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Hello and welcome to our latest video #MacroMemo. As always, we have lots to talk about. The U.S. government shutdown has been resolved, at least for the moment. We'll get into that shortly.

Let's talk about tariffs, which actually have been in motion mostly in a favorable direction, meaning the diminishment of tariffs. We'll talk a little bit about gold just in the context of what gold prices might do in the future. They've certainly risen a whole lot over the last few years.

We'll do the same with oil in terms of oil prices, which have been on the opposite trajectory. They’re down materially over the last three years and perhaps where they might go as well.

And we'll finish with a little critique, a high-level overview of the Canadian budget, which was proposed several weeks ago.

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We even talked about it in one of these videos, a few weeks ago, but it has now been formally approved by Parliament. And so it will be enacted into law.

Okay. Let's start with that government shutdown. As has been widely reported, it has now been resolved. It was a 43-day shutdown, which was a record. It was an intense shutdown, meaning all 12 of the appropriation bills had not passed.

So all 12 parts of government were shut down other than for essential work. And really what happened was the Democrats crossed the Senate floor to vote with the Republicans. Mildly surprising, to the extent the Democrats had seemed to have some momentum and had arguably won the November 4th municipal and state level elections and so on. But ultimately, they were the ones that moved.

And it may have been they simply were concerned for government workers not getting paychecks or for people not receiving food stamps, or for travelers having trouble at airports.

Alternatively, it could simply be that they are looking forward to the midterm elections next year and are of the view that if the Affordable Care Act subsidies do go away, as now seems to be the plan, that could actually favor them in those midterms.

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So we will see how that plays out. In the meantime, from an economic standpoint, the catch-up salary payments are being made right now. So those should be going into government workers’ pockets and presumably they will deploy some.

There was a bit of a liquidity pinch for a moment that is now, in theory, resolved. We still think Q4 GDP in the U.S. will be a percentage point plus weaker than otherwise simply because there were 43 days in which certain government functions did not occur.

There was already likely a rebound happening. We will see in the numbers, though, in Q1 2026. We will see presumably about an extra percentage point of growth just offsetting the artificial temporary weakness that took place in Q4. The economic data has broadly not been released during that shutdown. So it starts to be released.

Indeed, as I'm recording this, we get one small release today and one small tomorrow, and then the pace picks up somewhat from there. So we will get a better sense for the economy.

We do think we're doing a reasonable job of tracking it using alternative indicators, and so I don't expect any large surprises. But in general, there has been a bit of an economic deceleration. That would be the way that we would describe it.

But I'm burying the lead here, which is there is the risk of another shutdown as soon as February 1st.

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Only three of the 12 appropriations bills have been passed right through the fiscal year until next fall. The other nine have only been kicked down the road until January 31st. And so when we look at betting markets such as PolyMarket, they're giving about a 1 in 3 chance of another U.S. government shutdown. So we should be braced for that possibility.

It really is hard to intelligently comment on it. It's just hard to say where political priorities and even what the power dynamic will be in a couple of months, but it is just 10 weeks away. And we certainly haven't seen a great deal of cooperation between the parties.

So there is the risk of a shutdown. Arguing against, the Democrats arguably didn't extract too much in terms of cold, hard policy from this latest shutdown. Arguing for, you might claim that the Democrats did win the public relations battle. And perhaps so I have set themselves up better for the midterm elections.

And so it's possible we get one. If a shutdown did happen, I would guess that it should be shorter than the prior shutdown. Just because it would ultimately push politicians. It was essential workers who were nominally working, starting to claim more sick days, starting to slow down, and expressing frustration that they were not being paid in real time for their services.

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And so you might imagine that frustration on the part of essential workers mounting more quickly, in a way that would perhaps reach a resolution more quickly as well.

Okay, let's move on to the tariff file. As I mentioned, more positive than negative developments. So new trade deals, I won't rehash China-U.S. because that's now old news.

But of course there was a deal and a decline in tariffs there. The newest country level agreements are with Switzerland, Argentina, a number of other Central and South American countries.

Switzerland is perhaps the biggest of the bunch. Its tariff rate has fallen from a very large 39% -- it was the largest in the developed world – to just 15%, which is much more in line with the rest of Europe and Japan and so on.

So we are seeing the effective tariff rate incrementally decline. It also was incrementally declining in a different way, which is we've now seen some tariff relief applied to particular food products. And so, your coffee, bananas, fruit juice, beef and so on. Focus on cost of living. Tariffs have been removed on those products.

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Initially it looked like – and I think there's still a bit of this – that essentially products the U.S. doesn't make were being un-tariffed. The U.S. doesn't make coffee, doesn't grow bananas in any significant numbers. And so, as a result, it seemed like just a win for the consumer without really a loss for American industry.

However, as I mentioned, it did broaden beyond that to include fruit juice and beef and tomatoes and things that the U.S. does make as well. And so getting a little blurrier in terms of rationale and perhaps does just raise the potential for the U.S. to lighten tariffs elsewhere if there is enough of an uproar among consumers or enough pain being felt by consumers. So perhaps we will see more action on that front.

Tariff rebates have come into attention recently. President Trump has talked about a $2,000 tariff rebate, a cheque for American taxpayers. And it's not clear that this happens. In fact, Treasury Secretary Besson later said all that money's sort of implicitly already been paid out via the tax cuts that happened earlier.

But other White House members suggested there is still some debate happening. I would note the money is already spent in the sense that this is the tariff revenue that has already been spent to fund the tax cuts that occur. And so you're sort of double counting if you're also issuing $2,000 checks on that front. But, you know, the possibility exists.

It's not in our base case scenario. So if that money does flow, that is about an extra percentage point boost to GDP. And so it would significantly accelerate the U.S. economy, of course, and also significantly increase the deficit.

Just a final tariff thought from a Supreme Court IEEPA tariff perspective. Those are the country-level tariffs.

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There has always been a significant question as to whether those will survive the Supreme Court challenge. Right now, betting markets think there is a 75% chance those tariffs go away. That could create a little bit of tariff chaos for a moment.

I would just note countries signing trade deals are no longer governed by IEEPA tariffs. And so those tariffs may persist.

And we think there are enough other tariff tools in the toolkit, Section 122, Section 30, if you like to geek out a little bit. That would allow the U.S. in the end to get where it wants to go on tariffs, even if those IEEPA tariffs are lifted.

Okay. Let's move away from public policy. Let's talk really about commodities, both gold and then oil.

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On the gold front, gold prices have roughly doubled over just the last two years. They've been as high as about $4,300 per troy ounce. They've retreated a bit more recently. In the very short run, our bias would be maybe there could be a bit more of a retreat. And it's really just that the speed of the prior run up was quite extraordinary.

But over the medium term, we are still at least cautiously bullish on gold. And that is motivated by a few things.

One would just be the historical perspective. And so there have been three prior gold price cycles of note. Those would be those that culminated in 1974, 1980 and most famously also in 2011. Gold rose by an average of 671% across those three cycles.

It's only up by about 250% today. So it would suggest there could be more to run.

There are also some fundamental gold demand arguments at play as well. The dollar has been weaponized against Russia and so on in a way that has central banks more keen to diversify. And so they are adding to their gold holdings. And that is likely to be a persistent theme.

The U.S. dollar is becoming a little bit less prestigious or less central. And so investors perhaps holding a bit less in dollars and conceivably holding a bit more in gold. And so that's in part because China is on the ascent. It's in part because of fiscal concerns about the U.S. and indeed about a lot of countries.

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It's also because there's political polarization in the U.S. and of course antagonistic tariffs against the rest of the world. And so arguably the U.S. dollar declines and gold picks up a little bit of that slack.

And then more generally just inflation concerns. And you debate this because in markets, inflation expectations aren't actually that high. But surveys certainly are still concerned.

Similarly the realized inflation rates are still fairly high. And when you think about resolving fiscal excesses and so on, it's not unusual for inflation to remain a bit too high. So that tends to favor gold. It is a time of high global uncertainty that tends to favor gold. It is a time of declining interest rates that also tends to favor a non-yielding asset like gold.

And so you know in practice we do see central banks maybe buying a little less quickly than a year ago, but still moving at a pretty rapid rate. We are tentatively seeing private investors becoming more interested. And institutional investors do take time to shift their strategic asset allocation. So plausibly more inflows to come.

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Certainly, it is an inherently volatile asset class. It is crucial to recognize that the three other gold rallies were followed by about a 50% decline in the price of gold. So it doesn't hit a new threshold and just stay there. There tend to be overshoots and then partial declines. But as it stands right now, we think over the medium run gold could rise somewhat further.

And I guess it's worth acknowledging that Canadian investors already have some significant exposure to this, given just how heavily weighted the Canadian stock market is toward precious metals.

Okay, let's talk oil for a moment as well. Sort of the opposite story. And so the question is, why is oil so low? It's about $60 a barrel for West Texas Intermediate.

That is fairly low in an absolute sense. It is the culmination of a downward trend over the last three years. And so I guess the obvious question is why?

I think you can really attribute that to a mix of demand and to supply. Demand is rising, but fairly sluggishly. And so the economy globally just isn't that strong right now is part of it.

But there are also arguably structural forces. Electric cars are rising in usage. And it should be noted that ground transportation is about 40% to 50% of oil usage, so this is very relevant.

We're seeing also just continuation of a very long-standing trend, just more fuel-efficient economies, more service-oriented economies that are less oil intensive as well.

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And on the electric car side, China is by far, by a margin of about 50%, the world's biggest new car buyer. And over half of the cars they buy are electric right now. So there is a real shift happening on that front, even if it's perhaps underwhelming in a U.S.-specific context.

More generally, Chinese oil demand may be peaking based on what we're seeing. Oil demand peaked in Europe in 2006. Oil demand in the U.S. is plausibly peaking as well. It's going roughly sideways these years. And so the demand side is softer than we're used to it being.

Meanwhile, oil supply is really a function of a shift in attitude by OPEC (Organization of Petroleum Exporting Countries). OPEC was in profit maximizing mode which meant they were cutting production for a long time.

They've shifted quite clearly over the last year or two to market share maximization mode. They are producing more and more and more. And they are tolerating lower prices because they are gaining market share. And they recognize they are a low-cost producer and so they can win that war. And so, we think that extra supply persists.

And so it makes sense that oil prices are lower. In fact, oil inventories are fairly high right now and projected, by the International Energy Agency, to continue growing over the span of the next several years. And so the thinking here is that that mismatch persists.

Now, don't get me wrong, oil can stay fairly low near where it is. If you talk risks, the risks do tilt more up than down. And it really is a geopolitical comment that the U.S. attacked Iran not long ago. Russian sanctions are intensifying and Ukraine is hitting oil capacity in Russia. And there has been antagonistic talk by the U.S. toward Venezuela, another oil power. And so, there are risks to this.

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There are ways in which the world gets complicated and oil prices go up. But most likely, that we think oil prices can remain fairly tame.

I'm going to finish briefly just the Canadian budget, proposed several weeks ago. I won't rehash all of that. It did just pass and so the government survives therefore. That was a confidence vote. There would have been election if it didn't pass.

It was close. It was 170 to 168. The Liberals had to scramble to get there. One Conservative crossed the floor to join the Liberals as a member of the party. The Green Party supported this with one vote, but nevertheless. Two NDP members strategically abstained. And so that got them to the number they needed.

So I won't rehash the full budget. I'll just say it’s a big budget, an important budget representing a pivot in focus, maybe falling a little bit short of transformational, though. And so, yes, fiscally stimulative, with big deficits, but not quite as big as initially expected.

Yes, there’s a focus on CapEx. But actually the government is only adding new money of about 9 billion more dollars spent per year on CapEx than before. So it's more about encouraging CapEx.

And you'll recall Bill C-5 back in June, reducing barriers to infrastructure investment and resource investment. And they did do an accelerated depreciation measure, but less new money than you might think. Most of the tax cuts already happened in terms of a small tax cut in the summer and the carbon tax and the digital services tax and so on.

Yes, a big military portion, so that's quite genuine. Don't overestimate the fiscal multiplier though. So you do get some economic benefit from that. But it tends to be lower than other spending categories. And you normally would say yes, but CapEx generates a big multiplier. But in Canada a lot of that would be buying tanks and bullets and things that come from the U.S.

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So that's money that's actually leaving the country. So don't expect a huge economic boost from that particular element.

And then it's possible and quite realistic to be skeptical about the austerity side. The plan is to cut program spending growth from 8% a year, which was averaged over the last decade, which was very fast, to 1% a year, which is very slow.

And so we'll see whether they pull that off. There's reason to think they might not be quite capable of that. And so let's watch and see where this goes. Nevertheless, an important budget, boosting growth we think in 2026, maybe not quite as much as you would have guessed going into the budget.

Okay, I'll stop there. Thanks so much for your time. I hope you found this interesting and useful, and please tune in again next time.