AGF Management Limited (AGFB) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to another market update webcast. Joining me, as always, is Kevin McCreadie, AGF's CEO and Chief Investment Officer. Greg Valliere is here with us again today, he's AGF's Chief U.S. policy strategist. Before we get into our conversation, I need to cover off a few administrative items, as always and it's related to our virtual event platform. Today's presentation will last no longer than 60 minutes. [Operator Instructions]

Kevin, Greg, thanks for being here. So I've got 3 areas of focus that I want to do today. So I'm going to give you a choice where you want to start. So 1, 2 or 3, Greg, I'll -- you pick a number, and then we'll go from there. So which one would you like to do? 1, 2 or 3, Greg?

Let's do 1.

Okay. So 1 is the debt ceiling. I think you picked wisely, Greg, because I have a feeling you're the expert on this. So a lot of talk, and you've been writing a lot about the debt ceiling and even your latest couple of notes are talking about kicking the can down the road on this fact. Wondering where we are first, Greg. So maybe you can just sum it up for us from your perspective, where are we at in terms of the U.S. debt ceiling?

Great. Great to be with you, and thanks for having me on today's call. I would say that there's too much hype. I think there's a lot of hype right now that we could get a deal and we can wrap this whole thing up in the next few days. No, that's not going to happen. There are still so many unresolved issues. Are we really going to punish people who don't get jobs? Are we really going to have a cap on all federal spending? There are several major provisions in this bill that will encounter really adamant opposition from the opposing party, mostly from Democrats. So I don't think we're there yet. I think the big picture is we'll probably get a deal. I think it's probably going to require an extension. We may have to go into overtime before we actually get a deal and get all of these things ironed out. So I don't think we're going to have a default, but I think we're probably a few weeks away from getting a final deal.

Kevin, I'll get you to jump in now, Kevin.

Yes, I want to follow on that with Greg, because it's -- obviously, this is -- the markets have taken this for years now as sort of 'the boy who cried wolf', right? We always have this drama and we get to the 24th hour, and we settle it. You and I talked earlier on a different call this morning about the fact that it may be different this time because of the narrowness of the both the majorities in the senate and the house, how does that play into somebody trying to make a name for themselves and making this a bit different this time?

There's lots of potential, Kevin, for mischief here. I think that some members of the house who can't be controlled by Kevin McCarthy, some members are saying, we want more cuts. We don't want to have this watered down chunk of cuts. We want something more aggressive. People like Marjorie Taylor Greene. I'd say there's probably 25, maybe even 30 members of the house who are aggressive and they want even more spending cuts that would encounter fierce resistance from the Democrats. So there is the potential this thing could drag on for quite some time. The one thing I feel pretty sure about is that they're not going to get a deal in the next few days. There are still too many issues to be resolved.

Yes, and I wanted to say -- why I say that, Greg, is because the market is just not pricing it in. When you look at CDS, which is a way to ensure of a default on the treasury market, would imply something like a 6% or 7% probability of something happening here. But yet the players are very different and more radical this time around. To some degree, with the narrow majority in the house, you almost have McCarthy saying to Biden, I can't do anything about it because I can't get these people to go along, right? So this has -- this one could stretch into not just the 24th hour, but into this technical place where something has to happen to avoid it, right? This one feels different than the last couple.

Absolutely. This one could drag on -- I'd just add, this could drag on well through the summer before it's resolved. I can't rule it out. But will there be a default? I don't think so. I just think it's going to take a lot longer.

What's currently at debate, Greg, in terms of the spending? What are some of the things that are on the table here that need to be negotiated still?

Well, the Republicans are saying, and you have to say they make a good point, that we cannot have a deficit as huge as the one we have right now. Right now, our deficit is $31.4 trillion. All projections that I've seen show that in the next decade, we're going to add $1 trillion at least per year to the size of the deficit. I think a lot of Republicans, a lot of conservatives are saying, this is not sustainable. So that's the big overall issue. We're spending too much money. But beyond that, there's all of the particulars on just what kind of spending cuts do you want to make? Do you want to make spending cuts on social outlays? Do you want to have cuts on a wide range of programs that the Democrats are going to have to make concessions on? I don't think the Democrats are ready yet for these concessions.

Kevin, I'm just curious to know, you've talked about -- the markets may not be appreciating this just yet. From your perspective, what would satisfy the market in the end, and what wouldn't -- except for a default, like what needs to happen for the market to either take notice of this or it becomes a non-story.

Yes. So we've talked about the [ X-state ]. The [ X-state ] is a state that is out there that -- where the government essentially has to run out of money, or runs out of money. Then the question becomes then, how do you prioritize when that happens? Prioritization will be the next thing in the conversation, which is do you actually pay the bills coming due and all of a sudden ration off -- do you not pay someone's social security on time? That will become the next thing that people start to focus on as we move toward that June 1 date. June 15 becomes an important date as well. This is when corporate tax receipts come in. So there's this idea that if we can grind our way to June 15, the coffers get refilled. The bad news on that is if tax receipts are weak, this gets accelerated, too. So there's a couple of dates there. The market will look for a deal. It won't care about what deal. At the end of the day, they do need to see -- I think we'd all agree, fiscal restraint is not just going to be a U.S. conversation. It's going to be a conversation around the world, and after this post-COVID fiscal stimulus that was required to basically float these economies. I'd say, Greg, I would put this back to you. I think there is -- it feels like there is agreement that there's excess COVID funds that are sitting out there. Given the high inflation, that one does not seem to be the fight here. That, that should be returned, if you will, in this.

I think there's a growing consensus that, that money should be clawed back, and there were other issues as well that I think have to be addressed. For example, I think there's a need to do something on spending that has to be addressed as well. So I mean, there are many issues that will be part of a deal that could take weeks before we actually get it done.

Greg on that -- Kevin mentioned that there's an agreement on that...go ahead.

I guess that -- I'll point out to one other thing. Where you are seeing stress, and again, I think the market wants a deal. It's not going to care about some of the specifics here. It never does. It wants to avoid the default. The specifics will matter later in terms of what we live with. But I would tell you that if you look at the 4-week treasury bill this morning, it's telling you that no one wants to be near this problem. It's at 5.5% for 4 weeks out. You got to remember, short rates, overnight rates are at 5%. As you get past that 4-week window, they start to drop, which tells you the market may not be pricing it in default, but saying, I don't want to be around this problem at that date.

There's one other issue that could discombobulate everybody for the next few weeks. That involves whether people should wind up paying for this extra spending. Shouldn't we tighten up on some of this? I think the answer is yes. I think that -- my own personal feeling is that we go well into the summer before this is resolved.

Then maybe last question on this focus, for you, Kevin. Just curious, if we do -- worst-case scenario, we do get a default. What happens to equity markets, bond markets? How do you kind of prepare for that or -- as a manager, a portfolio manager?

Yes, so one of the things I think we all have to just get in the back of our heads. If it's a default, we don't pay -- make a debt payment, that will cause enough of a market reaction that will probably get this to be done and dealt with, and that default will be cured in the future, okay? But the technical view of it will not be good for the market. See, equity markets would be severely negative. Perversely, people would buy longer-dated treasuries, which aren't coming due in the near term, in defensiveness. So you'd actually be buying an instrument that defaulted, or some version of it that defaulted, because of the safety fear. It will be a short-term reaction, but it may be a reaction function that will be necessary to get these guys to finally to agree to something. It won't be good for markets.

No, and one last point for me is social security. If there's a catalyst that could get Congress off the dime, it's social security. I think that the threat that retirees won't get their full benefits, maybe within a month or so is going to be a powerful motivator for Congress to finally do something.

Especially in front of an election next year.

Yes. Yes.

Okay. Let's move onto Part 2. [Operator Instructions] So let's talk about monetary policy. Obviously, an ongoing huge storyline for the markets. So let's just reset and recalibrate and I'll ask Kevin first in terms of U.S. monetary policy, what can investors expect over the next couple of months from the Fed?

Yes. I mean I think we're overly focused on, 'is the Fed down one more?' et cetera. I mean, the damage is really not one more rate hike. The damage was done from going from 0 a year ago -- and in a place where even a few months before -- a year ago, you were saying you saw maybe raising rates twice in 2024, to raising rates essentially almost 5% in the case of the U.S., 4% and change in Canada, in basically a year. So whether it's another one hike, I think that, that may be the wrong focus. The data is coming in hotter everywhere. Inflation is -- we've anniversaried off some of the big numbers. As we've talked on these calls in the past, we would be in the spring with 4% handles on core inflation in Canada and the U.S., which you're seeing. We've always also said going from 8% to 4% was going to be the easy part as we rolled off those high numbers from last year. A lot of those influenced on the headline by higher energy prices in grain and wheat after the Ukraine invasion. But now we're in the 4%, and 4% going to where central banks want to go, to 2% is going to be harder. I think you have to balance that with -- we know there is a massive lag effect when you raise rates this quickly. Think of it as if -- and then we've talked about this. You have a headache, you take a bunch of Advil. It doesn't go away right away. You keep taking more Advil, you still have a headache until it kicks in. Or if you ever get into an old shower and you turn it on and it's cold, it takes a while. You keep turning it up, turning it up, turning it up, and finally, all of a sudden, it's scalding you. So there is a lag effect on higher rates, and I think central bankers know this. But they're also looking at the data. You look at Canada yesterday. CPIs came in a little bit uncomfortably high in many of the places, not just services where we've talked about the reopening effect. It's been goods, too. In many places like the U.S. and Canada, it's also the housing-related pieces of it. So shelter and mortgage rates. In the U.S., similar story, inflation is probably stickier and higher. It's the wage side that central banks are looking at and saying, that's where it gets embedded. If employers have to pay up for people, they have to put higher prices on their goods, that feeds its way into the economy because employers then demand more. So I think it's not -- and you can extend this into Europe as well. Bank of England, European Central Bank, all facing essentially the same thing - this normalization effect to try to control some of these hot data. Then the last point, it's not just inflation. You look at retail sales in the U.S. yesterday. Much stronger than where people thought. Now there's some lag effects there, too. We're seeing some of the retailers report this morning, like Target and Home Depot yesterday, which are starting to show some softness. So there could be some, again, last spend on. But it's not -- it clearly feels like it's not goods, it's more services and necessities.

Then, Greg, just curious to know your impression of Fed policy and where it might be headed?

Well, I would agree that we're about done. The one thing that worries me the most is the real estate market. I think that in many cities now in the U.S., there's a real serious problem with the markets looking pretty fragile, all of a sudden. So I would think that we are pretty much done. Although I would just note that the latest number on the Atlanta Fed shows that the economy could grow at 2.5%. Right now, the Atlanta Fed number is 2.6%. When you look at that, when you look at the unemployment rate at 3.4%, you have to say that if there is a slowdown, it's maybe fairly mild.

Yes. Let me touch on the real estate comment, David, if I might. If you are central bankers right now, then you are worried about this. I'm going to bring into that fact also the little bit of a banking hiccup that we've had here and relate it. But there are going to be different cases. When Greg and I talk about it, and now at real estate, let's really look at it in the commercial space in the U.S. where it's really about offices. The U.S. has probably 4,400 banks. The big banks actually don't have big real estate exposure anymore. After Dodd-Frank and Volcker, the biggest banks actually package that stuff up. If they lend it and put it in a bond, they keep a little bit of it. Where it sits is in Middle America, in the Bank of X, Community Bank, which lends money to a dentist who buys his office building. Then you have the secular phenomenon called work from home. We've seen in Greg's own city, a big package of office buildings, very good office buildings, $160 million worth of them that were bought in 2018 that had an occupancy rate of 82%. So 82% of the building was leased. Today, that's dropped to 50%. So the people who bought that, not only have they lost all that revenue, 30% of it, right? Their ability to finance it has gone up dramatically. So they'll lose both ways. Typically, when you have this type of a move up in rates, the landlord could charge you more in rent and they can offset some of that higher financing cost. If the number of tenants is actually dropping because of the secular phenomenon, there's going to be a lot of people mailing keys back in. It's not going to be at the biggest banks. It's not going to be at the big Canadian banks in terms of commercial. It's going to be, in the case of the U.S., more in these communities, smaller banks where that is 40% of what they do is lending into people. Don't confuse it also with -- but when we say commercial real estate, there are other pieces of it that may hold up better industrial. Warehouses, logistics, things of that nature. This is really about -- I think Greg and I are talking about real, core office space in many of these U.S. major cities. I'd say, bring real estate back into the Canadian version of it, it's going to be more on the consumer here, where unlike in the U.S., Greg can borrow for 30 years, stay in his house for 30 years. If he doesn't like where rates are going -- and most people have a mortgage that has either a mid-3s or less interest rate. But you can stay for 30 years, you don't have to move. We learned that lesson after '08. So most mortgages are fixed right now. We don't have the subprime problems and other things. It's not housing. So in the case of the U.S., the market is just stuck. People aren't moving, and you're seeing that in the data. In the case of Canada, where the mortgages amortize like 25 years, but you've got to refine 3 or 5 years. There are people who bought houses 2 years ago that are having to come back to the bank at much higher rates and probably don't have [ depreciation ] in there. So there's going to be some stress in the housing system that's not office only, it may be in the residential side, which we won't see in the U.S. So we bring it back to the bank situation. Many of the banks -- the bank problem is probably behind us, we've talked about that. But banks are the ultimate confidence instrument, right? If you don't believe in your bank, you take your money out. Unlike 2008, where we took depositors money and made bad loans, this is just depositors took their money back, and we lent that money out. For now, they're not bad loans yet. But people took their money out, somebody has to finance that loan that's been already made. People took their money out to buy higher instruments. So in the U.S., you can go buy a money market fund for 5.5% rather than keep your money in the bank at 0.5%. So I think that, that will exacerbate some of the banking issues. But I think for now, it seems like we put the lid on that. This commercial real estate thing will be the next thing in the U.S. banking system.

The one part of the story that I -- that mystifies me, quite frankly, is this belief that the Fed is going to be cutting rates in the next few months. That by the end of the year, we'll be seeing the Fed funds rate go down. To me, that's a real stretch. Kevin and I have talked about this on our morning calls extensively with a lot of AGF people. I think our consensus is that it's very unrealistic to expect all of a sudden to see the Fed beginning to cut rates.

But -- I fully agree with you, Greg, and I think what happens here, the pause is really a reflection of keeping your eye over your shoulder and looking at these 2 problems we just described and saying, we can't raise them a lot more here. We're probably not ready to cut, but we have to keep an eye on these problems. I think you also have a de facto tightening. If a bank in the U.S. is worried about its deposits going out the door -- or even a Canadian bank. You are not making a lot of new loans if you can't finance the ones you have. So credit dries up or it gets repriced. So someone who wanted an auto loan a month ago, and I'm making up a number, that could have gotten 9% from the bank. The bank says, I'm still in business, but you want that loan, it's going to cost you 13% or 14%. So in fact, the banking system when it starts to do this, it tightens very fast. It does the Fed's work. It further tightens and brings the economy slower because we need credit to grow the economy. Credit is sort of the oxygen of an economy, right? So I think you have to look at these and say, these problems, while they're not causing the Fed to cut, will certainly keep them on hold despite some of the hotter data.

On that front, I was hoping to ask you this question. Because of this disconnect, the market seems -- some people in the market want cuts and think that there should be cuts, and it sounds like the Fed might raise one more time and then pause for a bit. Is your sense that the Fed has got this right, that they're acting the way they should, this prudent approach? Because there's a lot of critics out there that's suggesting that they're not -- that Powell's not going down the right road with this. Any thoughts on that?

I mean I guess I'll start and I'll hand it to Greg, and he can take a view maybe of the Washington view of the Fed here. Obviously, they are going to be under a lot of heat. They were late to the game. But in defense of the Fed, we were going through something we've never been through before, right? We basically forced a recession. We put an economy into a coma, kept everyone alive by giving everyone a paycheck. Whether we close their business or not, we provided stimulus around the world. Then at the same time, with nothing to do, we couldn't go out, people bought goods and services like we've never done before online, and that created bottlenecks and supply chain issues, right? So these are things we can model, but really, we were in the unknown. I think the things that were done immediately after COVID were the right things to provide cash into the system. But I think that the criticisms you have of it is, and I think Greg would acknowledge -- I guess it would be the fall of '21, we all looked at it and said things are really running too hot and the Fed was still on that we're not even talking about talking about raising rates. I think that's where it felt to us that they were late. But I think given the unknown, when you get to that point, I think that they did what was needed to keep these economies -- and all central bankers did. I think that they got caught a little bit off guard and had to get more aggressive. I think that's -- that if I had one criticism, it would be there, maybe a little late on that.

I'd say that hindsight is always 20-20 (sic) [ 50-50 ]. I think the Fed overdid it. You always have to worry about the medicine killing the patient. But I think they're more on point now. So after a very rocky stretch, I think the Fed does have it right. I think they realize that they can't overdo it anymore.

Just a couple more quick questions on monetary policy. Kevin, I just want to branch out from the U.S. a little bit. In Canada, inflation ticked up a little bit last month. Now there's a debate about whether the Bank of Canada needs to -- they've been on pause, do they need to raise rates? Any thoughts on that first?

Yes. I think Bank of Canada meets first week of June. They're going to be the next one up here. The data is coming in hotter. They had forecasted inflation down to the 3s by the middle of the summer, early fall. With yesterday's data at core at 4.2%, that's still too hot. We know you're going to roll off some really hot numbers from last year, which should bring that down. But I'd say they're probably taking it back by the strength. Very similar to the U.S., wage growth year-over-year has stuck in the 5% range. Just like the Fed, employment costs at 5% are probably too high. That they need to see cool off. Again, we're still sitting at historically low levels of unemployment here in Canada. So I think they have to be careful because every time they raise rates, it has a direct impact on some of the impact of the housing sector of mortgages. I think we've talked about this on this call. In Canada, there's a particular mortgage product that has gotten the attention of central bankers. It's a variable rate fixed payment. So I'll make up a number. Greg's mortgage is $2,000 when he put this on. $1,500 of that goes to his principal, $500 goes against his interest. Every time you raise rates, you're paying less principal off, to the point now 40% of those are actually paying no principal off. They're just tacking on interest into the future. So every time they raise rates, they're very cognizant of some of this that's out there. Very different than the U.S., which is not concerned about that at this point. So I do think that they probably -- the probability of them hiking in June is less than 30%, it's actually roughly 30% right now. So I'd say even with that hot inflation print, the market here is willing to give them the benefit of the doubt that they can't get that aggressive in Canada.

Then last question...go ahead, Greg.

Just a real quick point. I think a real complicating factor continues to be this acute labor shortage, which has not been resolved. I think that the answer -- as I've been saying on these calls for a long, long time, the answer is immigration reform. We need more workers. I highly recommend an article in this morning's Wall Street Journal. It's talking about the labor shortage. It's still a big factor. I think it's a major reason why we're not going to get back to 2% inflation anytime soon.

Okay. Kevin, just one last question in terms of broader monetary policy. Is there any policy elsewhere outside of U.S. and Canada that's intriguing or surprising or it's a bit of an outlier for you in terms of what's going on? Bank of Japan, ECB, anything like that?

Yes, I'd say they're true. Bank of Japan being one, which is still stuck on stimulating the economy and in a little bit of a denial about the fact that inflation there, too, has finally picked up. In all places, it's now been 'be careful what you wish for' after 15 years of fighting deflation. Bank of Canada, which has been defending and trying to keep pegging it's 10-year bond rate, is probably going to have to slowly walk that back. I think the markets are recognizing that, very different than the rest of the world. I'd say the European Central Bank, we talked about the pain of going from near 0 to 5%. You got to remember, in the Eurozone, you were looking at negative interest rates when you started this, and they're not done yet. I think where the Bank of Canada as the first to start, probably the first to stop of the big -- the G7, the U.S. probably the second. I can say, the ECB still has got work to do, and the Bank of England has work to do. You're also dealing with, in the case of the Bank of England, pretty widespread labor unrest, which is, again, the demands for wage increases in some sectors of the economy at north of 10% aren't going to help cool inflation. They're looking at headline numbers because of the war last year, still that are in well higher, 200 basis points higher than where the U.S. is. So I'd say, while bank accounts in the U.S. are probably more in the wait and see and pause, Bank of England and ECB probably got more work to do, and the Japanese are probably about to give up this peg. So yes, I think the world is a little bit -- not exactly synchronized right now on this.

Great, thank you for that. So that -- let's move on to Part 3, and we'll take 5 minutes or so, and then we'll get to some questions from those listening in today. I want to talk about geopolitics. Maybe we'll start with the Ukraine war. Greg, your thoughts on what's going on, on that front these days and maybe the impact that might have to the markets?

Well, I continue to think this is an extraordinary story, a remarkable story of how brave the Ukrainian troops have been. You sense that the Russian troops are in disarray, that they are fleeing many parts. It looks like [indiscernible]. This horrible battle for months and months is starting to turn in the favor of the Ukrainians. I think that the amount of arms given by the U.K. and Germany and lots of countries has been remarkable as well. So I think that the war is not going to end tomorrow, but I am increasingly optimistic that the great fear that we all had that people would lose their enthusiasm has not occurred. The enthusiasm in the West is still quite remarkable. I think the bottom line here is that the Russians are -- again, are fleeing. I think at some point, the Russians are going to have to sue for peace. It could be many, many months away, but I think that there's absolutely no chance the Russians can win this war.

Yes, I think this is a critical juncture. Again, markets aren't paying much attention to it, David. We've got many other issues that we're dealing with right now on the geopolitical front -- or I should say in the central bank side of things, not the geopolitical front. What I'm concerned about would be the following, which is that we lose -- if, in fact, we're in a fiscal tightening and every economy in the world after financing COVID is running deficits beyond where they want. The wherewithal to keep financing is, you even see it now in the U.S., certain members of the house, which are controlled by the Republicans just saying, why do we want to keep spending on Ukraine? So the ability to keep financing this becomes questionable if they don't make massive gains here. If they get stuck in the spring offensive, you're going to hear many of these Republicans say, wait a minute, why are we keep funding this? Then you have a U.S. election. I think it was chilling, anybody who -- if anybody wants 15 minutes of theater, it doesn't actually matter which 15 minutes you watch of it, but the CNN interview with Donald Trump last week was wild, to use a word. But there was a question asked, how would the Ukraine and Russia situation end? He basically said, if he was president, it would be done in a day. So if you are the Ukrainians, you got to make a lot of progress here because while the West is behind you right now, it's how much funding is coming a year from now if you're still bogged down.

Okay. Beyond the Ukraine war, is there anything else on the geopolitical front that has caught your attention? In a long time on this call, we haven't talked about trade so much. I'm wondering if there's something on that front or if there's another event risk out there that maybe investors need to keep an eye out for?

I would just say there's been a surprising rapprochement if possible between the U.S. and China. In the last several days, there have been extensive talks by U.S. officials. I don't think we're going to have a thaw right away. But I get the feeling that both countries came to the edge and now are showing some conciliation. The story that worries me the most other than Ukraine is the Iranians. I think the Iranians continue to be a huge irritant in much of the world. Capturing ships in the Persian Gulf, killing their young people, getting closer to having a crude nuclear bomb. So I think as the year continues, I think that Iran is going to be a very troublesome story.

I guess for me, I'd say the ones that continue, and while they wax and wane off the front page, U.S.-China relations are clearly key. Greg and I would probably share the view that Taiwan is off the table for a while for the Chinese, but there's a lot of -- if, in fact, Russia gets desperate and the Chinese supply Russia with what are mortal weapons, Europeans have an issue with this. So I'd say keep an eye on China-U.S. trade. It seems U.S. relations has thawed a little bit here, but great interdependencies here. As much as we talked about reshoring and bringing things back, a lot of drugs, a lot of semiconductor, a lot of things are still made in China that would -- if economic weapons are used could be tough. I'd say the second one for me, nearer to home is U.S. and Canada and Mexico. The border issues in Mexico, or the southern border issues are real. But trade between those 3 countries -- the USMCA, the new NAFTA, when it originally was put in place, had only a 6-year term, which is incredibly short for a trade deal. That is up in 3 years. So if you're a company thinking about the rules and will they exist under a new administration, and you have 2 elections coming, Mexico and the U.S. in that time frame. You don't know who the leaders are going to be, I think trade gets a little bit -- will start to become an issue as you move toward that date and with that election. I'd say, third, lower probability, but something we all should pay attention to. These rapid advances in AI. While there was a political theater, I think yesterday, Greg, you'd probably agree that not much was there, but in the U.S. hearings on this. It's probably something to watch. The advances in this, we should think of something like Moore's Law, where chip speeds doubled every 18 months. The doubling of these things like ChatGTP (sic) [ ChatGPT ] and others are happening in about 6 months. So you're hearing governments start to wake up to this. It's not going to be the players in the G7. It's going to be the rogue actors, which are available to these same tools. So think of the Iranians, think North Koreans, et cetera, where this becomes something that's a longer-term problem but something on the geopolitical front that is, again, a low probability, but something that could become a problem.

Fantastic stuff, Greg and Kevin. Let's get to some questions from those listening in today. So let's go back to the debt ceiling. There's a question about the 14th amendment. I think the Democrats are asking Biden to invoke that amendment. For those who don't know what that amendment is, I'll just read it to you. So the amendment states "The validity of the public debt of the United States authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebillion shall not be questioned." That's a lot to digest. But Greg, maybe you can weigh in on this, whether that should be invoked and what that would mean for this process.

I think this has gone from being an extreme long shot a few months ago to being a possibility today. Is it a gimmick? Well, [indiscernible] would say it's a gimmick. It certainly isn't ideal. But if the alternative is to default, that becomes a serious option. It would probably wind up in litigation. There will be people who will push back against it. But I do think that using, citing the 14th amendment has a chance. Maybe we're up to 40% or so. Again, if we're looking at default, then this becomes a real option.

Anything on that, Kevin? Or are you good?

I think it will be a lot of things, if we're being honest. I think this has a greater chance than the $1 trillion coin, frankly. But this will invoke the Supreme Court. I mean, this is not going to be an easy fix either. This will be immediately filed and this will move its way up to the highest court very quickly. So it's not going to be an immediate solve. It won't give the markets a lot of comfort.

Okay. Back to monetary policy. We talked a lot about rates probably not being cut in the U.S. and Canada anytime soon. But the question is, when do you think we will get to a cut?

Yes. So again, I think the big fight in the market is this one you're talking about right now. The market is struggling with this disconnect between what the Fed is telling you, which is we're not -- we may not be done, but we're looking at it and the market is saying you should be cutting now or 3x in the case of U.S. before year-end. To Greg's point, Atlanta GDP with a 2-plus handle on it, unemployment at these levels, inflation is still running, it's hard to see this cut idea. It would take something pretty dramatic into the financial system, a really dramatic worsening of this banking situation, which we don't see right now to see that happen. So I think that disconnect has to be resolved. You may see a scenario where if you're worried about, again, too much demand for things, the Fed may continue to be on pause while the economy rolls into a recession. So the market is saying you got to get going now and the Fed is pushing back, and we'll see. You have to resolve this disconnect though for the equity market to really break out here. We've been in a very narrow range. Market's incredibly concentrated. The uncertainty in the market has manifested itself with people owning just a few names, Google, Microsoft, Apple, things that you know this is a quality growth trade. When you worry about the future, you crowd into these things like -- crowding like we've never seen. So it tells you people are playing the disconnect by saying, I'm going to play it safe here, but I don't believe. So I still think that you're probably looking at a recession in the U.S. given the lag effects here that show up later in the year to the first quarter of next year, which basically aligns with where the Fed is, which says we're not cutting rates until 2024. The Bank of Canada may be different. I think originally, you were probably looking at a cut here by the early fall. If the data continues here, you probably push that to the end of the year. But this too will be about does the, in this case, not banking, but does the housing problem start to manifest itself here in Canada? Which for now it's been resilient, but I'd say that would be the one to watch. So I'd say U.S., 2024; Canada, late '23 at the earliest in terms of cutting rates. ECB and Bank of England, as I said, ways to go before they can actually think about cutting until you really can control some much higher inflation.

Okay. Greg, a question for you. We talked about geopolitics and some of the areas that you guys are focused on. Question here though is about North Korea. Any thoughts on North Korea and whether there would be some implications for markets, Greg?

I don't see any imminent crisis right now. I think it's going to be a status quo. Obviously, North Korea engages in very harsh rhetoric, but I think things will stay basically stable.

Okay. Let's do...

Can I ask a question -- it's not geopolitical, but we haven't talked about -- this is, might be the first call we haven't talked about it. The presidential election, Donald J. Trump, and all these lawsuits. Give us your latest thinking on this in terms of candidates and nominees?

It's really an extraordinary story, maddening story in some respects. Here, you've got -- Donald Trump had a disastrous town hall meeting a couple of weeks ago in which he said outrageous things. Like January 6 was a beautiful day. People went to Washington with pure hearts, with big hearts on January 6. Lots of other things he said that horrified most Republicans in Washington. I'd say still, most of the Republicans like Mitch McConnell feel that Trump is an albatross, that he could lead to deep, deep losses for the Republicans in the next election, losing house and senate seats and the White House. So it's a very schizophrenic story. On the one hand, Republicans at the base level love the guy. But I think Republicans around the country are increasingly nervous about him. Then you see Biden, who has a majority of Democrats saying they don't want him. A majority of Democrats want another nominee, not Joe Biden, who is 80 years old. He clearly will be the nominee, assuming his health is good. Way too early to make a final call. But I would say that the American voters increasingly want somebody else. So I've been saying to people, my choice for 2024 is none of the above.

So can I ask a follow-up on that, David, if I've got it one more minute. If there's ever going to be a third party or someone to come down the middle, is it now? Who in your mind would that be?

There's a group called No Labels that would like to have a centrist, not an extreme partisan. It's possible. You need a ton of money, there's a lot of obstacles to run as a third-party candidate, but it's not totally out of the question. I think a centrist has a chance. There are some people like Glenn Youngkin, the Governor of Virginia. It looks like you'll see some other candidates jumping in. Joe Manchin may jump in. I don't see Robert F. Kennedy Jr., the son of Bobby Kennedy being a big factor, but he's over 20% in a lot of polls. So it's a very, very volatile situation. I think that the bottom line is that most Americans want somebody younger. Trump is going to turn 78 in a few weeks. Joe Biden is 80. The public wants some fresh blood.

So David, one more on this because we don't -- we did not get...

Fair enough.

So the public has clearly said that they -- Joe Biden is too old and worried about his competency. Shockingly lower numbers, even lower than Trump's numbers, right? Is there a place in time where somewhere between Labor Day and Thanksgiving where he just says, I've gotten enough done. Maybe I really don't want to do this again, and he opens us up to Joe Manchin, Kamala Harris, others -- that he's biding his time now to not be seen as a lame duck and just kind of runs the table a little bit longer before flipping over on this?

You can't rule it out. I mean, American politics has been so crazy over the last few years, you could see that happening. I just think for Biden, deep down in I'm told that he feels there's no logical successor. Kamala Harris has not been a great success. There are a few other Democrats who I think would jump in immediately if Biden didn't. But I think Biden, I think he runs. I think that his big problems are going to be the issues. The economy, immigration, crime. There's a long list of things that work against Biden and actually, in some respects, make Trump a real possibility to win another term. Believe it or not.

Okay. Let's do 2 more questions, guys. Kevin -- no, I'll save that one. Here's another political question. It's about DeSantis. Would he change things in the U.S. fiscally, if elected. Greg?

Yes. I think he'd be a fiscal hawk. I mean Donald Trump spend money like a drunken sailor. Donald Trump was not exactly frugal. I think that DeSantis does have a chance, he's raised a lot of money. An awful lot of Republicans who are sick of Trump are looking at DeSantis. But DeSantis hasn't really warmed up to people. People don't view him as somebody who's got a lot of charisma and that could be a problem as well. I think -- just bottom line, I think there's somebody else out there that we haven't thought of who's going to -- we've a long way to go, 1.5 years. I think somebody else makes a serious run. Maybe it's Joe Manchin, but I still say Glenn Youngkin, the Governor of Virginia is a player. He's worth $0.5 billion. He's got some charisma, he's moderate enough. The party needs a couple of more fresh faces.

Okay. Kevin, last question for you, and then I'll get some final thoughts from both of you. So this is a philosophical question, but what was the most unexpected for you in the last 12 months as far as markets go that still makes you wonder? So something about the last 12 months that you're kind of "hmm"?

Yes. I mean there's a lot. I mean, the last 12 months, we went from, again, as I said, that fall prior to the maybe 2 rate hikes in 2024 to this rapid cycle we were throwing on hundreds. If we had sat here in the spring of last year and said we would do a 50 basis point hike the market would have panicked. The volatility and the negative market returns we saw last year clearly, I think, reflective. But come the fall, we have been grinding higher on the back of what is yet to be seen in terms of probably the greatest predicted-and-not-shown-itself recession everywhere. We've been forecasting this for quite some time, and the market has striked it off. So that's been one. I'd say the second one is, in the days where some of these very large banks were failing, and they were failing because liquidity was going out of the system. Yet the market was up. A testament to the fact that the system has become more sound and solvent after 2008. But we seem to be shrugging a lot of risks that are still out there. I think that, that's something where I would say we're not through the volatility yet. There are plenty of potholes out here that could derail this thing. We haven't seen it yet because unemployment is low. But keep an eye on weekly claims and other things. There's a lag effect, as I said, maybe the hot water is finally showing up in the shower. So it takes a while, and so I'd say the summer will tell us a lot about this, but the market has been overly sanguine for some of the things we have had behind us here. So I'd say market for me being too blase about some of the risks that are in front of us.

Okay. Thanks again, guys. We'll get just some quick final thoughts, maybe 30 seconds each. Greg, I'll start with you and then I'll go to you, Kevin.

Well, I think we will get the debt ceiling resolved. I am not convinced we will get it resolved in the next couple of weeks. It could drag on into the summer. We'll get extensions. I don't see a default. Maybe the odds are 60-40 that we won't -- maybe it's even 70-30 that we won't see default. It's not out of the question, but I do think there will be an agreement. It's still going to be a rocky with both houses so narrowly divided. And as Kevin mentioned, there's the potential for 1 or 2 members of Congress who could really throw a monkey wrench into everything. But I'll stick to the scenario we get this resolved. I'm just not willing to say it's imminent.

All right, great. Thanks Greg, and then, Kevin.

I think we're range-bound. We can't break out here. There's still a lot of stuff. The market will move when we are in a recession. To the extent that this credit or the drying up of credit because the banking crisis in the U.S. has helped pull that forward. That will hopefully give the market. Summarily, remember, if company's profits are going down -- and we haven't talked earnings today. Earnings were okay in terms of expectations, but they're negative now 2 quarters in a row. Companies will start laying people off. So again, the markets will start to price in the next thing. So that's why this idea of a rate cut and starting to resolve where the Fed is and where the market is, is going to become important to where the market moves from here. Until you get that resolution, I think you're going to be in this range-bound, but incredibly choppy as we've been through for most of the year -- that stays with us throughout the summer. Some of the pot holes, and Greg and I have talked about the debts, probably the nearest term one that I think could create some headline risk with the market.

All right. That brings our discussion to a close. Thanks, as always, to everyone tuning in today. On behalf of Kevin and Greg, we appreciate your time and support and look forward to sharing our insights with you again next month. Before you go, please make sure to click the add session button in your attendee hub to register for our upcoming market update events, including our next installment taking place on June 14, next month. [Operator Instructions] See you next time, everybody.