Episode 3.4 with John De Goey

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Text transcript

Kevin Press:

Welcome to the Canadian Advisor.cast, a podcast dedicated to financial advisors and the people who work with them. My name’s Kevin Press. I’m Editorial Director of Advisor.ca. My guest today is John De Goey, a Portfolio Manager at Designed Securities in Toronto. He is the author of three books, the most recent being “Bull Shift: How Optimism Bias Threatens Your Finances.” John hosts a terrific podcast called Make Better Wealth Decisions, and he writes for multiple publications. He’s also an FP Canada fellow.

John, I’ve been looking forward to this one. Welcome.

John De Goey:

Thank you, Kevin. I’ve been looking forward to it, too. Glad to be here.

Kevin Press:

Last month, Ottawa announced the launch of Canada’s first sovereign wealth fund. The Canada Strong Fund will function as an independent Crown corporation, invest in infrastructure, mining, energy, technology, and other projects, along with the private sector. What do you think? Is it a good idea?

John De Goey:

It’s a good idea as far as it goes. I would like to know a little bit more; the details remain a bit sketchy. So, I’ll give you the pros and the cons. I would say that my predisposition is to be in favour, but the devil’s in the details, and a lot of the details are not known.

It seems as though, you know, we don’t really know exactly how retail investors are going to participate, even though the government has said that, that would be an option. And, so it’s a good idea. I’m just wondering what it’s going to look like. As people know, it’s not really a sovereign wealth fund because a true sovereign wealth fund takes excess profits from, say, resources or whatnot.

And, in fact, in this case, the government’s going to borrow $25 billion over three years, you know, and use it as seed money to help with infrastructure projects. I would say, it reminds me more of something like war bonds, Kevin. You know how during wars, governments issue bonds, and, they use that to finance the war effort. I would think of it as being similar to that. Canada’s really at war with the U.S. economically. It doesn’t feel like it necessarily, but I think that’s what the Carney government is trying to convey, that we, as Canadians, need to do whatever we can to support our sovereign interests.

Kevin Press:

It is important, I think, to use that term, an economic war or, at the very least, genuine conflict. Abacus polling points to what David Coletto calls an “optimism gap.” Canadians are feeling relatively good about Canada, but they are uncomfortable with the state of the rest of the world. I think Washington policymaking right now has a lot to do with that. Is this Canada Strong Fund evidence of this, do you think?

John De Goey:

I think so. I think part of why, just off the top, I told you I was prepared to give the government the benefit of the doubt until we saw the details. I think that’s true of Canadians in general.

They understand that if you rush to make deals with President Trump, as other nation-states have done, they’ve come to regret it because he tends to renege on deals and whatnot. And the fact that we have a government that is playing its cards a bit closer to its chest, holding out because time is on their side as the government in the U.S., as the president, in particular, is weaker heading into the midterms, and has less political leverage. It’s good to not say too much about what it is you want or to rush into a deal because you can probably get a better deal later on.

And I think that’s what Canadians are thinking as well with regard to the Canada Strong Fund. This is the sort of thing where we might be able to do things to promote our national interest economically in a way that other nation-states aren’t doing. And, so far, Canadians are on board with the idea.

Kevin Press:

Do you worry, though, that it contributes to home-country bias?

John De Goey:

Not necessarily. It could, but, it’s easy enough. First off, we’ll see what kind of an uptake it has, right? So, until people start investing in it, we don’t have to worry about it contributing to anything until we can actually see A, how to do it, and B, how much people do it. But you can easily deal with the problem, by, you know, by, you know, putting 5% of your portfolio into a Canada Strong Fund option- such as it is, whatever it will ultimately be- and then taking 5% out of your Canadian equity mutual fund or your Canadian equity ETF, so that you don’t necessarily go any further in allocating toward Canada. You just do it using different vehicles.

Kevin Press:

Yeah, I mean, for all the geopolitical risk out there, it still seems to me that global diversification adds value. I gather you’d agree with that.

John De Goey:

I strongly agree. I’ve always been a global diversification for equities, but also broad diversification within and throughout asset classes. So, stocks, bonds, you know, commodities, other things, different products, different strategies; diversify as broadly as possible. I’m a big proponent of Harry Markowitz and everything that he’s managed to get people to do as they think about portfolio construction.

Kevin Press:

How are you feeling about the U.S. right now in particular? We’re seeing this…it’s such an odd thing. It’s always fascinated me when risk is heightened, there’s a flight to quality, which is to say U.S. investments, Treasuries, and so forth. So you get into this odd situation where the U.S. is now triggering that volatility, but it is in fact also seen as the safe haven. How are you dealing with that really strange set of circumstances?

John De Goey:

Yeah, I would push back. I don’t think the U.S. is really a safe haven. U.S., as a stock market, has performed exceptionally well for the past number of years. But I think that, that of, and by itself, is why I would argue that it’s not as safe. There’s this notion of reversion to the mean, and what goes up must come down. And the things that have gone up the most in the recent past are also most likely, but not guaranteed, to come down in the not too distant future. I think the U.S. market is extremely expensive based on historical metrics, and I can get into that if you’d like. So I don’t really think it’s safe.

And I think that’s true for the bond market as well, because there are a lot of people now that are seeing that, that long end of the curve is starting to trend upward as the inflationary pressure of this war and other initiatives of the government are starting to become more apparent.

Kevin Press:

Yeah. Let’s talk about that. How much of this, your concern have to do with AI valuations?

John De Goey:

A substantial portion, but, not all. I would say technology writ large. So, you know, Google is not necessarily an AI company. Amazon is, possibly, to some extent, an AI company, but not necessarily. So, certainly, AI is part of it, but I’ve been concerned about high… you know, if you were a value investor, then you’re always going to have to look at matters in terms of… It’s great that there’s this revolutionary technology, and that’s always been the case.

Certainly, you know, if you think about the internet boom, 25 or 30 years ago, it was the same sort of thing, valuations became stratospheric, and the technology was, in fact, transformational. But, at some point, it becomes difficult to justify those valuations, and things come back down to earth when people realize that we’ve reached the limits. And I think we’re getting close to that with AI, but, who knows?

Kevin Press:

Is that your only concern about the U.S., as a place to put money, the relative valuations you’re seeing?

John De Goey:

Well, we’ve touched on the other concern, and that is the political risk. You know, one of the things that I say in my book “Bull Shift,” and when I speak to retail clients, I have a background in political studies and in public policy. And, the sense I get is that many people underplay the correlation between what goes on, you know, on Capitol Hill or on Parliament Hill, and what goes on, on Bay Street or Wall Street. I think there are a lot of things that do, in fact, spill over from one to the other. And because there is so much concern about the risks associated with the Trump administration and how volatile it is, it would be folly, in my opinion, to act as though things are normal and not show some caution with regard to the risks associated with having such a volatile person as a head of state.

Kevin Press:

You wrote a terrific piece for us in February of last year, and you said, investors were underreacting specifically to the tariff threat. And as much as markets have done well since then, that still feels right to me, at least in the long term. What do you think?

John De Goey:

Yeah, I do, too. I think it’s one of those things where I had a lovely conversation in the past couple of weeks-back and forth exchanging emails with a friend who, I won’t name him, but a very prominent YouTuber and podcaster- talking about the efficient market hypothesis. And I just put out a video about this very recently. And, I think of it as being a bit odd that people, you know, the market reacted very swiftly to the tariffs when they were announced on Liberation Day in April of 2025, and then reacted very swiftly when those tariffs were almost as quickly rescinded or significantly modified three days later.

But if you really think of markets being efficient, markets knew that there were going to be tariffs before the Liberation Day details were announced. It was just the quantum and the scope that were uncertain. But, the fact that they were coming was very well known. And I think now as we record this in May of 2026, a similar story could be told with regard to the war going on in Iran.

A number of very prominent commentators have said that there are supply chain disruptions and inflation that are baked into the remainder of 2026 that we should all know are coming. They’re unavoidable, even if the war ends immediately. And, despite that, markets are hitting new all-time highs. And that concerns me because… That strikes me as being a disconnect between what one would ordinarily expect with the efficient-market hypothesis [EMH] and what we’re currently experiencing. I don’t have an answer. And I’m a big proponent of EMH, but I also have to wonder about the extent to which it applies, and there might be some spots where it doesn’t apply as well as we might’ve otherwise expected.

Kevin Press:

It is such an odd combination of things right now. How do you talk to clients about it? What do you think advisors should be saying to their clients who ask these questions?

John De Goey:

I really think a lot of this is about risk management, and a big part of risk management is setting expectations. And, you know, I read recently that the U.S. stock market has more than doubled in the past three and a half years. Well, if you think about what credible firms like GMO are saying with regard to the expected return over the next five years being flat or maybe even negative in the U.S., and FP Canada putting out its Assumption Guidelines every year-they go live on May 1st-and saying that, you know, we should be expecting returns over the next 10 years or so of, you know, six and a half percent or so in the U.S. And I feel sorry for the people that are working on these Assumption Guidelines because, you know, if there is, in fact, a reversion to the mean, and you think of the rule of 72, then that would mean that the GMO numbers are right, and that we might expect a return of something close to zero over the next four or five, six years.

But, in fact, the historical returns for the stock markets are more like 10%. So, how does one make a long-term projection when the very short-term numbers could be very, very disappointing. And the very long-term numbers are going to be maybe in keeping with historical averages, but something in between-and I’ll say 10 years as something in between, between the very short term and the very long term-you’ve got to find a way to plan, and you’ve got to use a number that’s going to be reasonable.

And, you know, they’ve come down on a number of being in the low sixes, sort of, you know, for Canadian equity or U.S. equity, sort of 6.4, 6.5. And, that’s a challenge. I don’t know how many people are really thinking about that. When you talk to retail investors what their expectations are, they think that because they’ve been getting double-digit returns for the past little while that that’s normal and that they should feel entitled to it and expect it going forward. And that’s just not the case.

Kevin Press:

Go back to the risk management piece for us. Alternative investments is one of those topics that everybody’s thinking about and talking about right now. What role do they have to play in all of this?

John De Goey:

Yeah, I think the role for alternatives is growing. I think they’re relatively under-owned. What I said, you know, five or 10 minutes ago, Kevin, about Markowitz, you know, I’m a big believer in diversification within and throughout asset classes. And, for many investors that just means stocks and bonds, and you’ll diversify between domestic and foreign or, you know, long or short, or what have you. But, to me, there’s a whole other leg of the stool in the form of alternatives that you could use.

Things that are frequently not used by retail investors that are very extensively used by pension funds that can do a great job of improving the risk-adjusted return of any given portfolio and extending the efficient frontier so that you can either get a higher return for the same level of risk or a lower level of risk for the same amount of return, or maybe even a slight increase in both returns and a reduction in risk depending on where you move along the frontier.

Kevin Press:

I’m curious if you’re thinking about diversification has evolved in recent years, it’s just so much to absorb right now it seems. You and I are talking on May 5th. The Strait of Hormuz is still currently blocked. I’m curious if you think about diversification and the role specifically of geographic diversification. If you’re thinking about that has changed in recent years.

John De Goey:

Certainly, in recent years, I’m a little more worried about the risk of U.S. markets. And, again, for the reason I’ve given previously, which is, it’s expensive. And then the thing that we haven’t touched on yet, which is an offshoot of it being expensive, is that as a percentage of the world global stock market capitalization, it’s a higher percentage that it has been maybe ever. I think not too long ago, eight or nine years ago, the U.S. was about 50% of the world’s market cap, and now it’s getting close to two-thirds.

So if you want to diversify internationally, and, you know, people will say, well, you just hold a basket of cap-weighted, market-weighted indexes of stocks around the world, what you’re doing is, you’re not guilty of home-country bias, which is one of the questions you asked me about earlier.

But you might be guilty of unwittingly overweighting your portfolio toward one country, which has had an extremely high run-up, a strong run-up in the past number of years. So, by all means diversify within and throughout asset classes, but be mindful of those asset classes and those countries that are extremely expensive, that are maybe making up a larger allocation than would otherwise be the case.

Kevin Press:

What’s your take on Europe and Asia right now?

John De Goey:

I’m worried about stocks in general, candidly, but, I’m less worried about Europe or Asia than I am about the U.S. Basically, one of the things I’ve danced around is I’m most worried about U.S. valuations right now. So, I think one thing that you should do is you should, maybe, relative to what most people are invested in right now, maybe slightly trim some of their U.S. exposure and put more into things like Canada and Asia and Europe.

Kevin Press:

And there’s a strange thing going on in terms of conversations about the U.S. dollar. Trump says one thing; Treasury Secretary Scott Bessent tries to right the messaging ship, it seems. What do you think’s going on there?

John De Goey:

I think there’s a political gamesmanship going on, and I think it’s something that we, again, touched on earlier. People don’t always think about the role of politics in capital markets. Trump, in the things that he has said with regard to Liberation Day, seems to want a weaker dollar, so it’ll help the balance of payment.

But, by the same token, he projects strength in military objectives and other economic things. And so there’s this dichotomy where what you want and what you need to project are different things. And, so, people like Trump invest and play a bit of a “good cop, bad cop” game where, depending on how you want to move things. And it’s not a stretch to say that Donald Trump is actually trying to move markets, which is to say manipulate things from time to time. And tag-teaming with Scott Bessent would be just one example of how that could play out.

Kevin Press:

You know, it goes to this core question that I’m fascinated by and after all these years still don’t really have a clear sense of. Is it strategic, or does this administration just kind of keep flying by the seat of its pants?

John De Goey:

I believe it is strategic, but not in a way that we have ever come to think of traditional political strategy. So, what I mean by that is, most governments, in being strategic in the decisions they make and the public policy initiatives they espouse, are thinking about how they can get reelected and thinking about how they can enhance the brand of their party.

I don’t know that Trump really cares about that. I think his strategy is what can he do to enrich himself and his family and his close friends, what can he do to maintain political influence without even using the electoral process, and so forth. So, there is a strategy; it’s just that it’s a strategy which is so completely divorced from anything we’ve seen in a quarter millennium up until now that it looks like it’s completely random. It’s not random; it’s just pursuing objectives that are totally different from anything we’ve ever seen before.

Kevin Press:

Certainly important for investors to understand. I want to ask you specifically about the U.S.-China rivalry, and what’s been described as a kind of a hemispheric view of the world that, that’s emerging. What do advisors need to understand about that?

John De Goey:

Well, I think advisors understand this quite well. Again, it’s a form of warfare, but it’s economic warfare. And, different countries, especially under the Trump administration, are moving away from the traditional order of rules-based and co-operation and trade liberalization toward every country for themself. And, the two most notable countries are the two most powerful ones with their own sphere of influence, which is the U.S. and China. There’s a real race going on right now for things like rare earths and critical minerals and the ability to, in China, you know, control the area around Taiwan for microchips and in the U.S. to leverage AI and use that as a sphere of influence as well. I think most advisors, and I think most investors, understand that that’s the game that’s being played. And you don’t have to like it, but you do need to understand it, and I think most people do.

Kevin Press:

How do you see it playing out? Trump’s only got a couple of years left in this second term. Do you think we’ll see him move the needle on that?

John De Goey:

Oh, Kevin, I really don’t want to be a conspiracy theorist, and, it pains me to have to say this, but, I don’t think the war in Iran is going to end anytime soon. I think given what’s going on with the Ukrainians assisting the Arab states in trying to turn back the Shahed missiles from Iran, the Shaheds, I think the two wars- the one going on in the Ukraine and the one going on in the Middle East- might, ultimately, meld into one larger war. And, that is potentially extremely disruptive for supply chains and extremely inflationary.

And, it would not surprise me at all if in that context… We’ve seen it going on already in the U.S., where Trump is trying to get the Supreme Court to allow for redistricting and various things that could be extremely threatening to democracy. So, I don’t want to say that I think the world is going to burn, but I am extremely fearful of what we will experience over the next half year and maybe even for the remainder of 2026, because it might not necessarily be resolved with the election in November. It might spill over into the aftermath if 2020 has any indication. So, I’m worried. I’m genuinely worried that the world is going into a dark place in the not too distant future.

Kevin Press:

Yeah, it strikes me that we’re asking questions, even just asking questions that I don’t think we’ve ever seriously asked before. These things have always been batted around, as you say, lots of theories throughout our lives that we’ve heard, but, this time feels different. I think that’s fair to say.

John De Goey:

Yeah, I do. And that’s one of the things that I talk about in “Bull Shift” as well is that people will say, “Well, stock markets always go up in the long run.” Well, yes, they do, but they also have stretches of 10 or 15 and maybe even 20 years where they go sideways. And, given that we have gone up so very much since March of 2009, you know, we’ve now got a bull market which is basically 17 years old and counting, notwithstanding a hiccup for five weeks during COVID and another hiccup for seven months during the rate hikes of 2022. It’s a long-term secular bull that has lasted almost a generation. And, I worry that people haven’t thought about the threats that are real that have never occurred before: AI, climate change, demographics in terms of no one having any children anymore and people getting older and social security being a real drag, debt levels. You know, the U.S. debt level is now over $39 trillion.

There’s a guy by the name of Nouriel Roubini, who wrote a book called “Megathreats” about three or four years ago. And in it he itemized 10 different things that are basically threats that we’ve never, ever experienced before in humanity. And, we’re in a bit of a poly-crisis where all of them are playing out in real time simultaneously. And, what he said is that it was virtually impossible for the world to make it out of the decade without having a major, major drawdown. And that was four years ago. I think it’ll be four years this autumn. So, we’re at the point now where things could go very bad and could stay very bad for a very long time. So my concern, again, I don’t want to be a doomsayer, but by the same token, I don’t want to be cavalier about the risks that people are perhaps naively thinking will be minor.

I think we are in for some very challenging times, and a lot of the things that we are dealing with are things that have literally never happened before. And so we may have gotten through previous challenges, but these challenges are unlike anything we’ve ever experienced. And, as a result, I think all bets are off in terms of how we’re going to react.

Kevin Press:

I think we can talk about Dr. Doom and not be criticized as being doomsayers. Kevin Foley at YTM Capital wrote a great piece for us. It’s called “Technicals Over Fundamentals.” What he wrote about was how investors have learned to buy DIPs, which has benefitted them, as you say, for years, right? Central banks have been quick to support economic growth, which investors keep benefitting from. In other words, fundamentals aren’t driving investor behaviour. What’s your take on that thesis?

John De Goey:

I have to grudgingly admit that I think he’s mostly right. It’s funny because, again, I have a background in public policy, and I have spent much of my, certainly my younger years talking about a positive role for governments in general, both in terms of fiscal and monetary policy. And, I was shocked at how when COVID hit in February-March of 2020, of how this… what I call the COVID playbook was co-ordinated across the entire Western world. All the governments of the world basically brought interest rates down to zero. All of them started handing out cheques to keep households afloat in order to prevent both a health crisis and an economic crisis. And, it worked. It created inflation. And that was a new problem that had to be solved a couple of years later. But, the willingness of governments to intervene, to extend the business cycle, and to find a way to keep things moving has been a largely positive development that never used to happen before. And I think we’re seeing that it’s working very, very well.

When the time comes to buy the DIPs, so my concern is always the hubris of the “Bull Shift.” If people start thinking, “Oh, well, we’re invincible,” the next time we have a major problem, central banks are just going to lower rates and my stocks will continue to go up, and my property values of my home will just continue to go up.

Well, that worked well in a world where COVID is a problem, but what about a world where oil is at $150 a barrel? What about in a world where people can’t get food? Then you can’t really solve the problem through a loose monetary policy. And, so now, we’ve got a situation that you and I have talked about before, Kevin, where there’s a very real chance of stagflation. And stagflation is a different beast altogether from what we’ve had to deal with in the past eight or nine years. And, it’s a problem that we dealt with really in the ’70s. The last time we really had stagflation was in 1979 because of, wait for it, problems with Iran. So here we are, what’s old is new again.

Kevin Press:

Yeah, it’s hard not to draw parallels when oil supply and the phrase “energy crisis” starts getting batted around again. One of the key narratives this year was that we would see a significant CapEx spend on AI across multiple industries. Of course that was before any of what’s happening in the Middle East was on anybody’s radar. Is it playing out like the smart people said it would?

John De Goey:

Well, that depends on who you think the smart people are, I suppose. It’s playing out in a way where energy prices are expensive, and, yeah, so the oil is expensive for energy, the stuff that you put in your car, but, you need electricity for these data centres in a way that we’ve never needed energy before. And so, energy is a strategic resource in any way you look at it. And, again, that’s one of the reasons why, you know, the Canada Strong narrative works because, you know, we have a government that talks about being a global superpower of both clean and conventional energy because there’s just such a thirst for energy all around the world. So, is it playing out the way you expected, the way I expected? What I expect is that things will get very frothy until someone realizes that the valuations can’t be sustained. It happened in the 1800s with railways. It happened at the turn of the millennium with dot-com. And I think it’s happening again right now. I don’t know when the music’s going to stop. I think we’re getting close. But everything up until now has been playing out the way one would expect. But, just, as long as you realize that you’ve seen this movie before and that when the music does stop, things do, in fact, come down to earth rather quickly.

Kevin Press:

There is so much right now for advisors to absorb and to translate for their clients. There are conversations that are happening with clients right now that are likely outside of the comfort zones of all kinds of advisors, I imagine, across the country. What advice do you have for them in terms of how to talk to clients right now?

John De Goey:

So my concern, I’m going keep on coming back to “Bull Shift” because it’s ironic. I published the book in late 2022. And, I was worried about valuations being high then. Well, imagine, you know, the fact that here we are now heading to the middle of 2026 and valuations are just higher.

The CAPE is now, the cyclically adjusted price earnings ratio for the S&P 500 is hovering around 40 or 41, the second highest it’s been ever. The Buffett ratio, which is something that Warren Buffett uses, which is market cap divided by global GDP, highest it’s ever been. And so, I think advisors should be telling clients, Look, there’s a lot of risk in markets in general and the U.S. stock market in particular. And you should be finding ways to diversify your portfolio away from those things that have done very well. Thank you very much. Take your profits. Be fully invested. I’m not suggesting heading for the hills or heading to cash or anything like that, but find other things that you can invest in that will still get you good returns that are not as likely to take a major haircut if things are anything other than perfect going forward.

Kevin Press:

Thank you, John. Terrific to see you.

John De Goey:

It’s been a real pleasure.

Kevin Press:

My guest has been John De Goey, Portfolio Manager with Design Securities, author, and podcaster. Visit JohnDeGoey.ca. Canadian Advisor.cast is a production of Newcom Media. It is produced by Alisha Hiyate. Noushin Ziafati is our associate producer. My name’s Kevin Press. Thanks for being with us.