As we wrap up the year and celebrate the festive season, we wanted to share some of our favorite moments from one of your favorite Wealthion interviews from 2024: David Rosenberg with James Connor. Enjoy!
All the best for a happy, healthy, and prosperous New Year!
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Original interview, aired Jun 27, 2024: https://youtu.be/F90byjYWK5E
Andrew Brill 0:00
Happy Holidays from all of us here at wealthion to all of you, I’m one of your hosts here at wealthion. Andrew brill, we took a look back at this year, and hope you enjoy these favorite guest moments from one of our best interviews of 2024
James Connor 0:18
and just to clarify something you said about GDP growth and also government spending. You’re saying because the government has implemented so many programs and spent so much money, trillions and trillions of dollars, with the inflation Reduction Act and the chips act and many other programs, it’s not real growth. This is just a one off. And if we get a change in government come November, that could change drastically. Come 2025
David Rosenberg 0:44
Well, I’m not going to say it’s not real growth, because government is part of the economy and government spending is part of GDP. What I am saying is that the impetus to headline GDP growth from government, and the antidote that have provided from what the Fed has done, was not something I would deem to be permanent. It was temporary. And so a lot of that showed up in last year’s growth, which admittedly was unanticipatedly strong. But the main point is that these are whether it’s government, whether it’s double digit growth in credit cards, which that was a little bizarre, but it’s over. And the excess savings file, I mean, you don’t know the savings rate, the personal savings rate, that decision between, how are you going to treat your after tax dollar of earnings? I mean, the American consumer is now just saving three cents of every after tax dollar they’re earning, they’re only saving three cents. Historically, they saved eight to 10 cents. So, you know, a lot of that wild behavior, which really was a COVID impact, of, you know, YOLO, YOLO spending. You Only Live Once YOLO and Main Street is what FOMO is to Wall Street, revenge spending, anger spending, and a lot of that went into services that’s basically dissipated. So that’s the primary reason, of course. And take a look when people that say, Oh, well, interest rates don’t matter anymore in the new economy. Sure tell that to anybody in the housing industry right now in the United States or in Canada, for that matter, housing is actually in a fundamental downtrend south of the border. And not home prices, but housing activity that filters into GDP, auto sales are going nowhere. When you look at the classic credit sensitive sectors of the economy, interest rates are biting. So that’s really the big issue, is that after a year in which the Fed rate hikes were more than offset by a lot of other things that were happening in the economy, which I just mentioned, those other things in the economy, they’re done. But as I said before, all the lags from what the Fed has done on interest rates, the reset of the economy fully to this new industry regime that has yet to take place. And that’s what I think the macro bulls are missing in this picture. Yeah,
James Connor 3:10
you brought up an interesting point about the housing market, both in the US and also Canada. I actually spoke to somebody recently who is involved in residential construction within the Greater Toronto Area, and his revenues are down 25% year over year. And he’s, he’s what I would call a medium sized builder, but, and I’m sure you also saw the lumber prices, they’re down, I believe, 30% in the last three months. So all of these things are starting to percolate through the system, right?
David Rosenberg 3:38
And as you expect, and it’s even more remarkable in the Canadian context when you consider what immigration has done to demographics, but the Bank of Canada, I mean, I always like to say that, you know, Jay Powell always compared myself to Paul Volcker throughout that entire tiding cycle. And if you remember correctly, Paul Volcker is renowned for being the ultimate inflation Dragon Slayer, but he did that by creating the conditions for back to back recessions in the early 1980s and I always said that Tiff macklem resembled John Crowe back in the late 1980s early 1990s and remember that housing is the most interest sensitive sector of the economy, the most credit sensitive. And I get this question all the time as to whether you know, well the bank is starting to cut interest rates. Well, that’s going to reignite the housing market, to which I say, No, no, no, no, because it’s not just the cost of credit that matters for housing, it’s the availability of credit. And now, as you’re seeing the loan losses and the provisioning pile up on the Canadian banks, they’re pulling in their horns, and that means they’re tightening credit standards. And you can see that in the data, because you look at mortgage growth, mortgage growth in Canada, which historically is usually running like, you know, near double digits, because we’re so housing centric in this country. But mortgage growth and household credit growth in general is was running now basically flat to negative, adjusted for inflation, like you’re seeing actual contraction in Canada in credit volume. So it’s the availability of credit that matters as well. And bank Canada staffers just put a report showing that there’s still a lot of mortgage borrowers who have yet to totally refinance into this much higher interest rate environment that we had in our hands a year ago, two years ago, three years ago, five years ago. So there’s going to be a lot more pain. And what that means is that people are going to be compelled to either downsize or sell their property. So we’re going to have and you’re seeing it already in the already in the data. You’re seeing it in the new listings data in Canada that you’re seeing, and this is something that’s brand spanking new. Just in the past few months, is new listings relative to sales, have really picked up quite a bit. That is going to put downward pressure on home prices, and at the same time, it’s going to lead to, because of that, more supply coming on the market, which, of course, is going to put a cap on what residential real estate can really provide for the Canadian economy over the course, at least over the next year.
James Connor 6:12
And David, if you were Prime Minister tomorrow, what would be the first three things you would do to stimulate the economy and make it stronger again?
David Rosenberg 6:20
I mean, believe it or not, you know, Canada at the federal level, has a lot more latitude to do things to stimulate than the US does. I mean, I mean the US, I mean, look, America is the reserve currency, but their debt ratio is so far above ours. I mean, it’s, I think it’s almost triple, and our deficit to GDP ratio is pretty, pretty low, especially on the g7 ladder, but I wouldn’t do it through spending. That’s for sure. We have too much big government in this country to begin with. That’s one of the things that concerns me. Is that over this past decade, the corporate share, the business share. Now look, I am an unabashed capitalist. I believe in in in the free enterprise system, and so I think that there’s always a problem when the business sector share a GDP is going down and the government share GDP is going up. That’s why productivity is a big problem in this country. We have to rely on immigration to boost growth, because we can’t do it through productivity, because we have a government that doesn’t try to promote capital formation. You do that by cutting taxes. So you do it by cutting top marginal rates. You can do it through depreciation allowances. I think that finally, in Canada, we have to cobble together with the provinces to reduce interprovincial barriers to trade. But I think that you know, what you want to do is, and look, we have massive direct investment outflows out of the country. And you see this, by the way, to take, you know, go interview Canadian hockey teams they can’t attract. There’s a reason. I mean, the Oilers came close. However, you speak to Canadian hockey teams, they can’t compete with American hockey teams because the tax regime in this country is crazy. So that’s the first thing I would do, is I would do fundamental tax reform that would reduce that would reduce the tax burden, and I would prevent the deficit from spiraling by cutting spending, not the growth. Cutting spending outright. It’s incredible that all the spending that was supposed to be temporary coming out of COVID has meant to stay on the books. I think the spending level is like 30% higher than what the government was predicting it was going to be. Even when COVID was hitting. It was supposed to be temporary. But you see in the in the government sector, no spending is ever temporary. Now this wasn’t the case in the 90s under a different liberal regime, but let’s face it, Jean Cretan and Paul Martin were were fiscal conservatives in the Labor Party, and that’s what we have to get back to. So I would say classic, classic reduction of the government share of the economy, let the business sector flourish and allow their share of the economy to grow, and broad based, broad based top marginal tax rate reductions, that’s exactly what I would do on on day one.
Andrew Brill 9:16
Thanks again for watching these favorite moments of 2024 and we hope we can continue to provide you with information that will help you invest wisely and be financially resilient. Wishing all of you a healthy, happy, safe and prosperous 2025!
