CORPORATE PARTICIPANTS  

Amy Mottershead  

Business Leader, The Schmidt Investment Group, CIBC Wood Gundy  

Marvin J. Schmidt  

Principal, First Vice-President and Senior Investment Advisor, The Schmidt Investment Group, CIBC Wood Gundy  

Andy Rempel  

Senior Associate Investment Officer, The Schmidt Investment Group, CIBC Wood Gundy  

PRESENTATION  

Operator  

Good day, ladies and gentlemen. Welcome to the Live Town Hall Conference Call with Marvin J. Schmidt, Head of Strategy at Schmidt Investment Group, and Andy Rempel, Co-Lead of Investment Strategy at Schmidt Investment Group, and our moderator, Amy Mottershead, Business Leader, at Schmidt Investment Group.  

I would now like to turn the meeting over to Ms. Mottershead. Please go ahead.  

Amy Mottershead, Business Leader, The Schmidt Investment Group, CIBC Wood Gundy  

Thank you, Bob, for your kind introduction.  

Good day, and welcome to The Schmidt Investment Group Live Town Hall. I hope that each of you are well and will have the opportunity to enjoy the summer months ahead of us. Thank you for calling in from across Canada and internationally. It is a pleasure to share the expert knowledge of our team.  

My name is Amy Mottershead and I’m the Business Leader for The Schmidt Investment Group, and I will be moderating today’s call. Also, on this call, we have Marvin Schmidt, the Principal and Head of Strategy for our Group, and Andy Rempel, who co-leads Investment Strategy alongside Marvin and is the Head of our Tax Group.  

We compiled the questions we received from you into the topics for this call, and these subjects will form the basis of our session today.  

Before we dive into our first question, Marvin, could you please outline the key themes the conversation will cover today?  

Marvin J. Schmidt, Principal, First Vice-President and Senior Investment Advisor, The Schmidt Investment Group, CIBC Wood Gundy  

Perfect. Thank you, Bob, and thank you, Amy.  

There’s a number of questions that came in, so what the themes are is:  

First, are equity markets, the stock markets, somewhat overvalued, or even in a bubble, and the short answer is, yes, overvalued, to some extent, but not nearly as much as the media or many investors may believe; two, therefore, we are moving to a more of a neutral to slightly underweight in public equity, of course, depending on your timeframe, and also adjusting for geography and investment style and industry sectors of where we hold your equity investments to where we’re finding better value.  

Are we concerned about government debt globally, inclusive of Canada? The short answer, not in the short to medium term, but medium to longer term, we are much more so concerned. We see the economy to continue to remain strong and, if anything, get even stronger over the next 6 to 12 months. That being said, we do believe that the biggest return of the stock market is behind us, rather than ahead of us, as it is a leading indicator and not a lagging indicator. This does not mean, though, that we expect no return for the market over the next year. We just believe it will be more muted than certainly the last 5 months or 12 to 14 months.  

We do believe there will be increased pressure in 2022, and beyond, in heightened taxes. We continue to favour more than ever alternative investments and continue to underweight fixed income, which is paying very little today.  

We believe the possibility of inflation accelerating is higher than at any point in the last 20 years, but there are ways to mitigate, which we will discuss, but we do not foresee a 1970’s type of hyper-inflation.  

We do believe cryptocurrencies, like the Bitcoins of the world, are here to stay, but we do not believe they are here to stay as they are in their current form, and not without significant undue risk in the short and medium term.  

This highlights some of the key themes, and we’ll delve into the specific questions as they came in much more so.  

Amy Mottershead, Business Leader, The Schmidt Investment Group, CIBC Wood Gundy  

Thank you so much, Marvin. I’m really excited to hear the insights that you and Andy have to provide on these interesting and relatable topics.  

From the email questions that were submitted, intellectual curiosity spiked around the theme of current stock price valuations. Marvin, with the latest run of the markets well beyond the highs just prior to COVID-19, do the fundamentals of the world economy support the increase, and is this more of an emotional enthusiasm or is it based on economic fundamentals?  

Marvin J. Schmidt, Principal, First Vice-President and Senior Investment Advisor, The Schmidt Investment Group, CIBC Wood Gundy  

Sure. It certainly has been a popular question with clients in meetings and calls, and so forth, and it’s important to understand and break apart what some of the headlines are showing.  

For example, we’ve had a number of clients say to us, “Marvin, Andy, team, we see that the price-to-earnings ratio is running at 45, meaning that the price is 45 times the company’s annual earnings, and isn’t that crazily overvalued right now?” The short answer is, well, a little bit, but not really, because that headline that is very much in the media is not really telling the true story and the full story.  

For example, the trailing price-to-earnings ratio is 45. However, that isn’t really a good indicator at all, and the reason being is that the way you come up with your ratio is you take the price per share of a stock over its earnings per share of a stock and that gives you the  

price-to-earnings ratio. Well, when you look at it on a trailing basis, meaning the last 12 months—so the price  

is what it is today, but it looks at the earnings of the last  

12 months. Well, when the economy gets shut down and businesses get shut down, your earnings very much disappear, or certainly are drastically reduced. Therefore, when you look at the price today, you may think that’s quite expensive, but that would only be if you anticipate the economy to be shut down, as it has been the last 14 or 12 months.  

For example, the stock market, at the bottom of the financial crisis in March of 2009, had a trailing PE, price-to-earnings, ratio of 90. Now, at the bottom of the market in 2002, just after the tech wreck, when the dotcom bubbled happened, you had the price-to-earnings ratio at 50 for the trailing PE. Now, I think we could agree that if you invested in the spring of 2002, or on March 9 of 2009, when the PE, the trailing PE was 90, that likely may be your best investment opportunity of your lifetime, because the market has doubled or tripled since that time.  

Now, that is not actually a really good assessment. What’s a better assessment, that we look at it much more so in our industry and around our research tables here, is the forward-looking price-to-earnings ratio. Currently, the current price, based on what the expectation of earnings are over the next 12 months, is actually running at around 21. What is the historical norm for forward-looking PE? Well, it’s actually 19. So, we’re a couple points higher than historical norms when you look at the forward-looking PEs, but we’re not drastically overvalued right now. But, we are somewhat overvalued and, therefore, we are taking a little bit more of a defensive position right now, and then, like I said, going to a little bit more of an underweight position.  

The other thing we have to remember is that when we talk about how much the stock market has done over the last 14/15 months, well, in reality, in Canada, the stock market is actually only up 10 percent from pre-COVID levels. So, January of 2020, we are up 10 percent from there. In the U.S., the market is up about 30 percent, but that doesn’t tell you the whole story, because the Canadian dollar has also moved up. So, in the U.S., yes, it is more than Canada, but it’s up about 20 percent or so.  

Now, the other thing that we have to realize is just the  

way the math works. If the stock market—which it did between end of January to the third week of March of last  

year, that seven-week time period. The stock market in Canada and the U.S., pretty much around the world, they all dropped approximately 37 percent. Well, when you drop 37 percent—for example, if you have a $100 investment and it goes down to $63, then to go back from  

$63 to $100, you actually need to make a 59 percent return just to break even.  

Then, if you are a Canadian investor investing in the U.S. or internationally, for example, we’ve also had approximately a 10 percent currency impact from January of 2020. If you add that on, you actually need a little bit over a 70 percent return just to get back to where you were.  

When you see, my goodness, the stock market has taken off like crazy this last year, it’s true, it’s up 70 percent, but the way math works, you have to always make up a lot more when you go down. The real numbers really are that the market is, yes, up 10, or about 20 percent or so, Canada and the U.S., the U.S. being a little bit more so. So, that’s important to understand.  

The other aspect is that there still is good value to be found in pockets of the market. For example, there’s two different investment styles when it comes to the stock market, value or growth. The value style of investing has very much been out of favour for many, many years, and prices of these companies have been dramatically underpriced at big discounts, and that now, just in the last number of months, has really come in favour for the first time in many, many years. Therefore, we see really great opportunity continue, actually good, well-priced businesses on that value side, and, therefore, we’ve been slanting more towards the value side, which we see better opportunity.  

Also, all countries in the world are not equal. As we said, the U.S. would actually be one of the most expensive countries in the world, from a price-to-earnings ratio. Canada is quite attractively priced. Europe would be even more attractively priced in a price-to-earnings ratio. Of course, the emerging markets, they are dramatically lower than the U.S., but, historically, the emerging markets have always been priced a little bit lower than the U.S.  

So, yes, the markets are somewhat overpriced, but certainly not what the media or the average consumer or investor out there currently believes is the case.  

Amy Mottershead, Business Leader, The Schmidt Investment Group, CIBC Wood Gundy  

Thank you, Marvin. That was a good oversight into that topic, much appreciated.  

Continuing with the thoughts of COVID-19 and the unprecedented impact it’s had on our local and global economic environment; many individuals are cautiously optimistic with the rollout of vaccines and the reopening of many businesses. So, what is your assessment and outlook of the current and near-future environment? Beyond the stock market, where else should our attention be directed?  

Marvin J. Schmidt, Principal, First Vice-President and Senior Investment Advisor, The Schmidt Investment Group, CIBC Wood Gundy  

Sure. When I look at, overall, the economics side, current assessment and kind of the outlook there—and maybe I’ll have Andy pipe in on this one, as well—but the fixed income, the bond market is coming off historically low rates, so we continue to be really quite bearish on fixed income, and having lower allocations towards fixed income has benefited us, given that the fixed income market actually has negative returns this year.  

Could we see interest rates going up meaningfully? Well, not likely, for a host of different reasons. But, let’s not forget, if you have, say, interest rates at 1 percent and they go up to 2 percent, well, that’s a 100 percent increase, that’s a double, from 1 to 2 percent, and that’s much more difficult for the economy to absorb, a 100 percent increase or a double of the current rate, versus, say, if interest rates were at 5 percent and moved to 6 percent, same 1 percent increase, but 1 percent is a 100 percent increase when you start at 1, and a 1 percent increase at 5 is a 20 percent increase, right? So, a small interest rate increase can actually have a materially negative effect, certainly in the bond market, so we are actually somewhat less concerned about interest rates going up dramatically. We’re more focused on the percentage of increase from current levels and how the economy is going to adjust to that.  

We hear a lot about retail sales, and you hear Canadian Tire and Home Depot and car dealerships, they’re just having record sales, hot tub businesses having record  

sales, and so people are like “Can this actually continue?” because these are really the headlines that  

people are seeing, and that leads to is this a real economy or not, given how much money is being spent in  

retail sales, given the structural damage, let’s say, in the economy over the last 15 months with COVID.  

Well, that is true, retail sales in the last 24 months are up 10 percent per year, versus the previous five years, it only averaged 3.6 percent, so it’s almost three times more increase in retail sales, or consumer spending, than has been in the past. Isn’t that a big concern? Well, not really, and the reason being is that there’s other headlines that maybe don’t come to the front, which is, well, what your spending on retail sales, you’re not spending on entertainment, you’re not spending on travel, and so we try to look at things from a strategy standpoint on a much more macro basis versus a micro basis. Although one headline might have an alarming number, when you actually look at it on a macro basis, overall, when you look at all consumers, the populations in Canada, and mostly around the entire world, we have experienced record-high annual savings rates from people.  

So, despite this Canadian Tire and Home Depot, and all the expenditures on hot tubs and garden supplies, we’re still actually net/net saving more this last 15 months than we have historically at an unprecedented amount. So, there’s actually a fair bit of pent-up resources on the sidelines that will, at some point, as we open up here, find its way into the economy.  

Andy, do you want to add anything to that?  

Andy Rempel, Senior Associate Investment Officer, The Schmidt Investment Group, CIBC Wood Gundy  

Sure, Marvin. I guess, going back to interest rates, and whether we expect them to go up or not, I think one other factor we need to consider is how it’s affected governments. With the tremendous amount of government debt and government spending that’s occurred, interestingly, because rates have come down so much, overall, the government is paying less interest than they were previously.  

Now, I think that also, if we take that forward, there is going to be some limitations as to how much rates can go up, because this affects not only individual consumers, but the government, as well, if they’re going to have to account for much higher debt payments.  

We do believe that we’re probably in an environment now where we’re going to have much higher government debt  

levels throughout the world, which we’ve seen increase in virtually every country over the last year. However, we don’t see that going away, and that’s going to be a bit more of a permanent trend.  

Amy, maybe I’ll turn it back over to you now.  

Amy Mottershead, Business Leader, The Schmidt Group, CIBC Wood Gundy  

Excellent. Thank you to both of you, and great insight there on the government debt levels increasing with interest rates, and such like that, which leads us right into inflation, Andy.  

Inflation has a major effect on the entire country’s economy, impacting the daily lives of each person on both the large and the small scale. We know inflation can vary from asset to asset and during different time periods. Andy, what insight can you provide for our listeners with regard to the present state of inflation?  

Andy Rempel, Senior Associate Investment Officer, The Schmidt Investment Group, CIBC Wood Gundy  

Sure, Amy. Well, I’d say inflation is one of the biggest concerns that we would have today, and it’s probably one of the most common topics that we’re hearing about, whether it’s in the media, in discussions with colleagues, even internal discussions that we have with the investment managers that we work with.  

Inflation is often called a “hidden tax”. It’s not something that you directly see, but over time it can erode wealth, as your dollar does not go as far as it typically did.  

Recently, inflation numbers have been higher. There is a bit of a skew there just because we’re coming off of a low base. Looking year-over-year, we’re coming off of the first COVID wave back in March of 2020, when everyone was really staying home, not really sure how this virus would evolve, and not spending money the same way that we were. So, I do think that there is a bit of a skew there.  

There is, however, a tremendous amount of pent-up demand that has been created. Interestingly, Marvin talked about personal savings. Well, over the last year  

here, we now have about $100 billion of excess personal savings, beyond what would normally have occurred, and even higher is about $130 billion from businesses. That’s  

over what the pre-existing trend was. So, there is a lot of money that could potentially flow into the economy and be spent.  

In the U.S., the Federal Reserve believes this is more of a transitory issue, so it’s more of a temporary, one-time hit. You’ll read things that say, well, maybe you’re going to go out to the restaurants or get your hair cut, but you’re not going to go get six haircuts because you missed some last year. So, it may be more of a one-time occurrence.  

However, getting back to the government’s debt and how much they have accumulated, I do believe that there is a certain degree of appetite for governments to let inflation run, because there isn’t really a realistic way for them to pay back this debt, and so inflating it away and having it be a smaller part of your economy does seem to be a possibility.  

At this point, the base case is that inflation is a bit of a blip, but, really, no one knows for sure, because there has been this huge increase in the money supply.  

I think we also need to recognize that there were some inflationary pressures well before COVID. These were due to deglobalization, as trade frictions between the U.S. and China, they’ve not gone away, although they’re a lot less in the public eye now than they were a couple years ago. There has been some reshoring of factories due to supply chain issues, which, of course, makes them more reliable. However, it tends to be making the products more expensive, potentially.  

Inflation, ultimately, is a lagging indicator and it’s traditionally counteracted by the Bank of Canada or the Federal Reserve increasing rates. This would be detrimental to fixed income, as the rate of interest or the payment you receive is, for the most part, generally set, and we do see rate increases beginning next year. Initially, last year, there was a lot of talk that rate increases were several years away. However, that thinking has changed, and we don’t believe that it’s accurate any longer. We’re almost certainly going to see some increases next year, likely in the latter half of the year, but those could also start moving forward, as well.  

So, how do you kind of deal with inflation if it is a bigger issue? Equities fare far better than cash or fixed income in inflationary environments. So, when there are some of  

these upticks in inflation, there can be a little market turmoil or some draw-downs, but businesses can adjust their pricing and adapt over time. If their input costs are  

increasing, they do have the ability to increase their prices.  

The data does show that, historically, both Canadian and U.S. equities have done better during rising periods of inflation than their long-term historical averages. Particularly, Canada, considering we’re more of a commodity-based country and our market has a bigger commodity exposure than many other countries, this should help guide us through inflation. As part of our strategy of having a higher weight in Canada, that is going to give us a certain degree of protection.  

Amy Mottershead, Business Leader, The Schmidt Investment Group, CIBC Wood Gundy  

Thank you, Andy, for those valuable perspectives. Marvin, do you have anything you’d like to add on that topic?  

Marvin J. Schmidt, Principle, First Vice-President and Senior Investment Advisor, The Schmidt Group, CIBC World Gundy  

Yes, just a few points. One is—yes, so you talk about the stock market. Sometimes, in the short term, inflation may actually hurt the stock market in the very short term, say, the first 6 to 12 months, when you’re seeing an uptick in inflation, just because if you think about a business—we may have a lot of business owners on the call here today—if you have a backlog of orders that have signed off contracts with them, well, you’ve already given them a fixed price and you may not start that work for another 3 months or six months or 12 months, and yet inflation is picking up and you can’t adjust it and, therefore, your margins really get shrunk or go negative. But, as Andy said, businesses will change their prices the next time they accept a bid. Because they will not be not-be-profit organizations, they will not be charitable organizations, right, they are going to ensure that their margins always exist, even if in the short term they can’t quite adjust as quickly, but over time, whether it be the stock market or the private equity market—like Kensington, the money manager that we’ve hired on for many clients, they are very well positioned to do exceedingly well over a inflationary environment.  

The other thing, just to comment, is that real returns, we are concerned about real returns. We don’t know if the governments actually will have the ability or desire to increase interest rates to the extent to hold inflation down, as maybe they might want to, the reason being is because they have substantial debt and letting interest rates go up would actually, as Andy said, cost them a lot more money, cost us as taxpayers a lot more money, right? So, you may have a situation where, like normally—like, right now, we have negative interest rates—or, sorry, negative yields, real yields, meaning what your interest rate is. If interest rates, say, are 1 percent, inflation is running at, say, 3 percent, well, that means you have a negative 2 percent return. We could see—that’s not normal. Normally, you should have interest rates higher than inflation, but we could very well see a scenario and a longer-term cycle where we actually do have more experience with negative real yield.  

From 1946, after the Second World War, until 1981, there was actually a negative real return in the bond market in the U.S. of anywhere 1.25 to 4.25 percent per year for 36 years. Pretty near no one on this call--unless you’re 90 years old and were actively investing in 1950, you wouldn’t have the historical perspective to have experienced that, but that actually happened for 36 years, and we do think that that is a possibility.  

We are seeing—I remember when we talked about inflation 6 or 12 months ago on our call. We were waiting to see what are the policy statements that the governments are—the Bank of Canada and the different central banks are saying around the world, and they weren’t really commenting too much about inflation at that time, and now we’re starting to see early signs in their language that leads us to believe that they’re more willing to accept a bit of an inflationary environment, certainly much more so than the last 20 years, and, therefore, we need to adapt portfolio strategies in the event that that is a bigger chance of reality happening, and we certainly are positioning for that.  

Amy Mottershead, Business Leader, The Schmidt Investment Group, CIBC Wood Gundy  

Thank you, Marvin, for adding those additional points.  

We’ve discussed the environment, the market environment with stock valuations, where we should be paying attention in the economy and inflation, but, Marvin, what are a few of the overarching strategic  

investment themes that The Schmidt Investment Group will employ when tailoring and developing a strategy?  

Marvin J. Schmidt, Principal, First Vice-President and Senior Investment Advisor, The Schmidt Group, CIBC Wood Gundy  

Sure. Some of these, we’ve touched on a little bit, but just in synopsis, I guess, maybe, to put the whole investment strategy and themes together, one is that, you know, market pullbacks for the market, the stock market, stock market pullbacks, they are normal and we shouldn’t be afraid of them, and we should be well positioned for when they come. So, we’re very cognisant that part of—on average, every year, you get approximately a 13 percent pullback in the stock market. On average, throughout history, you get that about every 12 months. Every five years, you get about a 20 percent pullback in the market. So, those are normal, one should not be afraid of that. Market pullbacks actually allow us the opportunity to take advantage of repositioning and deploying additional capital or repositioning capital in other places, whereby we don’t always have the opportunity to do that, where we don’t see it in the best interest of the clients to do that, but when there’s a pullback, we look to more actively move on that. So, that’s one thing.  

We fully expect that there could very well be a pullback here sometime over the next 6 to 12 months, it could be 10, it could be 15 percent, and we are totally fine with that. As long as we have people’s income protected without risk, and their taxable needs and so forth are all covered off, and the rest of the portfolio is well positioned for a pullback, it’s okay to happen.  

Two is we are looking at putting together, which we have—there’s been much more focus on this—to put together uncorrelated assets or investment strategies. For example, private equity, private companies versus public companies, have no correlation to each other. Kensington has no correlation to the stock market. They really operate independently of each other. That is an effective diversification, whether it be adding real estate now into the portfolio or other alternative strategies, or money managers, like a Walter Scott, this year that’s only up 1 or 2 percent, last year they did fantastic. This year, Brandes or Conway, you know, or Foyston are just hitting it out of the park. So, putting together investment strategies that really offer really effective diversification, much more of a focus on that as we go forward in this next cycle, versus the last 10 or 20 years.  

Third is we are much more thoughtful to invest in after-tax returns as we are going into a more tax-heavy environment. So, we’re looking at tax-effective investing  

versus focusing only on pre-tax returns. Much more of our discussions in our strategy groups here is looking at what are the after-tax return we can generate for clients and developing strategies and solutions to make sure you can get as much in your pocket after the government takes their chunk.  

We are more cognisant of currency management. If the currency drops below $0.70, to actively move on that. If the currency, relative to the U.S., moves, approaches $0.90 or higher, well, we are more actively moving on that. When we’re in the $0.75 to $0.85 range, you know, flip a coin, we just don’t have any good clarity. We haven’t found anyone that can consistently forecast the Canadian dollar when you’re in this kind of neutral zone, but certainly when you’re in the barbell side of it, you know, below $0.70, over $0.90, we certainly plan to be much more active in that way.  

Then, lastly, I would say we are much more aware than in the past of getting paid while we go, rather than just capital gain. Given that fixed income is just not paying anything, basically, anymore, which fixed income was generating regular income, regular interest and yields, and so forth, but given that that has, for the most part, gone away, or mostly gone away, we are really looking at how do we look at other investment solutions that can pay us while we go versus just relying on the capital gain.  

So, those would be some of the key themes as we go through this next cycle, that as a strategy group here, we discuss pretty near every week.  

Amy Mottershead, Business Leader, The Schmidt Investment Group, CIBC Wood Gundy  

Thank you, Marvin.  

Cryptocurrency continues to be a hot topic, especially recently, since Elan Musk’s tweet on social media. This is a space with many questions, minimal historical data to pull from. Marvin, what is the perspective of The Schmidt Investment Group with regards to cryptocurrency?  

Marvin J. Schmidt, Principal, First Vice-President and Senior Investment Advisor, The Schmidt Investment Group, CIBC Wood Gundy  

Sure. This is a big question and I won’t have enough time on this call here to give full justice and insight to that question, but I will try to keep it at the higher level.  

We have spent an enormous amount of time in research and in calls and discussions and meetings with analysts and crypto experts, those that are for or against it, and government officials, so we have done an enormous amount of work, and we continue to do an enormous amount of work on that.  

In my opening comments, I said we do believe cryptocurrencies are here to stay, but not in its current form, and we’re seeing this play itself out. We’ve been of this view for quite some time, several years. This is not a last three-or-four-month or six-month position that we’ve taken, even though it’s only in the last six months, I would say, that you’re really starting to see government officials, policy officials starting to actually come out publicly with their positions on this. Whether it be the Chinese government, whether it be the U.S., you know, Janet Yellen, or whether it be Trudeau here recently, governments are speaking out quite actively now, whereas a number of years ago they weren’t.  

But, our position all along has been, and continues to be, and is playing itself out now, is that the cryptocurrencies—Bitcoin being, of course, the most popular one of its kind—is that going to be the new gold standard, is that going to be the new global currency, is that going to replace the U.S. as the world reserve currency? I don’t know. It wouldn’t surprise me if one day—when I say “one day,” certainly not in the short and medium term, but in the long term, possibly, but it’s not going to be from a private asset manager or private developer who created it.  

Because, we must remember, the overarching statement here is that currency is one of the main policy levers that any government has to manage their society. If they want interest rates to go up or down, if they want more goods to be bought or sold from their country, if they want to control inflation, if they want to influence employment, if they want to influence debt levels, all these different elements, and many more, have significant influence by how the currency is managed. If you have a $0.90 currency versus a $0.68 currency, that impacts everyone. You travel more to the U.S. at $0.90 versus $0.68. Like, this is all proven fact. Currency matters.  

If you take away currency from the government policymakers and now you have a private currency that is managed and controlled, how do you think the governments are going to respond? Do you think the governments are going to roll over and just let that happen and give up their influence or control on their societies? Not a chance, not a chance.  

That is what you’re seeing now, after all these years, these central governments are stating that—China, just in the last couple weeks here, said, “We’re not against cryptocurrencies, but we will develop our own cryptocurrency.” The federal government in Canada has said the same. The U.S. government has said the same. Countries around the world are all saying the same. You’re seeing, just this last week here, countries, the G7 countries coming together to agree to a global tax system, minimum 15% tax rate for companies around the world. So, governments are starting to work much more collaboratively, and when it comes to cryptocurrencies, they all know that they have to work together in order to have any semblance of control on their own society, because if they lose their currency management and the Canadian dollar means nothing anymore, and that’s the one thing they can control, what role is government really going to have?  

So, that’s the overarching. There are many different facets to this. It’s not to say that can Bitcoin go to $60,000, like it did, or $65,000, you know, a few weeks ago. Sure, it can. Can it go to $100,000? Heck! Can it even go to a million? Sure, it can. We’re not saying that cryptocurrencies can’t go materially up. However, the end game, we do not believe is what it was priced at when it was $65,000. The end game, just like Tesla—we had a conversation with a client not that long ago and they had a business that was generating about $600,000 of profit per year, and if that business was valued like Tesla was valued on the stock market, then our client’s business would be worth about $720 million. So, I asked the client, “If I gave you $720 million for your $600,000 per year annual cash flow, would you sell?” Well, of course, in a heartbeat, right? But, who would ever pay a private company $720 million to replace a $600,000 cash flow? No one can. It doesn’t make any sense.  

The same thing with cryptocurrencies. Could it go to a million, could it go to $100,000? Sure, it could. It doesn’t mean it makes sense. Just like are you investing or are you speculating? Going to Vegas, you may roll the Lucky 7 or pull the lever and win the big jackpot, but it doesn’t mean that that’s a sensible thing to do with every bill that you have.  

We are not about speculating here, we are about investing clients’ long-term, hard-earned dollars, and making sure that they’re well best positioned no matter what environment we’re in. Therefore, just like in 1999, when all these dotcoms, there were thousands of dotcom companies around, did we believe that when the Internet was developed in 1995 that it was here to stay? Sure, we  

did. Did we think that the thousands of companies that were priced ridiculously high with no earnings, that they were all going to survive? Absolutely not. That’s just the same thing here today.  

So, cryptocurrencies, I think are going to be here to stay, but I think there’s an enormous amount of risk and volatility, that one needs to look at it more as a speculative asset, not an investment asset itself.  

Amy Mottershead, Business Leader, The Schmidt Investment Group, CIBC Wood Gundy  

Excellent. Thank you, Marvin, so much.  

Andy, another dynamic topic that was brought forward as an area of curiosity was the online question surrounding environmental, social and governance, also known ESG issues, and stranded assets. This is a newer area of conversation in the economic world. Could you please walk us through what these are and their relevance to investors?  

Andy Rempel, Senior Associate Investment Officer, The Schmidt Investment Group, CIBC Wood Gundy  

Sure. Thanks, Amy. Most of the money managers that we employ on clients’ behalf, they do have policies that incorporate ESG issues into their investment process. I will say, though, that it is taken into account; however, there’s a wide range of views on this. Every firm is going to have different criteria and place different weights on these types of issues that arise, so there’s not a consistent outcome. Of course, most managers are not going to want to invest in companies that are doing terrible things, like dumping chemical waste into rivers or using child labour, or like engaging in corruption with foreign governments. But, in terms of ESG, we do think that there is also, quite frankly, a bit of a marketing aspect to it and it has become a very prominent topic in the media, but there really isn’t the consistency as to how companies are being viewed in this regard.  

I will say that I don’t think we’re going to stop using fossil fuels for many decades. The world continues to develop and energy needs increase. Taking the stand of removing energy companies from individual portfolios, I don’t think it’s going to quicken the pace of lowering carbon emissions, since there’s really limited substitutes, considering how much energy comes from fossil fuels. In  

fact, it may increase emissions, because energy is still going to be sourced, but maybe it’s going to be sourced in a less regulated country, or maybe it’s going to come from a more inefficient fuel, such as coal.  

So, I think, as investors and managers look to work with companies to promote change, this will be a lot more effective. Ultimately, the energy is needed and we’re better off working with the companies in more regulated jurisdictions than to take the approach of not having them in the portfolios at all, which could just simply lead to the extraction occurring in, let’s say, Venezuela, or somewhere else, that might have a much more detrimental environmental impact.  

Just this morning, there was an announcement that most of the large energy companies in Canada have pledged to be net zero greenhouse emissions by 2050. So, they’re definitely aware of investors’ concerns and looking to implement strategies to mitigate it, such as carbon capture, or just becoming more efficient.  

From an investment standpoint, one question that came up was, well, what about stranded carbon assets? First of all, what are stranded carbon assets? Really, that’s just going to be capitalized fossil fuel reserves that are never going to be extracted. Something like this would likely occur due to government legislation changes and it would result in reduced consumption of oil, gas or coal, and ultimately result in fuel reserves that are never extracted from the ground. Looking at this issue, it’s a much longer-term issue, because any regulatory change is going to be incremental and it’s going to evolve over decades.  

Looking at it from purely an investment standpoint, managers will assess regulatory change no different than regulatory issues in other industries, you know, CRTC policy on media and telecom companies or regulation of the banking sector. Whenever they’re looking to invest in a company, we have to ensure that there’s sufficient upside even if regulators do require higher carbon taxes or cleaner energy sources, and so this will be built into the investment process and into the decision as to whether a particular company is attractive, considering the stranded assets and increased regulatory costs.  

We do believe that it’s important to properly evaluate and price risk in the analysis of companies, which would include these factors, and it’s going to continue to be many years from now.  

Amy Mottershead, Business Leader, The Schmidt Investment Group, CIBC Wood Gundy  

Thank you, Andy. Is there any final comment you’d like to add, Marvin?  

Marvin J. Schmidt, Principal, First Vice-President and Senior Investment Advisor, The Schmidt Investment Group, CIBC Wood Gundy  

Yes, just, I guess, very briefly here, I know these are all big, big topics, so hopefully just be able to provide a bit of a highlight and kind of the end strategy or review on it, but I guess I would say it’s important to always remember—often, headlines will encourage you or want you to take an all-or-none approach. Like the stock market’s overvalued, should we get out of the stock market right now? Or real estate’s really hot, so should we get into real estate or get out of real estate? Or bonds are no good, so, therefore, should we have nothing in fixed income, you know, regardless of the situation?  

History has proven, and with the collective 200-plus years of experience here on our Advisory Team, has shown that an all-or-none approach never is the best approach. It really is more to move on the margins. Because, we just never know exactly. We are researching and studying all of the time. But, the way you win at this is by making adjustments on the margins and not big-or-none-type bets at all.  

I would say, from an expectation management standpoint, I believe that the biggest returns for 2021 are behind us and not ahead of us for this year. That being said, again, it doesn’t mean that, okay, well, we’re up 10 percent, or whatever the case is, should we just sell everything, or sell a bunch of stuff and go to cash, because we got our return for this year? That approach has never been, actually, a successful strategy. It triggers an enormous amount of tax. There are embedded costs that go with that. Then, you’ve got to get it right perfectly twice, when exactly when to get out and when exactly to get in, and that’s just really very, very difficult to achieve.  

We encourage anyone—we love to speak with our clients and if you have any questions or want to delve into any of these, or any other topics, more so, we are only more than happy to do that, so certainly drop us an email, give us a call. We look forward to, hopefully, seeing all of you again in person in the not too distant future, but certainly  

appreciate the flexibility for everyone to have had telephone or video calls over the last 15 months here.  

Overall, I just want to end by saying thank you. We’ve worked with many of you for 30 years now and just really, really appreciate the trust that you’ve put in my whole team here, and myself, and we certainly do not take that lightly, and we continue to try to serve you in the best way possible. So, thank you for all of your trust that you’ve placed with us. Thank you.  

Amy Mottershead, Business Leader, The Schmidt Investment Group, CIBC Wood Gundy  

Thank you, Marvin, thank you, Andy, and to all our listeners, have a wonderful day.  

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