00:00:05:05 - 00:00:43:08

Hello and welcome to our latest video #MacroMemo. As always, quite a lot to cover on the economics beat. We'll start just with some current developments in the context of holiday shopping trends, central bank activities, what's happening on the tariff file and just a day to catch up as the U.S. releases data after that shutdown ended.

Then we'll pivot into, I would say, a more thematic set of directions.

· We'll talk a bit about artificial intelligence (AI) and its potential effects on productivity.

· We'll talk a bit about the Monroe Doctrine, which is essentially the new U.S. foreign policy plan with an emphasis on the Western Hemisphere.

· We will talk about Chinese housing and its outlook as well.

00:00:43:08 - 00:01:26:09

Okay. Let's start on the current development front. And so just on the holiday shopping season, and this is really looking back at that American Thanksgiving, going okay, I guess. I would say it looks like overall spending was up about 5% from the prior year, though 3% of that was prices only. Perhaps at most two or even 1-2 was an actual increase in the amount of buying.

So nothing too overwhelming there. Online shopping, perhaps unsurprisingly, is still structurally rising. And so there was a 7%, a bigger increase in online shopping versus the prior year. Growth, though, not as fast as the prior year.

We are seeing some other interesting trends just within the details. And so one would be a shift to mobile shopping. When I read that, I thought it was just another comment that e-commerce was picking up.

00:01:26:09 - 00:02:04:17

But no, this is actually people buying things using specifically their phone, as opposed to other electronic implements, for what it's worth. So that is very much on the rise. And then also the use of artificial intelligence in shopping, in terms of getting guidance and suggestions. And this is all just the links provided by the AI through to the retailers is how it's being measured. That’s up seven and a half times just in the last year.

Okay, over to central banks. Central banks are all busy trying to cram in the last rate decisions of 2025 before the holiday season begins. And so we had the Fed in the U.S. (Federal Reserve) and the Bank of Canada not long ago. The Fed did deliver a third consecutive rate cut.

00:02:04:17 - 00:02:50:10

It now looks to be perhaps on hold for a moment, but we would budget for at least a bit more cutting next year. And we should learn who the next Fed chair is within the span of potentially the next several weeks. Early 2026, in any event, has been the target date for that decision.

And at this point, it looks likely to be between Hassett and Warsh, with Hasset’s odds now falling worse rising but both really very close to 50/50 right now, based on the betting markets that I have seen.

For the Bank of Canada, no rate change this go round, though they had cut the two prior times. The Bank seems to think it is comfortably on hold. Seems to be a little bit skeptical of some of the stronger economic data Canada has recently been printing and wants to just wait and see and make sure that's real before deciding what to do next.

00:02:50:10 - 00:03:33:10

And that brings us to – and this may or may not be the future, depending on when you're watching this – but I'll just pretend that it is, and it certainly is from my standpoint today. We have the Bank of England, the European Central Bank, the Bank of Japan all coming up imminently.

And so the Bank of England expected to cut rates. The Bank of Japan expected to hike rates. The European Central Bank, no points for guessing here, expected to remain unchanged. So all three possible outcomes to be embodied in those sets of decisions going forward.

And so interesting then, from a fixed income investment perspective, interesting from a currency perspective as well, to have central banks doing very much potentially different things.

Just for a moment on the tariff file, and I'm pleased to say we're not getting the same kind of overwhelming flood of news on tariffs that we were getting, let's say, a quarter or two ago.

00:03:33:10 - 00:04:31:12

But do note that the expectation is that the U.S. Supreme Court does render a verdict at some point in the not-too-distant future. There has been discussion. It could be in late December, which would still be then on the table before the end of the calendar year, or perhaps relatively early in 2026.

As to the fate of IEEPA tariffs, these are the tariffs that are applied at a blanket level to different countries. And the betting markets have maybe not a high level of conviction, but assign a fairly high probability, a 78% chance that the Supreme Court essentially rejects these tariffs.

And so there could be this scramble and the U.S. would likely implement other tariffs to replace it. But nevertheless, there could be a moment of chaos before too, too soon.

We have seen President Trump threaten withdrawal from the USMCA. That's the Canada-Mexico-U.S. trade pact. We don't take that too seriously at this juncture. If the U.S. had wanted simply to exit that deal, they would have presumably done that at the very beginning of 2025. We think that when negotiations are done, it will be a slightly diminished document.

00:04:31:12 - 00:05:14:20

But not perhaps radically changed from where it is right now, from the current tariff landscape. I would say do budget for lots of scares, though, and threats and bargaining tactics in the months ahead, though. There may be some nervous moments and this is perhaps one of them.

Similarly, we heard the White House threaten fertilizer tariffs, which really doesn't make very much sense. If farmers are already hurting in the U.S. We'd be surprised if these were applied. In fact, fertilizer tariffs were just lifted for phosphates.

The threat that was made specifically to Canada, presumably on potash, which is Canada's big fertilizer export to the U.S., we're dubious that would be implemented.

Quick data catch up here. And so the U.S. lost a lot of data during the shutdown.

00:05:14:20 - 00:06:22:20

It's still in catchup mode. Just mere minutes ago, as I'm recording this, we got October payrolls and November payrolls at the same time. And I would say on the margin a little bit weak. The unemployment rate did rise to 4.6%. It had been 4.4% a couple of months ago before we got these latest numbers.

And so a little bit higher than what we had seen before, an upward trend reflecting we think is something of an economic deceleration.

The job numbers themselves are tricky to interpret. The October figure was -105,000, which obviously is not very desirable. However, that happened to be the month when everyone who took a voluntary package from the U.S. federal government earlier in the year that happened within the day their packages expired.

And so what showed up was a large number of federal layoffs. It's not completely real. The November number was up 64,000, which is, I would say, okay, in the context of very limited immigration and population growth right now.

But what the Fed has said, they think that the job numbers are being exaggerated and the true numbers might be about 60,000 less, which would then be consistent with perhaps no job creation.

00:06:22:20 - 00:07:05:02

And so, somewhat soft labor market numbers is perhaps the way to frame this. There has been some economic deceleration.

Okay. Let's move into the thematic issues here. And so, to start with artificial intelligence, it’s certainly in focus from an investment standpoint and is it a bubble standpoint, a CapEx into AI standpoint. Those have been the focal points, as we've said a few times now.

The real prize, though, is productivity and efficiencies. And that is the purpose and goal of all of this AI. And there's been less talk about that.

I want to start by saying, we do think this is an exciting general-purpose technology with plenty of applications set to indeed increase productivity and change the world in many ways over the span of the next several decades.

00:07:05:02 - 00:08:08:14

There are a range of expert estimates as to how much faster productivity growth could rise per year over the next decade or so, and the range is a little bit laughably wide. You have a 0.1% per year is the most conservative we've seen. You have a plus 2.5% productivity growth per year as the most optimistic. That would be unbelievable.

That would be well over doubling the rate of productivity growth. You have credible institutions like the International Monetary Fund (IMF) saying maybe it's 1 to 1.5% faster growth per year. The OECD saying maybe it's 0.4 to 0.9. So no one knows exactly.

Either way, it is significant, potentially pretty massive. If you put this in the context of current, let's say, U.S. or even developed world productivity growth of 1 to 1.5% a year, if you can tack on even half a percentage point, that is a lot.

That is a one-third to 50% increase in your rate of productivity growth. And that increases prosperity. It increases real wage growth. It should increase corporate profit growth as well. And so it's potentially quite a big deal.

A lot of the forecasters, though, don't expect the effect to show up for a few more years.

00:08:08:14 - 00:09:01:18

And I would say that we're a bit optimistic on that front. We think it may be starting to show up already. We see quite a high adoption rate running faster and quicker than, say, for the internet or other major technological changes.

At the micro level there are certainly useful applications from a theoretical standpoint. There are some studies really focusing in on individual roles and individual companies that are finding real productivity gains at the company level.

The Saint Louis Fed actually argues that there has been about 1.3% faster productivity growth since the end of 2022, when ChatGPT came out. And so we think that maybe productivity growth is already running a little bit faster as we look forward to 2026.

We are somewhat optimistic. We think that there are a number of tailwinds, including rate cuts and fiscal stimulus and so on. But also we are budgeting for slightly faster productivity growth as AI spreads its wings to some extent.

00:09:01:18 - 00:10:00:05

Okay. Let's shift from there. Let's talk about the Monroe Doctrine for a moment. Not to get into the weeds here, President Monroe, a president in the early 19th century, laid out this original doctrine essentially saying the Western Hemisphere is not for Europe, it's for America, and so on. President Trump has, I guess you could say, updated and enhanced that to some extent, as part of a foreign policy update.

And so the U.S. is clearly prioritizing the Western Hemisphere as a key focus, which really has not been the case. You could say maybe Asia was being prioritized most recently. It  now asserts U.S. preeminence over the Western Hemisphere. And so they're saying everyone else is operating within the U.S. security perimeter, not the other way around. And aiming to limit the foreign strategic influence.

And so really, codeword for seeking to limit China's influence over the region and you might say Russia and Iran and a few others as well. And, you know, the motivation is a number of things. One is just there is this isolationist instinct. And so the U.S. is drawing closer to home and that does include the Western Hemisphere.

00:10:00:05 - 00:11:06:04

It does align with other objectives. The U.S. wants to limit immigration to stop the flow of illegal drugs, to reduce crime. The first to at least have a pretty clear connection to the rest of the Western Hemisphere.

And in practice, we are seeing very real actions taken. The U.S. has now repositioned an aircraft carrier and indeed, fleet, to the Caribbean, going after drug smugglers, going after Mexican cartels, threatening Venezuela.

There is a very real chance of regime change in Venezuela. I was just looking at betting markets and they assign a 52% chance that the U.S. and Venezuela engage militarily by March 31^st. They assign a 54% chance that Venezuelan President Maduro is ousted by the end of 2026. And so there could well be very real changes on that front.

And the U.S. is trying to limit China with regard to the Panama Canal. Indeed, the ports are being sold from a Chinese company to an American one.

The U.S. is helping Argentina, which was otherwise striking deals with China. The U.S. is celebrating right-leaning governments like Argentina, like a recent Chile election that tilted to the right.

00:11:06:04 - 00:12:04:19

The U.S. is proving somewhat antagonistic toward more left-leaning leaders like in Brazil. And we are seeing Chinese access to the Western Hemisphere reduced to some extent. Mexico just agreed to many, many tariffs on China across hundreds and hundreds of products recently, and I would think we may yet see more of the same for other countries.

And so this is an important change. I guess the question is what are the implications?

And so we would say, on the positive side – and we'll get to the negative – but on the positive side, if you want to be optimistic, you can say maybe there's a Fortress North America concept brewing here, in which perhaps Western Hemisphere countries will be in a position to trade with each other more.

And I will admit that the recent application of tariffs on almost every country doesn't exactly align with that perfectly. But the U.S. does seem sympathetic to the idea that it would like to source many of its resource imports – at least more from its neighbors, as opposed to other parts of the world. If Venezuela were to be overthrown, you can conceive of more oil production, perhaps lower global oil prices coming from that.

00:12:04:19 - 00:13:07:05

If efforts to limit the flow of illegal drugs succeed, well, there would be perhaps fewer illegal drugs, which seems like a societal win. And so certainly some real positives.

From a negative perspective, there is a very real risk the U.S. gets sucked into repeated conflicts in Latin America. That is sort of what happened when Theodore Roosevelt had a similarly aggressive policy in the early 20th century.

If the U.S. is more focused on the Americas, it's less focused on the rest of the world, which gives room for China, Russia and others to operate and expand their clout. Let's appreciate we're talking here about managed trade. And so cliques of countries and maybe Western Hemisphere countries get to trade with each other a lot, but perhaps they have less access to other markets to some extent.

And so there is some deglobalization which is an economic negative. And I guess these countries are losing a bit of sovereignty as well, to the extent that the U.S. is asserting itself more. And that applies, by the way, to Canada too; less trade with China, conceivably. It’s certainly hard to make a real pivot there when there will be pressure to put tariffs on China.

The U.S. probably more involved in Arctic sovereignty. And so Canada losing a bit of independence on that front as well.

00:13:07:05 - 00:14:03:07

Okay. I want to finish just with some talk about Chinese housing weakness. And so the housing market has been weak. We think ultimately, just to give the punchline away, that it will be weak for some period longer.

There had been some green shoots about a year ago. They seem to have disappeared. When we run through the numbers, it is still fairly soft.

And so housing sentiment index is low and falling. Home prices are falling pretty substantially on a month-to-month basis. Affordability has improved, but still quite poor. Land purchases are low and down. And falling housing starts under completion data, sales, data, all very low and falling as well.

There is still an imbalance in the market. There are many, many, many houses for sale. Far fewer are being sold. So the inventory to sales ratio is quite high.

So net net we should expect it to remain cool. It's not going to be an economic driver. I will say though, there are some silver linings that we should be aware of and perhaps celebrated.

00:14:03:07 - 00:14:55:14

So one would be mortgage rates have fallen substantially and may fall a bit further in China. And so that does provide something of a helping hand up. Rental yields which are still low, meaning it's not a great time to be an investor. They are still rising. Actually, they are the highest they've been in about eight years, despite still being low.

It speaks to how bubble-ish the market was before. But we are seeing rental yields rising. First Tier city prices are rising as well. So home prices falling overall. But it's really third Tier cities that are falling. Second Tier cities are stagnating. Biggest cities have started to see some increase and then builders are struggling less.

And so not to oversell this, there are still problems, there is still liquidation and so on. But the high-yield default rate for builders has fallen from a pretty astonishing level to a much less wild level right now.

So the level of concern in markets is down. It seems not to have triggered a financial crisis, I guess is the main point. So we haven't seen that spillover.

00:14:55:14 - 00:15:20:07

So for Chinese housing, you're not a contributor to growth over the next year or two. Fortunately, just from a broader economic standpoint, China's new economy and innovation and tech sectors are doing well. We do see room for stimulus that China can do as needed, given there have been some soft retail prints and soft CapEx prints recently.

And so on the net, we're still feeling okay about the Chinese economy, but really not expecting heroics out of housing.

Okay, I'll stop there and I'll say thanks very much. Hope you found this interesting and useful. Please do tune in again next time. And very happy holidays and a Happy New Year.