2018 Economic Outlook with Benjamin Tal_0_0

[Host:] Hello, everyone, [The Peter Pan Economy] and thank you for joining us today. On behalf of CIBC Investor's Edge, I would like to welcome you all to this webinar. My name is Dimple Sequeira, and I will be your host for this event. Now a few things to note before we get started. [CONTROLS] If you wish to view this webinar full screen, please click on the expander arrows located on the top right-hand corner of your screen. And should you have any questions during the presentation, kindly take a note, and you will have an opportunity to submit your questions after the presentation. [DISCLAIMER] Also CIBC Investor Services Inc. does not provide investment or tax advice or recommendations, so everything we share today is for education purpose only. And we are recording today's session, and a link will be emailed to anyone that registered online. [SPEAKER Benjamin Tal] Our topic for today's webinar is Economic Outlook for 2018. And to present this, we have Benjamin Tal with us this afternoon, and we're really excited and thrilled to have him here. Benjamin is the Deputy Chief Economist at CIBC, a captivating speaker, and a regular commentator on the financial and economic trends in Canadian and American media. Ben is also responsible for analyzing economic developments and their implications for North American markets. With great pleasure, please join me in welcoming Benjamin Tal. [Speaker:] Thank you very much. A lot to talk about and not enough time, so I will go through this presentation very, very quickly [The Peter Pan Economy] and see what makes sense and what doesn't. And I would like to try to cover a few questions that I think are relevant. The first one, maybe the most basic one is simply where we are in the cycle. Now we know that this expansion is very long. Where are we in the cycle? Should we start thinking about the late cycle investment strategy at this point? Another question, of course, is what's happening in the Eurozone. And basically, EU has been doing fine. Should we trade in Europe in a different way at this point? That's a good question, we'll discuss it. Energy. You know, oil prices have been going up, how should we trade energy at this point? We'll talk about that. Then, of course, we must discuss Trump. And the question is really a very basic one. How to trade Trump? Maybe we should not trade Trump at all. We'll discuss it. The wage mechanism in the US and in Canada is starting to change, what does it mean for inflation for interest rates and therefore investment? The tax package introduced by Trump is a game changer. We'll talk about that. What does it mean for investment? I think it's very big, and we'll talk about that. NAFTA, of course, you cannot discuss 2018 interest rates, stock markets without discussing NAFTA. Are we totally out to lunch when it comes to NAFTA? Is the market mispricing NAFTA? My answer is absolutely yes. The question is how to trade it and what does it mean for the TSX? Of course, what is the reaction curve by the Bank of Canada? The Bank of Canada just raised interest rates, but they're telling us that NAFTA is an issue, we'll talk about that. And, of course, if we have time, we'll discuss the very important issue of the Canadian housing market and to what extent we're in a battle, maybe note changes to regulations, what it means for the trajectory of the housing market, and then of course, try to put everything together and see how we can invest given all this information. So let's start very, very quickly. And the first chart is basically telling you [The Cycle is Old] that this cycle is old. This is the third longest expansion ever, and within two to three months, it will be the second longest expansion. And the only one that is still longer is the one in the 1990s that was benefiting from the internet revolution. So this is a very old cycle. And when you have an old cycle, usually people start investing using that cycle philosophy, and I say not so fast [Cumulative Real GDP Per Capita Growth During Expansions] because if you look at the next chart, you can see that, yes, it's long, but during all those years, it did not accomplished much. Namely, the recovery has been much more muted than in the past, which means that if you look at cumulative GDP growth, it's not really something to write on about, it's something in between which means that this cycle is much younger than it looks, and therefore, I will not jump so quickly to a late cycle philosophy because I think that the next recession is not tomorrow, namely this is not the ninth inning or the seventh inning of this game because, again, we will be recovering very, very slowly, so this is in the background. This is not really the end of the cycle. We still have time given what we were able to accomplish. Now clearly, from a cyclical perspective, 2017 was a very, very good year. In fact, many, [A Surprising Start] many economies surprise on the upside. We've seen it everywhere, namely this chart is telling you the difference between what the market expected in the beginning of the year and what we actually got. And you can see almost everywhere we have seen an upside surprise, clearly in Canada, we have seen a situation in which the economy was doing better. Now this is very important because we have to try to figure out what's happening in the stock market and what happened in 2017. And, you know, when it comes to Trump, and when it comes to its impact on policies, I would suggest that when it comes to actually the impact of Trump on financial markets in 2017, in my opinion Trump was nothing more than a blip. Trump was unable, in my opinion, to move markets. We know that after the elections, November 2016, the market reacted in a very violent way. We have seen the broad market correcting, the 10 year rate went up dramatically, and since then it started to go down, and down, and down, and the only reason why it's still where it used to be, I believe, is simply because of the fact that the fed is moving nothing to do with Trump. Same goes for the US currency. The US dollar went up dramatically after the elections, since then lost ground again. Now it's below the level we've seen before the election, again a blip. The consensus for economic growth in the US for 2017 was 2.1. That's basically what we got. Again, a blip. So Trump really in 2017 did not impact the market, in my opinion, in any significant way. But of course, you might say "what about the stock market?" Because the stock market did not reverse. Every day it's reaching a new high, and just two weeks ago, Trump basically tweeted saying, it's all me. And you know what, yes, the stock market in the US is reaching new highs, but also the German stock market, also the Japanese stock market, also emerging markets and the global markets in general. Basically, it's a global story, not a US story, nothing to do with Trump. And we are seeing it actually in this chart because the global economy is actually surprising on the upside. And the question is why, and the answer is very simple, easy money. When you have the Japanese Central Bank printing money with negative interest rates, that's a boost. When you have the European Central Bank, negative interest rates printing money, same here, interest rates in North America have been very, very low for a long period of time. That's a lot of momentum in the economy in terms of liquidity. And if you generate enough wind, even pigs can fly, and that's exactly what we are seeing. We are seeing a situation in which this recovery is a mirage. It's basically all about very easy money. And the big question is to what extent it is sustainable when it comes to a situation which it is surprising, and then we'll see how significant it is. We'll talk about it in a second. Now from this chart, you can also see that Canada led the way. In fact, Canada was the best performing economy in 2017 in terms of the surprise and absolute improvement. And clearly, that's the main reason why Trudeau is now smiling because the government got just $10.5 billion of extra money just because of the fact that we got extra 1.2 GDP growth which is very, very significant. Now this improvement could have been even better if oil prices were, you know, back to 100. If you remember back then, when we had GDP growth expanding at this rate, the impact was very significant because when we ship all those barrels of oil and they were worth $100 per barrel, then you get a big lift. Today, it's less than that, so the lift is not as significant, so it's not as significant positive contribution as it used to be. Basically, what I'm telling you is that opposed to what the Scotiabank is telling you, you're not richer than you think. But what I'm telling you is that we'll take it, and that's the big surprise of 2017, and that's why the Bank of Canada is basically touching interest rates, we'll talk about it in a second, but that's the background. Now we have to remember that when it comes to investment, when it comes to the cyclical story, we have to remember the background, and the background is actually this chart, [Slower Speed Limits: GDP Bar is Lower for Full Employment] which is the potential growth of the economy, namely the speed limit or the ability of the economy to grow. And yes, we are getting a nice rebound in 2017, but it's against the gravity force here of potential GDP, the ability of the economy to grow that is going down. The reason, of course, is demographics. We see everybody getting older. Clearly, even in China, in the Eurozone, North America, people are getting older, therefore, the ability of the economy to grow because of demographic forces is a very, very significant force slowing down the ability of the economy to expand. And yes, Trump can do a lot of things, but Trump cannot make America young again. And this is something that we have to take into account. Actually, the fact that productivity, almost everywhere, is slowing down, so you have reduced potential growth is something that will impact the ability of monetary policy to impact the market and also how high interest rates will rise at the peak. And that's something to keep in the background because it will influence everything, the TSX, S&P 500, and of course monetary policy. Very, very quickly, let's talk about some other pockets, [Eurozone: Progress Made But Still More To Come] one of them, of course, is the Eurozone. I've been longing the Euro for a while, especially against the British pound, and I will continue to do so, why? The Eurozone in fact is improving. It's surprising on the upside, and we have survived all the election cycles in the Eurozone. Of course, we have something happening in Italy, Spain is an issue, but overall I think that the political climate in the Eurozone is not as scary as it used to be from an economic perspective. Clearly, they are doing better than expected, and that's really positive. So I will long the Euro, I will continue to long the Euro, especially against the British pound because when you speak to British officials, nobody can give you one sentence telling you where this economy is going. This Brexit business is one big headache. They really cannot give you one sentence where are we going from here. And this kind of uncertainty is starting to impact the ability of their economic to grow, the labor market, and therefore when it comes to assessing where I want to be, clearly I will long the Euro against the pound. And why is it so important? Why the focus on Europe is so important? [ECB QE Announcements Impacting Cdn 5Y Yields (L) Taking a Slow Approach to Tapering as Slack Remains (R)] Because it's beyond the Euro, it's actually your mortgage rates. Clearly what's happening in the Eurozone is impacting the North American bond market. And if you look just at the chart at the left, you can see what I'm talking about. This is basically a measure of the reaction of the market, the five-year bond rate which will impact your five-year mortgage rate. And you can see how the markets reacted to different events. You know, when the Bank of Canada raised interest rates in July last year, the reaction was nothing to write on about. Even when the Bank of Canada changed direction in a very famous speech by Senior Deputy Governor Wilkins, the markets reacted but nothing big. When the president of the European Central Bank tweeted about the possibility of slowing down the rate at which they are, you know, buying bonds, the market in Canada reacted in a very significant way with a five-year rate actually moving. The reason is that one of the factors that impacted the bond market in the US and Canada is the fact that interest rates in Japan and the Eurozone are negative. So you're an investor, you want to invest, and you look and you see negative interest rates, and then you turn to left and you see interest rates in North America positive. You go to North America, that introduced more demand for our bonds and therefore kept interest rates low to the extent that the market will start toying with the idea that maybe, maybe the Bank of Japan and the Eurozone, the ECB will start slowing down the rate at which they're printing money, and maybe eventually, maybe 2019, they actually will go to positive rates, that will start shifting demand to their markets, and therefore will have an upside impact on our bond yields, the five year rate. So in a funny way, what's happening in the Eurozone can impact our mortgage rates. So I'm basically longing the Euro against the pound. I'm also positive on the Japanese market. The Japanese market is actually surprising on the upside. We're revising economic focus and consensus almost on a daily basis, and it's always on the upside. Why? Because first of all, for the first time, they're allowing foreign workers into the country, and that's huge. Already there are more than one million foreign workers in Japan, that's unheard of. That's leading to some improvement in the labor market. And the second and the big issue is the participation rate among women in the labor market went up dramatically. So yes, Japan is a demographic time bomb, but when it comes to the labor market, the participation rate in fact is rising because of the fact that more and more women are entering the market. Actually, a significant stimulus is coming from the fiscal side due to government policies, and you have a recipe for an economy that will surprise on the upside, and therefore, potentially even the stock market will do better. So I'm actually relatively constructive on the Japanese economy. Now very, very quickly, let's discuss energy. [Oil Demand Upgrade Met by Non-OPEC supply (L), Keeping Expected Deficit for 2017 at Slim Levels (R)] Am I buying energy now or am I selling energy? We know that oil prices went up nicely, over 60 bucks, and the question is why. And the answer is that supply of course is not there to the same extent that it used to be. Now you look at the chart on the left and you can see that really the marginal supplier here is non-OPEC, which is basically US production. And we have seen a situation in which we had this ping pong game, when the oil prices went down, OPEC pushed it back towards 50, 55, then US production went up, and the supply went up, and then prices went down. So we had this wonderful ping pong game over the past two years. The question is to what extent we can continue to play this game. At about 60, 65 bucks, I think that the market is very well balanced. Now it takes time for US production to increase drilling activity. If you look at their rig count, namely how many rigs they have, it usually takes about six months to go up and increase supply, and that's more or less where we are. So we are not there yet. So am I longing energy at this point? No, I think that I would be neutral on energy because I think we belong at about 55 to 65, that's more or less where we belong. I think that supply will rise, coming from the US in the next few months, and that would put the downward pressure on oil, so I'm basically neutral on oil. I'm not really jumping here saying this is a long-term trend. I think that we are very comfortable at about say 60 bucks a barrel. That's more or less where we belong. Now very, very quickly let's go to the US labor market because one thing that happened over the past two to three years is the following. The labor market is strong in Canada and in the US, regardless how you look at it, it is very strong. Now usually in this kind of situation when you have the unemployment rate reaching new lows, you have wages rising because the bargaining power of labor is improving. When wages go up, inflation goes up, and when inflation goes up, interest rates go up, the economy goes down, and that's a cycle, and until recently, we haven't seen it. Basically, we haven't seen wages rising in any significant way despite the fact [US Tight Labor Market - Slowing] that the labor market is on fire. The only reason, in the chart on the left, why the labor market is slowing in the US is simply because of the fact that maybe they're running out of people. If you look at the chart on the right, the quit rate is almost at a record high, which means that people are confident enough to quit. That's a very positive signal. If you look at what's happening [US Employment Recovery Still Has Some Room (L), But Businesses Having Hard Time Filling Vacancies (R)] in the prime-age employment-to-population rising, it has the potential to continue to grow but clearly reaching a peak. If you look at job openings, record high, a very, very strong labor market. So the key question is why wages are not in the sky. And I think that the chart to the right is starting to give us maybe a clue. And I believe that if you really search for answers about the market, about interest rates, the labor market has most of the answers, we just have to understand this labor market. This opening rate is basically at a record high. This might mean that companies cannot find people. So we have a very interesting mismatch in the labor market. We have people without jobs and jobs without people. We have people looking for jobs that cannot find them, and we have companies looking for people that cannot find them. That's very significant, and maybe, one of the main factors preventing wages from rising to the same extent that they used to because we have to deal with this mismatch in the labor market, and this is something that we see everywhere. [The Shrinking Middle Class] This chart is telling you the story. All the jobs created in the OECD were created in the higher end of the market, the labor market, and the lower end. The middle, namely the middle class, down, everywhere. This is the story. Yes, the headline numbers are strong, but if you go deeper, you find that not all is well in the US labor market for example. The duration of unemployment is still relatively elevated. Today in the US, despite very strong numbers, today, in the US, there are still more people collecting disability insurance than production workers. That's not a normally functioning market. Millions of people are not fully participating in the recovery. That's their cry and Trump is the messenger. So the reason why we don't see inflation rising to the same extent that it used to, the reason why wages are not rising, and the reason why interest rates are not rising as quickly as they used to, and therefore, the reason why this expansion is so long, those are the same reasons why Trump is the president today. It's all connected. The political scene, and the economic scene, and the stock market, they're all part of the same story which is reflected in the yellow bows that are negative, that's their cry, and Trump is the messenger. And I think it would be naive to believe that we in Canada are immune to this trajectory, we are not. We have the same problems. In fact, I believe that the number one socioeconomic issue facing Canada is actually widening income gap. It's widening, and widening, and widening from a long-term perspective, we see a situation which the quality of employment in Canada is going down. We see a situation in which the number of people making below average wage is rising. Yes, from a cyclical perspective, we are doing fine. We'll talk about it in a second. But the structural story is the story of a mismatch. We don't have the time to get into it, but one of the reasons why we have this mismatch is simply the fact that we have a mismatch between what people are studying and what the labor market needs because this kind of mismatch is also among very educated people. Canada is the most educated country in the OECD, but it's also the number one country in terms of the number of educated people that live in poverty. Namely we cannot translate those degrees into jobs, and that's an issue that we have to deal with. This is not for now because we simply don't have the time, but the issue is that from a short-term perspective, and that's the elephant in the room, that the problem that Trump is trying to solve, the problem that Trudeau is trying to solve, this problem simply does not have a solution. That's the elephant in the room that no politician will ever admit. In the short term, we simply cannot lift the yellow bar up. And really, we are dealing with the same problem. Trump is trying to solve it using trade, and Trudeau is trying to solve it using a tax policy, but they're dealing with the same problem, and therefore, we have a wage mechanism that is not functioning to the extent that it used to because of this mismatch. It doesn't mean that cyclical forces will not take wages up, but it means that the ability of those wages to rise, and therefore, the ability of inflation to rise, and therefore, the ability of interest rates to rise and kill the economy is limited because of those structural issues that you cannot resolve, you know, within a cycle. Now very, very quickly, another thing that Trump is trying to do at this point is the tax story. And I won't get too much into it, but to me, this is a game changer. The ability of Congress to pass the tax package is big with major implications for Canada. We are talking about de facto tax cuts significant to about 20%-21%, that's significant because the US was probably the most expensive country in terms of corporate tax, the margin, marginal corporate tax, now it's basically back to where everybody else is, including Canada. They are getting a significant break when it comes to accelerated depreciation, namely you can invest in them and then expense it immediately, that's a significant boost to cash flows, and then you have cash repatriation where $2.6 trillion sitting outside the country, and basically Trump is telling you, I'll give you a good deal, just bring the money back. President Bush in 2004 did the exact same thing. The money did come back, 90% of it went to stock buybacks and dividends, again lifting the stock market, so all those forces are very stock market friendly. The consensus is that this tax cut by itself will add roughly 5% to 6% to US earnings, and that's why I believe that, yes, the US market is expensive, but I think that it still has some potential because you really have to price in all the positive news, and the market is already pricing in 4%, 5%, 6% earning growth in the US for the S&P 500, and another 5% because of the tax cuts, you're talking about 10%, 11% earning growth, that's not insignificant, clearly can support the stock market for a while, and I think that's exactly what we are seeing now, and it has potential to continue. This is a big deal. And of course, it has negative implications for Canada. Yes, you can find many Canadian companies that can benefit from these tax cuts, especially if they have significant US operations, but overall, this is a negative. So think about it from an investment perspective. You are thinking at this point, where do you want to be, do you want to invest in Canada or in the US if you have a new facility to invest. And let's face it. You basically face the same tax rate, before it was usually better for Canada, now it's basically the same. You get a huge benefit from the accelerated capital depreciation. This is a significant boost to your cash flow. You can repatriate cash at a lower rate if you want, and you're not sure at the end of the day if you will have access to the US if you decide to locate your facility in Canada. Yes, you will get the healthcare business in Canada, yes, maybe better access to immigration, and therefore better, you know, set of skilled workers, but all those benefits probably will not be as significant as the negative that you will face if you don't have access to the market or you don't get the cash flow because of capital depreciation, acceleration in capital depreciation. So I think that, yes, maybe we can compete with existing facilities. I'm not sure about new facilities, and that should have an impact on the value of the Canadian dollar. We'll talk about it in a second. But before that, I would like to discuss trade. And, you know, Trump has been signing executive orders at the speed of light. But I believe that when it comes to trade with China, his pen will run out of ink because I believe that when it comes to China, and I'm not saying it lightly, I believe that the US needs China more than China needs the US. I think that when it comes to his policies, he simply cannot implement them on China. For example, during the campaign Trump was talking about a 45% tariff on China. That's interesting, but he cannot do that because what does it mean, de facto. De facto, it's going to lead to higher prices in Walmart. Basically de facto tax on low income Americans, your base, you're not going to do it. Second, what is the fastest growing segment of the global economy today? By far, it is the consumer of emerging market. [Consumer Spending in China to Rise at Double the US Rate (L), Leaving it $1.4 tn higher in 2020 (R)] You can see that this consumer is basically the future of North American manufacturing, demand for consumption is rising. We have the Y generation in China, 250 million young Chinese people who never experienced poverty in their life, their prosperity to consume is higher than the average American teenager, and what they want is a brand name, quality products, exactly what the Americans can sell them. And we're starting to see it already. [Chinese Takeout: Ordering Off a New Menu] You look at the Chinese tourist basically taking over, this is purchasing power that is the future of the North American manufacturing exactly at this point, and exactly at this point when you are able and willing to ship your products to the fastest growing segment of the global economy, you're going to see your access being eliminated. That will cost American manufacturers trillions of dollars in lost opportunities. And believe me, Germany will be more than happy to take over, you cannot do that. Again, the US needs China more than China needs the US. [The North Korea File] And then you have this guy. Well, I don't know what the solution with North Korea is, but I do know one thing, whatever the solution is, China must be a big part of it. And if China's a big part of it, the last thing you want to do is to start a trade war with China. Therefore, I believe that he will not go after China when it comes to trade anytime soon in any significant way. But you need to show something on trade, especially before the mid-term election. So you go after the little ones, the little ones, that's us. And that's why NAFTA is a priority. [First Specific Negotiation Objective] If you want to deal with your trade situation, you need to deal with the yellow part which is mostly China, but no, it's going after NAFTA which is 12% of the US trade deficit. Within it, you need a microscope to find Canada, and all of it is basically energy. So Canada is not really an issue when it comes to trying to solve the American trade situation. Nevertheless, we are in the midst of significant NAFTA negotiations that are not going very, very well. [Mexico Has Benefitted More From NAFTA (L),] We know that Mexico was a major winner [Unwinding Trade Links Wouldn't Be Easy For Us Either (R)] when it comes to NAFTA, getting market share from Canada, clearly the US in the other sector, and others. And we know that those negotiations are not going well. In fact, Trudeau is telling you the negotiations are not going well. We have a situation in which tomorrow Trump can wake up and say NAFTA is dead. And I mean it. It can happen tomorrow, with Trump, you never know. And we have a situation in which he can do that because under the Constitution, the authority over trade, you have it to Congress and of course the president, congress under the umbrella of commerce, and the president under the umbrella of national security. And you have a situation in which he's basically telling you, "I want out," and we can discuss until we are blue the face that that will hurt the US trade situation and US workers. That's irrelevant because he's telling you he wants out. So this is a real possibility. And yes, if he decides to kill NAFTA tomorrow, Congress would have to actively agree, if not, they have to go to the Supreme Court, big headache, that will cause a fog of uncertainty. And even without Congress, under the Constitution, the president has significant power over the court house and tariff and we're seeing it already. So he can cause a lot of headache even without Congress, very important to remember. And again, it's not just about tariff because if tomorrow we don't have NAFTA, we go back to the WTO, World Trade Organization tariff situation, where the tariffs are not very, very high, but the issue is not tariff, the issue is Chapter 19, the dispute resolution issue in which a bunch of judges are basically telling you what's right, the US versus Canada versus Mexico, and in many cases, Canada was winning the case and Trump is basically telling you, I don't want this Chapter 19, I don't want this dispute resolution. And Trudeau is saying, absolutely not because that's the only power I have, you remove the dispute resolution, we don't have anything, and therefore, if NAFTA dies, it will be over Chapter 19. So the question is how the market is pricing it in, [Markets Brushing Aside NAFTA Concerns in Both Stocks (L) and Currencies (R)] and the answer is it's not. If you look at valuations of auto parts manufacturers, nothing is happening. If you look at the Mexican peso, you know, the currency that can lose significantly if there is no Trump tomorrow, you see that it went down dramatically after the elections, and then it was the fastest growing, improving currency in the universe, went down a little bit since then, but still it is where, more or less, it was before the elections. Basically, the market is pricing nothing when it comes to NAFTA, despite the fact that everybody is talking about the possibility of NAFTA dying. And I think that when it comes to NAFTA, this market is in la-la land. I think that we are dreaming. I think the risk of NAFTA is significant, and if you're a CEO and you don't know if you have NAFTA tomorrow, you're not investing. And that's something that we have to take into account. In fact, already two-thirds of small businesses in Canada are telling us that NAFTA is impacting their decision-making process in a negative way, and this is just the beginning. So the question is why the market is so numb about a very clear risk coming from NAFTA? Why the market is not pricing it in? And the answer is, and we talked to a lot of CEOs and traders about it, the answer I believe is simply because of the fact that it's simply too big, it's too complex. You have so many possible scenarios and the market is not very good in dealing with many scenarios at once, they can deal with zero and one, black and white, they cannot deal with different scenarios. They simply don't know what to do. So the market is frozen. So the fact that the market is not reacting to it does not mean that NAFTA is not there. The risk is there, I don't know what will happen tomorrow with NAFTA. What I do know, however, is that when it comes to the market, it's really not pricing it in. Therefore, I am shorting the Mexican pesos. I am shorting the Canadian dollar because I believe those two currencies are not responding to reality. And this reality eventually will force the market to recognize that something is happening. Again, I don't know what the solution will be, but I know that between now and the solution, there will be a lot of uncertainty that will impact the ability of the market to function in a normal way. And in fact, the Bank of Canada, when they raised interest rates today already is telling us that NAFTA is an issue. [Higher Wages and Better Job Composition] We have a situation in which the labor market from a cyclical perspective is improving. We see average wages starting to rise finally. We see the composition of employment rising. Again, this is not a structural story, the structural story is actually lower, but we are talking about the cyclical story that's eventually leading to something very positive. [Strong Rebound in Labour Income] We see a nice rebound in labor income. As I said, 2017 was very strong and the labor market is participating in the story. And clearly, this is something that we have to take into account. And even the things that the Bank of Canada [Basically All the Decline in Youth Participation Rate is Due to Lower High School Student Participation] are worried about, for example, the participation rate of young people in the labor force because the Bank of Canada, the governor just a few weeks ago gave a speech, and basically, the speech was what keeps me up at night. One of the issues was basically young people are not participating in the labor market. As you can see, the chart on the left is absolutely right, the participation went down from 64% to about 60%, so he's really losing sleep over it. And I say, you know what, you should sleep well at night because that's not an issue. Why it's not an issue? Because all the increase... All the decline in the participation rate is due to a decline in the participation rate among high school students. That's not a reason to lose sleep over because those students should be studying, not working, and therefore, that's not a major macroeconomic force that will prevent you from raising interest rates. So clearly, the Bank of Canada was willing to raise interest rates reflecting the very strong labor market, the economy's surprising in the upside, but now, they're telling us we're not moving very fast on this month. Why? Because of NAFTA, because of the tax package coming from the US, all the forces that, to me, will work to weaken the Canada dollar, also will work to reduce the ability of the Bank of Canada to move. And in fact, I believe that the Bank of Canada will move more slowly than the Fed. So you have this issue in which we have headwinds coming our way through NAFTA and the package, the tax package in the US, both very significant and negative for Canada, and then we have other forces that will impact the ability and the willingness of the Bank of Canada to move. Another force of course is the Canadian dollar, which is now at about 80 cents, way too high. As I said, I believe it will go down, and the Bank of Canada will encourage that because this Bank of Canada is a bank with an agenda. The agenda is a weaker Canadian dollar. I believe that the Bank of Canada would like to see the Canadian dollar going down, not up. And if you raise interest rates as quickly as the fed, you actually prevent it from happening, so another reason why I believe that the Bank of Canada will move more slowly. [Interest Rates Sensitivity] And then there is another reason which is the debt situation. As you know, the Bank of Canada and everybody else is telling us that we have too much debt. The debt to income ratio in Canada is 170%. Everybody knows this number, everybody in this country knows this number, it's all over the media. I think it should be part of the citizenship test or something. I believe that without getting into really how much debt we have because I think that this debt to income ratio that everybody is quoting is a Mickey Mouse type indicator, it's not really a good indicator. Regardless, clearly, as a society, we are more sensitive to the risk of higher interest rates than in any other time in recent history. During the crisis, the US debt to income ratio went down from 165% to 140%. Ours went up from 140% to 165%, reflecting the fact that we did not experience a correction in the housing market. This means, as you can see from this chart, that we are more sensitive to the risk of higher interest rates. So every basis point counts, and it counts significantly, [A Mighty Basis Point] basically, monetary policy today is 20% more effective, namely any basis point increase is 20% more effective in slowing down the economy than 5 years ago and 40% 10 years ago. That's very, very important to understand. And what's important here is that this sensitivity to higher interest rates will prevent interest rates from rising. Basically, the disease is also the cure, namely the increased sensitivity to higher rates will prevent interest rates from rising to the sky because they will be so effective. But of course, you can raise interest rates without raising interest rates. [Growth in Mortgage Outstanding Could Slow Notably] And here I'm getting to the Canadian housing market. We are running out of time, so I will go very, very quickly. We are raising interest rates without raising interest rates through regulations. You're all familiar with the recent changes by OSFI to raise the qualification rates by 200 basis points. This is significant. We estimate that when you ask people to qualify at 200 basis points higher than the actual rate, that will impact roughly 12%, 12% of the market. Namely, 12% of people, potential buyers will feel it. Now when I say it will impact, it doesn't mean that demand or sales will go down by 12% because you should never underestimate the creative imagination of Canadian borrowers. They can go with lower duration, they can increase amortization, and of course, they can go out to alternative lenders. [Credit Unions and Private Lenders Will Benefit] Credit unions will gain market share after losing some market share recently because of the fact that they're not subject to those changes. Also, alternative lenders, private mortgage lenders will benefit mostly mortgage investment corporations already account for 10% of the market, on the way, I believe to 15% because we are basically transferring risk from the regulated segment of the market to the unregulated segment of the market. That's a negative derivative of the, you know, OSFI trying to reduce risk in the market. I'm not sure that we are not actually raising risk in the market. Clearly, the private mortgage space will rise because of that. Very, very quickly, of course, we cannot discuss housing without discussing what's happening in Toronto and Vancouver. And I believe the first, [The Best View of the Toronto Real Estate Horizon is from the Vancouver Harbour] the best view of the Toronto real estate horizon is actually from the Vancouver Harbor. Without getting too much into it, I will say the following. In 2015, activity in Vancouver went up dramatically, and then gravity took place because simply this activity did not make any sense, there was some speculation, some foreign buying, and of course, things started to slow down in 2016. And then the government introduced... I apologize, the dots there, red dots and the yellow dots are not exactly where they should be, but the government introduced a 15% tax on foreigners in Vancouver. And the tax itself really was not the reason why Vancouver slowed down, it's really because of the fact that domestic buyers stop buying, expecting to see some slowdown due to the tax on foreign investment. So it's not really the taxes, what people believe the tax will do. And of course, it went down, and then as you can see, the yellow line clearly, Vancouver is recovering because when you don't deal with the real issue, which is supply, every fix is temporary. Now take Toronto, move it 14 months to the left and you see the red line exactly the same thing. The crazy year in Toronto was 2016. We've seen huge increase in valuations and activity until the first quarter of 2017. Again, a lot of it did not make sense up to 2015, the market made sense, in 2016, it did not. We have seen a lot of speculations, a lot of flipping, and maybe some foreign buyers, and again, exactly at the peak, when gravity started to take place, we saw a situation in which the government, the Ontario government introduced the very famous 16-point program to slow down the economy. I won't get too much into it, foreign investment was a part of it, tax on foreign investment, and clearly, a rent control, which I think is a misguided policy. So overall, this slowed down the market, but again, it's not because of the policies but because what people believe the policies will do. And as you can see and you feel probably, Toronto is actually improving now again because you're not dealing with a real issue. The real issue is supply, the Places to Grow Act introduced by the Ontario government in 2006 is the number one reason why land prices and therefore house prices in the GTA have been rising for a long period of time. So from a real estate perspective, Toronto is like Vancouver, it's basically an island with limited supply, and yes, the changes to regulations, that will slow down the market, higher interest rates, that will slow down the market. The recession down the road, that will slow down the market. But from a long-term perspective, we simply don't have the solution for this affordability crisis because we don't have a rental solution, especially in Toronto and we don't have enough supply. So from a long-term perspective, even if we go down in the next year or two or three, from a long-term perspective, if you believe that the GTA and Vancouver are unaffordable now, you wait, it will become even less affordable a decade from now if we don't introduce the right policies. So I'm out of time. Let me just summarize what it is from an investor perspective. I think that we are not in a late cycle trajectory here because I think that this cycle can continue because this is old but it's really younger than it looks, given what we accomplished. I really think that the Euro is a good opportunity, especially against the pound. I like the Euro against the pound. I like Japan at this point because of the fact that they're able to surprise the market when it comes to economic growth because of the immigration, because of the foreign workers, women participation in the labor market, and of course, monetary and fiscal policy. I think that the US stock market will outperform the Canadian stock market. I will long in the US those sectors that are more sensitive to lower tax rates, I'm talking about a small cap that are more sensitive to the tax aspect. I'm talking about industrial for example. And I also like financials in the US because I believe that we will see some deregulations in the US. Trump probably can do that, and that's another positive for financials. I think that Canada is going to under-perform the US, but even here, I see some opportunities. I think that energy is neutral and some names are actually good. I think that if you look at the financials, they give you a very good solid base with very high dividends. So they are basically a good, safe place to be. And I think that the commodity space in Canada, given the global economy, I think can still do okay in 2018 because I think that the global economy in 2018 will be even better or better than expected at this point, especially coming from China, the Eurozone, even Japan, and the US actually with the tax cuts probably will surprise on the up side. So I see some momentum in the global economy, even in 2018, probably a play on commodities helping Canada. I don't like the Mexican peso. I will short it. And I do believe that the Canadian dollar is expensive, given the headwinds that we're going to get from NAFTA and of course the tax cuts in the US. So overall, there is some logic to this madness if you read the economic map correctly. This market is tradable, and for the first time, I'm actually trading Trump, especially because of the policy on taxes. I think that NAFTA is a major issue, and the market is not pricing it in. So again, there is some logic to this madness if you read the economic map correctly because after this recession, this long recovery, and especially the elections, what was normal in the past is not normal in the context of today's economy. Thank you very much. [Host:] Thank you, Benjamin. That was an amazing presentation. So while Ben reviews some of the questions, [Q & A] I just wanted our audience who joined in later to know that you can type your questions in the Q&A panel located at the right-hand side of your screen. And if you wish to listen to this webinar again, a link will be mailed to anyone that registered. Also, I would like to request the audience to ask questions more exclusive to today's topic and to avoid asking questions that are specific to the security or a company. So we do have some good questions coming in. And without further delay, let me turn this to Ben so he can answer some of these questions. [Speaker:] Okay, so first of all, there is a question asking for a copy of the presentation. I'm sure that you can get it. Another question is about stability of the stock market prices. I think that one of the reasons why the stock market is not panicking at this point is because of the fact that we are not in a late-cycle type situation. As I suggested, we are probably in the middle somewhere. And the market is reflecting that. The market is not panicking because the economic signals that we're getting are inconsistent with the end of the cycle type situation. So another question that is connected to that is when is the next recession? Well, I have no idea. But I don't think it's next year. I don't think it's 2019. Again, we can go... And actually this can be the longest expansion ever given the fact how slowly we'll be recovering. So I don't think that the recession is anytime soon. Of course, there is always, always the risk of monetary policy error, every recession over the past 50 years was helped if not caused by monetary policy error in which the central banks basically sat on low interest rates for a long period of time only to allow inflation to surprise them on the upside, and then you start raising interest rates because you're chasing a lagging indicator, and when you do that, you overshoot, and when you overshoot, you kill the economy. That's exactly what happened in 1991 in Canada, that's exactly what I believe happened in 2004 in the US, clearly, Greenspan did not kill the economy but made the recession worse by raising interest rates from 1% to 5.25% over the course of breakfast. So that's something that we have to monitor, and that's why I believe the Fed started to move a bit earlier because of the fact that they really don't want to repeat past mistakes. In fact, Yellen is telling us that she doesn't want to repeat past mistake, and that's something that we have to take into account. You know, people, of course, asking about the volatility. And the volatility in the market is not reflecting any late-cycle behavior. To me, this is very important. Again, many people asking about the real estate market, it's a very complex market, the GTA, Vancouver, Montreal is picking up. I believe that clearly if you look at the market now after the changes to regulations, we are talking about a situation in which the low-rise segment of the market, namely the more expensive segment of the market is going down because that's where the affordability issue is. The condo market is taking off. But now there are some big changes, for example, the Ontario Municipal Board is not functioning anymore because of changes to regulations. This means that even developers will not be able to develop to the extent that they want to. So supply would be an issue. So to me, the rental market is really the key. And without the ability to raise rent because of rent control, then you have very limited, what we call, purpose-built. And if you don't have purpose-built rental, you really have lack of supply and the rental market will be on fire. So again, from a short-term perspective, yes, it can go down, it can stabilize, it can slow down. But from a long-term perspective, without really dealing with the issue, this place is actually going up, not down, and we will have a major affordability issue, and of course, we need transportation, we all know about that, but we don't have time for that. Yeah, people asking about China. China is a very, very important part of the story. China is slowing down. China is slowing down because, you know, demographically, their labor force in fact is shrinking, China, why? Of course, the one-child policy is actually slowing them down. They're trying to change the economy in a way that you have more consumption, less investment, trying to do it, not so easy because the minute you slow down, you really want to prevent the social unrest, unemployment rising, so they go back to what they know best, which is really investment. So this transition of power from investment to consumption is not happening as smoothly, but that's more or less what we see in China. China will be able to maintain 6% to 7% GDP growth simply because of the fact that they can. Yes, they're sitting on significant amount of debt, but this is something that... It's not an event. It's not something that will crash tomorrow. Same goes for another question about the US debt situation. And yes, the US debt situation will be there. Trump is going to add $1.5 trillion to the debt over the next 10 years just because of the tax cut. So the tax cuts are positive for now, clearly negative from a long-term perspective. This clearly will put an upward pressure on the long end of the curve, namely long-term interest rates in the US will rise because of that. So that's a major issue. But again, it's not an event, it's not something that will happen tomorrow. You cannot even trade it. It would be a slow process that will raise long-term rates and will limit the potential of the economy to grow. Of course, there are many questions about Bitcoin, it's a bubble. Let's face it, Bitcoin is a bubble, but it's a bubble that could be with us for a long time. We know that if you take just the money coming from billionaires in China and you put only 1% of this money into Bitcoin, it can triple in value. So we know that it has potential, it does serve a purpose, but the minute you introduce regulations on it, that will be the end of it. I see Bitcoin and many other of those currencies actually playing a significant role in the future monetary policy. Banks will not resist it, they will be a part of it. But I think what we're seeing now is nothing more than a bubble, but it will have a significant part of the economy. Again, if you look at the correlation between Bitcoin and the Chinese Yuan, you can see that the correlation is extremely tight. It means that a lot of it is coming from China, there's no question about it. So I would be very careful about it. It will play a role, but it will not be... It will not be something that I would get too much into because it's too risky. There is a question about the Bank of Canada, and that will be the last question. The Bank of Canada is actually changing the way they look at the economy, and for the first time, they're admitting that NAFTA and the tax cuts coming from the US is a significant force that will influence their decision-making process. Therefore, we believe that the Bank of Canada will move more slowly than the Fed. I'm guessing maybe one more hike this year and they will take a break. [Host:] Thank you, Benjamin. [Thank you] It looks like that's all the time we have for today. I'm sure I speak on behalf of all the audience that I thoroughly enjoyed listening to your presentation. Thank you for such a great presentation and your precious time. On behalf of CIBC Investor's Edge, I would like to thank the audience. We really appreciate you being here. Should you have any questions or comments, please visit out Investor's Edge website or please feel free to get in touch with us by phone, chat, or email. Thank you for joining us today, and we will see you next time.