With equity markets soaring in 2024 and inflation risks looming, are we heading for a major market correction? Rosenberg Research’s Dylan Smith joins James Connor to break down 2025’s critical market and economic trends, from bubbly markets and the Fed’s Powell pivot to the stark contrast between U.S. growth and Canada’s lost economic decade. Explore how Trump’s tariff policies, shifting central bank strategies, and global uncertainties could reshape the financial landscape of 2025.
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Dylan Smith 0:00
I’m getting more and more and more worried about what a equity market correction will do to the macro economy. It’s markets driving macro right now, not macro driving markets.
James Connor 0:12
Hi. Welcome to wealthion. I’m James Connor. Well, we’re heading into 2025 and one of the things I always like to do as we head into a new year is set some financial goals for myself. If you would like to have a discussion with a financial advisor about setting some financial goals, go to wealthion.com/free to set up a free, no obligation meeting with a financial advisor, once again, That’s wealthion.com/free to find out some more information. Now let’s get on with the interview.
James Connor 0:45
Dylan, thank you very much for joining us today. How are things in Toronto?
Dylan Smith 0:50
Very good, very good. We’re finally getting some real winter setting in, so looking forward to that. Always good to be on.
James Connor 0:56
Well, we have a lot to discuss in a short period of time, so let’s get at it. And I want to start with the recent fed announcement. And as expected, the Fed cut by 25 beeps, and that marks the third such cut. And no, it was expected, the market got hit pretty hard on the back of this commentary from Jay Powell. What exactly did Powell say that spooked the markets? Yeah.
Dylan Smith 1:19
Well, as you pointed out, if you had asked anyone in the markets before this meeting what their baseline expectation was, it would have been exactly what happened, that they would cut race by 25 basis points, but that two of the four cuts that were in the last dot plots for 2025 would come out and would end up with the Fed median dot plot showing Showing 50 extra basis points of easing in the coming year. And so the consensus was already grouped around a hawkish cut, and that’s exactly what we got. So the big puzzle was, then, why did we get such a big sell off? Why did markets react so badly to this? And I think really, that comes down to the press conference, and really good was a sort of vintage power performance, in the sense that, you know, there was just a lot in there that was not so much hawkish as just very difficult to pass. So there were some statements that were kind of contradictory, where power would say one thing when he was talking about why he was easing, and then a kind of another thing later on, when pushed on a separate question in the press conference, but a few of the things that I think markets really picked up on. One was the commentary around the neutral rate declined to give us a sort of forceful answer where he thought it was. But I think everyone’s upgrading their estimates of where their estimates of where the Fed estimate that it is, because he said, you know, we’re basically close. And so that carries, not just for 25 but probably beyond. That carries a sort of pretty hawkish message. The other is that, and I’m not sure this was necessarily intentional, but the other was that the messaging around inflation came off pretty hawkish, basically the net effect of the revisions to the inflation outlook, which have inflation 2.5 next year and actually not hitting 2% on the forecast horizon, plus some commentary from from power, basically saying, you know, forget what we said in September at Jackson Hole, where we said inflation, the inflation out looks benign and its employment we should be worrying about. We’re back to hope we we, you know, inflation is a bit more persistent than we thought. And actually the labor markets in great shape. And really just off two data points for each of those under heavy distortions from hurricanes and strikes. The powers done. The powers done this big pivot. So I think you know, if there’s one thing that is true, it’s that there is a high degree of data dependence. And we would call it definitely a high degree of data over dependence, because what you get is the forward looking guidance and narrative changing very, very extensively and rapidly, not very high quality data quite quickly. And so that’s why we’re sort of saying, Look, if it can move this sharply in this direction. There’s nothing to say that a few benign inflation points and a couple of light light employment reports, but we’re back into the world of full cuts pretty quickly. And so I think the overall, overall message is that uncertainty regarding the Fed is way up.
James Connor 4:15
I like that term. You just use the Powell pivot. This guy can’t make up his mind. But what’s really interesting about it, the commentary centered around inflation is that I saw, and I think you and I discussed this before, but investor Stan Druckenmiller said the same thing a month ago. He said his biggest concern about 2025 was a re acceleration of inflation, and this was all built around the fact that Trump wants to cut taxes, increase tariffs and also deregulation. What are your thoughts on that? Is this, what’s going to drive inflation higher in 2025
Dylan Smith 4:53
it could be. It could be so. I mean, just to take one step back, I think he’s right to point some of those things out. But what’s in. Interesting is that the inflation conversation has moved on from what we might call sort of cyclical inflation. So inflation, that’s changes in inflation that are related to the underlying state of the economy. And I think the disinflation that we’ve seen over 2324 has been very much that. So we’ve had the shocks to supply chains dissipating. We’ve had interest rates set very high in damping activity a little bit that’s all helps inflation come down. And even bits of the inflation bundle that have been a bit higher, like rents and so on, we just know that those lags. So this is all sort of part of the ordinary process that you can look at history and look at the sort of economic theory and have an explanation for, and so make some forecasts about. And so before Trump was elected, we would have told you, look, basically, goods prices have been deflating, and they’re going to go back to kind of flat to modest, normal inflation, right, naturally. And meanwhile, services are going to continue to disinflate more rapidly, and especially you’re going to start seeing the shelter survey rolling over to be more reflective of real time rents, which are sort of flat to declining, and that would deliver on target inflation, probably by the end of 2025 and I think that’s still basically there in the background, But now what you’ve got is policy driven inflation risk that’s coming from the Trump administration, and it’s much harder to work out when and where that actually hits prices. The two major things, as you pointed out, what would tariffs do to inflation? And so we know that there, if you put a tariff on a given good you’re going to get pretty rapid read through into the price of that good maybe a little bit will be absorbed in margins, but really not much. Businesses don’t like to be asked to do that, so they’ll pass on the costs. And so you get a 60 plus percent pass through at least, which means that, you know, for a 25% tariff on, say, half the goods import base, that’s actually significant inflation. That’s a few, that’s a few. That’s a few that’s a few percentage points. Now, should the Fed be leaning against that type of inflation? Actually, no, because we know that that’s a one off level effect, right? If the tariffs don’t keep increasing, the price adjustment only really happens once, and so pretty quickly, you know, it’s kind of a step change in prices. Pretty quickly, the change in prices goes back to back to normal, having absorbed that one off step and to raise interest rates against that does absolutely nothing right. So there is tariff inflation risk, not clear to me that the Fed should be worried about it. That’s genuinely transitory and something that the Fed should be looking through. The bigger problem comes from, I think, the tax cuts, which would obviously be a big stimulus on the economy. And so then you know, first thing I should point out, not clear what actual tax package is going to happen or when you know it’s only due to reset the 2017 taxes that are being sunsetted by the end of 2025 so I think there’s going to be a huge amount of noise about this. We’re going to see Congress fighting with itself, fighting with the White House, fighting with with everyone they can to work out what this tax package is going to be, and it could raise anything from just extending what we currently have, which would be completely inflationary, neutral to some big corporate tax cuts, which I think would be inflationary, depending on what’s happening on the supply side of the economy. So if there is slack being built up into the labor market, then those tax cuts could come and even if they do cause a bit of a surge in investment, a bit of a surge in activity, not necessarily the case that that you get a lot of inflation coming out of that you could though. So it’s a source of it’s a source of real uncertainty. And then there’s the question about one challenge of these two policies interact, what if you create an enormous incentive for US businesses to invest. And then you put a 25% tariff on the machinery they want to bring it. Then you then you get a supply bottlenecks, and you’re back in a serious inflationary world. But that’s probably 2026 story. Um, so yes, there’s a lot of uncertainty. I think the Fed might be overreacting to a little bit, and people might be reading it a bit too much in terms of how quickly the Fed will factor that in.
James Connor 9:24
The other big news that came out recently was the q3 GDP number at 3.1% versus expectations of 2.8% Why was the number so strong? I mean,
Dylan Smith 9:35
it’s a bit of an upward revision. It’s completely within the bounds of normal levels of uncertainty around the GDP numbers. So we do see these types of revisions happening in both directions, you know, from time to time. So nothing sort of unusual about the fact of the revision. What? What has been happening recently, though, is that we’ve seen a decline in survey quality, a. On all the official data, and because we have basically smaller samples, and they’re coming in a little later than they used to, as basically people stop filling in paper surveys, but aren’t answering as much on the sort of digital channels, and that’s a problem for the BLS and all the stats bureaus, that’s leading to bigger, bigger inaccuracies in the initial estimates, and so larger revisions, once, once more of the data comes through. So the overall message, I think, from the GDP print in q3 is whether it’s 2.8 or whether it’s 3.1 is, is kind of it doesn’t change the story, which is really that, you know, we can, we can see the big effect of high government spending, not just in the public sector data, but in the consumption data as well, and in some of the investment data, we can see the AI story and very high intangible investment growth over the past couple of years. And so, yeah, definitely a story of, you know, although there are shaky pockets in the economy, the overall numbers are telling us that, you know, there’s a big supply side expansion happening. Productivity is rising, and so you’re getting growth.
James Connor 11:06
So the long and the short of it is, the US economy is still very robust. It’s taking along
Dylan Smith 11:11
nicely. If you if you look at the aggregate data, when we look at this, the biggest thing we are concerned about is actually what we see from the distributional accounts, which come with a much bigger lag, but they basically tell you what’s happening in terms of income and spending across the income distribution, right? And this is where this K shaped consumer theme is very, very important, because you have an impressively high share of income and spending happening at the very top, say, the top 20, top 10% of the income distribution. And that’s something to asset price inflation and the incredible earnings that people are getting off that. So the surging, surging stock market creating a wealth effect, basically, that’s driving spending. It’s analogous to what happened in in the growth surrounding the tech boom the late 90s. It’s analogous what happened around the housing boom just before the GFC? So it’s when you get these big asset price inflations. You do get strong consumption from the people who can access that, that part of the market, if you look at the lower tiers, you know, which are not enough by themselves to kind of drag the economy down that much. But that’s where you’re seeing, you know, reports from from earnings reports. You’re seeing it in the consumption data. You’re seeing it at loss of pricing power, you know, places sort of who are more geared to people who depend on their wages for changes in spending, rather than from their portfolio. So that’s one of the risks that we flagged. But I think what it tells you is that the outlook and the risk is all concentrating on what’s happening in the upper income pool, and we’re getting more and more and more and more leverage to this equity bubble that’s happening. So if you think there’s a chance of the correction, you should be worried about that correction spilling through into the macro economy, not the other way around. It’s markets driving macro right now, not macro driving markets
James Connor 13:04
in 2021 and 2022 the Fed made a major policy error by saying inflation was transitory. And do you think they might be making another policy error now by being so aggressive and cutting rates at the same time when the economy appears to be so strong? Well,
Dylan Smith 13:22
I think that’s, that’s the thinking behind the not the polls, but the signal that the easing would be much slower. And I think Palestine quite a lot of time in his press conference, and I mean, he wasn’t fully consistent on this, but sort of saying, like, you know, if you look at where the unemployment rate is and where growth is, like, we’re not getting a strong signal that we should be we should be easing aggressively. So I think they’re actually responding to that problem. Isn’t that that’s backward looking data, and actually, where we are on the employment rate, where we are on growth, would constitute a very nice steady state, like a very nice baseline, right? And here’s one of the contradictions. Paul also said, we’re still restrictive. In other words, he thinks that the effect of where interest rates are right now is that it’s putting the brakes on a little bit. And look, we can fight about whether a 2% inflation target was the right one. That’s what the Fed officially has to aim for, but you have to ask, what’s wrong with 2.5 right? What’s so magical about 2% and so that creates an argument for Well, what you’re actually doing is creating a risk that you stay too tight for too long. It’s the exact mirror image of the mistake that the Fed often makes of staying too loose for too long and then having to aggressively raise interest rates, as we saw during the inflation episode of 21 which they only caught much later. And so I think the risk is actually on the other side, that there’s, you know, the lag impact of higher interest rates will come through. And especially, you know, if the Fed, you know, sort of holds on long enough to to be one of the contributing factors. An equity market correction. Well, then you can see them getting the blame for what happens afterwards by staying too tight for too long. So always a difficult game being a central banker. But I think that’s actually in terms of Fed era. The era is that they stay too tight not to lose.
James Connor 15:13
And just on the back of that statement, do you think the Fed is being political? Do you think Jay Powell is trying to keep his job here before Trump becomes president.
Dylan Smith 15:25
Well, if he was doing that, he he would be signaling more cutting. So I don’t think one of the things I take him at his word on is, is that, you know, he is vehemently there to protect his independence in the independence of the institution. That’s really interesting. Really interesting, actually, if you go back and read all the biographies of the central bankers, Greenspan was one of them. A lot of them come either from markets or, you know, they’re sort of already politically aligned with with the administration. So I mean, Greenspan famously was a big Nixon Republican early on, and love Reagan. And so there were concerns that, you know, when he was appointed, he might, he might be appointed as someone who would, who’s at least, whose ear the White House would have. And what always happens every single time since burns that a central banker comes in to the Fed, they get absorbed by the institution, and they become fiercely independent every time it is such a powerful job, I think that’s mostly what does it, and they don’t want that diluted. And I think power was appointed by Trump, and I think we’ll do a lot to defend the independence of that appointment. So I think it’d rather go out, you know, we can argue as economists about whether he had the right policy, but I think it’d rather go out with the perception that he’s his own man and independent then that he’s desperately trying to hold on to his job.
James Connor 16:46
So let’s talk about Canada now. And there’s so much to discuss here between Trump and Trudeau and tariffs and the finance minister quitting and so many other things, but we just had a discussion on how strong the US economy is. What’s happening with the Canadian economy? Well,
Dylan Smith 17:03
I mean, yeah, lots going on the political sphere, which I which I guess we can touch on. But for the Canadian economy, I think really two things are top of mind. One is the structural pieces, and then I break those down into a combination of very weak to flat productivity growth for whole decades already, a decade of lost productivity growth in Canada finding it very hard to get enough investment to keep the economy producing more and more with what it’s got. And then a simultaneous in the last three or so years, a very large immigration shock, which has sort of amplified that productivity problem in the sense that not all of these workers have been absorbed into the economy, and so you have a lot of inefficiencies arising as a result. So that is leading to per capita income growth, per capita output growth both negative. And so there is, you know, although we haven’t hit the threshold of two consecutive quarters of aggregate negative growth. There was a recessionary feel about the Canadian economy, especially on a per capita basis. So things are not particularly strong, and then you have this sort of sorrenties, tariff threat from from Trump, kind of hanging over everything. And that is creating a lot of uncertainty. It’s creating a lot of anxiety, and so it’s another sort of big headwind, potentially for looking at the economy, that it probably needs to clear that threat before things can can kind of kick off again a little bit.
James Connor 18:34
So why don’t we talk about, you just mentioned the tariff? Why don’t we talk about how important export is to Canada’s GDP. And what would happen if the US did impose a 25% tariff on exports? Yeah.
Dylan Smith 18:49
So if I have my numbers right, exports to the US, just to the US, are about 27% maybe touch less of Canadian GDP, very big, but there are some very sort of major components of that that form the bulk, and it’s really commodities and industrial goods. So crude oil is the biggest single export to the US, and I think that the biggest risk for both sides actually, is that that gets tariffed. But if it does, it’s actually hard to see the US. It’s very inelastic demand for for crude, right? And so that it’s not clear that that tariff would stop the pumping. So I think a lot of the costs would be paid, actually on the US side to a tariff on crude exports. So it’s probable that that is off the table. If there’s one thing we know about Trump, it’s that he doesn’t want higher gas prices locally. So I think that message would get through from his advisors. But beyond that, you have a lot of metals, a lot of commodities, lumber. A and so. And then automotive value chains. There’s goods crossing the border back and forth, especially in Windsor Detroit, between the US and Canada. So all of that is extremely critical to the Canadian economy, but also important to the US economy. There’s a lot of rare metals, green transition metals, that can only be got in Canada, uranium, the US export imports most of its uranium from Canada for its nuclear industry. So, you know, I think Canada is very nervous that the US will create a big policy mistake. But like, let’s be clear, it would be a policy mistake for the US to impose these tariffs, because they bear a big portion of the cost of those tariffs as well. And so the hope is that, you know, Canada is playing a little bit of nice, a little bit of good cop, bad cop. We’ve got the Alberta premier who really manages that crude related RELATIONSHIP WITH US states, kind of playing the friendly, more sort of naturally Trump aligned person, while the Ontario Premier is saying cutting off your, you know, Canada exports electricity to the US from its hydro plants, we’re going to, you know, we’ll stop that, you know, playing a bit of hardball as well. So I think what that’s doing is having the effect of making people realize in the US it’s not straightforward. Just bully Canada until they give you some things you want, kind of situation, although Canada will have to make some concessions eventually.
James Connor 21:23
And I want to put that export number into perspective. You said exports represent 27% of Canada’s GDP. How does that compare to the US? What percent of their GDP comes from exports? Oh,
Dylan Smith 21:36
it’s massive compared to the US. And the US ones are counting up a deficit, right? So, so the net effect for them is, you know, it’s a almost insignificant part of the economy. Canada is one of the one of the most export dependent economies in the world, especially in relation to the US. I should say, really only Mexico compares in terms of trade exposure, GDP exposure to the US. So it is a critical issue. And maybe to segue to the sort of other thing happening in Canada, which is on the policy and political side. We’ve just had Christopher Freeland, who happens to be my MP finance minister and deputy governor, Deputy Prime Minister, rather, has resigned, and she did so in dramatic fashion, with a very scathing resignation letter that was made public, in which she basically said, I am very, very worried about the tariff, what we’re about to engage in with the US and the negotiations. I would like to keep as much powder dry as possible. And you have not allowed me to do that, and so I can’t continue as finance minister, basically, very critical of Trudeau office pushing spending onto treasury, which she does not want to, not want to execute, and she ties that explicitly to the trade war. So I think there’s an awareness there on how important this issue is and how much risk is tied up in it. And I think the hope from the Canadian business sector is that this resignation will will trigger a more serious response, and potentially a change, either a reshuffle or a change in government, that that gives a bit more confidence that will be managed, as well as it was when freedom led the process in 2017, 18, I want to
James Connor 23:19
spend A little more time on immigration. You mentioned this earlier, but immigration has had a big pack in big impact on Canada’s GDP per capita. So the US GDP per capita is around 76,000 USD, and in Canada it’s below 60,000 How is immigration impacted this number? And
Dylan Smith 23:40
well, most, most, basically, it’s a bigger denominator. And so the the number of people you’re defining GDP by, has grown. Now, when you have high levels of immigration, what you’d ideally want is for the new Marina GDP to be growing faster than the denominator as a result of the skills you bring into the country and the country and the productivity gains that you’re getting. And the evidence is pretty clear from almost all immigration waves that that is true in the long run, and especially an economy like Canada’s, or a demography like Canada’s, in which without an immigration at all, the population would be declining. The birth rate is below replacement rate, and so it’s definitely necessary. But what’s happened in the kind of shock around COVID, where there was a year of slower immigration, and then we had all these supply chain issues, the government kind of responded by over loosening immigration policy, and what we’ve seen is one of, like, a historic global immigration shock in the Canadian economy. So I just kind of for fun, the immigration episode that always like, I remember is when I was working in Europe, and there was big concern about Syrian refugees, maybe on Heidi skill engineers and people like that, moving to Germany, and Germany’s capacity. To absorb this number of people as fast, and what they were taking in was a million people a year, which was sort of 1.2 ish percent of the German and Germany’s whole population Canada for two years, between 3% triple for twice as long. It’s an enormous immigration event, and it’s not being talked about in those terms locally. I think just because Canadians are kind of squeamish about squeamish about it, but I think I think it has to be acknowledged that. And I think it is because the government has now said that basically, we’re putting the brakes on completely for the next two years, basically to allow this large number of immigrants to be absorbed into the workforce and to be absorbed into the infrastructure. But so this shock has had productivity implications. Because actually, you know, although many of them have found their way into the workforce and not very productive, it has strained systems like healthcare, education, transport infrastructure in a way that has actually damaged productivity growth, right? And so, yes, in a decade, or two decades, Canada will be better off for this, but it’s happened so fast in such a concentrated period of time that right now it’s actually had a negative economic impact. And
James Connor 26:09
I just want to clarify one point. This is this immigration policy is totally different than what we’re seeing in the US, where we have millions of illegals coming across the Mexican border into the US, the people that are coming into Canada now they’re coming in through proper channels, but they’re coming in because of Reckless policies put forth by the Liberal government. Basically, as you said, Too many people in such a short period of time. Yeah.
Dylan Smith 26:36
It’s like Canada is lucky to have either oceans or the US buffer. It doesn’t have to worry about illegal immigration very much at all, similar to Australia. So you can control it, and you can select for high skilled exactly the kind of people you want to generate productivity growth. But you know, a lot of those channels that was sort of under, under, under monitored, I guess, by the government. Where people have been getting in, the lower threshold is students who are just sticking around, low skilled temporary work visas, people sticking around. And so the average skill level of the new coming to Canada has gone down a lot.
James Connor 27:16
So the other thing I want to touch on in we didn’t talk about this in the US, but the unemployment rate in the US is around 4% in Canada, it’s significantly higher, and maybe immigration is a big part of that. But the last unemployment print came in at 6.8% and the trends been going up now for quite a few quarters. Maybe you can speak to that,
Dylan Smith 27:35
yeah. So I think it’s a direct result of of you know, the very high number of arrivals is that what we’re seeing in the KL labor market is that they’re not being absorbed at the pace that would hold the unemployment rate constant. And so what you’re getting is a big build up of slack in the labor market, basically, which has a number of consequences, but the first one is ready that you have a gradual drag on wages, and that is fundamentally disinflationary. More supply, same amount of demand, means prices go down, or in this case, prices rise more slowly. And so, you know, it’s a deflationary shock to the or just measure shock to the Canadian economy, which is great from a central bank perspective, because it means they can normalize rates very rapidly without having to worry about overheating the labor market again. The other thing is, I think it’s important to sort of flag the difference between the type of labor market weakness that happens because of a negative demand shock. So we are back to the unemployment levels that we or unemployment rates that we last saw during the 2015, 16 oil industry recession. And that was that was back when Saudi decided they were going to try and take out the US shale system by massively over producing and cutting oil prices down. It got like $30 and the North American shale industry survived, but not without a huge amount of pain and a huge amount of restructuring. And in Canada, what that looked like, because Canada’s a high cost, marginal producer, it was worse than for the US. And so there was a, there was a lot of unemployment connected to the oil industry that, you know, the rates are about the same, but that’s a much, much more damaging shock, because people go from employed to unemployed. What we’re seeing is that the private economy is kind of holding employment flat right now. It’s a little worrying, and that it might, it might dip negative, but really, what we’re seeing actually, is believers supplying has just exploded relative to what we want from demand, and that’s what’s keeping the unemployment the unemployment rate. That is disinflationary, but it’s not as damaging in terms of aggregate growth.
James Connor 29:49
So when we look at the Canadian economy, we have a faltering economy slowing GDP or negative GDP, our unemployment rate is increasing rather quite. Exactly, and we didn’t even talk about the Canadian dollar yet, but we also have a potential for this big trade war with the US. Things don’t look too good for Canada. Do you see them going into recession within the first half of 2025 it’s definitely
Dylan Smith 30:14
possible. It’s definitely possible. And I think, I think what probably does it is that if you look at the government’s immigration targets, they go slightly negative, so they are expecting a net outflow of people. Now, if you look at the last year or 18 months of Canadian economic history, if you stripped out all of the new arrivals, and the effect they have, in terms of, you know, bring some money over. But even if you know, some of them finding work immediately spending spending that money, or even if they aren’t immediately finding work, They at least need that morning’s coffee in the morning. So there’s, there’s still a consumption boost from people arriving. And if you, if you strip that out, you’ve basically got negative GDP growth, right? So the way I’ll answer your question is to say that, unless something changes to domestic demand, there will be a recession because of that, that drying up. Now, what could those things be? Well, if you’re optimistic, you could say that the Bank of Canada has reduced interest rates so aggressively that you’ll actually see business investment picking up. You can also say that there will be a competitiveness effect and a net benefit from the very weak Canadian Don certainly some segments like tourism, anything goods, export oriented, and assume there’s no tariff, all benefit from that, and so that can actually be quite stimulative. Of course, Canada is lucky that it’s occur at a time when there aren’t any inflationary pressures. So imported inflation from the weaker exchange rate, it’s not having a very big effect, which means that rates can continue to go down. So what the Bank of Canada and policymakers are backing on is that, basically, the BOC has managed to get ahead of the curve, and he’s fast enough, and that, combined with the dollar, will help pick things up a little bit. You can easily be very skeptical on that and say, well, we’re not seeing business investment pick up yet. Consumer demand is a little bit in question, because even with rates lower half, the mortgage market is renewing in the next 18 months, and they’re going to have a disposable income hit from that almost definitely as they go from, you know, two, 3% COVID interest rates to 456, percent mortgage rates. Now that’s that’s a big hit to disposable income. And so, yeah, I don’t think Canada’s out of the woods by any means. My
James Connor 32:44
God, we got a lot of issues here. So okay, let’s talk about, you mentioned, the Bank of Canada. And just, I just want to provide some more detail for our viewers. They have been very aggressive. They’ve cut five times this year versus the US, which is three times. The Bank of Canada rates gone from 5% down to 3.25% this has had a big impact on the Canadian dollar, because interest rate differentials have really blown out between Canada and the US, and the Canadian dollar is down 10% this year alone. So maybe you can speak to that. And I think it’s at a 20 year low.
Dylan Smith 33:23
Yeah, anymore, yeah. So it’s that interest rate differential. It’s the fact that the productivity differential as well demands a lower exchange rate, or weaker dollar, Canadian dollar, and the tire threat as well. But the looney is actually so weak now that we’re wondering if we’re bottoming out like it’s all priced in probably. And so in the last few days, we’ve sort of published a couple of things saying, Look, this might be the bottom for the Looney, because you can actually, you can actually paint a picture of things improving a bit. One is that we think two cuts is not enough for the Fed. It’s going to do more than that. And so that’s loony positive because it narrows the implied margin a little bit. We do think ultimately the tariff threats are overblown. We you know, I think Canada will be able to simultaneously talk tough and give enough concessions for Trump to say, Okay, you’re one of the good ones. And then focus on Mexico. And kind of, you know, give kind of a state of execution, I’ll be dollar positive, literally positive, yeah. And so, you know, if you stop putting those things together, there’s, there is some upside. And, you know, but if there was a tariff, it blows through 160 right? It’s not 10% down. So definitely two sided risk exists for the dollar.
James Connor 34:49
Yeah, see if you are an American and you want a good travel deal, come to Canada, because you’re gonna save like 40% on your dollar, especially if you’re big skier, you can save a lot of money by going to a Whistler versus. Is Vale or Aspen?
Dylan Smith 35:01
Yeah, fast game too, yes. So
James Connor 35:06
one other thing I want to touch on, too, and this is more of a positive for Canada, but our debt levels compared to the US. So the US has 35 or $36 trillion in debt, mind blowing number. But as a percent of GDP debt to GDP, I think it’s around 115 to 120% now, depending on whose research you look at, compared to Canada, ours is significantly lower, around 40% or 45% maybe you can just speak to that. And is that a big positive?
Dylan Smith 35:37
I think it is. Look. First thing I want to clarify is because this can be confusing. Depending on who you read, you’ll see sometimes it’s like 115 to one 20% US debt to GDP ratio. Sometimes you’ll see more like 90 to 95 that’s the accurate one, because that’s people netting out inter agency debt. So like the US Treasury owes the Social Security Administration money, which sometimes gets counted, but it’s government to government, so you should strip it out. So we’re just over the 90 threshold in like, real debt owed to the public or to foreign asset holders the US, and that’s usually crisis level for a lot of economies, right? If, if your average, just the average country, got to 90% you’d be getting close to vulnerable territory. Now, of course, the US issues the world’s reserve currency. There is always a bid for for treasuries, because of, you know, what type of huge global institutions have to hold it, there already is no better reserve asset in the world. And so the US can tolerate much higher debt levels than other countries. But that doesn’t mean that they’re not pushing the envelope, especially if these six plus percent, you know, deficits continue for another four years, another four years beyond that. So definitely a concern in the US, much less so in Canada. Now, Canada got to 90% there’d be a financial crisis immediately, right? Canada cannot carry as much federal debt as the US can, but it actually is among the better, and I think it’s actually best in the G cell in terms of general debt ratios. And so the criticism is coming for a little bit, is that it’s almost using that strength is an excuse for a bit of fiscal and discipline. So the most egregious example, I think, currently, is Justin Trudeau. And as government gave away a tax rebate, not a rebate, they cut sales tax off certain items over Christmas to sort of, you know, like very nakedly attempt to carry political favor, it’s probably actually gone the other way for them, and part of the finance minister resigning was around additional rebates that Trudeau wanted to give out. So you know, it’s not to say that fiscal issues aren’t still important and that the debt trajectory should be down. But if you take the latest budget from a few days ago, and it’s worked, the debt to GDP ratio should be, should be consolidating over time. And so yeah, for all Canada’s problems fiscal you know, fiscal problems are way down the list, actually.
James Connor 38:15
So just to summarize everything we discussed, the US you think is doing pretty good, and you don’t see too many major concerns, although there is uncertainty associated with Trump and the policies that he’s going to actually put forth. The Canadian economy, it sounds like it’s in real trouble, but I summarize that pretty good,
Dylan Smith 38:33
yes, but I’d flag. I’m getting more and more and more worried about what a equity market correction will do to the macro economy could trigger a country around well, Dylan,
James Connor 38:44
that was a great discussion, and I want to thank you very much for spending time with us today, and I look forward to chatting with you in the new year, if someone would like to follow you online or learn more about the research from Rosenberg research. Where can they go? Rosenberg research.com?
Dylan Smith 38:58
Takes a little little while to type, but that you’ll find everything we write there. And anyone who doesn’t currently subscribe can get a 30 day free trial to absolutely everything we do, daily commentary, strategy, models, in depth, research, that’s all that. Dylan,
James Connor 39:15
once again, thank you.
Dylan Smith 39:17
Thanks. Always a pleasure. You
James Connor 39:18
would like to speak with a financial advisor about your financial future. Go to wealthion.com/free after providing some basic information, wealthion will connect you with a vetted financial advisor. Once again, That’s wealthion.com/free thanks again for being with us today, and I look forward to seeing you again soon.
