Eric Lascelles

Hello and welcome.

My name is Eric Lascelles. I'm the Chief Economist for RBC Global Asset Management and very pleased, as always, to share with you our latest monthly economic webcast. This happens to be the first such webcast for 2026 - so January 2026. And I must confess, this title is not the most evocative of titles: New themes for a New Year.

I won't waste your time on that, I'll just jump right in and we can start talking about some of those new themes. As we often do, we start with something of a report card. Why don't we talk through some of the more positive themes that are going on in the world right now, and that we see in the months and quarters ahead. And we can talk a bit more about the negatives and the interesting ones just in a moment.

So starting on that positive side, we do continue to believe there are some important growth tailwinds for 2026. That significantly informs our view that economic growth across a fair swath of the world should look fairly good for the year, and indeed could improve somewhat from the first half of the year into the second half. And, that list of tailwinds includes interest rate cuts, fiscal stimulus and a handful of other things that I'll get into in a little more detail later.

The word tariff does appear in this report card. It's right in front of you, tariff impact on inflation. But, I will say that the word tariff does not appear as much as you might normally expect in this particular webcast. We're not seeing the kind of big changes that had taken place across much of 2025. To be sure, there are still substantial, open-ended questions around the USMCA trade deal, vis-a-vis Canada and Mexico, but in general no longer a central driver of change, at least in the outlook. Though, there is still some impact being felt.

In this context though, in a positive context, we can just say the tariff impact is proving to be a little bit lighter on inflation than initially feared. We're looking at a U.S. inflation print, as I record this on January 6^th, that is now a little bit below 3%. We and many others had run our models and crunched some figures and assumed that we'd be seeing tariff inflation more like 3.5% around now.

And so, it is proving a little lighter than expected, which is welcome. I can say just more generally in thinking about the kind of economic regime, or the investment regime, we're in right now. We are in the combination of a rate cutting regime, which is generally welcome, with one in which the economy is expanding.

And that might not seem all that interesting because economies expand most of the time, but actually, it's fairly rare for rate cuts to be happening outside of an economy that's sliding into recession, which of course, is trouble. And so, to combine rate cuts with an economic expansion is historically fairly rare and quite welcome, and usually fairly constructive for markets.

It's usually a good thing, for the stock market as an example. But again, more on that in a moment. We are hoping for faster productivity growth ahead. In fact, I'll say we're expecting some, but hoping for more than some faster productivity growth ahead. And much of that is AI inspired, and we'll talk about that too in a moment.

And then just to speak to Canada briefly, we've seen some actually fairly pleasant upside surprises for the Canadian economy in recent months. Most powerfully in the job creation numbers, which really pretty materially exceeded expectations in each of September, October and November.  I won't rain on this parade too much other than to say I don't think that rate of hiring is going to last.

I'm a bit suspicious of it. I suspect the economy isn't moving quite as quickly as those numbers would suggest, but I can't argue that the numbers have looked pretty good recently, so let's celebrate that. Over from the positive themes now to the negative themes, it's a shorter list to start with and so we'll take that as a positive perhaps.

On the negative side, we are still seeing what I would describe as a mild U.S. economic deceleration right now. Case in point, the unemployment rate is still edging a bit higher. It's now the highest we've seen in a number of years. I can say that risk assets, that's just fancy language for stocks and credit spreads and these sorts of things,

they are improving less reliably than they were, let's say, earlier in 2025. And so I would still say we think they can go up. Stocks can go up, and credit spreads I should say, can remain narrow. However, it's not proving to be as easy of a journey or as straightforward a journey as it was across much of 2025.

That does speak to some questions around AI and some other things that exist, and indeed, there are still worries about an AI bubble. We've argued that there is much to like about the AI sector and that we think there are some very real important things going on there, but the bubble concerns are not unconcerning at all.

And indeed, there are very real questions as to whether valuations are too challenging relative to what you might expect earnings for those companies to grow at, over the coming years. We are still seeing housing market weakness in China, indeed some CapEx weakness too. So, there are parts of the Chinese economy that aren't so great, and this is maybe a bit of a non sequitur, and there's no particular reason it had to appear in the first month of 2026 versus a year ago or a year from now.

But there are real concerns about U.S. Social Security's funding status and the extent to which there will be enough money for U.S. retirees, and I'll give you a bit of a sense for that later as well. And then just on the interesting side and there's a lot of interesting this time, we will talk about the Monroe Doctrine.

So this is something laid out by President Monroe in the U.S. in the early 19th century, but it's been revised a few times since, and was revised by the White House quite recently. Really, there is a renewed emphasis on the Western Hemisphere for U.S. foreign policy, and we are seeing that in action. In fact, as I record these words, just a few days ago, there was a rather substantial change in that Venezuelan leadership prompted by the U.S. I think linked to that new emphasis on the Western Hemisphere - and we'll talk about that too in a moment. We'll spend some time on artificial intelligence in the context of the economy and a number of quite promising things and a couple of question marks and concerns that exist in that space as well.

We should talk maybe right now just about central banks. So, in December to close out the calendar year, we saw the Fed in the U.S. cut rates, we saw the Bank of England cut rates again, and so those were broadly welcome actions. We saw the Bank of Japan hike rates. So, just on a very different path than everyone else with ultra-low rates for decades and now tiptoeing its way into less ultra-low rates.

And then we have the European Central Bank and the Bank of Canada, on hold. And I'll talk a bit about our outlook for 2026 a bit later in this presentation. Let's acknowledge there are substantial and important inflection points immediately ahead as I record these words. The U.S. Supreme Court expected to rule on IEEPA tariffs fairly shortly,

it's possible it’s actually as soon as this Friday, January 9^th. You may be watching me after it's happened, or perhaps it will be delayed a few weeks beyond that. But the Supreme Court is quite likely to reject the IEEPA tariffs the U.S. has used to really tariff, in kind of a broad way, many countries around the world.

And so there's quite a high chance those get removed. However, we think there are enough other tariff tools in the tariff toolkit that the U.S. can probably ultimately kind of reimpose similar type of tariffs and be in a not completely different situation a number of months down the line, but do watch for that. We are expecting to learn the new Fed chair relatively shortly.

There is a thought that should happen perhaps in early January. And so again over the next week or two, betting markets would have you think that there are two leading candidates here, Kevin Hassett and Kevin Warsh. So, we know it will be a Kevin, but we do not know which of those two it would be.

At one point, Hassett was thought to be the prohibitive favourite. It is now close to 50/50. Actually it's about 43/43 with a few other lesser candidates, as well. Warsh has become more plausible. And just in terms of how to think about that, Hassett would probably cut rates more, also, probably be the more politicized candidate, you might say.

And so, you might see short term interest rates fall more with a Hassett chair, simply because he would cut rates more, and that's the greatest relevance to short-term rates. However, long-term rates might be a bit less pleased, worried about Fed independence, worried about inflation policy missteps and that sort of thing. With Warsh, it maybe the same sort of directions, but ultimately, maybe a little bit less powerful would be the way that I would think about it.

I don't have any inside view as to who wins of those two. I might, have forced to pick, say maybe the odds for Warsh are a little bit higher than the market thinks, but ultimately, it really could be either one and we don't have any inside view to that. And then the other thing that's just coming out as quickly, a potential inflection point, is on February 1^st. There is the risk of another shutdown of the U.S. government.

If you recall it was shut down in October and about half of November as well, and so, much of that funding was only extended until the end of January. There could be another shutdown on February 1st. The odds of that have fallen, though. It seems like there isn't as much appetite for another battle, particularly on the side of the Democrats.

I was seeing betting markets suggest a 40-some percent risk of another shutdown as recently as mid-December. It's now just over about a 20% chance, so I would say let's assume it doesn't happen. If it did happen, it would probably be short lived, but would be unwelcome, nevertheless. And then just to flag, you know, the USMCA trade deal of course, up for renewal, renegotiation in 2026.

I think that is going to come into increasing focus. I would just warn from a Canadian perspective, at least, there will be some moments when everyone is feeling fairly nervous and there will be some fairly big U.S. demands. I don't doubt there will be some concessions, though I would note Canada has made significant concessions already in advance and anticipating this.

At this juncture, we don't think that the USMCA is torn up. We don't think it ends up being radically different than the current tariff environment that prevails right now, but there are some risks. But I would say let's not overreact when threats are made, that's part of the negotiating strategy. So, let’s just work our way into the picture show here to establish and validate some of those claims that I've just made.

Let's start with this. This is actually historical U.S. GDP growth and our forecasts going forward. I would say the U.S. managed some pretty extraordinary quarterly gains in recent quarters. You can see nearly 4% annualized GDP growth in the second quarter of last year,  and more than 4% annualized growth in the third quarter, well beyond expectations. However, we do think there is a bit of a reckoning coming. So, you'll see that first light blue bar is a very small bar, and so that reflects our expectation that the fourth quarter growth may be much more limited, only around 1% growth. Do note, we're assuming that the shutdown that took place in that quarter chops a percentage point, a percentage point and a quarter, off of that.

And so I think that it would look fairly pedestrian absent that, but equally not as fast as we had seen before, and consistent again with this idea that we can see hiring is slowed. We can see unemployment rates have gone up. We think we're seeing in the real-time data consumer spending growth slowing a bit, not in a problematic, disastrous way, but in a way that doesn't support growth that's running at twice the recent norm.

And that's what 4% type numbers were doing. If you look a bit further forward though, you'll see we then have a bit of a jump in the first quarter of 2026. So that would be rebounding from the shutdown and playing a bit of catch up. So it's artificially strong there, also a little bit of tax cut benefits starting to show up in that quarter as well.

Then loosely speaking once those distortions are through, just the economy is moving pretty well, that is maybe accelerating mildly toward the end of the year. As I mentioned before, the economy is weakening a little bit in the U.S., here is the unemployment rate. You can see it's been trending higher now for a good two years, in fact, a little bit more than that.

This is the highest unemployment rate we've seen since 2021, and so that makes it sound quite grim. I would just say the current unemployment rate is 4.6%. It's pretty benign. We would say in general, 4 to 4.5% is, our best guess for a neutral unemployment rate and a normal rate. You wouldn't want it to be much lower,

it's unsustainable, creates inflation. Of course, we don't want it to be too much higher. I guess it is a 10th of a percentage point higher, but it's sort of in the realm of normal, but no longer at the hot end. That's now at the cool end of normal, you might say. And so, let's watch to see how much more, if more, there is a deterioration here.

Of course, there are some twists and turns to this. Is AI displacing workers? We think a little bit, we're not convinced that's showing up too much in the headline numbers just yet, but there are some real questions there, too. I mentioned growth tailwinds before. I very briefly alluded to monetary policy and fiscal policy, and so you can see those at the top of this list of tailwinds that should prove beneficial to 2026 economic growth, and so those are important. You’ve got U.S. rate cuts, likely some this year. Less clear if we get a lot of rate cutting from Canada, you might wonder why there are two pluses then. That is because there has been quite a bit of cutting that took place in 2025, and the policy rate is outright stimulative.

So levels matter too. The Canadian policy rate is quite low, it's two and a quarter, the U.S. is still in the high threes. And so, Canada does get arguably a bit more of a helping hand. And the rest of the developed world also broadly lower than the U.S., but ultimately everyone gets a helping hand and there are enough lags involved.

Meaning even if Canada doesn't do a lot of cutting this year, there's still a helping hand from last year. On fiscal policy, there are some positives there too. We've seen fiscal stimulus really in the U.S. and Canada and in Germany, in a number of markets. So that is providing help as well. Stock markets, of course, are massively higher than they were a few years ago, quite substantially higher than a year ago.

That is also beneficial. There's a wealth effect, people are becoming wealthier. They spend a fraction of that wealth as consumer spending. Low oil prices, oil prices that have trended a bit lower, maybe even the prospect of more Venezuelan oil, that might be a multi-year, prospect, are ultimately good for growth. This is just a like a tax cut,

it's just a cost saving. It helps to pull inflation down. It allows central banks to keep rates lower, and so that's broadly welcome. Obviously not for the sectors producing oil. And the U.S. dollar as well, maybe a slight positive for the U.S., if not for others. And then we do think that artificial intelligence CapEx does continue to grow this year.

That's of greatest relevance to the US, and I guess you could say China. And then we are hoping for some extra productivity from AI. So that's something that should be a global phenomenon. Every company in the world can benefit, every person in the world can potentially benefit from AI enhancements, and we think that starts to show up a bit more visibly going forward

Let's talk about inflation for a moment. And so really, just very high-level U.S. inflation metrics. We focus on the U.S. here because it was the country imposing most of the tariffs, and that's where the inflation comes from. Other countries shouldn't expect to see much more inflation. I guess the story here is one in which of course inflation, much too high a few years ago, that's largely since been resolved. But we found ourselves sort of stuck in the mid-twos to mid-threes kind of range. And you know the latest number, in particular in the U.S., has shown some further improvement. We'll see whether it sticks. We’re a bit suspicious. It was a bit too good to be true. And with some missing data from the shutdown, a few too many 0.0s in the numbers suggested that there was some incomplete and maybe even charitable assumptions made.

But ultimately, it's fair to say that inflation is seemingly cooling a bit, and at a minimum, not really picking up in a big way, which had been the fear as tariffs came online. So, the inflation story is holding together not too badly. I mentioned earlier, what kind of investment regime or economic regime is this, and certainly one way of framing it is here we are in a rate cutting regime, one that is combined with, we think, persistent economic growth. And I mentioned earlier, that's a pretty attractive combination. Very often when you're rate cutting, and you'll see a lot of blue shaded columns there, those are the unhappy ones. A lot of rate cutting is associated with a recession.

That's why the rate cutting has happened - there's a big problem. This rate cutting, seems to be consistent with an economy that's still growing. And it's, again, it's rarer. You can see fewer than half of the episodes are associated with that. And you can't see on the chart, but, generally it’s a fairly positive time.

Rate cuts are good for markets. Growing economies are good for markets. Rate cuts also help bonds rally. And so that combination is pretty good for investment portfolios. And not to make too many promises for the future, and of course, a lot of this is when things happen that weren't expected. And to the extent these rate cuts are already priced, you can argue that maybe the stock market's already priced that in as well, and that's a fair critique. But in general, this kind of environment can be favourable. So, we're inclined to think that we can see risk assets continue to rise. Let's talk about AI and the economy, and if memory serves, in six different ways here. And so, let's talk about the first three on the positive side of the ledger.

The first item would be just CapEx, capital expenditures. You're seeing, in particular, the biggest U.S. tech giants, the five so-called hyperscalers, spending $500 billion in 2025, set to spend even more in 2026. Potentially an extra half percentage point to economic growth just from the growth rate of that CapEx. We do see the rate of growth decelerating,

it's not like you can just grow at 50% a year forever, quite obviously. And again, it's not enough just to spend $500 billion every year. That's not growth. That's just sustaining what the prior year achieved. And so, it is a bit of a tyranny of you need to keep growing this just mathematically to get the economy going bigger on this very narrow basis.

To be clear, it's okay if that doesn't happen forever, nor will it happen forever. But we think there is room for more of that to happen in 2026. CapEx can grow somewhat further, and that is a support for growth. You have stock markets, wealth effects. And so just to the extent tech companies have driven a big part of the S&P 500 returns in recent years, people are a lot richer.

People are able to spend some of that wealth, and we can see something of a k-shaped economy out there whereby middle- and lower-class Americans are not feeling so great, or are just doing okay. And higher income Americans, who almost by definition, disproportionately own the stock market, are feeling somewhat better in part because of that fact, they've earned some big capital gains, probably. And then productivity is the other angle to think about. It's actually the most important one. This CapEx business is helpful in the short run. It' s not the point, though, and it’s just a waystation toward a broader goal. And the broader goal is creating this artificial intelligence that makes everyone more productive and efficient and so on.

And makes companies more profitable and saves us on the amount of time we have to spend on tasks, and changes how everyone lives their lives. We do think that there are some real productivity effects. Indeed, we think we're starting to see little bits of evidence of the additional productivity coming in, and so that that's the real goal here - and maybe it's starting to happen. And we are broadly optimists as it pertains to the long-term productivity outlook. Now, there are some complications. You can see it's not negative forces necessarily, but just some things worth monitoring. One would be just concerns about bubbles. And so, particularly U.S. tech valuations are pretty high - a lot of data centre construction. Will there be overbuilding? Probably in some places. Some circularity in the investment supply chain. And so, companies in this sector are kind of investing in each other, and the money is going round and round. And I think there is some logic to it, but it does make it a bit more opaque and makes it a bit harder to judge each company on its genuine merits.

There are labour market impacts potentially to watch. We can say there are now studies saying that young workers in specific AI adjacent fields are losing jobs, they are not seeing the kind of hiring they would normally have expected. So that is a real source of damage. Major companies appear to be pausing hiring, now they're saying they can grow without hiring.

That is productivity. So, there's an underbelly to productivity, potentially. And so, to the extent they're using AI to replace this and that's a bit unclear, but to the extent they are - then there is some societal damage, you might say, that comes from this. And then, you know, more unemployment, perhaps during a transition, possibly more unemployment in a structural sense.

We're hoping not. But, that is a risk and something that you need to think very seriously about as this pretty radical technological change comes along. And the last element is just geopolitical rivalry, you can say. And so, you know, U.S. exceptionalism is still quite remarkable. But, you know, China is innovating fast, and China is investing heavily in AI as well and accomplishing some fairly impressive things and trying to come close to matching the U.S. in chipmaking - though there is some distance left to come. And it is another sphere of rivalry, much as the space race was in the 1950s and 1960s. Let's move on from there, that was a lot. Just to really round out some of those comments with pictures.

So, this is a really just a review of sorts of different estimates for how much faster productivity growth might go, thanks to AI. And so just to help you here, I think we have 10 different sources. In some cases, these are your big public institutions, the IMF, the OECD, in other cases, it's banks or other academics.

And so, different sources, with quite a range of estimates. So, this is per year over the next decade, how much faster various parties think productivity growth might run as a result of AI. I should say, those white rectangles are kind of our forecasters who gave an upside scenario as well. So, you know, the dark blue is probably the safest place to operate.

But you know, someone thinks that you could see as much as 2.5% faster productivity growth, per year, every year over the next decade, which would be extraordinary. You'd be talking about, economic growth that was running more than twice as fast as normal over that decade. Which of course, then maps into corporate profits and stock market gains and hopefully, individual well-being as well.

You have quite credible sources like the IMF saying their base case is almost 1% more productivity growth per year, and they think upside is 1.5%. I mean, that one is a huge figure. You've got the OECD, a little more conservative, kind of running in that loosely a half percentage point a year range. Also good, also important. You know, productivity growth is normally about 1.5% a year. You get an extra half percent, just a third more. And you know this, if it's not already clear to you, productivity growth is how material prosperity at least rises, right? You can have GDP growing, but if it's only because you have more people and more workers, no individual is feeling any better.

Productivity growth is how you get that. And so getting even a third more is a pretty huge thing. There are more conservative estimates. You'll see on the right side, just a couple of tenths extra, assumed by some fairly credible estimates. So, we really don't know and we're just going to have to see. But we think we are starting to see, perhaps some positive benefits accrue.

And it seems to us that productivity growth has been moving slightly more quickly recently, perhaps reflective of this. And then I guess the other thought here is just how quickly artificial intelligence is coming on. So, there are three different general-purpose technologies on this chart, and the extent to which they were adopted over the span of decades.

And so, you can see the personal computer, and within 3 or 4 years, 20% of households were using it. This is, I think, U.S. data. And then within 20 years it was more like 70% or so. You can see the internet came on much more quickly than that, and you had the larger fractions.

It was you're more like 30% or 40% within 3 or 4 years. And today it’s more like, you know, 90% plus. And then you can see a bit of a rump of a line. It's still very early going, but generative AI is in the dark blue. And so you can see the data is not perfect.

There isn't a one-year estimate and so on. But you know, the best guesses here are that you've already got about half of households using AI already. That is much faster than the adoption rate for the personal computer and the internet. So I mentioned that just to say, first of all, this is a big deal.

It is affecting a lot of people's lives already. But also, and this seems to be true as technologies come on, and it's not quite linearly true, but in general, every new technology seems to get adopted even more quickly than the one before. And in particular, when the new technologies are software. It just appears on your phone or your computer, and you don't need to even make large, purchasing decisions.

And so, it makes sense these things are coming faster. But it's already becoming a very real part of life, I guess is the point. And then here’s that chart I mentioned earlier. We think maybe we're already seeing a bit of faster productivity growth. That's very tentative just to be clear. I mean, you can see, nonfarm business productivity growth for the U.S. in dark blue.

The trend line is gold. You can see there were some funny things during the pandemic. It went fast for a bit, and kind of slowed down back to the trend. More recently the last couple of years, the blue line exceeding the gold line happened right about when OpenAI released its first ChatGPT, which might be ascribing too much influence to that particular development.

But nevertheless, we have seen productivity growth seemingly start to move a little more quickly than the trend rate again. So maybe that's the early going of AI showing up in the numbers. Let's pivot fairly hard here. So, from artificial intelligence now to really foreign policy, you could say. And so, the preamble to a discussion of Venezuela and the Monroe Doctrine, and so on, is just to say, the U.S. has lost focus of sorts in the Western Hemisphere in recent decades.

So, that chart on the left is showing you Brazilians. So, Brazil, the biggest Latin American entity, and Brazil's trade with the U.S., in gold - and one should note rising, but rising slowly. Brazil's trade with China, in blue, which was long, much lower than Brazil's trade with the U.S. and then about 15 years ago surpassed, exceeded, U.S. trade with Brazil and now you know Brazilian trade with China is running well over double or in the realm, I should say, of double what the U.S. is. So, in other words, China is the dominant trade partner, I should have led with that. The table on the right is so similar, though, is more complicated but also more comprehensive.

So, we have a Spheres of Influence scorecard we've created, and it's explicitly designed to compare the influence of the U.S. and the influence of China for different countries. We've done it for most of the world's major countries. This is just a handpicked selection of Western Hemisphere key players. And so, the sphere tilt column, the second one from the left, the fact that those numbers are all positive says the U.S. is actually ultimately still the more connected, more influential entity in North America and South America. And in Canada's case, quite substantially. In Mexico's case, substantially. In Peru's case, very fragile, as with Argentina and Brazil, just a very slight lead. That incorporates trade, which China, by the way, is leading in, as that chart shows. But this also includes financial flows and remittances and immigration flows and even like-for-like voting at the UN, and membership and international organizations, which are quite a broader concept. And so the U.S. still in the lead, but, if you go to the far-right side, you will notice that all of those numbers, bar one, are flat or negative.

Maybe the easier way to say this is that you've got five negatives, one flat and one positive. So, five of the seven countries have become closer to China, even if they're not outright closer than the U.S. So, they're getting closer to China, and so again, just further to the point, the Chinese influence is growing, and the U.S. influence has waned.

That was a long preamble. The U.S. is now setting about trying to do something about that. And so, we've seen a lot of talk about the Monroe Doctrine recently. So again, James Monroe, president in the early 19th century, first laid it out. He said the Western Hemisphere is very special to the U.S. and a source of focus, and European powers should not be involving themselves in what, at that time, were newly independent colonies across North and South America. We've seen that essentially restated with a Trump corollary, or as some jokingly call it, the Donroe Doctrine. So, Donald, I guess, is the D for M, on Monroe.

But the idea being, something similar is happening today. And so the big ideas are that the U.S., from a foreign policy standpoint, is prioritizing the Western Hemisphere. It’s not just prioritizing it, but is asserting its preeminence in the region. So, they’re saying we are the number one entity, we have special privileges the other countries in the Western Hemisphere don’t have and, you know, the countries outside of the Western Hemisphere don't have. And then the U.S. is seeking to limit foreign influence in the region. So that is sort of code for limiting China's access and limiting Russia, you might say, and limiting Iran and so on. And so really, you know, being the preeminent entity in the region.

So that is the goal of this new foreign policy objective. I can say that as it happens, those goals do align loosely with some domestic objectives of the White House. And so, limiting immigration. Seeing a lot of refugees from Venezuela - stabilizing Venezuela would go some distance towards doing that and so on. Limiting illegal drugs; we've seen fairly intensive military activity in the Caribbean already. I think reducing crime, you can maybe debate a little bit, whether that's a valid goal and whether there’s benefit from focusing on the Western Hemisphere or not, but maybe in the context of illegal drugs that might. So, in any event, there is a certain connection there, just as a small aside.

And then let's talk about initial outcomes. So there's already things happening here. So one would be Argentina was bailed out and they've got a currency swap line and kind of defending their efforts to reform their economy. And Milei, the president of Argentina, is also a right leaning libertarian. And so certain alignment there. Mexican cartel leaders who were, I guess, in Mexican prisons have been transported to U.S. prisons and are facing U.S, charges.

And now of course, Venezuelan regime change. So we know there was a bit of an embargo going into the holiday season and, it's now gone up from that. I'm not sure if you would say regime change is the perfect phrasing. I've seen decapitate as a word used which might be more appropriate to the extent that, for the moment at least, and again, I'm recording this on January 6th, and it's mere days after all of this is begun. It looks as though the same party remains in power. And so it is just the president who has been ousted and shipped to the U.S to face charges. And so, again, unclear whether it is a full regime change or not.

I think you can say there is clearly a risk of temporary political instability in Venezuela as this plays out. The opposition leaders are agitating and saying they should get to rule. And indeed, there are fairly strong arguments that prior elections were not conducted on a level playing field, that perhaps those should just be revisited,  and the opposition would say that they have won. Oil production - I mean, in focus, Venezuela, believe it or not, has the largest proven oil reserves in the world, more than Saudi Arabia. They've only been producing about a million barrels a day, though. And they had at one point, a few decades ago, been producing more like 3 million.

And frankly, that feels low too if you have the world's largest proven reserves, given some countries are 10 million plus. And so the question is, what happens to oil production? And, I mean, there is a risk of a bit less oil production in the very short term, just if there is, you know, political chaos. It's unclear if that's playing out.

I've seen estimates that there might be 2 or 300,000 more barrels a day that could be unlocked fairly easily. And so maybe it then pivots to a little bit more, fairly quickly. I think the goal, and all this talk of American oil companies entering and so on, would be that, in theory, you could get up to several million barrels a day over a period of time.

Now, that period of time might well be 10 or 15 years, not 1 or 2 years, just to be clear. But nevertheless, you know, the thought process is this is something that should increase the supply of oil over time. And from an economic standpoint, should maybe help to reduce inflation a little bit because, oil prices are an important part of the price basket.

As for the Venezuelan economy, I think there's a hope that it can be stronger in the long term. It's hard to imagine it getting a whole lot worse. You should know the Venezuelan economy is about 80% smaller than it was in 2010. So it's just been a disastrous run. And U.S. embargoes and so on certainly haven't helped, though I would argue that the political philosophy is also perhaps not been helpful.

And so to the extent the U.S. embargo is lifted, or some variation on that, you could imagine some improvement, but probably not an immediate benefit, if we're being fair. There is a hope for greater regional stability emerging from this. And so, I believe Venezuela has sent, something on the order of 7 million refugees out. And they’re in Colombia and other places, they have worked their way to Mexico or somewhere in the US.

And so, stability would be welcomed, I suspect, by other players. And I guess just thinking through some other consequences, are Russia and China emboldened in the sense that if the U.S. can go around removing leaders of countries, what does that say about Ukraine? What does that say about Taiwan as an example? So there is a certain risk there, that that is their sphere of influence, perhaps.

And then from a Canadian standpoint, the concern is, indeed we saw Canadian oil stocks go down a bit on this. The concern is just that Canadian oil is heavy oil. Venezuelan oil is heavy oil. The capacity to refine that exists essentially exclusively in the U.S. Gulf refiners. And so if Venezuelan production were to rise quite a bit, that could crowd out Canadian production and you'd end up with a bigger price gap and a discount for Canadian oil.

So there is a risk there. I think it's sort of a multi-year risk, but nevertheless there is a risk there too. Okay. Positive prospects. So, what might go well with a new Monroe Doctrine? Well, hopefully, not at all clear, but hopefully you end up with this fortress North America mentality in which perhaps trade barriers are reduced within North America, and those resources can flow freely to the U.S. as an example.

And so that kind of attitude would then be helpful to the likes of Canada, Mexico and Venezuela and others. Potentially, you get greater regional stability if the U.S. is paying more attention. It's possible, potentially, that you limit the flow of illegal drugs. They're certainly trying, though. Of course, if there's a shortage, the price goes up and the incentive to find some more goes up.

But in any event, maybe that helps. More scrutiny certainly of Chinese and Russian and Iranian and so on, investments. That's already happening. There are probably some positives to that. On the negative side though, let's understand that this is managed trade with the U.S. dictating who gets to trade with who, and China doesn't get to trade or doesn't get to be as involved is protectionism.

And there's of course economic costs to that. The U.S. gets potentially sucked into geopolitical quagmires. And there have been other episodes of U.S. history in the early 20th century, perhaps to a lesser extent in the 1980s, when the U.S. was very much involved in regime changes and trying to run various Latin American countries.

And it did get complicated quickly, and there weren't all that many happy outcomes that resulted. And so that is a distinct risk. The U.S, by focusing on the Western Hemisphere, is, one might argue, ceding power to the rest of the world. And so, China again free to operate more and perhaps Russia and others. And so that is perhaps dangerous to the world.

And then, of course, just for the other countries within North and South America, they have effectively less sovereignty. The U.S. is saying it gets to make the big decisions, and we're hearing sort of ominous things about Greenland again and comments on Colombia, and so on. And so, certainly there are things to be rather concerned about on that front as well.

Nevertheless, I wanted to share with you just kind of the broad themes here and what's been happening already. And this is going to, I think, remain an important geopolitical and foreign policy factor over the next several years, if not well beyond. A couple other public policy type items, fairly quick hits. This one very quick.

So, it's possible to look at policy uncertainty indices. We've done that many times before. It's possible though you may not know, to break it into different sectors. This is health care policy uncertainty. And I list this just because it's still quite high. A lot of the policy uncertainty, trade policy uncertainty, indices have come down a lot. This health policy one really hasn't.

That makes sense. It does speak to the level of uncertainty that remains in that space. You'll know that Medicaid benefits were trimmed somewhat around the middle of 2025. We've seen some health insurance subsidies cut toward the very end of 2025. It's not clear how problematic that will be. The chances are quite problematic for some parties.

And so, this is still in play. We are going to see some big health care debates going forward. This is one of the more volatile areas in the policy space. So, let's watch that quite closely. Another important area in the policy space is on the entitlement side of things as well, of Social Security.

So that's just the word for essentially the retirement benefits paid by working Americans into a program. And then they receive benefits upon retirement. Somewhat ominously, as this chart would suggest, the trust fund that is used to partially fund Social Security looks like it will run out in 2033. And so just to be clear on this, that is not the source of the bulk of Social Security retirement funds.

It's essentially a pay as you go system. They levy a payroll tax, and that is used to pay retirees. So, technically speaking, the people who were working decades ago were not really paying for their future retirement. They were paying mostly for the retirement of people at that time. And of course, our concern is going forward as the working age population, as a share of retirees, shrinks because of slower population growth, it becomes harder to maintain this trick.

The good news is there is a trust fund, so it's not completely pay as you go. Essentially what happened was in the 80s and 90s and perhaps into the early 2000s, the trust fund, the tax was collecting more money than was needed, in terms of retirement benefits. So they were able to build up a coffer of several trillion dollars, which was great.

However, the reverse is now happening. There are lots of retirees, there are fewer workers. And so, they're rapidly eating through that. And again, it is set to expire or run out in 2033. The question is, what happens at that point? And current law would say, you're allowed to use the payroll tax money, you're not allowed to use general revenue.

And so just based on the fraction of the current benefits being paid out of this trust fund, suddenly everyone's benefits get cut by about a quarter. So you end up with about three quarters of the benefit instead of the full amount. I should emphasize, I do not predict that, there are some potential solutions, as you can see on the right side of the screen. You could increase the payroll tax. Not counting on that one. You could increase the retirement age. They did do that in the 80s. They could do it again, not counting on it, but it's an option. You could loosen immigration policy. It's a classic trick for suddenly having far more taxpaying, working age people, not counting on that.

The political climate is not too friendly to that right now. I think the two things to think about as solutions would be, fund Social Security with general revenue. So just change the law and say you can take money out of the general coffers again, which just would speak to continued very large fiscal deficits, which would be concerning on a different front, but would solve the social Security question.

And/or, shrink Social Security benefits. So again, I guess you could shrink them down to three quarters of the total. I don't think that's likely. People generally talk more about maybe you make it a bit less generous for high income retirees as a way of saving costs. That might be an option. Others talk about maybe you, not de-index to inflation, but you make it a little bit less generous in the way the indexation happens. And so, you’re still paying technically more every year officially, but maybe it's not quite keeping pace with inflation or not even outpacing inflation, which sometimes happens, as part of this is actually indexed to wage growth, not to inflation.

So there are some solutions. I don't think there's going to be a disaster here. Equally, there are some pretty hard decisions that are going to have to be made over the next seven years, right? That seven years away that they run out of money. So something to start to think about a little bit more. Okay. A couple other thoughts here.

So just on China. China doing all sorts of wonderful things in the new economy space and frankly quite exciting. And the stock market's done very well because there is a focus on all this. And it's been a very cheap market as well for a period of time. But just wanted to flag one particular thing here. Not that it's the only thing that matters.

And that one thing is just that the Chinese housing market is still quite weak. You can see Chinese home prices on the left still falling. In fact, there was a moment where they'd been starting to fall by less about a year ago. We were hopeful there were green shoots. Those weren't real, I guess. And so home prices back to falling fairly substantially on a monthly basis, affordability still isn't great.

And then we're seeing similarly land purchases by developers just continuing to fall as well. So that market is still weak. We cannot count on the housing market being a new driver of the Chinese economy. And then just a couple thoughts on Canada. So, on the Canadian economy, this is an economic data surprise index.

The economic data has been surprisingly good is the way to frame that high number on the far-right side. And further to what I mentioned earlier, which is we have had three pretty astonishingly strong job creation numbers in a row, and the unemployment rate came down and so on. We are a little skeptical. We're not convinced the job creation or the economy is quite as good as those numbers suggest.

And I'll just even flag this next chart just to illustrate. The official numbers would say, and this is year to date. We're going to get the December, the final month of the year in a couple of days. So from January to November 2025, the most commonly watched job report says that Canada created 218,000 jobs.

And so that would be actually pretty good, particularly given very little population growth right now. However, you have this other survey, the payroll survey. It's comes out later. We're in fact still missing November. Won't get December for quite a while. And so not  generally regarded as closely, but it's high quality data.

And it would say you only created 17,000 jobs over those same ten months as opposed to the 11 months. But anyway, it would say there really wasn't much job creation. I'm not saying the blue line is wrong, I'm just saying that maybe the truth lies in the middle somewhere. We're not convinced Canadian job creation or the economy is quite as strong as it looks.

And I think the Bank of Canada rate cuts that have taken place are broadly justified. And there is still a bit of a challenge ahead, particularly until we get clarity on the USMCA trade deal. OK, central banks, just for a moment, this is just a chart of what they've been up to. And again, Japan in red has been the one ‘hiker,’ kind of marching to its own drum or dealing with inflation in a serious way for the first time in a long while.

The other developed world central banks broadly cutting, you can see towards the top the Bank of England and the Fed. The U.S. is expected to cut rates further. We think that's probably fair. European Central Bank in gold expected to keep rates roughly unchanged. Chance of a cut. That sounds about right. Bank of Canada in dark blue has done quite a bit of cutting, has found itself well below the UK in the U.S. and that's notable. And that does mean a bit of a different dynamic going forward. Interestingly, the futures market, that's what those dots are after the line ends, thinks the Bank of Canada is more likely to hike than cut in 2026. That's possible. I mean, the economy may do better this year with some rate cuts, or with the benefit of prior rate cuts I should say, and some fiscal stimulus and maybe clarity on the USMCA. And maybe some AI-driven productivity and the deregulatory efforts that should be helpful as well.

I would still say I’m assuming it's more of a flat to a little bit of cutting. So, I would disagree with the market on this one. It's not impossible at all. But I would say my preference is that there probably isn't going to be any hiking, or at least not first. You'd more likely see a bit of cutting, perhaps first.

Okay. And then just to finish on this. This is a measure of tax competitiveness in the corporate space. I want to emphasize that the Canadian budget a few months ago flagged that Canada had the lowest corporate tax rate in the G7. And we said, that sounds funny.

And so we dug into it. And there is some truth to that. We ended up digging more than, frankly, I would have cared to had I known how far we'd have to go into marginal effective tax rates and average effective tax rates and just standard corporate tax rates and the differences and so on. And there are even quite substantially different estimates and all sorts of assumptions.

You need to assume return on capital and labour shares and things that in the end make the numbers maybe a little bit less perfect, a bit less trustworthy than you would like. But equally, we didn't find any obvious bias in the assumptions. And so, we actually just averaged five different measures of corporate tax rate, which I'm sure is not the best way to do this, but it was an easy way to do it.

We actually ended up finding that Canada technically had the lowest number among the G7. And, the point isn't to say therefore everything is perfect in the tax space. I would argue that it's not, in part because when you are beside a large, dynamic, attractive market like the U.S., it's not enough to have functionally the same tax rate as them.

You probably need to be somewhat lower to motivate countries to be there. And point one percentage points is probably not the number that you need. You can also argue Canada looked very good across several of the marginal effective tax rate metrics. And that would be a metric that would maybe best be a gauge for, okay, I'm already a business in Canada, should I expand? Hey, maybe I should. This tax rate is pretty good. If you looked at average effective tax rates though, which would be more of the I'm a business somewhere in the world and considering entering a new market. What market should I enter? Canada didn't look nearly as good. And that, you might argue, is the more important consideration, at a time like this.

And so again, Canada not perfect, but equally not in horrible shape, I guess would be the takeaway from a corporate tax perspective. I would still say there's clearly a productivity issue. I would say that the red tape has been quite problematic. It's become a little bit lessened, recently. Hopefully that's enough to get things rolling again.

I think there's a cultural issue in terms of just risk-taking attitudes, and that's going to be maybe somewhat harder to overcome. Businesses just not investing capital anywhere near on the level of per worker that happens in the U.S., even on a like for like, sector basis. So, there's work to be done. The tax side isn't quite as bad as it first looks.

Obviously, the personal tax rate side is a bit less attractive, however. And I'll stop there and I'll say thank you very much for your time for sticking with me. We covered quite a bit, I guess, as is appropriate in the first such webcast of a new year. If you find this interesting, as always, we publish a fair amount on our website rbcgam.com/insights.

Feel free to follow along on LinkedIn as well, where we do a fair bit of publishing. You can use that QR code with your camera if you'd like to. And so, again, thanks so much for your time. I wish you very well with your investing. And please tune in again next month.