Eric Lascelles

Hello and welcome to our latest video #MacroMemo. As I always say, there's a lot going on. This, I would say, is particularly enormously busy. We're going to talk about some big new developments, including a new Fed chair nominee and some other fairly substantial market moves recently. We'll also talk about Greenland; the U.S. has expressed aspirations for it, although Europe isn't so keen.

How does that all play out? We'll also talk just about a busy White House in a broader context. I would say the White House has been busy from the get-go, but it's sort of pivoted in terms of the kind of things it's proposing, and it's worth appreciating that.

We'll spend a moment actually on the earnings outlook, which looks fairly favourable.

We'll finish with just a very quick, brief Canada checkup. So, let's circle around to the top. Let's talk about those big new developments.

The first one is that as we have been revisiting our economic forecasts, our GDP forecasts for 2026, and actually for 2027 as well. For the most part, those are fairly optimistic.

They have, if anything, tended to increase relative to our prior forecasts a quarter ago and most land above consensus. Not to oversell that, but ultimately, I guess you could say the economic environment does look reasonably supportive for the year ahead. And of course, we think the combination of rate cutting and fiscal stimulus are some of the important contributors to that.

Another big new development: we now have a sense – presuming Congress approves, which is likely -- for the next Fed chair. Kevin Warsh has been nominated by the President for the chair of the Federal Reserve. He was a former Fed governor in the late 2000s and so he has some credibility and experience on that front.

He had been a hawk at the time. He didn't like quantitative easing, didn't like expanding the balance sheet and so on. He still seems to retain elements of that, still doesn't like money printing per se. However, he’s seemingly pairing that with a dovish stance as it comes just to the policy rate, the fed funds rate, and so he’s seemingly supportive of rate cuts there.

So it’s sort of a mixed billing, you might say, on that front.

The Warsh nomination, seemingly when it was announced, was a catalyst for some fairly sharp market moves. We saw the U.S. dollar rise, or I should say, maybe incompletely unwinding some significant softness that had previously expressed itself in January and also contributed to a very sharp decline, it would seem, in the price of gold and silver. You'd struggle to make complete logical sense of those market moves in the context of this happening.

One reason is just that he has been the favourite, or among the favourites, for over a month, so this isn't a shock that he is the nominee. Two, actually to the extent that he had ceded the lead to a different favourite about a week ago, that had been Rick Reeder, who arguably was less political than he.

And so you would have argued, therefore, the dollar perhaps should have fallen when he (Warsh) was nominated and gold should have increased. But that we saw the opposite move. Certainly, we can say Warsh is less political than the person who has been the long-time leader, which was Kevin Hassett. But Hassett hasn't been the favoured candidate for over a month now.

So it’s a little bit curious. I would say, if anything, the way you maybe interpret all of this is just an opportunity, a catalyst of sorts, to revisit valuations and some assets failed the test. Maybe the dollar had fallen too quickly across January, maybe gold and silver in particular had gone up too fast – almost parabolically recently – and so those just couldn't be sustained.

I would still say we think the U.S. dollar can decline over time, just for context.

So why don't we talk gold and silver for a moment?

So again, huge recent drops, just in the days after what has been an almost parabolic increase over the prior few months. The catalyst again was seemingly Warsh, but not clear. as I said, that it's entirely a logical interpretation given his stance.

I think in terms of that decline, as I'm recording these words at least, it looks as though gold and silver have found technical support in and around the 50-day moving average. Honestly, it’s hard to say exactly where it goes from here. Silver had been particularly overextended and gold maybe a bit less.

So, I would say some structural factors still are fairly supportive for precious metals, maybe particularly for gold,

We still look for a declining dollar over time. We still think there has been an important loss of trust in the U.S.

We think it's reasonable to have some concerns about the fiscal environment globally and in the U.S.

There has been politicization in the U.S., including, of the Fed with a criminal investigation still outstanding into current Fed chair Powell.

It’s not absurd to be nervous about inflation, even though we have a relatively benign forecast. And so I wouldn't be surprised if gold actually did manage another rally from here.

I would warn that ultimately, past historical bull markets in gold do usually end in tears; that is to say, usually you see quite extraordinary run ups and then you give back about 50% of that at the end.

So it’s hard to say where exactly we are and all of that, but nevertheless, it wouldn't be a shock if gold actually did manage to recover some of those losses and perhaps even extend some of those gains, at least in the short run.

Another quick important item: Iran. So, we're going to talk Greenland in a moment, which maybe has been the more in-focus geopolitical item, but just worth flagging, the U.S. has sent an aircraft carrier to Iranian shores.

President Trump has repeatedly condemned the Iranian leadership. There have been recent public protests that were cracked down upon in Iran. Trump had suggested perhaps some help was coming.

Polymarket, a betting market, gives a 50% chance of a U.S. strike on Iran by June 30th. Now, that's something, maybe not quite as extraordinary as you might think though, because of course the U.S. did strike Iran last June 22nd.

So this would not be a brand new concept. Nevertheless, it would be quite significant if it took place. And of course, it could well be more extensive (next time).

The better question is whether Iran is likely to experience regime change. The betting markets give a 19% chance of that by June 30th. That's notably down; it had been a 40% chance assigned to that in the first half of January.

So, it looks less likely the Iranian regime is disrupted. It seems like negotiations, particularly on nuclear issues, might ensue. But this is unpredictable. It is high stakes; a bad outcome would see the Strait of Hormuz blocked and oil prices spiking.

A good outcome would see the end of Iranian nuclear ambitions, perhaps the end of sanctions, oil production rising and oil prices falling. And so it’s hard to say which of those transpires. We think maybe a good outcome is more likely than a bad outcome, but actually status quo or something approximating that might be the most likely of all.

Just to throw in a quick other geopolitical item in, obviously Venezuela is still relevant, we've talked about that in the last such video #MacroMemo.

Elsewhere: Cuba is under a lot of pressure, they've lost access to Venezuelan energy and sanctions against Cuba have increased. Again, there is a real chance that the government falls. The risk is the highest it's been in about a decade that something like that happens.

So certainly, there’s very real motion from a geopolitical standpoint. Given that, let's just keep rolling along. Let's talk Greenland. It had been absolutely the top focus. It has faded a little bit, but worth reviewing.

And so, Greenland is still somewhat in focus after the U.S. invaded Venezuela, given what seems to be an expansionist U.S. foreign policy and given the Monroe Doctrine, which is asserting the U.S. as preeminent in the Western Hemisphere.

Greenland, of course, is a kind of European kingdom-type territory within the Western Hemisphere - so something of an outlier.

The White House would say Greenland has significant military importance, has interesting and attractive natural resources as well That’s perhaps the most powerfully argued of the reasons that the U.S. aspires to Greenland.

You can counter that, though, and say that the U.S. already has sufficient access, both from a military and a resource standpoint.

There is a treaty outstanding from 1951 that grants the U.S. quite considerable military access to Greenland and even the ability to expand its presence. It's actually been shrinking its presence over the decades, although it could grow that back up.

From a resource standpoint, the U.S. companies are able to enter the market. There are Canadian, Australian, Swiss and other companies in there mining right now.

Looks to us as though a deal of sorts is most likely that does not relinquish Greenland’s sovereignty. We've heard claims that a framework is already established, although it’s unclear if that's fully true. The U.S. is likely to build its military presence there, we'll see about the mineral side. I think that's actually, in the end, less of a focus, very much more secondary.

I would say, even if this ends up being a tempest in a teacup and isn't a central driver of anything in the short run, there are still potentially long-term repercussions here.

The U.S. has not been trusted as a trade partner now, and I would say rightly so, over the last year, with lingering consequences. I think you can argue the U.S. is becoming much less trusted as a military partner. And there is even the fear of the U.S. as a military adversary, given its recent expansionist aspirations.

NATO has clearly been weakened by recent events. It is clearly a more dangerous world. We would say this supports the weaker dollar / steeper yield curve thesis over a multi-year period. Will we see Europe and the rest of the world pushing back harder against the U.S. more in the future?

It's certainly been noted that as much as Europe struck a trade deal with the U.S. less than a year ago, the White House has not been shy about threatening additional tariffs.

So why make concessions when these deals may not ultimately stick? Why appease more generally? We will see if it becomes a more contentious time from that perspective.

OK, busy White House, so plenty going on; I've already described a few things. I think you could say the White House has been certainly very busy, almost nonstop over the last year, but maybe there’s a pivot of sorts happening.

So it is a little bit less about trade, though there are still things happening there, including some tariff threats I just obliquely referenced. Less focus maybe on fiscal for the moment, so less about tax cuts and spending growth and so on. Though I must confess, as I record these words, there is a mini-government shutdown that looks about to be resolved and probably isn't too consequential.

But again, less about trade, less about fiscal, more about a flurry of more granular decisions and ideas, many focused on cost of living in the lead up to the U.S. midterm elections, though not exclusively.

For instance, on January 7th, Trump proposed a 50% increase in the defence budget. I think it's right to be somewhat skeptical.

I doubt that much money will truly be deployed, but any kind of move in that direction would be pro-growth. It would also, of course, be increasing the U.S. deficit.

Housing affordability is very much in focus. The White House has announced a couple hundred billion dollars of mortgage-backed security purchases, which should help to bring down mortgage rates.

It's proposing that large investors be banned from owning single family homes, so some real shifts in the housing market and trying to support housing.

January 9th, President Trump proposed capping credit card fees at just 10%. And so you would think, pro-consumer, pro-household, pro-affordability, anti-bank, anti-credit card. Loosely, that's right. Except for a 10% credit card fee cap, or rate cap, would very much exclude a lot of participants from the credit card market if you're a lower quality borrower.

Arguably something in the realm of 40% of Americans might lose access to credit cards. So, it doesn't seem obviously attractive. We're dubious it gets implemented in full, but you can kind of see the idea and perhaps some variation is implemented.

There is also a new proposed cap on the amount of money that private health insurers will get for their services.

The increase is a mere 0.1% increase from the prior year. The expectation had been 3% to 6%. That could very much hurt health insurers, could hurt patients if health insurers have to scale back on the services they are willing to cover. And so, all sorts of things are kind of scattering in different directions.

It's been very busy. In terms of what to make of all of this, well, again, very busy. It does point to the scope for volatility, for swings in markets and so on. There is, as I mentioned, a cost-of-living theme, and so that makes sense in the lead up to the midterms. Some form of fiscal stimulus wouldn't be a surprise alongside that in our mind.

Some of these actions do hurt businesses and help households, and so it's important that investors be aware of that. Some sectors are being targeted in a negative way here still.

Still, stepping back and now pivoting just to the broader earnings outlook here. The main takeaway, to me, is that actually the earnings outlook at the top-down level is still fairly good.

There have been questions and challenges and of course stock market valuations are in some cases fairly full, if not outright challenging. But the earnings picture is still pretty positive and some of that is grounded in the favourable economic outlook we talked about before.

But you know, from an earnings outlook perspective, there may even be upside risks to fairly robust expectations.

It's notable that in recent quarters the percentage of companies, in the U.S. at least, beating their earnings expectation just keeps rising from one quarter to the next. The consensus earnings outlook for the U.S. itself has kept rising for 2026 and 2027. It's not exclusively a U.S. phenomenon, there's also fairly robust expectations for earnings being expressed for much of the rest of the world.

The 2027 earnings outlook, in terms of growth rate, looks even better than 2026 based on current forecasts. And I guess underneath all of that, it does look to us as though there may be room for profit margins to rise somewhat further in a CapEx-heavy, AI-oriented kind of world.

So, for the moment at least, the earnings picture is favourable, and it's one of the more important supports for what could be a rising stock market over the next year or two.

Okay, I'm going long. Nevertheless, I will insist on finishing with a word on Canada. So just a quick check up - really a particular focus - which is on January 26th Canada announced a small tax cut, I guess you could say: the GST tax credit was enhanced. This is primarily for low-income households. It's a quarterly payment, if I understand correctly.

It's long existed, it's now been enhanced. The first enhanced payout comes this spring. It's actually a particularly big top-up. The general payments go up 25% over the next few years. This first payment goes up 50%, and so that's relevant in and of itself, and part of the idea that the Canadian economy could start moving more quickly in the second half of the year.

Equally though, some tongues are wagging that the current government could be considering an election. They're a minority, they're one seat short of a majority. They’d surely love that majority. And so conceivably this is an effort to curry favour with the electorate perhaps. Polls wouldn't suggest it's an obvious moment. The Liberals aren't that much ahead of the Conservatives.

But, maybe the Liberals think this will push them over the top. Maybe the Liberals think another spat with the White House over the USMCA, which is frankly likely in the coming several months, could help as well. So, let's just keep in mind that minority governments historically have not lasted for an extremely long period of time.

There could well be a federal election in Canada this year. We will see.

I'll stop there. Thanks so much for your time. I hope you found this useful and interesting. Please consider tuning in again next time.