Happy New Year and welcome to the download. I'm your host, Dave Richardson. I hope everyone had a lovely holiday season, and all the best to everyone in 2024. We've got a fantastic lineup of guests coming up over the next several weeks to get you all set for investing in the new year. But we thought we would start today with Canada's hardest working economist. Because it all starts with the economy, Eric, does it not? I mean, that's why you're an economist, because really nothing else matters other than what's going on in the economy, right?

A little known fact, we could be a company of one person and do just as well, I think, at investing. Yes, you're right, Dave, this is the only thing. No, I'd like to clarify. I'd like to think of it as a semi-important part of the investment decision making process. I think the average person thinks it's a bigger part than it is because a huge part is also security selection and making bets in ways that aren't purely related to the economy. And to be honest, part of it is that forecasting is hard, and so we can be really smart and have great models and do a lot of hard work, and then we're feeling good if we get it right 60% of the time. And so it's maybe less of a surefire way to wealth than some of the other strategies. But when you put them all together, that's how you minimize volatility and maximize return.

Exactly. It starts with the base case of what you think is going to happen in the economy. Everything flows off of that. You we were talking that you were a scholarship athlete in the NCAA, National Collegiate Athletic association in the US, and we were lamenting or just talking about what was happening with college football in the United States, and you had some insights in terms of your experience as a collegiate athlete. And I guess one of the things we came down to is it's good to see these kids who really are the stars of the show getting some money trickling down. And very clearly, more of the money should be trickling to you out of this firm as the key star of the whole firm, Eric. Are you starting to see that? Have you got a name, image and likeness deal that you're working on with the firm?

Working on it. Most importantly, is my boss listening to this? That's the most important part, Dave. If not, we can abandon this shtick.

I'm hoping neither of our bosses are listening. I was going to suggest the podcast host should also see some of that additional revenue as well. But since we're on to unemployment and maybe we can be a little aggressive on this front because the job market continues to be fairly resilient. We'll get to Canada. Canada is a little bit different. As we do this every month, I never track the Canadian employment numbers as closely as the US, thinking that over time they'll just kind of line up as we follow the policy. But the volatility in Canadian numbers is quite interesting as we do the reporting. But we get to the core report this morning, which is the US jobs report, and what do we see out of that, Eric? A little hot, right?

Yes. The headline number looked good. It was another month of above consensus outcomes. So 216,000 jobs created. 175,000 had been expected, for what it was worth. And that's been the approximate trend to me. Those numbers aren't that different, to be honest. But nevertheless, it was a robust month of hiring, and unemployment accordingly stayed flat at 3.7%. You might recall a couple of months ago it had been 3.8%. So, a slight improvement over the last few months. This is maybe me picking my preferences here, but I would say, as with the last several, there were some soft underbelly components and I think it is worth flagging those. One would be, we are now seemingly in an era — that's a bit of a premature statement, we've had a couple of months of this — but nevertheless negative revisions to prior months. And so we lost 71,000 jobs over the prior few months that we thought had been created and that, it turns out, weren't created. So that does color the interpretation. It's not quite the same as saying subtract 71 off 216 and what do you know, it was a moderate miss instead of a moderate beat. But it's not a totally inappropriate way of thinking about it. We sometimes talk about the household survey. This is just the other way. It’s famously volatile. You might recall last month had like a crazy, slightly unbelievable 586,000 job creation. The month before that had a similarly sized job destruction. This one was back to big time negative, and so it was minus 683,000 jobs in December. Now, I don't think anyone truly believes that was the net job loss, but there's a little bit of informational value in there. And we've now had two negatives in the last three, and this one's a big negative. So not everything was parroting the robust job creation line. And then the other thing I like to look at is aggregate hours worked; just tallying up literally all the hours that all the people put in. You would think, when there's hiring, you should have more hours being put in. But no, actually it was a minus 0.2% and that's the second decline in three months. And so it's this kind of curious situation in which there are more people working, but collectively they're putting in fewer hours. And so I guess to step back from that, I would say, again, what people tend to focus on. The payroll number was a beat, the unemployment rate was a beat, but actually maybe items number three through seven on the list of what matters were actually significant misses. And so I walk away still with this frustrating view that we think we're seeing some softness beneath the surface. It's kind of weird that we're not getting it so much in the headline number, but we do detect temporary employment still falling. It fell another month. Job openings — not in this report, but it came out not long ago — another pretty substantial step down. So there is a deceleration, but maybe not to the point of being outright weak at this exact juncture. So the debate is just: where does this end? The optimists would say, when you smoosh all these different things together, that some deceleration is good because it increases the likelihood of achieving a soft landing. We can't be adding 200,000 plus jobs indefinitely. And the pessimists say this is the first step towards a recession. And really you can't distinguish between the two right now. It's a little bit weaker. And you're debating where that weakening trend stops.

Yeah, I've got to say, Eric, I just spent the last several days in New York City, and I have been trained by folks like you over the last 30 years to wander around and observe what's going on. So you're looking at the hard data and the reports, and of course that's really what's critical. But there's that anecdotal as well. I generally do some travel over the holiday season, generally somewhere in the US. I often go to California, but this time we drove down to New York, and I don't know why, but you get a general feel of just how hot things are. The hustle and bustle there. You go out to the stores. Is everything packed? Are the bags full, people carrying around extra bags? And even here in Canada, as it was in the holiday shopping season in December, it just seems to me there's just a feel that things are ratcheting down a little bit. Not the kind of feeling you get when I would go away in 2008-2009. When you were in the midst of a fairly serious recession, you could feel it. You went to book a hotel; you went to book a restaurant. I could get into the restaurants I wanted to go to. And believe me, when I drop my name at a restaurant in New York City, that's not going to get me to the front of the list. That might actually stop me from getting a reservation, but I could get into all the restaurants I wanted to, when I wanted to. Very unusual. Just little signals like that. To me, as we've been talking about, it's pretty mixed but trending in the wrong direction.

I would say that's my general sense. And the reality is you get 1000 economic indicators and 300 still look great, 300 don't give a clear picture and 400 are looking worse. I think it's right to say we're getting a weakening trend. It's not unanimous or aggressive, but yeah, I think that's right. I'm trying to think if I have any clever anecdotes. I don't think it's quite as hard to get into restaurants in Ottawa. But anyways, I can't quite share it. I did get into them though, so my name clearly carries some excellent weight there. But that's great insight. Thanks for that, Dave. Yeah, that's the impression I get. Funnily — I don't think that's quite the right word — but strangely, I'll say that in the payroll's numbers, leisure and hospitality saw another good job gain. So we can't quite say that the restaurant industry is collapsing or anything, but nevertheless, yeah, little anecdotes like that.

No, I'd say the service felt normal. So there's enough people there and you can get in and it felt kind of normal. Again, anecdotal is worth what it's worth and that's why we bring you on to really dig into the numbers. Otherwise, we reverse to where we started and say we don't really need an economist. We just go out and put our finger in the wind and we'll feel what's going on in the economy. But in Canada — let's get back to that — the numbers are a little different. Flat on the month?

Yes, that's right. Up 100 jobs. It was up 0.1 thousand jobs. So that's a small number. That's about as close to zero as I can think of having gotten. Not the impressive headline that the US managed, and indeed the Canadian economy has broadly been softer. And indeed, I think you could say just non-US developed world economies really have not been reliably growing for a year now. You look at the quarterly GDP numbers and the job numbers, and so this is, I guess, par for the course there. It's not the sharp decline you'd expect in a recession. And that's been this curious situation of what's a recession if nobody's panicking and overreacting? Just this kind of weird malaise. Unemployment was unchanged, and so maybe that's the other angle, which is unemployment is just 5.8%. It was 5.0% at one point, so that is a significant increase. If there was a Sahm's rule applied to Canada, we'd already have passed that 0.5% threshold. That tends to signal the onset or the eventual arrival of a recession. But unemployment was unchanged. The full-time side was quite weak. 23,000 jobs lost there. That's a big deal. It was even a softer report than it looked. The private sector, though, added 11,000. I would say it was a softish report, and beneath the surface it was mixed. Again, full time down, private sector was up. Again, I must confess, being an economist can be a frustrating occupation, because you just get endless contradiction, and even if the data within one month perfectly lines up and you say that's a clear read, of course, then the next month comes out and totally blows that out of the water. You're left just looking for trends of some sort, with contradictions that always abound. The other weird part in the Canadian one this time was that the job losses were pretty much all Ontario. It was 48,000 jobs lost in Ontario, and no other provinces really had job losses to speak of. BC was up 18,000, Quebec was up 10,000. Now, of course, the more you slice the country up, the even more volatile the numbers become. And so I can't particularly think of a reason why Ontario would have had this big job loss and others wouldn't, and Ontario wasn't suffering outsized job losses over the prior several months. And so again, I put that in my skeptical file folder, and we'll see what comes the next month. But in theory, Ontario was the real loser here.

Okay, and then the other number out this morning is ISM. So let's finish off with just a quick read of that and then we'll get the crystal ball out and take a look at the new year. So what are you seeing in ISM?

First of all, of course, there are always two ISM numbers. The manufacturing number was already released and so that one was a little higher, but basically still slightly sub-50. The manufacturing sector is in theory in contraction, but not profoundly enough to pull the rest of the economy down with it, which sometimes happens. Again, you can take what you want. One little stat I've been trotting out — and go listen to my webcast, which will be out shortly. I get into this with pictures, Dave, in a superior form of this conversation. No, that's not true. But in any way, with pictures, though, which is nice. And so I think it's the 14th consecutive month in which the global PMI — so this is global manufacturing PMIs, including the US and other countries — it's the 14th consecutive month in contraction, and that's the longest we've been there in modern history. The data goes back just to the late 90s, but it's the longest consecutive months in decline. And so again, pessimists will say, if that's not a sign of things going badly, then what is? And of course, optimists will say, well, listen, if 14 months of decline can't kill the economy, then maybe we're just going to be okay. I'm not entirely sure what to make of that. I think that the best interpretation is just that manufacturing is weak and that's got to be a bad thing. And so, it remains pretty weak, though not weaker than the prior month. The services one is the one that came out literally just minutes before we started recording this. So I'm sure I have very little profound insight to say, but I can say it was a miss. It was a significant step down. So in general, the service sector has been more resilient. I can even say in the job numbers, both for the US and Canada, you do still see more service sector job creation than good side. So I would say that theme broadly holds. But the ISM services headline number fell from 52.7, which would be moderate growth, to 50.6, which would be pretty close to stagnation. So that is some genuine weakness. The employment part — so again, this is where nothing ever quite lines up and maybe we'll get some big revelation next month —, but the employment part fell from 50.7 — so it was previously signaling very modest job creation in the service sectors — to a 43.3. For those who don't know, that's a small number. That is a long way from 50. We spend vanishingly little time below 40 or above 60. It's all 40 to 60. It's mostly 45 to 55, and really mostly about 50 to 55. So that's a really weak number. Again, we will see. In theory, it's signaling there could be job weakness down the line. In practice, it’s anyone's guess. To take away from it, I think the headline or the job numbers in the US were decent, but not quite as good as they looked on the surface. The service index was actually outright weak. So we are getting a bit of weakness here, as per your anecdotal findings in New York.

Well, adding on to the anecdotal findings, as I try to piece this all together, the other thing that was remarkable about the trip, because I drove from Toronto down to New York and through New York state, Pennsylvania, New Jersey, we were driving all over the place. And by the way, don't take a car to New York City. That's my other travel tip. You're better to be walking around and taking public transit. Nevertheless, construction everywhere, massive infrastructure projects. When you're traveling around in the summer, the roads are always dug up, but these are large scale revitalizations of major infrastructure. Everywhere you went, whether you were in a small town in northeast Pennsylvania or in the heart of New York City, this government spending. And it wouldn't just be the US. The same thing in Canada and other parts of the world coming out of that rebound, out of COVID. And a lot of that money is just hitting. These trillions of dollars don't just roll out overnight. The projects are shovel ready. But sometimes the shovel starts digging slowly and it actually happens a few months down the road. Is that not the thing that's warping these stats? We've probably got better measures and better tools than we've ever had before. The numbers are mixed and all over the place. But that's what all this money has got to be disrupting and making it harder for you because it's hard to track where that money is coming from?

Yeah, the timing is an awful lot harder. That's totally fair. Construction employment in the US was up in the latest month — not that I'd want to hang my hat on one month, but that supports that. Maybe the big point is, at least at the US federal level, which isn't where all this spending is coming from, in fairness, but at least at the federal level, it is fair to concede that there really weren't big new pieces of legislation that came out in 2023. Basically, it was the Inflation Reduction act and some other things that got passed well before that, and they just exceeded all expectations in terms of the uptake and tax credits and things like this. And so the estimates were off and there ultimately was a huge amount of money spent and large deficits run. And when I think of the US run of success, particularly relative to other countries over the last year or so, a significant fraction to my eye is the fiscal picture, which is more money flooded out that door than imagined. And we're hardly close enough to Washington to nail this all down ourselves. But we lean on the Congressional Budget Office and the IMF and the OECD and other very credible forecasters to try and get a sense, and nobody quite saw that coming. By the way, they do predict some fiscal drag this year. And so that's part of the economic slowdown story we're talking about. But again, we'll see what surprises come on the actual money-out-the-door side of things. When I think about why the US has been resilient beyond the infrastructure story, some of it is just that the US is a less rate-sensitive economy, so it's been less punished. And we've done work saying, yeah, but they're still pretty rate sensitive, but clearly less so. I guess that's the main point there. And then the American consumer was just more willing to spend. And so we've seen them dip into that, into that excess savings they accumulated and spend a significant fraction of it; and other countries just haven't gone in that direction. And so as we look forward to 2024, it seems as though there's going to be a bit less fiscal support; it seems as though the consumer is maybe getting a little bit tapped out. It's still the case that they're a less rate-sensitive economy. And so we are budgeting for a material slowdown. But as we were talking about before we started recording, one pivot we've made in terms of our views is, well, first of all, it's really important to recognize there are always multiple viable scenarios here. The base case isn't the only case; it's just the one we think is most likely and most plausible. And so we've been talking a long time about recession risks, and that's been our base case. It still is. We still are looking for a mild, short recession in 2024. However, we've reduced the likelihood from 70% to 60%. So we have been pulling that down. At one point some time ago, it had been as high as an 80%, just for context. And so, just simplifying into two viable scenarios, the soft-landing alternative, which would be the economy still slowing somewhat, but just not having a recession, so kind of a happy outcome. We've been bumping that higher. So that's in the realm of a 40% chance right now. And I would still emphasize — this is just fun with math — 60 is 1.5 times higher than 40. It sounds like they're both really close to 50. There's a big enough difference, but nevertheless, that's a closer call. And if you talk about things with a 40% likelihood, those are things that can happen. And so that possibility does exist if maybe the fiscal push ends up being bigger than all the experts think for this year, if Americans refuse to stop spending, and if the Fed starts cutting rates with enthusiasm, as many are speculating in the coming quarters.

Eric, we've already started this view of 2024 and what's happening with those comments. So that's the general economy. Again, still a little more optimistic than we've been for a number of reasons; jobs and spending and what we talk about. But if we look at the year, it's going to be likely a very dramatic year from a political perspective in the US. And so, what are you expecting that to look like? Probably a pretty simple answer there. But how does that impact what you're thinking about from a forecasting perspective? I know the Federal Reserve likes to stay out of the way of elections for a lot of different reasons in terms of how they manage rates. But what's going to happen politically in the US over the coming year? Are you concerned that that could skew the way things play out?

That's a great question. And I'll say that it probably is fair to assert that the Fed maybe is a little less inclined to raise rates when national elections are rolling around. Of course, we're debating will they cut rates and how much will they cut? I suspect there are fewer limitations on them in that regard, but not enough to force them to cut more than they want to. So I suspect they can run as they think is mostly appropriate for 2024. But on the election side, let me step back and just say it's a really busy year globally. In fact, I think that the metric people have teased out that the largest fraction of the world's population were voting in a national election this year ever, which is sort of neat. And that includes places like India and certainly the US and Indonesia and South Africa and the UK and Mexico and also Taiwan, maybe consequentially, given geopolitical concerns. And the list goes on. So it is quite a list and all relevant in their various ways. But the US presidential election, of course, particularly captures the imagination. And so that's coming up in November, getting closer. I just finished putting together our first look at policy stances of the different key candidates and what some of those things might represent and imply. And so, as it stands now, it is most likely to be a Biden-vs-Trump affair. So a rerun, in a sense, of the 2020 election. If you came at this from outer space and just said, well, historically, incumbents win most of the time, and, gosh, this one guy beat this other guy last time, you'd assume that Biden had a pretty strong chance of winning this one. That's not what the polls show. They show it to be a close race. Maybe that's the most important comment. But between the polls and the betting markets and so on, they all have Trump a little bit ahead. So there is a very real chance, maybe a better than 50% chance, that Trump would beat Biden. It's not quite impossible. What we're going to start watching these republican primaries that come up as we record this; under two weeks is the first one. And so we'll see who consolidates second place support. Maybe there's a chance that establishment republicans could rally around someone who could then mount a challenge against Trump. But it is most likely Trump at this point in time. It was worth highlighting that 2016 to 2020 did fine from an economic perspective and markets were broadly happy. So I don't think it's nearly so simple as to mention the uncertainty that admittedly does come with the Trump administration. I mean, that's its own issue, and it'll just be hard to figure out what comes next. It didn't actually last time tally up into anything particularly devastating to the economy. And so it's a bit of a tricky one, trying to sort out just what the economy might prefer and just what the market might prefer. You can maybe mount an argument. The market could even be keen on a Trump presidency in the short run, to the extent he's talking corporate tax cuts, he's talking less bank regulation, things like that. It gets a bit blurry because he's also talking about tariffs, and tariffs generally aren't all that welcome from an economic or from a corporate standpoint, though some companies win if they get protected, of course, from foreign competition. The list goes on. It's a big, long list, and it's a bit early maybe to pretend we've got all the answers right now. But the bottom line, it's a consequential election. There is a fair chance of a change, but these polls and these odds are going to change a thousand times between now and November. We're a little bit ahead of the game, pretending we've got all the answers there, but that's going to matter. And just further on the US political side, don't forget that there is a risk, at least, of a government shutdown in the next month. In fact, mid to late January and then again early February, they're going to have to sort that out. Given that they did sort it out twice in the last several months, I'm going to assume they sort it out again. But there is some question mark there, too.

Yeah. And we try to stay apolitical here. It's just, here are the numbers, here's what may or may not happen, and here's how it plays out. And people tend to overplay the significance of who wins at the presidential election. There are so many things that are happening below the surface. And as you said, a lot of panic when Trump was elected in 2016, because of a lot of uncertainty, a lot of bombast, but the actual policies played out from an economic perspective anyways to create quite favorable markets. A complete different set of policies from this current administration. And things have played out again. It's been fairly good as well. You overrate those things, but you also have, of course, elections for Congress in the US. And is there any lean one way or the other there? And would that create some different issues if you have a full alignment on one side or the other?

For sure. I was just going to say that. You can have all the legislative aspirations you like, but if Congress isn't aligned, then good luck delivering that. I think recent presidents have been a little more aggressive in terms of executive orders and working within the minutiae of the existing laws. So, again, there are things that one can do, and of course, presidents do control foreign policy and various other things. I wouldn't want to suggest that presidents are toothless, but it does come down in significant part to Congress. Looks like it could be fairly close. As I've seen it, there's a fair chance it's going to remain a divided Congress. There is a real chance it could be, though, a republican sweep. And so the Republicans, more conceivably than the Democrats, could end up with both chambers. And so if it were to be a Trump plus Republicans, then you could envision maybe more action. But even that's tricky. We know not every Republican is exactly the same. And you need 60 votes in the Senate to get really big things done most of the time, and that's not something anyone's going to achieve. And so, again, there'll be compromise. I tend to view policy platforms as aspirations or even just signals to the base as to, this is the sort of thing I do in a perfect world. But in reality, only a pretty small fraction of those things happens. And further to the «presidents matter and politics matter», you look globally and for all of the blame some leaders get and all of the gratitude other leaders get, most countries are ebbing and flowing in an approximately similar fashion. And of course, some countries do play a bigger role in that outcome than others. But at the end of the day, people do tend to maybe overestimate just how relevant it is. And inherently, it's a four-year or maybe an eight-year thing, and if it was bad policy, there's room to course correct. And here we are as investors investing for the long run. And over the long run, no one president gets to dominate.

Exactly. And that's the most important point, Eric. Short term, little swing here and there. But over the long haul, it's where things go, and that's what's most important from an investment perspective. If you pick another country where there's an election happening for the listeners to watch out of interest, what country are you going to be watching most closely, other than the US?

Gee, that's a good question. Normally it'd say maybe the UK, but it looks like it's a foregone conclusion of a pivot to labor. A lot of the big elections are settled. Indonesia. People don't think about Indonesia much. It has 300 million people. It is the fourth biggest driver of global growth. It's expected to be at least over the next five years or so. We talk about China, India and the US, it's number four, and it's actually number five isn't all that close to number four. And so they are a big deal. And so they have an election. And Joko Widodo, the president, has hit a term limit. And so there's going to be a change. For all of that buildup, though, Dave, it looks like it's probably going to be the same party. And guess whose son is set to be the vice president? So it's probably going to be a continuation of the same policy, which I would say has been effective. Maybe India is one. India is the new China. It's some sort of interpretation. It's just the fast growing, now the biggest, most populous country. And so it matters quite a bit. And it does have some significant elections. And again, as it stands right now, it's probably the incumbent and there are some pros and cons to that, but I would say economically, there have been a lot of pros. And so that would be a good outcome. I guess a lot of status quo outcomes are the expectation internationally right now.

Yeah. Some of my fun holiday reading was about Indonesia, and they're moving their capital this year. So they built a planned city where they're going to be moving their capital because Jakarta is literally sinking into the ocean. And anyways, if you're interested in that kind of thing. And then I went down the wormhole of all of these other countries that have built capitals, including Washington, DC, by the way, which I hadn't really thought of from that perspective. But a planned city as a new capital. Brazilia. Anyway, so there's just some additional fun reading for you, if you like that kind of thing.

Dave, before you go, I want to say, I've only been to Indonesia one time, to Jakarta. So I guess I can't say I've been to the capital soon, but to Jakarta. And this just was totally inappropriate — how I got wrangled into this, I don't know — but I ended up on a panel at a big conference in Jakarta. My fellow panelist was the future finance minister of Indonesia. Opining on Indonesia, and I was thinking, I bet there are a few people around here who know a little bit more than I do. But anyways, that was one of the more unusual situations I found myself in. He became the finance minister. He's no longer the finance minister. It's moved on several cycles since then. But for a moment, I was an Indonesian expert as well.

There you go. So instead of Canada's hardest working economist, we'll start to introduce you as Indonesian economic expert Eric Lascelles. Any other final thoughts of what might be interesting or what you're going to be looking at as we head into this new year?

Yeah, maybe let's not forget about inflation. And so inflation is looking a whole lot better than it was. It's wonderful to be in a world of 3% or 3.5% type inflation, as opposed to the 8 and 9 and 10% that were so horrible in the middle of 2022. So that's great, but not totally settled yet. And so we'll see exactly where we end up here. We think December could be a little tricky when those numbers come out. We know that supply chain complications, particularly with relevance to the Red Sea, are getting a bit tricky. We've seen dry bulk shipping costs go up a bit again and so on. So maybe we haven't totally licked the supply chain problem. And so there could be a few complications. But for all of that, we still feel pretty good. And so particularly if you were to fall into recession, we feel quite confident inflation can settle more, and we see the breadth of inflation narrowing and so on. But you asked for things to watch, and so let's watch and make sure that we do really quell inflation because central banks and all the debates around them and when they start cutting and how aggressively, a lot of that does come down to whether inflation lets them do any of that.

Well, Eric, thanks again for your time this morning. And it'll be fun to watch this year play out. It should be a really fascinating year because we should start to get some of the final answers around some of these things that we've seemingly been talking about for the last two years together in terms of how this ultimately ends. Sort of the last final phase of the normalization of the global economy coming out of COVID. And you'll be here with us on a regular basis all year. And a great reminder that Eric has all kinds of content across social media, including the webcast that he referenced. And where's the best place to find all that stuff for you, Eric?

Gosh, I mean, if you look me up on LinkedIn. Maybe Twitter is really simple for people. You'll find links, but ultimately rbcgam.com and there's an insights tab and it's all there, plus insights from other similar thought leaders. And so maybe that's the best one of all, I would say.

Again, if you want more Eric — and I mean, who doesn't? But go and check him out in all those forms, because he goes even deeper in those formats. So, Eric, happy New Year. All the best to you and your family this year, and thanks for joining us early in this year, and we'll look forward to you throughout the year.

Thanks so much. Same to you, and same to everybody out there.