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This is a business where getting it right means everything. I consistently say that. So I look for analysts who've had not only great track records, but seem to have a finger on the pulse of what's been going on the last couple of years. James Thorne fits that bill directly. He's the chief market strategist for Wellington Altus. Jim, thanks for finding time for us. I always like to get the chance to pick your brain about what's
know what's next and we're going to talk interest rates we're going to talk the impact in the economy what does it mean for individuals and you know that's the bottom line for us how can we help people that's what you do at wellington altus but let me start with this uh no particular order really but the thought that keeps coming to mind we've got the bank of canada
trying to, you know, sort of reduce, choke off whatever adjective we want, you know, economic growth. But we've got, you know, for inflation sake, but we've got the central government, federal government doing stuff that actually pumps up inflation. And we've finally had Tiff Macklin kind of refer to that. He's not blunt, but he refers. Wouldn't that be nice if we could sort of get on the same page? What's your take on that?
Well, I think maybe we live in interesting times. Yeah. Look, when you go on national TV and you basically say if 2% is Sankar Sank for the Bank of Canada, then these central bankers need to speak up, whether it's Tiff Macklin or whether it's Jay Powell. You've got, rightly or wrongly, you've got policymakers in Washington and Ottawa have used the fog of the COVID pandemic to
to implement a progressive left policy that I don't think anybody signed on for when they started doing these extreme monetary policies in the middle of March 2020. And so I think, you know, the central banks, I think Jay Powell and Tiff Macklin are, you know, I'm not going to use the term upset, but let's be frank, the central
We started to come out of the COVID pandemic in 21 and they should have stopped all these special programs then. And they went way too far. And so now we are dealing with the brunt of that. And unfortunately, Jay Powell and Tiff Macklin were put in a very difficult position by the policymakers and they're pushing back.
Well, the other thing you've been saying for a while, as I'm going back, maybe the Outlook conference a full year ago, it might have been two years ago, too, saying, hey, look, don't look for interest rates to come down until this coming, you know, sort of March, April period.
And you said that ages ago when, you know, when people were saying, oh, they've got to lower the rates, you know, is that kind of stuff? You said, no, it's not going to happen. They're going to keep increasing rates and they aren't going down earliest, as you said, the end of the first quarter. I'm just wondering where you're at with that now. Yes, I think Canada is going. So so the real question is going to be is what do they do?
When Canada, what does Tiff Macklin do when the economy goes into a recession and we're going into a recession? And how do they respond to that? And so I think, unfortunately, Tiff Macklin has had to blindly follow the move of the Federal Reserve. They raised rates too much.
We are in an economy that is much more interest rate sensitive. We have our mortgages aren't 30 years. We are more dependent on the housing market and we have more personal debt to disposable income. So we're going to have a hard landing in Canada.
Right. And I think we're going to have a soft landing in the United States. So I would expect Mr. Macklin to start really starting to think about reducing interest rates in January or February of this coming year. And I think that's,
Then, Mike, I think we have a two-year period, let's say between 24 and late 25, where they bring rates down. And we get sort of the echo of the COVID situation, which is going to replicate what happened after World War II or World War I, where we get off the sugar high.
Fiscal policy does stop. Economic growth does really dramatically drop off. The effect of high interest rates on the real estate market is felt and they start cutting rates. And we pivot from inflation to deflation, secular stagnation and growth fears, which is exactly what happened in the early 20s.
And after World War II, everybody there, it was called the forgotten depression in the early 1920s when we came out of World War I and the Spanish flu. So but I want to I want to just sort of amplify, you know, the question you have when I look at in my mind is I honestly it's a pity. And that's why I use Shakespeare, that there's something rotten in Canada. I honestly think that that Jay Powell and Tiff Macklin are smart guys and they know everything.
If they had us in the room and we're talking with them like this and it wasn't political and they weren't ahead of these institutions, they would be agreeing with us. Right. They've got a political minefield to negotiate. So I'm of the view, Mike, that we really aren't going to know what the long term ramifications of all this mess is until 26 or 27.
Right. But at the same point in time, I think we need to batten down the hatches and recognize the fact that we're going to have a significant economic slowdown. We're going back to deflation and people are going to be surprised at how rapid interest rates come down in 24 and into 25.
See, that's where it's going to get interesting, too, because I appreciate the interest rates go down. Sovereign debt becomes a little less onerous on the interest side. But the other side, man, if we're going to have a significant and again, sorry, I'm digressing, but
I want everyone to hear you're making a distinction between the US and Canada. We're talking Canada this moment, which is we'll have a more severe drop down. Well, you know, look at our debt situation across the board. Look at our government debt. Well, revenues are going to go down to that. Yeah, I appreciate their interest expenses going down, but revenues are going to go down. I'm just saying it's not a very nice cocktail that we're looking at here.
Right. And so and so the way we get out of like so when I first met you, the question we always talk about, we've got this debt mess that we got to get out of even before COVID. We've got this debt mess. And so the way you there's three ways you can get out of it. Right. And I'm going to just be general here. So let's let's just we can do the left way, which is tax rich, tax the rich and redistributing and redistribute that. That doesn't work.
We could do the extreme right way, which is trickle down economics, right? Which is give tax breaks to the ultra rich. That doesn't work. And the third way, what we hear a lot from newsletter writers is the Austrian way or the Austrian school way, which is let's just blow it up and burn it down, right? And that's not going to work. And why I would say that to you, Mike, is if that was the case, they would have done that in 1997 with the long-term capital management crisis. Remember the Asian-Continent crisis?
So then how do we get out of this basic question? And the way we get out of this is we grow. We grow with the private sector. And so what I would say to your viewers is all is not lost. And what I would say, if you're going to think about where you want to position yourself in this mess, and we've talked about this, look at Bitcoin.
People are buying Bitcoin. Look at, we call it the magnificent seven. Look at these large technologies. Listen to what you said. First time I ever met you, you said, and I steal your line all the time, Mike, and I don't give you credit for it. Every company has to be a technology company. That's where we are. So what we need to get into is if we bring rates down, economic growth goes down and your, your, your listeners should think about innovation, growth,
technology, if we're going to blow this up, then it's going to be the blockchain. It's going to be some variation of Bitcoin and Ethereum. If you want to go into gold, that's fine. But what I would say to you is,
The millennials will go into Bitcoin and look at, and this is where I get a little bit more Machiavellian is, look, isn't it interesting when we first started talking about Bitcoin and blockchain, where it was a scam, right? Well, Mike, you and I are old enough to remember that's exactly the same pitch we heard about the internet in 1995 and 1994.
And once the establishment got a hold of it and grasp it, it became the go-to theme. What do we have happening now? We have mass adoption of Bitcoin by Wall Street, Bay Street will follow, and we're in front of this thing called the halving cycle.
So, what I'm saying to you is, you know, when we talked about a little bit about the new financial system, yes, we have the solution. Interest rates are going to come down. Where do you want to invest? I think, Mike, that this in Canada is going to look a lot like it did in the 1990s.
And what happened was you had the real estate bubble. You had John Crow come in. He raised rates. He wiped out. We had a real estate correction. But then real estate went sideways for a decade. And here's the thing. Banks in Canada did okay. Why? Because it wasn't Scotia.
It became Scotia McLeod. And they embraced the capital markets. Dominion Securities was bought by Royal Bank. The banks need another income stream. The banks need another vehicle like the capital markets, like they did in the 1990s.
to basically, and I won't call the storm. Let's look at this glass half full. Real estate goes sideways for a decade. What's that going to be? It's going to be blockchain. It's going to be crypto. It's going to be tokenization of assets. And when that happens, Mike, there's your building of the new financial system. Think of it that way. Let me, and again, that comes out of the private sector, though, what you're saying there. It's not going to be government driven. Yeah. Well, that's, let me just ask a simple question.
Or I'll just reflect on my own feelings. I have absolutely no confidence that the people who brought us into this mess, I'm talking the fiscal policies that begat the monetary policies, but the fiscal policy, I think they're clueless. I look at our productivity numbers, you know, I look at our capital investment per worker, all of those things, you know,
I'm really with you on the private sector will have to have to lead this out, have to the only way out is growth, the least painless way, you know, least painful way is growth. And but I don't have confidence in the in the people in politics to either even at the basic level, understand them, let alone implement. I mean, for example, the federal government, and I don't want to be overly political here, but 215, they come in power, I'm still looking for the first productivity enhancement proper policy.
You know, I'm still looking at policies. Where's your policy to really encourage innovation? Not more government handouts. You know, that is not a long term solution. So I'm just wondering what your take on that is.
is. Sure. So I became very unpopular up here in Canada a while back when I said, get out of Canada. Because if you're sitting there thinking about what you just said and the facts you just laid on the table, right? And then you sit there and go, well, we're going to go through something like a 1990s and an innovation boost to grow our way out of it. Canada has none of that.
OK, we have nothing. We have what Shopify. Right. And in the 90s, we had something. Right. We had Bell Canada. We had Nortel. We had JDS Uniface. So first off, it's get out of Canada. And we know from data that that the average Canadian has 50 percent or 52 percent of their assets in their assets.
RSP in, in Canada where, you know, it should only be about 3%. Right. So, so that's the first thing. Right. And then I think you've touched on, and I think, but there are, and so that's first, so let's go talk politics and I'll, and I'll sit there and say politics, we're going to, I'm going to focus on the Ottawa, but we could apply it to the provincial level as well and the local level, but let's just focus on Ottawa because it's easier. Right. Yeah.
The Liberal Party that exists today, Justin Trudeau's Liberal Party, is not the Liberal Party of his father. And one of the things that his father did was he basically went on the record. I put it on my Twitter feed. He went on the record in 1979 and said, we are going to stay in the center. And what the Liberal Party of this country did is they basically, with the NDP, they went extremely left.
And I think to the surprise of many of the establishment within the Liberal Party, and we could also apply that
to the Conservative Party, right? I mean, so let me be clear. I grew up in Ontario, right? I'm a small C conservative. Like Bill Davis was my type of a conservative. Like I'm not a far right conservative guy. Be that what it may. So what we have is we've got these polarizations, right? And what will be interesting to see is who will go back and take the centre because
Because that party that takes the center
will run for the next decade, I think. And I'm not, I am not, I am not saying it's to, I'm not, let's leave the party out of it. But what we're going to start to see within the United States, within Canada, let's look at New Zealand, the far left progressive party lost. We can go through Europe. The far left progressive policies are losing election after election. So,
We're going to move back to the center. And it just a minute. It's just a matter of time of how that happens. Right. Does that happen internally within the Liberal Party before the election? Does that happen after? And so I I know there's a lot of consternation, but I'm still very bullish for the run because into the end of the decade, because Mike,
If everything you say is correct and we need to get that productivity growth going,
Necessity is the mother of all inventions. And we will be, the banks will be forced to absorb blockchain because they need the product line, right? Everything's going to happen, AI. So I am much more constructive. But I want to amplify with what you say. I mean, I wonder what Pierre Trudeau would say today if he was alive, seriously.
seeing how his son has moved his party to the extreme left, because that's not what politics was up here, you know, in the eighties and in the nineties. So yes, we've gone too far, but let me ask last thing. And we talked about this before the demographics have suggested that this should have happened. Right. And so the real question is going to be, and I think it's happening is look, uh,
the bank of canada raised rates okay let's argue about whether or not the carbon tax
is acceptable or not, right, Mike? And you and I, we voted, we're a democracy. And let's just say, you know, guess what? We decided as a community to put the carbon tax in. Fine. But guess what? Why not do it in a less inflationary way? Why are you doing it right now? And then you sit there and go, well, because, you know, the government says we don't care about monetary policy or inflation.
Well, they do now. And you know why they do now is because the cohort of individuals that basically voted them in has a variable rate mortgages and they're trying to figure out what they're going to do.
And this is exactly what happened to the baby boomers in the 60s when they forced their social programs down on us. Guns and butter, the great society. And if you know what people miss is that the foundation for that inflationary spike that happened in the 70s. Yes, it was going off the gold standard. Yes, it was the oil shocks.
But it was the progressive policies that were forced on society by the baby boomers in the 1960s that was taken up by the Kennedys and Lyndon Johnson. We're doing the same thing. So what happens?
The boomers get older. They got to buy a house. It's 16% mortgages. And guess what happens? They temper their social views a little bit, don't they? And if you look at the polls with Trudeau and what's happening with the liberal parties, I think they're really surprised at how quickly they have abandoned climate change and ESG for being able to have a house. I think it's really interesting, but it's not unique. I'll put it that way.
Well, the other thing is very understandable. I mean, that's been a theme of ours on Money Talks, that it actually, by the way, wasn't inflation, it was the cost of living. And I make a distinction. Like if you've doubled the price of my groceries, I don't care if it doesn't rise further after that. I can't buy the groceries anyways. And I think that's a mistake when I look at the general analytical approach from economists. No, no, no, it's not inflation. It's I can't afford that.
And now, so what if it's only jumping another 2% instead of 8? I can't afford it. But the other thing I just want to emphasize, and I could go on all day with you, I love hearing what you got to say, is I agree completely with what you're saying. I think it's the private sector's turn and they're going to come out. My worry is how much pain has to be experienced because we got people losing their houses now.
You know, that's a very painful thing. We've got others who literally are wondering, how do you make ends meet at the most basic level, like food, like letter? And so I believe that change will come. I believe we'll have to look at the economy. It'll have to be prioritized. I just hope there's not a heck of a lot more pain before that recognition comes to the general public and then the politicians after that.
Sure. And I think if they hit the perfect golf shot, right. And if you hear what they're talking about, right. So what's different about now from, from the world war two is they had the level of debt that we had today, but they kept interest rates pegged. They couldn't basically do anything with interest rates until 51. Right. So, so what,
What happened is you don't have the interest payments on debt, right? So what does that mean? Well, interest payment on the federal debt in the United States is going to cross a trillion dollars, which is going to be more than the appropriations for the military. All right. So we're going to have austerity. That's why I think economic growth is going to slow more. I mean, the point about going back to secular stagnation and deflation were based on
digitization, demographics, debt to GDP and globalization. That's not argued about in the power corridors of the economy. Where people argue is that it's not going to be as bad as we thought because of the fact that they were going to do what they did after World War II and basically come out with a Marshall Plan and Eisenhower did the big infrastructure plan for the interstate highways in the United States, right? Okay.
Well, because we had fiscal policy run wild because of the pandemics, guess what? Mr. Biden and Mr. Trudeau's policies are basically put in a penalty box for, I don't, let's say, two, three years, right? Austerity is going to come. We're going to be forced to have that happen. And so if that is the case, then what is the best case scenario if you're sitting there as a central banker?
The best case scenario would be to get it back, get interest rates down to two to two and a half percent overnight. Let's say two and a half to three percent. Let's just argue there. And then let's sit there.
And then, Mike, if you can't afford your house with the Bank of Canada overnight rate at two and a half percent to three percent and you're on a variable rate mortgage, then I'm sorry, Mike, you don't deserve to have the house. If you have a business that can't basically run at two and a half to three percent overnight rates, then I'm sorry. OK, so when you hear them say interest rates are higher for longer and you listen to them carefully, what they're talking about is they don't want to go back to the zero bound.
Yeah. Right. It's not clear that that's going to be the case, though. Right. So I would suggest to you that we're going to get back down to two to two and a half percent, three percent. Let's just say three to keep everybody happy. Three percent. And it's going to happen faster than you think, because I am expecting a growth scare. And this is exactly what happened after World War Two. Right. What happened was you had the growth spare and everybody thought that we were going to go back to the 30s.
Right. We're going to go back to the 30s and we're going to go back to deflation. That risk sits there. And so I would suggest so if that is the case, what do you want to do? Right. Well, like we've been talking about since I've known you, digital assets. Right. Any company, if you're in equities, any company that is not becoming a technology company or isn't a technology company, you should not consider.
Because the biggest theme in our lifetime on a private sector basis is going to be the move from the analog world to the digital world, which you and I have been talking about forever. That's our saving grace. That's our saving grace. And then when we get to 26 to 27, then we're going to have to figure out if our real concern is because look, Mike, if they don't change their ways, right?
Then Jamie Dimon, the head of J.P. Morgan, has come out. We're going to have 10 percent overnight raise. We're going back to the Volcker area. Like we are going back there and there weren't. So either. And so what I hear is when you look at the the the the at least in the the the establishment folks.
on the left and the right in this country and in the United States, they are starting to voice their concerns about the extreme polar policies. I'm trying to be agnostic here, but I'm trying to say we need to move back to the center. We need fiscal responsibility. And in that type of environment, growth is going to be slower than you think.
We're going back to low inflation or deflation and low interest rates. How long that lasts? I think it's going to last for a couple of years. It's going to be tougher in Canada than the United States. So I would get out of Canada and into the United States, and I would look for areas that are evolving.
And companies that are, and that's not to say that we've talked about commodities before. That's not to say that commodities are left by the wayside, right? It means, you know, ExxonMobil is a fantastic technology company, Schlumberger. There are energy and commodity companies and mining companies that are embracing technology. That's a secular theme that's positive, right? So there's a lot of positives, a lot of positive that we can hang our hat on.
Well, as I say, I'm really looking forward to this because you're going to be at the World Outlook Conference February 2nd and 3rd. There's just a ton to talk about. I mean, these are unusual times. I use cliches like historic change, but we've seen it. We're living it right now. And I know that that's what you spend your 24-7 thinking about on behalf of Wellington, you know,
all this, the private wealth, all of that. And I appreciate very much you share your expertise with us, but I'll be looking forward to seeing you February 2nd and 3rd at the World Outlook Conference. Thanks for having me, Mike. Terrific stuff.
