Hello and welcome to The Download. I'm your host, Dave Richardson, and we are joined by Canada's hardest working economist, Eric Lascelles. This is another period of time, I imagine, in your life, where you're putting in 26 hours a day. I don't know why but something's happened and there's a lot of stuff going on.

Weekend, what weekend? That’s my main view on life right now. So yeah, that's right. The tariffs keep me pretty busy in particular.

Yeah. And I'm in London right now. We're going to be quick today because I'm rushing off to catch a flight to Bakhu, Azerbaijan. Quite excited about that. But I'm getting lots of perspectives, and when we have a longer time frame, I'll share some of those perspectives from things we've picked up this week in London and as I go to other parts of the world. But we're here to listen to Eric Lascelles on Job Friday. We got both the US and Canadian jobs reports. We usually start with US, Eric, so why don't we kick it off there?

Yeah, sure. So 151,000 jobs created. This is for the month of February. A little bit below consensus. And indeed, the market is taking this a little bit negatively, and the unemployment rate did rise from 4.0 to 4.1%, though really it is just in this low 4% range, and it's been bouncing around for a while. I'm not sure this is a new trend in particular. And then revisions were minus 2,000 to prior months, which is virtually nothing. In the end, I guess slightly light. If you wanted to feel a bit worse about it, you would note that there were some distortions the prior month that maybe held back the prior month and should have boosted this one. You think about the end of the California fires and the end of some inclement weather in January. So maybe that's where the disappointment is ultimately coming from, because really, when you step back and you say, as I've said before, 100 to 200,000 jobs a month is about what you need to keep an even keel. It is technically in that range, but maybe it should have been a bit more just given earlier weakness and given the expectation for some bounce back. If you're looking for evidence of the new administration in the US in the data, it's hard to say whether it's there or not. For one, the number is not too startling in either direction, so nothing too enormous emerging from that. But federal government employment was down slightly. Now, the thinking is most of the layoffs that you would get and that have been announced will show up probably in the March data and beyond. But you did get a little bit of that, we think as well. Then I'm intrigued. I don't know if this is truly the case or not, but certainly you could postulate that you see a bit of an anticipatory tariff effect because transportation and warehousing employment was up by 18,000, which would be consistent with what we're hearing, which is a lot of companies were scrambling to bring inventory in from abroad before the tariffs would hit. Maybe that squares. Maybe the fact that leisure and hospitality employment was a little less also squares if the rest of the world is staying home and balking at Trump policies. Ultimately, I guess, slightly soft, but to me, not something that suggests a big deviation. It's part of the broader story, which is we've seen some deceleration in US economic growth in recent months, but it's still certainly growing, and there's not a serious question about that. Obviously, tariffs, if they're applied or not—and of course they have to some extent and they've been removed and round and round we go—if the tariffs end up staking in a major way, that's certainly materially growth negative for the US, though.

By the way, I went to high school with a pair of twin brothers. One was named Clement, the other Inclement. Actually, Inclement was a nicer guy. We can still have fun even if we're tight for time. I believe the last time we spoke even, and it's not that far back, I think we did a podcast about three weeks ago, and we were talking about your forecast around a potential recession in the US, down to around 15%, which is very much on the low end, and you were at the high end of most analysts. So is everything that you're starting to see happen? When I'm traveling across Canada, talking to business people, I'm talking to investment managers here in London, they're seeing how that uncertainty is just creating that little bit of stall, not quite a paralysis, but just clogging things up as people try to figure out what's going to happen. Have the odds or potential for a recession are up or you still need to see some more data before you change your view?

Yeah, I think they have. I've been asked that before and I've been saying that, yes, if we thought 15% was the US risk over the next year, maybe it's up to 25% or something. I don't think it's jumped to 50% or 80% or anything like that. I think the way I would view recent developments is going into this presidential term, we were of the view that you would, if anything, get maybe a bit more growth as opposed to a bit less. And that was that view on tax cuts and deregulation and animal spirits being these tailwinds, and they would maybe outmuscle the tariff related headwinds and the immigration-related headwinds. We'll see. It's still the early going. We shouldn't make any definitive judgment, but I would say based on what we're seeing so far and with particular relevance to the last week in a tariff context, in the last perhaps month, in a animal spirits context, we are losing a bit of momentum here. I think we need to take this tariff—I shouldn't say seriously, we always did—but it's skewing in a bigger tariff direction. Whether or not it's 25% on Canada and Mexico is hard to say given all the on and off actions recently, but I would really just say we need to recognize that the tariff threat is bigger than once assumed, and indeed, the drag from tariff is probably going to be somewhat bigger. As you say, maybe there's even an uncertainty effect that's already consequential before the tariffs are that big. Animal spirits. We saw this big boost in confidence and expectations going into the Trump presidency, and that's significantly come off. As we just revisit assumptions in a very stylized way, we end up with the thought that, well, as it stands now, you'd maybe expect growth to be a little bit weaker, all else equal, as opposed to a bit stronger on the back of the policy mix that we're getting, with room to change that view. I don't view that as being a recession call for the US. I think we're talking about less growth, and it would take pretty enormous tariffs and other problems to get the US into a proper recession. But we're certainly thinking somewhat less growth. And of course, that's just the US side. The Canadian side is, of course, much more sensitive to all of this. And if the tariff threat is much more real and much bigger than before, that's quite consequential. It's hard to say intelligent things when the rules are changing every single day. So I don't know that I can say anything too intelligent, but I would say, previously, we'd assumed you get targeted tariffs that do some damage, but it's limited. We're not assuming that giant tariffs stick around forever, but it does seem to me, whether it's steel or aluminum or reciprocal or the 25% that's back on, perhaps before too long, we do need to recognize there could be pretty honking tariffs, at least for a period of time. Even if that does prove temporary, it does serious damage. We could have a Canadian economy that's shrinking in the coming months. And so I would say our thinking about Canada in particular has changed in, unfortunately, a more negative macro direction.

Well, it is interesting, though, Eric, again, and sometimes we bump into each other in between these tapings, and this time we did. And just three weeks ago, even though the tariffs were on the table, the expectations around the tariffs were short lived, probably overblown in terms of what most people think might happen. So it's interesting to hear you today saying that this is coming in maybe a little bit above expectations. And it's certainly roiled markets without a doubt.

It really has. And just the willingness to apply large tariffs does seem to be there. Obviously, then you get this screaming from industries and some pushback and some delays. No one really knows exactly where it lands. But I would just say this is different than the first term. It does seem as though the tariff headwind is going to be bigger. I would say as well, it seems like maybe the tax cut tailwind might be smaller just because a lot of what we're talking about is continuing prior tax cuts, not really delivering new cuts in any kind of way. I guess that's of relevance more to the US. But the frustrating thing for Canada is it does seem as though there's just maybe animosity that exists that isn't maybe strictly explained by the border or strictly explained by trade balance. It puts Canada in this perverse position. Mexico can say, hey, we've reduced the flow of X or Y, and you can actually make progress toward goals and therefore avoid tariffs. It's not quite clear in some cases what Canada can actually do, which perversely means the risk of tariff sticking around is considerably higher, arguably. We've adjusted for that. Certainly an enormously wide range of possible outcomes right now. One of the reasons why our tactical asset allocation isn't that far from home, Dave, just because it's hard to sort out exactly what will happen. I'm always a little bit frustrated when I'm forced to make forecasts based on political assumptions because those are just hard to get right. It's political whim. It's even more frustrating when it's not even just one political whim, but then it's off and then it's on and you can't even get a read for what that particular view exactly is. And so we're left with an enormous amount of uncertainty. And maybe to circle back to that, then that does real damage. The uncertainty means people don't spend as much money and businesses don't invest. And some Canadian businesses are saying, well, I guess I just better put that factory in the US because whether the tariffs are here or not, I just can't take that risk. And so there is real damage that gets done along the way as well.

I guess that makes it particularly hard for you and hard for everyone who's trying to judge markets. By the way, we're going to get Stu Kedwell on again early next week, and we'll talk very specifically about global equity markets. If you want to go back, the podcast before this one is with Sarah Riopelle, and she talks about economic conditions under different assumptions of tariffs and asset mix and positioning your portfolio. Of course, Stu has been talking for many months and has not changed his view that this is a market, particularly with the new administration, that you want to dollar cost average your money. And so we'll have another repress on dollar cost averaging. But what's interesting, let's say I stripped the emotion out, I stripped any animosity or positivity that I might show to the new administration. I always want to be neutral. We don't get into politics here but if I take it policy for policy and you consider economically, okay, this is the plan. These are the things we're going to do to drive a pro-growth agenda and lower interest rates, lower inflation, make things more affordable for the middle class and in areas where people voted for Trump, and you throw the tariffs in, and if it's not just a threat, it makes it very, very difficult. And you've got DOGE, and you've got the cutting back of government, and part of it is managing the deficit. You just can't square the circle. The tariffs create a real problem for you to make that entire plan work. And we're all witnessing it live in terms of that market reaction, the way the businesses are reacting with an uncertainty. We've talked about this on the podcast many times, when human beings are uncertain and are emotional, we all react differently when we face uncertainty. But generally, people just paralyze or the fear sets in. It's not a time when you're uncertain. Let's board your head, here we go. And so it just seems strange. If you're going to make this policy mix work, what's going on right now runs counter to it, particularly a big part of it is, you're going to grow your way out of some of this deficit issue, and this is not helping.

Yeah, I agree with all of that. That's quite right, Dave. It's certainly not growth maximizing. I would say maybe the best chance that we managed to avoid enduring large tariffs is, though, that the market is expressing its discontent. I guess we didn't see much weakness in these payroll numbers, but we could well see less enthusiastic data in the coming months as a result of this uncertainty at a minimum. That could be what is prompting for instance, the delay of the Canada-Mexico tariff, or at least part of them, until the end of the month. Perhaps that will then temper some of the enthusiasm for those reciprocal tariffs that get announced on April 2nd. I'm hopeful that's the case. I'm not sure my forecasting track record is quite perfect as it's coming to tariffs, though. You can look like a genius one day and a fool the next day, and then you're back to a genius the next day. So maybe I'll be in good shape in the end. But it's just amazing how much things are moving.

No, exactly, Eric. Again, I truly sympathize with you. But whether you're keynesian or you're Art Laffer, I don't think you can piece together this policy mix and make it come out the way it's designed to come out. Again, markets will always tell you—and markets are not always right either, let's be fair—but markets will give you a view, a snapshot in time, an assessment of where we're sitting. Right now, they don't like it.

That's right. I found it fascinating. I guess people are listening, not today necessarily, but on March 6th, I thought it was particularly fascinating. That was when the tariffs were mostly lifted for Canada and Mexico, and yet the stock market was still down. That was a statement that, of course, the tariffs matter, and that's been the key concern, but just the lack of consistency of policy and the uncertainty and so on, is damaging in and of itself. And so there are some other issues. As you know, in terms of the recommended asset allocation we've been making, we have been tilting a little bit away from the US and a little bit towards some other markets. Of course, the valuation argument has been there for a long time, but now it feels as though perhaps there's another reason for at least a bit of caution in that direction just on the basis of this policy uncertainty. By the way, there are policy uncertainty metrics and the trade policy uncertainty metric, easily a record high going back decades as you might well imagine. Of course, in long term questions, too. You don't want to overstate because, of course, who knows how long this lasts? And this is a shock and awe campaign, and it may well settle down. And of course, midterm elections come along and maybe limit aspirations beyond that, as is often the case for presidents. But nevertheless, here we are in this world in which there's so much happening right now, and it's maybe tilting less favorable versus positive. There is a geopolitical element in terms of some isolationism we're seeing, and the US doesn't want to be the global policeman anymore, it would seem, and is disengaging from things like the World Health Organization and NATO and perhaps the World Trade Organization and so on. It's hard to draw a connection between all those things and what it means for GDP or what it means for the stock market. But some of the US exceptionalism is rooted in its outsized role in the world and some of the US dollar's reserve currency status and the ability to borrow cheaply and some other things. Not suggesting those things are vanishing altogether, but there's a bit of erosion happening. It'll be interesting to see how all of this plays out. But some of those US exceptional advantages that apply to markets might become a little less exceptional without, of course, fundamentally compromising the fact that the US is a source of all this innovation and entrepreneurship and does probably have the ability to still grow GDP faster than most of its peers, but maybe a little bit less than we've been used to, I would think.

We're going to check in with you a little bit more frequently, if that's okay with you, over the next few weeks as all of this plays out. I'm here in Europe. I really did want to get into a pretty significant policy change in Europe, and particularly out of Germany this week, which created a lot of jubilance in the markets here. Actually, equity markets in Europe have been, on a relative basis, fantastic—even on a real basis—for the first two months of the year. I want to dig into your thoughts on that. But unfortunately, I've got to go catch a plane. You're probably heading somewhere, too. But Eric, thanks for checking in on this report. And again, I hate to provide any certainty around forecasting, except to say that when things are uncertain, and you pointed out twice, which is, I think, really important, where your asset mix is, you're neutral, which means you got your bonds, your bonds are your insurance and your offset against the volatility in stocks, and you're waiting to see where the next really good opportunity is, a little bit away from the US. So it's exciting to be an economist right now, Eric. I'm jealous.

If you say so. I can think of some other descriptive words. But no, you're right. It is very much.

Well, when we see you on the cover of People magazine or something, then we'll know we've really hit a high mark for economists, as we've hit a high mark with uncertainty. And I vote for you for the first cover.

Well, thank you very much, Dave. Nice to talk to everybody. Bye.