Hello and welcome to our latest video MacroMemo. Plenty to cover off on the economic front. In terms of a table of contents, we'll start with just whether markets are priced to perfection. We think maybe they are. Just to give you the answer in advance. We'll talk about survey data versus hard economic data in the U.S. and how there's quite a difference there and just what to do about that.

We'll talk about the consumer in the U.S. specifically, and some tailwinds that the consumer is now enjoying. A headwind though that is now presenting itself on the opposite side of the ledger. We'll spend a moment on geopolitical risk, just acknowledging there's a lot of that sort of thing around the world these days. And many of those risks do tilt to the downside.

We'll talk about the latest averted U.S. government shutdown and the idea that we're probably not going to get a shutdown this year at this point. The Republican presidential race is now underway and coming into form. And we can talk not just about that, but about the election platforms that a theoretical Trump versus Biden race might bring. And we'll finish with some Canadian housing market stress discussions.

As I say this, it sounds like a lot, so we'll jump our way right in. Back to that first topic. So priced to perfection. Risk assets, stock market, etc. has been quite happy lately. As I'm recording this on quite a run, the S&P 500 in the U.S. reached a new all-time high not too long ago and so feeling quite content.

There are a number of macro factors, I should say, that support this, including the idea that the Fed in the U.S. might be tilting toward rate cuts before too long, which is nice. The downward trajectory of inflation, the assumption that continues and the increasingly plausible hope for a soft landing in the economy, for the economy to avoid a recession.

So all of that does support the markets' happiness. This can all happen, as I've said. However, I should say, those outcomes do represent something approaching perfection and there are other possible outcomes that are maybe not quite as perfect, if that makes sense. And so again, we think a soft landing is viable. We give it a 40% chance. We think there's a 60% chance though of a recession, which you might call a hard landing.

And so it's not a certainty that we get to that that economic nirvana, if that makes sense. It's not clear the Fed can cut rates a lot without a hard landing. And so maybe you get the rate cuts, but a hard landing or you get a soft landing, but no rate cuts. It's hard maybe to get both at the same time.

It's also not clear inflation can fully cooperate unless we get a recession or a hard landing that really tames the labour market and tapers service-side inflation as well. Again, we might well pull off this perfect landing, but there are some downside risks to it and thus some downside risks to current market pricing, at least in our view.

Let's go from there to survey versus hard data. And so the idea here is that we get a lot of information from surveys and sentiment and expectations and what businesses are feeling and that sort of thing. And then we also get hard data, which would be actual numbers of people being hired or amount of money being spent or number of things being produced.

And usually those things rhyme with each other. Right now, particularl in the U.S., we have something of a disconnect between the survey data and the hard data. And so the survey data in general has been pretty weak. And so I think of an ISM Manufacturing Index, it's been below 50 for I think it's actually 15 straight months.

And so that signals that manufacturers are feeling quite pessimistic. The ISM Services Index in the U.S. isn't quite as weak, but it's around 50. That's something in the realm of stagnation, which is not exactly great. The Homebuilders Sentiment Index is well below 50 as well. And so that signals the thought that the housing market is contracting and there's pessimism there.

The Association of Independent Businesses, which looks at small business sentiment; that's still below normal. And so the survey side of things is quite weak, is not inconsistent with something like a recession or at least some real economic weakness. On the other hand, the hard data has been generally stronger. It's been mixed. There have been bits of weakness, bits of strength, but in general it's been stronger than the survey data.

And actually recently there's been some outright strength. And so you think of of GDP in the third quarter rising an incredible 4.9% annualized. It's looking more like a two-point-something for the fourth quarter, but that's still pretty good. Retail sales in December, the latest month up 0.6%. So consumers still spending at that juncture. In the U.S. initial jobless claims.

In the U.S. initial jobless claims. It's a weekly series, just 187,000. That's the second lowest week in a very long time. And so we're not seeing lots of people being laid off. U.S. home prices rising again and so builders feeling grumpy. Home prices, though, actually rising. And so something of a disconnect between the survey data and the hard data there as well. And so what do we do with this? Hard data is ultimately what matters in terms of capturing actual activity in the economy.

And so we can say the U.S. economy has been doing pretty well lately. The reason we care about survey data is that a) it's released quickly. It tends to be the freshest look at things. And b), it's theoretically forward looking. There are a lot of questions in these surveys about the future and new orders and expectations. And so in theory it should be telling us something about where the hard data will go down the line.

So it's supposed to be quite useful. But that disconnect between the two is significant right now, and we keep thinking that the weak soft data or the weak survey data will map on to the hard data over time. So far it hasn't. Historically, it usually does. It's a bit of a waiting game right now. I think you have to admit the longer the two are disconnected, the less credible the waiting game becomes.

And so that's sort of where we stand right now. Not quite sure what to do with that. Still thinking there should be some weakness because of what the surveys are saying, and I should say what some other indicators are saying, like our business cycle work and recession heuristics and so on. But it is proving to be quite a waiting game.

Okay, let's move from there really to talk about the consumer. And again in the U.S. context, mostly two tailwinds, one new headwind. The two new tailwinds are mortgage rates have fallen nicely as interest rates have declined really since mid-October. And so that's a boost, at least to those who are buying new homes and they're paying much less on their monthly mortgages.

Gas price is also down, and of course, that's an immediate boost and affects almost every American. And so that is also freeing up some spending power. So those are nice things for consumer spending and indeed would argue for further growth. Don't forget, though, on the flip side of the ledger, that the amount of accumulated pandemic savings has diminished over time.

So there's less of a buffer there. Hiring isn't quite as robust as it was, say, a year ago. It's okay, but it's not as strong. Student loan payments resumed in October, so there's been a certain loss of free cash to that. There's set to be less fiscal support just in general in 2024, which might be a bit of a dampener on spending.

And the new thing, those are all not particularly new. The new thing is that we are seeing some rising delinquency rates among consumer credit products. And so credit card delinquency rates are going up for a while, are now pretty high, not not global financial crisis high, but pretty high. Auto loan delinquencies are rising as well. They are getting to higher-than-normal levels.

Mortgage loan delinquencies are also rising. They're still low. Those I wouldn't want to make too much of a fuss over that. But again, you sort of take it away and and again, contradictions abound. You've got some things that are pushing the consumer forward, maybe some new things that are starting to push in the opposite direction with something of an ambiguous overall implication.

But we move from there to geopolitical risks. And so how hard to do justice to this since there's so much going on. But just to give you kind of a high-level tour. 2024 is a year of elevated geopolitical risks in our view. There are some obvious hot-button issues here. You still have this war in Ukraine. Ukraine no longer making ground, no longer advancing. Russia, if anything, maybe advancing a little bit.

The funding for Ukraine becoming less reliable to the extent that the U.S. is having budget problems. And if there were to be a Trump presidency, which is a real possibility at the end of this year, that would further undermine funding at least for Ukraine. And so there are some issues there and potentially Russia gets to make some gains, which would be, I think, problematic. In a China versus the U.S., or China West standpoint.

The frictions certainly persist despite a summit that occurred late last year. The Taiwan election, which recently occurred, chose a pro-West government and that displeased China. If there were again to be a Trump presidency, there might be less support from the West for Taiwan. In the meantime, though, and pivoting back toward directly China as opposed to Taiwan, it does look as though, you know, tariffs stick and the frictions persist.

These are two world powers and so that is consequential. And then the Middle East, of course, which is a tinderbox right now on a number of fronts. And so tensions are high. It's not just Israel-Hamas, it's also Iran having recently struck forces in elements in Syria, in Iraq and in Pakistan as well. Pakistan didn't much like that.

It's now struck rebels in Iran. This isn't government striking governments per se. It's rebel forces and ISIS and U.S. bases and other things. But nevertheless, these are some significant Middle East players that are now fighting at least a little bit with one another. Of course, Houthi rebels in Yemen firing at ships, trying to transit through the Red Sea.

I guess the point is there are a variety of ways that the situation could deteriorate from here. Tensions are extremely high. Through an economic lens, which is certainly not a comprehensive perspective, but through an economic lens, that could affect the price of oil. So there's some upside risk to oil as it stands right now.

It is already starting to interfere with supply chains vis-a-vis the Red Sea and the Suez Canal. And so the U.S. and UK are now trying to combat that with their own ships in the Red Sea. But that is not proving to be a perfect solution. And so it is a messy situation there. There are some real downside risks I think that obviously exist.

And then just looking a bit further. Just more generally from a geopolitical perspective, I think the other thing one has to say about 2024 is that it is a year with a lot of national elections. We saw Taiwan, and we get Indonesia fairly soon. But there's also India and Mexico and the UK, and of course the U.S. as well.

And those all could be quite consequential also. Let's shift into the U.S. political situation now for a moment. We'll just start by saying the U.S. government did not shut down on January 20, which had been a risk. The shutdown was averted for a third time in four months. Unfortunately, the solution was only a temporary solution in the sense that they have extended government funding through to March 1st, which is just about a month from now.

And so that that doesn't solve the problem. It is a bit wild that we are now one-third of a way into the U.S. fiscal year and there still hasn't been a budget passed for that fiscal year. And so they're just sort of rolling existing spending plans over, over and over. The good news is there was overwhelming bipartisan support for the continuing resolution that extended the funding further.

It was 74% in one chamber and it was north of 80% in the other in terms of share of votes. It's hard at this point to imagine there being a shutdown in 2024, even though they'll have to deal with this again on March 1st. Just because, of course, they found a solution three straight times. But equally because as you get closer to that presidential election in November, the odds of this happening decline.

And it's such an unpopular thing to do that the party that did it would be perhaps punished by voters. And so we're not too worried about about that right now. It would be nice for the U.S. to have a budget before the year was actually completely over. And let's go from there just to acknowledge, you know, the Republican primary race is ongoing right now.

And so I'm saying these words, you're going to hear them after, I think, the the New Hampshire primary. And so I shouldn't say too too much, but it is certainly looking very, very good for Trump in terms of his ability to win in that he's already the overwhelming favourite to capture the nomination. There is a small chance that Nikki Haley pulls off an upset, but I think it's pretty small.

And so we really should be thinking at this juncture of a Biden versus Trump 2024 election, a reprise of what happened in 2020, and maybe useful just to spend a moment thinking about some of the campaign promises the two candidates are making. And there are somenotable differences, as you might imagine. And so on the domestic side of things, we've heard Biden talk about raising corporate tax rates, raising the top tax rate for individuals.

Trump, on the other hand, wants to cut corporate taxes. So a very different plan for taxes. Biden talking very loosely about more regulation, Trump talking about less. Trump plausibly being maybe the preferred choice in the short run, at least for investors, because investors like low corporate tax rates and less regulation and that sort of thing. So maybe that's a small plus for investors.

If there were to be a Trump win. I would say it's much less clear from an economic standpoint, though. And so, you know, to start with fundamentally both like deficits, neither would be especially austere from a fiscal standpoint. So I'm not sure there's a lot to distinguish them on that front. And that's actually a big part of the economic determination.

It should be noted that Trump has said he wants more tariffs, which would be, I would say, modestly bad for the economy. We learned in 2016 to 2020 that tariffs aren't a killer blow, but they are something of a negative. And so that would be a mild negative if those were to be implemented, both for the U.S. and the rest of the world.

Trump has said he wants less immigration. Now that's its own complicated issue. Potentially slower population growth could be a negative, and so the economic implication is maybe a bit less favourable in a Trump direction. Trump's also talked about repealing the Inflation Reduction Act that was Biden's signature achievement. setting aside the environmental implications which could be significant, that would reduce a big source of government spending.

Now, it's probably naive to think that they wouldn't find something else to spend money on or cut taxes accordingly. But nevertheless, that does remove a significant source of government spending and potentially could quashsome nascent green industries in the U.S. And so potentially some trouble there as well. But again, hard to say what he would do with the freed-up money.

So economically I would say it's much less clear that Trump would be the preferred candidate. You might even be inclined to argue the opposite. Foreign affairs implications could be significant. Biden, again, with many of these things, would be the status quo. With Trump, it appears he would be much less supportive of Ukraine, potentially less supportive of Taiwan as well.

Certainly in general, much more uncertainty in a Trump presidency, which is what we saw between 2016 and 2020. That's not something that markets tend to much appreciate. Trump certainly will be negative for the rest of the world. He is something of an isolationist. And so whether we're talking Canada or Europe or China or other parts of the world, probably a net-negative versus the alternative.

Now, for all of that exciting talk, I should say, ultimately both candidates would be constrained by Congress. And so there could well be a divided Congress. That's probably the best single guessing. So nobody gets to do exactly what they'd like to do. A more realistic shot is that there could be a Republican sweep. It's possible that the Senate doesn't just go Republican, but the House remains Republican.

And so perhaps Trump would have a little bit more leeway. But even there don't underestimate the divisions that exist within the Republican Party and also the extent to which a simple majority isn't enough actually to accomplish major things. And so, again, all presidents are ultimately constrained to one degree or another by Congress. I'm going to finish quickly with a comment on the Canadian housing market.

Not the usual spiel, though. So I think we know Canadian housing has been weak, home prices have been falling, resales have been, in general, trending lower. We are expecting some softness ahead. We think home prices should be flat to lower over the next few years, but that's actually not the main thrust of my conversation here. The bigger point is that despite that weakness from a financial perspective, from sort of a financial crisis concern perspective, the mortgage delinquency rate in Canada is still very low.

Now it's risen from 0.14% of mortgages to 0.15% in recent quarters. But you should know the 0.14% was the lowest ever, as far as I can tell in historical data. The 0.15% is still very low by historical standards. I guess by definition the second-lowest ever. And so we're not seeing a lot of distress right now. And it's sort of worth pushing into the question of why is it so low, even though clearly home prices have fallen, mortgage rates have gone up, there has to be some measure of distress.

And I think you can answer the question in a few ways. You can start by saying unemployment is still low. That is ultimately the most useful determinant of whether people can pay their mortgages or not. So that hasn't been a problem at least yet. Most homeowners, most people with mortgages have quite a lot of equity in their home.

Home prices rose enormously over the years. People started with down payments. People have made payments over the years. And so if people run into trouble, they can just sell the house for a profit. They don't have to become delinquent in their mortgages. So that's the answer for most people running into trouble. Those with negative equity would be those who bought quite recently.

And so that would be a group in more peril than most. But the majority did lock in their mortgage rates, and those mortgage rates are still at a very low level for another few years. So most of those people aren't feeling too, too much pain yet. For people who do have a variable rate mortgage. And so that would be the subset that might be feeling pain as those rates go up.

Lenders have proven extremely flexible with payments in many cases, allowing for paying less than the interest that's accumulating. And so the amortization period grows, but people can make the payments during this temporary period of higher interest rates. Making other special arrangements just to ensure that people can make their payments. And so at the end of the day, we still see a very low level of mortgage delinquency.

To be sure, we're likely to see more pain in the future. And if unemployment goes up in a recession, that will hurt to the extent people are going to be rolling into those higher rates over the next several years, that will hurt to some extent as well. So let's budget for more pain there. But it's from a very healthy starting point. And it's worth reflecting on the fact that even if we had a tripling of the delinquency rate, that would only bring it to about the norm of a couple of decades ago.

It wouldn't actually be all that high by historical standards. It could go beyond that. We'll see. But nevertheless, it is quite a good starting point and maybe there's surprisingly little financial pain accruing at this early stage. And so you could maybe the point here is we still think when you think about the Canadian housing market, it makes more sense to think of it as an economic variable, as something that's going to maybe weigh on the economy; less of a financial crisis type of issue.

Okay. Well, I'll stop there and say thanks so much, as always, for your time. I hope you found that interesting. And please tune in again next time.