00:00:06:13 - 00:00:26:19

Hello and welcome. My name is Eric LaSalle. I'm the chief economist for RBC Global Asset Management. And very pleased to share with you our latest monthly economic webcast for the month of May 2025. The title of this presentation is Tariff Ebb and Flow. And so of course, tariffs featuring centrally as they have every month. Going back over the last several webcasts.

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I think it's appropriate, though, to think of it in an ebb and flow context, in the sense that we most certainly had a flow of tariffs, particularly just after our last webcast in early April, with the reciprocal tariffs that were announced and some other tariff damage that was done. Since then, though, there has been at least some tentative ebbing of tariffs.

00:00:44:19 - 00:01:02:29

And we've seen some, some exclusions made for certain products. We've seen the reciprocal tariffs, or at least a fraction of them delayed for 90 days. And so perhaps we've seen the white House blink. And perhaps the the outlook isn't quite as concerning as it first looked when it appeared that tariffs would be very large and possibly quite permanent.

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Let's jump in though, and we can talk about that and talk about all sorts of other things that are going on. And we'll begin with this report card as always. And just to flag the negative themes. And of course, there are still some real challenges out there. And tariffs do genuine problematic economic damage, to be sure. Let's begin just by saying policy uncertainty has actually declined somewhat.

00:01:22:29 - 00:01:44:16

So it's still very high. I'll show you a chart on that in a moment, but it is down a bit. And so that is to say, there's still quite a range of ways, quite a number of different ways. The world and US public policy in particular could evolve, but perhaps slightly smaller range than before. And in particular, we can say that, the threat of enormous tariffs proving permanent seems to be a bit lower than it was before.

00:01:44:19 - 00:02:03:27

Now, for all of that, sizable US tariffs are still very much in place. And so that does economic damage. There is still a threat to Canada. And Mexico. And indeed, a number of sector oriented tariffs are expected to come online before too long. Obviously when we're talking tariffs we're talking about less economic growth. We're talking about more inflation.

00:02:03:27 - 00:02:24:27

That is at least in the direction of travel, of stagflation. And so we've been obliged to downgrade our growth outlooks and to increase our inflation outlooks. Neither of which are particularly desirable outcomes. We can acknowledge that there is likely to be lagged pain from tariffs. And so while the economic data so far hasn't been too, too bad, though, neither has it been very good.

00:02:24:29 - 00:02:47:00

There is reason to think there'll be more weakness later. So that's part of the story too. Indeed, on that front, we certainly believe the recession risk has gone up in recent months. And so actually for the US and I would say for Canada, we're in the realm of about a 40% risk of recession over the next year or so, not the most likely outcome, but certainly wouldn't be a great surprise if there was a mild recession, essentially because of tariffs.

00:02:47:03 - 00:03:08:29

We can see some real damage in the Canadian economy, some actual job losses, some other things that suggest that the high uncertainty in particular is weighing in Canada, even though the tariffs haven't come in quite as hard on Canada recently. And then I'll just remind everyone as well. Of course, inflation was pretty sticky even before tariffs. And so we're dealing with that as well on top of the tariff issue.

00:03:09:02 - 00:03:28:09

So that's the negative. It's a pretty long list I would say that there are still some pretty significant problems in the world. Equally though on the positive side, it is news, and it is good news that the white House appears to have blinked in a scaled back some tariffs. Just recognizing there is a limit to its tolerance for economic and market pain.

00:03:28:12 - 00:03:49:07

Canada and Mexico did, somewhat surprisingly, avoid the reciprocal tariffs that were implemented on April 2nd. And so the thinking had been they would be hit, square between the eyes, and they were not hit at all. Now they are nevertheless subject to other tariffs and steel and aluminum and auto sector tariffs and so on. But, that was a pleasant surprise and a positive development.

00:03:49:09 - 00:04:11:14

I can say the U.S. economy still alive. I would still say growing. So far. I say that perhaps, imperfectly right now as first quarter GDP just came out and it was down, but it was down for funny reasons. And so imports surged as people were front loading on products. And we think that for whatever reason, the inventory data just didn't didn't catch up to that import surge in a way that would have offset, the supposed damage to the economy.

00:04:11:14 - 00:04:28:20

So we still think that the general trend, on the US economy is one of growth. But, you know, that is being threatened by tariffs going forward. Most countries I can say, in fact, let me go back one. Tariffs are not a surefire recession in our view. So as mentioned, of course it's negative news, but it's not an automatic recession.

00:04:28:20 - 00:04:49:05

That is not our forecast. Right now. Tariffs are not overly inflationary outside of the US. When you think about tariffs, country imposes a tariff. It hurts themselves. It hurts the country. They're hitting as well. The inflation impact of that tariff hurts the country. Imposing the tariff. Their prices go up doesn't actually directly increase the prices of the country.

00:04:49:05 - 00:05:16:22

They are targeting. That country just suffers fewer exports and a weaker economy. Now, to the extent countries are retaliating in part, of course, there are some inflation implications for them as well, but not as much. And I think perhaps less than was commonly imagined. Going into this, I can equally say, and again, looking at the rest of the world, not focusing just on the US, or for that matter, Canada, most countries around the world are actually not that reliant on US exports, and so they will not be hit that hard in our opinion.

00:05:16:22 - 00:05:35:04

And indeed in particular, as the US steps back from prior international responsibilities, there are opportunities for China. There are opportunities for Europe as well to take advantage of. And indeed, we are still getting bits and pieces of rate cutting underway. I don't think we're going to see a lot of it this year, but there is scope for some further monetary easing.

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And then just lastly, on the interesting side of things, certainly worth continuing to flag this changing world order that we are witnessing right now. And we'll talk a bit about that. We'll talk a bit about rising patriotism. In fact, we'll do it specifically in a Canadian context right at the end of this presentation. And I should acknowledge, because there aren't any slides to this effect.

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Over the next little while, the Canadian election has been settled. The election was on Monday, May 28th. It did yield a Liberal minority victory. Prime Minister Carney remains prime minister. And as we look at the policy mix there, it does seem to us that there are some growth friendly elements from some minor tax cuts and some, perhaps enhancements that make it a little bit easier to engage in resource projects and perhaps some additional infrastructure as well.

00:06:17:26 - 00:06:35:11

Overall, likely a bigger deficit or a smaller deficit in terms of the the fiscal impulse there as well. And so probably not a bad policy mix in terms of unleashing some growth. Over the coming years, though, for the moment, of course, for Canada, the dominant concern is tariffs. And part of that can be determined by decisions from the Prime Minister's office.

00:06:35:11 - 00:06:51:03

But of course, so much of that comes out of the white House as well. And so it's not entirely in Canada's hands. Okay. Let's jump forward and really into the picture show here. And so just to revisit many of those themes I just flagged, but this time with a bit more meat on the bone, so here's global trade policy uncertainty.

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And you can see we rose to unparalleled heights in recent months. We have never seen this level of trade uncertainty. And it is now down. It is down, notably, as we've seen, some greater clarity on the sorts of tariffs that were planned in early April, some greater clarity that the US white House isn't going to push for the maximalist tariff in every scenario, that it does have some sympathy for sectors that are being hurt and so on.

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And so the uncertainty is down. It is still very high, though. And I would say to me, the main takeaway beyond it's hard to predict the future, is that for businesses and households, it's probably not or still rather not a time to engage in a lot of CapEx spending and big ticket purchases and home buying and car buying and so on.

00:07:31:14 - 00:07:49:08

So probably still some softness from the uncertainty itself. Just a look at the stock market. And so the stock market of course didn't much like tariffs and so retreated rather significantly. It has staged a partial recovery for some of the reasons I've mentioned, which is just looks like we won't get the biggest and worst tariffs forever. Market is still down.

00:07:49:08 - 00:08:08:03

And of course, we can't say with certainty that that was the low that we previously saw. So there is still some weakness. It does make sense that there's weakness because the economy is significantly challenged, even as we see some tariffs lightened a little bit. Let's not forget that the actual economic damage and the damage to corporate earnings is going to become more visible over time.

00:08:08:06 - 00:08:24:16

And so over time, in a way that could yet create additional headwinds for the stock market in the in the short run. So that that very much is a risk for now. In terms of the tariffs, state of affairs, I'd maybe lump this into three different categories. The first one would just be, let's recognize there are still significant tariffs in place.

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So there's a 10% baseline reciprocal tariff that most of the world is paying really ex Canada and Mexico. China of course has been hammered by tariffs repeatedly. That tariff rate is conservatively over 100%. In fact you can argue it goes up as much as 245%. And with a significant number of products at about 145%. But I'll tell you what the average effective rate is in a moment.

00:08:47:29 - 00:09:11:28

And then sector tariffs. And so we have now seen steel tariffs, aluminum tariffs, auto sector tariffs all applied. And we've seen some retaliation by China by Canada and a handful of other countries. So there are real tariffs in place. Those will do damage. That's point number one. Big red x beside it. Point two though is the more constructive thought, which is just that the recent direction of travel on tariffs has been toward maybe slightly lower tariffs and slightly more exemptions.

00:09:11:28 - 00:09:30:17

And so we had that delay, the 90 day delay on reciprocal tariffs. We had electronic products and a few other product areas exempted for Chinese products from US tariffs. And so the iPhone gets to come in and not be $3,000. Just as an example, certain exemptions from auto tariffs are being, have just been announced, in fact.

00:09:30:17 - 00:09:54:05

And so lessons I would say slightly the blow really about avoiding double counting and not having a steel tariff and then also tariff the car that has steel in it, but still tariffs in that space. And then similarly at least talk of striking a deal with China, China seems a bit more reluctant to engage. But nevertheless, the US has shown that it would like to avoid, this level of economic pain persisting, indefinitely.

00:09:54:07 - 00:10:08:24

And then just of course. And here's back to the X. And so I guess and website you a little bit let's recognize obviously, as much as the direction of travel is lighter and that's a really important thing. There is still pain ahead. And so, you know, the 90 day delay on reciprocal tariffs expires in early July.

00:10:08:26 - 00:10:29:02

Perhaps they'll be deal struck. It is a lot of deals to try and strike in a fairly short period of time. And so I think the risk is we could see some of those tariffs resume. Usmca renegotiations are pending. And so that will be a challenging time for North America with the risk of additional tariffs on the likes of Canada, or at least the threat there in as a a negotiating tactic from the US.

00:10:29:04 - 00:10:49:02

Further sector tariffs arguably more than arguably indeed explicitly plan. And so auto parts are coming on literally within a couple of days as I record this. I'm reporting this on May 1st, by the way. Copper tariffs, forestry computer chips, pharmaceuticals, all planned to varying degrees as well. Us de minimis exemption ends on May 2nd.

00:10:49:02 - 00:11:11:06

That is tomorrow to me. But probably yesterday at best to you. And so, bottom line is that, Chinese products, have come across the US border in large numbers directly to consumers for cheaper products, but up to $800 per product. So not not not entirely and exclusively cheap products. And that exemption ends. And suddenly the 100% plus tariff rate will apply to those products.

00:11:11:06 - 00:11:29:17

And that will be a very real moment, for the American consumer. And then, of course, fundamentally, the US still has a lot of grievances, about other countries. It wants its own trade deficit smaller. It wants other countries to do more. And so I wouldn't assume this is the last of the tariff talk. And of course, we know that tariff economic pain does arrive with a lag.

00:11:29:17 - 00:11:45:28

And so, you know, we really haven't seen that much of it yet, but we will see more of it over time. Okay. So this is a chart we've used before. But we have we have tweaked it and I would say enhanced it. And so this is a chart that shows two things. The dark blue bars are the really the trade orientation of each country toward the US.

00:11:45:28 - 00:12:07:28

What fraction of their economic output is consumed by American. So that is the Vietnam Mexico Canada show. They've got the biggest three. Amazingly, the Vietnam numbers, just every time we update this go higher and higher and higher. It's now number one beyond Mexico even, but significant exposure there. Non-trivial exposure in Taiwan, Malaysia, Thailand, South Korea and then, significantly less if you look beyond that.

00:12:07:28 - 00:12:26:16

And that's further to our thought that for a lot of countries, they're not that affected by U.S tariffs. The other metric here, those little gold dashes, that is the average effective tariff rate the US is charging on each country, right now. So not the reciprocal tariff threat. We had a chart that looked at that at one point.

00:12:26:16 - 00:12:40:01

And that's not what this is. This is the current average effective rate. So you can look at China there and it's right off the top. In fact, we had to revisit the scale to make that work. 104% is the average tariff. And so the way to think about that is you got a few things that are 245%.

00:12:40:08 - 00:12:57:11

You have a bunch of things that are 145%, but actually there are small number of things that are at 0% right now, certain sector exemptions that exist. And so it averages to 104%, for other countries, the numbers are generally smaller. We're talking about numbers sort of in the five to to 10 or 15 or 20% range.

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But nevertheless, you know, real hit there. And so, for Canada, if you're wondering, the number is between 4 and 5%, the average effective tariff rate right now, for Mexico, it's up in the teens, the low teens, I should say. And so, of course, the countries that are most exposed to the countries with a big trade exposure, and, with a high tariff rate at the same time, and so that that is the next that we're looking at.

00:13:19:17 - 00:13:38:03

And so you can certainly see that, in some of the countries, including, including Thailand, perhaps particularly vulnerable Mexico, Vietnam, quite vulnerable right now as well. Those would be the some of the countries hit harder than most. And then just looking through some of the forces that are relevant to think about, in terms of, doing our forecasting.

00:13:38:03 - 00:14:00:09

Well, I think there's three buckets of considerations. The first is the up front forces. So high uncertainty is very front loaded. And, of course, a negative on activity and CapEx and so on. Demand gets front loaded to as businesses and households to a lesser extent, try to buy things before the tariffs come on. So we've seen that that's that's arguably offset the uncertainty effect and made the economy look okay.

00:14:00:11 - 00:14:18:00

You then have near-term forces. And so the first one is just the tariffs themselves, which sounds pretty obvious. But of course the tariffs do their own damage and increase the cost of things and functionally reduce real incomes and reduce productivity levels and reduce demand and so on. So I mean, that's the main channel. You can certainly say, boycotting is a consideration too.

00:14:18:01 - 00:14:33:08

We are seeing boycotts that go above and beyond the fact that a product might now be more expensive from some other country. You have dumping. I'm not convinced dumping is a big force. You'll see there's not even a color associated with it in this analysis. And so the dumping idea is, well, you know, China used to sell lots of things to the US.

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Maybe they don't get to. Maybe they're going to dump some of their products in other markets and, reduce prices and of course, outcompete local businesses. And so on. And so I think there probably is some of that I would just say, keep in mind, equally, there will be shortages, outside of the U.S of things the U.S normally provides and the prices of those products are going to go up in a way that I think provides a pretty significant offset.

00:14:54:18 - 00:15:11:21

And the same story exists. You could say, within the US, which is the US is going to have a surplus of some things, including agricultural products, and they will be perhaps selling at a loss. And, and simply trying to sell, so much product, and the prices could go down in those spaces. But of course, in other spaces where the US doesn't make enough, the price will go up.

00:15:11:21 - 00:15:31:04

So I'm not sure there's a net effect there, but it certainly is a force that will be relevant, for certain sectors, wealth effects, of course, with the stock market down, people are poorer, people spend less, monetary stimulus and fiscal stimulus are in a position to provide some limited help. So that's a near-term offset. But of course, on the net, the full set of tariff effects are negative.

00:15:31:06 - 00:15:52:02

And then lastly, just in terms of the long term effects, well, on shoring toward the U.S is one we do think there probably are going to be some extra factories that find their way into the US over the next several years, based in part on the tariff pressures. That probably is something that's real. I'm not convinced it's going to be a positive and often big enough force to offset all the negatives elsewhere, but there probably is some effect there.

00:15:52:05 - 00:16:10:08

Conversely, a loss of trust. And so, the rest of the world is losing trust in the US. And we may see bigger risk premiums and higher cost of capital in the US, and just less of a willingness to engage with the US. And that could do subtle but long term persistent economic damage to the US.

00:16:10:10 - 00:16:30:27

Okay. I'm hitting you with all sorts of information here. Lots and lots of numbers, really, that the notion behind this, this table is not that all these numbers matter or that you need to pay particularly close attention to most of them. It really just is. We've had so many twists and turns and more recently, ebb and flow of tariffs that let's not pretend we can, neatly, entirely summarize what's going to happen just into 1 or 2 scenarios.

00:16:30:27 - 00:16:53:09

There's a lot of different ways this could go. And so let's just look at the full range of conceivable outcomes. And so we just we've kind of run the simulation to say what would happen to economies and inflation and unemployment if there were no tariffs, if there were giant tariffs, if there were medium sized tariffs and the full spectrum, you can see the gold shaded areas are right now our best guess for the most likely outcome for the effective tariff rates, for different markets.

00:16:53:09 - 00:17:12:07

And you can see what we think the impact is on the economy and inflation. And so on. And so, again, of course tariffs are economically negative. So lots of negative GDP prints there. For the US focusing on that. We think that it's a palpable blow, a significant blow, something in the range of 1 to 2 percentage points and maybe closer to two percentage points lopped off economic growth.

00:17:12:12 - 00:17:32:20

That, in theory, still leaves room for a little bit of growth this year. So that's what we're budgeting for. But it is a big effect. And this is not rocket science. It's not an exact science. And so there could yet be surprises and error bars around this. Certainly more inflation in the US. You'll see when we look at other markets, a country like Canada, we assume it's a lower average tariff rate, but still quite a bit of economic damage.

00:17:32:20 - 00:17:56:09

And that's because Canada is just so trade oriented and so trade oriented toward the US. You can see that for other countries, the inflation hit is generally a little bit lighter, at least relative to the economic hit. And that's for some of the reasons I mentioned earlier, which is just that, for the rest of the world, if they're not reciprocating fully in tit for tat form with U.S. tariffs, and there's no reason to think that their inflation should go up, to the same extent.

00:17:56:11 - 00:18:11:05

Let's think about some just extra thoughts to lard on here before we, we move on. So one would just be I mean, those forecasts I just shared are our best figuring of the economic damage. But if there's a risk to that view, I would flag the risk. The damage could be a little bit bigger as opposed to a bit smaller.

00:18:11:05 - 00:18:32:14

And that's in part because uncertainty does its own damage of of an uncertain magnitude, in significant part because of assumed asymmetric effects. And so, just to explain that, you know, the really haven't been big tariffs around the world, at least for most of the world in recent decades. And so all the models are sort of built on the assumption that maybe a 20% tariff is ten times worse than a 2% tariff.

00:18:32:14 - 00:18:47:04

And because 2% tariffs are really maybe what we were dealing with in recent decades. And you got to think there's a risk that the damage is more than ten times worse when it's a 20% tariff. And what's a 2% tariff? It's annoying, but you don't really change your behavior. When it's a 20% tariff. It can render businesses unviable.

00:18:47:04 - 00:19:10:01

It can really change behavior in a way that magnifies the damage. So there could be extra damage just from that. Boycotting has an additional effect. Supply chain distortions have an additional effect. Inflation expectations aren't in a great position after the inflation shock of recent years. And so there's a risk that that, you know, an initial price increase could become embedded in expectations and could make it harder to get out of, an inflationary loop.

00:19:10:01 - 00:19:32:04

So, could be more damage than we think. That's where the risk is. I would also just remind people this is just sort of mechanical. There is no subsequent fancy rebound after a tariff unless you get rid of the tariffs. So I mention that because of course, normally when there's a negative economic shock and maybe even a recession, you then get to grow more quickly than normal in subsequent years as you catch up to where you would otherwise have been.

00:19:32:07 - 00:19:49:13

There's less catching up with tariffs. The tariff makes everyone poorer, makes the economy smaller. Certainly the economy can return to growth, but maybe returns to just to a normal rate of growth as opposed to to rebounding in a rubber ball like fashion, which is the usual experience after periods of economic hardship and then corporate earnings as well.

00:19:49:15 - 00:20:04:06

I can just say that, of course, corporate earnings more variable than GDP. And so if the economy loses 1 or 2 percentage points, well, you'll multiply that by 2 to 6 times. If you want to figure out what the effect is on corporate earnings. Normally it would be 2 to 3 times. But because of course trade is the shock here.

00:20:04:06 - 00:20:23:29

And trade is really the domain of multinational often publicly traded firms. They are affected more than the average segment of the economy. So more like 2 to 6 times, which is significant and wouldn't say in a worst case scenario. But in a in a negative scenario within the realm of the base case could completely wipe out U.S corporate earnings growth, for the year.

00:20:24:01 - 00:20:39:18

And then just a couple of other thoughts, just on a timing perspective. You know, we do think at least some of the initial economic damage has been masked by that front loading. I mentioned earlier, there are lags, in fact, about an eight week lag from a Chinese factory to a U.S. retail shelf but lags due to shipping time.

00:20:39:21 - 00:20:59:03

You need to exhaust your inventories of the cheaper goods before you maybe raise your prices. Some companies engage in fixed price contracts so their input prices don't go up immediately. And then similarly, some companies are just crossing their fingers and opting for the moment not to pass on higher prices, hoping to maintain market share, hoping to maintain customer loyalty.

00:20:59:06 - 00:21:15:26

And just hoping the tariffs go away because they can't do that indefinitely. And so if the tariffs stuck around you would see then the higher prices later. And then international effects, as I've sort of alluded to, maybe smaller much of the rest of the world isn't that exposed to U.S. demand. Rest of world inflation won't necessarily be that much higher.

00:21:15:26 - 00:21:43:23

So that's actually a bit of a more constructive thought on the inflation side than what we've shared in the past. Okay. So just a quick look. This is the the really consensus or market based, recession probability indicator. And so I just mention that because as much as there's movement in a number of directions, the tendency in the last couple of months has been for these lines to tilt a little bit higher, just recognizing that the risk of recession has gone up, to some extent, and if we look at the US side, it looks to me like it's in the realm of about a 30% risk.

00:21:43:26 - 00:22:03:25

We've been saying it's more like a 40% risk. A couple of offsets here. So one would be oil prices. And so oil prices are down. In fact, even since we put this chart together, they are down further west. Texas oil is under $60 a barrel at this point. And so I would say there are three macro type things going on that have contributed to lower oil prices recently.

00:22:03:26 - 00:22:22:29

One is just, a weaker global economy and expectation thereof. So people are pricing in just less demand for oil because the economy will be revolving at a lower rate. Part is because OPEC. So this is the oil cartel that has a significant say over the price of oil. They increase production. And they did that to seemingly punish non-compliant partner.

00:22:23:00 - 00:22:38:27

So some of the OPEC members and OPEC partners were producing more than they were supposed to. That's a way of making more money in the short term. But of course that lack of discipline was then lowering prices. OPEC is now actually increasing production. Really to drive home that point and punish those countries that have been doing that.

00:22:39:00 - 00:22:56:20

Reading between the lines, you would think that won't be a permanent condition, but that's where we are right now. And then lastly, potentially us-iran negotiations. And so that has been at least discussed. And so, I guess I'll believe that when I see it. But nevertheless, Iran could have additional oil production unleashed if there was to be some sort of accord struck there.

00:22:56:20 - 00:23:14:28

So that that is all said, oil prices lower. Implications just from an economic standpoint, one would be the economy gets to grow a little faster because lower oil means that inflation is a bit lower and costs are a bit cheaper, for the average business and household. So that's, that's a positive. Not obviously for the oil sector, but for, for just about everyone else.

00:23:15:01 - 00:23:29:15

And then incrementally lower inflation as well. And unfortunately, it still seems to us we will see a bit more inflation, not a bit less in the coming months because of tariffs. But beneath the surface, we would have had less, if oil prices were the only consideration. And then just a quick comment on the currency as well.

00:23:29:15 - 00:23:49:00

So this is a US dollar, on a trade weighted basis. And so the US dollar is down as you look on the right side, notably so. And indeed it's at the weakest level it's been at now in several years. So I would very much say that's a notable development. And of course, a weaker currency, in principle makes the US economy a bit more competitive.

00:23:49:03 - 00:24:05:07

In principle actually means tariffs could even more expensive, you know, for imported products are becoming expensive from the currency and expensive from the tariffs. And so that maybe adds particular pressure there. But to me, maybe the big takeaway is for all of the recent action, it's pretty tame in the grand scheme. And so we're really just back to the low end of a range.

00:24:05:07 - 00:24:24:19

And we had been at the high end of the recent normal range. It is still a pretty expensive dollar. We have seen several cycles historically, most obviously in the mid 80s. And then again, in the early 2000 where you had, you know, multi-year periods of a softening dollar. And we think that, the most likely outcome is a dollar that can continue to fall from here.

00:24:24:21 - 00:24:45:19

And so it will likely have some more significant effect on the economy and inflation over time. For now, though, I wouldn't want to overstate that. And I would I would simply say that it might be starting to provide a helpful, offset, at least from an economic perspective. Versus tariffs. And then just looking at the inflation side, of course, we're all on pins and needles waiting for evidence of inflation picking up.

00:24:45:19 - 00:25:02:15

And actually maybe we're getting that. So that dark blue line both for the US and Canada here. This is a daily inflation metric. And so it trawls the internet looking for real time pricing and gives us a much fresher sense of what's going on than the official monthly releases. And you can see those blue lines have been trending higher recently.

00:25:02:15 - 00:25:17:23

And in the US case, it is now the highest we've seen in well over a year. And so that is to say, when the April inflation numbers come out, we can expect, I think, to see some additional inflation. And I would think largely due to tariffs. In fact, if anything, the lower oil prices would have argued inflation should be lower.

00:25:17:26 - 00:25:33:21

The fact that it's not suggests that we may see a very real effect, from tariffs here. So we're on the cusp of starting to get a sense for that. And of course, that's an undesirable outcome. Okay. On to geopolitics here for a moment. As we've done things like this before, this is maybe a bit more carefully fleshed out than in the past.

00:25:33:21 - 00:25:54:25

And so let's acknowledge there are prior or pre existing geopolitical trends afoot. So the big one would be just shifting from a hegemonic to a multipolar world as China attained a level of economic strength and military strength over the last couple of decades. So we already were doing that prior to the last three months, some rising of international barriers over the last decade or so.

00:25:54:25 - 00:26:14:25

So it hasn't just been the US and tariffs. We've seen more, more by domestic and more industrial policies and, and this sort of thing implemented. And so, not just, President Trump doing this kind of thing, though, he is doing it at a level that we haven't seen elsewhere. And then just a gradual erosion. We'd already been seeing some erosion of the US dollar as a reserve currency.

00:26:14:25 - 00:26:39:02

It still is the reserve currency. It still will remain pretty important, I think, on that front, but it's becoming incrementally less important over time. Some of that had already started. You recall as an example that, the US, you could say, weaponized the dollar when it, put sanctions on Russia and limited Russia's access to its own currency reserves in dollars and, limited companies and banks from interacting, with Russia via the Swift payment system.

00:26:39:04 - 00:27:01:15

And so there was already some erosion of the dollar's, safe haven, status and reserve currency status. But now we have more happening. And so the U.S, of course, has prominently pulled it back from the world, from a trade perspective, from a military perspective, from a support for international organizations perspective as well. There are simultaneously and of course, largely as a result of those actions, there has been a loss of trust in the US.

00:27:01:15 - 00:27:18:05

So more antagonism, you know, from to the rest of the world by the US policy chaos in the US, overreach of the executive branch. And so there has been a loss of trust there. So the question is what happens next? What are the implications of that? The answer is, boy, there's a lot of them. So let's get our way through this.

00:27:18:05 - 00:27:40:20

So one would be of course cliques of countries form. And where we're seeing that to some extent, around different, different multi-polar powers, protectionism tends to rise. And so what do you know, we're getting tariffs and nationalism. International norms tend to be undermined. So we're seeing just the international global rules proving, less effective. And so undermined military spending tends to go up.

00:27:40:20 - 00:27:58:18

It's a more dangerous world. We're very much getting that, you tend to get a bit less growth, a bit more inflation, slightly higher risk premiums. And so I would say we are getting all of those things. And then investor outflows from the US. So the, you know, the US dollar special status erodes appetite for U.S bonds diminishes to some extent.

00:27:58:18 - 00:28:29:20

So you get higher yields or higher cost of capital there as well. So we think we're seeing bits of that, global superpowers are emboldened, whether it's geographic and with their borders or on other fronts. And so we're seeing that they will soon bump into one another. And there are opportunities here. There's opportunities for Europe and the euro and perhaps German boons to step up and play a more central role in, in the world opportunities for China, to fill a US sized hole in the world from an economic standpoint, from a leadership standpoint, from a military standpoint and so on.

00:28:29:22 - 00:28:46:23

And then just to recognize these trends tend to persist for an extended period of time. So, these are pretty important trends. And, you know, may well prove just as relevant as the effect of tariffs in the short term. You can see a bit of the loss of U.S exceptionalism here, by the way. So this is the size of the US term premium.

00:28:46:23 - 00:29:07:28

So basically how much more you, you get in return for owning, let's say, a ten year bond over a short term bond. And so historically you were paid more money to own that longer dated bond. Actually in the last ten or so years, you really weren't being paid much money, if anything, for that. And we're just getting back as you see that up arrow on the right side, just getting back to a place where the term premium is positive again.

00:29:07:28 - 00:29:24:09

And some of that is just unwinding distortions from the 20 tens. But we do think that some is, international investors maybe not wanting to stick their neck out quite as far and hold quite as many U.S assets, let alone, U.S debt, let alone U.S debt that that's termed out over the span of a decade or longer.

00:29:24:09 - 00:29:38:24

Just because, of course, there's so much that could come under the bridge between now and then. So this of course is to the US disadvantage and it will cost more to borrow as a result of that. Just one word on China, one slide, at least on China, which is, we still think China can be fairly resilient despite tariffs.

00:29:38:24 - 00:30:01:13

Obviously there are challenges therein. And this is all relative perhaps to fairly bearish expectations. But we think China will suffer only fairly limited damage. Only about 2.5% of what it makes directly is consumed by the US. Even recently, we did some work to get a broader, more expansive definition. And even that more expansive definition is maybe 3.5% of what China makes indirectly makes its way, or directly to the US.

00:30:01:15 - 00:30:17:28

And so, not not not a killer blow. China has a pretty strong bargaining position versus the US as well. China does seem to be genuinely innovating, not just copying. So that question of what happens once China, reaches the technological frontier, is it out of luck in terms of growth, or can it forge ahead?

00:30:18:02 - 00:30:36:05

It does seem to be forging ahead in the AI electric vehicle, solar panel, drone space, among others. It seems to be genuinely at the technological frontier, so that's pretty impressive. And that's good news for China. Obviously, the government has made peace with the private sector. And so that allows the private sector to be somewhat unleash, and grow more quickly.

00:30:36:05 - 00:30:50:28

There had been a pretty tight leash on that sector for a number of years. And so it is, on harness again. Consumer oriented stimulus has been delivered in a big way. That's one of the keys to the Chinese economy growing. And so they are doing some tax cuts and some other things that do encourage consumer spending.

00:30:51:00 - 00:31:07:15

And then property market stabilization. And so this is just we think we're seeing China's housing market stabilize. We think we're seeing even some home prices in the bigger tier. Markets start to rise a bit more quickly. And so bottom line isn't that China gets to grow quickly. But the bottom line is China may not be as badly off as you would think.

00:31:07:15 - 00:31:11:25

And tariffs are not necessarily the dominant force affecting China right now

00:31:12:16 - 00:31:33:21

Turning to Canada, certainly we see a significant amount of concern and concern. We think about tariffs, and the US policy. And you can see that very visibly here on the small business data. And so, small business confidence had fallen to the weakest level rather on record dating back over, at this point, 25 years, we have seen at least a small rebound.

00:31:33:21 - 00:31:59:02

And so we'll certainly take that. And that is likely because the reciprocal tariffs didn't hit Canada, directly, but it is still a very high level of pessimism. And we believe that we are seeing some actual economic weakness. And so that uncertainty effect is real, for the Canadian economy. And indeed, just jumping to this next slide, looking at your Canadian employment, we can see there was an outright drop in jobs in the month of March, a pretty significant one, the worst decline we've seen in a number of years.

00:31:59:02 - 00:32:16:03

The month before in February wasn't great. It was about flat as well. And so there's some real weakness on the employment side. I can say there's some real weakness on the GDP side as well. And so February GDP for Canada came in. It was down 0.2%. We're seeing some softness here. We're not convinced there's a recession coming.

00:32:16:03 - 00:32:27:21

But boy, there is likely to be a period of of softness. Initially on the uncertainty. And then as we see some adjustment to the tariffs and of course, the auto sector and a number of other sectors particularly adversely affected,

00:32:27:21 - 00:32:38:20

and we can also see that there is some genuine boycotting effect of Canadians visa v the US. And so this is the data showing the land travel from Canada to the US.

00:32:38:23 - 00:33:02:15

And now with two months of data showing a decline, we can say there has been a cumulative 25% decline in people visiting, the US. And of course, that does damage to the US tourism sector. There's also some damage from boycotting in a more general sense, to Canada, just in the sense that there are also boycotts on, on consumer goods and this sort of thing that Canadians buy in Canada of a US origin, but nevertheless damaging Canadian retailers and the like.

00:33:02:15 - 00:33:21:08

And indeed, one form of boycott isn't just a pivot to, some new domestically made product, but instead to sit on one's hands. And so that does damage to the economy as well. But it is mostly a US phenomenon, and it is showing up in the US numbers. And it's indeed not purely a Canadian thing. We can see this with other international travel as well.

00:33:21:10 - 00:33:49:16

And then let's pivot from there just to, to patriotism and nationalism and so on. There has been very much a surge of nationalism outside the US, and largely in response to us threats and US tariffs. And countries have perhaps been snapped awake to some extent. And that's visible maybe in particular in Canada. And so just to summarize from it, from an overview standpoint, arguably strengthens and more of a focus on Canadian culture and perhaps what makes Canada different than the US, makes the country somewhat more inward facing.

00:33:49:18 - 00:34:12:15

Maybe less internal conflict, fewer separatist inclinations and so on. And what we're seeing, of course, efforts to reduce internal trade barriers, in particular, more by Canadian inclinations, maybe even bigger sports and cultural budgets, to the extent that it's something that reflects, patriotism and nationalism as well. From an economic standpoint, I guess pursuing big projects is perhaps the most obvious implication.

00:34:12:15 - 00:34:34:22

And so stronger borders, but more military spending, a greater Arctic presence, more resource projects, more infrastructure projects of various descriptions have been articulated. Efforts to deepen ties with other non-U.S. markets and, as mentioned, efforts to reduce interprovincial barriers, as well. And then on the negative side, and just recognizing usually when we talk about nationalism, it's a bit of a dirty word.

00:34:34:24 - 00:34:56:08

It does create an us versus them mentality. And it represents something of a retreat from globalization and encourages protectionism, and so on, and does create economic inefficiencies to the extent you have countries in parallel doing things that might be better done by one country. And of course, does in theory increase the risk of international conflict as well, if countries are feeling very nationalistic.

00:34:56:08 - 00:35:16:11

And so there's some good in there, there's some not so good in there. There's some interesting in there as well. And we'll just have to take it, I think, as it comes. And so I'll conclude there and I'll just say thank you very much for your time, and I hope you found this useful and interesting. And as always, if you want more of this, you can follow along, ever more closely via ECS or LinkedIn or best of all, at RBK.

00:35:16:14 - 00:35:27:02

Com the insights tab is where most of our research, including this webcast and other videos, ultimately go. And so I'll say thank you again. I wish you well with your investing. And please tune in again next month.