Hello and welcome to The Download. I'm your host, Dave Richardson. It is time to check in with Canada's hardest working economist, Eric Lascelles. Eric, you've already shared with me that this is arguably the busiest day of your entire life so far. And if Canada's hardest working economist, who's already having trouble working on a 24-hour clock—let alone 23 hours since you lost an hour over the weekend—how is this even possible for you to get through today if this is the hardest you've ever had to work?

The only way I can get through today, Dave, is that time does not travel backwards. It only goes forward. By definition, it will be done in 24 hours. But no, there's a lot happening, obviously. And so, of course, here we are, and it’s useful mentioning, we’re recording this on Monday, March 9th. And so, of course, all sorts of things going on in an Iranian war and oil context. But as it happens, we're trying to pump out our latest MacroMemo, and there's a few other deadlines of that sort. And obviously, important investment decisions to be made at the investment committee level when markets are moving. And so there is an awful lot going on, but there’s always a moment for you, Dave, and so I’m happy to share some thoughts.

We are very honored to get that time. By the way, he is going to cheat. He's going to fly to Vancouver like I am, and we will pick up three hours. Love it that you're pumping stuff out because we need some more stuff pumped out. And your stuff doesn't come through the straight of Hormuz. It's going to hit the market pretty much right away. But why don't we start with the disruption that we're seeing out of the military action in Iran? And we don't want to make light of this in any way. Clearly from an economic perspective, the reaction to what's happened has been significant. And I think what we've been used to, or we become used to with the current administration in the US, is that fairly broad or bold things, actions have been taken or statements have been made, and that roils the economy. Then we pull back fairly quickly before you don't have significant damage done. This one feels like there's the potential because of all of the different ways that the global economy is intertwined, that this could have a bigger impact. So just on a base level, what's concerning you the most and what are you spending your time thinking about as you put together your MacroMemo that everyone should read, by the way, and will be out. We'll tell everyone before we finish off how you can get that when it is done later today.

Right. I mean, certainly a great question, Dave. If I had a perfect answer, I would be living on a private island somewhere, I'm sure, managing my own billions of dollars. But so there's an element of uncertainty here. But I will say, first of all, and you referenced this, usually when we see geopolitical events, it's a relatively mild reaction, and it's quite short-lived, and it bounces quite quickly. And I don't think we should completely abandon that idea. But it's equally fair to acknowledge that this is towards the bigger end of the spectrum when it comes to geopolitical events. So this is, of course, war between the US and Israel and Iran, and it is of consequence to the world, primarily through the lens of energy prices. And so the availability of energy has been significantly curtailed. The strait of Hormuz is not transiting very well right now, and that is where loosely 20% of the world's fossil fuels transit. And in a world in which oil demand is quite inelastic—it takes a lot to convince you or I to stop driving our cars or stop heating our houses—and in which the supply of oil is also fairly inelastic, that's fancy economic language for you don't need a big outage of oil or natural gas to create a big swing in prices. And so here we are observing a big swing in prices. It's a bit of a moving target. We did a bunch of modeling at the start of last week and it said, well, if oil is $15 a barrel higher—and that was about what it was at the time; it's now more than that, I'm afraid to say—if oil is $15 a barrel higher, you subtract on the order of 0.2, 0.3% from various countries' GDPs, and you would add 0.3 and 0.4% to various countries' inflation prints. And so no one loves either of those developments, but it's not the end of the world, which was the main takeaway. We've since seen oil prices go a fair bit further. So it depends how you care to define that, but they're up maybe $35 a barrel or something loosely on that order. And so it's more than double. And I guess you can double some of the effects there. But equally, there are some nonlinear implications whereby maybe the pain is a bit more than double, even though the price is double what you were seeing a week ago. And so there is some real pain that results, and it's not evenly distributed. So just as it happens, a disproportionate share of the energy that goes through the strait of Hormuz is going to Asia. A disproportion share of the natural gas by pipeline is going to Europe. And so there's a certain irony that this is something initiated, you might say, by the US, but actually they suffer less than most other parties in the context of the energy price movements that are happening. Let’s throw Canada briefly into the mix. Of course, Canada is an energy powerhouse and a net energy exporter. And so most models would have you believe that it's a net positive for the Canadian economy. Now, let's appreciate there's some nuance to that. And so you've got parts of the country that don't make any energy at all and don't like it very much. And other parts that benefit, of course, hugely. So there's a great variation. Even setting that aside, you've got a consumer versus business skew. And so consumers right across the country aren't much liking paying more to fill up their cars. And so that's also an angle to consider. But on the net, if anything, maybe the Canadian economy gets to go a little quicker, but equally—and I don't think anyone's celebrating any bit of this—but stop short of popping the champagne, even from a forecasting perspective, just in the sense that, of course, also the stock market is down and there's some risk aversion and some other things that, of course, do hurt at the margin as well. So probably not too many outright winners in this situation, but ultimately, maybe some countries hurt less than others, and maybe even mathematically, a country like Canada could be slightly ahead. The US, I hesitate to say, finishes ahead, but US is a net energy exporter at this point, not on the scale of Canada as a share of GDP, but nevertheless, the models would have you believe that the US is significantly less exposed to this as well. Now, for all of that, Dave, really, the question here is, how long does it last? Maybe how bad does it get? And so it does get tricky. It's not quite a turn-the-ignition-key and the oil refining resumes and the oil production resumes and so on. It is a costly procedure to halt some of these things, and broadly they are being halted. It is a tricky thing to get them restarted as well. And so that's an open question for the future. It gets trickier the longer it lasts. And so here we are having realized now that this is at least going to be bare minimum a few weeks. It already is, you could say, a few weeks at this juncture. And so there is some real pain and there will be some lasting effect. Markets have been shifting their thinking a little bit. Going into this, we certainly thought that the odds of a strike were higher than the market thought. So I'll take the credit for that. But ultimately, like almost everyone, we thought it was going to be surgical strikes and it would look maybe not that different than it did in June of 2025, and it wouldn't necessarily metastasize to where it is right now. And so the question is, how long does this last? I don't think the strait of Hormuz is closed for the rest of my lifetime, and I'd be surprised if it was closed for a year. I think most likely we're talking about a couple of months or something like that. And so that does significantly inform the effect, because when you're crunching these numbers and you're starting to say, uh-oh, $100 oil in perpetuity is a problem. It probably isn't in perpetuity. And likely, very loosely within a couple of months, you probably see some significant easing there. It's possible it happens sooner, Dave, because all it would take would be a decision of some major party to change the equation. And we're already hearing China is the biggest importer of that energy that flows through the strait of Hormuz. It seems like, if I understand correctly, maybe they're reaching a deal on the side to let our ships go through. I mean, movements like that could significantly ease the pressure. And so it's possible that oil prices settle sooner than that. But I would just say, so long as it's not a permanent equation, we don't think it's a full-on recessionary blow to frame it through an economic lens. And from a market standpoint, obviously it is consequential. It is a concerning thing. It does require some repricing. We've seen some repricing. I would say from a technical standpoint, we're now hitting some stock market levels that are becoming a little bit more interesting. It's no statement that this is the absolute floor necessarily or anything like that. But generally speaking, one has done well to take advantage of downturns in the past. And so I would say we are at least looking with significant interest in that direction. And again, centrally premised on the idea that this is probably not $100 oil forever. This is a temporary shock. And so there's reason to think there is some opportunity for things to rebound at some point down the road. And the perpetual debate is, is this the bottom or is this not the bottom? And the good news here is that you don't need to get things exactly right. And often you can start to sleeve a little bit of money in over time in a way that can take advantage, nevertheless. But that's still in contemplation mode from our side.

And I probably should have warned the listeners to cut the speed down to half because Eric's going to squeeze in a lot in the few minutes we have with him. But yeah, I mean, if you look at futures markets, let's just hop in there on oil for a minute. Just looking at some of the futures markets this morning. You go at three months, oil's back down in the $80s. You go out five months and oil is down around $70 a barrel. These are on contracts for delivery of oil months down the road. So market is kind of expecting some pullback here in terms of the policy and a scale down of the military action in the near future. If we look at just what most people are talking about or projecting, as I listen to different analysts on different television stations and read articles, it almost seems a unanimous view. And this is based on, again, the track record of the Trump administration thus far around escalate. Escalate in terms of action or words, and then pull back and declare victory and move on. And this seems to be the almost consensus view. But when we start to talk about oil and an oil price that spiked to almost $120 a barrel overnight. Let's just go back to COVID and the Russian invasion of Ukraine, and oil spiked to about $130 a bill, just to put that in perspective. And then the one thing that we learned out of COVID was that once you put a shock into the system, and particularly as you start to talk around supply chains—in this case, we're talking very specifically around the supply chain of oil. Not just pumping oil, distributing oil, but refining. As you said, I like your term, fossil fuels, which is maybe the way to think about it, you can't just flick it on and off too quickly. We've seen markets have fallen back down to, if you've ever listened to Stu Kedwell on this podcast, we talk about technical analysis. We're at some important technical points where the market has fallen back to where you'd expect it to fall during a lot of uncertainty and a crisis where we're not exactly sure how it will play out. But let's at least acknowledge there's the potential for this to be quite a challenge. If we see a move towards unconditional surrender, which seems highly unlikely, how does this royal through? Is it possible that you get another COVID-like scenario?

Yeah, it's a good question. And so I would say, maybe to be optimist, let's start on the best-case scenario. So the best-case scenario, this is purely from an oil price, from a global stability thing, would be, of course, quick resolution, regime change in Iran, this sort of thing. And so that is seemingly an aspiration of this US Israeli effort. It doesn't seem overly likely since there appears to be reluctance for boots on the ground. And we all remember the Iraqi and the Afghani experience, and it seems maybe reasonably hard to pull off. The odds of that have gone up given the scale of the attack versus what a surgical strike might have accomplished. But equally, it can hardly be your base case scenario. The other scenario that's gone up is a political chaos scenario in Iran, in which you have different factions vying for power, and that is perhaps the least desirable of all. And so that risk is also higher. The status quo outcome in which it's still an Iranian regime that doesn't much like the West and is still sanctioned, this sort of business is probably the most likely, and we even saw the next appointed head of Iran is very much continuous with the prior leader. In fact, he’s his son.

And so just for the record, Eric, I turned the job down. I did not put my hat in the ring. I'm hoping you didn't either.

So I guess in terms of how this could be very complicated as a bad scenario and maybe even setting aside the politics, well, I mean, one would be even if you think, well, the US can take out Iran's ability to shoot missiles at ships traveling the strait of Hormuz. And so maybe there's an ability to contain that. And of course, it is the shock and awe campaign and all military installations being taken out in Iran. The twist is there was also the matter of the actual oil production refinement, and natural gas production refinement in the Gulf States and the extent to which those have been targeted, too. And so you could have the strait of Hormuz functioning, and yet you could have a very limited ability to actually produce this product. And so that is certainly a concern as well I would say. I wouldn't want to underestimate the very strong incentives all parties have to keep this thing going and to find a way for energy to get to markets. And so I wouldn't want to underestimate the ingenuity of Gulf States and others to keep themselves producing. But there is a bad scenario in which the oil prices stay high for longer because even if the strait of Hormuz were cleared, you have a very limited ability to ship. And I guess another scenario—and again, this is just focusing on downside risks—and maybe to avoid getting too optimistic in this scenario would also be, well, maybe you take out the missile capabilities of Iran. But of course, these drones are a new form of warfare and a different game altogether. And it seems like they're so cheap to produce. We've all seen the asymmetry of—I'm speaking loosely—$10,000 drone, and it costs $3 million to intercept it with a missile. And obviously, that's a losing proposition for the party that's doing the intercepting. And so there are ways this does prove quite tricky. Again, conversely, as I said—and I'm just waffling back and forth across good and bad—but speaking to the high level of uncertainty, I guess it's going on right now. As you said, White House has often declared victory and moved on with surprising speed. There certainly are talks ongoing. It is interesting that China is the most reliant on that energy and in theory, an ally of Iran. And so are there paths towards some resolution that exists there? It's possible. So there are a lot of ways it can go. As you said, the futures market, probably not too different than our thinking, which is not too many parties think this is a forever triple digit oil environment. You're quite right. You've done a better job of summarizing the situation than me, Dave. So I'm just echoing you at this point. But we did see oil that was up in the 130s or so in a Ukraine-Russia war context. So this is not a completely unfamiliar ground. And of course, it wasn't permanent then either, even though access to Russian energy was significantly curtailed and remains in some ways. So you could argue this one has a greater likelihood of being resolved with a normal flow of energy over, say, a year or something like that. And gee, there was a question you asked me that I've seemingly not gotten to. Do you remember what it was, Dave?

Well, I'm going to continue to go down the negative, and then we'll pull it back and go to some more positive scenarios. And you've been covering both sides of it, which is fantastic. Only you have the ability to do that. That's why we love having you on. But the other thing that we originally scheduled this podcast to discuss in advance—well in advance of any expectation that this military action be taken—is the jobs report that came out of the US on Friday, which was also muted. Some inflation reports that came out in the latter stages of February that suggests that inflation is still kicking around in the background, significantly above the 2% target that the Fed and other central banks would like to see inflation fall back to. So inflation is, I guess by definition, elevated, would be the term we might use. And so you start to box yourself into a corner where oil is everywhere. Oil is problematic at high prices in terms of what it does for inflation. You got a consumer that has been incredibly resilient, but at some point, there's got to be an end to just excess money to go out and spend. Prices tick around. We're expecting the Fed and other central banks to be, at the very least, not raising interest rates. This throws a wrench into a lot of the conventional thinking that's been driving markets higher over the last few months. Where do you think the threshold is in terms of where this damage is not reversible?

Right. No, it's such a great question. And so we've had, as you say, at best, mixed billing on the data recently. The way you framed it, put it a little on the negative side of the ledger. I might still stubbornly put it slightly on the positive side, but to your point, not unabashedly positive. And so payroll's numbers were soft. There was a loss in February. I think it does need to be put into the context of a big upside surprise the prior month, and in the context of a few other things. There was a strike that subtracted 31,000 jobs and a few tampering factors like that. But it's fair to say, bottom line is that job number wasn't super great, and the unemployment rate did go from 4.3 to 4.4%. And it does come on the heels of, as you said, some inflation numbers that, particularly on the core side, remain imperfect. And so here we are now potentially looking at a notable jump in inflation over the next couple of months. And so it wouldn't be a shock to see a 0.5 to a one percentage point I believe, depending on whether the higher oil sticks around, and partially a function of oil, partially natural gas, and partially some other things that trickle in. And so suddenly an imperfect situation for sure. I would still say, when I look at the labor market, I personally think the starting point isn't that bad. We're still seeing low jobless claims. We still have a normal looking unemployment rate. The latest ISM numbers were actually really good. The manufacturing and services prints. The latest Beige book, which is another real-time, forward-looking business signal for the US, actually ticked a little higher as well when we try and smush it together into one number. And so we think the starting point was pretty good and there's a degree of resilience there. But it's probably not going to be as pretty a picture for consumers in the months ahead as they recoil at higher energy prices. And given that markets are down a bit and maybe influences the stock market wealth effect and some of those other variables. And so it does look somewhat worse. And again, it comes back to if this ends up being a two- or three-week thing, that's not too bad. If it's a two- or three-month thing, which I think is probably the scenario that's best case, it's consequential and it absolutely dims 2026 somewhat. But you can equally talk about a second half re-acceleration and some normalization that takes place. If it just drags on and we check in and it's the fall and the oil prices are still triple digits, then you're certainly considerably more concerned. And I would still stop short of recession type of talk, but I would say, well, then it might be an overwhelming year from a growth standpoint. And it certainly would be a year in which inflation will be a lot higher than we would like. And so those are loosely the frameworks. And I remember your prior question, Dave. Look at me remembering things after the fact, very much unlike me. You're asking about whether we get stuck at higher inflation. And so, of course, the experience in 2020, 2021, 2022 had a lot to do with supply chains and things. And so you can argue, well, I guess that is what we're talking about with the strait of Hormuz and energy, specifically. But I guess the broader concern would be, could it bleed into other things? And so I think a little bit, as I understand it, it is now slightly more complicated to transit product through the Suez Canal as an example. And so that is a little bit of something. And the cost of ensuring shipping has now certainly gone up as much as it's very much focused on one specific part of the world. And so I have seen a few claims that, gee, this could really narrow supply chains. I'm a little skeptical. I think at this point it's fairly concentrated. And oil tankers ship oil. They're not in the business of shipping other things. And I don't know that it has to spill over in a big way elsewhere. But I guess you would say just the cost of shipping, though, should be going up as the cost of energy goes up. Ships use a lot of that. So inevitably, there are cascading implications that extend from this, and they do tilt a bit more negative than positive. But again, all it takes is a deal with China and Iran or a deal with the US and Iran. Or we're seeing the US try to insure these ships now or some variation on that. And these things can change very quickly.

Yeah. And I set it up and I purposefully went fairly negative. I preface the question by saying I'm going to go negative. The flip side of this, if we look at employment, this is something that you've explained on previous podcasts. And by the way, please follow us so that you get every one of the episodes wherever you're listening to podcasts and give us a lovely five-star review. Eric's on about every two weeks. And we have lots of other investment experts who are talking about these things and these issues as they play out. Both positively and negatively, they try to give a really neutral picture around what things are happening, how they could play out so that you can make great investment decisions. Obviously we're on YouTube as well. So if you like to look at us—which would be shocking, really, but some people do—you can subscribe to us on YouTube. But one of the things you've explained is if we look at the jobs numbers in Canada and the US, for that matter, you have populations that are not growing as fast because immigration has slowed down significantly from a year and a half, two years ago. So if population is not growing, you don't need as many jobs being created to maintain employment at the same levels. And that's what you were saying right around the jobs report in the US, that you're not seeing big numbers in terms of jobs created, but income is rising. You're looking at just different measures of manufacturing productivity. Those are higher. And so unemployment rates sticking around the same. So it's not really that awful when you put it in that context, right?

Yeah, that's right. Don't let me overstate it here. You are the pessimist. I was the optimist a moment ago. I'll flip it around here just to really throw people off. I mean, I totally agree, of course. Ultimately, you look at trend basis. The last three months—and exclude the strike, so there was a health care strike, and so that did really make these latest February numbers look worse. On a three-month basis, X strike, you're talking about 16,000 more jobs a month. If you were keeping up with the very, very limited US population growth that you just referenced, you might want that to be 30,000, not 16,000. But the point is we're missing on the order of 10,000 or 15,000 jobs, not 200,000 jobs. I know many have in their head that normal is 200,000 jobs a month. Normal now might be 30,000 jobs a month. Just missing ever so slightly. And again, why you have an unemployment rate that's 4,4 right now instead of 4,2 or 4,3, if that makes sense. Certainly, there is a bit of tech laying-off happening. So that AI theme is a real story, but it's not dominant at the macroeconomic level, but you do continue to see a bit of weakness there as well. A little bit of job cutting in the federal government, too. And so that's been steady as well. Maybe reflecting some of the belt tightening that Department of Government Efficiency has been trying to do over the last year. So perhaps that's in the mix as well. But on the grand scheme, you look at those initial jobless claims each week, and they're still very low. There are not large, pernicious, persistent layoffs that are happening right now. And it should be mentioned, it's a number of workers for sure. It's also wage growth. And so wage growth actually held up running 3.8% a year, looking pretty decent. And so, again, handoff going into this now period of uncertainty wasn't too bad. I'm not too concerned about that payroll number. I'm more concerned about now, what does it mean with oil at $100 plus a barrel and it could elicit some caution from businesses, will increase inflation temporarily. We're all hopeful and indeed thinking that in a couple of months we get to see a handy little unwind as some part of this gets resolved. But there is some pain along the way first.

I was in London last week listening to a lot of investment experts and speakers talk talking about this because it became, of course, the most important topic to discuss around markets and the economy. You have a scenario where Trump at any point in time can stand back, declare victory. I've really defeated them in terms of their Iranian military capability, and we can pull that off the table and just settle back. There's, hopefully, a more compliant regime in place there. We just set back to normal. This has been a hiccup. This is a president that traditionally likes to watch markets as much as we like to watch markets and measure success in that frame. There is a pullback, and I think that's some of what you were saying to counter my negativity is, although there's a wide range of things that can play out, it seems like markets and the consensus of experts is that you're likely going to see this not continue for years. It is likely more like weeks. If it's not just weeks, it's a couple of months, and then we move forward and some damage can be done. But again, you can look to the second half of the year where this is just a blip on the radar and things are moving forward again.

Yeah, I think that's well summarized.

And what I think we need to, out of all of this, as you're noticing the volatility in our discussion as we bounce back and forth between positive and negative scenarios and uncertainty, what does that create in markets? Well, that creates volatility. And we already have markets that were at fairly high levels of valuation. We've talked about that many, many times with different guests on the podcast. And so when you have higher valuations, you need to have more good news than bad news. When you get lots of news that creates uncertainty, it creates volatility. And we talked about this at the front end of the year. We expected this year to be more volatile. We did not specifically forecast this particular military action and the essence of this particular military action. However, for a number of reasons, anything that was going to happen could create that volatility. And that's what we're seeing, Eric.

Yep, absolutely.

From an investment perspective, Stu Kedwell talks about dollar cost averaging as an approach as you're moving money in or taking money out of the market, doing it in a gradual basis. And this is where volatility can actually help you in some sense. And then from a positioning standpoint, the diversification of having bonds as insurance to offset stocks and having the right level of growth in a financial plan in place. This is when the value of that really comes out, because if you have that plan in place and you're looking forward over the long term of how you're going to reach that plan, when you get a short-term wrench thrown into everything, you sit back and go, okay, my plan and my portfolio are structured to withstand this in the near term and ultimately benefit from it over the long. And this is what on this podcast we want to do by having incredible guests like Eric on. And Eric, you're doing your MacroMemo, which I think is always fantastic. Once again, where do people get the MacroMemo?

Absolutely. Well, you can get it right off our website, rbcgam.com. There's a lovely «insights» tab. It has all sorts of great research, not just from my team, but MacroMemos are on there. There's a written version. You got to wait a day or two, but coming soon. And similarly, there's actually a nice little 15-minute video summary of it as well, which some people like to consume. And we also have a monthly webcast that just gone up there. There's plenty of ways to get some perspective there. But MacroMemos, probably your best bet is through that channel.

Yeah. And again, we say it somewhat tongue in cheek, Canada's hardest working economist, but I actually do mean it sincerely. Eric's bandwidth is unbelievable. He's also doing some work on the impact of artificial intelligence. And Eric, we're going get you on in a couple of weeks. We wanted to focus on what’s at the task at hand, so to speak, which was the jobs report and Iran. But we don't want to miss the long-term thinking around how AI is changing the world. We'll get you on shortly to talk about that, but you'll be able to read about it earlier than that. So you'll show up in form. That's your homework. Our homework is to check in on our flights and get to Vancouver. Eric, thanks so much for joining us today. Always a pleasure.

Absolutely. Thanks so much. Thanks, everyone.