Global Economics Archives

Buy The Stock Market Drop? Tariff Mania.

Let the Games Begin:

As someone who likes to purchase stocks when the markets are bleeding, I wanted to do a quick discussion since the stock market is basically in freefall after Trumps “Liberation Day”, I think he meant he wants to liberate the US from it’s money.

After doing a bit of reading the net tariffs the US has imposed are around 22% overall, which is 19% higher than it was last year. After reading this Motely Fool article, they point out that every time there have been small increases in the tariff rate, 0.5-2%, the markets tend to fall around 20%-30% from past peaks, this has happened countless times in history. These “Liberation Day” tariffs are 19% higher, so it’s likely this will be one of the largest stock market declines potentially ever seen, (assuming Trump’s administration keeps these in place, who knows).

Missed the Boat:

I’m quite highly indexed in the US market as a Canadian, around 80% of my holdings, so this has been somewhat painful (well not really since I tend to ignore the market day to day). But as far as my investments go I don’t really like to sell my stocks, and I haven’t. I’m planning to ride this painful fall all the way into the pits of despair, as I don’t have the time or conviction about the timing of the bottom to sell on the way down and then hope to buy at a lower price. Generally selling while a market is falling means you’ve already missed the boat.

My Covid Market Strategy:

Last time, during covid, I took out some loans to invest in the market near the bottom. Then the recovery started because the central banks made it very clear they would cut interest rates. The economy bounced back as it learned how to manage this unknown event. Yes there were supply chain disruptions, but the fundamental hyper-globalization of the world economy wasn’t put (as much) into question.

Should I Do It Again?

Since I don’t have much cash on hand right now, the question I want to answer for myself, is it a good idea this time to take out loans to invest? Is this a prudent financial plan? As of writing, prime rate is at 4.95%, so I’d have to make above a 5% return in the stock market each year I’m borrowing money, in order to justify this plan. I’d also have to try to evaluate the risk of rates increasing. I’d also have to come up with a somewhat reasonable estimate of the length of time the stock market will be in the dumps and when it will start to recover. With these questions in mind I began researching.

Bank of Canada Thoughts:

I started with what the Bank of Canada has to say about tariffs and interest rates, as well as the speed of the recovery. This paragraph from an event in Feb 2025 does a good job of summarizing the discussion and the problem.

Initially, they are expecting excess supply in the economy as exports fall, this will likely lead to a short term jump in inflation. Assuming this jump isn’t too bad. We will then have the problem of a lack of demand, due to job losses and lack of business investment in the economy, which Canada has already been suffering from for the past decade or so and this trade war will only make worse.

“Smooth the Decline”:

As Tiff Macklem said, they cannot restore lost supply, but they might be able to “smooth the decline in demand” a.k.a. cut interest rates, which they’ll try to balance with upward pressure on inflation, a.k.a. don’t cut them too much.

Projections from the federal reserve were sitting at 3 further 25 point rate cuts as of a week ago, but today economists are projecting 4 cuts. Additionally, while the Bank of Canada said itself that they would have liked to hold rates prior to all the tariff nonsense, the projections from all the large Canadian economists were an additional 2-3 cuts for the Bank of Canada in 2025. I think it’s possible we also see 3 cuts bringing the benchmark rate down to 2% by the end of 2025 given this tariff shock. There are risks to the upside that inflation does get somewhat out of control due to the tariffs (which inherently increase prices), and the bank is forced to hold or even slightly increase rates, although I think the bigger risk comes to lack of productivity and output, rather than serious increase in prices.

Pandemic Inflation vs. Tariff Inflation:

The reason prices increased so much during covid was that people were unable to work leading to supply chains getting backed up, then governments and central banks pumped trillions of dollars into the economy. This was a perfect recipe for higher inflation. Fewer goods to go around, but citizens with more spending power for various reasons. This time around the dynamics are different, people don’t have as much money floating around, savings rates are in the gutter, people are already stretched, there aren’t as many good jobs around as there was in 2019. What this means is that higher prices will likely just result in less demand for goods, leading to contracting economies and drawn out recessions. Covid wasn’t really a traditional recession, the recovery was unprecedented. This time is going to be different, this is going to cause long term, painful economic damage.

S&P 500 P/E Ratio:

Looking at history, what will likely happen to the stock market is a big drop, followed by years of slow climb as the economy adjusts to this new reality. The only question is how far it will drop. Another thing to consider is that looking at the Price to Earnings ratio of the S&P 500, it’s hovering at around 23.5 as of writing and earlier this year it was close to 27. Even at a P/E of 23 this is still on the higher end of an “expensive” stock market, something closer to 20 would be considered reasonable and a good buy. Since these tariffs will likely decrease consumer spending and cause companies earnings to fall in the short term, it easy to see that the stock market might have a ways more to come down based on this alone.

Here’s a good chart of where the stock market was right before the dot com bubble, and where our 2025 market was. Really it looks like the tariffs were the catalyst the market needed for a bit of a correction.

Q1 Just Ended (safely), Q2 Will Hurt:

The earnings part of this ratio is yet to be updated as we await company earnings, since we just closed out Q1, earnings hits won’t show up in financial statements until Q2. It’s hard to say if the market will be able to properly price this in, or if Q2 earnings season this summer will lead to another large leg down in the market as we see the real tariff reality reflected in earnings. As the market continues to try and price in the absolute worse case scenario, it’s likely going to overshoot to the downside, which is when the buying opportunity should present itself. Only warning I have is be prepared for a very long and slow climb back up, and be prepared for multiple short term drops as the market begins to get more information and a more complete picture.

Short-Term 4-Year Plan:

At minimum it will likely be at least 4 years before things change (again, unless Mr. Orange changes his mind). Factoring in a 4 year bleed, I somewhat hesitate to recommend the plan of borrowing money to invest. The state of our economies were already stretched quite thin prior to this, and this will completely shake up global trade. Another potential wrinkle in this policy is that this ends up being a temporary 4-year (or shorter) policy, and in 2029 everything goes back to pre-tariffs. I would consider this a very likely scenario.

Unfortunately, this being the case would arguably make things even worse in the short-term for Americans as companies will be reluctant to onshore production and invest in long-term plans to build in the US. Which will just result in these companies trying to find other partners to trade with and cut the US out entirely, and overall reduce economic activity in the US.

Guns and a Foot:

The US will almost certainly see high inflation and job losses due to companies inability to be competitive globally and export at reasonable prices as countries start to put reciprocal tariffs in place. It’s equally possible in my view, that this “Liberation Day” ends up being very short lived. Once the US begins to feel the impacts, markets falling. It’s possible that everyone, including those around Trump in the next 6 months to a year start calling for him to revert these policies. If he does reverse course prior to the end of his term, the markets will likely react positively, although they probably won’t return to their highs of January 2025 due to a lack of trust in Trump.

Passing of Time:

As an investor you have to balance the possibility of both these things happening. It’s likely this will be long and drawn out, but it is equally likely things will change sooner than later. In either scenario, the US *should* return to a more free trade policy at some indeterminate date in the future. Since this is almost a certainty, whether in this administration or the next. The length of the downturn doesn’t necessarily matter if you are a long-term investor buying with cash you can afford to dump into the market. This is likely going to be viewed in the future as a stellar buying opportunity. I think it is a safe bet to say that for the next 4 years, the US will no longer be viewed as a safe haven for capital. The long term impacts on US economic dominance due to this policy, lack of trust with trading partners, intangible things, will be harder to quantify.

Modern Era Volatility:

Something you might notice looking at a chart of the S&P 500 is that in recent years volatility has increased significantly. This is partly due to the speed at which information travels these days. Reactions to world events tend to be more instantaneous than they were 25 years ago. The decline from the dot com bubble was a 2-3 year long protracted fall, whereas the covid decline was, I’m not kidding, 3 weeks. Then the fed stepped in to “save the market” and the recovery began, within about 6 months it returned to where it left off in Feb 2020. Between 2020 and 2024 there were some ups and downs, with a period of a 20% drop from 21-22, but on the whole things were more stable.

I wanted to point this out because I think the modern era will play into the speed and severity of the decline. I don’t expect the recovery to be nearly as quick as the covid recovery, but I think the sharp declines in the market will continue for a couple of weeks at most, then things will stabilize once all this tariff stuff plays out globally. This makes predicting the bottom a challenge, so the general advice would be to buy in slowly in chunks on days when the market is down over the coming weeks and months. I hesitate to think this decline will be as fast as the covid decline, but the “big” one time shock of these blanket tariffs, the “main event”, has occurred. Whereas during covid, the main event was when everyone realized the speed of the spread of the virus and then governments around the world telling people to stay home. This time it’s Trump telling America to… Well, insert your favourite expletive here.

US and China:

Importantly, to much of the high tech industry. Chips from Taiwan will become more expensive. Ton’s of supply chains are located abroad, especially in China, and lots of consumer electronics are manufactured in Chain or Taiwan. With the additional US tariffs, projected lack of consumer spending, you might see companies like Apple drop significantly (which it has already). I’m not going to be buying individual stocks, but my suspicion is that consumer spending will basically halt for a while as people worry about what the tariffs mean for their jobs, and as many people begin losing their jobs during Q2 they won’t have money to spend.

To Borrow or Not To Borrow:

On balance, I think borrowing money right now to invest holds a good amount of risk. I don’t really see a guarantee that things will improve. When we had the covid downturn, the action of the central banks and governments supported economies rather than taking a chainsaw to them. There are many more uncertainties this time around. That being said, every time in history that the US market has fallen, things have eventually recovered. On top of this, there is an limit to the amount of time that Trump will be in office (for now).

US Global Dominance in Question:

The only assumption that hasn’t had to be questioned for the last 80 years, is if the US remains the dominant economic force once all of this is over. They were riding the high of being one of the most innovative and powerful economies in the world. The competitiveness of the US on cutting edge tech, and top talent from across the world being attracted to the economic machine is genuinely put into question thanks to this move. China was already on pace to surpass the US as the largest economy, it’s currently at #2. I suspect this will just accelerate the US decline in competitiveness.

I am still somewhat naively hopeful, that the US will come out of this and be able to resume somewhere near where they left off. There will be people within the country that will continue to be on the cutting edge, entrepreneurialism is still going to be at the heart of the US. They will still export a lot of media to the rest of the western world.

More Room to Fall? China Hits Back:

I think there is still room to fall. The market is down about 15% from it’s January peak. Considering these numbers are only starting to bring the market back to realistic valuations, I’m not even sure the tariffs have been priced in yet.

On the “pricing in” tariffs front, today China announced reciprocal tariffs on the US, which caused the already down market to drop even more today. The US imports over $450 Billion of Chinese goods which now have a 34% tariff slapped on them as of this morning. Stocks with large exposure to the Chinese market such as Nvidia, Apple, Tesla saw more severe drops than the market overall. Over the weekend, and starting next week, it is likely that other countries will retaliate against the US as well, namely the European Union. Which will lead to more pain and further drops in the US markets. Each time another large economy decides to fight back against the US tariffs, it will continue to hurt the US markets more and more. As this builds up I suspect it will become more and more likely that Trump will backpedal. Even if he does no one will trust his word anymore and the market may just continue its freefall.

Timing:

With the small amount of cash on hand I have right now, I’m likely going to start buying in slowly. I won’t buy in all at once, I’m going to buy chunks in the next week or two once the drop is nearer to 20%. With a clearer picture now in my mind, I may also take on a small amount of loan risk that I feel I’d be able to pay off successfully should that turn out to be a poor decision. It’s also important to consider your stage in life when deciding how much risk to take. I’m 25, I don’t enjoy taking on huge amounts of risk, but I’m young, so taking on a bit more risk than someone who is retired isn’t a bad move. Regardless, prudence is also important when we’re talking about entire economies getting hurt and people losing jobs. If you’re not in a recession proof job, be careful. I don’t really have all that much to lose right now, but I also don’t want to be an idiot and lose for no reason. So calculated risks are important, and I think this is a good time to take action and calculate some risks.

That’s my analysis of the scenario, only time will tell what the outcome is, but I’ll leave you with the age old saying of “buy low, sell high… And hope the US comes to it’s senses”. We may not be at the eventual low yet, but buying on the way down has proven to be a winning strategy time and time again, timing the market is a fools errand, so just be sensible. Trump can do a lot of damage, but I believe the US will still come out of this as a top player on the world stage, even if it takes 4 years for all this to blow over, and even if there are some irreversible problems caused, only time will tell. This time, the decision isn’t as easy as it was during covid, but if you drown out a bit of the noise. Buying in while things are looking bad, and understanding that this is all (most likely) temporary, is how success stories are built. As always.

Keep Investing,

-Oliver

End Note:

Dividend Stocks vs. Interest:

I wanted to add a bit of an endnote here. Last time when I borrowed money to invest, I did it relatively safely. I mostly purchased stocks that had over a 100-year history of paying out dividends, in a country with a stable economy (which is a bit harder to quantify this time), and I made sure that the dividends they paid out would at minimum cover the interest on my loan, effectively reducing my risk to near zero. Beyond that any increase in the share price was “free” appreciation. Just wanted to throw that out there as something to consider, obviously be careful about the industry you choose, but this is just an idea to mitigate risk while increasing your position in the market.

Rate Cuts and Housing, The Booming US Economy & Canada’s Innovation Problems

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post.

Bank of Canada Moves 0.5%

Coming off the back of a Bank of Canada rate cut of 0.5% on Wednesday, October 23rd, 2024 there are still some questions in the air about if/how/when we will see this change start to impact fixed rate mortgages, housing market activity, employment rates, inflation etc. I also wanted to briefly mention an anecdote I heard from a friend of mine since we are nearing Halloween and I thought it was interesting, related to the economics of Halloween.

Inflation Down from August

As it stands right now, the 5 yr government bond which fixed rate mortgages are based on, has actually begun to tick up slowly in the past 2 weeks, but the longer term trajectory is declining overall. The Bank of Canada said in their last decision discussion that if the economy begins to evolve in the way they anticipate that more rate cuts are on the table. Inflation as of Sept 2024 was down to 1.6%, oil prices dropped quite a bit more than anticipated which is helping, housing has finally also started to subdue, I have noticed this myself, that prices for housing rentals and purchase are becoming more competitive and even post interest rate cuts the “crazy increase in activity” hasn’t happened.

Prime Time For Home Buyers and Investors

There are still a lot of good deals out there for the savvy investors and home buyers, condos are somewhat oversupplied in many markets and I truly think that now is a once in a long time type of purchasing opportunity (feel like I’ve been saying that for 2 years, but I think we’re approaching the tail end of good deals). There is a great opportunity right now to get into a property at a great price with lots of choice on the market and ride declining interest rates, lock in a fixed rate a year or two from now at something closer to 3-4%. Once companies begin hiring again the hiring freezes are over, economy starts moving again, I’m predicting a very different market 12-18 months from now once these rate cuts have worked their way through the economy.

Local Real Estate Strains and Successes

The Bank of Canada has also predicted in their October 2024 Monetary Policy Report that GDP will climb as we go into 2025 and 2026 as compared to 2024 (which was a tight year, if you tried to renew a mortgage at the start of this year you’ll have felt the strain). So if we’re factoring everything in, expanding economy, lower inflation, decreasing housing prices, decreasing interest rates, 5-7 months of supply in some (great) housing markets, I really think this is a case of buy when others are selling. However, housing tends to be a very regional thing, some areas in Toronto have actually just continued to go up, through all of this, it’s almost like it’s own little bubble where the economic strains didn’t happen (generally in the 1.75 million – 3 million range in particular pockets).

The Problem with Condos (Oversupply & Office)

Condos on the other hand are dime a dozen right now, so much available, great prices if you know where to look, and very few buyers. Now, why are there few buyers, well if you go back to my last post where I talked about the increasing vacancies in office real estate you’ll have noticed that downtowns are having a harder time than suburbs are right now with a majority of office employees working from home 2 or more days a week. There’s simply not as much need to live downtown anymore, so people have moved out to the suburbs where they can get something larger and only have to commute downtown once or twice a week, not a bad deal especially considering you can get a bit more space for the same price as a shoebox downtown. I believe that the general economic malaise, in addition to the shift in expectations for office workers has led to a twofold issue of extremely high office vacancies (20% in some downtown areas), which has led to this oversupply of condo inventory as well. If you look at all these factors of different types of housing supplies building up in different areas they are all somewhat related to a simple yet profound change in the way that our world works post-covid (in part).

Consumers Are in “Wait and See” Mode

Another thing noted in the Monetary Policy report is that consumer spending has continued to decline from the start of the year to Q2 (and likely into the end of the year). Things like cars, vacations, and interest rate sensitive goods are all seeing declines compared to last year. People are feeling the strain, so the interest rate cuts are quite welcome. On a personal note, I was searching for an apartment to rent recently as well as potentially purchasing a used car, and it seemed like every time I looked prices were continuing to decline, “if prices will keep dropping, why not wait until they bottom out.” I’m sure that’s what a lot of people who are looking at housing and cars and any other large purchases are thinking right now. There will have to come a point where interest rates on loans are appealing enough that people will want to purchase their car or home or whatever else, either that or prices are low enough to entice the same. But the issue with just waiting for prices to come down is that we need people to be spending money for our economies to not collapse, so holding rates too high for too long can lead to some negative consequences that most people would not be too happy about.

United States Riding the AI Wave

Strangely through all this downturn stuff, the US economy and stock market has just been doing just fine. The US has a lot of growth companies, and have been able to ride this new “hype wave” of AI which has just injected even more excitement and money into their veins, meanwhile a resource based economy like Canada is suffering because of reduced demand and reduced spending on things like oil and gas, while supply of oil and gas continuing to improve. As an aside, Canada continues to be a bit of a place that is tough on innovators, there are tons of regulations, which arguably is good, but too much can lead to a stifling of innovation. Highly regulated sectors tend to favour incumbents, again, not necessarily a bad thing, especially in some sectors where regulation is extremely important.

Canada’s Lacking Innovation Problem

I don’t know that innovation is quite in the blood of Canada in the same way that some parts of the US “move fast and break things.” On the other hand, if you look at a lot of these “fast movers”, we’re essentially returning to baseline with some modern upgrades where now instead of 20 cable channels we have 20 streaming companies, and instead of taxis we have Ubers which are just as expensive or more expensive in some cases. There’s a great video about how tech companies are becoming worse and worse and basically once they undercut and drive out all their competition they cease to be good deals and with the monopoly they now hold increase their prices and leave people without any other option but to pay for their services.

Tech Company Monopolies, Poor Regulation

It’s a bit more complicated than that, but in a nutshell, that is what has been the ultimate result whether it was the intention from the get go or not. From a business standpoint, it’s just good business to try and get hold of a monopoly or something close to it, patents were invented with that idea in mind. Allow innovators to profit off their creations. But just as I was complaining about too much regulation, there are some sectors that do not have enough regulation or are too highly influenced to properly regulate and encourage competition. There are simple reasons why we can’t have a purely capitalist economy, and why a purely state run economy runs into problems as well. As with anything, there needs to be a good middle ground, in some ways Canada does a better job of this than the US, but with respect to innovation, I think Canada needs to be more encouraging of this and work on keeping our best potential innovators in Canada instead of just hopping over to the US where the rules are a bit more favourable.

Economics of Halloween (God Bless the Dollar!)

To close off this discussion I wanted to divert a bit and talk about Halloween. It’s not the largest shopping holiday, but it is one that almighty capitalism has invented to collect our dollars. I was speaking with a friend recently and was informed of these seasonal Halloween shops and the micro economies that they work in. Some of these smaller stores will top $1,000,000 in revenue just on this one holiday, retail margins tend to be significantly smaller than something like software, but if you have a few stores opened, each doing $1,000,000 in revenue, you have quite a solid business on a few months worth of work each year. So I was curious, how much money does Halloween bring in each year? I only have the US numbers and they tend to spend a bit more than Canadians but it’s interesting nonetheless. In 2023, Americans spent $12.2 Billion on Halloween. Seems like a lot of money. To give a frame of reference Amazons 2 day “Prime Day” sale this year generated $14.2 Billion in revenue. So, while Halloween is quite popular among children and their parents. Amazon, in just 2 days, does more revenue. Other holidays spending for reference: Valentines Day $25.9 Billion, Black Friday online sales $70 Billion, Easter $22.4 Billion. Halloween at $12 Billion is a good attempt at a shopping holiday, but it doesn’t seem to have as much mass appeal as pretty much any other shopping holiday. Moral of the story, give Halloween a boost and buy some chocolates this year :P. Just thought this was kind of interesting. That’s all for my economic brain chaos, thanks for reading.

Keep Investing,

Oliver

Newsletter #24: Bank of Canada Rates and Economic Impacts. Slower Return to Housing Market

This Weeks Blog Post:

Rate Cuts and Housing, The Booming US Economy & Canada’s Innovation Problems:

Why does it seem like the US in invincible
Why tech companies get worse and worse every year, the undercut and monopolize strategy
Small tidbit on Halloween and shopping holiday economics

Read the full article here: https://oliverfoote.ca/canadas-economy-vs-the-us-innovators-technology-housing/

Market Talk:

This weeks market talk is sort of woven into the blog post. But effectively. yay! 50bps rate cut! Bank of Canada says more to come. Economy should improve in 2025-26. Housing still slow, especially condos. Amazing time to be a buyer. Probably won’t see this type of inventory again for 10+ years if rates continue coming down.

Event Update!

Thank you to those who have already indicated interest in my event (details below)!
If you would like to be a part of it you can respond to any of my emails until the event with: “sign me up!”
If you have done so already, expect to receive a Zoom link about 1 week prior to the event.

Topics:

Mortgage rule changes coming Dec 15, 2024,
how interest rates are affecting housing & the economy,
and more!

Details:

Date: Saturday Nov 16th, 2024 @ 10:00AM
Duration: 45 mins – 1 hr
Location: Zoom! (Webinar)
Special guest: Deren Hasip from Mortgage Scout

Hope to see you there!

Market Performance as of Friday October 25, 2024:

S&P 500: 5,808.12 (+22.46% YTD)
NASDAQ: 18,518.60 (+25.41% YTD)
S&P/TSX Composite: 24,463.67 (+17.21% YTD)

Canada CPI Inflation Sep 2024: 1.6% (0.4% Decrease from August 2024)
Current BoC Benchmark Interest Rate: 3.75% (0.5% Decrease on Oct 23, 2024) Unemployment Rate August 2024: 6.6% (0.2% Increase from July 2024)

Subscribe to our newsletter!

The Economics of Gaming

Update Dec 14, 2024: Added Newsletter Email Archive at End of Post.

Startup Costs of Modern Gaming

Video games, what great fun. I’ve been noticing a lot more people getting into gaming who may not have ever played before, and or people are getting back into gaming for one reason or another. On my flight back home I downloaded an emulator in the airport on my phone and played some of my favourite childhood games. Then back in Canada, I found myself in a major big box store, so for the heck of it I went into their gaming section. It has been a while since I bought a new console. The last console gaming related activity I did comprised of modding a Nintendo Wii that I got second hand for $50. The sticker shock in the store was real. A new PlayStation 5 for $659 (+tax) is a nice chunk of change. Want a second controller with that. Try $95 (+tax). Want a new game that came out in the last 6 months, try another $80. Want to play online with your friends, try a $95/year subscription to access “PlayStation online”. So doing some quick math, just to get up and running is $930 (+tax). Over $1000 net. This is in Canadian Rupees by the way. Needless to say $1000 to get started with a modern gaming console is quite the steep price. Although, you could make the argument that it will last longer than a phone and those things cost more than $1000 often times. The point of this exercise is that if you’re not really a gamer day-to-day you likely won’t understand how this pricing makes sense. Let’s just say there is a LOT of money in gaming. So much in fact that it is larger than ALL of the global music, film, and TV markets combined… let that sink in. Now lets try to find out how that makes any sense.

Larger Than TV, Film, and Music… Combined

According to statista the revenue in 2022 from the global gaming market was 347 Billion USD. Sony, the creator of the PlayStation, has sold 36 million of their $500-600 consoles since release in 2020. Xbox has sold 22 million of their Series X/S consoles in a similar price range. Doing some more quick math, for Sony, that’s 18 Billion in revenue in around 2 years. We’ve all lost out minds recently that Taylor Swift is a Billionaire, and she’s top of the top in the music industry, so you know just 9x that in one year for Sony. Not to mention that the 9 Billion is a tiny portion of the overall market. So where is the rest of the money going? Well statista says that around 248 Billion of their 347 Billion is all mobile games, games on your smartphone. Which is kind of crazy to think about, but makes sense. Every single person has a smartphone. So naturally, some are going to play games, some will even pay money for those games or will buy in-game items. The barrier to entry is so much lower since everyone already has a phone, and the price can be more affordable since the size of the market is gigantic. One of the most successful recent games was Fortnite, it was free to download, available on almost all platforms, and they made an absolute killing off in-game purchases. Many games are completely free to play and make their millions just from running ads in between sessions. From the mobile side most people have heard of Candy Crush, and Angry Birds. They are both absolutely huge games, Candy Crush has made $20 Billion in lifetime revenue.

Apple and Google in Gaming

Something to point out here are the companies that truly benefit from the huge mobile gaming market (and arguably make it accessible). Apple with the App Store, and Google with the Play Store. Each respectively taking a 30% cut on any game purchases, in-game purchases, etc. Up until quite recently they have had a strangle hold on the App market for their devices. There have been some anti-trust cases coming up against them for monopolistic practices in recent times. Apple and Google have probably been some of the largest benefactors of the mobile gaming market, alongside the fact that their smartphones already tend to sell quite well. So if you hold any Apple or Google stock, you are already technically benefiting from quite a large segment of the gaming market (among other things). Without getting too much into the details of the lawsuits, a 30% commission on any sale when you can replicate code with the snap of a finger is not a very popular price, especially when you are forced to pay it no matter which platform your game is developed for. Hence the anti-trust lawsuits.

Microsoft and Nintendo’s Dominance

There are also some other major gaming companies. Microsoft, the creators of Microsoft Office and major investors in OpenAI. Own the Xbox and own Minecraft which is the most sold game of all time. They also recently purchased one of the largest publicly traded gaming studios Activision Blizzard who created the Call of Duty series which has been ultra-successful as well. Microsoft, also owns many other gaming franchises and studios which have done quite well. Then there is Nintendo, who recently have created the Nintendo Switch, which is one of the best selling consoles of all time, they also have many classic franchises that I grew up playing like Pokémon, Super Mario, and Legend of Zelda. Nintendo was actually one of the first companies to come out with a small handheld video game console and pioneered that market. Today we are seeing things like the Steam Deck from Valve which allows people to pay PC games on the go. These major studios control a large portion of the non-mobile market.

PC Gaming and Independent Developers

There is also the PC gaming app store Steam which like Google and Apple takes their 30% cut. They are the major gateway to PC games. On the PC there tends to be more room for indie game developers who work solo or with a small to medium sized teams because coding games for PC’s tends to be much more accessible than for consoles (startup costs for console development are in the tens of thousands of dollars). If these PC games become successful, sometimes they will be ported over to gaming consoles by request of the major console makers. The nice part about PC gaming and Mobile gaming from a development perspective is that you don’t have to be a billion dollar corporation to release your game. There have been some super successful games that started off small with one or two developers and have become smash hits, like being a professional musician that gets an early break with a popular song. Some examples that come to mind for me are Hollow Knight which is developed by a team of three, and Stardew Valley which is developed by one guy and has sold over 30 million copies. He’s probably one of the most individually successful game makers of all time. Like being a famous musician however, there are millions and millions of people trying to make their video game, and some become minor hits, but only a tiny few become ultra famous. You’re competing against the incumbents who have collective knowledge among their developers on the scale of millenniums of time spent building games. But hey, no harm in trying, always fun to start a new hobby, and with the sheer size and diversity of gamers (try 3 billion or so), you may find your market.

Watching People Play Games

Another gaming adjacent activity, is livestreaming and watching other people play video games, sometimes on a professional gaming team. If you’re like my parents, when they first saw me watching YouTube videos of other people playing video games, they thought it was weird. I sort of get it. But the best way that I’ve found to explain this phenomenon is like entertainment, or sports. You watch a good movie because the characters are funny, or charming. And you watch a professional gamer because you want to exclaim when they are doing something wrong that you’d never be able to replicate in a million years. Same story, different medium. YouTube itself made something like 30 billion dollars in advertising revenue in 2022, which it shares with the people who post videos on the platform. Many of whom are gaming content creators. There are layers and layers on gaming, and if you get involved enough the rabbit holes can go quite deep. But it has become such an all encompassing medium. You can play it directly on about 10 different platforms. You can develop your own games or work as a developer with a studio or you can watch other people pay for fun or professionally (e-sports).

Gaming Will Only Grow

Gaming is not going away, and the market size is projected to more than double by 2030. With a phone in everyone’s pocket and a computer in everyone’s house, there is always going to be space for a game or two… or three, who’s counting. With the layers of entertainment, modification, customization, development and more. There is space for every type of person within video games and something that will appeal to everyone’s tastes. Each successive generation becomes more and more interested in video games and this will naturally allow the market to continue to grow. It’s still somewhat hard to fathom that gaming is larger than all of TV, film, and music combined. But when you consider all that encompasses a “game”, it can be a very broad term. You never know where inspiration will strike, like this post. But if you get inspired to make a video game, you should go for it, it’s never a bad idea to participate in a growing market. I’m always interested in learning about different markets and gaming is one that you don’t frequently think of as being the behemoth that it is. Hopefully I was able to give a decent synopsis and education about why it is the way it is. As always thank you for reading and have a great day!

Keep Investing,

Oliver Foote

Newsletter #22: Economics of Gaming, Back to School!

This Weeks Blog Post:

The Economics of Gaming:

Gaming is larger than TV, Film, and Music… combined. I explain how this is possible.
Who the major players in the gaming industry are, why Apple and Google are involved.
How individual developers are building a name for themselves in the world of giants.

Read the full article here: https://oliverfoote.ca/the-economics-of-gaming/

Market Talk:

School is back! As someone who is frequently driving in the middle of the day, I have noticed a bit less traffic on the roads as people get back into their regular routines and we make our way into fall with the leaves already changing colours.
The Fed cut rates by 0.5% last week which was big news! The market did nothing because the expectations were that the fed would cut rates by, you guessed it, 0.5%.
For the astute observers of the market, you will have noticed here in Canada and in the US that our longer term bonds, have been steadily dropping for months in anticipation of the rate cuts that we are now seeing. At the start of the year I was finding 5 year fixed mortgage rates in the mid to high 6%, now you can find them in the low 4% range. That’s HUGE and should make purchasing a home more affordable.
The increase in housing activity has been somewhat muted at best, it’s not the most exciting news in the world to hear that things are normalizing again so it’s not getting as much air time, and most people just look to the benchmark interest rate set by the Bank of Canada which determines variable rate mortgages, rather than the 5-yr government bonds which determine fixed rate mortgages (that most people go for anyway).
I also think in general people are a bit tired about hearing about real estate, and they’re somewhat ready to just buckle up for the next little while and hope nothing crazy happens again, but as these rates go lower and lower I do expect that a year from now there will be many more people out there looking for homes, hopefully due to an improving jobs market.
The jobs market in the US was fairly resilient up until a few months ago, Canada’s job market has shown weakening signs for over a year now. Finally the US decided to join the party. The central banks seem to have come to the conclusion that inflation is not quite the concern it used to be (in fact we officially hit 2% inflation in Canada this August, yay!) and are now more worried about higher unemployment (6.6% up from a low of 4.8% in July 2022), so they are likely going to continue to cut rates in the hopes that (business) investment increases and employment improves.
Final aside here, I’ve noticed used car prices are finally coming down, and used cars are sitting on the market a lot longer than they used to be. Dealers are providing lots of promotions on new and used cars.

Market Performance as of Friday September 27, 2024:

S&P 500: 5,738.17 (+20.99% YTD)
NASDAQ: 18,119.59 (+22.71% YTD)
S&P/TSX Composite: 23,956.82 (+14.78% YTD)

Canada CPI Inflation Aug 2024: 2.0% (0.5% Decrease from July 2024)
Current BoC Benchmark Interest Rate: 4.25% (0.25% Decrease on Sept 4, 2024)
Unemployment Rate August 2024: 6.6% (0.2% Increase from June 2024)

Thank you for reading!

-Oliver Foote