00:00:05:14 - 00:01:04:01

Hello and welcome to our latest video #MacroMemo. The agenda for today is certainly to talk about tariffs and some of the tariff increases that have taken place, in particular in the month of August. We'll talk about inflation. We're starting to see in the U.S. some additional inflation from, centrally, tariffs. But there are some other forces at work as well.

We'll talk a little bit about what corporations are seeing in the economy. This is something we do once a quarter, just digging into the corporate reports and seeing what their take is on how things are going there. We'll talk a little bit about inventories and the extent to which businesses have or have not been frontloading and what that means.

We'll talk about where tariffs could go in future presidential cycles. And so what happens after Trump?

Finally, and maybe most interestingly, I’d like to think, we'll talk about the quarter century in review. We’re a quarter of the way through this century, somewhat mind-bogglingly. So we'll talk a bit about what happened in the first quarter century – and perhaps of greater relevance, what might happen in the second quarter century.

00:01:04:01 - 00:01:57:23

So that's the plan. Let's jump right in. We'll start with tariffs as we almost always do. And so just to flag, it's been a little while since we've done one of these videos, to get it out of the way. Yes, there were tariff increases on August 1st, as had been broadly expected. Indeed, they were as expected.

The average U.S. tariff rate we calculate has risen from 14% to 17%. That's a fairly high level and it does real economic damage. And as we'll talk to in a moment, it does add to inflation as well.

You could say that the countries trading with the U.S. broke into a number of different categories. One would be the countries that did manage to strike deals before that August 1st deadline. And so those would include Japan and the UK, Vietnam, Thailand, also the European Union. They got, you might argue, somewhat better deals.

Then countries that got extensions, they did not see their tariffs go up, but neither have they a deal. That would be China and Mexico.

00:01:57:23 - 00:03:17:18

Both are scheduled to revisit things before the beginning of November for Mexico, the middle of November for China.

And then you have the third category, countries that failed to secure a deal. And so those would include, of some relevance, Canada, Taiwan, India, Switzerland, Malaysia and Brazil. So suffering from somewhat higher tariffs as a result.

I should hasten to mention that for Canada, although the tariff rate is now 35%, which is quite a large number, it isn't quite as bad as it first looks just because USMCA-compliant products are exempt, and it appears the great majority of what Canada sells to the U.S. is exempt.

There is still some damage and certainly some products that are suffering at a 35% rate right now. But on the aggregate, it's not as bad as it first looks.

For Canada and I would say for Mexico, the real question is, when the USMCA deal itself is renegotiated – that's scheduled for the middle of 2026, but it could well happen before that – whether the deal largely stays intact or not, because if the deal were to fray in any significant way, then you could ultimately have a much larger fraction of Canadian and Mexican products encountering those higher tariffs going into the U.S. and that would be a pretty big problem. So that's where the focus needs to be right now.

Let’s shift from pure tariff analysis now into some of the implications therein.

00:03:17:18 - 00:04:47:22

And so we'll start just on the inflation side, so U.S. inflation. Indeed, maybe I'll even step back one small step and say we've seen some economic weakening in the U.S.: softer payroll numbers, softer Institute for Supply Management (ISM) numbers. Not universally weak. Retail sales were fine just as a counterpoint. But in general, we are seeing some economic softness. And now we are seeing more and more clearly some inflation heat as well, which is again consistent with the theory as to what tariffs should do.

June Consumer Price Index (CPI) had shown some extra inflation. July CPI, recently released, has now again done the same. So two straight months of somewhat hotter inflation. And we do see it particularly in goods inflation, in fact even more so in core goods, which makes sense. Those are the traded items, indeed highly traded products such as furniture and recreational goods are running hotter.

Appliance prices actually fell a little bit in July, but they've been running hotter in earlier months. So I'll include them in that category as well. And we do see, I would say some of the inflation broadening perhaps slightly as well. A measure of median CPI that we look at that had very smoothly been decelerating on a year over year basis, has now started to slightly accelerate again.

And our tracking of real-time inflation pressures and metrics does suggest that there could be additional inflation over the next month at least, but we think probably over the next several months, as well. The fraction of businesses planning on raising their prices has increased palpably in 2025. So we're still budgeting for more inflation.

00:04:47:22 - 00:06:15:07

I do want to emphasize it is on a much, much smaller scale than what we saw a few years ago with the giant inflation shock during the post-pandemic rebound. We're talking about maybe an extra percentage point of inflation for the U.S. this coming year. We saw, of course, eight, nine, 10% inflation a few years ago. That's a very different order of magnitude.

Nevertheless, it makes the job of the central bank somewhat more complicated, makes the average person a little bit poorer and so entirely unwelcome.

Just to add a bit of complexity here, of course, there are other inflationary forces at work. One also pushing upwards in the U.S. is just a weaker U.S. dollar. That is theoretically inflationary.

Conversely, though, probably more powerfully, I can say that U.S. shelter costs are providing a disinflationary influence. They're not falling outright, but they are rising less quickly. And there are all sorts of lags associated with that. Essentially because we've had some housing market softness in recent years, this is going to be a weak point in CPI over the next little while. And so that is providing a counterpoint, a deflationary influence.

Oil prices similarly providing a similar influence. Oil prices have been down. And of course, we've seen OPEC (Organization of Petroleum Exporting Countries) change its strategy and increase production, focusing on market share as opposed to profit maximization. We are seeing demand that's somewhat softer. And it's probably a murky mix of cyclical forces in terms of just expecting a bit of economic weakness from tariffs and the like, but also structural forces.

00:06:15:07 - 00:06:54:18

It looks like possibly Chinese demand for oil has peaked and half of the cars sold there are electric. Demand in the OECD (Organisation for Economic Co-operation and Development) has peaked long ago. In the U.S. it may be peaking right about now. And so oil prices are somewhat lower and so providing something of a helping hand from an inflation standpoint.

We still think inflation goes up somewhat over the next six months to a year. But again, it may not be to an overwhelming extent. And we think it could be very limited indeed outside of the U.S., where countries just are not retaliating very much with their own tariffs. That would be how you'd expect to see additional inflation in those markets and again, that's just not happening.

Okay. Let's talk for a moment about what corporations are seeing in the economy.

00:06:54:18 - 00:08:21:00

Speaking loosely here, compared to a quarter ago, we've seen quite a profound decline in references by companies in their quarterly reports to tariffs and trade wars and a decline in reference to pricing strategies, which would be an oblique reference, you would think, as well, to the tariffs and their consequences. Also significantly fewer references to economic slowdown and unemployment and job cuts, and fewer references to supply chains and disruptions and transportation costs, and material costs as well.

So it would appear that companies are significantly less concerned about tariffs than they were a quarter ago. That's, of course, a welcome development. It suggests that they're handling it fairly well and also just that the tariff worst case scenario has not at this point happened.

Conversely, we see companies talking more about certain other things that I would say more often than not there's a positive element to them. Tor instance, talk about AI (artificial intelligence) and machine learning is up quite a bit. References to cryptocurrency and blockchain are up a fair amount as well, references to tax policy and tax rates. Keep in mind, the U.S. did some tax cuts over the last quarter, so that’s also up fairly significantly too. And so on the whole, it seems like companies are feeling better about the economy.

They're a little bit less worried about the bad things or maybe a little bit more focused on some of the good things, like AI and like lower taxes.

Okay. Let's talk a little bit about something that we have been trying to better understand and we think maybe we finally do. And so what is that? That is front-loading.

00:08:21:00 - 00:09:42:12

The idea being that we had this big surge in U.S. imports earlier in 2025, and the theory here was that companies were front-loading. They were buying things before the tariffs hit, and maybe they'd be in a position to pass those higher tariff costs on to their customers a bit later than otherwise, because they could first work through these cheaper inventories they'd managed to accumulate.

It looks like when you dig more deeply into that, it's not quite as profound of a scheme as it first looks. And so, yes, the imports surged. However, it appears that a significant part of that was importing of gold, which had nothing to do with tariffs and was more of an investment play, an inflation fear play, and so on, but of no relevance to commercial inventories or to consumer prices.

When we actually dig right into the inventory data and we look at the inventory-to-sales ratio for manufacturers, for wholesalers, for retailers, you really don't see much of a build over 2025 to date. Maybe the slightest of increases in retail inventories, but nothing much to speak of in the other two and really not very much for retail either.

The point here is this should still be the normal process by which higher import prices or higher input prices are passed along to consumers. That is to say, these businesses are still holding a month or two of inventories each. So if you're working through wholesalers and then retailers, it’s certainly not unreasonable to think it should be 2 or 3 or even four months before an import price shows up in an output price for the consumer.

00:09:42:12 - 00:10:56:16

Nevertheless, there isn't really any reason to think that the process should be longer than normal because the inventories didn't actually build that much bigger. So we're actually starting to see that now.

The tariffs started to go up in a significant way, you might say, in March and April and May. And here we are now, getting July data and looking forward to August and September data. That's when we should start to see some of these price effects become a bit more profound.

One other tariff thought – this is a bit of a medium-term thought – which is to say that there are some questions as to what happens to tariffs in 2029 and beyond? I'm referencing 2029 because, in principle, there should be a new American president.

And of course, your modern American presidents, with the exception of President Trump, haven't generally embraced tariffs. Tariffs, in theory, hurt the economy. Tariffs have proven even today fairly unpopular with the public. And so it doesn't seem unreasonable to think that those tariffs could just go away in 2029. And so that's a possibility that we should be aware of.

I would just flag I'm not sure that's the automatic guaranteed outcome, as much as you might think it's the logical choice. And so really for four reasons, I’m just flagging the risk that tariffs could stick around longer than that. One reason is just don't underestimate the inertia of public policy. It's much harder to change something than to leave it in place.

00:10:56:16 - 00:12:22:20

That could well create tariffs for a longer time. Maybe of greater relevance, the longer tariffs are in place, the harder it is to get rid of them. Companies that benefit from the tariffs will fight to keep them. Some companies become reliant on the tariffs, even uncompetitive globally without them. And so they need them to remain viable.

So companies will fail and sectors will be damaged, if tariffs were eliminated at a later date.

And so it will be hard to do, likely. There will be lobbying efforts against that.

Another factor is governments may become reliant on the revenue generated by tariffs –

tariffs generating, conservatively, an extra $200 billion a year of revenue. When you fast

forward a number of years, there’s probably still a fairly large deficit in the U.S. and

probably fairly large debt as well. It may be hard to give up a couple hundred billion

dollars of revenue, even if there's economic damage being done.

And maybe the fourth reason is just if the next president after Trump were to be

Republican, it might be hard to undo President Trump's Keystone initiative. If the next

president is Democrat, well, they have not exactly been overly pro free trade in the last 15

years or so.

Note that President Biden left the Trump tariffs on China in place. He also didn't appoint judges to the World Trade Organization. And so the Democrats are not guaranteed to be the pro-free market party, were there to be a Democrat president. Again, not to say that tariffs stay, not to say they're gone, just to say it's actually quite uncertain what happens.

00:12:22:20 - 00:14:20:00

It's less clear than you might think that the tariffs go away in three and a half years. And this is critical because businesses are deciding, ‘Where does that next factory go? Does it have to be in the U.S.? Could it be in some other market?” And so they're having to gamble on this and there just isn't clarity about it.

So we need to recognize there's a pretty significant medium-term uncertainty. Okay.

And then lastly for me, though I'll be taking a bit of time: here we are at a quarter century crossroad. We are now – depending on how you define quarter century and whether you think the century started in 2000 or 2001 – and let's not get into the weeds on that.

Let's just call it 2020-24. We're done the first quarter of this century, we're starting the second quarter. Let's look back. Let's look forwards.

Looking backwards, what were the key macro themes? And so just to flag a few and a very unsatisfying rapid-fire list:

• The rise of China is certainly a big one.
• Globalization was a powerful force, even if it ebbed toward the end.
• Tech sector dominance was undeniable in terms of the most successful companies and what drove the stock market.
• Demographics started to sour and, of course, continue to today.
• The European project really lifted off. The euro wasn't a physical currency until, 2002. We saw a number of these things really begin at the turn of the century, and it survived some pretty severe speed bumps and has expanded from 11 to 20 countries and has deepened the integration as well.
• We saw a lot of private sector leveraging in the first half of the quarter century by the public sector, leveraging public sector borrowing.
• In the second half, there was a commodity supercycle in significant part because of China's rise.
• We had fairly moderate equity returns, quite limited returns in the first part of the quarter century. Quite impressive returns over the second half, but moderate on average.
• We saw falling bond yields with the exception of the most recent few years.

And of course, no shortage of punctuation marks like a financial crisis and a pandemic and a dotcom bubble and the war on terror that has since faded somewhat, and so on.  So quite a lot at that level as well.

00:14:20:00 - 00:15:34:03

So, I guess having thought of that, what might come ahead? It's very difficult to say what kind of punctuation marks might happen. But in terms of persistent themes:

• China, in terms of China continuing to rise, butting heads with the U.S., competing with the U.S.
• It is now a multipolar world.
• It would appear we are pivoting from a rule-based global order to a power-based global order. So the world's most powerful countries may bully those that are somewhat less powerful.
• The middle class globally continues to rise.
• As additional emerging market countries reach a certain level of income.
• Demographic challenges intensify.
• The tech sector likely remains key here as a driver of growth and innovation, with AI specifically potentially a very central theme, maybe the central theme of the next quarter century.
• Climate change relevance rising here as the consequences grow and the ability to reverse it fades as well.
• S. exceptionalism diminishing somewhat, we think, both in an economic sense, but also, in a more general sense. So maybe the dollar becoming a bit less central and the U.S. Treasury market becoming a little bit less central over time, though certainly very important both, we suspect, for the foreseeable future.
• Oil demand likely peaks globally between 2029 and 2034. That's getting to be fairly soon.
• Rise of India and rise of Southeast Asia as the next big, populated, fast growing markets that could make waves.
• Faster productivity growth, we think, on the basis of tech and healthcare innovation, and AI and so on. We're quite optimistic on that as a partial offset to challenging demographics.
• From a market perspective, maybe slower but still moderate stock market gains, maybe moderate bond yields, but perhaps a steeper yield curve given some of the risk premium that now seems to be appropriate in many markets.

And so a big long list, interesting to think about. We'll see where we go. We'll check in 25 years from now and see how well that prediction went.

In the meantime, I hope you found some value in this. Thanks so much for your time, and please tune in again next time.