In this episode of Wealthion, James Connor hosts Jonathan Wellum, CEO of Rocklink Investment Partners, to discuss the unfolding crisis in commercial real estate. Jonathan provides a his perspective into the challenges facing the sector, including high vacancy rates, plummeting property values, and the systemic risks posed by these trends. Did you like this video? Let us know in the comments!
Jonathan Wellum 0:00 There's going to be a lot of write downs, you've seen, it's horrifying to look at some of these real estate. You know, they're worth $500 million a year ago now they're worth 200 million. I mean, it's a $300 million reduction on something that's probably been leveraged, you know, 75, 60, 75% I mean, that's basically wipes out all your capital. So yeah, this is going to have to run through the system and we just warn people be careful just try to minimize your exposure to the businesses that are in that space. James Connor 0:31 Hi, and welcome to wealthion I'm James Connor. Well, it's been another big week in terms of earnings, we have over 30% of the s&p reporting this week. It's also a big week for economic data. We had week numbers on McDonald's and Starbucks, and I guess people are fed up with paying $8 for a frappuccino. But does this mean the consumer is starting to feel economic duress? Or are we sleep slipping into a recession? To help answer this question, my guest today is Jonathan Willem of rocklinc investment partners. And rocklinc is a wealthion endorsed financial advisor for Canadian investors. Jonathan, thank you very much for joining us today. How are things in Toronto? Jonathan Wellum 1:13 Things are going well in Toronto. I'm thinking about the beautiful weather and friendly folks and people and so forth. Maybe not the maybe not just all the economics and the politics, but in terms of the markets to have been really robust in Toronto also, as they have been in many parts of the world. So yeah, we're just enjoying the basking in the nice warm, sunny weather here. James Connor 1:36 Let's good now want to discuss these markets, too, in the US and also Canada. But why don't we start with the US. And as I mentioned, it's been another big week in terms of earning earnings. And also economic news. We have a Fed announcement coming out today, we got the non firms on Friday. And I want to start with the economy. And we recently saw a very strong q2 GDP number came in at 2.8%. Much stronger than it was which was expected, also much stronger than what we saw in q1 with a revised 1.6%. But what's your take on the q2 numbers the economy heating up again? Or is this just an aberration? Jonathan Wellum 2:16 I mean, our view, again, we're longer term investors are trying to look for businesses that can weather both the ups and downs of the markets and so forth. But having said that, we do try to contextualize and understand the existing circumstances. And I, I think that, you know, we're still part of a weakening trend that it's great to see the 2.8% GDP print. But I'm a little skeptical. I think there's a lot of other numbers that are coming in that are showing a weakness, and and the fact that the US has certainly been the strongest of many countries around the world. But no, I think there's enough evidence that the increased interest rates, have a crimp the economy and locked in particular, as you mentioned, just in your just in your introduction there, you're seeing people especially on the lower end of the economic scale, really feeling the pressure of the inflation, of the increased costs of food, transportation, insurance, housing, and so forth. So those are really taking a bite out of the consumer. James Connor 3:14 And I always like watching commodities, okay, because I think when you watch the price of commodities, that gives you a good idea of what's happening globally, right. So the price of oil is been trading in between 70 and $80 a barrel, it's currently around 75 bucks a barrel. But I it's a lot weaker than I thought it would be given what's going on in the world, especially with geopolitics. And continued hostilities in the Middle East. Also troubles down in Venezuela. But what's your thought on the oil price here is low oil price, an indication of a weakening global economy? Jonathan Wellum 3:50 I think I mean, that's I think what's being priced in, in the short run a weakness in China weakened weakness in some of the larger global economies that are energy consumers, even the numbers out of Germany, just a day or two ago, were quite weak. Europe is not really doing much of anything. They're very overall Europe's got a small bit of growth, if you look at the numbers, so I think knowing that's being factored into the oil price, but if we look at we were looking at the inventory, so in terms of energy, and those are still very tight. And so from our perspective, 75 $80, or oil is a pretty decent price. And we think of anything that could trend up over time. And that unless, I mean, I think the wildcard there is what happens in the US elections. What happens in the US if there's an on if Trump gets elected, there's going to be obviously more emphasis on drilling. But right now, I think in the short run, yeah, I think the markets are looking at that they're selling oil down a little bit prices simply because they're anticipating some weakness, but I don't think that's really showing up in inventory numbers is still pretty tight. The us as we know is unloaded a lot of its strategic reserve on the market who knows what they're doing right now and they're trying to obviously stay in state In power the Democrats and and so we're still bullish on oil and we own a couple of oil companies we think and they're trading at very good prices, great free cash flow yields. And we think that that's a great space to be over the next couple of years. James Connor 5:13 Now you bring up a good point, because there's a lot of speculation that the Biden administration is doing anything and everything they can to suppress the price of oil to keep the voters happy. So the other thing I want to ask you about is the price of copper, because once again, this is also known as a barometer of the economy. And it was not too many months ago trading at or near $5 a pound now it's down, it's approaching $4 a pound. But I'm wondering if this is another indication that the global economy is slowing? Jonathan Wellum 5:44 Yes, you know, I think that's, that's the reason, probably the primary reason why it's down in the short run. But again, when we look at the longer term dynamics of copper, we say, Hey, this is an opportunity. If there's weakness in certain copper stocks you want to own or exposure to the area, I think this is a good time just to slowly accumulate some more exposure to the space. Yes, it's come down, because again, people are concerned in the short run about economic growth. But when you look at the supply of copper and the demand over the next three to five years, there's going to be a real imbalance. And so from our perspective, we that's where we just take a look at this. And we say this is an opportunity just to chip away, just carefully pick away add a bit more to some positions where we can get exposure to the copper. I mean, if they continue in this energy transition, that we're talking about the green energy, which again, we'll see how that all goes, there's going to need a lot more copper, as we've talked about before, and other people have talked about in your show, getting a copper mine up and going. It's very difficult. We've actually had a couple of large, you know, large ones stopped it right at the point of production, that colbray Mine in Panama, where we had some exposure to it through Franco Nevada. And so there's just no question that I think Copper has a bias to the upside over time. So yeah, don't let the short term trading, knock you off a long term thesis, if that's where you're at, that's where we're at. James Connor 7:03 And there's an ongoing debate on whether or not the US is going to slip into recession. What are your thoughts? Jonathan Wellum 7:09 We step back and we don't get as preoccupied with recession or non recession? I mean, it we think about it, but what's going on in the US right now, which I think is what stimulating it more than almost anything is these massive deficits. So I mean, they're, they've got 2 trillion plus, I mean, it's probably two and a half trillion, if not more of deficits that they're incurring, which is, you know, it's high single digits, percentage of their total GDP. And so, you know, if you're spending that kind of money, which is completely and totally unsustainable, yeah, you can sort of make your economy look like it's a little stronger. And so if there's any kind of reasonable balancing of budgets, I'm not talking about a balancing budget, and even just pulling down the deficits, that economy would be in a recession, and it would be much slower. They've also had a massive inflow of immigrants across the border. And so you've got government spending on the municipal level, the state level and the federal level to support these 10 million, 15 million people across the border. So there's just a lot of stimulus going into that economy that, I think is just no way it's sustainable. And so we, when we look at buying businesses and buying investments, you know, we're gonna discount that and try to be very careful to what we're prepared to pay and look for businesses that are not, you know, we're not inordinately impacted by some of those trends, which, again, are not sustainable. James Connor 8:28 So we have a Fed announcement coming out today. And the market believes there's going to be a zero probability of a rate cut. But the next one is coming up in September, I think the probability is around 95%, that they're going to cut 25 points, give or take. And I want to get your thoughts on this, given that inflation is still being very stubborn and thinking around this 3% level, do you think the Fed is making a policy are by cutting and risking that inflation is going to tick up again, especially with this strong GDP number that we just saw? Jonathan Wellum 9:03 Yeah, it's a great question. I mean, a couple of things. The Fed over the last couple of years really telegraphed what it wants to do. And so I think it's it's made it fairly clear. I mean, maybe it will surprise us today. But they've made it fairly clear that they're not going to cut today, and that they want to cut in September. So unless there's really unusual numbers that stopped them from cutting, I think in September, you will see a 25 basis point cut. And that's not my prediction. That's what they're telling us. And that's what they're telegraphing, I think there's enough evidence to support a cut in the rate. And we've also seen, I think it's important also that we've seen the Bank of Canada cut twice. We've seen the UK, the Bank of England cut once. We've seen the Euro land cut once. And so I find it hard to believe that there isn't some coordination going on. And so I think that if the other central banks have already done a little cutting, I think it's the Feds turn at some point. And I think that that's giving us a bit of An indication that they probably will go, should they go? I mean, a cutter to just to realign the interest rates to try to get the yield curve to uninvent, and so forth, I think is probably reasonably sane. It's just where do they go from here? I mean, one of the, one of the reasons why there's so much pressure to cut, as we've seen in Canada, as we've seen in Europe, as you see in the UK, also, and we're going to see in the US is there's just so much debt, and you can't finance all this debt at the higher interest rates. And so I think there's a real concern there this concern over the via, you know, the viability of the banks, and some of the losses that they're sitting on real estate market, all of these things factor into it. So are they prepared to take a little bit higher inflation in order to try to make sure the balance sheet doesn't get too far out of whack? I think so. And so that's why I think we've seen the cuts in Canada, also, where we have inflation here that is still running very high. R, it's weakened our dollar, which only puts inflation up a little bit higher. But I think the bank account is very concerned with these massive debt levels and our real estate market. So there's other factors that are kind of driving it. I think that's probably true in the US also, when we go into September. I'm also a little cynical about the Fed. I think that they are very political. They say they're not other people say they say other people, of course, have disagreements on this. But I think that they wouldn't mind trying to stabilize things as much as possible and have it as strong as possible for the existing powers to be in Washington, which I think they would prefer to have the Democratic Party reelected over the Republican Party. James Connor 11:34 Yeah, especially if they were going to cut in September, like only two months ahead of the election, you think if they were going to do it, they should have done it this month or last month, right? Like why wait so close to the election? Jonathan Wellum 11:47 Yeah, and I think some of the data is supporting them to move in September, and so forth. But I also think that's just an added impetus, along with all these other factors. It's just another reason why I think they want to show some easing, and to make Americans feel a little bit better about the situation. So we'll, we'll see what it says coming up in a couple of hours. We're taping this obviously, in the morning of the of the 31st. So I think we'll we'll find out how aggressive Powell is in talking about the next meeting and what they're going to do. So he's, he certainly has telegraphed in the last little while exactly what they're going to do. So I don't think there's gonna be any surprise. James Connor 12:25 So in spite of this strong q2 GDP number, you think the US economy is slowing down. And one of the things that it's really impacting is the real estate price. And I want to speak about commercial real estate prices and this whole work from home thing, remote working, it's having a big impact rate across the economy, especially with commercial real estate, Moody's recently came out with a report saying vacancy rates in the US hit an all time high of 20.1%, in q2, high, or I should say, the highest since 1979. That's when they started taking those records. And then if you look at some cities, like San Fran, everybody reads a book the problems happening in San Francisco, but their vacancy rate now downtown is 35%. And that's up from 28%, just a year ago, even in the city of New York, it's approaching 20%. And I want to get your thoughts on this what's happening within the commercial real estate. And if you think this can be if this can lead to a much bigger problem in the US? Jonathan Wellum 13:26 Well, I mean, it is a big problem. There's no question about this numerically alone, it's a large issue. And it's and it's not going to go away. Because the trends I think are well established, I think if you talk to businesses, yeah, they want some people back in the office. But they're, they're very much prepared to have people work two to three days in the office, and then the rest of the days at home. And sometimes even less than that. And you can take a company take an area like San Francisco, and it's highly tech oriented. So if the if there's any place, you can work from home and be sort of in a tech company. And so and just the the power of the employees over the employer, in some cases, if they're highly trained, they have a lot of leverage over the employees over the employer in terms of where they want to work. So I think this is a longer term trend that is here to stay. And so therefore, we're going to have to burn through the excess. And if we burn through the excess, you want to be careful about who's holding the bag in terms of these buildings, who's going to have to take the write downs and write these off. And in the United States is largely a lot of the regional banks. It's not as much the the massive, you know, the the money center banks, the large ones, the JP Morgan's of the world and so forth, I think are much better positioned in terms of weathering this, but some of the regional banks, I'd be careful of we don't own any. And I think that, yeah, there will be some write downs. I mean, it's been largely telegraphed to the market. We know it so it is getting, I think priced in to some of the businesses and, you know, the businesses, you know, the banks do have a fair bit of capital that they can sort of weather this I mean, our view has always been in the last couple of years is that the banks will just have a tough Tough time, we're not predicting they're gonna blow up or anything like that. But it's just one of those areas, we say, Hey, do we really need to be here? Can we figure this all out? Or is it just easier to go somewhere else? It's like Warren Buffett often says he's got this pile on his desk, and he says, you know, too hard, too hard pile, in some cases, some of these businesses or industries and what's going to happen to try to spend all the time to figure out all the little nuances, our view is, hey, if we can find a better area to invest in a better business is more predictable. We don't have to spend all this time and then end up wrong at the end of it, then we go somewhere else. But no, there's going to be a lot of write downs, you've seen the, it's horrifying to look at some of these real estate. You know, they're worth $500 million a year ago, now they're worth 200 million. I mean, it's a $300 million reduction on something that's probably been leveraged, you know, 75, 60, 75%. I mean, that's basically wipes out all your capital. So, so yeah, this is going to have to run through the system. And we just warn people, be careful, just try to minimize your exposure to the businesses that are in that space. And of course, this could lead to opportunities, also some bottom feeding and people being able to step in. But I think that's going to take a while because there's been a systemic change in the demand for that particular square foot of real estate. And that's not going to change anytime soon. So be very, very careful and watch your exposures, and particularly leveraged financials, just watch what your exposure is to that space, so you don't get stuck and, and get disappointed me just having an investment that goes nowhere. For the next couple of years would be a horrible thing to write. James Connor 16:32 This show is sponsored by better help. To feel my best. There's two things I do on a regular basis, I work out with a personal trainer, and I meet with a therapist working out keeps my body in shape. But working with a therapist keeps my mind in shape and keeps me thinking in a positive manner. Life can be crazy busy with family and work commitments and managing your investment portfolio and just so much more. With fall that it's hard to fit in time to relax and have some fun. That's why it's important to keep your mind fit and focus as much as possible. Therapy can provide you with the skills which allow you to manage stressful situations more easily. If you would like to speak with a therapist or give it a try, consider better help. It's all online and fully flexible according to your schedule. Never skip therapy day with better help, visit betterhelp.com/wealthy And to get 10% off your first month. That's better help, Help.com/wealthion. Now back to the show. You mentioned Warren Buffett, I know you're a big fan of his investment style. Have you been to his shareholder meeting in Omaha? Jonathan Wellum 17:41 I've been down to about 15 of his annual meetings over the years, but not in the last few years. We're planning on going down last year, which would have been wonderful. This was last time that Charlie was still with us. But then they had COVID still, and there was still restrictions on travel and a few things like that. But no from 1993, virtually up until almost 2009 with a couple of exceptions in there I went every year. And we loved it. It was just like they call it the Woodstock of capitalism, right. And just meeting the other investors and hanging out with people other value investors was a real experience. And in our business at the time, which was AIC funds, we would bring down a number of advisors with us. And so you're trying to again indoctrinate and instruct them and teach them in the in the in the, in the benefits of value investing. And so we just we turned it into a weekend and have a wonderful time and, and learned, learn a lot of things and and remember that investing should be they shouldn't be overly complicated that you want to be approximately right rather than precisely wrong. And you want to make sure you stick to you know, areas that you understand where you're competent, and don't get your head, too buried in the things that aren't relevant. And I think Buffett has a great way of seeing through that. Of course, he's a genius financially. And he makes things sound so simple, but he himself has gotten an incredible mind to say the least. James Connor 19:09 I went once in 2018 and I would highly recommended for anybody to go with a great experience. Jonathan Wellum 19:15 Yeah. James Connor 19:17 I want to ask you about what I did. I so he goes to a favorite steakhouse there in Omaha, or what's it called? Jonathan Wellum 19:24 Go rats. James Connor 19:25 Yeah, so we went there just because I'm not a fan of the steak. Jonathan Wellum 19:30 Oh, yeah. You got some beautiful rib eyes there. Right. And T bones. I think his favorites a T bone? I think it was. Yeah. James Connor 19:36 So I wanted to discuss the US financial markets now and the equity equity market specifically. And even though we saw this very strong GDP number, we have weak numbers coming out of McDonald's and Starbucks. And this is the consecutive second consecutive quarter that both companies have reported weaker numbers and they both sided less foot traffic. Coming into their stores or the locations. And they also said people are spending less money. And once again, this is like another big indicator that the US economy is slowing down when people aren't spending money on a frappuccino or a $5 meal plan. What are your thoughts? Jonathan Wellum 20:17 Well, and I think the other thing I do is a sort of indicated a little earlier discussion, people might be spending the same amount of money. In fact, they wouldn't be spending the same money, but it's where they're spending it. So if your insurance premiums have gone up by 30%, you have no choice, you're putting the extra amount of money insurance, if your food bills up 20, 25% over the last couple of years, you're buying food, and you're gonna buy it at the supermarket. And rather than go to McDonald's, where you're going to pay a premium to have it all packaged up, and it's probably not as healthy for you anyway. So where it's very expensive, you're going to you know, energy costs, car, transportation costs, car costs, cost about your mortgage is gone up home costs and so forth. So people I think, are reallocating their spending, particularly the I say, the bottom half, if you will, or those who are a little bit closer financially to the wire. They have no choice. And so are they going to go by go to Starbucks? I mean, why would you pay, I'm not sure why someone would be going to Starbucks that often anyway, and I can afford to go Starbucks, I think they charge a ridiculous amount of money for a cup of coffee that you can easily, easily make in your own home or invest in and invest in a high end coffee maker and you'll get your your payback will probably be about a year. But But for people who are our culture, the wire is so easy just to bypass the Starbucks. The price I have not been into McDonald's for years, because they don't know more and more from the health gurus perspective, but people have been telling me what the cost is to take a family to McDonald's. It's outrageous. It's very expensive. So. So I think that's what you're seeing, you're seeing a reallocation of spending. And that's when it comes to from our perspective, as investors, we're trying to go into companies that are on the top tier of where you're going to spend your money. In other words, it's inelastic, you're going to go to those companies. First, the companies that are more discretionary, where you don't have to go there. Those are the businesses, I think you're going to be we're seeing the vulnerabilities and that gives us the best indication that there's pressure on the consumer. And so that's, that's the way we're looking at it, people are spending, but there's no way they're going to spend it on things that are more frivolous or unnecessary and more discretionary. They're really tightening your belt and watching where they're spending their money. James Connor 22:28 You mentioned car insurance. And one of the reasons why we have such high car insurance here in the last couple of years is because of car theft. And the city of Toronto in 2023, there was over 12,000 cars stolen, that works at 32 cars a day. And there's similar numbers in many of the cities in the US. So that's one of the big reasons right there. So we Jonathan Wellum 22:49 Yeah, I mean, I got a letter from my insurance provider. I've never had an insurance claim in my life and my autos and haven't had a speeding ticket for I think, six years or more. And they doubled my insurance on my Yukon, Yukon anally and they doubled it. And they sent me the letter and they said, basically, this is a high risk of being stolen. And didn't matter. When were you locked, it didn't matter if you had it behind gates, it didn't matter. This doubled it doubled my insurance. So again, you see that sort of thing happening on people and you have if you have a couple of cars, and all of a sudden your insurance is not just doubled to say it's even 50% that takes a big chunk out of your budget. I mean, it's it really starts to add up. James Connor 23:28 Yeah, apparently EVs are the best cars to hit because they can't steal those. So I want to talk about the Canadian economy. Now we went through the US economy and also the US equity markets. And given that we both reside in the city of Toronto, when I get your views here, we know that the GDP has been significantly weaker than we find what we find in the US. GDP per capita has been in decline for five years now, which is shocking given how strong the US has been. And you think there'd be some spillover into the Canadian economy. But that's not the case. What are your views on the Canadian economy? Jonathan Wellum 24:03 Were very, very weak, very weak. And no, it's what frustrates I think Canadians that are a little bit more knowledgeable and understand what's going on, as I said, this is policy induced. So this has been driven by government policies, particularly at the federal level in Canada, that are disastrous from a financial perspective. So, you know, you you curtail our ability to develop our resources a country like Canada, which is so rich and resources you curtail that you make it more difficult the cost of capital goes up for all those industries. You put more and more regulations on every industry, you increase taxes everywhere, particularly carbon taxes on fuel, which then puts the price of everything up because energy is what is the you know, this the what provides the grease for the whole economic system. And so and then you then you add three, three and a half percent to your population base where you bring people in who you can't assimilate You don't have the infrastructure to take the these new immigrants. I mean, I mean, James, you just go through this list and you go, how could you possibly have strong economic growth, but you increase the cost structure for businesses, you've now got a capital gains tax has just gone up and corporations so that we have a pretty hefty capital gains taxes, the worst thing you can do to economy is strangle the capital. So all of these things are being done. At a time when consumers already have a lot of debt and in a housing market is overvalued. And we've had way too much of our economy in housing market and not in producing and making other things. It's craziness. So we need a complete reversal of policy at the federal level, and at some of the provincial levels to some provincial governments in Canada are very good, others are quite weak. But that would be the issue. And we have done leash our oil and gas industry. We have great uranium, we have potash nitrogen. I mean, you know, all the resources we have in this country is phenomenally rich country, and we're importing energy to our country. I mean, this is this kind of stuff is completely insane. The policies are outrageous. And Canadians, I think, are getting fed up with it. And, and so yeah, so we're seeing a declining standard of living in this country, over the last number of years, particularly intensified since 2015, with the socialist policies of Justin Trudeau. And so, yeah, so this is this is a big problem, I think, you know, we're seeing this around the world where you're getting a bit of pushback against heavy heavy concentration of government. In Canada, the government sector at all three levels, federal, provincial, and municipal is about 46% of the economy? Well, I don't I don't have to tell you that. If you're giving 46% of your resources to an inefficient, ineffective, unaccountable sector, then it's going to strangle the private sector. And that's what's happening in many of us, not just in Canada, but many of our Western countries, we could unleash growth if we were to shrink to the public sector, and put the money back into the private sector and cut taxes and regulations. James Connor 27:04 So you mentioned the numbers 46%. In Canada, how does that number compare to the US. Jonathan Wellum 27:10 the US is in the low 40s. So about 40 to 43. Just to give you a perspective, in Canada, in the early 60s, we were at 15%. So you've seen this massive increase in the size of government 15%-18% in 1960. In France, if you go over to Europe, and in Germany, it's close to 50. In France, it's actually around 60%. So again, you want to see where economies are growing and where they're not and where they're just being just stifled, if you will, and smothered by the private by the public sector, is when the public sector becomes larger than 35, 40%. It just becomes very, very difficult, as in Canada, as you know, we've increased the cost of our federal bureaucracy by well over 40% Over the last couple of years. And what do we see for that in terms of efficiency? We nothing. I mean, it's, it's even greater inefficiencies. The more money you throw at inefficient sectors, the more you waste, you do not cure a inefficient sector that's not run properly by more money. The only way you cure that is by cutting it back and making it competitive and more accountable. Yeah. So we need to see that in Canada, we need to see that in the United States, also, I mean, United States has also got serious issues and challenges. And certainly throughout Europe, I mean, our western democracies, that have been so profitable and have grown so well over the last number of decades really high over the last 150 years, I think, are just being smothered by their own success. And we need to have a reset, a reset back to a competitive capitalist system, a true capitalist system. James Connor 28:48 So speaking of reset, I recently had a discussion with David Rosenberg, and he thinks we're going to see a major reset in the Canadian housing market. I want to get your thoughts on this. According to the Toronto real estate board as of June there were 6200 condos for sale in the Greater Toronto Area, new condo Sales plunged 57% year over year, and a large part of it just has to do with the slowing economy and also an oversupply of condos in the downtown region and higher interest rates. And in spite of these, the number of condos that are for sale, the prices are only down 2.6%. So it looks like there's a big disconnect between buyers and sellers. But what are your thoughts on this? What are your thoughts on the condo market in Toronto and also the real estate market? Jonathan Wellum 29:34 Yeah, I mean, I really respect David Rosenberg. He is an excellent analyst and I followed him since his his Merrill Lynch days and going and going way back and and he's done great work in this area. And I often look to Him and some of his some of his calculations. No, I know several people who are involved in the Toronto condo market. And yeah, I think you've got it's been so dominated by by investors and they he'd been holding on holding on holding on and just sort of praying that this thing will, you know, will write itself. But I agree with Rosenberg, I would suspect that the risk of a substantial drop just to clear the market and clean things up and to stop the building, I mean, you still have more condos coming on online. I mean, the problem is it takes years to get a condo project set up, and then you start building a construction of it, you still, it takes years before those are complete. So we actually have more condos coming online at this time. So you've got more supply, you've got way too many investors in the marketplace, the demand has just plummeted. Living in downtown Toronto, or any major city is much less attractive than it was a few years ago for a whole host of other political reasons. And in terms of safety, and people not going downtown because of de changes in work patterns, and all of that sort of stuff. So I think you're going to have to get a market clearing price on some of this, that's going to be quite painful to people. And yeah, it's going to be a lot less, it's going to be a lot larger than a 2% drop, I think you're going to need a more substantial drop, I'm not gonna throw it a number, but the number is going to have to be very, very large in order to clean the market out, which would be the best thing that could happen for the market. Because this has been this excess has been building as you know, for like 15 years or more. I mean that people was just how do you how do you make money in Toronto and just buy a condo, you know, and sit on it and then sell it a few years later? Well, that whenever that happens, it goes on for 1015 plus years, you know that paydays coming and that's I agree with Rosenberg, that day is coming in terms of the broader US real estate market in Canada. Again, just following it in different areas, cursory and having talking to investors, our own clients who are in the market, it is soft, it's very soft, there's much more supply in the market, sales have dropped off, and prices continue to weaken. So a lot of real estate in the residential side is easily off 20% or more all around the Toronto area. And you know up in cottage country and things like that, where there was just some crazy excesses Around COVID people thought they could just you know, go and live in their cottage and buy up cottage property and live, you know, Lake lakefront and work lakefront. Those prices you've seen in some cases are off 25% or more. So there is some of that purging taking place. But again, we've had such a large uptick, even if it comes off 20% It's still not cheap. And and so I think we're gonna continue to see that weakness. And just because interest rates come down a little bit, I that's I do not see that solving that problem, we have an imbalance and prices got way out of whack. So it's going to take a bit more than just interest rates coming down, it's going to take lower prices to clear the market. James Connor 32:39 There's another fun stat for you. Toronto has more construction cranes than any other city in North America, by fact, by a factor of four. And there's two as of q2, there was 221 cranes in operating in the Greater Toronto Area. And the next highest city in North America was LA with 50. Jonathan Wellum 33:01 You really can't believe it, James can you? I mean is just so excessive. And that's why there has to be a reset. And the best thing that could happen via reset. And unfortunately, you just want to be as clear as possible from that and just let the dust settle before you before you march back in there and see if you can make some money off the pain of others I guess. But that's that's the beauty we that's the beauty of the capital markets, if there is an excess, then we got to wash it out. The the problem with the Fed and a lot of our policies at the government levels, we've kept these excesses going for way too long. And now to clean them up is going to be even more painful. But it's always better to have a cleanup process and to to have a purging and a reset on it. James Connor 33:44 Jonathan at the onset, I mentioned that your firm Rocklinc is a wealthion endorsed financial advisor for our Canadian clients. And for those viewers who might not be familiar with rocklinc. Maybe you can tell us a little bit about the company and a butcher investment approach and what your style is. Jonathan Wellum 33:59 Sure, well, we're registered across the country. So we can serve Canadians in all the provinces and we have good representation and in almost all the provinces. And so we're a discretionary money manager. And so we work with the clients and customized portfolios based upon their needs, their risk tolerances, their time horizons, and so forth. And we do our own original research here. Within the firm, we have a number of CFAs and professionals that are registered again as their portfolio managers along with myself, and we will buy again what we try to do is create concentrated portfolios. This is a big difference between us and you know, the industry at large. We'd like to own 20 to 25 great businesses and then a handful of other fixed income instruments if you know for that sort of portion of the allocation, but we really go deep so we understand the companies well we try to buy companies that we believe are really well positioned for the next three to five years they have a rising tide good secular growth, great moat surrounded isn't so that there's predictability to the businesses, and we don't have to go into any sector, if we feel that a certain sector is not going to be that rewarding for us, then we can just stay clear of it. So we're not, you know, you're trying to index investor or be closet indexers, we're we're as far away from that as possible. And so we're good, just good old value investors try to be disciplined. I think the toughest thing in this market is just trying to find really well run companies that are reasonably priced. And you know, we do a lot of discounted cash flow analysis, looking at the free cash flow, the businesses, the balance sheet, of course, is critical in this environment, so that they can weather any challenges that could emerge out of out of anywhere. And yeah, so that's the way we invest. And we love working with clients, if anyone wants to, to approach us or to contact us free of charge, they can come in, we'll do an analysis, we'll talk to you and talk with them. There's no pressure whatsoever. We just love working with the clients and in trying to create good long term performance for them without taking ridiculous risks. James Connor 36:02 you mentioned that you only have 20 to 25 names within a portfolio, how many of those names are Canadian? How many are American? Jonathan Wellum 36:10 Yeah, probably more 30, 35% would be based in Canada, the rest would be American and a couple in Europe. And but as I as I think I've said before, the key, even the Canadian companies we own are generally making money in North America or around the world. So we really only have two companies, I think that are 100%. Canadian. So, you know, we really we look at where we look at industries and where the best businesses are in those industries. And that generally takes us south of the border, and also into Europe from time to time. And some there's some amazing companies we have here in Canada, also that are wonderful businesses. James Connor 36:50 I know every client is different, depending on many variables and risk factors. But where are you allocating capital now for your investors? Jonathan Wellum 36:59 I think the major sectors that we would have would be we have the technology space is essential. I mean, that that can run across, you know, companies that are in sort of software, businesses, Roper at Autodesk. We have owned and we still own and things like Amazon, we haven't been as big and you know, sort of these AI stocks. We haven't owned a video, we didn't take the large uptick. And we're not in the volatility of that right now. So technology, infrastructure businesses, so long term, businesses that have hard assets and tremendous long term contracts, inflation adjusted, especially non regulated. Infrastructure businesses, precious metals is another area that we've maintained, probably about 616 18% of the portfolio, which is much larger than most of our other competitors. And that's because, again, as we've talked about, we are concerned about that we're concerned about reset. What does that mean, if they were to knock a couple of zeros off our Dalhart currencies, we we'd like to own the gold and silver in particular, those are the biggest exposures through a lot of the royalty companies and a few of the premier miners, we're not in speculating in junior Junior miners. We have some disk descriptors, consumer staple businesses, also in the portfolio, and a number of non bank financials. I mean, the financial industry is still a great place to be, but we're careful about leveraged financials. So we have a number of non bank financials and one of the companies who bought more recently, Burford Financial Group. And that's a litigation finance company. And that's that, so they provide financing to support litigation. And that's a really fascinating, intriguing business. And so that's again, other there's other ways to play it within the financial services industry without just buying banks all the time. There's lots of non bank financials. So those are some of the some of the key areas that we'd be investing in, in terms of putting it putting money. James Connor 38:52 And just to expand on that litigation financing. So for example, if a country were to nationalize oil and gas assets, that would be an example? Jonathan Wellum 39:03 Argentina, Argentina did this a number of years long, long before Malay was there and so they nationalized a large oil company and the they now have litigation. In fact, the courts have said that Argentina owes $16 billion. Well, a company like Burford actually helped finance the legal costs and has, so they'll have the capital of set aside, they'll look at the viability of it first of all, and say this is a highly viable lawsuit. So then they'll set aside the capital and they will fund then all of the legal costs up until the time where you reach a conclusion on it. But then they're taking 40% of the actual take winnings. So now, we don't know what Burford is going to get here, but they couldn't walk away with up to $6 billion of the 16 billion. If that fully materializes. Now, it probably won't fully materialize. You're gonna have a smaller amount. But just to give you a sense of the kind of upside you can get, this is a $3 billion stock and they can end up with $6 billion winnings. Now, that's not why we bought the stock, that's to us an option that could take place, we didn't even value that in the company. But what they do is they'll only take on about 4% of legal cases, but then they'll fund it. Because if you're if you're a large corporation or company, you don't want to be funding these off your own balance sheet and green, this could take three, four years, you go to a finance company, and then you'll get them to fund all that they'll take the risk of not working out, but then you have to share a substantial margin amount of the of the profit or the or the or the litigation penalty. So yeah, it's it's they generally run IRAs internal rates of return over the last 10 years, they've been averaging 25%. And so you have to smooth the dough. Again, you have to be a long term investor, when you buy a company that because earnings, there are going to be up and down per quarter. We're looking at that business like that for three to five years. We don't care about the quarterly returns, we're looking at their ability to identify highly probable law case lawsuits where they can they can finance a winning lawyer and a legal team and then get substantial portion of the of the revenue. So yeah, it's, it's it's big business, and there's good opportunities there. James Connor 41:13 Yeah, it sounds like a very interesting business. But listen is always very fascinating discussion, Jonathan, and I want to thank you for spending time with us today. If someone would like to learn more about you and your firm rocklinc, where can they go? Jonathan Wellum 41:25 Yeah, our website is fantastic. So that would be rocklinkccom. So www.rocklinc.com, rocklinc with a C, not a K at the end, and it's got all the information there. And if you just do info@rocklinc.com, then you send a note that will come in to us and we can respond. And our phone number would be 905-631-5462. 5462 is link. And in any of the extensions there, you can talk to anyone and you will get through to the people you need to need to speak to love to love to talk to the clients. So if you have any questions, just contact us directly. We'd love to speak with them James Connor 42:05 Once again. Thank you. Jonathan Wellum 42:07 Thank you very much, James, look forward to speaking to you again. James Connor 42:10 Well, I hope you enjoyed that discussion with Jonathan Wellum and give you some insights on what to expect in the coming months in both the US and Canada. We all need help when it comes to planning and preparing for our financial future. And if you have a financial advisor and you're happy with them, then great stick with them. But if you don't, or maybe you want another opinion, consider having a discussion with a wealthion endorsed financial advisor at wealthion.com. It's a free service that wealthion offered, so anyone who has an interest, you can find out more information at wealthion.com. Once again, thank you very much for spending time with us today and I look forward to seeing you again soon.
