Hello, and welcome to the Download. I'm your host Dave Richardson and we are joined by Canada's hardest working economist, once again appropriately dressed in flannel for the coming Canadian winter. I too am in flannel just to support his cause because we need him to come up with his continued, just absolutely perfection accurate forecasts on the Canadian and global economy. Maybe at least an A, right? Do you think you give yourself an A for this year so far, Eric?

An A? Sure. Let's bell curve it and give me an A. That sounds just fine. But by the way, on the flannel, Dave, that is entirely because well, first of all, I'm at home— I'm not sure I'd be wearing flannel in the office—, but I'm wearing it at home because I'm too cheap to turn the heating on before Thanksgiving. So we got to hold out for another few days here and see if I can pull that off, especially with heating costs as they are these days. It seems like a particularly important goal compared to normal.

Yes, that's why I say hardest working economist. He's always thinking economics every moment of every day, every decision in life, because we all are economic actors making those decisions every minute of every day. I'm sure actually we'll come back to heating oil and energy prices as we go through this, but the big news today that we want to check in on every month are the jobs reports that came out, in both Canada and the US this morning, and pretty significant market reaction on the US jobs number. What do you see there and what are you interpreting out of those numbers? Is it where you expected them to be or is it a little hotter than what you thought?

Yeah, I mean it's right on the screws versus where the consensus had expected. I must confess, over the years, I've ceased to be someone who puts together a huge amount of work trying to predict it one minute before; I've left that to others for the most part. So I won't pretend I had a particularly clever secret view. So it's not a huge surprise, but I would say, I think the logical thought process would be that you should see some slowing in hiring as we see clear evidence of softening economy elsewhere. Case in point, the ISM manufacturing numbers came out not that long ago and they showed pretty clearly a lower production metric and new orders were falling and in fact the employment plans are now below 50, which in theory would suggest manufacturers are at least planning to lay off more than to hire. So we do see some tentative evidence of economic weakness in the US. It's not recession level weakness, but some deceleration. But we're not seeing it really all that much in the job numbers. So 263,000, again on consensus. The unemployment rate managed to basically reverse the increase it did last month and so sitting now at 3.5%, and mostly holding together. You could see a little softness in retail and transportation, which I do find interesting because those can be leading indicators. But for the most part it was a pretty good, fine-looking report. So no signs of great distress there, but consistent with the fact that jobless claims had been going up for a while from the summer into the early fall and they've been coming down the last six or so weeks. And so, the labor market in the US is holding together for the most part. If you wanted to poke a hole or two you could say, well the household survey— so this is a payroll survey, they contact businesses, they ask them who's working for you? There is an element of uncertainty there because of course they don't know what new businesses have informed this time. They don't quite know which businesses have failed. And so there's some guesses they have to make with regard to that. There is an alternate survey— it's actually the most popular, it's the main type used in Canada— where you are directly contacting people and saying, are you working? And if you look at that one, for the US, it was actually only up 12,000 jobs. And so, it's choppier. It doesn't necessarily mean a whole lot, but still the fact that it was on the lower side maybe hints that there was a bit less strength here than it first looks. But in general, the labor market is holding together. Hourly earnings are decelerating a little bit. That's been a trend now for a number of months. So they're still running 5% year over year, but they're running 0.3% month over month. So if you do the math on that, that's less than a 4% rate. So it does seem like we're maybe losing a little bit of heat out of the labor market there. And then in terms of what does all of this mean? Why would the stock market be unhappy in response to a pretty good-looking job number that frankly wasn't that far from consensus? And I think there's probably a little bit of wishful thinking in there, but nevertheless, at the end of the day, it's one in which it’s essentially good is bad at this point because an economic data that strong means that the Feds has got to hike even more. And so, bond yields have gone up to reflect that and the stock market has gone down on the view that the Fed is going to have to hurt growth even more later to cool this economy down. And it is absolutely fair to say, as I look at economies around the world, that the US economy has been holding up better than most. You see clear weakness in Europe and in the UK, and you see bits and pieces of it in Canada, and less in the US. There's more heavy lifting for the Fed there. And that's a big reason why the Fed is now talking 4,5 to 5% as a peak policy rate. I'm not quite sure they get that far, but nevertheless, I shouldn't even say it's clear that they haven't gone far enough just because there are such leads and lags involved in these things that we couldn't really honestly claim we've seen the full effect of the tightening that's happened so far, but they're going to have to keep going at least a little further.

Isn't this the way it's going to play out, given the unusual job market that we have coming out of COVID, and that we have all these job openings that can't be filled? But there are still people who are out in the job market and they're going to find jobs. Aren't we just going to slowly see those job openings decrease? And to a point where there's no more job openings and we're starting to see more significant job losses? Isn't that the way it's going to play out? And if that is the way, what do you think is the key number? What is the key number that you're looking at to really give you a sense that we have rolled over, that we're heading towards the recession— that you think is most likely to happen—, and then ultimately get to a point where the Fed is forced to either stop raising rates or perhaps even lower rates?

Right. So I suspect those will all be different points. I guess that's a big question, Dave. A very good question, though. For instance, when does the Fed start fighting rates? Well, it's going to be pretty tentative on that front. It needs to be crystal clear. Inflation is coming down. It's probably less motivated by precisely what the economy is up to. But if the economy were to fall into recession, I'm sure that would make the argument a little more compelling and so on. I don't know that we're going to get too many credible signals, at least until 2023 on that front, and maybe not even until many months into 2023. So I'm not looking really for that right now. I guess my focus is more on the economic side and trying to sort out what sorts of turns are happening there. And there's a lot of ways to answer that question. One would be to say, well, you start with confidence and then turn to intentions and then look to activity. And so we've seen a pretty big hit to consumer and business confidence and a notable change in intentions, which is to say that businesses say they're going to hire less, as per our earlier discussion on that ISM employment component. And you see that in other places as well. And so it seems like there's a turn in intentions. And it's also true with capex intentions and things like that. So really the thing we're waiting on is the actual activity to soften in line with the intentions. I think we've lived through a strange enough few years to recognize there can be at least partial disconnects and so on. So I'm not convinced it's going to map quite as neatly through as it might normally, but I do think we're looking for that is the main answer. The labor market is always a funny one in the sense that it's considered a lagging indicator. So I don't know that it's going to be the first thing to turn and yet they release it so quickly. Here we are talking about September data, and it's barely October. It's still relevant. So it's in the discussion. I think we need to watch probably the weekly jobless claims particularly closely. And so, no real signs of great weakness there right now. So that one hasn't particularly turned yet. I think we really need to watch retail sales and consumer spending in particular, as there's some vulnerability mounting there. And so that's one that we're watching quite closely as well. But the list really goes on. I'll take what I can get, and we're looking at real time indicators. I'm not picky when it comes to the data. If I can see useful information that's been evocative in the past, that does the trick for me. If you really want to get ahead of things, you can say, well, when central banks raise rates a lot, the economy tends to slow quite a bit. There's quite clear relationships there. So we've already seen those kind of causal turns happen and we're just waiting for it to shift.

This is why I'm the dumb host and you're the smart guest. Don't ask Canada's hardest working economist to say just one indicator. He's looking at everything all the time. Twenty-four, seven. So it was the wrong question.

Sorry, Dave. No secret silver bullet.

Yeah, exactly. So we look at Canada and of course, in Canada we're largely driven by what's going on in the US and elsewhere, but the Canadian jobs report is coming off,, a pretty weak August, a little bit more normal. Anything to glean from that?

Yeah, so the Canadian job numbers did look pretty normal, up 21,000. It really, in a sense, was a boring month in that both countries were close to being on the screws in terms of versus what the consensus had expected. Now, it's worth saying, well, hold on, what was the consensus expecting? Was that good or bad? And in the Canadian context, it happened to have been a decent expectation. But I think the context is everything here. You mentioned August was softer. It was quite soft. It was almost a 40,000-job loss in August. And people are forgetting July and June were also down. We had three consecutive months of job losses. They weren't colossal job losses. There was some funny business in them. For instance, the bulk of the loss last month was education services, which I wasn't aware of, 49,000 teachers being laid off in August. I'm not sure that actually happened. There might have been some seasonal remnants in that. But I know in this particular report, in theory, 46,000 teachers were hired. What do you know? Almost exactly the same number they thought were laid off last month. And so I think there were some seasonal distortions there that probably don't fully reflect what was happening. So it's choppy still. But I think it's still fair to say, if you look at a certain four-month trend or a six-month trend as well, we're not seeing as much hiring as we used to see. I think the deceleration in the labor market is clearer in Canada. Maybe that's a statement that the Canadian economy is suffering a little bit more. I think you could perhaps mount that argument and justify it by saying that Canadian housing is softening more profoundly than in the US, as it should, given the dynamics that we can see. And so that's likely there. Conversely, really, you could also say, and this is now swinging back to the US, that it remains very strange that the US labor market hasn't softened more. I mean, we've seen the GDP numbers softer. We've seen a lot of things softer. In fact, officially, productivity growth has collapsed in the US because they kept hiring workers even if the economy was slowing. And that's not something that usually persists. There should be some resolution to that, and it should be in the form of less hiring or maybe outright layoffs as well. But by the way, and this is me now jumping around, you mentioned job openings before. So certainly, I would say a central thesis for us is that recession is more likely than not, but the labor market doesn't do as bad as it would normally do in a recession. And a big part is precisely because there are a lot of job openings. So companies say, the economy or the demand is set to be 5% weaker than we thought when we were first planning. They were planning on hiring a lot of workers. They can just plan to hire fewer workers, and that may result in less actual laying off. Now, I should say we're already seeing some of that. So for instance, in the US, job openings fell by a million in the latest month, so we're already seeing some of that. History suggests that you don't get to completely sidestep job losses even when there is this buffer in terms of openings. And so I still think there will be some hit, but less of a hit makes sense. Maybe the other thought— and we were just talking about this as a team—, which is, okay, fewer job openings, less painful than firing people. Certainly that sounds fair. However, they were going to hire a million people next year, and now they're not going to. That's somebody suffering. They don't know they're suffering because they never got the job to begin with, but there is still a cost from that as well.

Yeah, and that was sort of the direction I was heading with that long-winded question earlier. We did circle back to it. A lot of the stuff I'm reading right now, as we look forward, is where we're sitting right now, with the Fed raising rates and central banks all around the world raising rates, that it's tightening up the financial system, and you start to get to a point where there's just the potential for something to break the system. So we saw the mini crisis— we had David Riley on talking about what's going on in the UK and the UK pension fund and what was happening with the Gilts, the bonds in the UK. Is there anything else out there that you're seeing that worries you? That could be a real tipping point on the global economy that ultimately does get us into that recession, be it something similar to what we saw in the UK? Credit Suisse, the issues they had, what we're expecting to be a really tough winter with energy prices and just energy period in Europe, China and everything that's going on there? What's the one thing that you're looking out at that you think could be that big canary in the coal mine or that big tipping point on when we get into some real economic difficulties?

Dave, did you just make a mistake and ask me for one thing again? I don't know if I can give one answer.

Can you zero in on ten things, Eric for us?

This is where a bad memory comes into play, and I won't be able to keep track of ten. But I would say the pension fund story, and indeed, I think the most logical place to expect trouble is in the context of rising rates. It means if you're levered, if you're leveraged off, that can be a problem. At a minimum, it makes your life more expensive and then some things may break. And so, David Riley is much more articulate on the British pension situation specifically, but that was in a nutshell the situation there. They were levered probably more than they should have been. And what do you know, when yields spike higher and then somebody's making a margin call, pension funds aren't all that liquid. They're not in a position, they're not able to make a margin call on short order. Who's levered? Obviously, housing markets, mortgages and so on are quite levered. So that's precisely why we're expecting housing market pain and some suffering, unfortunately, to happen there. Banks can be levered. I think for the most part, banks are a whole lot better capitalized and better regulated than they were 12 or 13 years ago. Though I guess if you wanted to pick some of the weaker players, the name Credit Suisse does come up fairly often. In fact I was talking to Stu Kedwell about that just the last couple of days, but that certainly comes up. For a while, private equity was coming up as a levered player and I have to say, having talked to some people, I'm a little less nervous about that than I was before. I mean, they're not that liquid, that's a criticism in some ways, but that's also a benefit there. They're able to hang on to their money and not panic and indeed they have a lot of cash on the sidelines they can deploy, perhaps opportunistically, but nevertheless. So really, who’s levered is the question? Inevitably I'm missing things, but as I look through that, I don't see things that are obviously guaranteed to break and so I'm tending still to view it through an economic lens which is, well, higher rates are just going to be painful and slow everything down and certainly contribute to a recessionary outcome, but hopefully without the financial contagion channel being all that profound. But it's hard to say. I mean, if British pension funds are forced to de-lever and they have to make a forced sale, maybe they're selling US corporate bonds and suddenly something else is breaking and so it's very hard to speak with precision. And so, usually being patient and not overreacting is a good strategy through those kinds of periods. Just in terms of the other one of the big scary things that could happen, I think we were really saying our base case scenario is recession, but what are the downside risks that could still exist? You have to talk to geopolitical, which you did. It remains quite unlikely, but if there was an invasion of Taiwan, that would be ten times worse than the invasion of Ukraine in an economic context. Very unlikely, but that would be bad. Much more conceivable is just that the energy situation keeps getting worse in Europe— and OPEC hasn't helped recently, but Russia could well respond to that effort to cap oil prices, which I think comes on December 4. And if they say «no more oil from us», then all of a sudden you've got much higher oil prices. So I think there are a few scenarios in which you could have trouble through that channel and of course that's troubling in a few ways. It's both bad for growth and bad for inflation, which is kind of the double whammy that we're not looking for. So those are some of the more prominent risks, obviously. Conversely, base case is a middling recession and it's inherently temporary and you're coming out of it. And Dave, I don't know if this got much discussion or not, but in terms of our own tactical asset allocation, we've actually added a tiny bit of risk recently and the logic behind that isn't necessarily that the worst is completely over— we think a whole lot of bad news is priced in. People say it’s incredibly grim right now. And so if you're thinking that maybe it's been six months shifting from being cautious to being more aggressive investing, well, this could be the beginning of that six month period. And so I think that's worth keeping in mind as well.

Yeah, and very important for investors to keep in mind overall that at some point the market is going to sense, as you say, that we're through the worst of this. And then you typically see a fairly big move as long as things are playing out, as you suggest; middling recession, coming from a relative point of strength, particularly in job markets, as we've been discussing, and that could be a real trigger. So that idea of starting to nibble at a little bit more risk is something that I know quite a few investors that I'm talking to are looking at, and quite a few advisers are thinking about that in terms of the way they talk to their investment clients. So Eric, you actually did get to that one answer; the answer was leverage. So see if you can find leverage and that's where the stress will come. But because I guess you look across the economy, the economy is just not levered to the same extent or at least in the spots that create that systematic risk the way we were in 2007-2008. So not as big a worry, but that is where the potential is. Anything else? We might not see you for a couple of weeks. Anything else you're looking for? I guess the next CPI reports would be the obvious thing as a clue, but anything else that you're really going to be watching closely over the next month?

Yes. So the inflation matters a lot. And I would say the thing within inflation that really matters a lot is the breadth of inflation. We've seen lower inflation prints for a couple of months now, but it's been sort of a gas story. It's been pretty narrow. We still see a lot of pressure coming out. It's just all little things that people buy every day. We're hoping to see some turn there. I don't know for sure that this month will be it, but nevertheless, that's the remaining unaddressed issue, I would say. So that's the big inflation one. The other one is, we're just paying close attention to China's National Congress, big meetings that are happening just next week, actually starting next week, as we record this. And the President Xi very likely gets reappointed to another five-year term. But will they do things about housing? Will they change the zero-tolerance policy? These sorts of things. Probably not radical shifts, but nevertheless, you just get little hints like, oh, we're focusing on common prosperity and that means reducing inequality, or stability. It means we don't want growth to be too fast or too slow. So there's some readings that will be needed, but that could be very important. China matters a lot. And if you wanted to be optimistic on China and, say, China zero tolerance goes away over the coming months, that would be a pretty significant tailwind to the world economically.

Excellent. Well, Eric, we will check in with you if something urgent comes up. Otherwise, we'll follow up on that story coming out of China and the next job report a month from now. Thanks as always, for your time.

Okay, Dave. Happy Thanksgiving. Thanks, everybody.

Happy Thanksgiving, everyone.