There is an absolutely massive amount of interest rate relief, monetary stimulus, and special programs that are still at work in the economy, not just locally, but around the world. And these will still be alive through the rest of 2021 and into 2022, even as the pandemic sort of breathes finally to a close.

So growth conditions in the next 18 months look absolutely terrific. If you look at the government finances, the things that funded that relief, they’ve been damaged, and there will be longer-term consequences for that.

But in the near term, much more important is the health of the consumer. So you have balance sheets that are in reasonably good shape; net worth in the United States, which is actually at an all-time high despite the difficulties of the last year. You have the ability to carry debt as a result of rather low debt levels and very, very low interest rates, and in better condition than it’s been since Ronald Reagan was president.

Then you add to that the massive amounts of pent-up demand that we all feel. And I think we’re going to see growth rates in the range of 6% in Canada, a GDP growth. Real growth in the United States 6.5% this year. And then even next year, as you start to normalize, put distance of the pandemic behind and relieve some of that pent-up demand, still 4%-or-so growth.

In fact, when you add inflation to that, you come up with nominal growth rates in the economy that are at levels that most of us have never seen. We’re talking about nominal growth rates 8%, 9%, even a bit above for brief periods over the next 12 months. Very interesting conditions lie ahead.

As solid as the economic outlook appears to be, there are threats, of course, that we need to consider. And we’re nearing the end of this pandemic, but there is the threat of a fourth wave, and the transmission rates of some of these variants are quite concerning.

We’re assuming in our forecast that this naturally winds down as the percentage of the population that’s vaccinated rises. And we need to keep an eye on that, obviously. There are other, more traditional geopolitical pressures. The Middle East again is a hot spot concerning investors. The tensions between China and the United States didn’t pass with the change of the administration. Even Canada-U.S. relations are a bit tense with protectionism, which also transferred from one president to another.

So we’re not without potholes ahead of us but, by and large, they appear manageable, and we continue to look for very, very strong growth conditions out over the next 12 to 18 months.

Inflation hasn’t been a particular concern for economists or investors for almost decades now. It’s come down since the early 1980s and the advent of monetary discipline. But we’re seeing right now probably the most important inflationary spike that we’ve seen since 1980 to ‘85.

Right now, as I speak, the inflation reports are punching up through 4%, 4.5%. Now there’s reasons for this and, very importantly, there’s reasons for this not being sustainable. The supply chain bottlenecks, there’s base comparisons that are quite weak. Because of course, right now, we’re comparing on a year-on-year basis to a period that we were deep in lockdowns in most of the world.

In fact, I was speaking to our economist, Eric Lascelles, only this morning who said that the really early indicators of future inflation may well be peaking in here, but this is clearly a very important threat that we need to monitor on an almost-daily basis.

What we need to worry about as investors and what central bankers have to worry about isn’t so much the reported level of inflation – it’s inflationary expectations. Because to the extent that rising inflation gets embedded in expectations, it becomes a problem as we all build them into our demands for returns, for compensation, et cetera, and it becomes a self-perpetuating issue as it did in the ‘70s and ‘80s.

We’re not there yet. When we look at market-based indicators of inflation expectations, they’re elevated, but they’re still reasonably well anchored towards the 2% level. These are incredibly important to investors. If we get this wrong, and if central bankers wait too late to raise interest rates and tamp down inflationary pressures, interest rates will rise and stock prices will fall, as valuations under stocks don’t accommodate much higher than current levels of interest rates. This is an important element that must be followed very closely by investors.

Although we’re quite positive on the outlook for the economy over the next year to 18 months, we don’t really see a need for short-term interest rates to rise all that much. And it’s possible that they won’t begin to rise until fairly late in that horizon.

The economy is still in need of support as we leave the pandemic behind. We know that central bankers are committed to making sure that it has solid traction before they remove some of that support. And in fact, before they get to raising interest rates, they’d want to start winding down quantitative easing programs. So there’s a lot of time between now and then.

So we’d look for essentially flat rates at the short end, anchored right where they are into the year-end of 2022 and maybe even into early 2023. And you move further out the curve—and as we speak, we’re closer to 1.5% on a U.S. T-bond being the world’s most important 10-year interest rate, as it sets the trend for all others—we think it’ll peak out at most at around 1.75%. And if we’re wrong, not that much above that over the coming year.

Much of the acute interest-rate risk that we were concerned about earlier in 2021 has been removed from the lift in interest rates that we saw in the first three or four months of the year. And there are longer-term structural forces that should contain long-term interest rates at not too far above current levels going forward.

So as you get later into this cycle, aging demographics, a preference for higher savings rates, all these things take away from global nominal GDP growth, suggest that real rates of interest after inflation rates of interest won’t rise much above 0% to 1%, probably holding long bond yields at below an ultimate target peak of 3%, 3.5%. Expect to earn your low single-digit returns on sovereign bonds over the next 12 months. And I don’t think you’re going to earn much more than that on a coupon for a long, long time.

Many commentators have been concerned about the level of valuations in global equity markets, and the U.S. equity market in particular. I mean, that concern is reasonable. U.S. equity market is almost 30 times trailing-12-months earnings.

On the other hand, I don’t think that price-earnings ratios are going to settle back to levels any of us are going to be comfortable with. And secondly, we’re on the cusp of very, very strong earnings reports.

To deal with the earnings first and the kind of economy that we see forecast, we think that you could move up to very strong revenue gains, you could move margins from 8% to 10% in the United States. You could take earnings from probably $200, $210 at year-end up to, I don’t know, $250 even, slightly above, at year-end 2022. You attach a multiple of even 20 times earnings, which is slightly higher than normal but consistent with a lack of great alternatives in the fixed income market, and return to more reasonable levels of inflation and stable interest rates, and you’ve got returns in the high single-digits in Canada, mid-single-digits in the United States, and high single-digits outside of North America.

We’ve maintained very high equity weightings in our asset mix really throughout the period. And we have been reluctant to reduce these, despite the level of valuations, because we think the market is simply looking forward to very strong earnings growth which we think will be delivered.