Transcript: 2019 Economic Outlook with Benjamin Tal

2019 Economic Outlook with Benjamin Tal

Benjamin Tal

Jan 24, 2019 12:00 pm to 1:00 pm ET


Good afternoon, everyone, and thank you for joining us today. MORGAN DE HAMILTON: On behalf of CIBC Investor's Edge, I would like to welcome you to this webinar. My name is Morgan Hamilton, and I will be your host for this event. Now, a few things before we get started.


CIBC Investor Services Inc. does not provide investment or tax advice or recommendations so everything we share with you today is for education purposes only. We are recording today's session, and a link will be emailed to any that registered online. To view this webinar in full screen, please click on the expander arrows located on the top right hand corner of your screen. And if you have any questions during the presentation, please kindly take a note, and you'll have the opportunity to submit your question after the presentation.


Our topic for today's webinar is going to focus on the economic outlook for 2019. To present this today, we are very excited to have CIBC's deputy chief economist Benjamin Tal here to share his expertise in the subject matter. Mr. Tal is responsible for analyzing economic developments and their implications for North American fixed income, equity, foreign exchange, and commodities markets.

National and global media regularly seek him out for his insights and analysis on economic issues that impact financial markets, consumers, corporations, and public policy. With great pleasure, please join me in welcoming Mr. Tal for today's presentation. -Benjamin Tal: Thank you very much. A lot to talk about, and not enough time. Clearly, as the title of this presentation will tell you, we are trying to normalize the abnormal.


I can give you a brilliant economic analysis here: One tweet will change everything. So we have to really realize that we are trading in an uncharted territory, and we have to see to what extent we can focus on global forces that are there, Trump or no Trump. Because Trump is a game changer, but the fiscal, monetary, structure of the economy haven't changed, and we have to understand what makes sense and what doesn't. So let's start with the big picture.


And the big picture is that the global economy is actually slowing down. 2017 was a peak year for the global economy at 3.7%. Every economy did better than expected, led by Canada, by the way. So a rate of growth of about 3%. The only exception was the US economy, which continued to grow in 2018, when the rest of the global economy actually went down, from 3.7 to 3.4, and clearly Canada went down dramatically. So the question is: Why? And the answer of course is Trump. The US is able to outperform because of the tax cuts introduced by Trump for 2018. This fiscal lift was a very significant lift that is really helping the US economy to outperform other OCED economies.

The question is: Will it last? The short answer is: No. As you can see 2019, you will see the US joining the rest of the global economy in slowing down. So the peak was 2017. Everybody with the exception of the US went down, slowed down in 2018. And now in 2019 we will continue to slow down, with the US joining the group. The issue with the US is that the short-term gain of 2018 due to the fiscal stimulus introduced by Trump will be replaced by a long-term pain that might put 2020 at risk of a recession, we'll discuss it in a second.

[No Surprise: Commodities Are Cyclical]

But clearly when the cycle is turning and when we are slowing down, it's very clear that the commodity space is not a place you want to be in. Commodities are, in general, very cyclical. And this cycle is no exception. So I see a situation in which the overall... global economy is slowing down, suggesting that the commodity basket is not going to be a place to be. And of course, one exception is the oil market, which is supply, demand, and geopolitical issues. And in fact I believe that the oil market is an interesting buy at this point. I think that when it comes to Alberta, when it comes to Canadian oil, I think that the market punished Canadian oil a bit too much, Canadian producers a bit too much.

Basically the market is operating under the assumption that we will not see any pipeline capacity coming over the next few years. That's not going to be the case of course. We're going to see Line 3 coming, Keystone will be there, and even Trans Mountain I think would be there. So I think that the market has been too rough on valuations in the energy sector in Canada. Therefore I see it actually as a buying opportunity if you have a time horizon of a year or two. So that's basically a footnote regarding the oil market. So the cyclical story means that the commodity market overall will not be very attractive, and the question of course:


What does it mean for interest rates? Now, as you can see from this chart, interest rates of course as we all know have been rising in North America, but not much relative to any other cycle. In emerging markets, interest rates have risen very, very quickly back to what they used to be, simply because of the fact that those economies needed to protect their currencies and that's something that led to this huge increase in interest rates. We haven't seen the same in the west, basically the increase in interest rates has been very, very limited historically speaking and the question is how close we are to the end of the cycle, the end of the tightening cycle, and that's really the topic of the next chart.


And the next chart is a very telling chart. It's a bit scary, so let's discuss it. This is the yield curve. This is basically the difference between long-term interest rates and short-term interest rates. Usually, long-term interest rates are higher than short-term interest rates, and that's a normal situation. But there are occasions, as you can see from this chart, that we have what we call an inverted yield curve, in which short-term interest rates are higher than long-term interest rates. Now, taking a very close look at this chart, what happens a year after we see an inversion? There is a recession. With no exception.

We see in which the yield curve was a very good predictor of a recession. In fact, some say that the yield curve is the best economist out there predicting recessions. And we have seen it in 1988, in 2000, and clearly, recently, the mother of all recessions. And every time it happens, all those smart economists will tell you: Don't pay attention to it, it's very, very technical, you won't understand, it's not telling you anything. Even in 2006, Bernanke told the market: Don't worry about this inversion, it's all technical.

Sure enough, a year after, we're in the mother of all recessions. The point here: We have to respect the message from the yield curve. And as you can see now, we're very close to inversion, we're not there yet, and we are very close to inversion, the question is, what is the message? And I think that in order to get the message we have to understand why those yield curves were inverted. And I suggest that every economic recession over the past 50 years was helped, if not caused, by a monetary policy error in which central bankers were chasing inflation that was not there, only to raise interest rates way too quickly, and high interest rates killed the economy. I suggest that the '91 housing market crash in Canada was caused by a monetary policy error when the central bank raised interest rates way too quickly.

Even in 2006, although... the central bank was not the cause of the recession, it clearly made it worse when Greenspan raised interest rates very, very quickly between 2004 and 2005. So, the speed at which central bankers were raising interest rates in the past was the main reason why we have seen an inverted yield curve and therefore a recession. Will central banks, this time around, repeat past mistakes? Will the Fed and the Bank of Canada repeat past mistakes and invert the yield curve? My suggestion is no. I don't think they will do it this time. In fact, until 2 or 3 months ago, most central bankers were very, very eager to continue to raise interest rates and we were running the risk of another monetary policy error, but then they stopped.

They stopped and both central banks are telling us now: We are taking our time. This is not going to be business as usual. We are not going to invert the yield curve, there is no reason to be too aggressive on monetary policy, and that's something that I believe will be the difference between this cycle and the previous cycle. It doesn't mean that we're not going to see a recession, but it means that we are not repeating past mistakes when it comes to monetary policy.

Both central bankers will tell you: At this point we are not willing to be too aggressive, inflation is not a major issue, wages are not rising in any significant way, and clearly, the cycle is telling us that the economy is slowing, and both central bankers are telling us: Our focus at this point is not inflation, our focus is more economic growth. So let's focus on what's happening when it comes to economic growth in the US and what the Fed is witnessing.


First of all, something very interesting is happening. We have a situation in which the Federal Reserves in the US-- They have been raising interest rates for a while now. And still, as you look at the debt financing by households, it's actually going down relative to income. So interest rates are going up but debt payment's actually going down. The question is: Why? And the answer is that yes, the Fed was raising interest rates, still raising interest rates but the bond market is not cooperating.

Namely, if you look at the chart to the right you can see that, in the past, whenever you raise short-term interest rates, long-term interest rates go up, especially the 30-year rate, which is where most mortgages in the US are. Today, the increase in short-term increase rates did not lead to the same increase in the long end of the curve, namely the 30-year mortgage rate is not rising in any significant way, therefore people are not paying much on their debt. And that says something that is different, and therefore you don't see more obligations and more-- an increase in debt financing. That's extremely, extremely important, so that's actually supporting the consumer.


Another factor, is that... corporate profit has been rising very, very, very strongly. You can see, much faster than wages. This means that corporations have much more room to raise wages if needed, without actually transferring the cost to the consumer. Also we see a significant increase in the number of business applications in the US, in fact a record high number. This means that you will see small businesses still hiring. So yes, the labor market in the US is tight. I suggest it can be even tighter. Again, supporting overall economic growth. So that's the positive. However, the US economy is facing some negatives that the Fed has to take into account.


One of them is actually oil prices. You might be surprised, usually lower oil prices is a good thing. But not this time, because we have a situation in which the consumers, given where we are in the cycle, are not really spending this savings that they get from gasoline prices. That save it.


And when you save it, it's nice, but it's not helping economic growth. At the same time, we have to remember that the US is a major, major producer of oil. And when oil prices go down, as you can see from this chart, production goes down, and this production is impacting investment, and that's why we are seeing investment in the US starting to slow down.


And the futures suggest that actually it will continue to slow down, so this is a major factor facing the Fed, basically telling you: Listen, why raise interest rates in an environment in which businesses are not investing.


Add to it the fact that interest-sensitive sectors like housing and auto, are actually going down. The housing market is softening and will continue to soften. The auto sector is definitely slowing down, inventories are rising. Again, a reason to believe that this economy does not need a significant increase in interest rates any time soon. And then we have the big one.


And the big one is the fiscal swing that we are going to get. If you have a situation in which Trump is spending money when the economy does not need help, then something will happen later, when you have to pay this debt. We are talking about the situation in which 2018 was an OK year for the US. This year did not need a lift. Nevertheless, Trump spent $1.2 trillion of extra money, tax cuts, fiscal stimulus, lifting this economy when it need to be-- there was no need for it to be lifted.

And therefore, when you lift something when it's already high, you're only wasting a lot of money because it's not very productive, not very effective, so yes, we got a short-term swing, and we have seen a significant increase in activity in 2018, and that's why the US did better than the rest of the OECD. However, this was the short-term gain. The long-term pain is coming, especially in 2020, when we will see the mother of all fiscal swings. When you move from something very big, to something negative, it's a very, very big negative, 1.3% of GDP swing. One more accident and you are in a recession. And clearly we know what direction the budget deficit is going.


It's going up. And that's why we believe that the Fed is rethinking its trajectory. Until 2-3 months ago, the Fed was telling us: We are going and going and going. Just recently the Fed is changing its language.


All of the sudden it is much less aggressive and the market is now expecting a fairly muted response from the Fed. And in fact, I will not be surprised if come mid-2019, late 2019, the Fed will have a 2020 vision, if you wish, and basically will realize that 2020 would be a tough year because of the fiscal swing.


And it's not a stretch to believe that we will see a situation in which the Fed will be cutting interest rates, not raising interest rates in 2020. And even if they don't cut interest rates, they probably will stop raising interest rates, and actually they might even slow down the rate at which they're removing liquidity from the market.

So, the asset purchasing program. So, we have a situation in which the Fed is going to be much more dovish than it was suggested just 2 months ago, and this is a very important signal to the market, and one of the reasons why the market is now kind of stabilizing is because of the fact that we have a Fed that is not willing to repeat past mistakes, the market is starting to realize that the Fed is very, very close to end this tightening at this point, and this is something that is appeasing the market, helping the market to stabilize. Now, you cannot talk about the US economy without talking about trade.


And clearly, the trade situation is a factor. You probably remember this picture. He said this was a very friendly conversation Well I don't know about it, the question is: To what extent the US can win a trade war. And my suggestion is yes, the US can win a trade war against China, against Canada, and even Europe. In many ways, the US economy is an island. Their dependency on exports is much, much lower than our dependency, China's, or the European Union.


Nevertheless, it is going to hurt the US, and I think that if you look at the relative pain, clearly we are paying more, China's paying more, but the pain is everywhere, so who's going to win in this war? Well, I think my focus is really on China. It's not NAFTA, it's China. If we have a full-scale trade war with China, then we have a situation in which we are going to see a global recession. A global recession that will impact everybody. So the question is whether or not we will reach this point.


And my submission today is no, I don't think we'll reach this point, I think that China will compromise. China will compromise because they need to compromise, because the damage to China would be very significant. We have to realize that China has something called "Made in China 2025". That's a very, very, very important goal for them. By 2025, and they're not shy about it, they are telling the market, We would like to basically control, dominate this segment of the market in the high tech. We want to control it globally. It's called "Made in China 2025" and they are going for it, they are not shy about it.

Now if you look at what Trump did, the first wave of this trade war was a $50 billion tariff. 70% of this tariff went not to Walmart-type stuff, it went to "Made in China 2025" basically attacking this plan. This is significant, this is significant. In many ways, what Trump is doing is basically targeting China's future. It's targeting China's future, where they are most vulnerable. This is a brilliant, brilliant trade policy.

I think that this is something that is really changing the equilibrium globally when it comes to trade. And maybe it's a brilliant trade policy, maybe he has no clue about it, but his advisors definitely are part of it. And I suggest that because of this policy, where he is targeting China where they're most vulnerable, this policy will lead to a situation where China will find a way to compromise. China will take a very, very long-term view. They will call it instead of 2025, they will call it 2035. Trump is a blip, eventually we will reach that point, and I believe they will. Trump is just slowing China. And I think that the way they're trying to cope with the situation is 1, to spend more.


And China is going to spend more, they have some room fiscally to spend as you can see from this chart. They are still relatively low compared to advanced economies in terms of debt to GDP ratio, so they can really spend more money, they are already lowering reserve requirements, they're spending more, they're trying to lift their economy. They also can use their currency as a weapon. The Chinese yuan went down since May by about 7%. And that's a very significant issue because in the past, when the yuan went down, they market went crazy. In 2015 the yuan went down by only 2.5%, the S&P 500 went down by 8%, and emerging markets basically were collapsing.

Today it's down by 7%, nobody's noticing. The difference is that between 2015 and 2018, the Chinese government introduced a significant amount of capital control that is controlling and limiting money fleeing out of China. And if you ask any developer and they'll tell you in Vancouver, they will tell you that less and less Chinese money is entering our economy, so the real estate market, reflecting how difficult it is to get money out of China. Something that is really impacting not only China, but also many other countries, including Canada. Now what does it mean? Given this environment, I suggest that there's some mis-pricing in the market.


2018 earning per share was about 10% if you exclude the tax aspect. So the tax aspect was huge, basically half of the increase in earning per share. That's extremely important. 2019 you don't have it, and we are basically expecting after revising downward, roughly 7%, that's what the market is expecting, makes sense. What does not make sense is 2020. 2020, we're talking about 12% or so, which is roughly what the market has seen in 2018 without a tax, but remember 2018 was a much better year.

2020 will be a weaker year with the fiscal swing, therefore I think that the market is mis-pricing 2020. So the way I'm positioning myself now is the following: I think that the stock market in the US is now trying to find some sort of equilibrium and I will not be surprised if with the Fed not moving, and some sort of compromise coming from China, there's another possibility of some improvement in the stock market in the US, generally speaking, in the next few months.

At that point, if it goes up, I would take profit and wait for the market to adjust for the mis-pricing of 2020, which I believe is a bit too strong. Now, all this is the background. Now, we have to deal with one issue, which is the core of the issue of the difficulties and the trajectories that we are seeing in the global economy, especially in the US and Canada. And that's the cycle. Where are we in the cycle? By May of this year, by May of this year, this cycle, this expansion is going to be the longest expansion ever. And the question is, Why? And the answer is the wedge mechanism. You see, what is a cycle? A cycle is the following: When the labor market is strong, like now, the unemployment rate is down. Wages go up. Wages go up because of the improved bargaining power of labor. Wages go up... inflation goes up. Inflation goes up, interest rates go up, and higher interest rates kill the economy. This time around, yes the labor market is on fire, but wages are not rising in any significant way, as you can see from this chart.


The red bar is telling you where we are now compared to where we should be, so something is broken here. Something is broken here, the wedge mechanism is broken. And the question is, Why? And the answer is extremely important to understand. Part of the story, of course, is, I suggest...demographics.


Look at this chart. This chart is telling you the story. We have 3 lines here. One is young people, basically stable, the other is prime age, 25-55, down. The fastest growing segment of the labor market today, by far, is the...age group 55 and over, by far.


The fastest growing segment. Now, in the past, when you're age 60, 62, 64, you know, they give you a piece of cake and a watch, and they say goodbye. This time that's not the case. They are involved, they are healthy, they are happy, and they are in the labor market. They only thing maybe, what they do, they take Friday off. So as you can see from this chart, you have more people working, but they reduced the number of hours, that's why we've seen sometimes the disconnect between number of jobs and the number of hours worked in the economy.

This demographic story is very important because it means more people working less. Another disinflationary force here is that when you're 62, 63, 65, let's face it, you're in the labor market but you're not after the next dollar. If you're in your 20s, that's exactly what you do. So the fastest growing segment of the labor market is the one that's not asking for a raise. That's another disinflationary force that suggests that we are going to see much more subdued wage trajectory over the next few years because this demographic story is just unfolding and it's a very powerful one. The other reason why the wedge mechanism is broken, of course, is the mismatch in the labor market.

We have people without jobs, and we have jobs without people. This mismatch in the labor market is really changing the wedge mechanism, the way we know it. And by the way, I would suggest that this mismatch in the labor market is resulting in a significant... widening in the income gap in Canada, in the US and Europe, and that's something that was leading to Trump, leading to Brexit, so everything is connected. The reason why the expansion is so long, namely the fact that the wedge mechanism is broken, is the same reason why Trump is the president today, and I suggest that the economic story and the political story is one.

Something that we really have to understand, and it's not going to go away, it's not people not liking Hillary, it's much bigger than that, there is a big cry here, reflecting this economic reality of the mismatch in the labor market, resulting in a significant widening in the income gap, and unfortunately it's getting worse, not better. Now, given that, you are the Bank of Canada, what do you do? Clearly the Bank of Canada would like to find a way to actually overcome what we're seeing in the US, because the tax changes in the US were a game changer.


Not only for the Americans, most of all for Canada. Let's discuss it for a second. I remember, you know I used to represent the Canadian government as a private sector economist in Europe, that means I used to go to Europe and talk to European investors why they should invest in Canada, and I showed them a PowerPoint presentation and I basically told them the tax rate in Canada is lower than the tax rate in the US, invest in Canada, have a good day.

Now I have to change this presentation because now after the change, their tax rate is actually lower than our tax rate. Something that is really impacting investment. As you can see, Canada needs this investment more than the US. And now we are actually underperforming when it comes to that. In addition, we have a situation in which they can repatriate money, about $2.3 trillion coming back to the US, going to dividends and stock buybacks.

Very, very important. And also, as you know, in the US they don't have global warming, we do. So we pay for carbon, they don't. That's something that is really, really impacting the psyche of businesses and the movement of capital, and how much capital is actually coming to Canada, so our ability to compete with the US has been compromised over the past year because of those changes in policy. And I suggest that this is something that we have to take into account. Now, the Bank of Canada knows all that, and has to take this into account, especially in an environment in which--in which we look at our export performance.


And our export performance is nothing to write home about. Even with NAFTA, and by the way, the renegotiation of NAFTA, or NAFTA 2, if you wish, was very important, I think that we were very, very close to a 25% tariff on autos that would've been recessionary in Ontario, so the fact that we got what we got I think is just...sign the dotted line and run, and don't look back.

Because think it's a good deal, unless of course you're in the dairy industry, otherwise the new NAFTA is a good deal, but even with a good NAFTA, with the first NAFTA, if you look at the red line you can see that we have a situation in which our export performance was nothing to write home about, lagging the US and global trade. And the Bank of Canada is realizing that, so don't expect this all of the sudden to change because we sign NAFTA, it will not. It's a much more structural issue, and clearly what it means that maybe we need a lower dollar, or relatively weak dollar, and I think that Bank of Canada, a bank with an agenda, would like to keep this dollar low, and that's why they are going very, very slow with interest rates.  


As you can see here, we have a situation in which the Bank of Canada moved very, very gradually. But if you compare it to previous cycles, not in any significant way different. You see, the red line is basically what the Bank of Canada did this cycle. compare it to previous cycles, and it's not a muted tightening trajectory by any stretch of the imagination. You basically can stop now and it would be a normal tightening cycle.

The only difference, it started from a much lower base. Basically a situation in which interest rates went almost to zero and then they started to go up, as opposed to any different cycle, but the magnitude of the increase is more or less the same. And I suggest that it really doesn't make much of a difference where you start from, what counts is the effectiveness of monetary policy, namely how much every basis point will impact the economy, and I suggest by a lot.


Because, as a society, as an economy, we are much more sensitive to the risk of higher interest rates. We have a situation in which interest rates can be a powerful force today. The debt-to-income ratio at 170% is the highest ever, so every basis point counts, because people carry so much debt. This is very different than what you have seen, by the way, in the US, where they went through the mother of all deleveraging. And therefore they are less sensitive to the risk of higher interest rates.

That's not the case here. And therefore we have a situation in which every basis point counts, the Bank of Canada knows that. And maybe what the Bank of Canada is telling us, maybe the disease is also the cure. Maybe the eco-sensitivity to higher rates will prevent interest rates from rising to the sky. Another reason why I believe that the Bank of Canada is almost finished, when it comes to interest rates.


Remember, consumer credit, household credit now, is rising at the slowest rate in any known recessionary period over the past 50 years. You have to be in a recession in order to see credit rising more slowly, in fact credit now is rising more slowly than what you have seen during the 2008 recession. So we have a situation in which the combination of B20, which is the regulations by the government to make it more difficult to borrow, and higher interest rates together are really impacting the split at which consumer and house credit are rising, and again, relative to the US, we are much more sensitive because we carry more debt consumption, debt relative to GDP and income is much, much higher.

So we have to take all this into account and get into the psyche of the Bank of Canada, and this Bank of Canada clearly has no motivation whatsoever to raise interest rates in any significant way. They changed language dramatically since October. In October they were very bullish talking about taking interest rates from 175 to 3, now even 2 sounds too high. So all of the sudden they change because they realize that if they go to 3% they probably would overshoot and they would invert the yield curve and that would cause a recession, especially in an environment in which other things are slowing down, especially the housing market, the consumer.


And higher interest rates can really impact, because this is just the beginning, people are paying more for their debt. And overall, if you look at B20, I suggest B20 changes to regulations, making it more difficult to borrow. I suggest that this is a major, major factor, a game changer, if you wish, when it comes to impacting the trajectory--add to it higher interest rates and you have the recipe for a slowing housing market, slower consumer spending, and investment is not happening.

So I suggest that we will see 1.5-2% GDP growth in 2019, no reason for the Bank of Canada to go in any significant way. For the housing market overall in Canada, of course depends where you live, clearly the adjustment in Vancouver and Toronto is not over, I think it will continue, I think you will see a situation in which, in Vancouver, the condo space is starting to slow down, that will continue.

And I think that, in Toronto, the number 1 casualty was the low-rise segment of the market, namely detached, especially new construction detach. I think that will change, and actually the next leg to fall will be the condo space, because we have seen a significant increase in price, especially of new construction relative to existing sales, and this huge increase is simply something that we cannot justify, and therefore I suggest that we slow down, especially given the fact that both in Toronto and Vancouver 50% of new condo buyers are investors.

And 45% of them are in negative cash flow, which means that some of them will stop buying, some of them will be selling, there will be some increased supply, some reduce demand, that will take the condo space, especially new construction condo space, down, and it's already started dropping, and that will be the next shoe to fall. This is not a free fall by any stretch of the imagination.

This is just undoing totally crazy 2016 and early 2017 in Toronto and crazy 2015 in Vancouver that did not really... it was totally inconsistent with fundamentals, there was a lot of flipping there, and we have seen a situation in which now we are undoing it. This is not a free fall, but this is a very healthy adjustment. From a long-term perspective I believe that places like Toronto and Vancouver will be even less affordable unfortunately, given the attractiveness of the lack of supply and huge demand, especially coming from immigration.

So what does it mean in terms of investment, what does it mean in terms of playing the market? Clearly, if you are in the bond market, I don't see a significant, significant correction in the bond market, namely I don't see the short end of the curve rising in any significant way that would lead to a selloff in the bond market. I just see the bond market relatively stable with very limited increase in short-term interest rates, maybe 1 more move by the Fed and the Bank of Canada, if at all. I think that when it comes to the stock market, I think that valuations are very, very reasonable at this point. They are very reasonable, they are not expensive, and I think that we have seen a little bit of a recovery in the stock market, I think there is more room for that over the next few months, reflecting some good news probably coming from China. I believe that we will find some sort of improvement there. Even Brexit, if we get another referendum, that would be actually a positive story for the market.

The Fed would be more muted on interest rates, that will continue to support valuations. So I think that the stock market in the US is actually interesting at this point; at one point, maybe mid-2019, I will take a profit, because I think that this... this improvement will be short lived, and when people start realizing that 2020 will be a very challenging year, people will start tweeting about the recession, the fiscal swing, that's when you see valuations going down.

Especially given the fact that today's valuations are inconsistent with this kind of scenario. So I will participate in this rally in the market in the short term, and then I will take profit. In Canada, more challenging because of the fiscal situation-- the tax situation in the US that is limiting our ability to compete. So, more challenging, but there are some opportunities. I think that we can participate in the short-term rally in the-- of the US if it comes. Valuations in Canada are very reasonable. I like energy. I like energy in Canada because I think that the market was too rough on producers.

And I think that it's time to rethink those assumptions. I think that those pipelines eventually will be there, and I think that the market will compensate those companies because of that. I also like, actually, banks in Canada. After the adjustment, I think that banks are very attractive in terms of valuations, but more so, even with flat yield curve, namely interest rates not rising in any significant way and loan payments just not rising, we have to remember that banks in Canada do not borrow in a way that they in the US do. Their dependency on the yield curve is not as great, and I think that the mortgage market, the housing market, although slowing, we are already-- I've seen a significant slowing already, it's already priced in, so I don't see more negative news coming there.

In the US, beyond the short-term rally, we have to look at something that is not cyclical, and I think that the health sector in the US is interesting. I think that it was, I think, one of the only sectors that did well last year, and I think that given the way it has diversified, it's a good investment not only to get some gains, but also-- and not to participate in the slowing US economy and the slowing global economy, but also enjoy some diversification power there, so I like health in the US. So, we have to really be careful when we move, how we move, short-term looks good. Beyond mid-2019 I would be more careful as 2020 is approaching. Thank you very much. Now we'll take some of your questions. -MORGAN DE HAMILTON: Thank you, Mr. Tal, for your insightful presentation.


While Mr. Tal's reviewing some of the questions, I wanted our audience who joined in later to know, you can type your question in the Q&A panel located on the right hand side of your screen. If you wish to review this webinar again, a link will be emailed to everyone that registered for this webinar. Also, I'd like to request to the audience to ask questions more explicit to today's topic on the economic outlook for 2019. And to avoid asking questions that are specific to a security or company. Well, we have some questions coming in, so I'll pass it over to Mr. Tal now. -BENJAMIN TAL: The housing market in Alberta, of course, is facing major, major challenges. The oil sector in Alberta is facing those challenges because the collapse not only in WTI, but also in the spreads between Albertan oil and WTI.

Those spreads actually now have narrowed significantly following the decision by the government of Alberta to cut production. I don't know if it's the best course of action, but it was a necessary course of action to lower the spreads. As I suggested, the market's been very, very negative on Alberta for a while. The housing market in Alberta will relate to employment and the economy. I suggest that 2019 will not be a great year, so I suggest that if you are looking for a house, probably you have the bargaining power. I think that you will see, following 2019, 2020–2021 probably will be a better year for the housing market in Alberta, but for now I think that it's a buyer's market.

What do you need to see to happen in a soft landing scenario? I think that to get the soft landing scenario you need the Bank of Canada and the Fed to stop more or less where they are now, and I think that's very reasonable. So the issue now of a policy error is not really from a monetary policy perspective, it's actually from other perspective. We have a lot of errors happening, we have the trade dispute with China, which is an error. We have the fiscal situation in the US, which is a policy error. And we have the government shutdown, which is an error. So all those forces are now negative, so it seems that the central banks, the Fed would have to be the grown-up in the room, and therefore I suggest that you will see them actually keeping interest rates relatively low, and even actually cutting interest rates in 2020.

Something that can take us to a soft landing. The question is about Brexit, and one of the reasons why I didn't talk too much about Brexit is simply because nobody knows what's happening, nobody has a clue what's happening. And I suggest that even Theresa May cannot tell you what will happen. In a funny way I think that there is some room, if you want to speculate, to actually long the pound and the stock market in the UK. Because I think that so much bad news is priced in already, and if we get some sort of a new referendum or something along this line that might take us away from this madness, that would be a positive development.

So I think that given how much bad news is priced in already, I think clearly this is something that you want to look at, it's a risky move of course, nobody knows, but that's an interesting situation. The Canadian dollar against the US dollar. I think that the Bank of Canada is a bank with an agenda. They would like to see the dollar relatively low. And I think that they're relatively happy with where we are now.

Two factors will impact: one is oil, the other is interest rates. As I suggested, the interest rate story probably will not be a major, major factor...anymore because both central banks will be very muted over the next 12 months. So your call on the dollar will be a call on oil, and we think that oil will go a little bit higher. But I don't think that will be sufficient to actually take the dollar significantly higher. So I'm basically guessing that the dollar more or less will stay where it is now over the next few months, quarters. Emerging markets. Emerging markets is interesting. You know, emerging markets were suffering greatly because of the strong American dollar, and of course interest rates rising in the US, because most of their debt is actually US denominated.

With China trying to improve, China stimulating the economy, with China probably escaping a full-scale trade war because they will compromise, that would be-- and the Fed not moving in any significant way, that would be actually a short-term positive for emerging markets. I do believe that if there is a rally in emerging markets I would like to participate in this rally. It's almost similar to the rally in the S&P 500. It will be short lived, I will take profit, and then I will wait because I think that China will slow down beyond its ability to stimulate the economy.

And with China slowing down, emerging markets will slow down. But for now, for the next 6 months, I think that the emerging markets can be interesting. And especially I'm talking about the tigers here, the Asian economies that are more linked to China. By the way, there are clearly some indications that the high tech sector, looking at Korea, looking at other places, slowing down, so we have to be careful there, depends what industry you are, but overall I think that there's a short lived opportunity in emerging markets if we get some good news regarding trade with China. Yeah, I think that the question is about China waiting Trump's tenure without compromising.

Absolutely yes, I think that he will compromise. I think he will compromise and just wait Trump's tenure. I think that's their policy. Remember, they take long-term view all the time. And I think that... I think that this is something that we have to take into account. They don't want to put at risk their 2025. They simply will call it '35, so I think that's their strategy, and to minimize the damage. And in between, they will try to use the currency and some stimulus to ease the pain. The question is: Do you see a bear market in the next 12 months? That's a very, very good question. And that's a tough one. It's interesting, if you... If you chart the current trajectory in the stock market relative to previous trajectories, half of them were actually starting to recover at this point, from this point forward, actually, went up, and half of them went down, so it's basically 50/50 bearish market, bear market versus a recovery.

I will stick to the idea that in the short term, because of policy issues and because of interest rates coming from the Fed, there is still room for the market to go up, valuations are OK. So I suggest that, yes, the market in the short term can be interesting, especially in some specific sectors that we mentioned earlier. However, I think that beyond that, with 2020 being a tricky year, I would take profit. OK, there's a question on immigration. And I think that the issue is about the housing market and immigration, absolutely.

And that's why I believe that from a long-term perspective, the housing market will continue to be very, very strong. My point about the condo space being the next shoe to fall is simply because of the fact that despite this demand, and especially investor demands, we are seeing a situation in which supply is going to be a bit stronger. We have to remember that it's not that we are dealing with fundamentals, we are dealing with a crazy 2016 and early 2017 that simply did not make sense. A lot of this valuation was based on speculation. As opposed to real fundamentals. The minute we undo it, and we are in the process of undoing it, we'll go back to something normal that is more consistent with the very strong demographic story. There is a question about lines of credit and the environment of high interest rates. If you look at delinquency rates, it's true that actually we're seeing delinquency rates in lines of credit rising a bit faster, or slowing more slowly than any other products.

And one of the reasons is that we have seen debt moving from credit cards to lines of credit. The overall impact of the line of credit on the market is not very significant, it's a misconception, it's relatively small. I think that if you want to focus on the housing market, you focus on the mortgage market at the margin, the line of credit. What's interesting, that's a side note, is that we are seeing more and more, because of B20, because of the changes to regulations, we are seeing more and more people actually going to alternative lenders, and that's something that worries me, because alternative lenders are less regulated, so we are shifting activity, if you wish, or shifting risk, from the regulated segment of the market to the unregulated segment of the market. How does the US political shutdown impact outlook?

Absolutely, I think that's, again, I think that never before have I seen a situation in which policy errors are so important in determining the overall trajectory of the cycle. And clearly the shutdown, although it will be reversed soon, obviously, it is impacting the psyche of consumers, the psyche of investors. So it's not a positive, so it's an amazing situation to see how policy errors are impacting the economic cycle, and that's why I believe that the Fed will be very modest, because the Fed will have to undo the damage of all those unforced errors. Is the US dollar at the risk of losing its reserve status? The short answer is this will be such, such a slow process, that it will be almost irrelevant from an investment perspective.

People have been talking about it for a long period of time. That's not the case. The case is that it's there, it will continue to be there, yes over time clearly it will lose some of its importance, but it will be such a slow process. Should I buy gold in this environment? I think that if you ask me what is the number one factor impacting gold at this point, it will be the value of the US dollar. It's not going to be demand, it's not going to be supply. It's going to be the value of the US dollar.

If you believe that the dollar will go higher, don't, and vice versa. I think that many people believe that the US dollar will go down from this point, after going up for so long. I'm not so convinced. I think that it's already priced in that the Fed will not move in any significant way, and I don't see the ECB, the European Central Bank, or the Bank of Japan moving on rates any time soon. So I don't see what will take the dollar down dramatically. And therefore gold is not very interesting at this point. So the question was about... About, you know, sensitivity to higher interest rates. And if people are actually paying more, what does it mean.

As I said, as a society we are much more sensitive to the risk of higher interest rates, and those interest rates have risen. I that the... There are all kinds of people talking about how close people are to delinquencies, bankruptcies. We don't see it. I don't see a major, major issue with delinquencies at this point, they're actually not rising in any significant way. The labor market is strong. The number 1 issue is the labor market. The minute the labor market goes down, then delinquency rates will go up. The only reason why the labor market will go down is a recession.

The recession can be caused by significantly higher interest rates that will limit the ability of people to spend because more and more money will be paid to service debt. This can be recessionary, a consumer-related recession that will lead to higher unemployment and then you will see delinquency rising. I don't see it happening in any significant way, at least not in 2019. And even in 2020. I do see a situation in which the bank will not repeat past mistakes. And therefore you won't see interest rates rising in any significant way. And that's really the key message, one of the key messages of this presentation, that we are very close to the end of the interest rate cycle. -MORGAN DE HAMILTON: Thank you very much, Mr. Tal.


It looks like that's all the time we have for today. I'm sure I speak on behalf of the entire audience that I thoroughly enjoyed listening to your insights. And thank you very much for a wonderful presentation. On behalf of CIBC Investor's Edge, I would like to thank the audience for attending today. Should you have any questions or comments, please visit the Investor's Edge website or please feel free to get in touch with us by phone, live chat, or email. Once again, thank you so much for joining us today. And we're looking forward to our next session.

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