Hello and welcome to The Download. I'm your host, Dave Richardson. It is a hard working day for Canada's hardest working economist, Eric Lascelles. We've got a recent election in the US and a result there. We've got the Federal Reserve making a decision on rates this afternoon. Eric, how do you even have five or ten minutes to spend with me?

I'm actually doing two podcasts at the same time. I'm just hoping the questions align. It should work fine.

Wow. Unbelievable. I don't know how you do it.

My favorite color? Orange.

Okay. Orange. Am I looking orangey in my backdrop? I'm glad we're not on video today. But anyways, we've got the election result now, and we've done several podcasts with our different investment managers and talking about how getting some certainty around the winner is helpful in terms of the markets, at least having an idea of policy and what might happen. We've had you on over the last month, and we've talked about the differences between Harris and Trump. But now that we actually have the result, and you've seen as well, a couple of days of market activity at this point, what are you thinking about from an economic perspective post-election?

Right. All excellent questions. So to begin with, as you say, uncertainty not gone, because there are still some questions as to which of the various Trump promises and mentions even will go implemented and which won't be. We have nevertheless seen a material reduction in uncertainty. There were two very different ways the US could go, and now it's down to one way with ambiguity, but nevertheless, it's a much clearer path ahead. So that's certainly being welcomed by markets, I would say. And it's nice to get that uncertainty down a little bit, at least as a forecaster as well. So that's certainly one thought. I can say that markets are taking this outcome precisely as we thought it would. That's not always how it works. So I'll take my wins when I can get them. We were hardly unique in predicting this, but as predicted, stock market is up and bond yields are up and the US dollar is up. And we think all those things broadly square with the economic and market implications that come from a Trump presidency, and perhaps even all the more so to the extent it appears very likely — not quite certain, but very likely — that there will have been a sweep for the Republicans. They've picked up the Senate, and it looks like they've picked up the House of Representatives, we think. And so that's also consistent with those outcomes. Not to say that every bit of the Trump platform is economically positive in the sense that tariffs are set to be economically negative and to add something to inflation and less immigration is also a mathematical subtraction from GDP growth. So there are some negatives there. But that combination of deregulation and tax cuts, and maybe some oil industry unlocking as well, are certainly welcomed by markets and are something that we think can on the net, drive the US economy forward a little quicker in the short run. I should mention that, Dave, we have generally been saying that a Trump win would be, short term, loosely economically neutral. Lots of positive, lots of negatives, but ultimately roughly canceling each other out just in terms of the rate the economy would grow at over the next year or two. Because it's a republican sweep, it unlocks the potential for a bit more action. We have bumped that up a little bit just on the view that there might be a little bit more tax cutting and a little bit more reduction in regulations. There might be a little bit more animal spirits as well, just getting businesses excited, whether or not the policy environment changes that much or not. And so we do actually have a short term slightly positive. I'm not looking for a giant increase in the deficit. We don't think this is on the order of the fiscal impulses that were coming and going immediately after the pandemic by any means. And keep in mind, there are all sorts of checks and balances in the US, and the reconciliation rules will mean that with only a razor-thin senate advantage, this isn't a scenario where you can just pump trillions of dollars out the door whatsoever. But we think on the balance, it can be short term economically positive. There's plenty else going on, but maybe that's the big takeaway.

Yeah. I hate to throw you a curveball because we didn't chat about this before we started recording. But I know with the genetics that you've got, curveballs don't faze you. You've got the baseball skills in the family that we've talked about. By the way, if you don't know what I'm talking about, you should hit the «subscribe» button wherever you're downloading the podcast so that you can go back and listen to previous appearances from Eric and find out about his super talented family. His son is a great baseball player, and Eric is an athlete, too. Click on «like» or «subscribe». Give us a five-star review. Always helpful to our efforts. Eric, when you look at some of the analysis around the election — and we try to stay very apolitical here, we're just talking about the economic impact and the market impact as we talk about the election. We're not cheering one way or another or talking about some of the emotions around this particular election. But one of the arguments for people who voted for Trump was that he was President from 2017 to 2021. If we take out COVID, the first three years and a bit of his presidency, we saw very strong economic growth. We saw low inflation, low interest rates. Markets did very well. Then you look at the current administration, which Kamala Harris represented. It came out of COVID, but we have a period of higher inflation, higher gas prices, grocery prices, higher deficits. And Trump, certainly for the COVID part of his administration, added quite a bit to that as well. And so the decision was like, hey, he did it before, he'll do it again. But the economic circumstances of what he walked into in 2017 versus what he's going to walk into in January 2025 are very different. Can this policy prescription that he's talked about — which includes tariffs and tax cutting — be set up to have the same results? It's a different circumstance. Could this actually work the other way? Some of the people we've talked to say this could work the other way. Those tariffs could be really super inflationary. We haven't killed inflation or put the final nail in the coffin. You see what I'm getting at? What are your thoughts on that?

I do. Let me start by saying we have certain assumptions, and if those assumptions are proven incorrect, then we will have to pivot in terms of the implications of this presidency. We are assuming that there will not be large scale deportations of undocumented immigrants in the US. Certainly assuming less immigration and tighter immigration rules. We assumed that, by the way, as well with Harris, but just to a lesser extent. We're not assuming 12 million people are removed from the US. If that were to happen, that would radically upset the apple cart and have all sorts of implications for housing and wages and simple economic growth and everything else. We're not assuming that. We're not assuming that the entirety of the Trump tariff platform is implemented. We're not convinced the world will be hit by a 10% blanket tariff in addition a 60% hit on China. We don't expect the Fed or the Civil Service to be sharply undermined. I think we're going to see some attempts to make changes there, but I don't think it's going to be to the point of undermining the ability of the Fed to do its job. There's a risk there. I guess that's the first thought. But why don't we think those things? Well, for a number of reasons. So keep in mind, even with a Republican sweep in Congress, there are still checks and balances, and many Republican senators and representatives are not keen on that scale of disruption. And so that limits what can happen. This is a bit obscure, but I'll mention you may be familiar with the Chevron ruling. It was one of the Supreme Court rulings in the last year. And just to simplify, there's much less room for government agencies — and by extension, presidents — to interpret laws and read between the lines and say, the law says there will be no illegal immigration, and we interpret that to mean also removing people who already came, as an example. It's much harder to do that going forward, and the courts, in fact, are ultimately going to be the final judge of those sorts of efforts, and a lot of such initiatives will be caught up in the courts in a way that will limit some of these more unconventional things from being implemented. Then the other thought as well, the people who have enthusiastically — or not — surrounded Trump. You see a lot of Wall Street Titans and hedge fund types and C-suite executives across a variety of sectors. Clearly, they are of the view that the better economic policies will be implemented, and perhaps the less desirable ones will be either not implemented or implemented with some measure of restraint. I suspect they also hope to influence the decision making on those particular policies. I think there's a fair chance that they managed to succeed. I'll also just mention, when push comes to shove, it was very notable in 2017 to 2020 that Trump used the stock market as a measuring stick for his success and for the success of his policies. And so if suddenly there's an announcement that the US population is going to shrink by 12 million or that tariffs are going to increase everyone's costs by several percentage points, that would not be great for the stock market. And the stock market also wouldn't like the loss of the Fed's credibility and wouldn't like a non-functioning government, even though there's a love-hate relationship with regulations and with the government. I wouldn't say it's an iron-clad case that therefore only good policies will happen, and bad ones won't. It's not nearly that simple. But I think it's reasonable to think that some of the more exotic proposals probably won't get implemented. And the ones that will are the ones that are not necessarily the good ones. I don't particularly think tariffs are all that welcome in a growth context, but they will be restrained in a way that lends itself to the forecast that we have, which is we've got it being a mild economic positive. There could be surprises to that, but maybe the other thing to say is just it's rare that politics are the dominant driver of markets and the economy for that matter. There are other forces. I do take your point that the economic circumstances are different this time. Here we are with a bit of inflation fragility having come out of that environment and interest rates that are not low. And there's not that much room for an economy to move especially quickly without it overheating, so you don't want to just blindly add fuel to the fire. 2017 obviously was different in many regards. Rates weren't high, inflation wasn't high, but it wasn't as though the economy was in some great depression that needed to be boosted. It was also an economy running around its potential. I would say that's not a completely unfamiliar setup. You do get to the heart of it, which is, uncertainty is down. We know who won. There is still a fair amount of uncertainty, though, in terms of exactly how this does get implemented. So we're going to learn more. Things like tariffs and foreign policy can be implemented pretty quickly after January 20th, when Trump takes office. Some of those don't require legislation to implement. You don't need to woo Congress to get their backing. So we're going to learn some things fairly quickly. My suspicion is that we're going to get these things in moderation as opposed to their most extreme version.

Then what I was thinking about the difference between then and now. You had an economy, as you said, with low inflation, low interest rates, coming out of the Obama years. But there was the potential in the US economy to grow faster. And so you come in, you cut taxes, you goose the economy a little bit and it takes off. We get a little higher growth for a period. Well, now we're sitting with an extra, what, 7 or 8 billion dollars of debt. Trillion. I should be very careful with my billions, trillions of millions, but 7 or 8 trillion, you probably know the exact number of additional debt. And you're coming out of a period where you've already had an issue with inflation. You can't just go and start willy-nilly cutting taxes or running up more deficit because you're going to create some real problems longer term or even potentially short term, given where the fiscal deficit is in the US right now.

Right. It's very true. Keep in mind, when we talk about tax cuts, big part of that tax cut talk is keeping the existing tax cuts because those tax cuts expire toward the end of next year. And so a lot of the tax cut talk is just, let's keep what we have as opposed to actually cutting them further. So it's not quite as fiscally costly. It's not a new slug of stimulus. It's maintaining the current amount, if that makes sense. Do keep in mind, deregulation is, in theory, at least free. You're changing rules, you're getting rid of red tape and so on. That has an ambiguous impact, to be honest, on whether an economy overheats or not. It definitely makes it move more quickly, but it can make an economy more productive, just not to have to go through all this red tape and have to wait for approvals and things like that. And you've seen the banking sector soar, and of course, that's a particularly burdened sector from a regulatory perspective. You do then have to step back and say, well, maybe there's a risk of problems ten or twenty years down the line when somebody pushed it too far in some exotic financial instrument, and you could lay some part of the blame for the global financial crisis, maybe on deregulation from the '90s. There is a risk, but I think equally, it's fair to say that it's something that could unleash some extra productivity, to the extent that businesses just operate a bit more smoothly. But I'm with you. It's not exactly the same. Let's not look for it to be an absolute repeat. And the stakes are a little higher this time in the context of really high debt and deficits in particular, but also in terms of just wanting to make sure that inflation doesn't heat up. And we do think inflation will be a little higher under Trump. In fact, I was literally in the middle of tacking about a third of a percentage point to our 2025 CPI forecast. That's about the order of magnitude that we're thinking. So visible. And inflation might be 2.5% or a little higher as opposed to low 2%, which actually is a symbolically different number. The Fed has been busy recently, but there could be a bit less Fed rate cutting as well. I wonder whether it's been overdone, but nevertheless, market’s now thinking, okay, this thing gets down into the high 3%, but not into the low 3%, and certainly not into the high 2%. And so that might be a slight difference, too. So there are some implications despite all that. Not that we're all about the stock market, but the stock market is pretty important to investors, and it is a pretty good bellwether for the outlook in general. Stock market is still pretty enthusiastically up, and it's even the small and mid caps that are up even more, which is closer to a main street. We can say markets are voting and they're saying they think the policy mix that's on its way is more likely to be good than bad. I don't want to just blindly take that. We're active investors. Our whole goal is to beat the market, so we can't just take what the market's saying and follow it. But nevertheless, I do take some solace from that.

Yeah. So we've seen markets go. We've seen yields pop up a little bit. They seem to have settled down a little bit from the initial reaction. And then that takes us to today's decision by the Fed Reserve, and what was the decision they made, and what were some of the interesting things they said coming out of that decision?

So first of all, this is one of the lesser of the Fed decisions. No new dot plots, Dave. No new forecast to go with it. So it was just a rate decision, a communique, and a press conference. And so enough information, I suppose, in the end to talk about. We got bang on the screws as expected, that 25 basis point rate cut. So yes, they went 50 in September. They did describe it as a good start back then. They didn't want to suggest it was going to be the new normal rate of cutting, so it wasn't. We got a 25-basis point cut. No surprises at all, from that perspective. The economy continues to expand at a solid pace, I concur that that's a good description of the economy. They said the unemployment rate has moved up but remains low. I'm not sure it actually has since September, but anyhow, it's higher than it was a year ago, but it's still pretty low. They said inflation has made progress toward the 2% objective. Now, there was good news broadly all around, and again, consistent with a rate cut. The press conference did yield a little bit of an inflation concession, which is just the latest inflation report was a little higher than expected, so it wasn't a perfect one. There are still a few questions there, but on the whole, a familiar story. The Fed was, though, pretty distinctly non-committal about what happens next. They were hardly promising rate cuts for November, back in September. But nevertheless, data dependent is the way they described it. The market is taking that to heart. So the market has priced in 64% of a rate cut in December. So this is not a fully priced rate cut at the next opportunity. It's only a little bit more than a 50/50. And for a number of reasons, not really based on the Fed's statement or anything, but in part from the election, in part just from the really good growth we've seen in recent months and the broader trend, the market's now pricing just three more rate cuts by the end of 2025. It's not a lot. We're now down to 4.75%, and it just gets you into the very high 3% is how I would describe it. To me, that feels a little high. I fully get that there's a new president, and maybe inflation is a hair higher, and maybe the Fed cuts a hair less and so on. I still feel like we can be talking about mid 3%, anyhow, as opposed to high 3%. It would be my sense. I might even be bold and push a little further. I mean, it's a tricky thing because you look at the economy right now, you have to say it's looking pretty good for high 4% or 5% type policy rate up until quite recently. So you can't quite say, well, it's got to get down to 3.5% just to survive. It seems to be holding together, which is amazing. But I just keep thinking, things must have changed so much since 2019 that back then you would have said a 2% rate was neutral, and now we say it's a 4%. Has it doubled in the last five years? I mean, the pandemic distortions are mostly gone. Okay, there's some de-globalization, and there's some climate change and a few other things that tack a bit onto inflation and do a few other things. But I don't know. You could persuade me it's a high 3% instead of a low 3%. I'd have trouble getting all the way up to a 4%. The markets had such a history of overreacting over the last year and pricing in no cuts and then lots of cuts, and then very little. It's just gone back and forth so many times. I'm starting to think maybe it's pricing in a little bit too little. That's Eric's hot tip of the day, or at least Eric's thought of the day. But still some rate cutting, but with less urgency and with a bit less speed. I suspect the Fed would not be baited, by the way, into commenting on the election or even into the «what would a tax cut do?» They were just saying, we’re going to see what happens and then we'll act on it, which I think is the right attitude. But I'm sure internally, just as you and I are interested and curious exactly what gets implemented, we're going to be watching very closely to see what the new White House wants to do.

Then all of this gets me thinking about our beloved Canada and our Canadian economy, because that's where our listeners sit. You say strong US dollar. Maybe rates aren't coming down as much as we were hoping for. You got the Canadian housing market and everything going on there. What else out of this? You've got lower taxes, you got maybe a little bit more inflation, higher deficits down there. How do you rate this as we look at the Canadian economy and what happens there? How does it change our progress?

Yeah, I think on the net, this election is a negative for other economies that aren't named the United States. It's as simple as tariffs aren't great for other players, and there's an element of uncertainty. As you say, tax cuts in the US, good for the US, but they do render everybody else a little bit less competitive. That's a thought I've had, and not unique to Canada, but relevant to Canada as well. And there was some pressure, perhaps on countries to reallocate their government spending toward the military and things like that, which maybe yields less of a short-term economic payoff as much as it has its own value, particularly in a non-economic capacity. So I would say on the net, a little bit negative. There are some offsets, though. So weaker Canadian dollar, of course, helps to juice competitiveness a little bit. And I'm not personally convinced whatsoever that the Bank of Canada has to cut rates less quickly because of whatever has happened in the US. I think realistically it's probably a similar trajectory, but if you made me pick, I'd say if anything, Bank of Canada could cut a little more as opposed to less, just dealing with some of these challenges and some of this uncertainty. So I think the Bank of Canada can still cut a fair amount. That means that we can still remove some pain for Canadians with mortgages or for the housing market more generally. So I think that story persists. When I think about Canada right now, certainly first and foremost is: will Canada be hit by tariffs or more realistically, what tit-for-tat negotiations will the US impose on Canada? And will Canada wriggle out from those? Or will Canada have to make some concessions? And some of those could be economic concessions. So that's the big question. But beyond that, I mean, immigration is moving so quickly in Canada, Dave. The recent rule changes. The government now thinks the population is going to shrink over the next couple of years. And I'm not quite convinced it'll be that negative, but that's a big loss of an economic tailwind. We're all just crossing our fingers and assuming, but with a bit of wishful thinking, that productivity is going to snap back the second the immigration goes down. I think it's not unreasonable. I think it could, but it's not quite a guarantee that you get that back at the same moment. It could be a choppy 2025 for Canada. I don't think it's necessarily a recession or anything, but it could be a choppy period as we refined our productivity growth and as we adjust to the slowest population growth the country has seen — maybe akin to 2020, but other than that — going right back to World War II. There certainly are some issues there. Obviously, investors and the Canadian stock market are very tilted toward resources and banks and other things. I should say that's not particularly oriented toward the average main street business or the average economic experience. The world's banking sector is actually pretty excited about the Trump win just because the last leg of Basel III may not be implemented. Maybe banks won't have to de-leverage, and that applies to every bank in the world, more or less, including Canadian ones. And if you think the economy moves a little faster in the US, maybe that has implications for resource prices. Not to suggest, therefore, the stock market necessarily is full on celebration mode, but the economy isn't the stock market, including Canada — maybe especially in Canada. There's quite a sector divide differential between the economy and the stock market in Canada. It was notable to me that initially, at least overnight with the election, you had the US stock market rallying a couple of percentage points. You had most other regional markets up a bit, too. They've maybe tempered their enthusiasm since then, to be honest. But the idea that it's a pure negative for everybody else's market is still to be determined. A lot of big companies operate across borders and benefit from lower taxes on their US division or vice versa, their Canadian division. In the end, I guess there are a lot of moving parts.

Wow. Absolutely fascinating. You think about it, this is why this has been so much of a focus, particularly over the last three months, coming into the election. We get the result. Now, as you say, some of the uncertainty or quite a bit of the uncertainties are off the table, but there's still lots of things we don't know for sure. There are so many moving parts in terms of what will likely be a shift in policy in the US. That comes right to some of our front doors here in Canada. Eric, always great to catch up with you. Thanks for doing this. All joking aside, I know how busy you are with everything related to this election and a Fed meeting coming right after. So I really appreciate your time today.

My pleasure. I always think if I were to write down everything I just said, it would take me two days. So to do this in the span of half an hour, I'm feeling pretty good. So thanks for giving me that opportunity in that platform. And take care, everybody out there.