Hello, and welcome to our latest video #MacroMemo. As always, plenty to cover off. We're going to start with the Federal Reserve, both in the context of where monetary policy might go in 2026, who the next Fed chair might be, and some recent criminal allegations against the current Fed chair and what that all means.

We'll talk certainly about Venezuela. There has been a former regime change recently with potential implications for the price of oil globally.

We'll talk about China in a fairly long-term context in terms of its technological efforts and aspirations and where it's been going there, and the extent to which that's quite positive.

And then we'll cover off a couple of smaller things. One of those smaller things, it just doesn't sound too small as I say it, is the artificial intelligence CapEx outlook for 2026. Just a few little thoughts from us on that. And then similarly, where tariffs are landing and who was ultimately absorbing that blow within the U.S.

So that's the plan. Let's just scroll back to the top and we'll start with the U.S. Federal Reserve.

Just briefly to flag from a monetary policy stance: right now you've got about one cut priced in for the first half of 2026. You've got about one cut priced in for the second half of 2026. I don't think that's too far from a reasonable assumption, though I would say, as we have a new Fed chair coming in May, I might pick slightly more cutting than that (as opposed to less) because they are expected to be fairly dovish.

Similarly, hot off the presses as I'm recording this, we got a fairly tame U.S. inflation report that might allow a bit more cutting as well.

Let's pivot within the Fed subject to the next Fed chair. And so on that front, theoretically we should learn the nominee quite soon. It may be a mid-January sort of thing, it's unlikely to be much beyond February.

As it stands right now, you have two leading candidates according to betting markets. One is Kevin Hassett, 42% chance. One is Kevin Warsh, 38% chance. And there are a few other candidates at a fairly low probability.

Hassett is the slight favourite as those numbers would suggest. We think he would be the most dovish, perhaps the most politicized as well, as he would talk about lower short-term rates consistent with more rate cutting. Maybe, though, higher long-term rates or at a minimum, a steeper yield curve, just as there would be maybe some concern about that politicization about inflation later and that sort of thing.

Kevin Warsh had previously been a Fed governor, probably a little bit less politicized, probably a little bit less cutting, though still fairly dovish. And so ultimately, not quite as much of a steepening yield curve.

A few other candidates, perhaps more traditionally conventional. But I think it actually is fair to say that all are reasonably qualified and none would be overly problematic, though, certainly still with some implications for the bond market and the yield curve as well. We will learn more about this possibly very soon indeed.

The third Fed item, and the last Fed item, is just that there have now been criminal charges laid against Chair Powell on the basis of a construction project for the Fed. It may be backfiring, is maybe the angle that I would take on this, from four perspectives. One is simply that Fed Chair Powell is no longer sort of passively taking White House criticism, he is now striking back.

Number two is that Powell may be less likely to resign in May, so he'll cease to be the Chair in May - that's clear. However, he has a number of additional years in his governorship position, which is sort of beneath that. And traditionally Fed Chairs do resign, which gives the president another spot to appoint someone to. Powell may opt to stick around if he's concerned about the politicization of the Fed, and that would limit Trump's ability to get the majority of Fed governors.

I can say that there are fresh market concerns about the possible politicization of the Fed, given these latest charges. That's bad for markets; that could be bad for inflation. It’s certainly not what the White House desires.

And then the fourth item is just that there are now some Republicans in Congress saying that they are considering holding up any Fed nominations, including the Fed Chair nomination, until these accusations against the current Chair are resolved. This makes it harder for Trump to get his nominee approved, and harder to get that going somewhat sooner.

Perhaps the takeaway from all of that is maybe the White House will back off a little bit. It wouldn't surprise me if that was ultimately the case.

Let's move from there to Venezuela. And so, the U.S. of course has removed President Maduro, the president of Venezuela, just about a week ago as I'm recording this.

The U.S. now claims to be running the country, though absent boots on the ground in a significant way. In practice, it has been more of a decapitation than a regime change, just in the sense that the same political party is, for the moment at least, nominally in charge of Venezuela. In fact, the former Vice President has now been simply appointed to president. And so we’re unclear the extent to which the U.S. is actually calling the shots, unclear to the extent to which this traditionally very far left political party will listen to what the U.S. would like it to do.

And so, we’re unclear the amount of change that we will see. More on that in a moment.

Why has the U.S. done this? Well, I think you can argue there are seven reasons.  One would just be that U.S. foreign policy is now focused on the Western Hemisphere and seems to be pivoting fairly profoundly from isolationism to interventionism. And so certainly this is an intervention.

Number two which is Venezuela has long been a problem within the Western Hemisphere with ties to China, Cuba, Russia, Iran. There have been various forms of intensifying sanctions from the U.S. on Venezuela, dating back quite a number of years.

Number three is the last two Venezuelan elections were arguably fraudulent. This government was arguably illegitimate, and so the U.S. feels perhaps more free to intervene.

Number four is that Venezuela nationalized its oil assets in the 2000s. That took possessions away from U.S. oil companies and the U.S. is getting those back.

Number five, you can argue economic mismanagement. And so, pretty incredibly, Venezuelan GDP per capita has fallen by 72% since 2013. That is atrocious. You can argue that something fairly radical needed to be done to get that economy fixed before it became even more problematic - though you can certainly say U.S. sanctions on Venezuela were a significant part of that economic problem, it should be noted.

Number six, problems have been spilling over from Venezuela to its neighbours. It’s sent 7.9 million refugees out of Venezuela and scattered across South and Central America, and even North America – and that has been problematic for the countries around Venezuela.

Number seven is just that it does seem that there has been some drug trafficking through Venezuela, perhaps from Colombia. There have been allegations that Venezuelan leadership was involved in that. Indeed, that was the premise for the capturing Maduro and the charges that have been laid against him in the U.S. right now, and so that is why the U.S. went in.

We are now seemingly in a period of instability in Venezuela. The U.S. is again not there. Will the political leadership ultimately comply with U.S. demands? Will the military go along with what the U.S. wants? Will armed civilian groups, who are a different, very strong source of power, also go along or try to undermine things?

It is notable that it's rare for U.S. military interventions to fully work and to yield economic and political stability. You look at Iraq and Afghanistan in recent decades, and you look in the 1980s at Central America, and there were ultimately failed involvements in Nicaragua, El Salvador, Guatemala and Honduras. And so we’re far from certain that the problems of Venezuela are fixed in a rapid or reliable way.

Obviously, Venezuela is central to the world from an oil perspective. It has, in fact, the world's largest proven oil reserves - astonishingly more than Saudi Arabia, and yet has only been producing about a million barrels per day of oil. It had once been producing about 3 million at the turn of the millennium.

You would think there should be some scope to grow this over time, and if the U.S. oil companies come in and so on. I would say, perhaps over the medium and long run, we will see that happen. Immediately, though, I'm not sure I'd hold my breath.

And so, we've seen the U.S. seize the shadow fleet of vessels that have been shipping Venezuelan oil. We may see less Venezuelan oil going to market (as opposed to more) in the near term, blocking China's access to the oil. Again, we may see less, not more oil.

It's not clear the extent to which oil companies genuinely want to enter Venezuela. They would need a degree of stability and security guarantees that might be difficult to achieve, especially if the U.S. doesn't want to maintain troops in Venezuela. And so it’s not clear that we will see much of a near-term benefit, and maybe even an open question from a longer-term standpoint, given the decay of infrastructure and human capital in Venezuela over the years.

I will say from a Canadian oil standpoint, there are some pretty profound negatives here. And primarily it's just that Venezuelan oil is heavy oil. Canadian oil is heavy oil. That's an unusual type. There are Gulf refineries in the U.S. that specialize in processing this.

However, Canada may be crowded out somewhat if a larger fraction of Venezuelan oil makes its way to the U.S. market as opposed to elsewhere, and so incentivizes the pursuit of other markets for Canada and pipelines and so on.

And then finally, from a geopolitical standpoint, of course, there are questions as to what the U.S. might do next from a foreign policy standpoint. The White House did levy threats against Colombia. I'm not sure much will come of that. They have leveled threats against Greenland and aspired to possess Greenland. That, I think, you need to take somewhat more seriously.

And then, of course, the backdrop to this is that now there are protests in Iran and U.S. proposals to intervene. It's not quite clear what happens there, but it certainly bodes very close watching.

Let me move from that very complicated and uncertain topic to a longer-term issue. That is China in the technological capacity.

And so China, short-term economic wise, has some challenges right now. You’ve got falling CapEx, weak housing, sluggish consumer spending - it's a challenging picture. We think, though, that the medium to long-run prospects are actually still quite good. And beneath the surface, you see, as an example, productivity growth still moving quite nicely. We think China has quite good long-term prospects.

We've talked before about a Critical Technologies Index that puts the U.S. in first place in all major categories, be it AI, computer chips, biotech, space or quantum computing. And so you can argue that's bad for China, but China is number two in all those things.

That is when you stop and think it’s pretty incredible for an emerging market, a developing country that is only about 70th in GDP per capita, to see that level of accomplishment. It suggests that we should see massive productivity gains in the future in China and we should see significant gains in productivity over a sustained period of time. This should be an engine that drives the Chinese economy for a good long time.

And when you dig further into the numbers, China does the second most economy-wide research and development in dollar terms in the world, again behind the U.S.

But it does look to be on track to surpass over the next few years.

You know, scale does matter for things like this. Both the U.S. and China have big advantages here. Big countries can just throw more money at it.

China's filing three times as many patents per year as the U.S. China is doing some pretty exciting things and in some pretty important, critical, industries.

China is the world's biggest auto exporter now by a factor of two. It's also the largest auto consumer as a country by a factor of two: 30 million units per year, plus, right now. China makes 62% of the world's electric vehicles, which may be the future of personal transportation. The quality seems to be reasonably high now and much better than five years ago.

Battery technology: China makes three-quarters of the world's lithium-ion batteries. A single company makes 35% to 40% of the world's electric vehicle batteries.

Solar panels: China dominates 86% of all solar modules produced in 2024, and the share is going up, not down.

On robotics, specifically industrial robots, China installed more than half of all the new industrial robots in 2024. It now operates 40%-45% of all the industrial robots that exist in the world today.

Certainly, you can push back and say, well, China is lagging in artificial intelligence, and that's fair. But actually, when you look at many of the performance metrics, the performance gap is shrinking and is fairly small relative to the U.S. – and China is doing it in a radically capital lighter way, not needing to spend nearly as much money.

China is lagging in computer chips. I would say less so on chip design, more on chip fabrication. So there is certainly room to progress there, and that is a failing for the moment, but they are pushing hard.

And pharmaceuticals: big advantages in approval times, lower trial costs, huge patient pools. China has really started to push, not just on generics, but on innovating, and did one-third of the world's clinical trials last year. And so, in theory, there should be a pretty impressive pipeline of drugs and medicines that come out before too long.

The conclusion here is, we think, really very positive that China is innovating in a major way. It is seemingly very near or at the technological frontier.

We think there's room for a lot of productivity gains to come and income gains to come based on what they're doing. And that should, again, keep China moving forward pretty impressively for a good long time.

Two last quick ones for me. One, is just artificial intelligence CapEx. So, we've argued the most important part of artificial intelligence is the way that it improves productivity, efficiency, and so on over the long run. But, in the meantime, CapEx, just the money companies are spending investing in their AI and building it out is pretty important to the economy as well. It's grown quite substantially in recent years, and it's been an economic driver, but the question is whether it can continue. Certainly, you can't see growth rates forever of the sort we've seen in recent years – sort of 50% plus annual growth.

We do think, though, that 2026 still has some room for some pretty strong gains: 30% plus growth. It can still be an economic driver. Forecasters have actually repeatedly underestimated the extent of this growth and have had to revise it higher. So there's an upside risk to this we think.

We think the U.S. economy, in particular, could grow a quarter to a half percentage point faster than otherwise in 2026 because of this. The fact that artificial intelligence company valuations are still rising, and the fact that the big tech players still have significant free cash flow not deployed to AI and to CapEx, suggests that the trend isn't quite over yet.

I'll finish ever so briefly just on tariffs, where tariffs are landing in the U.S. And so this is all very loose math, but we can say U.S. businesses are ultimately absorbing we think about half of the tariff hit, and that's more than expected.

Normally consumers take most of that. In fact, they take the great majority of that, but that's not the case so far. This time, consumers are only taking about 35% of the hit, and foreign manufacturers are taking about 15% of the hit right now.

From an economic standpoint you can say that's actually less painful, in the sense not that consumers matter more than businesses, but more that the elasticities involved tend to be a bit less painful for businesses getting hit by this, than by consumers.

Also note from a U.S. standpoint, foreigners are absorbing a fraction of the pain as per that 15% share, and so that helps to explain why the economic damage hasn't been quite as large as feared. We wouldn't want to underestimate the damage to businesses, and so of course as investors, we do care somewhat about that.

Also, we wouldn't want to underestimate the idea that, over time, probably a larger fraction of the tariffs do eventually accrue to the consumer. But for the moment, a significant fraction is hitting U.S. businesses and that is fairly unusual relative to prior rounds of tariffs.

Okay, I'll stop there. Thank you so much, as always, for your time. I hope you found this interesting, and I hope you found this useful. Please consider tuning in again next time. Thank you so much.