Hello and welcome back to the Institutional Beat podcast, where we cover interesting and relevant topics for institutional investors. My name is Haley Hopwood. I am a portfolio manager with PH&N Institutional and your host today, and I am joined by our chief economist, Eric Lascelles, to talk once again about all things tariffs. And I do have a little bit of a funny story, because Eric and I did attempt to record this podcast on the morning of April 9th, and less than an hour after we finished recording, what I thought was a pretty good conversation at the time, Trump announced his pause on reciprocal tariffs and much of what we talked about instantly became a bit stale. So here we are again for take two. So an extra big thank you to you, Eric, for being here today.

My pleasure. I'm hoping things stick a little longer this time though. Realistically, that's probably not going to be the case.

Fingers crossed. But let's just keep this conversation rolling here. We're not going to start from scratch on the topic of tariffs, because when you and I spoke on the podcast back in December, you provided a really great overview about what tariffs are, how they inflict damage, and what makes Canada vulnerable to tariffs. So for those of you out there listening, if you missed that, please feel free to go back and give it a listen.

We also talked about what was being threatened at the time and the likelihood that that would come to fruition. And it's fair to say that things have evolved quite a bit since then, and the severity and the scope of what is being threatened and implemented has escalated. So perfect timing to get you back on for another discussion.

So why don't we jump right in? A couple of weeks ago, President Trump dropped a bit of a bombshell with his Liberation Day announcement of reciprocal tariffs on the world, which, interestingly, did spare Canada and Mexico from further damage. But he did impose some pretty hefty tariffs on other countries. And that sent financial markets into some turmoil.

Of course, we now know that the implementation of those tariffs has been postponed for 90 days, but not everything was postponed. So there remains this baseline 10% tariff on everyone. And also tariffs on China remain in place. And those have grown quite significantly. And as we record this on April 14th at 10:30 a.m. Pacific time, they’re at an eye-popping 145%.

So, lots of pain still being felt out there. So let's talk about this. The original idea with these reciprocal tariffs, at least as I understood it, was that for any country who was imposing tariffs on the U.S., they would get a similar-sized tariff imposed back on them. But that's not exactly what we saw play out.

So Eric, maybe we can start here, and you can give us a little bit of an overview of these reciprocal tariffs and what they ended up looking like and the thinking behind them.

I'd be happy to. And so you're quite right. The original vision and the original, you could say articulation of reciprocal tariffs was that the U.S. would hit other countries with tariffs if those countries had hit the U.S. or already had applied tariffs on the U.S. And so that didn't sound necessarily so bad to the extent that you might imagine a world in which both countries were persuaded to reduce their tariffs, and you could even end up if you squinted your eyes extensively with more trade, perhaps, than you might have otherwise had.

So that was the optimistic take on reciprocal tariffs. Now long before April 2nd, which was the original announcement, we did have a sense that it was going to be a whole lot broader than just that. And so we had heard a lot of grievances about countries, of course, around trade surpluses in general, and countries with sales taxes, and countries that have have in other ways, perhaps disadvantaged, subtly the U.S. or even just perceived to have disadvantaged the U.S.

And so when April 2nd came along, and April 2nd had been warned as being the big one, it did prove to be the big one. And the U.S. did announce quite massive tariffs on a large fraction of the world. And it was entirely a function of what countries have the biggest trade surpluses as a share of their trade versus the U.S.

And so we had, at the time, an additional 34% tariff on China and 20% additional on the E.U., and a big 46% on Vietnam. Vietnam sells an awful lot to the U.S. And the list went on, the U.K. had a 10% hit and so on. Within that, I guess a couple of comments. One would be that Canada and Mexico were excluded, and so more on that a little bit later.

I guess the other one, though, is simply the comment that these tariffs have not persisted. I think the U.S. recognized it may have bitten off more than it could chew, and markets were greatly discontented by that development. And the economic threat was fairly significant. And so we have seen a material unwind. Now I do want to emphasize reciprocal tariffs are not gone in the sense that, at best, it's a 90-day delay.

Furthermore, the tariff was not completely removed even for 90 days, in the sense that what has generally happened is that tariffs were reduced such that there's a 10% tariff rate that remains, and that's still pretty significant, and that still has material consequences. So let's be aware of that. Things have continued to move, since then.

And so we can say that of course, the tariffs then got much bigger on China, up to 100 and some percent number that you mentioned a moment ago. And that is frankly proving elusive to me, just given how quickly it is moving. You can argue, of course, once you're over a certain level of tariff, it almost doesn't matter what the number is because you're just not going to trade.

And so you might argue these sorts of numbers are already at that level. Since then, seemingly we have had some, cell phones and some computers and some electronic parts then excluded from a portion of the tariffs. There's even talk of pulling down the auto tariffs a little bit. And so I'm saying a whole lot of things, I guess the takeaway is we had enormous tariffs theoretically coming into play briefly.

That's been scaled back. It's still pretty significantly sized. And the reality is of course that's not the final word on the subject, in part because there's just the extraordinary uncertainty and just such a range of changes that are coming every few days that we really can't speak with great confidence about where it goes. And there is still a fair amount of economic damage, you might say, that accrues, even from the sorts of tariffs that are in place right now.

And I think there's been a significant loss of trust in the U.S., and there's a significant unwillingness perhaps to invest and hire and make long-term decisions, when these tariffs are so substantially swirling.

And what does it mean in terms of how these countries can negotiate? Because if it's not simply about removing their own tariffs, and it's more about trade imbalance, what does a country like Vietnam do, for instance?

I think it's awfully hard to say. And so that's what has us nervous and again, emphasizing that idea that 90-day delay sounds good. Then it's an opportunity of course, to negotiate. It's going to be tricky for more than 100 countries to negotiate all at once with one country. But one of the lessons from the first Trump term was that it took well over a year even for a few countries to negotiate proper deals.

So there's a measure of skepticism that this can all be settled in short order, suggesting some uncertainty and some tariffs that persist beyond that. As you say, if ultimately the goal is just to reduce the U.S. trade deficit, that's a tough one. It's a tough one because, of course, no country has complete and absolute control over their trade surplus or trade deficit or trade, for that matter.

And to play perhaps devil's advocate, you can argue that, from a U.S. standpoint, a country that doesn't save much money or a country that is technically a net borrower – which is what the U.S. is, in large part because its government is borrowing so much – almost by definition, you are going to run a trade deficit.

Those two things are hand in hand. And so, this is not just about other countries not selling things as cheaply, or other countries not trying to sell to the U.S. It's also the U.S. has to save more if it doesn't want to have a trade deficit. And of course that hasn't been a part of the conversation. And the fiscal trajectory doesn't seem to be going in that particular direction.

So I think it's quite tricky. There are concessions that countries can make that maybe aren't specific to the size of their trade surplus. So likely countries can commit to spending more on their military. For some countries, not Vietnam, I don't believe, but, the digital services sales taxes that exist, say, in Canada, and that exist in Europe and some other places, it's conceivably we could see those go away.

So there are concessions, I think, absolutely that can be made here. China in the first Trump term did promise just to buy more U.S. things. So we could see commitments from countries. Okay, we’ll buy more, whether they buy more is a bit of a different question and frankly, harder to engineer. And so I guess you might have to revisit that at a later date.

But that could be part of the story as well. But again, the point being, it's going to be, I think, tough negotiations. Easy enough to say we'll pull our tariffs down if you pull yours down. But that approach has been tried by a few countries and the U.S. did not immediately bite. So it's not just as simple as removing tariffs on both sides.

And so we're working with the assumption that tariffs can decline somewhat, perhaps over the next six months or so. But they're unlikely to go back to where they were before the beginning of this Trump term. And there's probably some real damage that still sticks around.

Yeah. Maybe just quickly, we can highlight who is sort of the most vulnerable in terms of countries. We've talked a little bit about that and we just talked about Vietnam, but there's some others there because we know it's not only the size of the tariff, it's how much they export, of course, to the U.S.

Yeah, exactly. And so it's the interplay of those two things. How much trade do they do with the U.S., and how big is the tariff that they've been struck with. The amount of business they do with the U.S. of course, not that it's fixed, but it's a number that's fairly stable, at least so far.

Of course the tariff numbers are just ebbing and flowing in a way that we can speak with a bit less conviction there. But I can say, far and away the three biggest trading partners with the U.S. – and this is from the perspectives of the other countries, meaning the damage they might suffer if their access to the U.S. market is impeded – would be Mexico, Vietnam, and Canada.

So those are the big three. Two of the three haven't been hit by reciprocal tariffs, but they have their own challenges on other fronts. Vietnam that has been hit by far the most because it has an enormous trade link to the U.S., and actually, it was hit by the largest reciprocal tariff. Though I guess you could debate that to the extent that China keeps getting other tariff increases along the way.

Really the other countries that are quite exposed are also mostly Asian. And so this makes sense on two fronts. Many sell a lot to the U.S. And so we're talking about, Taiwan and Japan, India, South Korea, Thailand, Indonesia as well. So, they sell a lot to the U.S. And because they have large trade surpluses, they've also been hit by pretty large tariffs.

So the Taiwan tariff is 32%, the Japan tariff is 24%, and so on. I do want to emphasize though, when we step back and look a bit more broadly, one thing that's notable is that most of the world's countries, including regions like the European Union and the U.K., and I'd even say actually a country like Japan, certainly they are to some degree reliant on U.S. economic demand.

But, in general, we're talking 2 or 3% of their gross economic output is being consumed by the U.S. And so not to underplay the damage that might occur to that 2 to 3%. But it is broadly a manageable blow. It's a palpable hit, but it's also something that I think is manageable. The countries that have existential questions are Canada and Mexico and perhaps Vietnam, the U.S., obviously significantly hit as well, since it is the counterparty to all of these tariffs. But many countries I think will be okay if a bit diminished.

And then maybe let’s just spend an additional moment on China. Obviously, they fit into that camp of not being as exposed to the U.S. in terms of their trade, but they are being hit with some pretty large tariffs right now. What's the fallout from that? Obviously, there are exemptions in place for certain things right now. But there's even been talk about I think tariffs coming back in place on those categories like cell phones and things, but perhaps in a different form, a more targeted form.

So what does that fallout look like? Is it the consumer that's suffers here, are we actually going to see iPhones go up in excess of $3,000 in the U.S.? What does that look like?

Yeah, it's certainly a lot of moving parts as you say. Of course, the China-U.S. trade relationship in dollar terms is huge, but they're also both enormous economies such that actually the share of  each one's economy that is directed toward the other is a bit more limited than you might guess. So just 2.4% of what China makes is consumed by the U.S.

Just to give you one, one little factoid on that front, in terms of who gets hit by that? Well, I mean, I guess disproportionately, it is U.S. consumers and disproportionately it would be then some Chinese manufacturers, and some Chinese consumers, too. Keep in mind, the U.S. sells, let's say, agricultural products to China. And so there are some consequences and some food price effects that might accrue there, though interestingly, China has, if anything, too low inflation.

And so they may be objecting less to a small increase in inflation than in other countries. But the most visible effect, I think, is on the U.S. consumer. And there are just certain products that Americans buy that are produced almost only in China. And again, that cell phone, the iPhone in particular is, I suppose, a classic example of that.

And as you said, if you just crunch the numbers and wonder what a 140% plus tariff means for cell phones, it's awfully expensive. And it would send the price up, you know, to a pretty extraordinary degree. And, yeah, we'd be talking about phones that are $2,000 or even $3,000, which of course is, is a no go, at least for the average buyer.

And so I guess not a surprise then, that we've seen some sort of exemption on that particular front. And it feels like that's the way the tariffs are going, which is we see big bold tariffs and then there's a reality check in which, well, we can't really tolerate this pain point, and we can't tolerate that pain point.

And we see some adjustments. And to be sure that the risk is there, that the tariffs go back up on cell phones and on other things for Americans. But I would say that the goal of the U.S. administration is to ensure manufacturing, and so I don't doubt there will be some additional on-shoring for the U.S.

But you're not going to achieve that in the span of 30 days or 90 days. That's a multi-year project. And so I'd be surprised if big tariffs were reapplied on cell phones or the like in short order. I think that if the U.S. is committed to this approach, it's going to have to be some sort of ratcheting higher approach or the big tariffs come on three years from now, or some combination of that, because otherwise it's just going to be too painful for Americans.

And I think as much as the White House has shown a pretty remarkable tolerance for economic and market pain, we have also seen in recent weeks at that tolerance is not infinite. And as a result, my suspicion is that kind of critical item will remain accessible. We're seeing a few rumblings as well, about tweaks to some of the auto tariffs that were recently introduced.

And again, it's another product that Americans need. And there'll be a lot of screaming if those cars become much more expensive.

Okay, well, why don't we pivot to Canada now? So as we've talked about, they were not hit by these reciprocal tariffs, but we've already been in the ring for a couple of rounds now. So maybe just quickly to recap, there of course are steel and aluminum tariffs in place. Those are not specifically on Canada, but Canada does get hit disproportionately with those.

Those are at a 25% level. There's tariffs on autos; that's also at 25%. And then on top of that, of course, everything not covered by the USMCA is also being hit with that 25% tariff with some carve outs for oil and gas and potash at 10%. Now, have we seen the worst of it for Canada or, you know, are things really just getting started?

Well, I mean, it's hard to say is the honest answer. That was good summary, by the way. So yes, let's start by making the point that Canada is being hit by tariffs and by virtue of the close economic and trade relationship with the U.S., those tariffs do hurt to some extent. And auto tariffs, in particular, are potentially quite problematic.

Not to downplay the consequences of steel and aluminum, and some of the other smaller elements. So Canada is being hit, but you're absolutely right, the big surprise was that Canada did not get the full hit. And I would say, to be honest, going into April 2nd, we had, I don't know if I'd call it a worst-case scenario, but a bad-case scenario in which Canada would be hit by a 25% tariff on everything, which, of course would have been extraordinarily problematic, and a surefire Canadian recession.

We had a good scenario that maybe had Canada hit by a 10 or 15% kind of blanket tariff. So we ended up with none of that, which was not even on the bingo card, I guess, to put it that way. To speak, I guess, to the level of pain that Canada currently suffers, I would say that, loosely speaking, probably the effective tariff rate on Canada vis-a-vis the U.S. is probably about 5 to 10% right now. So, you know, a whole lot better than expected, but not trivial. In terms of where it goes from here, I'm personally skeptical that that was it.

Because it's just hard to fathom that Canada and Mexico went from being sort of enemies, number one and two, it seemed, as of a few weeks ago, to being sort friends number one and two almost overnight. And it was notable that when the reciprocal tariffs were unveiled in the Rose Garden at the White House, President Trump did in his formal speech complain about the Canadian dairy sector.

It didn't sound like a country that he'd come completely to terms with. And so, we’re inclined to think that, really, the way to think about this is Canada and Mexico were getting different treatment because there will be formal negotiations with them to revisit the USMCA trade deal. And that's officially scheduled for mid-2026, but realistically probably happens somewhat sooner.

So many ways this could go. It could just be bigger tariffs are a threat that hangs over the head of Canada and Mexico as part of those negotiations, encouraging the countries to make concessions that are favourable to the U.S. It could be that substantial tariffs are applied on Canada and Mexico before those negotiations begin to ramp up the pressure.

I would note as well that we're still expecting some sector-level tariffs that will be relevant to Canada, including on forestry and copper and pharmaceuticals. I think the computer chips are probably a bit less central to Canada. So, there is certainly going to be some pain there. So unfortunately, it's likely we are going to see more tariffs as opposed to less.

It's a bit of a fool's errand to suggest we can get it exactly right and with precision. But, you know, for the moment, kind of the interesting debate in Canada is, it looked like it was sort of a surefire recession when there was going to be a big blanket tariff coming in – that’s suddenly a little bit less sure, but there absolutely is still some damage. And that damage could grow to the extent that we could get bigger tariffs.

Right. And you already kind of hinted at this a little bit in terms of the negotiations and the next steps there. But let's talk about Canada's response just generally to tariffs. There has been of course, some counter-tariffs that we've put in place. What can we expect to see beyond that?

Well, Canada is responding. So there have been different camps of countries. And you have countries that are behaving very cautiously and not levying counter-tariffs on the U.S. and hoping to negotiate. And you have countries that are punching back, maybe not quite in a tit-for-tat fashion, but punching back significantly. And I would say China and Canada are most obviously in that latter group.

And so Canada has been responding. If I've got my numbers right, I believe Canada is up to tariffs on about, in Canadian dollars, $60 billion worth of U.S. products that flow into Canada. And with the expectation that that could grow down the line. And, I should say that predates the auto tariff response.

So basically the U.S. auto tariffs on Canada and Mexico, really directly affect the value added that isn't American. So you can see the value-added that's Canadian and Mexican. Canada is now hitting U.S. value-added. So it's not the whole car that gets tariffed as it comes into Canada, but it's the part that the U.S. added value on, which is probably a pretty significant part.

And so, Canada is punching back. To be honest, I don't know if that's the winning strategy or not. It's hard to say. Obviously, in the China context, we're seeing the U.S. responds and escalates. And of course, eternal escalations aren't desirable. Equally, I think the attitude is, particularly for Canada, these tariffs are just so unsustainable and undesirable that the country has to just maximize the pain to the U.S. in the hopes that it proves undesirable and the political will weakens and some of these tariffs go away.

The pain, I mean, ironically, the pain of applying tariffs on the U.S. hurts Canada at least as much as the U.S. – as is of course the case and the reverse as the U.S. applies tariffs. But Canada's in maybe a better position to hold its nose just given the stakes of getting rid of those tariffs.

And so Canada's responding, I guess we'll see whether we get further escalations toward Canada. But I would think there'd be some, response as well. I should say, of course, this is all in the context of an election. And so I think that maybe has made Canada a little bit punchier than otherwise. It's politically popular to respond.

And so we'll see whether that approach changes at all, subsequently. But for the moment, yes, Canada very much in the responding camp. And I would think we'll continue to do so if needed. And sorry, maybe Haley, one other thought. You could ask maybe beyond just tariffs in terms of unconventional – so we had of course a flirtation with electricity tariffs going the other way or I guess taxes on exports.

And of course that was pulled back fairly quickly. The scope does exist for more aggressive action, and of course, the classic toolkit would include export taxes. And so just making some things even more expensive. And the obvious thing would be necessities that the U.S. absolutely needs, whether it's oil or potash or some of the other products. That possibility exists.

I like to think it's a last step action, but it exists. Similarly, you could actually just restrict the export of things. It's the same sort of idea. Obviously, it does a whole lot of damage to Canada as well, but could maybe bring people to the negotiating table, if needed. There are unconventional actions that one could pursue in terms of cutting the U.S. off from different things.

I would say at this point in time, I'm not expecting that. And again, the great danger here is you escalate in a way that really attracts U.S. attention. And then potentially you have a problem. And as much as you can flag all these scenarios in which, ohh the U.S. would really struggle if it didn't have those 4 million barrels of oil a day, you know, Canada's pretty darn reliant on a lot of U.S. things as well, and it's a dangerous game to play. And so I'm hoping it doesn't get to that and it can be resolved with more conventional responses.

And is there anything to – maybe two schools of thought here, but – to deepening the trade relationships globally and also domestically, in terms of the provincial trade barriers. Is there any kind of traction that we can make in those areas?

Yeah, I think absolutely. So that's a great point. And unfortunately, the time frame is such that, realistically, we're not going to fill a tariff hole that that appeared in March, April, with solutions that might be wonderfully beneficial and, and I hope will be, but that accrue over the span of quarters and years and even decades to be honest.

And of course, we're talking about pivoting toward, let's say, China or towards Europe or towards other countries. Geography is a very, very strong determinant of trade. And, Canada and Europe, as an example, have had a very strong free trade deal now for quite a number of years. And there is significant trade that occurs.

But it just has not made sense when there is this big market, that's right beside Canada. And so if these barriers remain, there absolutely are incentives to trade more internally and to trade more externally. And I fully expect to see more of that. However, to the extent that the U.S. is 80% plus of Canada's international trade, I don't see any scenario other than, I guess, tariffs that are so incredibly large as to prove entirely on unsurmountable, that the U.S. will not be by far the largest trading partner for Canada.

We do see important steps, I think, when it comes to provincial trade barriers coming down. Recognizing it takes time, recognizing it's not as simple as saying, “Hey, let's get rid of a tariff,” because it's not tariffs, it's rules and regulations. And a lot of the efficiencies you could gain would be, “Hey, why are there ten different provincial health regulators and ten different education regulators,” and so on.

And of course, at some point you're almost eliminating provinces in terms of all of their functions, and so I think there's a limit to how far we go. But at a minimum, there seems to be some progress on maybe aligning occupation regulations and occupation certifications in a way that could allow more labour mobility. I think there's some room to align transportation rules to allow products to flow across the country with fewer barriers.

And so I think the will is there. I don't expect a miracle, but I think we'll see some action. It's a tricky one with China because of course, China also just levied additional tariffs on Canada, because Canada put a tariff on Chinese electric vehicles because the U.S. did it. And so it's just this ironic kind of situation.

I do think, though, that there's some scope and in particular if suddenly U.S. agricultural products, as an example, are largely unavailable to China because there's giant tariffs on them, I would have to think there's an opportunity there. I would have to think there are opportunities extending to Europe as well. But it's, again, not enough to fully fill the hole that the U.S might create.

Okay, so knowing what we know now in terms of what is in place currently, what could we be looking at in terms of implications for growth and inflation? And of course, I'm interested in hearing your views on Canada, but let's include the U.S. in there as well.

Right. And so that is, at least as an economist, where the question ends up. And so unfortunately, tariffs do significant economic damage. The small tariffs in the first Trump term were visible but fairly modest in terms of their economic effect. The damage could be significantly greater this time. The challenge, of course, is gauging what the end position of tariffs will be.

And we've seen so many changes and huge tariffs, and then pulled off and back and so on, that I wouldn't want to suggest there's only one way this could go. There are quite a range of scenarios. And in the best-case scenario, the damage could be fairly modest; in a most-likely scenario, it is rather significant, but not quite recessionary.

There are scenarios in which it is full and recessionary and worse. And so, it really does depend on how the tariffs go. I can say that if you presume – with the full reciprocal tariffs on for a moment, the U.S. effective tariff rate was about 22% and probably a little higher once the China tariffs rose even more – if you presume that the U.S. average tariff rate ends up, let's call it at 15%. And so maybe we don't quite sustain all of the recent win in terms of the reciprocal tariffs being reduced equally, though of course there are other sector level tariffs, and so we end up with something like a 15% average. Our math would suggest that chops between 1 and 2 percentage points off U.S. economic growth. 1.3% might be our best guess, but I don't want to be overly precise because there's a lot of uncertainty there.

And so that visibly reduces the rate of economic growth. The U.S. economy that would have grown at a happy 2.5% might be growing at more like 1% or only a little bit more for 2025. So that's quite significant and U.S. unemployment rate goes up a percentage point, and inflation is hotter than it would have been. And so on.

And so certainly undesirable. From a Canadian standpoint, again, it depends on what tariffs come. And so far Canada has dodged the reciprocal tariffs. And so actually Canada's toward the lower end with maybe a 5 to 10% average tariff vis-a-vis the U.S. And so in that kind of scenario, it's actually similar to the U.S. It's a 1 or 2 percentage point economic hit.

The damage is similar, but of course the average tariff is lower. And that's just because Canada is so much more reliant on the U.S. economy than the U.S. is on its trading partners that the damage ends up being a bit bigger. And so we're budgeting for a real effect. But gosh, if we're wrong, and if Canada comes in with a 20 or 25% tariff, that is a deep recession.

So that's where the risk lies, I suppose, for Canada right now. Certainly, China is impacted when there are big giant tariffs that come on at over 100%. And so, possibly a couple of percentage points chopped off Chinese growth. I'd like to think the Chinese average tariff rate does come down somewhat from there. And so that might reduce the scale of that blow.

But, you know, we're talking multiple percentage points on the economy. We're talking unemployment rates that are in the realm of a percentage point, perhaps higher than they would have been. We're talking about price levels that are also in the realm of maybe a percentage point or even a bit more than they otherwise would have been. And so that's the most likely scenario right now.

And of course, it's unnecessary in the sense that this is just a policy decision. It's not a pandemic and it's not a financial crisis, but we find ourselves in the business of downgrading our growth forecasts right now. And unfortunately, maintaining these massive error bars in terms of just not knowing exactly what tariffs will come.

And similarly, I should acknowledge, for all of this fancy modelling I'm suggesting is happening in the background, I would equally say, no one quite knows what the effect of a big tariff is, because we just haven't had that many big tariffs in the last 50 or 60 years, in fact, arguably almost in 70 plus years at this point in time. And so, it's all fine and good for a model to say, well, we saw a 2% tariff one time and it did this. And so a 20% tariff should be doing ten times that damage.

If I had to guess, I would say that the bigger tariff does more than ten times that much damage. And so there is some upside risk in terms of the extra damage that could be inflicted from tariffs. And of course, via the uncertainty channel, via the volatility channel, via even boycotts, which we're seeing.

And so we're seeing less buying of U.S. goods in a number of markets – that isn't in the theory, that isn't in the tariff. And yet it's certainly set to do some damage and showing up most visibly, I think in the travel data already.

Okay. So you talked in there about growth and inflation. So growth falling, inflation rising. You know that seems like the recipe for a stagflation of sorts. Is that something that is a real risk out there right now?

Yeah, I mean I think we're certainly traveling in a stagflationary direction. I think you could debate just what stagflation is, and it doesn't need to be in place for a number of years to count. And does it require a true stagnation of the economy as opposed to just meager growth? And so, again, definitions will vary, but at a minimum, in that direction of travel.

And so, tariffs are unfortunate on two economic fronts. One is that they hurt growth. The other is that they add to inflation. Of course, we don't like either of those two things. And indeed that is the definition of stagflation. So traveling in that direction, if we manage to avoid the full reciprocal tariffs coming back, I don't think it needs to be an outright economic stagnation.

But it's certainly undesirably weak growth. And on the price side, of course, you can quibble and say it's a price level shifting as a one-time thing, and there's no reason that the rate of increase needs to be any faster five years from now. But that's, I think, beside the point, which is it does inflict additional price damage.

And so, yeah in the stagflationary direction, maybe not quite on the order of the 1970s.

Right, and it does challenge to some extent the response from central bankers, I guess, because there is that inflation component to think about. But our view, I think, favours the fact that we would likely see them react to growth impacts as opposed to inflation. Right?

Yeah. For central banks, I mean, it's a tricky one, as you say. Higher inflation would argue for hikes and lower growth would argue for cuts. And so they do need to weigh those two factors usually. And also, theoretically, central banks end up cutting a little bit more as opposed to less. And so they focus a bit more on the growth side.

It is a bit trickier this time than usual though, because of course, here we are entering this threat, with a bit too much inflation already. And with a history of some inflation surprises and inflation expectations that aren't quite as anchored as we might like them to be. And so I would say that central banks probably can't cut quite as much as they might normally want to for that reason.

And I would say that's the language that the central banks are using so far in terms of, you know, being very vigilant still, on the inflation front. It’s also fair to say that, if you just think about the policy mix and what's the best way of dealing with any kind of economic pain, at least that emerges from tariffs, arguably, fiscal policy is slightly stronger of a tool. And I would fully expect to see bits and bobs of both.

But, arguably fiscal policy is a bit of a stronger tool because it allows more concentration, right? Rate cuts, I guess, help everyone and stimulate every bit of the economy. Whereas not every bit of the economy needs to be stimulated because of course, the service sector doesn't get directly hit by tariffs, at least so far.

And some companies, of course, do well when their foreign competition is impeded. And so there are winners and losers, as much as there are more losers and winners. And so it's tricky for central banks. With fiscal policy, of course, you can have a policy that says companies that are hurt, I help, or sectors that are hurt, I help. And you can be a bit more direct.

And so if things get bad, I think we'll get help on both fronts. I think you get a bit more fiscal help than monetary help. But to answer your question in the longest way possible, Haley, yes, you would expect a bit more rate cuts.

Okay. Excellent. So why don't we finish off by talking about some market implications? So obviously we saw some pretty negative moves on the back of the Liberation Day announcement for equities and meanwhile bonds were actually playing their role as ballast in the portfolio at least at that time. But then we later saw the bond yields rising, which was interesting and a little bit concerning as well.

So maybe some thoughts from you in terms of what we might see from here for markets?

Well, I guess starting with the stock market at a minimum, you can say the interpretation of what the stock market should do in response to tariffs is fairly straightforward. And it's the thing that markets have been doing, which is the stock market doesn't much like tariffs. And the stock market, in particular, doesn't like slower economic growth which translates pretty directly into weaker earnings.

But of course beyond that as well, you might make the comment that, this kind of uncertainty in policy risk also just creates risk aversion above and beyond any kind of rational economic growth forecast. And that can have an effect as well. So those things are swirling. Do note that as much as we might subtract a percentage point or two off economic growth, corporate earnings tend to have a higher beta.

They tend to be more volatile, and just in general to swing to a greater extent than the economy does. And in this particular instance, you can argue maybe that effect could be even larger again, just because, if we're talking big corporations often they're multinational corporations. And so they're very trade exposed. And in fact, they are multiples more exposed to foreign demand and for that matter, foreign supply, than say U.S. GDP is, to use that as an example.

So the stock market is very much affected right now. I think it's a bit of a guessing game whether the response has been sufficient or not. And it does depend on where the tariffs settle precisely. To my eye, it looks it looks roughly proportionate to the sort of impact that we've had so far. If you believe the idea that maybe moderate tariffs prevail at a later date, perhaps there is some upside out there somewhere.

But of course, it's premature to make any kind of judgment as to whether we've reached any kind of bottom right now. And so I'll leave that there. On the yield side, it's much more ambiguous what's supposed to happen to start with because of course tariffs hurt growth, which pulls yields down, and tariffs increase inflation, which pushes yields up.

So you've got a push and a pul. The risk aversion element usually then results in yields falling, which as you say happened for a moment but hasn't continued to happen. And so there's this extra variable that really isn't usually part of the conversation. Which is just, it does seem as though there is some tentative loss of trust in the U.S., and I guess it makes sense to the extent that the whole global order is being upset right now.

And so I think some investors are just questioning their orientation toward U.S. markets. And of course, many have been so overweight the U.S. and it's performed so remarkably, particularly in a stock market context in the last decade plus, that people are heavily overweight and maybe revisiting whether that makes sense at a time that it's difficult to predict U.S. policy.

And the U.S. is feeling a bit less exceptional on a number of fronts right now, and so we've actually seen something of a bond sell-off more recently. And so, the implications are a bit unclear as to which of these things is going to dominate. At a minimum, we can say it's not quite the neat and simple bond rally sending yields lower, as you might normally expect.

And it's a similar conversation when we talk about the currency market, which is any kind of tariff model would expect that the country – the antagonist, the country imposing the tariffs – should have a stronger exchange rate. And so that would suggest a stronger U.S. dollar. Of course, we're not getting that now. Part of it is that, of course, some countries are retaliating, and that starts to muddy the water in terms of what the right currency response is.

But you would still have expected a stronger dollar. We’re not getting a stronger dollar, we're getting a weaker one. And so it does again feel as though this might be a straw that broke the camel's back kind of situation in which everybody knew that the U.S. dollar was expensive, just like everybody knew that U.S. stocks were at least expensive relative to their international peers.

But, it was working and no one was questioning it. And now that people are losing a bit of faith in the U.S. and in the decision making, and some erosion is happening, perhaps in the reserve currency status, we have a dollar that's actually weakening. And so my best guess would be if we were to see a further intensification of tariffs, you could see that dollar fall further. And for sure our forecast over the next few years is that the U.S. dollar could continue to fall from here.

Interesting. Okay. Thank you, Eric. So maybe I'll just add for our institutional listeners out there that these strong market moves that we've seen over the past couple of weeks, it's likely resulted in some asset mix drift across portfolios. And so, I would just encourage everyone to be keeping a close eye on that during these volatile times. And, it's also just important to remember that this is not the first or the last time that we're going to face volatile markets, and there's clearly risk out there.

But these types of environments do provide good opportunities for active managers.

Absolutely.

Okay. So Eric, thank you. Once again for being on the podcast  and sharing your expertise with us. We really appreciate it.

My pleasure. Any time.

Thank you to all of our listeners out there. We hope you can join us again next time.