amongst the averages: Within markets, the dispersion of valuations between cheap and expensive businesses remains unusually wide – this offers fertile ground for the discerning investor. The valuations of our strategies suggest we are reasonably positioned to benefit from this opportunity. In contrast, owners of S&P 500 ETFs may find themselves scratching their heads in a few years’ time.

Irrespective of the path of the economy, there are deals to be had:

  • Winpak Ltd: Our Canadian small cap strategy is a long-time owner of the happily boring packaging manufacturer Winpak. Conservatively managed and highly profitable, this 5-decade old business offers an 8% earnings yield, a rare level over the last two decades.
  • Andritz AG: In our global strategy we recently purchased an Austrian manufacturer that provides machinery for pulp & paper mills, hydroelectric plants, and separation facilities such as water treatment plants. Its balance sheet is in a net cash position and Wolfgang Leitner, deputy Chairman and prior CEO for 28 years, owns $1.5 billion in stock. If he can sleep well at night with his investment, so can we. Andritz’s 11% earnings yield looks like a deal today.


Despite prognosticating on economics tonight, there’s a reason our days are instead spent focused on company analysis, paying the right price for good businesses and long-term ownership.

To illustrate why, I’d like to share an excerpt from the annual report of BASF, the largest chemical company in the world, wherein the company’s CEO shared his outlook for the coming year:

The [geopolitical events of the last year] have changed the world – politically, socially and economically – and their effects are far from over.

[It] was an exceptionally difficult year for the global economy and income from operations declined 33 percent. I anticipate [it] will be another difficult year for the chemical industry as a whole.

In addition to economic challenges, we are faced with adverse political conditions.

The European Union’s strong tendency toward over-regulation in its current policies is also particularly counterproductive.

Both of these factors create worrying uncertainty with regard to capital expenditures in the chemical industry, threaten the industry’s capacity for innovation and endanger jobs.

This is a long list of things to worry about.

The kicker is that this annual report was published over 20 years ago and during the following five and a half years, BASF’s stock rose over 100% without factoring in the 3% dividend yield. BASF isn’t a great company, but sentiment was low, it was cheap and its earnings, while cyclical, were intrinsically linked to economic growth – and were set to improve given time. If you had worried too much about the CEO’s concerns, you would have missed an attractive opportunity.

The risk of recession, inflation and geopolitical struggles were concerns 20 years ago for BASF and they are concerns today. But they aren’t enough to keep us up at night.


QV clients’ funds are well balanced between stocks and bonds today. I believe both constitute good long-term value.

The near term is always uncertain, but if adversity beats down equities, bonds will provide ballast and a stable source of funding to buy stocks at more attractive prices. With the benefit of time, this helps ensure the certainty of the long term.

Thank you again for joining us tonight and for entrusting QV to grow and protect your wealth.

All views and projections are the expressed opinion of QV Investors Inc. and are subject to change without notice. This Update is provided for informational purposes only. QV Investors takes no legal responsibility from any losses resulting from investment decisions based on the content of this Update.


Mathew Hermary | Chief Investment Officer

Mathew oversees QV’s investment strategies and makes portfolio decisions for the global equity strategy.