(en anglais seulement)

Hello and welcome to our latest video MacroMemo. This is in fact the final MacroMemo for 2022. And so I think fittingly, we will do a year in review for the year that was. We'll do a very brief year in preview for 2023, and we’ll also dig in a number of other economic directions. We'll talk about China's economic reopening, we’ll evaluate recession odds and talk about the extent to which they might be falling a little bit.

We'll celebrate inflation that's been falling nicely. And we'll also just touch briefly on central banks and what they've been up to on the pandemic itself and also on societal health or the notion that society might be in decline and whether that's true or not. And so that's a lot to bite off. Let's get going.

We'll start with a year in review for 2022. I suppose safely we can say it was a year of extremes. We had economies overheating to an extent not experienced in a number of decades. That contributed to, though not exclusively, the highest inflation in a generation, plus the most aggressive central bank tightening in two or three decades. And the uncharacteristic stumbling of the Chinese economy, which normally has been among the strongest drivers of growth.

So quite unusual, fairly unpleasant in a number of ways.

As one year turns to the next, we can say that several of these dynamics are now changing and so economic growth has slowed. Inflation is now becoming a little bit less high. China has abruptly reopened, which we'll talk about more in a moment. And so some significant change is happening really as one year turns to the next.

And so that leads to 2023. We are still looking for a recession. We still think that's the most likely thing, though I'll give you some diminishing odds a bit later. But it's still the most likely scenario, and that's really due to still very high borrowing costs due to still-elevated prices and a variety of other headwinds that are hitting the economy right now.

We think China can revive significantly as it loses its pandemic restrictions. We think inflation can fall quite profoundly. In fact, we believe it can significantly normalize over the full span of 2023. We think central banks are nearing the end of their tightening process And there's even a chance they could cut a little bit later in 2023. And ultimately, as much as a recession is likely the starting point, we believe a recovery could take hold as soon as the last quarter of 2023.

So we could be emerging from recession into a new, hopefully multi-year recovery at that point in time. Okay, let's dig into some thematic issues now of relevance to today.

We'll revisit an important one right now, which is China reopening. This is something that we've now known about for several weeks, but it's still fairly new and it's quite important.

This is the world's second largest and in some ways most important economy, lifting some extreme pandemic restrictions that had held down its economy. China has eliminated masks and PCR testing. It has significantly curtailed its centralized quarantine facility usage. It has abandoned its electronic tracing app that was limiting where people could go and what they could do. And it has given instructions to local governments to narrow their lockdown significantly as well.

So this is a big deal. It is a big deal both in a health and an economic context. In a health context, the expectation is, unfortunately, that there will be a significant rise in cases and in deaths as well. The official numbers, by the way, don't show that at all. We're not getting good data from China right now, but the anecdotes are quite clear that we are seeing a surge both in infections and in fatalities.

And I can say that some of the better modeling out there argues that China could suffer from several hundred thousand to as many as a couple of million deaths as a result of this reopening. And so, again, big negative health consequences from this. But it does unleash the Chinese economy.

Now, let the record show everyone thought that China would reopen in the spring. They've done it in December instead. Essentially, you've pulled forward everything by a quarter. It's not a permanent shift in tactics. It's just something that's happening a little bit sooner. So that needs to be put into perspective, I think. I think it's also worth acknowledging in the very short term,it's not clear if the Chinese economy does better or not.

The real time economic data would suggest that there's been some revival since the restrictions were eased. Anecdotes suggest streets are, quote, eerily quiet and these sorts of things as people try to protect themselves from the new wave. So it's not quite clear how the economy does in the short run. Probably not that well, but if you look out over the next few quarters and the next year or so, it does strongly argue for a revival of economic activity and the stock market has been keen to that effect.

I will say I'm still a skeptic on China from a longer-run perspective. I think China has some pretty significant growth headwinds that need to be grappled with and its demographic situation is quite poor. It is increasing the power of the state versus the private sector, which is not conducive to fast growth. China's now subject to what amounts to an embargo on chips, it can't get advanced US chips. That's going to limit its industry as well.

And so there are still important restrictions on China. China doesn't get to grow at 6 and 8% per year, but it could have a decent 2023, which is an outlier to the extent that a lot of countries might be in recession.

Okay, let's pivot from there. Let's talk recession odds. And so recession outlook is still we think there. We expect a recession for most of the developed world.

I will say, though, that the risk of recession has arguably shrunk at least a little bit, and that's partially in the U.S. context, because the U.S. economy, the data, just keeps hanging on. It’s holding together better than we thought it would, in part because bond yields have come down a little bit and financial conditions have eased a little bit, so that helps growth slightly.

Inflation's now falling. We expected that, but it wasn't a certainty and so it's a happy development. And China's reopening will bleed through to other countries in a positive way over time as well.

And so when we summarize all of those incrementally positive developments, we're saying we used to think the risk of a U.S. recession in 2023 was about 80% we’re now saying it’s something like 70%.

Let the record show the risk is probably a little higher than that for Canada, maybe at 75%. It's a fair bit higher than that if we're talking the UK and Eurozone, it's approaching 100%. In some cases they might already be in a mild recession. Nevertheless the risk has shrunk a little bit as opposed to increasing recently. But again, recession more likely than not.

We have a scorecard of indicators that still says probably yes, in the end.

Inflation is falling happily. This is an important one as well. U.S. inflation numbers came out and showed a third month of softness out of the last five months. So that was taken quite positively. It does suggest that this inflation deceleration is for real.

That makes sense. We’ve been predicting this for a while. The original drivers of inflation have all turned and we are seeing signs of softer inflation in a number of places. We can see that the money supply growth has slowed. We can see that Chinese producer prices are now falling on an annual basis and China is still manufacturer to the world that matters for global consumers.

The cost of shipping containers has plummeted almost all the way back to pre-pandemic norms. Used car prices still quite high, but now down by more than 10% from their peak a few months ago. We can say the breadth of inflation has narrowed and so just a number of things rising quickly is finally starting to turn. And that's important because that was a thing that wasn't cooperating, even as some of the headline inflation prints had started turning in the late summer, in the early fall, just about every measure of core inflation we can think of had a nice month in November and so is starting to come lower. Dwelling costs and inflation aren't they are still the thing that are pushing aggressively higher but we know that there will be a turn. There's a classic lag here. We know that in the pipeline we will see a turn more visible by the middle of 2023 and indeed, home prices and rental costs are falling as well. And so the bottom line here is it's not going to be a smooth process, but it does look quite good that inflation can continue to fall.

We have a below consensus inflation forecast, which is to say we're optimists in this regard. Continuing on the inflation theme, but in a different way. Tongues have been wagging lately. Some prominent pundits have been proposing that central banks should change the inflation rate they target. They have traditionally targeted around 2%, and some people think they should shift that to three or 4%.

And there's some temptation. Oh by the way, I should start by saying I'm dubious. I don't think it happens, nor do I think it's a good idea. But it will be debated for some time and there is a chance. And so the temptation really is that there is, of course, less distance to travel. If you target a 4% rate instead of a 2% rate, that means there's maybe two or three percentage points of work left to go instead of five percentage points left.

So there's sort of a selfish temptation to shift it at this point. In general, as a central argument for a higher inflation target is it reduces the risk. Central banks get stuck at a 0% rate, gives them more wiggle room, more room to stimulate during crises. And so that's an attractive one. And it's also fair to concede that it's probably going to be a little harder to hit a 2% inflation rate in the future than in the past.

As we see globalization turn to de-globalization and as workers gain some clout. In this climate, change proves inflationary, It's going to take a bit of extra work. So that's not ideal. By the way, we've actually been saying we expect inflation to average a little bit over 2% over the long run, not as a strategy or a tactic of the central bank, but just they may find that they averaged a little bit more given some of those forces.

So we do have some sympathy towards that. But I would say there's an important difference between accidentally drifting a little over target and explicitly targeting something that's, say, twice as high as the official inflation target. And the reason I'm dubious that we see a significant leap in the inflation target is, well, to start with, it's quite bad for central banks’ credibility. It doesn't look good.

Central banks have made this mistake. They've allowed inflation to run too high and suddenly they say, well, I meant to do that. That doesn't look all that great in terms of confidence that they will control inflation in the future. By the way, every time there's a crisis or a deep recession, there is a clamor to change how central banks operate.

People were proposing after the global financial crisis a higher inflation target didn't happen. And so I think, again, we're going to hear this talk. I doubt it will be acted on. Don't forget, central banks in emerging markets are actively cutting their inflation targets over time. They want less inflation. They think it's better to be lower, not higher. And there's likely some rationale behind that.

Canada in 2016 conducted quite a thorough and extensive review of its own inflation target, explicitly considering whether a higher inflation target would be better. The conclusion was no, the benefits did not outweigh the costs and I don't see why that calculus would have changed over the intervening six years. When you change your inflation target, when you raise it specifically, it does distort the economy.

It's bad for growth, distorts investment decisions, and the process of changing it is incredibly damaging for investors and bond yields and banks and pension funds and insurers and lenders and stock valuations, all sorts of cascading, very significant consequences that actually are quite unattractive. So I'd be very surprised if we saw an explicit increase in inflation targets. Okay. Couple of other items to knock off here.

One would be central banks. They've been busy. In fact, central banks in the developed world have mostly been doing the same thing, which is raising rates by 50 basis points just before the holidays set in. That describes the U.S. Fed, the Bank of Canada, the European Central Bank, the Bank of England, even the Swiss National Bank wasn't all identical in the details in the sense that the Fed still says that there's a fair bit more work needed.

Bank of Canada, Bank of England suggested that they were getting pretty close to the finish line, so not a lot more work needed there. The European Central Bank is still in scramble mode, trying to catch up to where it should be. So it may be different trajectories going forward, but nevertheless, a very similar pattern recently. But in general, policy rates now no longer low, getting fairly high and in some cases getting fairly close to their peaks.

We think a brief one on COVID. While the big stories in China, which I've already discussed, but globally COVID numbers are getting a little bit worse. For what it's worth, it says BQ sub variant. That's very contagious. It is now clearly rising in the US and UK and parts of Europe as an example. We don't expect lockdowns, though.

We don't expect big economic consequences. And I guess reflecting maybe the endemic status of the virus at this point in time, it's fascinating to note that in the UK, even as this plays out, the UK is actually seeing more people admitted to hospitals with the flu than with COVID. That's not to say COVID takes a permanent backseat, but nevertheless it is now one of several viruses to be grappled with essentially.

Let me conclude with a few thoughts. Just this notion that society is in decline. And so the conventional wisdom is to say that Western society is declining to some extent, and maybe with the US leading the way. And it's true that certain things would support that thesis, we can say that political polarization is up and measures of trust are down and social capital is seemingly eroding.

And it is fair, unfortunately, that there are rising overdose deaths and a fall in US life expectancy, which isn't a good thing at all. I do want to say the story's a little bit more nuanced than all of that. And so for instance, the homelessness generally the anecdotes are that it's much higher actually at the national level. Homelessness is down over the last 15 years and only very slightly higher recently.

When we look at rates of single family households versus two family households,that did get worse for a number of decades, but it's been pretty stable now for several decades. That's not getting worse. And actually US divorce rates have been declining for 40 years and are now half what they were in the late 1970s actually fell quite sharply even further over the pandemic.

Crime rates are down sharply over the last several decades. They have risen in the last year or two and fairly significantly, but really only to the point of going back to levels of a decade or two ago, which were not thought of as as bad at the time. And so there's been an increase. I'd like to think it's temporary, but nevertheless, this is not back to 1970s levels of crime.

It's back to late twenties or late nineties levels of crime. We can say as well that educational attainment continues to rise quite nicely despite very high education costs. And so the point isn't that society is vibrant or necessarily improving. I think the point is just it's quite a mixed bag as it stands right now. And there are some positives and there are some negatives and it might not be declining quite as quickly as the average person imagines.

Okay. On that not so cheery note, let me turn things around here and say happy holidays, Happy New Year. Thanks for sticking with me this year. Hopefully you've found some interesting things that you were able to pick through and I wish you very well with your investing and in the New Year.