Bulls in bears clothing
Markets turn bullish, office vacancies increase, 'Dry January' might bring post-alcohol opportunities, 'pizza hedge bonds' are a thing - as are more Small Business insights in your inbox!
The biggest news this week is…things are kinda feeling more confident? Not wanting to jinx anything, and you might not have felt it in your P&L yet, but the signs, figures and facts are getting up there. Markets are rallying a bit, talk of recession is ebbing a bit, robots are apparently the future (again), property is still strong, private equity is opening their doors and looking to invest (in daycares for some reason).
This is likely another <SWING!> in the constant cyclical ‘will it / won’t it’ recession discussion, but the market is certainly moving confidently despite rate rises, profit warnings and general inflation pain - and the numbers seem to prove it. It feels like the current excitement around AI and how it will transform business is fuelling some of this fire (even if it’s something of a coincidence), but really there’s a general sense that everyone looked at the falling inflation %, rising job numbers and general market stability and thought ‘how bad can this get’ - and then realized ‘it’s probably not that bad really is it’. If things keep on keeping-on, then we’ll all see something of a loosening. Maybe lower lending rates, maybe cheaper mortgages, maybe better revenues, maybe a happier tomorrow.
It certainly feels like there is a thaw coming, so, hey - let’s keep everything crossed and hope for the best.
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Top story this week☝️
Stocks rally, market turns bullish(ish)
The majority of groundhogs might have seen their shadow and scurried back into hibernation (one, sadly, didn’t even make it that far), but the investor market is beginning to wake up off the back of positive inflation and jobs reports, and they’re predicting a short financial winter. The S&P 500 jumped more than 1% and the NASDAQ exceeded 2% - but what was most interesting was the jump in tech stock. Tech has taken a beating in the past year - job losses, profit warnings - and as it’s seen as more ‘risky’ than traditional stocks, it tends to show how confident the market is. Meta (Facebook) stock is up 51%, Amazon is up 31%, Alphabet (Google) is up 20%, Apple is up 20%, Microsoft is up 10%. This is a huge rebound by any measure, even if those stock prices are a long way from their all-time highs. Why is this important? Well, the market was worried that we’d see another dot-com bust, but this time round tech was disciplined and survived the rout. Tech is so embedded in all markets now (and the future of markets) that this was really a test of how much they are trusted, and it looks like they passed the test. “But I’m a Small Business owner - how does this affect me?” - great question. What we’re hoping is this means lending will get cheaper and the banks will open their doors again. Which would be nice. Link
US raises rates, adds jobs, inflation still on a knife-edge
We’ve covered how inflation works before and how weird this current market is, but to add a cherry on top of the weird, the US Federal Bank has raised the rate to 4.75% while also hinting the rate could ratchet as high as 5.25% - just days after Canada announced a rate hike pause. This is despite both Canada and the US adding near-record numbers of jobs in December and ‘playing for the same team’. Does this all matter? It does when it comes to mortgages - which are primarily tied to US bond rates. Link
Office vacancy rates remain high, housing shortage remains desperate
There’s an increasing number of empty offices downtown (Calgary is currently reporting a 30% vacancy rate). There’s also a post-pandemic national housing shortage. So the thinking is - what if these empty office spaces could be repurposed into housing, solving all these problems with one bold strategy? Great in theory, but maybe not in practice. Link
Top ChatGPT contenders. Link
Great podcasts for Small Business owners. Link
A follow-up on that ‘Tsunami’ of retiring owners. Link
The Data Room 🤖
Each week, The Data Room provides some insight into Small Business data, and each month(ish) you’ll get a deeper dive in your inbox. Here’s this weeks insight:
Unreal returns and the hedging of pizza
Real Return Bonds (RRBs) are hard to understand. Fixed price pizza is easy. But the disappearance of RRBs and the magical appearance of ‘pizza hedge bonds’ shows that both the government and pizza stores are predicting an extended period of high inflation.
Back in November 2022 the Canadian government announced that it would discontinue its real return bonds (RRBs). Now, this has sparked a lot of criticism - so let’s try to understand the arguments for and against this federal policy change.
Let’s start off with the basics: what are RRBs, and why do people (who write articles that accuse the Department of Finance of making a misstep) seem to like them so much?
RRBs are different from regular government bonds because they are inflation-linked, meaning that the face value of the bond will increase as inflation increases. Standard government bonds are low risk and low yield compared to many other investments, but in order to attract investors the yield has to increase when inflation rises. In periods of dramatic inflation the yields on standard bonds won’t keep up, which means buyers will take a loss on the real value of their investment, however, since RRBs are inflation-linked both their face value (and therefore yield) will increase meaning investors will still come out on top.
So, to put it simply, during periods of lower inflation investors can take advantage of a standard government bond’s slightly higher yield, but during periods of high inflation an RRB will generally outperform a standard bond. The Department of Finance stated that they have discontinued RRBs because of low demand and low liquidity. Since there isn’t enough active trade in the RRB market, they would rather focus on other initiatives like green bonds. This stance has earned them some pushback, with claims that the popularity of RRBs has in fact increased and that the low liquidity is the result of oversubscription – meaning that a majority of buyers hold onto these bonds instead of selling them which then limits the supply.
So what’s going on here, and what does this show us about Canada’s current thinking on monetary policy? It’s safe to say that when even Pizza Pizza is offering fixed-rate deals so their customers can hedge inflation, the general public is understandably wary about their economic future. If you’re the Department of Finance, this is bad news - you want Canadians to have confidence in the value of their buying power so that they keep buying, borrowing, and saving at rates that will manage inflation and bring it back to levels around 2%. The claim can be made that doing away with RRBs signals that the Department of Finance sides with Pizza Pizza in thinking that inflation is likely to rise and that giving investors access to bonds that are inflation-linked is a bad idea.
For the Canadian government - just like pizza - getting burned is bad for business.
The Balance Sheet 💬
Each week, The Balance Sheet, provides Small Business opinion, voices and futures, and each month(ish) you’ll get a deeper dive in your inbox. Here’s this weeks insight:
Could ‘Dry January’ extend indefinitely?
Cannabis boomed, then settled down as the speculators moved on. But it points to a larger possible post-alcohol future, and it’s a future which is full of opportunity given the ever-prehistoric state of Canada’s provincial liquor laws.
It wasn’t that long ago that the craft brewery renaissance happened. What started as a trend towards smaller micro-brewing in the 90’s turned into booming business in the 2000’s driven primarily by taste, trends and generational shifts. By the later 2010’s craft breweries were mainstream, and the chances of not seeing a progressive beer menu in a restaurant or a wide-ranging taproom in your local town became much rarer. Craft breweries became big business, extending from simple production to full scale hospitality, events and international export.
All of this happened in Canada despite liquor still being held ransom by somewhat Calvinist provincial law making. Prohibition might appear to be something in the long forgotten past - but for Canada prohibition is still a reality in some shape or form. The lack of a nationwide approach to liquor, in particular, makes even internal trade very difficult and expensive, thanks primarily to the bare-faced, de-facto dominance of liquor corporations. In Nova Scotia, one of only four provinces that allow inter-province wine e-commerce purchases, that wine must be purchased directly from the wine maker themselves and that wine must be produced in Canada. That same e-commerce purchase in Ontario or Quebec meanwhile would be illegal for no clear reason, other than apparently trying to cut off several huge markets for Small Business owners. However at the same time in Nova Scotia, liquor can only be purchased from NSLC stores, unless a private retail licence is issued - of which only 4 have ever been granted. These private licences are terminally ‘under review’, but that ‘review’ has been happening for decades with no movement towards a meaningful change in regulation. There are very few angles on this particular Kafka-esque piece of provincial liquor legislation that don’t look more than a little bit suspicious.
Canadian liquor law is a mess, and it’s a constant headache for Small Business owners operating in either viniculture, distillery or hospitality. You want to open a simple wine bar in Nova Scotia? Oh, you’ll need to invest in a fully-staffed kitchen and a food license too! Can you open a bottle-shop in Ontario? Yes? Maybe? Want to do the same in NS? Nope, that’s still illegal - but you can sell liquor with takeaway food, as long as that liquor is wine, a cooler or cocktail (in a single-serve tamperproof container - up to 400ml - with no more than three ounces of alcohol each, that must contain multiple types of alcohol or at least one additional ingredient like simple syrup, soda or juice).
The change or loss of a licence can also risk a business overnight - as Cape Breton brewer Big Spruce found out when they were prevented from selling their beer at farmers markets despite having a liquor permit to do so. As the co-founder of the Warehouse Market pointed out:
"The profit from selling beer was what gave us the confidence to give a really good health insurance policy to all of our employees."
This slice of reality will, of course, not change anything at the liquor corporation HQ. Small Business survival and happy employees apparently mean very little when each province has a mega-monopoly to defend - and Small Business owners are always going to be the easy target.
The move to post-alcohol therefore has distinct opportunities for business owners and investors. As Health Canada makes us all reconsider the viability of alcohol in our weekly diets and with 35% of drinkers practicing some form of abstinence, there’s already a post-alcohol renaissance in the making. With no need for licences, expensive legal fees, immediate international e-commerce markets, grocery store stockists…the list goes on - if you were to consider starting an alcohol - or alcohol adjacent - business now…would you? Or would you think about what removing (or even reducing) alcohol from your model might mean for your balance sheet? It’s possible - bars like Getaway are pioneering the atmosphere and social interactions of the wet bar but with a dry approach. We’re moving a long way from sugar-laden $14 mocktails now - hyper-low alcohol natural wines and ciders are providing law-bending access to hangover-less after-work hangs, creative ingredients and cutting edge zero-proof mixology are creating fascinating chapters in non-drinking bar culture.
And it’s a culture that’s growing fast with a new generation of potential drinkers increasingly eschewing the bar lifestyle for better bang-for-the-buck experiences that they’ll likely remember - that is if the numbers can add up and the business models can support it.
Space Camp 🚀
Each week we highlight some news, insights or updates aimed specifically at those starting a new business, or considering a new startup venture. If that’s you, you should also check out our Startup and New Business Programme.
BC charts First Nation representation in startups
An interesting report from the First Nations Technology Council about the level of First Nation representation in BC startups, with a welcome nod to the struggle First Nations founders have in accessing capital using traditional funding routes. Link
Toxic culture and the death of a startup
Planswell was a successful Toronto-based startup that exploded with claims of sexual harassment. This is an interesting look at how company culture can undermine women - and particularly women of colour. Link
Market at-a-glance 📈
BOC Indicators (Link):
BOC Prime Rate: 6.70%
BOC Unemployment Rate: 5.0%
BOC CPI Inflation Rate: 6.3%
BOC $USD Exchange Rate (Link):
Low: 1.3312 CAD [0.7512 USD]
Average: 1.3362 CAD [0.7484 USD]
High: 1.3442 CAD [0.7439 USD]
Best GIC Rates (Link):
1-year GIC: 5.30%
3-year GIC: 5.28%
5-year GIC: 5.28%
Best 5Y Mortgage Rates (Link):
Prime Rates (Link):
TD Bank: 6.70%
National Bank: 6.70%
CRA Canadian Pension Plan Rate: 5.95%
CRA Employment Insurance Rate: 1.63%
CRA Minimum Wage per Province: Link
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