Hello and welcome to The Download. I'm your host, Dave Richardson, and it is Jobs Friday. Jobs, jobs, jobs. And that means we have Canada's hardest working economist, Eric Lascelles, with us. Eric, how are you doing?

I’m doing just fine. Thanks for having me.

Now, Eric's kind of laughing at me this morning, and I'm kind of laughing at myself. I've not somehow transformed into Donald Trump Jr., but if you're watching on YouTube, I have a very orangey appearance. I am in a hotel and apparently the lighting makes me look orange. Also, I was on a beach over the weekend. I got a little bit of sun. I got a little bit of color, so I look funny. And let me tell you what happened, Eric Lascelles. I'm at one of those hotels. It's all fancy and modern, and they have the television. In the old days, you just turned on the television, and you were on the channel. Or you turn on the television and you're on the cable box. Now you turn on, you've got to decide whether you're on Apple TV or Roku or all these different things. You got to program around. So I turn on the TV in this hotel. I don't even know what offering this was, but what pops up on the TV is the playoffs featuring the Lake Elsinore Storm. And there is a young Elliott Lascelles spraying the ball all over the place, just dominating. And so it was one of those fluke occurrences. And they won their playoff series.

They did, yeah. They're the California League champions. I should say it's an 8-team league, so let's not get too worked up. They never would have qualified based on the performance of the team when my son was a member of it. He lost his first 10 games, but they nevertheless snuck into a playoff spot and then won. They won 2 rounds and won the whole thing. Pretty cool.

Heck, there's a bunch of people in Winnipeg and Saskatchewan who don't mind winning titles in small leagues. The CFL is only 9 teams. I think this is pretty good. Anyways, congratulations to Elliott again. Good start to the career. And the Padres are looking good in the baseball playoffs as well. Last year this time we were talking about Blue Jays. We just won't talk about that, but we will talk about jobs and jobs numbers. Not disappointing was Elliott's first season. What was a little bit disappointing was the jobs report out of the US this morning, although markets seem to have reacted well to it. Why don't I leave that to you, and you can run through the numbers and get your thoughts?

Yeah, that's right. The numbers were a bit soft, and so that's the opening comment. But as we've discussed on a number of occasions in the past, bad is good, right? There's been some concern about overheating and too much inflation and maybe wages picking up and so on, and this did not create further concern in that direction. We ended up with 29,000 jobs created in September. The expectation had been 90,000. You can start by saying, that’s one third of what was expected, which doesn't seem great. And I should say, there were some negative revisions, minus 60,000 over the prior 2 months. The unemployment rate did go up. It went up from 4.1% to 4.2%. I shouldn't suggest this was a perfect report. It was a bit cool across probably the main metrics that you would look at. But again, to the extent overheating has been the concern, this was not too hot. I would actually argue this was closer to «just right» in terms of oatmeal temperature than the expectation, because there's very little population growth in the US right now. And so, 30,000 jobs is about right. We would say 30,000 to 50,000 a month is about what you want to just hold steady, which is broadly what we want to have happen here. Actually, if you now look at the 3-month moving average of job creation— and this is after these revisions and so on— it's up 50,000. That's exactly broadly what you'd want. Okay, the unemployment rate went up from 4.1% to 4.2%, but actually, it went up from 4.14% to 4.18%. This is not a cataclysmic increase. It's very small. You're back to where you were in June. It's really, we would say, continuing in the low 4s, and that has been the theme now for well over a year, if memory serves. That's just fine. Certainly, there's always a danger to trotting out stats you never mentioned before to support a certain thesis you might have. I really shouldn't do that, but Josh Nye, my colleague, did bring to my attention that U-6, which is the broadest unemployment rate metric. It includes people who are working part-time but don't want to be, that economic reasons are compelling them to, and people who aren't looking for jobs but should be, but are discouraged. Those wouldn't normally get included in the unemployment rate. It's not the number of people or the percentage of people without jobs. There's lots of happily retired people and students and so on who are not showing up in the unemployment numbers because they're not aspiring to jobs right now. If you broaden the definition a bit, actually, it went down and it's the lowest in several years. Go figure. I would say overall, things are looking fine despite some weak headline numbers here. Maybe of greatest relevance to inflation or the Fed— and I'm hoping we get to talk about all those things— actually, the wage data was quite soft within this. Again, one month is one month, but hourly earnings only rose 0.1% in the month of September. That's month over month. It's now down to 3% year over year. That's the weakest we've seen in the cycle. You got to be careful with this one because ultimately, I'd like to see workers earning lots of money and enjoy big wage gains, of course, and that would support spending and all sorts of other things that economists generally care about. But to the extent that inflation is the concern right now and worries about central bank hiking and that kind of thing, not the worst thing in that very narrow lens to say, okay, we're in a situation here where we're not going to bubble over because the wage side is fairly cool right now as well.

Well, the inflation data that's been out more recently, the most recent one, was also a little bit on the soft side. However, the war rages on. The Strait of Hormuz, depending on who you listen to, is completely open or completely shut. There's lots of oil flowing or there's not any oil flowing. It's been pretty hard to get really a lot of real data. So you follow the markets. The oil prices settled back from when it spiked up over the last month to over $100 a barrel. I think we're down below $90 as we talked this morning. What's your sense of where inflation is in the US? And then maybe we'll pivot to where we're sitting in Canada as well.

Right. Of course, inflation is too high. Let's start by acknowledging that. That has been something of a theme now, alas, going back 5 years or so. Our basic statement would be that we were in a sub-2% environment before the pandemic. 2% was the goal. It was hard to get there. Often, we missed a little bit below. It certainly has been, at bare minimum, the opposite. We've been above 2% just about exclusively since then, and it's been tough to get back down. In fairness, it's been, at least in part, a number of unfortunate shocks. You had various pandemic-type shocks in terms of supply chains and altered demand and revenge spending. Remember that concept? People making up for lost time. And here we have an energy shock. And so just a cascade of events have pushed us here. But nevertheless, here we are still with inflation that is too high. Not like it was 3 or 4 years ago. That was the 8 to 10% world. We're in a 3% inflation world depending on the metric right now, but still too high. It's funny, I recorded my monthly economic webcast 3 or 4 days ago. We just published it today— a little bit of processing time there— and at the time, oil was over $100. Now, as you mentioned, it's under $90. Not that that's a small change, but a relatively moderate change. And a change of direction suddenly feels like it changes everything. The danger is that you overcompensate for that. A little bit similar in bond yields. Hey, yields are down a bit. Hooray, they're going to keep falling. Of course, the thinking 2 days ago was they'd rise to the moon and so there are dangers in straight-line projecting any particular trend. Back to inflation. Inflation is too high. That's the general comment, but we did get some better news recently. The PCE deflator figures for the US, as you hinted at, did come in a bit below consensus, and the core number in particular was actually just outright a soft figure, which we'll take. Oil prices obviously have been central to the inflation pressures, and again, we'll see where they go tomorrow and the day after. I think you mentioned lots of different narratives, and I'm actually just reading a report claiming that excluding Iran, the oil exports in the Middle East are completely normal again. That's about the most optimistic that I've seen— I've seen some numbers that aren't quite so friendly— but diesel is at its own pressure point. That's in the news right now. Certainly, some is flowing, and we've seen oil that's down, and that just mechanically is going to help the next month's inflation print. That's welcome. I mentioned the slower wage growth. Our thesis is still that inflation will be too high this year but that it can become a little bit less too high, if that makes sense. I couldn't tell you exactly how or when or precisely why, but we are assuming that the oil constraints and the energy constraints in the world become a little bit less intense over the next 6 months to a year. Things are aligned for that to happen, though you could have said that 4 months ago and been wrong, so let's be cautious on that claim. But even if oil is $90 or $100 a year from now, that's not inflationary because it's the same price as it is right now, just to include a tricky thought. But we still see how it’s causing disinflation. We see wage growth that's been pretty cautious. You've got central banks that are doing a little bit of rate hiking, not making trouble for the economy, we don't think, but keeping it from overheating. We do think that credibly, that adds up to inflation that's a little bit less high down the road, which is a welcome thing and certainly of relevance to the Fed, I would think, as we all debate what happens later this month with that decision, and certainly of relevance to bond yields as well.

Is the next hike pretty much baked in for the Fed?

Actually, no longer, Dave. It's really been priced out. Certainly, the thinking is still there's rate hiking to come. There's still a full hike priced in by the end of the year, so I'm splitting hairs here. Actually, for the 28th of October meeting, the markets slashed that pricing recently down to less than a 20% chance. So the December one is still assumed, and so there's probably still some more tightening, but the October one really got priced out for some of the reasons I just mentioned: inflation came in a little better and oil's down to $90 and the wage pressure was less. Probably more relevant, truthfully though, is that you also had 2 Fed voters come out and say there's no rush. We can use some patience here. Williams and Jefferson were the 2 most prominently opining on that. I think the market has always been a little bit wary about that October 28th meeting because, do recall, there is a certain event of political significance 6 days later. November 3rd is the midterms. If it was necessary, they could hike then. I mean, there's plenty of precedent, in particular for a cycle that's already begun— and it started in September— to continue. I wouldn't say that they couldn't, but I would say maybe the Fed's life is a little bit easier at a time of political pressure. If there's not that much urgency to tighten, maybe you tighten in the September and the later 2026 one, and you give that one a pause. Right now, it actually looks like we may not get that. There's still 3, 4 weeks of information that will accrue before we have to render a final verdict there, but at this point, maybe not this time, but probably still some tightening left to go.

Yeah, and we'll get some actual experts on the podcast next week to take a look at those bond yields, particularly those in the US and that 10-year Treasury, which is such an important bond, and that's the yield. And what's happening with the yield there is so critical across the whole economy. And we just saw that yield spike up and get up over 5.3%. Again, just for perspective the high for the 10-year US Treasury in October of 2023 was 5.02%. So we went running through that and then just raced higher. And again, we'll get some experts on it, but when I look at the charts, my little minor league technical analysis, it looks like we had kind of blow-off top, and now we've settled back to around 5.2%. This number this morning takes some pressure off the Fed, takes a little bit of pressure off the whole inflation story. But it seems, Eric, that more of what's happening on the US debt front and the global debt front in the bond market is about the amount of debt out there, as much as it is about growth concerns, inflation concerns. This is about people looking at the mass of debt— and we use the US as the core example, the largest economy in the world— and they're concerned about the fact that we're in the middle of an election campaign. There are ads running all over the place. If you end up on a US television station, nobody is talking about debt. They're talking about everything but debt. Some very unusual things they're talking about, but they're not talking about managing debt. And again, if I go back in my mind and think about election campaigns in the '90s and '80s, there was at least one side— or one and a half side— of the political spectrum there that focused on debt a lot. And there was nowhere near as much debt back then. So what are your thoughts in terms of this debt, the total volume of debt, and then how that's affecting the bond market? Is that the driver or do you think it's other things?

Yeah, I think that's a big underlying part. And our basic thesis is that this is a higher interest rate environment than it's been for some time. And that's the big reason why. The era of quantitative easing is long gone. That used to depress yields. The fiscal situation has, if anything, gotten worse, not better. Just mechanically, lots and lots of bonds to be absorbed. Of course, it's not just the US. A lot of countries running big deficits. International investors have to absorb more than just all that Treasury debt with, of course, some crowding from the AI companies that are now issuing too. There certainly is a supply-demand factor in a US-specific context. Historically, Japan's been the biggest owner. They've got currency concerns, and if anything, they'd be inclined to sell some US debt and buy some of their own currency as they defend the yen. At a minimum, they're probably less faithful buyers. China still runs a big current account surplus, which means it is accumulating foreign assets still. That's what that means. But they're not really in the Treasury buying business these days. They're accumulating other international, often private sector assets, and so they're less buying too. It makes a lot of sense that yields are higher. As mentioned, here we are also in a higher inflation environment and with maybe some loss of political trust and a few other things that are maybe nudging as well. I will say that that doesn't mean yields go up forever. And so our thinking has been that bonds are increasingly of pretty good value at these levels, and we've been making little tilts in our portfolio to that effect as well. Time will tell whether this is the top or if there's some other top or something else, but higher yields make sense. If you want to be a constructive investor, of course, you can say, gosh, I can lock more than a 5% nominal pre-tax return for 10 years— or 5.5% for 30 years. That would've been something we would've killed for a number of years ago. And so there's a real opportunity that exists here without any kind of promise that there's a big rally to come, but just the coupon itself becomes more attractive. And even the coupon math becomes more interesting because even if you're saying, well, I'm worried that yields are going to go to 6% and then keep moving higher, the coupon's a big enough cushion at this point that you can actually still plausibly earn positive nominal returns between the yield and any risk of capital loss if you're worried about that. There's an asymmetry forming in bonds where we're more comfortable owning them at these levels without making any promise they're going to collapse from here. It makes sense they're higher for the reasons articulated. I will say there still are some concerns about the politicization of the Fed and this sort of thing, but you've got this new Fed chair who, to his enormous credit, did hike rates and probably the appropriate thing and seems willing to do that. Not a political operative or anything like that. I think that extra credibility is quite useful. Almost confusingly, the more the Fed raises rates, arguably, the less long-term yields need to go up or even the more they can come down because the long term is reflecting in part fiscal fears— which is not going away, unfortunately— but also inflation fears, and those should diminish as the Fed hikes. And a bit of a term premium reflecting maybe a lack of confidence, and that can diminish too as the Fed hikes. We think that maybe we're hitting some more stable period. That's certainly an attractive thought, I would say, right now. We've seen a big drop in yields here. And back to the inflation comment, which is oil is down and the job numbers are a bit weaker, and so some of the overheating concerns are diminishing too.

Yeah, it's interesting to watch what's going on in that bond market. I think it's one that we really do want to watch. We're going to get Sarah Riopelle on because she's had some thoughts around her asset mix. And we'll have some more people to take a look at that, that really do understand the technicals and what's going on in the bonds and stock market, given all this concern around debt and inflation and jobs, all the things we're talking about economically and how that plays into your portfolio. We always like to lay the base with you from an economic perspective and then take it from there. So if you're looking forward to those episodes, please make sure you subscribe wherever you get your podcasts. Subscribe and follow us on our YouTube channel. And then you won't miss any of the great topics that we're going to cover and the occasional funny colored skin that I come up with depending on the hotel I'm staying at and the crazy lighting that I've got. That's always interesting as well. My kids particularly enjoy the randomness of my appearance on YouTube. So, Eric, since we are a Canadian podcast, why don't we shift focus to Canada? We haven't had you on to talk about a lot of the news. The Canadian government is trying to do some things to push the Canadian economy forward. Some high-profile things as well. So what are your thoughts? Maybe go back over the last 2, 3 weeks, some of the things you've seen happen, and what do you think is the net result of that? Are we going to make progress there, or is this more show than dough?

I think there will be and I think there is some progress happening. If I can frame it this way, we wrote in a recent Macro Memo about Canadian productivity. It's well documented. We just wanted to make sure we were covering our bases and putting our thoughts out there. Of course, it's been very poor and we tried to diagnose that. Really, it's not one thing. It's tempting to say it's taxes. And it is taxes, but it's also the regulatory environment and even some business culture. We were in a slow productivity growth regime globally. Some pandemic distortions. Lots of different things help to explain why productivity has been so atrocious in Canada. Our thesis, though, was that things are starting to get better. As an example, just as the pandemic fades and there was some drag, it would appear, from work-from-home type mandates, as people trickle back to the office, you lose one little drag, as an example, and other forces of that approximate effect. We think the world, as it happens, is shifting from a low productivity growth regime to a high one. That's an AI comment, by the way, and so that's helpful to Canada too, but not uniquely so. Then within Canada, the question was: is anything changing? It really does look like it is, and that's been incremental over the last 18 months or so, but there were some big movements in recent weeks. Just to summarize those, I'll start just by saying there have already been efforts to get the infrastructure investment and the resource investment going. You recall a year ago, there was an announcement that certain special major projects would be fast-tracked through review systems and so on. That was all very nice. It looks like now the latest iteration is, hey, let's make all major projects fast, and why are we just giving a few this special status? The commitment now— and this needs to be delivered on, and we will see— is to conduct all reviews within a year. That's years-and-years faster than the historical norm. To have one review mechanism, not multiple overlapping, possibly contradictory review mechanisms. In essence, make it much more appealing to engage in these sorts of projects in Canada. Of course, there was an investment to that effect recently, and we will see the extent to which that does surface proper international money and so on, but it does look like there's at least more domestic money to be allocated from the government in part, but also there's a fund being set up and that may end up proving quite significant as well. The other change though is on the tax side. There was a corporate tax cut that just took place, and it sounded technical and obscure in the sense that basically, there's an accelerated depreciation provision, and they made it so more capital would be eligible for. It sounds awfully boring. It's a big deal though. First of all, the fraction of the capital that a business would invest and that's eligible for this very favorable tax treatment rose from 15% to two-thirds. That is a huge leap. That is more generous than the equivalent OBBBA Act in the US, which has been famously supercharging US investment. This is in principle even more generous than that, just to give some sort of sense to it. If you try and measure it properly— I know it's tempting to just look at the corporate income tax rate and say, well, Canada is worse than the US— but really, it's kind of a complicated ecosystem of taxes that a business is actually thinking about and actually paying. They are considering the provisions for depreciation on their capital and is there an R&D tax credit and how broad and how generous is that and am I paying sales taxes on my inputs? There's a lot of different taxes that actually ultimately would tell you what the tax rate is on a business. There's a concept called the marginal effective of tax rate of capital that tries to smoosh all these things together. It makes the assumption that the Government of Canada's calculations would say that they basically more than cut Canada's effective corporate tax rate in half. It got cut by more than half. They would say it's now the lowest by a significant margin in the G7, much lower than the US and so a very favorable tax environment. They excluded a few sectors. There's a few things. I'm not suggesting they played with the numbers overly, but nevertheless, the OECD has some numbers that are pretty good, but not quite as wildly good. But it's still a big tax cut. Canada is now very credibly competitive in a purely tax sense on the global stage. That's a big deal. I's going to take time for this to get going. The uncertainty of tariffs, unfortunately, still dominates in the near term. Would you make that big investment if you don't know if your business has access to the US? But I would say, in general, these are important steps. These are the steps that economists have been arguing for, if you're looking for more growth in your business sector, at least. I think this is good. As I look at Canada's long-term prospects, you're starting to tick some boxes in terms of getting productivity going again. I think that the world's attitude toward resource security has changed and the ability to expand Canada's resource sector has improved. There are a number of things going for Canada here over the long run right now.

Yeah, the only thing, as someone who's observed this for a long time— and I know you'd be similar— is we've got to execute here. It's nice to see, at least as a Canadian, in a world where capital can go anywhere— capital can move around more freely than ever before— but you've got to be attractive, you've got to be competitive. But then as you talk about the fast-tracking on projects, you've got to deliver on that. And that takes every level of government, and you got to work through the courts on things. And so Canada's had a hard time proving that they can execute across the board on that front for a long time.

Yeah, absolutely fair. The proof's in the pudding. We will see over the next few years— in fairness, that’s kind of the realistic timeframe— but I would say when we talk to business leaders, they feel somewhat optimistic. There's one famously cantankerous CEO who said, for the first time, I can't think of anything to complain about. And I think that's pretty high praise. And so, let's hope that remains true.

The attitude shift and the message is important. As you say, let's tick those boxes and then let's see it go into action. We face some serious concerns if we can't be competitive on a global level economically. We make those choices as a democracy in terms of what direction we're going to go. It seems like we're dipping our toe in the water of trying to push economic concerns forward. Another fabulous thing. Maybe it's the lighting in the room or my little bit of a suntan from my trip over the weekend, or maybe I got this glow because I'm now a European. And you are as well. Are we European yet, Eric? What do you think of that little venture with the European Union?

Well, I think Canada and Europe are making a real effort to connect more deeply with one another, and that probably is the right approximate effort right now at a time of isolationism with the US and some fracturing of the global order. It's nice to see like-minded countries coming together. Do note, though, that Canada already has a free trade agreement with Europe, so that's already very much in place and in effect and fairly useful. There are already efforts underway to collaborate more with military procurement and production and these sorts of things, and that makes sense. It doesn’t require associate membership, I should add. We'll see if there end up being more student exchanges and things like that, but there is a limit, I think, to the integration, and it's really on both sides. On the Canadian side, Canada has just argued it needs to maintain its sovereignty. It doesn't want to give away its right to determine trading partners or regulations and things, and of course you'd have to do some of that if you were serious about getting really close to the European Union. Then the other thing is the European Union has this very tricky situation where they already have all sorts of members of different tiers. You've got countries that share the currency, countries that don't, but nevertheless are part of the European Union. But you have other sort of partner countries that allow free movement, and they have to accept certain regulations from Europe, and many of them have to contribute quite profoundly to the European budget in a way that Canada probably isn't aspiring to. I think this is a statement of friendship, and I'm not expecting too much more than that. But there is an opportunity for middle powers or like-minded countries to collaborate more, and I think that's the idea that's being expressed here.

I've referenced this on the podcast before in a previous episode, but I attended a speech from an investment manager who was originally from India and was an investment manager in the Asian space. And I remember him standing on stage and pointing and saying, hey, Canada has too much stuff flowing that way— and he was pointing down south of the border to the US. And he said what you really need is things to be going this way— and he was pointing one thumb over towards Asia and one thumb over towards Europe— just to diversify where your trade is. We're experiencing the downside more recently of our geographic proximity to the US, although longer term that geographic proximity is a big bonus for the Canadian economy. But bumpy road right now doesn't mean you shouldn't be trying to get those other pipes open to do more work with some other areas when at different points in time your partner to the south may say, we're going to manage policies a little bit different right now. And it's good not to have all your eggs in one basket, so to speak. So these are all initiatives that I think Canadians, at least if you look at the polling data, are fairly positive about.

Yep, exactly. There's been resounding political unity and public support for this sort of thing, and that's the effort, and it's going to be a multi-year effort, and we'll see where it all ends up, but I think there's reason for some optimism in there.

Eric, I think we're both heading out to do some speaking today, so we'll maybe cut it short there. I'm not even sure it was that short, but it's maybe shorter than we've been lately anyways. As always, we'll get you on in between the jobs reports, maybe around when the Fed announcement is on the horizon, to get an update as we see some of these numbers flow in. And maybe we should talk a little bit about what we think is going to happen in that US election and the impact that that could have on the global economy. Eric, thanks for your time as always, and congratulations to Elliott. Does he get to come home at all now?

He's coming home tomorrow as we record this, for all of 2 weeks. Then he's off with Team Canada to the Dominican and then back to Phoenix, and it just continues. But yeah, we're going to get him for a couple of weeks, which we're looking forward to.

Mom and Dad are always happy when that happens. I love it when my kids come home. Eric, congratulations on everything. Thanks for your time, and we'll talk to you in a couple weeks.

Thank you. Bye.