Speaker 1it's friday november 6 2026 episode 305 i'm kevin muir and i have the great pleasure to be welcome to the show today anthony shilapati he is the founder of veritas investment research canada's largest research boutique anthony thanks for joining
Speaker 2us today kevin it's a
Speaker 1pleasure and as a great canadian i see that you actually come prepared you have your own beer yep what are
Speaker 2you drinking today i'm drinking a beer it's a light ipa yeah called the lazy hero and it's from a local brewery called cameron's yeah right here in oakville ontario and um i'm always supporting the independence i don't buy chain beer i don't buy chain anything that's what happens when you're
Speaker 1the largest independent research shop you always looking up for the little guy i'm drinking party dad ipa which is definitely not my style it's both an ipa and and it's party dad which is what i'm not but we're going to give it a
Speaker 2whirl is that a is that a
Speaker 1collective arts uh it's a nickel brook brewing oh also an independent there you go i knew that was going to be the case that's how we roll it is all right so it's not often that i get to say that i have a forensic accountant on the show uh what like did you when you grew up do you know in high school and university do you think you wanted to be a forensic accountant like how how did
Speaker 2this come about zero i grew up as an entrepreneur okay i uh started out delivering papers i was barely 10 years old 11 and um i started out with a paper locally and that became um one that i took over all the neighboring uh roots and uh from my friends who didn't want to do it every day so i said to them well what days can you do it and they said well i can only do wednesday thursdays fridays i said fine i'll do all those other days you do those days and i i didn't realize what i had figured out how to do but i figured out how to do it and also how to um get people to align with a view and build something anyway um after that followed that up doing working in grocery store shining apples at three dollars and a quarter an hour and then i got into the clothing business and the clothing business was a lot of uh i was like i grew up right here in toronto and i was at st mike's in high school and one of my buddies started selling remember those boss chanel shirts yeah at uh on outside dundas there and various parts of the city so he said look i got this going on but i need people you know everybody at the school well you can get people riled up how about we get some people to help up and i said okay we can do this so we started out counterfeit shirts down at dundas so you're telling me yeah and so but you know we learned again how to build a business we understood how to negotiate how to run from the cops and that didn't work and i said to him i say he's still friend today will i said well this is this i don't run from cops it's not my shtick i said i'm going to just take everything we've learned and all the contacts we have and i'm going to sell all kinds of promotional products to companies so my dad's in the furniture manufacturing business and i'm working for him in the summers now by this point and he all his suppliers all his you know business customers i i go see them and say hey do you need hats jackets pens watches whatever and we did it hey my mother runs that business yeah so you go to university
Speaker 1and you say i i should learn how to do accounting is that basically how that works i'm
Speaker 2gonna do i'm gonna speed up everything now i went to university taking commerce because i love business yeah and um i wanted to be a lawyer oh so i did everything in high speed in my life and um my in second year i was a lawyer and i was a lawyer i was going to get into law school and i you know studied a little bit but not much i scored under 70 that's not going to work so i i wrote it again i scored about 76 or something again i'm not getting in after second year and i'm liking this accounting and i'm liking this business and the reason why is because when i file my taxes i figured that once all the magic of what i learned allowed me to create how much tax i was going to pay and i said this is amazing and companies do this and in terms of how they run their business and changing the accounting i said it just fascinated me so that's it i i stumbled into become an accountant and i i hated audit uh but you know i met some interesting people along the way i wrote them being one who was a famous forensic accountant and uh he gave me perspective and said look you're learning about businesses and then i ended up working with him doing litigation work due diligence work and i was and i loved it and billing by the hour is a problem and then i said you know what we're going to get into the stock market and we started writing about companies
Speaker 1right okay so you're working with this this fellow al rosen and he's a forensic accountant you guys are doing this and then you say well we're going to take our skills and we're actually going to apply them to to the stock market and what this is the mid-90s
Speaker 2like when yeah so it's mid-90s um and i'm teaching at york university i'm teaching accounting and i'm using in class companies like laid law lowen group future shop chapters and i'm showing how they're kind of cooking the books so one of our students he's head of research at a brokerage firm michael palmer he says hey can you write about this stuff i'm like i don't know ow what do you think of this he says really yeah this is great so start writing some reports and it's 1999 nobody cared about governance no auditors weren't auditing analysts weren't analyzing they're just worrying about the next deal sounds like 2026 it was actually a phenomenal thing for us we wrote about all every company we wrote about most don't exist and then we wrote about nortel and that was february of 2000 we lost clients we were laughed out of meetings um we john roth in the newspaper said hey you guys are hurting our ability to raise capital in the u.s and let the ceo put a name
Speaker 1for
Speaker 2ourselves yeah
Speaker 1and okay so you you were writing about like just the two of you were you know created this this this niche where you started talking about the shenanigans let's just say that we're going on at these shops with in terms of the the accounting is specifically is that correct like just kind of like you were you know what like david einhorn got famously on cnbc and started talking about the spvs in 2008 but you guys would be doing this back in in the early 90s and you're like oh my god it's in the in the late 90s early 2000s yes yep and when does vertas get born october 1st 2000 okay
Speaker 2so it's actually
Speaker 1at the other side of the like the the dot com had already cracked or at least peaked well it just
Speaker 2cracked a little
Speaker 1bit right and so then and who are your clients like what and what do they want to hear
Speaker 2pension funds mutual funds um institutional investors those were our clients and what was that
Speaker 1still today many
Speaker 2are still our
Speaker 1clients today for sure we both we both know a fellow that has been with you from day one that's correct biggest the supporters and and i and i was kind of shocked at the at the length of your relationship and how long you've been going and stuff but what was that like being you know all of a sudden this person out there in the wilderness talking about things that previously nobody had wanted to talk about and they were negative you must have been getting like as you mentioned some bad press from the the company some pushback but at the same time you're also getting positive feedback from the clients that are saying hey wait nobody else is saying these things talk to me about the the how that must have felt to be in the midst of such a you know a push and pull a yin and yang it's
Speaker 2actually very stressful but at the time i was in the wilderness so i was talking to a friend of mine and i was talking to a friend of mine and i was talking to a friend of mine and i was talking to a friend of mine and i was talking to him and i was the word stock. I didn't understand that there were board members and those were all people that all knew each other. And that, you know, I, for me, I focused on the accounting and I said, well, wait a minute, you know, this debit sitting on the balance sheet makes the earnings higher. And they made a choice to do that. Had they put it on the income statement, it would have been a different thing. Look, they changed their revenue recognition policy. Had they not done that, the earnings would have been different. And what I saw was that it angered managements. And so at first I was terrified. First report that had pushback was Bombardier. And this is 2001. Stocks near 20%. 20 bucks. And I'm saying they're cooking the books. And I had no idea that the connections of the Bombardier family to the government, all these relationships. And I think if I had done it today, because of all the people I know and how much I know the ramifications of being wrong, it would be more difficult. So I think, you know, timing is everything in life. I was young enough to be unaware of what I was doing, but yet smart enough, or I had a skill that was unique. And I was willing to just use that skill. And, you know, at first it was hard to get clients because no one wants to hear negative things. If you're a portfolio manager, and I said, well, I'm going to do this, and they say, you know what, this is a sell. Well, clients don't want to pay. I'm telling you, essentially, you're wrong. And your whole career is tied to being right. And you own a position. It became personal for many. And they said, you know, the industry, the institutional industry is a voting. That's how you get paid. So they vote to allocate commissions. So we had one client I'll never forget. He said, I'm giving you negative votes. Because if anyone in my shop votes positively, I'm offsetting it. And what I saw that people said, you're hurting my ability to manage money. And you're hurting my positions. It's because of you, Anthony. You know, that's why we call it the business veritech. We struggled. What are we going to call this thing? And then we said, well, what do we do? We just tell the truth. We're not here to hurt anybody. And over time, what I've learned is I can tell right away if someone could be a client. If you don't like hearing that, you know, that shirt doesn't fit you well, or something else that might hurt your feelings, we're not going to be able to do business. Because I'm here to help. Right. Yeah. Like, we only get paid by the companies that read the research. If we don't perform, we don't get paid. And you're like a good friend when someone has
Speaker 1salad in their teeth is willing to tell them that.
Speaker 2Right. You know, if we had been wrong, I have to say on Nortel, you probably wouldn't be. Right. But you weren't.
Speaker 1You were spot on correct.
Speaker 2If you're going to do something that's out there, you better test it a million times, and you better be right.
Speaker 1Right. Let's talk a little bit about Nortel, because that was really the company that made you, wasn't it? In terms of your call, then, and you were highlighting the vendor financing and things like that. Walk me through how that evolved. What you saw, were you shocked when you realized it? Like, was it one of these things where you kept saying, this can't be, I got to go back. Couldn't it be the market? Is this wrong? And for those who don't know, Nortel was Canada's largest company was, you know, Nortel and Bell, I think we're 40 or 50% of the Canadian stock index. Well, 40. Yeah. Yeah. And they went to, you know, Nortel eventually went bankrupt. It was the dot com, one of the darlings that eventually blew up. So talk to me about that whole. The whole episode with Nortel, because I think it's fascinating and really says a lot
Speaker 2about you. I'm going to try to make it as succinct as possible. There were a few things that surprised us. Notably, they would complete an acquisition that could have been in the billions in size and they would do them in weeks. Having done due diligence work, I know that to complete, do diligence and do it in two weeks, and then two weeks later or four weeks later, I'm going to do another multi-billion dollar deal. It just doesn't work. Like you can't, you can't possibly do a good job. Then you say, okay, they're making, they're doing these acquisitions and they're using stock. Okay. Well, the accounting rules say that there's therefore no cost to the acquisition. Right. Because if you spend money, then you have a cash outflow on the cashflow statement. But if you use stock, there was no cash outflow. So we said something novel. We said, imagine they'd issued the stock, raised the cash and went and made the acquisition. And that was actually hurting their cash flow. And then we said, wait a minute, this is growing through acquisition. When you're doing free cashflow, if you use, if you grow through CapEx, then that's considered part of free cashflow. If you grow through acquisition, that doesn't get included in free cashflow, according to your CFA textbook. And I don't have a CFA, so I don't care about all these structures. In fact, that's what I tell people. The problem with studying CFA is it creates group think. It's not a bad thing. So does studying to be an accountant, but that's if you, if you understand business, then you interpret what the accounting tells you. So we said, if you grow through acquisition, then the acquisitions like CapEx, and you need to allocate a portion of that acquisition to keep the operating cash flow flat, right? And that should be considered your maintenance CapEx. Then we said, wait a minute, they're growing, but they're extending customers' credit. That's considered a long-term receivable. That's part of a financing cash outflow. Wait a minute. If they did it at the short-term receivable, then that would be part of operating cashflow, which would flow through free cashflow. But if you just say, pay me longer than an operating cycle, maybe that's 30 days, maybe that's 120 days, whatever, then it shows out of that. So the morons that just follow operating cashflow, unless CapEx would say, Ooh, look at all the free cashflow. But if you include the long-term receivables, you'd see that the cashflow was negative. And so those were the type of things that we found. And we said, we don't know what their organic growth is because they're growing through acquisition. So to us, we don't know if this business is growing or not. You're paying a higher and higher multiple. Didn't add up.
Speaker 1When you started to figure this out and you, kind of came to the realization that the Canada's largest stock was problematic. And you went around and told people there must have been a lot of disbelief, like pushback immediately for you. What gave you the confidence to stick with it? And why were you so sure you were correct? Like, because everyone around you has invested interest to be telling you the opposite. And not only that, I'm assuming that a lot of people fell for this.
Speaker 2You know, I, I think it's, you have to have people around you that believe in you. And at the time that was Michael Palmer and Bill Marshall that were much more seniors. And they were part of the business. Bill Marshall was the sales and Mike Palmer was the president running the business and they believed in it. And I think that was key. And I think I was just too young to, to realize the magnitude of what I was saying. And, and I think because of that, it was easier for me to say it.
Speaker 1Oh, I get it. Listen, there's a, you know, a famous story that one of the market wizards, they went and they got bullish on stocks and they were, it was, I think it was in the early eighties after that kind of 20 or 15 year bear market, or at least the sideways market. And he knew himself that he wasn't going to be able to go, whatever this, whoever this market wizard was and buy stocks aggressively enough because he he had all the scars from the years of doing it so he hired a young kid and the reason he hired a young kid was because he didn't have the scars so to some extent you were like that okay so this is nortel and the dot-com bubble crashes and then all of a sudden there's probably not as much business for you for a little while but then we get the the gfc going up into the gfc and there's lots of shenanigans happening there as well um what did you see and and what how did your forensic accounting help you there in terms of figuring out the banks and it wasn't just the gfc canada had its own specific problems which were slightly different than
Speaker 2the u.s yeah we had something called our abcp problems and the banks were holding um fixed income and and so we i we went through each of their fixed income and looked and saw what was in there and found that they had the abcp paper found that they have cdos and cdo squares and said wait a minute they're valuating at this price they're holding it apart that doesn't make sense that's gonna there could be a run on this and we called out national bank it was a big one and cibc uh we were very early on cibc um and it was because we went through their note disclosures and said wait a minute they're having all this unrealized losses uh through their comprehensive income and yet nothing's of course showing through their earnings and that's just because these are you know held to maturity and all that stuff and we said wait a minute this is going to eventually come across and what is in there were you
Speaker 1are you shocked that this the same thing just keeps happening like like this is like i'm listening to your story and like all this accounting problems and we you know like we might as well get to today because one of the reports you wrote recently is how much today some of these um kind of neoclouds and stuff look like lucent nortel cisco from way back when but like a little bit of time ago i was like oh my god i'm not sure if i'm gonna be able to do this i'm not sure if i'm going to be able to do this i'm not sure if i'm not sure if i'm going to be able to do this gosh you think that they would learn their lesson
Speaker 2you know it really comes down to one of my favorite books popular delusions and the madness of crowds and in and everybody should read this book but basically the consistent um additive to every mania is people and people are driven for fear they hate fear and they love greed and the more money that's being made the more envy is created the for the more formal comes and as a result the more money that's being made the less questions that are asked because when everybody's making money nobody has questions and that's consistent if we talk about tulips railroads houses uh routers and chips data centers we can keep going it's it's it when everybody's making money it's like being at a party and there's lots of alcohol everything's gonna be fine okay so let's
Speaker 1talk about the current environment because it's very much like dot-com right like you know tell me what you're seeing what's worrying you in terms of the current environment and its resemblance to the dot-com crash
Speaker 2look at it's the same but different so it requires significant amounts of capital and you always you need that in order to sustain any period of exuberance notice you don't know it's a bubble until it bursts it's just a period of exuberance so liquidity is like alcohol at the party and so to me if i'm monitoring what's going on i want to see what's happening with the liquidity and the further we are on in the party the more difficult it is to get the liquidity the alcohol right and so if i look at the if i look back to the 2000s um nortel as a as a key component they because they produce the fiber optic cable you needed the fiber optic cable then you needed cisco's routers you needed lucent software and and other kind of products and otherwise you couldn't get the internet to work so nortel said well wait a minute we're the biggest great balance sheet tell you what we're going to do don't pay us in 30 days why don't you take 180 days how about you take 360 days it's all good because we're building out the internet this is changing the world you guys are going to be able to sell this service for unlimited prices so they did that and it ended up failing when the customers couldn't get the capital so it always becomes a tug-of-war between the the customers those that are building out the exuberance and today we're talking about data centers back then we're talking about the internet they they have they're pulling that they need invest they need capital because otherwise they can't pay for the chips they can't build the buildings the customers in nortel's case needed the capital to pay for the fiber optic cable so nortel gave them an extension it eventually the customers couldn't didn't generate cash investors got impatient and the thing rolled over today what we're seeing is nvidia investing in customers okay what started out that way then they said well you know what everybody's on to this like the first time we wrote about this was in 2023 okay when nvidia first did a deal with coreweave right that no one thought no one looked at then we looked at every single transaction that nvidia had done every investment that they made and found that about 80 percent of them were in customers now not material in dollar amount but that was the first thing that it was in customers now we don't know how much those customers were actually purchasing but we knew that they were finding thing their customers somehow okay but nobody cares because revenues are growing earnings are growing everything's fine that started out with just the customer financing then it became will guarantee the lease payments on the data centers and they said well wait a minute this is such a great business we will guarantee the revenue on that data center and if it's less than that we're covering and if it's more because it's such a great business I want a percentage don't you want to buy my stock I mean I'm investing in the future and then they did one better last quarter they said only to our investment grade customers we are going to give them 12 months to pay for that chip that is in such high demand we can't even produce enough of them that we don't care we don't even want to accept payment at the end of the day you you again have a tug of war the the customers of nvidia they need capital or which has to either come from other financiers or from a positive return on investment so far there's no positive return on investment so they're having to continue to go to the market and because there's you're starting to see that they're getting more creative there's off balance sheet vehicles being set up meta set up Hyperion last year 45 billion dollars off balance sheet lease agreement that that is guaranteed by meta financed by blue owl and they because of how they set it up they claim that they have lower capex but they really don't it stays off the balance sheet until there's a possibility or it's probable that they will have to cover those lease payments that is the data center doesn't generate enough revenue on its own to cover the lease so we're at the early stages we're not going to see this kind of unraveling on the balance sheets until um the that data center is built and you start to see that they can't it's not generating enough revenue to pay for the lease payments and then because nvidia was probably involved somehow guaranteeing the lease payment too we'll see them them start to um recognize some of these off-balance sheet liabilities whether it's the lease payment perhaps the revenue guarantee they'll take have to take provisions on the long-term receivables you see what i mean how how do you
Speaker 1think this plays out in terms of like is the market going to be ahead of that and smell that before it occurs like are we already experiencing that i think the market is waking up to this or is this just a little hiccup and you know it won't be till we actually see the the accounting change that the market will sell off
Speaker 2you so we're going to look for that accounting change i don't think the market's going to look at note number 27 subsection 3 in the footnote they're not they're not going to think that that's important what i suspect they're going to be ultimately hit is when they warn on their current earnings or they lower guidance nor tell i will never forget it was february of 2001 they raised debt and in that same week two or three days later they warned and to us when they raised debt i said wait a minute so that means that future cash flows dreams are being financed with debt that's the end like where else are they going to get money
Speaker 1right well this is the thing about this bull market it was always so it's so amazing to me was early on it was like don't worry about it it's all getting you know finding a set of free cash flow and these guys are making so much money you don't need to worry about it then all of a sudden we hit this point where they're like oh you know what uh the they actually need some money so they start raising debt and they raise debt to the the largest amount that they've ever raised in terms of the hyperscalers and the mag sevens and they're just raising money and they go don't worry about it it's okay because the reality is there's going to be tons of money down the road for this then all of a sudden oas option adjusted spreads start blowing out and next thing you know what are they doing they're raising equity right and this is these are market don't forget the whole bull market of or the bull reason for tech stocks was that they were free cash machines and they were buying back all these stocks like go look at google amount of shares outstanding it was declining declining declining now all of a sudden whoops largest largest secondary in history what about apple yeah apples it doesn't have earnings
Speaker 2growth if it doesn't buy back
Speaker 1stock yeah it's it but
Speaker 2you know i i don't know man they issue debt yeah to buy back stock to me worst thing a company do the value of the stock is a derivative of the underlying fundamentalism of the company it can change on a whim the the debt obligation there's no whim this is the amount you owe me back and this is the interest rate yeah you you finance a building with a with a with a with a loan because there's something i'm gonna those bricks are worth something the stock could be worth less for nothing that the company did nothing that management did and that's why you asked me is what we're experiencing right now the market realizing that this is not going to work and you know you've been doing this a long time like me um you never know what the catalyst is going to be yeah i never said you know valiant blew up when after hillary clinton tweeted during the campaign in 2016 2015 saying that there is a company with the first name with the first whose name starts with a b that um is gouging prices in the pharmaceutical industry and where that she was concerned about that essentially and people made the link that that was valiant and then everybody said oh so their business model is just making acquisitions and increasing price oh my god and you mean their earnings number they make it up and it's all adjusted numbers and it's like two and three times what the gap number is remember nobody cares until they care and then when they care they care a lot and so these um that these little you know anecdotes the things i'm telling you it's the things that make it the same because it's the people's reaction so yet today what did we have we had a change in the midterms so now it's all blue so everybody's freaking out that gonna be fewer data centers fewer chips sold but none of the companies said that anything's gonna slow none of the none of the expectations changed revenues didn't change everything's fine like if you just step back yeah you go okay this noise happened but nvidia is going to report results in a couple of weeks if they hit all the targets and they say their future projection is going to be fine why shouldn't the market go higher you and i can argue that it doesn't make sense there's all these other issues but what i've learned over time is that it takes a long time to flesh out the uh the positivity because as humans we love hope when i tell you a story of a stock to buy i'm telling you a dream you can't argue with the fact that spacex ipo says that they're going to change the world they're going to bring data centers to outer space they're going to bring humans to populate other parts of the universe like these are fantastical stories how much is that worth whereas i tell you the bear case it trades that over a hundred times ebitda it burns cash it has obligations that will ensure that it's going to burn cash in its foreseeable future that we don't have the ability or technology yet i think to build the data centers in outer space um and yet none of that so so that's the let's say the bear case bear case is always based on facts and the danger as i've learned over time is that i can be as you know one of my favorite um um he actually was it's from charlie munger yeah and it's his uh human misconceptions and it is every human should read this whether they're in investing or not but it tells you all the weaknesses that as humans we have and one of the ones he talks about they say whoa i'm a accountant i found something in note number 27 subsection c nobody knows about this this is means the company's gonna be out of cash next year short the stock you're an idiot you're really smart you found something interesting but if nobody is gonna care about it not today and not ever that note 27 subsection c took up some space on a page won't matter
Speaker 1well i think we might be getting into a world where stuff matters again and one of your theories is that it's never been a better time to be an active manager and you think there's a lot of risk in passive investing why do you think that
Speaker 2well you know even the mighty buffett said that passive investing is the way to go and i think passive investing works because interest rates go down and when interest rates go down valuations of everything go down and when interest rates go up and as a result of that um those companies that are have the longest dated cash flows which are technology companies they will gain the highest valuations and because the index is market cap weighted when one dollar goes in they believe they're buying 500 companies which they are but 27 subsection c the index is market cap weighted when one dollar goes in they believe they're buying 500 companies which they are but but today 27 subsection c the index is market cap weighted when one dollar goes in they believe they're buying 500 companies which they are but roughly 46 percent roughly 46 percent roughly 46 percent is is is telecom and communications telecom and communications telecom and communications or technology and communications or technology and communications or technology and communications and if we add tesla and and if we add tesla and and if we add tesla and and and netflix will get over 50. and and netflix will get over 50. so you're buying basically so you're buying basically so you're buying basically one trade If that goes wrong, as it did a couple of days ago, the market will fall 4%. And so now you own this passive investment and you look at it and you say, because you probably bought it on your discount broker and you're trying to click through, why is this happening? Why is no one stopping from falling? Passive funds are unmanaged funds. It's essentially like driving in a car that's autonomous. It's an autonomous vehicle. It's going in the direction that you told it was going to go. It didn't care that there was a pothole on this road. It didn't care that the slope on this road wasn't very good. That wasn't the point. This is the shortest route. It's taking that way. And there's no one to say, hmm. This road is now slippery today. We should probably go somewhere else. And while everything was going from the lower left to the upper right and the story was positive, everything is great. And remember, I started by saying humans are conditioned that when somebody makes money and it wasn't me, I now have envy. So I want to get what my buddy has. And then somebody else says, well, I got FOMO. I got to get on this too. And then they tell two friends and they tell two friends and it grows. And I think today there's a lot of risk in the passive investment because it's one trade. And that's not including all the financial institutions that have significant wealth and asset management that's tied to the markets. It's not including the power companies. It's not including the construction companies that are building the data centers. All of that's tied to the same trade. I saw something.
Speaker 1I saw something. I saw something. There's a Goldman Sachs study. They go through the concentration of markets over time. And I think if you go look back and look at the other times that we were this concentrated, I think it was like 1929, 1962 and 2000. I'm like, those were not good times to buy our own equities. Maybe they're not time to good time to buy equities, but there's something else that has been just kind of like beaten with a stick. And nobody likes, and it was actually kind of funny how, how much sentiment is turned on this because, you know, it was only five, six years ago that everyone thought bonds were all the rage and could never go down in price. And now it's kind of funny how, you know, five years of them or four years of them going down will change people's attitudes. But you have a different opinion. You think bonds are something that people should be looking at now here. Why is that?
Speaker 2Well, the yield on the S&P 500. Is lower than the 10 year bond and you're supposed to get paid more to take equity risk, not less so conceptually, it's not right, but, but that's, let's leave that in a textbook. Then you say to yourself, okay, rates are currently 5% ish. We know that governments around the world paying excessive amounts of debt, the U S is largest. Payment is interest payments, and it's going to get, it's going to get worse because then you've got, you have a old age security, et cetera. So this, this problem of high interest rates is putting the entire, uh, the entire world in a vice. It's like putting pressure too much debt is always pressure, especially when rates are rising. And so now let's look at what dry what's driving the rates to be high. Well, inflation, well, inflation is tied to something that's started by the U S which is going on in the Hormuz strait. And of course the swing that took place in interest rates when they went down 2022, then they started rising cake to, to offset that. But I want to leave that aside. So what I think today is that much of the high interest rates is tied to these. Extenuous ish issues, which are related to oil prices. I think that can be solved, not that we go back to 50 bucks or 40 bucks, or dare I say, minus $37, like in June of 2020. But I think that will ease inflation. And now let's take back the trade, the key trade, which is, well, if AI works and companies become more efficient. Then what will they do? They'll compete with each other. We could have prices going down. They're going to cut people. And what is the central bank's key driver, employment and prices. And so if you have a shock, the prices, which is lowering, and you have a shock to employment because AI works, then they got to lower. Rates. Now let's say AI doesn't work. Then you take away data center and, and the, and the associated build out. And GDP last year is essentially flat. So now how do you stimulate economies? Well, the government only knows one way they got, it's like a, a hammer in a carpenter's hand. The only thing they know how to do is hit that is everything's the mail, right? So they lower rates. So whether AI works or it doesn't work, rates are going down and you, we may think Trump is crazy that, uh, you know, he's been pushing the central bank saying, well, putting undue pressure because he wants to lower rates. He knows how to do the math. He looks and says, we're taking on all these trillions of dollars of debt, which we need to do because we want to stimulate the economy and keep it growing. If, if. Yeah. If rates go up, it's going to be a harder, we're going to have a harder time to finance this.
Speaker 1Well, speaking of rates going up, um, recently the bank of Canada has raised rates and, uh, one of your, um, kind of calls recently has been that Canada will outperform the U S. Do you think that with a hawkish central bank that will continue to outperform it and what, what makes you confident there or what drives your forecast of the loony or not the loony, but the Canadian stock market? Canada has its problems,
Speaker 2we could talk well, is the gold price going to stay up oil prices is vulnerable because of Hormuz could get settled banks. Oh, we're very concentrated on financials. Something could go wrong, but we're not one trade, which is AI. And so if there's a shock to the AI trade and you saw it, okay. So, um, I think that's, that's, that's the basis of that. nasdaq was down six the s&p was down four and a half tsx was down two now one day is not a trend Do you worry about the market? i don't suggest that everything's going to be the same every day but i'm taking the outcomes that i can see and why i believe that took place and i think that that can sustain itself um so that's that's that's the basis of that do you worry
Speaker 1about our banks though here because like one of the things that i think is happening is money's coming back to canada i think that Carney's encouraged all the pensions and other kind of long-term investors to bring money back to Canada to fund what is needed in terms of our build-out. But one of the things that kind of seems to me that's happening is it just going back into the index and, you know, the U.S. might have a lot of AI stocks in their index, but we have a lot of banks in our index. I look at the valuation of the banks and I'm scared of the Canadian banks up here.
Speaker 2So, valuation, in the way we think about the world, is the last stage of the process of the investment decision. Because valuation is an art. Analysis is the science. So, when you look at the valuation, you say, whoa, they're expensive on a price-to-earnings basis. Fine. But that's only a problem if you are concerned that either the multiple contracts, because rates are going to go higher, or I'm talking central bank rates, assuming that markets properly discount that, or earnings, future earnings, are going to slow their growth rate. So the key to figuring out whether that multiple is a problem is to assess what's been driving the earnings. And in that case, what makes me concerned is that 40% to 60%, depending on the bank, has come from capital markets and wealth management, or including asset management. So again, one trade. What's been happening over the last year? Maple bonds. All the largest hyperscalers raising money, record levels. IPO. These are all huge capital market fears. All the bond offerings, all the private private stuff. So that's been driving. If that slows, then that's going to hurt capital markets. If that slows, markets fall, that's going to hurt wealth management. So those banks I'm most concerned about are those that are most levered to capital markets and wealth management. Those that are sticking to, you know, Canadian banking and wholesale banking, et cetera. Look, everybody's going to get hurt. When it rains, even when, and it's pouring, you're going to get, even if you have an umbrella outside, you still get wet. Okay. The water, the water goes sideways. There's a lot of things that happen. So, but, but the ones that are most vulnerable, again, looking at the earnings are those with the high exposure. Can you share those with us?
Speaker 1Which ones are which?
Speaker 2Well, I think the one that's most exposed is probably national. Okay. Right. And then the next one largest exposed is probably RBC. Now we've got to balance that with the fact that RBC also has so much of everything else. Right. And it's such a stalwart within the rest of its businesses. So it's hard for me to say just because of that, but definitely in the case of national. And then I probably look at a BMO as well.
Speaker 1One of the things that when you started to talk about the earnings falling, I was expecting you to talk about real estate and you didn't. What do you feel about Canadian real estate? And are you worried about its effect that like we've had some tough times and the market has definitely corrected a lot. Is it finally time to buy or is it the pain going to continue? And will it ever kind of show up on the bank's balance? the bank's income
Speaker 2statements great question kevin so for the last 14 years we've been running what i think and has been described as canada's most honest and direct real estate conference it's called the great canadian real estate conference and this we have it every fall and this past fall we just had it in about a month ago in in october and the name of our this the theme this year was oh are we there yet okay and it was very interesting right because are we are we there i didn't say where could have been at the bottom could be at the top could be somewhere halfway i think most people would assume it's the bottom but and what i think i've concluded and i wrote on the website is that we have a lot of people who are interested in this and i think it's a lot of people who are interested in this and i think it's a lot of people who are interested in this and i think it's a lot of people who are interested in this and i think it's already a summary so i'll give you the i'll give you the 10 cents look i've been a bear on real estate probably for the last 14 years that was what drove me to think about doing this conference because i have clients that had that had similar concerns so we took them on a mystery shop and we've done this before with many of our businesses it's how we found mount valiant ultimately had all the philidor fraud that they were doing i pretended to be a customer oh wow yellow pages we pretended to be a customer like if you want to understand how a business is working yeah be a customer
Speaker 1so are you going to buy some neal clad compute
Speaker 2soon well i i did call core weave um when they went public i wrote i read i wrote a report on the s1 and i said this report reads like accounting porn because they had everything like governance issues stuff that we haven't seen since 2000 lead underwriter goldman sachs oh sorry i think it was jp morgan i now it's been a while i haven't looked at it it was one of the two they gave them a billion dollars loan guess what to be paid back by the underwriting and they were the lead underwriter you can't make this up okay let's go back to real estate though because i'm sure all the canadian i get all i get all wound up because it makes you know people have asked me why do i do this because i can't stand the little guy getting screwed yeah so real estate we went on these mystery shops to see what it was like to buy what the sales experience was like and in essence what made me concerned was i was suffering from one of charlie munger's um human misconceptions which is i'm fake and i call this is the problem i gotta fight with always i'm gonna favor what i'm really strong at which is analysis doesn't make sense to income doesn't make sense to a replacement cost the numbers don't make sense and so doesn't make sense to rent and so we said well why would i buy something the only reason why i'm buying it is to sell it to somebody else for more i didn't realize that rates were going to keep coming down that that immigration was going to take off the record levels that the government was going was going to be so strict on new construction anyway where we are today i think is we're in the bottoming part of the market we're not at the bottom real estate is an illiquid investment it's much different than the stock market in the stock market there's a there's a budge and you see you know a million shares traded which again is still not meaningful we get to a whole discussion but you see lots of transactions in real estate you're looking at a fraction of one percent that actually trades and you're determining the average price you're determining the value of your building based on those recent transactions but those recent transactions are may not be indicative of a liquid market so what i think is going to happen here is we're going to get some significant displacements that two million dollar house that that's been sitting for a while because it used to be a two and a half and then they put it back on a two is going to eventually sell at 1.2 and then everybody's going to look at it and go oh my god this is a fantastic time to buy or if i'm already underwater and i can't hold it anymore i better sell and so that's going to create the bottoming okay but but that's significant
Speaker 1pain still ahead is what you're arguing i would
Speaker 2i would argue that there will be some significant pain and displacement yes right
Speaker 1okay and so does that then translate to finally having a negative income for the banks because so far the banks you know like the the housing market is corrected and it hasn't affected the banks the banks are at all-time highs but under your scenario does it actually leak into the banks
Speaker 2the only way it leaks in well first of all more banks don't lose money on mortgages they're very it's very little okay even during the financial crisis right the impact was basis points they lose money on credit cards they lose money on unsecured lines of credit okay they've been largely keeping out of this because there's been an entire gray market you know all the all those mix okay right that have been mortgage investment corporations that have been financing those things are the ones that have picked up the slack especially in the last five years to finance things that the banks didn't want to and that's not that the banks are not going to get hurt but that's that's been happening so what i would watch i'm going to leave you with one last thought yeah what i would watch for that's going to be the key trigger is job losses right if you don't have a job it doesn't matter what the interest rate is yeah and so what's happened now our unemployment's gone up but that's because that guy that used to sit in ottawa can't even say his name he increased the number of immigrants at a rate which was faster than the number of jobs that were created that it creates unemployment but that's not the same unemployment like what we said in the early 90s right where unemployment rates went to 13 percent yeah and immigration was at much lower rates so those were real people that had a mortgage that lost their job now those immigration numbers are way down so when last quarter last month sorry we saw a lot of people who were unemployed who were unemployed who were 68 000 job losses here in in canada and the month before some 20 000 if that continues then you'll see this the pain one of the things
Speaker 1when you were telling the story about um the banks not going to be hurt because they're actually not the ones on the hook for this the part of the let's just say the part of the stack that's going to get hurt isn't banks and it's private mortgage investment corporations and things like that i i i was immediately kind of just like completely agree with you and i was wondering whether what you feel about the whole evolution of private markets how they've expanded and And in essence, a lot of the things that we looked at in 2008 or 2007 and 8, the banks doing all these crazy things, they're now, it's being done by private, you know, private credit and private equity and things of that nature. So the reality is that is, are we going to have the rich people get absolutely hosed in their private investments in the coming years?
Speaker 2Yes. Yeah. I think what's happened is, again, the key to sustaining the period of exuberance is liquidity. Liquidity is like oxygen. You don't know how much you need it until you lose it. Liquidity to a period of exuberance is like alcohol at a party. Right. Near the end of the party, you start running out. So you go get your dad's stash. Then you go. Then you go to the neighbor's stash. And the privates, that's what they are. And what have they done? They started with the sovereign funds, then the pension funds, then the mutual funds. Now they've gone to retail. And so you've gone from a billion-dollar ticket to $25,000. That in itself tells you that it's becoming harder and harder to sustain the game. You're seeing extension funds. And so basically, they're having a harder and harder time monetizing those investments. And so now they're putting it into insurance vehicles. This is a whole other thing we're spending time looking at. Okay. And that's putting now the risk on policyholders, which is very dangerous. But so I think these entities are kind of the last thing. They're the last straw of providing the financing. And the fact you're seeing gating cuts to distributions, those don't happen when things are going well.
Speaker 1Got it. Okay. Before I let you go, I have asked you a lot of different questions. If you were the interviewer and you were interviewing yourself, what would be the question that you would finish up with? What have I failed to ask about? What do you feel is an important aspect of the market? Wow. What am I missing?
Speaker 2That things take longer than you think and happen faster than you expect. And I know everybody's heard that before. But this is a very choppy market. It's going to be very difficult to make money. And you're seeing it, you know, company like Element. They're going to be very, very slow. They're going to be very slow. soft maybe their guidance could have been a little bit lower than expected stocks down 20 points like there's meaningful pain going on when companies miss which means that the stock picking is very important so what I think if someone were to leave me with a thought these are markets where you don't want to be taking undue risk it's a time where I said we're early on, we're in the thunder period. There hasn't been any lightning and there's definitely no storm. So in the thunder period, you want to start thinking, wait a minute, has my investment gone up in value because earnings have increased, because cash flows have improved, or has the multiple just expanded? And if it's the latter, then you've got to ask yourself okay is that multiple expansion sustainable and if it's not because it came from expectations that there will be data centers in this in the outer universe then maybe it's time to lighten up on some of those stories because what sounded like a good story at the party when it was like 1 30 in the morning when you wake up again at 11 a.m that that story it's not gonna sound so good
Speaker 1okay that's some great stuff now before we let you go you like that i like that i like it we're gonna play a little game we're gonna do desert island discs uh trader edition so you have to give us your three top bands or albums i don't care whatever you want there are three top ones and then if you were on if you were stuck on a desert island these are the only three things you can listen to and then also what trader or investor at any point in time like they could be living dead would you want on the island with you let's start with the three bands or albums what's your
Speaker 2first one first one is um acdc back in black nice this is my favorite band of all time it's not even close um and i was 10 years old when that album came out yeah and i remember sitting in my buddy's basement uh john mcdonald and his brother hugh he was three or four years older than us and he was already in high school right i think yeah he was like 15 probably he's in high school and so he had the album and he had the the record player my buddy didn't have a record player so we finished school before he did so we'd get home first we'd rush home and we'd be listening to this album but i'm talking about over and over and he would come home and he'd get angry and kick us out of his room but i remember like hell's bells like back in black i can't okay well that's it for what and then the other ones are lighter in of importance But there's a great album and a great comedian, George Carlin. I think George Carlin is absolutely brilliant. You'd think that comedians are dumb. Oh, no. They are brilliant. Yeah. No, they're all brilliant.
Speaker 1He's especially so.
Speaker 2I learn a lot from comedians. I watch comedians do shows because I do a lot of presentations. and it and it helps me become a better presenter helps me become a better orator and they're masters yeah and the one that stands out most of course is the seven words you can't say on television for sure but there's so many others well i like
Speaker 1the one where he says like you take the average person and then think about how dumb they are and then yes um okay number three what's
Speaker 2the third one the third one is a bit out there okay it's um it's uh abba greatest hits and i i'm very eclectic i i play piano i play guitar and and i just love those songs you know dancing queen and and uh anyway fernando and so on it just there was so much fun and i remember dancing to them in university and over and over and over again i can't i know that sounds silly oh no i
Speaker 1can't remember who it was listening to or reading the other day but it was somebody that was in sweden trying to buy the original because some of those songs were sung in swedish and you can get the original ones in swedish so you should think about that all right and which trader or slash investor would you have on the island with
Speaker 2you charlie munger charlie munger it's not even close charlie munger is brilliant about everything uh just and i i think investing as i've learned over time again because I started with a background in deep analysis tiny tiny fundamentals and over time what I've learned how important behavioral finance is right and understanding people because people you know see stock charts stock charts are really people reacting to what's going on the better you understand people the better you'll be able to determine when they're going to figure out that today it matters and then it's going to matter
Speaker 1a lot right that's awesome okay so let's finish it up with you telling us a little bit about veritas um explain your firm what it is and then also you know who should reach out to you like is it institutional only and what's the best way for them to you know find out more or get some samples from
Speaker 2about your work so we're an independent equity research firm we use a forensic based approach and and that means that we're looking to analyze yesterday's performance to critically assess whether it's repeatable sustainable whether it came from business innovation or accounting innovation that's our rockets, there's no rocket science. We just spend more time looking at the details so that our forecast can be better. And we're going to avoid things that could go wrong. That's the number one thing, uh, which is the cornerstone of our business. It's about avoiding the bombs because the longer you do this business, the more you realize that the markets are rigged to go up. And so if you can avoid those stocks that are going. to go down you'll be very very very successful investor so that's how we do our research who should reach out to us pension funds mutual funds family offices we deal with a number of retail platforms really most notably rbc dominion securities where we're exclusive and we launched an asset management arm which uses that research to manage portfolios and we also launched the foundation where we use that same forensic based approach to help donors make better donation
Speaker 1decisions got it so veritas research anthony it was a real pleasure having you on and i really thank you for your time
Speaker 2thanks kevin that was a lot of fun
Speaker 1take care buddy bye
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