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EPISODE DESCRIPTION
Episode 93: Matt and Taylor are joined by Brendon Ogmundson. Brendon is the Chief Economist at BCREA (BC Real Estate Association) from Vancouver, BC, who's specializes in housing market analysis and macroeconomic forecasting, and is a member of the BC Ministry of Finance’s Economic Forecast Council. Brendon was also recently named one of the most influential economists in BC by Business in Vancouver.
Brendon's 1st Appearance in Episode 35: https://KelownaRealEstate.podbean.com/e/35-brendon-ogmundson/
Brendon's 2nd Appearance in Episode 61: https://KelownaRealEstate.podbean.com/e/61-brendon-ogmundson/
Brendon is here to discuss: → How tariffs work, the reasoning behind the US/Canada tariffs, and other ways Canada can target the US. → How these tariffs can impact the Canadian economy, inflation and GDP expectations, and where interest rates will go. → Who will be most affected in BC, what this means for real estate, and the Canadian dollar.
BCREA Website: www.bcrea.bc.ca
Brendon Ogmundson's LinkedIn: @BrandonOgmundson
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CONNECT WITH MATT
Matt Glen's Website: www.mattglen.ca
Matt Glen's Email: matt.glen@century21.ca
Matt Glen's Instagram: @mattglenrealestate
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CONNECT WITH TAYLOR
Taylor Atkinson's Website: www.venturemortgages.com
Taylor Atkinson's Email: taylor@venturemortgages.com
Taylor Atkinson's Instagram: @VentureMortgages
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Welcome back to the Kelowna RealEstate Podcast.
(00:01):
I'm your mortgage broker host,Taylor Atkinson.
And I'm your real estate agenthost, I'm your real estate agent
host, Matt Glenn.
What's happening, Taylor?
Well, better question, what'shappening, Matt?
Yeah, things have been crazy.
You know, adjusting from one child
to two, holy shit, is a lot.
It's a ton of work, but it has
been awesome.
Yeah, congratulations.
Yeah, thank you.
Our daughter, Dove, born a couple
(00:23):
of weeks ago, it's been awesome.
Yeah.
Our son loves her.
No jealousy situation.
It's honestly been a greattransition personality wise.
It's just workload wise.
It's been crazy.
Also, I've just been super busy atwork, which has been perfect
timing there.
But yeah, it's been interesting
for sure.
I mean, yeah, the whole parenting
life journey is such a, aninteresting one, but you guys seem
to be thriving in it.
(00:44):
So yeah, it's going pretty well.
Honestly, I'm not complaining onebit.
It's going well.
Yeah.
Yeah.
Cool.
Well, yeah, like you, I mean,yeah, we did a bit of a family
vacation and it was awesome.
And, you know, you build those
core memories with the kids.
And, you know, it's funny, you go
through this mindset, like not torelate parenting to real estate,
but I'm going to, it's socyclical, right?
Like every few weeks or months orwhatever it is, you're like, ah,
(01:05):
well, we just got to get over thisnext like milestone hurdle and
then life will be a bit easier.
And I find it's the same with real
estate.
policy and media and everything,
there'll be something that we'relike, we just need to get over
this hump, right?We just need to get over COVID.
We just need to get overinflation.
And now it's like, we just need toget through this tariff talk.
We brought on Brendan Ogmanson todissect it.
Hot commodity right now, Brendan.
Yeah.
The guy's booked like as manyshows that he does in a year and
(01:28):
two months.
But I feel like he's the only
resource we can lean on toactually talk about this stuff.
Well, he's definitely the bestresource for real estate in BC to
get an idea what to expect.
Not that anyone really knows what
to expect.
I mean, it was kind of reassuring
to know that he's also pulling hishair out because... everyone else.
I mean, at least us.
(01:49):
How do you advise clients?
What do you think is going tohappen?
Nobody really knows.
So he's built a lot of different
scenarios.
But I guess for me, and this is
just my own, I mean, you cancomment what you heard from the
show, but we recorded thisFebruary 27th.
It's going to be released on March4th.
That's technically when the finaltariff announcement was supposed
to be put in place, but that couldchange.
But what I got out of theconversation was the likelihood of
(02:09):
both countries coming out with thetariff policy of 25 % is most
likely going to happen.
That's going to affect our GDP
negatively and cause inflation togo up slightly to be a sustained
level.
If that happens, variable interest
rate or bank account overnightrate is going to drop.
Renan said potentially 100 basispoints, which is a 1 % drop on
(02:30):
prime, which would bring the primerate down to 4 .2, and then you
get a discount on that.
Likely, variable rates could be in
that 4 % to sub 4%.
for a short term, and then fixed
rates would likely go up slightly.
So we're probably going to see
variable down in that 4 % rangeand fixed up in the 5 % range.
(02:50):
But that's just what I took out ofthe conversation briefly.
What about you?I guess what I took mostly is just
the amount of uncertainty is wedon't really know because he's
talking about like, if thishappens, if this happens, like...
If the U .S.
imposes tariffs, if we retaliate,
they have different consequences.
Yeah, it's a tough one.
Too bad that our economy is goingto take a hit and rates could go
up at the same time or slightlyup.
(03:12):
It's just a tough one.
Normally, the economy starts going
down and you just lower rates andhelps a little.
Yeah, and I think if variablerates come down, it's not like a
relief of, oh, great, because thatmeans inflation is going up again.
Inflation sucks, man.
We've been through that.
It doesn't look great for oureconomy.
Then in terms of activity level inreal estate, I know you and I have
(03:32):
been smoking busy right now, but Ithink this could slow things down
a little bit just because of thatvolatility.
The uncertainty killstransactions.
I don't find rates affected asmuch.
It's like people don't want tomake a decision that they're
locked into a house for...
10 years if we have no idea what's
going to happen exactly next weekthat's exactly right that's
(03:53):
exactly right yeah yeah the onething there is right now is
uncertainty so yeah yeah that'sthe one thing we're certain about
all right well yeah enjoy the showguys all right in this episode
like every episode sponsored bycentury 21 assurance realty best
brokerage in the okanagan andactually the interior bc we're
growing that's exactly right yeahyeah the one thing there is right
now is uncertainty so yeah yeahthat's the one thing we're certain
(04:14):
about all right well yeah enjoythe show guys all right in this
episode like every episodesponsored by century 21 assurance
realty best brokerage in theokanagan and actually the interior
bc we're growing geographically,agent -wise.
So if you're an agent looking fora change to a growing brokerage,
give us a call.
If you're a buyer or seller
looking for an agent, give us acall and enjoy the show.
Brendan does not disappoint.
All right.
Returning to the show, BrendanOgmanson, thank you so much for
joining us again, man.
How are you?
Thanks a lot for coming.
lot for coming.
Good, good.
Good to be here.
I mean, there's not a lot going onsince we last spoke, but it seems
like you're never going to be sureto work with the way things are
going.
(04:34):
I've got, I think, between January
1st and June, I've got, I thinkit's like 40 to 45 presentations,
podcasts, whether it's in -person,virtual, it's kind of mixed.
I usually do about 50 to 60 in ayear, and I have basically that
already.
for the first half of the year.
So yeah, it's a lot.
Obviously, people are really
interested to hear about tariffs.
We all have been talking about
(04:56):
everything.
past couple months.
the first couple months.
And it's crazy because it's not
even like you're going to have thesame topic for all those things.
So much things happen from day today that you have to change up
your presentation every day.
The amount of updating analysis
(05:16):
and slides that not just me, butthe Bank of Canada has been doing
it, other economists I know, it'sjust this constant updating and
updating and updating.
As new information comes in, more
refined details about... about thetariffs and when they might happen
and what magnitude and everythingelse.
We've written a whole piece calledChoose Your Own Misadventure about
tariffs that we had started in, Ithink, in December.
So it was a really fun pre-Christmas period running
(05:37):
macroeconomic simulations, the wayeveryone wants to spend their
holiday season.
And by the time we put it out,
like, because we had scenarios forlike 10 % tariffs and like that's
over.
What's the point of even including
10 % in those simulations at thispoint?
So that was like, we put it outand it was basically already kind
of obsolete by the time it wasout.
(05:59):
And I've had to update that sincefor presentations.
And yeah, it's a lot.
Yeah.
I mean, even for this show, right?Like we're recording this February
27th.
We're going to do a quick
turnaround.
It'll be out March 4th.
A lot could change between then,but tariffs were supposed to be
announced March 4th.
So we won't hold you to anything,
but yeah.
Yeah, Yeah, we were kind of, I
(06:19):
guess, on schedule for March 4thafter that like 30 -day reprieve
where I don't know if there's anynegotiating going on in the
background or what.
And then yesterday, I think Trump
had said it would be April 2nd,but then it seemed like maybe he
was confused about other tariffs.
And then some of his advisors
corrected it was still March 4th.
Who knows?
This is not the best crew in termsof like rational thinking and pre
(06:39):
-planning or coherent thought.
Well, can you kind of summarize in
a few minutes, break down thetimeline of what's happened in the
last few months?And I mean, the whole show talked
to us like idiots because we arelike Matt and I don't have a clue
what's going on.
Much like probably most people,
not to insult our listeners, butlike it's a lot to digest.
Every economist is like, tariffsare not a thing that most
(07:00):
economists have had to think aboutfor a really long time, because
obviously free trade has been veryimportant.
Yeah, and like, so everyone's beenscrambling to textbooks like, how
does this work again?And yeah, so don't feel bad if
you're like, what's going on withtariffs?
It's very arcane, and we'll getthrough it together.
(07:22):
Okay.
Let's just start with the
simplest.
Where were the projections before
tariffs started to take over ourlives?
So if you talk to me in like pre-election, I guess, pre -election,
yeah, I would have hoped at leastthat we would have a Kamala Harris
administration.
We would have to talk about
tariffs at all.
And then in that scenario, we
would, I think, be looking at apretty nice recovery this year.
(07:42):
Everyone, you know, if you lookedat.
The Bank of Canada's forecast, theIMS forecast for the Canadian
economy, they were expectinggrowth to pick up to like 2%, 2
.5%.
So a decent kind of year for
growth.
And then for the housing market, I
was expecting things to get kindof back to normal after two really
weak years of activity.
Yeah.
Expecting sales come back to likearound their 10 -year average,
(08:06):
maybe a bit above.
And with a pretty well -supplied
market in terms of listings, theprices were pretty flat and be a
pretty calm year.
Instead, we're kind of scrambling
to talk about... I was feelinggood there for a second.
Yeah, about tariffs.
So like it kind of kicked off post
-election when Trump put out a,whatever you call it, truth.
So stupid.
stupid.
About how he was going to put a 25% tariff on Canada and Mexico and
(08:27):
a 10 % tariff on China.
And then that kind of sent
everybody scrambling.
Because before that, it was like
the talk was like a 10 % tariff.
And that's bad.
That's not going to tank theeconomy.
25 % is going to have a differentanimal.
That caused a lot of concern veryquickly for our listeners, too.
Like, what is a tariff?I think it's probably a good place
to start.
It's just a tax on imports.
(08:47):
So it's, in this case, the U .S.
will be putting a 25 % tax on all
Canadian goods exports to theUnited States.
So whether that's lumber or autoparts or steel or aluminum, if a U
.S.
business who needs...
Canadian Steel as part of itsmanufacturing process, they're
paying 25 % on that purchase atthe border or being voiced for,
(09:08):
essentially.
At the start, Trump was talking a
lot about how foreign governmentswill be paying these tariffs.
And then I guess someone probablypulled them aside and corrected
them, because he hasn't said thatin a while about who actually pays
tariffs.
In the most recent Bank of Canada
Monetary Policy Report, there's areally good graphic about what
happens with tariffs witheconomies like the US and Canada
that have a really integratedsupply chain.
(09:28):
So how many times that tariff getspaid and then how much of it gets
through the prices.
If you're an American auto parts
manufacturer and you order steelfrom Canada, you pay the tariff.
Then you ship those auto parts toa car assembly plant in Windsor or
something.
Tariff gets paid again.
And then the finished product, thecar gets sent back to the United
(09:50):
States.
Tariff gets paid again.
All those tariffs get baked intothe eventual consumer price.
All that ends up happening is thatprices are raising it.
You end up with inflation.
because of tariffs, you raise some
revenue as well, but at theexpense of a slower economy and
higher inflation.
Part of their justification of
this was, I guess, two things.
They said they wanted to stop
illegal immigration and drugs, butthey also wanted to be like
(10:13):
America first and support theireconomy that way.
Is that still their kind ofstance?
Yeah.
So the two main proponents, I
think, of... tariffs besides Trumpin his administration are his
treasury secretary, Scott Besson,who people assume is an adult
because he worked with GeorgeSoros as hedge fund and is
generally well -regarded infinance as like a serious person.
I think he's absolutely setting aflame to that reputation with
(10:33):
every speech he makes.
And then Stephen Mirren, who's
Trump's chief economic advisor,essentially.
Stephen Mirren wrote a paper allabout how to use tariffs, sort of
blaming global economic system.
kind of biases the U .S.
dollar higher at the expense ofthe U .S.
manufacturing sector.
So all of these sort of wreckage
that we've seen in the U .S.
manufacturing sector, especially
in the Midwest, the United States,since China was allowed into the
(10:55):
WTO, what the consequences of thathave been over the last four years
is that China is a super low -costproducer.
They can produce very, verycheaply and sell cheap goods back
into the United States, then takethose dollars, recycle them in.
to US treasuries, which pushes theUS dollar up and keeps kind of
Chinese economy more competitivethan it would be otherwise.
So China tends to manipulate itscurrency and they haven't really
(11:18):
done anything serious in the wayof like trying to rebalance their
economy towards like moreconsumption.
So a healthier global economywould be a China that had a lot of
like... household consumptionhappening, a lot of domestic
investment rather than justexporting cheap goods to the rest
of the world and kind of causingthese imbalances.
(11:39):
So one thing that he kind ofargues for is that U .S.
dollar should be lower, whichwould help manufacturing in the
United States.
But Trump has a strong dollar
policy, and they still want the USdollar to be the global reserve
currency.
So one thing you can do to try and
punish countries like China is puta very large tariff on their
imports to the United States.
(11:59):
So it kind of forces them to
reorient their economy towardsmore consumption and less savings.
That's sort of the theory.
So you take that kind of nuanced
theory.
And some of it I find kind of
incoherent, but at least it's aneconomic argument.
And then filter that through likea particularly dimwitted toddler's
brain.
And you end up with what we have
(12:20):
now, which is tariff good, tradesurplus good, trade deficit bad.
And instead of putting a largetariff on a country like China,
where you can maybe see theargument, they put huge tariffs
on.
Canada, where they run a very
small trade deficit with Canada orMexico or now the EU.
So all of your allies and yourlargest trading partners.
I think the only calculus thatTrump does is he sees what the
(12:43):
largest number is in terms oftrade, and he wants to put a tax
on the largest number so he canraise the most revenue.
He has this weird idea about howAmerica was never richer than when
they had really high tariffs.
I don't know what that argument
is.
I'm not sure what he means by
richer.
I think he means government
revenues, which is no one's ideaof how you measure wealth of a
(13:03):
country.
So it's really difficult as an
economist.
There's not a lot of coherent...
thought behind any of this.
So it's really hard to figure out
what they're thinking because it'sso irrational.
A long way of like, why is thishappening?
They have a particular theoryabout trade and it's been kind of
dumbed down to essentially likeexports good, imports bad.
(13:24):
That's where we're at.
So because of that, we might end
up with a 25 % tariff on allCanadian imports to the US next
week.
That is crazy.
So I heard him talk about that.
So he basically said the golden
age of American finances were 1870to 1914, which is basically the
time after the American Civil Warto World War I. I'm not obviously
an economist or a historicaleconomist at all.
(13:45):
But I read that World War I wasbasically a massive wealth
transfer from Europe because theyspent all their money.
And they basically just hired USAto fund World War I. And that's
when they got rich.
like it's exactly the opposite of
what actually happened.
And then World War II, I feel like
no country benefited morefinancially than the US in World
War II.
That just doesn't make any sense
to me.
(14:06):
No, obviously none of it makes any
sense.
Some of it is like they need to
raise revenue.
They're currently running about a
6%.
budget deficit, 6 % of GDP budget
deficit that they need to dosomething about.
They won't raise taxes.
They certainly won't raise income
taxes.
This is a way of essentially
introducing a consumption tax onAmerican taxpayers, but not
calling it that.
Good media spin, really.
(14:26):
Yeah.
It's like they're raising taxes on
American consumers and businesseswithout having to say they're, and
then pretending somehow that it'sactually paid for by foreign
governments, which you've seen manon the street interviews where
they even like people will try toargue that.
It's actually foreign businessesor foreign governments pay the tax
because they've just listened.
They just drink the Kool -Aid.
(14:47):
But you see less and less of that.
And I think people are starting to
wake up to the idea that thesetariffs are pretty destructive.
It is crazy when you think aboutlike the president talking about
51st state and stuff.
And you see these man on the
street interviews.
And these people who had literally
no beef at all, love Canada lastweek, are like talking like, yeah,
let's take him over.
Fuck him.
(15:08):
Right.
It's like, what on earth is
happening just because this onedude brain farts this shit?
It's insane.
It's insane.
So, yeah, without even gettinginto the nonsense of all that.
Yeah.
Canada or whatever.
I mean.
Obviously, if any other president
had said anything like this,they'd be fitted for a straight
jacket.
But he gets to play by his own set
of rules for whatever reason.
(15:29):
So I could rant about that all
day.
But as far as the impacts, I think
maybe we should talk about what itmeans for the Canadian economy.
And there, really, tariffs canaffect an economy.
There's sort of two paths.
One path is if Canada didn't
retaliate.
So if we didn't put our own tariff
on U .S.
imports into Canada, then the
impacts are serious.
They're just maybe less severe.
There's debate about some of thesethings, but obviously our exports
(15:49):
would take a pretty big hit.
They're 25 % more expensive now.
U .S.
businesses might look for
substitutes domestically.
That means we're selling a lot
less in the United States.
The impacts on inflation without
retaliation, this is where there'ssome debate.
Without us retaliating, the impacton growth would overwhelm
everything else.
we would get much lower inflation.
Bank of Canada would have torespond pretty aggressively in
that scenario.
And we'd get an exchange rate
(16:11):
depreciate in our models to like66 cents.
So fun for anyone that's stillthinking about traveling to the
United States.
That's not the path we're
choosing.
We have chosen to retaliate with a
25 % tariff on about 50 % of USimports into Canada.
There will be at least someinflationary response.
In this with retaliation scenario,you still - take the same hit to
gbp but then the impact oninflation and the bank of canada
(16:34):
is what really kind of matters soand that branches off again so
under one scenario you might havelike a transitory shock to
inflation no one wants to talkabout transitory inflation anymore
after the pandemic but You know, aone -time increase in prices due
to the tariffs on U .S.
imports that kind of goes away
after about a year.
(16:54):
Under that scenario, I think the
Bank of Canada can act prettyaggressively to address the
economy and the weakness in theeconomy.
And I think they would end upcutting rates by 100 basis points,
125 basis points, whatever it is.
You kind of look at, like, the
Bank of Canada's most recentprojections.
They started out very severe andhave since still back.
I think, you know, what startedoff as, like, three points of
(17:18):
economic growth.
growth lower than would be
otherwise.
And now it's a little bit lower
than that in their most recentprojections.
So they have 1 ,000 people workingon this, and everyone else has a
handful.
So go with their numbers in most
cases.
In the case where you have
transitory inflation, I think theBank of Canada can lower rates.
(17:39):
Maybe they lower to between 1 %and 1 .5%.
They probably don't go all the wayto the zero lower bound.
The situation that we might end upwith is a low but persistent
higher inflation.
In Tiff Macklin's most recent
speech, he had some projectionsfor the impact on inflation, the
current most likely proposal fortariffs and retaliation.
(18:00):
It shows about 0 .5 % to 0 .6 %increase in inflation over
baseline, which is like 2 %target.
They show inflation running atbetween 2 .5 % and 2 .6 % for like
three years.
So like pretty persistently higher
than target, like not much higher,we're not above 3%, but higher
than target inflation for a reallyextended period of time.
Obviously, they don't show whattheir monetary policy response
would be.
(18:20):
So I did some work to just sort of
try and match that specificresponse in our models.
It kind of tells you that theywould probably not be able to
lower rates at all under thatscenario.
If inflation is just running.
2 .5%, 2 .6%, it seems like they
would not be able to cut ratesvery aggressively or maybe at all.
And in that case, Mortgage ratesdon't move very much either.
Maybe even you have a little bitof a risk premium built in because
(18:44):
the economy is a little shakier.
So you might end up with five
-year fixed rates going a littlebit higher.
And that seems to be their mostlikely scenario.
We have a much weaker economy, aneconomy that's in their estimates,
I think, very shallow recession tojust zero growth for a two -year
period and where rates are kind ofhovering around where they are
now.
(19:04):
So you get all that weakness and
not necessarily a lot of firepowerdirected at pulling us out.
of that.
It's taken great pains even to
explain monetary policy can't fixeverything in the economy.
This would be a structural, if allof a sudden our largest trading
partners - trying to trade this alot less, that's not really a job
(19:27):
for monetary policy to fix.
And they're trying to communicate
that, I think, as well.
So under that scenario, obviously,
the housing market would beimpacted if you've got certain
parts of the economy, certainregions that are being more
affected.
Sales are falling.
In our models, they fall back tobasically the weakness we've seen
in the past two years.
(19:47):
So sales are running pretty slow.
Prices coming down, inventorystarting to build up.
Not an awesome scenario.
It's like a doomsday kind of
scenario, but it certainly wouldmean another year or two of really
slow sales, especially if interestrates can't come down.
Is BC better off or worse off orkind of median for the country?
off or worse off or kind of medianfor the country?
(20:07):
Or like, how are we looking there?So BC exports about 50 % of its
goods to the United States,whereas the rest of Canada is
about 75%.
Ontario, I think, is around 80 %
because they have the autoassembly kind of supply chain that
goes back and forth.
Alberta, I think it's closer to
about 90 % because they send somuch oil.
The only reason we run a verysmall trade surplus with the US is
because they buy a lot of oil fromus to refine in the Midwest and
(20:31):
the Gulf Coast.
You see less exposure, not zero.
It's still 50%.
About a quarter of that is energy
products.
22 % is oil and gas.
I think 4 % or 5 % is electricpower.
That's probably pretty inelastic.
I think they'll just keep...
Buying that, they'll pay the 10 %tariff that is currently proposed
on oil and gas exports.
Products that are going to be
(20:55):
hardest hit are forestry, again,after they were already really
severely impacted by the 2018 20 %tariff.
I was reading some research from,I think it's a forestry
association in BC.
But I guess the tariff is also
additive.
It doesn't replace.
There's currently a 14 .5 % tariffalready in place on BC softwood
lumber.
And this 25 % is on top of that.
(21:15):
So apparently it would be close toa 40 % tariff on softwood lumber.
When the 20 % tariff was put inplace in 2018, lumber exports from
BC fell by about 30 % and salesand manufactured wood products
fell about 30 % and forestryemployment fell.
You can imagine those types ofimpacts applied to the mineral
sector and metals and all thatkind of stuff.
We already have, even withoutthe...
Broad -based tariffs beingannounced, they did already put a
25 % tariff on aluminum and steelimports.
(21:36):
BC exports about a billion to abillion and a half dollars of
aluminum products to the UnitedStates every year, mostly from the
smelter and kinemat.
So that community could be really
impacted if that tariff causessome real disruptions to their
operations.
So yeah, you can just imagine like
all those communities, largely inthe north and like the northeast
where our oil and gas comes from.
kind of the North Coast, where
(21:57):
Kitimat and some of the forestrykind of communities of the
interior and the island, those arethe communities that would be
hardest hit.
The Chamber of Commerce in Canada
put out a map showing like whatbig cities we most affected by
tariffs in Canada.
And none of the big cities in BC
are on that map.
It's like we have none of the kind
(22:19):
of hotspots for tariffs.
You know, if you look at
Vancouver, Kelowna, Victoria,Abbotsford, Chilliwack, and
Nanaimo are sort of the big citiesin BC.
And none of them were consideredto be like hotspots for tariff
impacts.
So we are going to be affected,
but it's less so than a lot ofother places in Canada.
Not to say that there aren't likesmaller communities for sure in BC
(22:40):
that are really going to feel theimpact.
And some of your models then, someof your models then, like
obviously we're anticipatinginflation is going to be... on the
higher side a little bit, is itgoing to be more specific to
products and goods where thatinflation's affected?
I'm just thinking like lumber.
Sure, we're going to probably
(23:01):
export much less lumber, but nowwe're going to have a bit more of
a surplus.
Would that lumber cost go down?
Would that not help housing supplyor I guess building costs?
But then my mind's just circling.
I'm like, okay, but if
provincially or federally, we'reseeing inflation everywhere.
then they're going to have torecover that cost and pay for the
wage subsidy to go up.
(23:22):
Are we going to see a decrease on
any products because there's moreof a surplus, like oil and gas,
lumber, anything?Or is it just like once we start
hitting that inflation treadmill,everyone's got to jump on board?
got to jump on board?Yeah.
On the lumber side, I would hopethat we have other export markets
we can tap as well.
(23:42):
Might not have a huge... domestic
kind of surplus, though maybe thatwould help to offset some of the
other increases in building costs.
I don't look at pro formas for
buildings, so I'm not sure howmuch of the content of, say, an
apartment building is imported andhow much might be subject to a
tariff.
But I'm guessing that a fair
amount of what we use, at least onthe equipment side too, is
(24:03):
probably imported and those costsare going to rise.
So who knows where it shakes out.
It's a really good question.
It depends on how much of a marketthere would be, I guess.
What it just means is thatproduction.
production would be a lot lower.
Maybe you'd have a temporary
surplus, but eventually they wouldjust shut down a lot of
production.
In the softwood lumber example,
they just would cancel a bunch ofshifts or shut down some mills.
They're not going to build asurplus of goods.
(24:24):
Once that inventory is worked off,they just would not be producing
as much.
Yeah.
That's why the scenarios areprojecting GDP coming down in
addition to inflation going up.
It's driving that wedge from two
sides.
And the inflation part is really
like, obviously, you're makingsomething 25 % more expensive.
That's going to drive priceshigher.
And a lot of research shows thatdomestic producers also raise
their prices to match the higherimported price.
(24:49):
Makes sense.
They pulled extra margin.
So you do get these inflationaryimpacts at a time when the rest of
the economy is really, reallysuffering.
What about something likeadjusting the foreign buyer's ban
to just...
What about something like
adjusting the foreign buyer's banto just... U .S.
only banning Americans?Yeah.
Yeah.
I mean, I think there's a good
argument for lifting the foreignbuyer ban in general.
Yeah.
Even the amount of investment we
need in housing over the next 10years.
So the U .S.
(25:10):
is a pretty deep capital market.
So I don't know if I'd want tocompletely shut out one of the
largest financial markets in theworld.
But I know they'll look at otherthings they can target other than
just using matching tariffs.
Maybe they'll be able to put an
export tariff on Canadian oil,which would be interesting.
The U .S.
has already kind of communicated.
That's a weak point given that oilonly has a 10 % tariff because
(25:32):
they really don't want drivers inthe Midwest and around those
states to see a giant spike intheir price of the pump.
That might be a pain point if thepremier of Alberta doesn't get in
the way that we could cause alittle extra pain.
It's interesting to note, though,too, like in 2018, when they put
tariffs on softwood lumber andsteel and aluminum and appliances,
it only lasted about a year beforeAmerican businesses were getting
(25:52):
really upset about the rise intheir input costs.
If you look at surveys thatFederal Reserve does, they're
already hearing from smallbusinesses about uncertainty and
how tariffs are going to affecttheir business.
And we just got over aninflationary episode, and now
we're going to have prices risingagain.
I think they could lose politicalsupport really, really fast.
And if you get a really big marketreaction as well, that could be
(26:13):
convincing to an administrationthat pays a lot of attention to
financial markets as sort of agauge of how well they're doing.
So it could be a really temporarything, but it's a little
disheartening in like how muchenthusiasm there is, I guess, at
the top for an idea that's...
So kind of stupid on its face.
I've heard the argument and I kindof agree with it.
It's like this really takes awayfrom the last year and a half of
(26:37):
our own like internal bad policy,tariffs, capital gains, inclusion,
spec tax, anti -flipping tax, likeall these other things that we're
just crushing our own economywith.
Now it's kind of like, you know,short term memory, like, oh, like
Canada's been fine.
We treat ourself really well.
The States is crushing us.
It's like, well.
We wouldn't also be in such a badpredicament if we didn't just have
like a horrendous four years ofour own economy.
What is your prediction?Like come in a week or a month,
(26:59):
whenever they actually come outwith this, like, do you feel that
like 75 % are we leaning towardstariffs being set out on both
sides?out on both sides?
Seems that way.
It's really hard to know what they
want.
Sometimes they'll talk about how
unfair the trade deficit is withCanada, even though it's very,
very small and entirely driven bytheir own purchases of oil.
(27:20):
They'll talk about how muchfentanyl is pouring across the
northern border.
And then if you look at their own
data, they see something like 43pounds of fentanyl at the Canadian
-US border.
That's clearly not the issue
either.
I don't know what would...
convince them because theirarguments for are so transparently
lame and there's data showingneither of those things are an
(27:41):
issue.
So what the actual goal is, is
really, really hard to say unlessit's annexing Canada's 51st state,
which is so batshit that I don'teven understand how it gets talked
about.
So I don't know.
Hard to have any real convictionon any of this stuff because it
doesn't make any sense, right?If it does go, it does go, I'm
just trying to summarize in my ownhead.
(28:02):
If it does go tariffs on bothsides, Canada and US, we would
likely see GDP come down a littlebit, inflation go up a little bit,
sustained for a couple of years,and likely Bank of Canada
overnight rate would react by apercent, like 100 basis points, a
percent lower for a shortduration.
If inflation is transitory, I feellike if it's really persistent, if
it's 2 .5 % and they...
Start lowering rates, then
inflation starts creeping a littlebit higher, maybe to above 3%.
(28:25):
Then there kind of gets intoexpectations.
We don't want a repeat of what wewent through during the pandemic,
where we had what should have beentransitory inflation and the Bank
of Canada treated as transitory atfirst, and then got too far behind
the curve when it turned out itwasn't that transitory and they
had to be very aggressive.
I think they really want to avoid
repeating that mistake.
(28:45):
They might be a little more
cautious this time around.
The interesting thing will be how
governments react on the fiscalpolicy side.
Also, I think probably morecautious considering how
inflationary a lot of theemergency measures and spending
was during the pandemic.
Can't see them responding with
that same kind of firepower.
So there's a lot of more caution
on the part of policymakers.
They know how much people hate
inflation, seemingly hateinflation more than they hate
(29:07):
unemployment.
And so I think we'll be a little
more cautious in treating theeconomy this time around.
There's been a lot of talk aboutour dollar getting lower and
lower.
Like when I think about that, it
seems like kind of a positivething in a few ways to me.
But I don't know, like, what areyour thoughts on that?
Positive in some ways.
I mean, it certainly helps our
(29:30):
exporters be more competitive.
It also kind of shields them from
having to do things to be morecompetitive, like increase their
productivity.
If you're only competing on low
cost and you don't have to competeby just being better at your
business, by investing inmachinery and equipment and
(29:50):
productivity and all those kindsof things and innovation, that's
not great.
And also, it's inflationary.
So the more the loony depreciates,that means all of their imported
goods get more expensive and thatgets passed through.
So you certainly don't want acurrency that's too low.
Certainly tariffs make this worse.
This is the other part of it, too,
that doesn't make any sense.
When you put a tariff on another
country, the country imposing thetariff tends to see their currency
(30:13):
increase, which doesn't help yourtrade balance because now your
exports are more expensive andimports are cheaper.
So it actually makes your tradedeficit worse.
This is like simple macro stuff.
I guess they just don't think
about it.
they just don't think about it.
The bond yields have been like afreaking roller coaster for the
last, well, quite a while now.
(30:34):
Do we predict bond yields going up
a little bit with tariffs?And then, so we're going to kind
of see like an inverse, right?Fixed rates are probably going to
come up a bit.
Variables going to come down or
like what's happening.
Do you have any predictions on the
bond yield?Yeah, it's been interesting.
The period between the electionand when tariffs were like
announced at the end of.
This is the end of January.
The five -year bond yield hit 3 .3on two separate occasions and also
(30:59):
hit 275.
It was all over the place.
I think lenders were just tryingto ride out that volatility.
We didn't see five -year fixedrates move very much because
they're not going to be constantlyadjusting their lending rates up
and down.
When the tariff was announced that
Monday, as soon as markets opened,I think the five -year bond yield
hit like 2 .5.
It went really low.
And even like as of this morning,it was like under 2 .7 briefly
(31:22):
based on tariffs.
I think five -year bond yields
will start pricing in and probablyalready are pricing in a much more
aggressive Bank of Canada.
Like if you think about any bond
yield is essentially just the sumof where do you expect the Bank of
Canada to be the next five years?And then how much risk are you
going to build in, right?So usually the term premium
between the five -year bond yieldand the Bank of Canada, so how
(31:46):
much higher the five -year bondyield is the Bank of Canada
overnight rate, is like 50 basispoints.
So at 2 .7, you could assume ifthere's not much of a risk premium
that the markets are pricing in aBank of Canada at about two and a
quarter.
So the lower the five -year bond
yield gets, the more they'reexpecting the bank's going to have
to really, really start cuttingrates.
(32:07):
What I'd be worried about, Iguess, is at least in the short
term, even if five -year bondyields are falling.
that they're falling becausethey're pricing in a recession.
The markets are pricing arecession.
And then that risk premium getsbuilt into the mortgage spread.
So a normal mortgage spread islike 160 basis points, but we've
seen in periods of crises or justaround recessions that sometimes
that spread can blow out to like200 basis points or more.
(32:27):
So you could be having a situationwhere five -year bond yields are
falling, but five -year fixedmortgage rates are rising because
there's a lot more risk,obviously, in the economy.
There's a lot more risk in lendingout to a population that might be
losing its jobs, losing jobs thenext few months.
So that'd be my worry, I guess, islike we'd have a temporary...
increase in five years fixedrates, even as the Bank of Canada
is cutting, which we've seen inthe past.
(32:47):
And then on variable rate,obviously variable rates would be
falling along with the Bank ofCanada.
Yeah.
You know what else is interesting
there is we've seen a lot oflenders in the last month or so
give like very competitive rateson a one and a two year fixed,
which historically we've neverreally had, but it kind of leads
you to think like they wouldrather have short term money out
(33:09):
because like.
they don't know what's going to
happen either in two years.
You know, they want to recycle
that instead of locking somebodyin.
Yeah, exactly.
Yeah.
I guess like right now, five -yearfix for uninsured is still like
around four, six, four, seven frommost like big lenders.
So, you know, they seem likepretty cautious about lowering
rates much more.
Yeah.
Well, and that's the thing we'rebeating that on variable now,
(33:30):
which is like only just come in,you know, which is nice to have
the option, but we thought acouple of years ago, like, yeah,
do a three -year fix.
Cause in three years, we're going
to have a great opportunity tohave a better decision.
Now it's like, Oh, what do we do?like And now like you'd think
like, well, if we're going to bein a recession, maybe the obvious
(33:50):
recommendation to clients is takea variable.
It's going to be lowering rates.
But then.
There's like a 25%, maybe higherprobability that inflation is
going to be higher.
The Bank of Canada can't count
rates, maybe has to raise rates.
And like, that's maybe enough to
scare anyone off of a variable.
Yeah.
Crazy times, man.
Sweet geez.
Yeah.
Yeah.
No, we appreciate you coming onthe show.
I mean, that's a lot ofinformation and yeah, thank you
(34:13):
for explaining it to us.
Hopefully we'll have an answer in
a couple of weeks and then, youknow.
It's hard not to talk about itwithout like tearing your hair out
because it's so nonsensical.
hard not to talk about it without
like tearing your hair out becauseit's so nonsensical.
but i've been trying i've beentrying to walk the line and
(34:34):
presentations you know not beingtoo uh been been trying to walk
the line and presentations youknow not being too uh Yeah.
You just have a disclaimer at thebottom.
You just have a at the bottom.
Like none of this will be valid by
tomorrow.
of this will be by tomorrow.
One of these days, I'm justgetting on a full on at a podium.
I'm doing this guy's lost hismind.
(34:54):
I think, you know, I've run onetoo many.
My brain will just break and I'mjust going to get to lose my mind
on stage.
Yeah.
by tomorrow.
Well, let us know when you're
ready for that.
We'd love to be there for it.
it.
Yeah.
The platform's all yours for that.
Okay.
Well, yeah.
Thanks.
Thanks for coming on, man.
We appreciate it.
Talk to you soon.
And yeah, we'll check out your
LinkedIn posts because I'm surethat's going to be updated.
(35:14):
Thanks See them getting crazierand crazier and crazier.
You need to start wearing a whitelab coat.
Okay.
Have a great day.
Welcome back to the Kelowna RealEstate Podcast.
(00:01):
I'm your mortgage broker host,Taylor Atkinson.
And I'm your real estate agenthost, I'm your real estate agent
host, Matt Glenn.
What's happening, Taylor?
Well, better question, what'shappening, Matt?
Yeah, things have been crazy.
You know, adjusting from one child
to two, holy shit, is a lot.
It's a ton of work, but it has
been awesome.
Yeah, congratulations.
Yeah, thank you.
Our daughter, Dove, born a couple
(00:23):
of weeks ago, it's been awesome.
Yeah.
Our son loves her.
No jealousy situation.
It's honestly been a greattransition personality wise.
It's just workload wise.
It's been crazy.
Also, I've just been super busy atwork, which has been perfect
timing there.
But yeah, it's been interesting
for sure.
I mean, yeah, the whole parenting
life journey is such a, aninteresting one, but you guys seem
to be thriving in it.
(00:44):
So yeah, it's going pretty well.
Honestly, I'm not complaining onebit.
It's going well.
Yeah.
Yeah.
Cool.
Well, yeah, like you, I mean,yeah, we did a bit of a family
vacation and it was awesome.
And, you know, you build those
core memories with the kids.
And, you know, it's funny, you go
through this mindset, like not torelate parenting to real estate,
but I'm going to, it's socyclical, right?
Like every few weeks or months orwhatever it is, you're like, ah,
(01:05):
well, we just got to get over thisnext like milestone hurdle and
then life will be a bit easier.
And I find it's the same with real
estate.
policy and media and everything,
there'll be something that we'relike, we just need to get over
this hump, right?We just need to get over COVID.
We just need to get overinflation.
And now it's like, we just need toget through this tariff talk.
We brought on Brendan Ogmanson todissect it.
Hot commodity right now, Brendan.
Yeah.
The guy's booked like as manyshows that he does in a year and
(01:28):
two months.
But I feel like he's the only
resource we can lean on toactually talk about this stuff.
Well, he's definitely the bestresource for real estate in BC to
get an idea what to expect.
Not that anyone really knows what
to expect.
I mean, it was kind of reassuring
to know that he's also pulling hishair out because... everyone else.
I mean, at least us.
(01:49):
How do you advise clients?
What do you think is going tohappen?
Nobody really knows.
So he's built a lot of different
scenarios.
But I guess for me, and this is
just my own, I mean, you cancomment what you heard from the
show, but we recorded thisFebruary 27th.
It's going to be released on March4th.
That's technically when the finaltariff announcement was supposed
to be put in place, but that couldchange.
But what I got out of theconversation was the likelihood of
(02:09):
both countries coming out with thetariff policy of 25 % is most
likely going to happen.
That's going to affect our GDP
negatively and cause inflation togo up slightly to be a sustained
level.
If that happens, variable interest
rate or bank account overnightrate is going to drop.
Renan said potentially 100 basispoints, which is a 1 % drop on
(02:30):
prime, which would bring the primerate down to 4 .2, and then you
get a discount on that.
Likely, variable rates could be in
that 4 % to sub 4%.
for a short term, and then fixed
rates would likely go up slightly.
So we're probably going to see
variable down in that 4 % rangeand fixed up in the 5 % range.
(02:50):
But that's just what I took out ofthe conversation briefly.
What about you?I guess what I took mostly is just
the amount of uncertainty is wedon't really know because he's
talking about like, if thishappens, if this happens, like...
If the U .S.
imposes tariffs, if we retaliate,
they have different consequences.
Yeah, it's a tough one.
Too bad that our economy is goingto take a hit and rates could go
up at the same time or slightlyup.
(03:12):
It's just a tough one.
Normally, the economy starts going
down and you just lower rates andhelps a little.
Yeah, and I think if variablerates come down, it's not like a
relief of, oh, great, because thatmeans inflation is going up again.
Inflation sucks, man.
We've been through that.
It doesn't look great for oureconomy.
Then in terms of activity level inreal estate, I know you and I have
(03:32):
been smoking busy right now, but Ithink this could slow things down
a little bit just because of thatvolatility.
The uncertainty killstransactions.
I don't find rates affected asmuch.
It's like people don't want tomake a decision that they're
locked into a house for...
10 years if we have no idea what's
going to happen exactly next weekthat's exactly right that's
(03:53):
exactly right yeah yeah the onething there is right now is
uncertainty so yeah yeah that'sthe one thing we're certain about
all right well yeah enjoy the showguys all right in this episode
like every episode sponsored bycentury 21 assurance realty best
brokerage in the okanagan andactually the interior bc we're
growing that's exactly right yeahyeah the one thing there is right
now is uncertainty so yeah yeahthat's the one thing we're certain
(04:14):
about all right well yeah enjoythe show guys all right in this
episode like every episodesponsored by century 21 assurance
realty best brokerage in theokanagan and actually the interior
bc we're growing geographically,agent -wise.
So if you're an agent looking fora change to a growing brokerage,
give us a call.
If you're a buyer or seller
looking for an agent, give us acall and enjoy the show.
Brendan does not disappoint.
All right.
Returning to the show, BrendanOgmanson, thank you so much for
joining us again, man.
How are you?
Thanks a lot for coming.
lot for coming.
Good, good.
Good to be here.
I mean, there's not a lot going onsince we last spoke, but it seems
like you're never going to be sureto work with the way things are
going.
(04:34):
I've got, I think, between January
1st and June, I've got, I thinkit's like 40 to 45 presentations,
podcasts, whether it's in -person,virtual, it's kind of mixed.
I usually do about 50 to 60 in ayear, and I have basically that
already.
for the first half of the year.
So yeah, it's a lot.
Obviously, people are really
interested to hear about tariffs.
We all have been talking about
(04:56):
everything.
past couple months.
the first couple months.
And it's crazy because it's not
even like you're going to have thesame topic for all those things.
So much things happen from day today that you have to change up
your presentation every day.
The amount of updating analysis
(05:16):
and slides that not just me, butthe Bank of Canada has been doing
it, other economists I know, it'sjust this constant updating and
updating and updating.
As new information comes in, more
refined details about... about thetariffs and when they might happen
and what magnitude and everythingelse.
We've written a whole piece calledChoose Your Own Misadventure about
tariffs that we had started in, Ithink, in December.
So it was a really fun pre-Christmas period running
(05:37):
macroeconomic simulations, the wayeveryone wants to spend their
holiday season.
And by the time we put it out,
like, because we had scenarios forlike 10 % tariffs and like that's
over.
What's the point of even including
10 % in those simulations at thispoint?
So that was like, we put it outand it was basically already kind
of obsolete by the time it wasout.
(05:59):
And I've had to update that sincefor presentations.
And yeah, it's a lot.
Yeah.
I mean, even for this show, right?Like we're recording this February
27th.
We're going to do a quick
turnaround.
It'll be out March 4th.
A lot could change between then,but tariffs were supposed to be
announced March 4th.
So we won't hold you to anything,
but yeah.
Yeah, Yeah, we were kind of, I
(06:19):
guess, on schedule for March 4thafter that like 30 -day reprieve
where I don't know if there's anynegotiating going on in the
background or what.
And then yesterday, I think Trump
had said it would be April 2nd,but then it seemed like maybe he
was confused about other tariffs.
And then some of his advisors
corrected it was still March 4th.
Who knows?
This is not the best crew in termsof like rational thinking and pre
(06:39):
-planning or coherent thought.
Well, can you kind of summarize in
a few minutes, break down thetimeline of what's happened in the
last few months?And I mean, the whole show talked
to us like idiots because we arelike Matt and I don't have a clue
what's going on.
Much like probably most people,
not to insult our listeners, butlike it's a lot to digest.
Every economist is like, tariffsare not a thing that most
(07:00):
economists have had to think aboutfor a really long time, because
obviously free trade has been veryimportant.
Yeah, and like, so everyone's beenscrambling to textbooks like, how
does this work again?And yeah, so don't feel bad if
you're like, what's going on withtariffs?
It's very arcane, and we'll getthrough it together.
(07:22):
Okay.
Let's just start with the
simplest.
Where were the projections before
tariffs started to take over ourlives?
So if you talk to me in like pre-election, I guess, pre -election,
yeah, I would have hoped at leastthat we would have a Kamala Harris
administration.
We would have to talk about
tariffs at all.
And then in that scenario, we
would, I think, be looking at apretty nice recovery this year.
(07:42):
Everyone, you know, if you lookedat.
The Bank of Canada's forecast, theIMS forecast for the Canadian
economy, they were expectinggrowth to pick up to like 2%, 2
.5%.
So a decent kind of year for
growth.
And then for the housing market, I
was expecting things to get kindof back to normal after two really
weak years of activity.
Yeah.
Expecting sales come back to likearound their 10 -year average,
(08:06):
maybe a bit above.
And with a pretty well -supplied
market in terms of listings, theprices were pretty flat and be a
pretty calm year.
Instead, we're kind of scrambling
to talk about... I was feelinggood there for a second.
Yeah, about tariffs.
So like it kind of kicked off post
-election when Trump put out a,whatever you call it, truth.
So stupid.
stupid.
About how he was going to put a 25% tariff on Canada and Mexico and
(08:27):
a 10 % tariff on China.
And then that kind of sent
everybody scrambling.
Because before that, it was like
the talk was like a 10 % tariff.
And that's bad.
That's not going to tank theeconomy.
25 % is going to have a differentanimal.
That caused a lot of concern veryquickly for our listeners, too.
Like, what is a tariff?I think it's probably a good place
to start.
It's just a tax on imports.
(08:47):
So it's, in this case, the U .S.
will be putting a 25 % tax on all
Canadian goods exports to theUnited States.
So whether that's lumber or autoparts or steel or aluminum, if a U
.S.
business who needs...
Canadian Steel as part of itsmanufacturing process, they're
paying 25 % on that purchase atthe border or being voiced for,
(09:08):
essentially.
At the start, Trump was talking a
lot about how foreign governmentswill be paying these tariffs.
And then I guess someone probablypulled them aside and corrected
them, because he hasn't said thatin a while about who actually pays
tariffs.
In the most recent Bank of Canada
Monetary Policy Report, there's areally good graphic about what
happens with tariffs witheconomies like the US and Canada
that have a really integratedsupply chain.
(09:28):
So how many times that tariff getspaid and then how much of it gets
through the prices.
If you're an American auto parts
manufacturer and you order steelfrom Canada, you pay the tariff.
Then you ship those auto parts toa car assembly plant in Windsor or
something.
Tariff gets paid again.
And then the finished product, thecar gets sent back to the United
(09:50):
States.
Tariff gets paid again.
All those tariffs get baked intothe eventual consumer price.
All that ends up happening is thatprices are raising it.
You end up with inflation.
because of tariffs, you raise some
revenue as well, but at theexpense of a slower economy and
higher inflation.
Part of their justification of
this was, I guess, two things.
They said they wanted to stop
illegal immigration and drugs, butthey also wanted to be like
(10:13):
America first and support theireconomy that way.
Is that still their kind ofstance?
Yeah.
So the two main proponents, I
think, of... tariffs besides Trumpin his administration are his
treasury secretary, Scott Besson,who people assume is an adult
because he worked with GeorgeSoros as hedge fund and is
generally well -regarded infinance as like a serious person.
I think he's absolutely setting aflame to that reputation with
(10:33):
every speech he makes.
And then Stephen Mirren, who's
Trump's chief economic advisor,essentially.
Stephen Mirren wrote a paper allabout how to use tariffs, sort of
blaming global economic system.
kind of biases the U .S.
dollar higher at the expense ofthe U .S.
manufacturing sector.
So all of these sort of wreckage
that we've seen in the U .S.
manufacturing sector, especially
in the Midwest, the United States,since China was allowed into the
(10:55):
WTO, what the consequences of thathave been over the last four years
is that China is a super low -costproducer.
They can produce very, verycheaply and sell cheap goods back
into the United States, then takethose dollars, recycle them in.
to US treasuries, which pushes theUS dollar up and keeps kind of
Chinese economy more competitivethan it would be otherwise.
So China tends to manipulate itscurrency and they haven't really
(11:18):
done anything serious in the wayof like trying to rebalance their
economy towards like moreconsumption.
So a healthier global economywould be a China that had a lot of
like... household consumptionhappening, a lot of domestic
investment rather than justexporting cheap goods to the rest
of the world and kind of causingthese imbalances.
(11:39):
So one thing that he kind ofargues for is that U .S.
dollar should be lower, whichwould help manufacturing in the
United States.
But Trump has a strong dollar
policy, and they still want the USdollar to be the global reserve
currency.
So one thing you can do to try and
punish countries like China is puta very large tariff on their
imports to the United States.
(11:59):
So it kind of forces them to
reorient their economy towardsmore consumption and less savings.
That's sort of the theory.
So you take that kind of nuanced
theory.
And some of it I find kind of
incoherent, but at least it's aneconomic argument.
And then filter that through likea particularly dimwitted toddler's
brain.
And you end up with what we have
(12:20):
now, which is tariff good, tradesurplus good, trade deficit bad.
And instead of putting a largetariff on a country like China,
where you can maybe see theargument, they put huge tariffs
on.
Canada, where they run a very
small trade deficit with Canada orMexico or now the EU.
So all of your allies and yourlargest trading partners.
I think the only calculus thatTrump does is he sees what the
(12:43):
largest number is in terms oftrade, and he wants to put a tax
on the largest number so he canraise the most revenue.
He has this weird idea about howAmerica was never richer than when
they had really high tariffs.
I don't know what that argument
is.
I'm not sure what he means by
richer.
I think he means government
revenues, which is no one's ideaof how you measure wealth of a
(13:03):
country.
So it's really difficult as an
economist.
There's not a lot of coherent...
thought behind any of this.
So it's really hard to figure out
what they're thinking because it'sso irrational.
A long way of like, why is thishappening?
They have a particular theoryabout trade and it's been kind of
dumbed down to essentially likeexports good, imports bad.
(13:24):
That's where we're at.
So because of that, we might end
up with a 25 % tariff on allCanadian imports to the US next
week.
That is crazy.
So I heard him talk about that.
So he basically said the golden
age of American finances were 1870to 1914, which is basically the
time after the American Civil Warto World War I. I'm not obviously
an economist or a historicaleconomist at all.
(13:45):
But I read that World War I wasbasically a massive wealth
transfer from Europe because theyspent all their money.
And they basically just hired USAto fund World War I. And that's
when they got rich.
like it's exactly the opposite of
what actually happened.
And then World War II, I feel like
no country benefited morefinancially than the US in World
War II.
That just doesn't make any sense
to me.
(14:06):
No, obviously none of it makes any
sense.
Some of it is like they need to
raise revenue.
They're currently running about a
6%.
budget deficit, 6 % of GDP budget
deficit that they need to dosomething about.
They won't raise taxes.
They certainly won't raise income
taxes.
This is a way of essentially
introducing a consumption tax onAmerican taxpayers, but not
calling it that.
Good media spin, really.
(14:26):
Yeah.
It's like they're raising taxes on
American consumers and businesseswithout having to say they're, and
then pretending somehow that it'sactually paid for by foreign
governments, which you've seen manon the street interviews where
they even like people will try toargue that.
It's actually foreign businessesor foreign governments pay the tax
because they've just listened.
They just drink the Kool -Aid.
(14:47):
But you see less and less of that.
And I think people are starting to
wake up to the idea that thesetariffs are pretty destructive.
It is crazy when you think aboutlike the president talking about
51st state and stuff.
And you see these man on the
street interviews.
And these people who had literally
no beef at all, love Canada lastweek, are like talking like, yeah,
let's take him over.
Fuck him.
(15:08):
Right.
It's like, what on earth is
happening just because this onedude brain farts this shit?
It's insane.
It's insane.
So, yeah, without even gettinginto the nonsense of all that.
Yeah.
Canada or whatever.
I mean.
Obviously, if any other president
had said anything like this,they'd be fitted for a straight
jacket.
But he gets to play by his own set
of rules for whatever reason.
(15:29):
So I could rant about that all
day.
But as far as the impacts, I think
maybe we should talk about what itmeans for the Canadian economy.
And there, really, tariffs canaffect an economy.
There's sort of two paths.
One path is if Canada didn't
retaliate.
So if we didn't put our own tariff
on U .S.
imports into Canada, then the
impacts are serious.
They're just maybe less severe.
There's debate about some of thesethings, but obviously our exports
(15:49):
would take a pretty big hit.
They're 25 % more expensive now.
U .S.
businesses might look for
substitutes domestically.
That means we're selling a lot
less in the United States.
The impacts on inflation without
retaliation, this is where there'ssome debate.
Without us retaliating, the impacton growth would overwhelm
everything else.
we would get much lower inflation.
Bank of Canada would have torespond pretty aggressively in
that scenario.
And we'd get an exchange rate
(16:11):
depreciate in our models to like66 cents.
So fun for anyone that's stillthinking about traveling to the
United States.
That's not the path we're
choosing.
We have chosen to retaliate with a
25 % tariff on about 50 % of USimports into Canada.
There will be at least someinflationary response.
In this with retaliation scenario,you still - take the same hit to
gbp but then the impact oninflation and the bank of canada
(16:34):
is what really kind of matters soand that branches off again so
under one scenario you might havelike a transitory shock to
inflation no one wants to talkabout transitory inflation anymore
after the pandemic but You know, aone -time increase in prices due
to the tariffs on U .S.
imports that kind of goes away
after about a year.
(16:54):
Under that scenario, I think the
Bank of Canada can act prettyaggressively to address the
economy and the weakness in theeconomy.
And I think they would end upcutting rates by 100 basis points,
125 basis points, whatever it is.
You kind of look at, like, the
Bank of Canada's most recentprojections.
They started out very severe andhave since still back.
I think, you know, what startedoff as, like, three points of
(17:18):
economic growth.
growth lower than would be
otherwise.
And now it's a little bit lower
than that in their most recentprojections.
So they have 1 ,000 people workingon this, and everyone else has a
handful.
So go with their numbers in most
cases.
In the case where you have
transitory inflation, I think theBank of Canada can lower rates.
(17:39):
Maybe they lower to between 1 %and 1 .5%.
They probably don't go all the wayto the zero lower bound.
The situation that we might end upwith is a low but persistent
higher inflation.
In Tiff Macklin's most recent
speech, he had some projectionsfor the impact on inflation, the
current most likely proposal fortariffs and retaliation.
(18:00):
It shows about 0 .5 % to 0 .6 %increase in inflation over
baseline, which is like 2 %target.
They show inflation running atbetween 2 .5 % and 2 .6 % for like
three years.
So like pretty persistently higher
than target, like not much higher,we're not above 3%, but higher
than target inflation for a reallyextended period of time.
Obviously, they don't show whattheir monetary policy response
would be.
(18:20):
So I did some work to just sort of
try and match that specificresponse in our models.
It kind of tells you that theywould probably not be able to
lower rates at all under thatscenario.
If inflation is just running.
2 .5%, 2 .6%, it seems like they
would not be able to cut ratesvery aggressively or maybe at all.
And in that case, Mortgage ratesdon't move very much either.
Maybe even you have a little bitof a risk premium built in because
(18:44):
the economy is a little shakier.
So you might end up with five
-year fixed rates going a littlebit higher.
And that seems to be their mostlikely scenario.
We have a much weaker economy, aneconomy that's in their estimates,
I think, very shallow recession tojust zero growth for a two -year
period and where rates are kind ofhovering around where they are
now.
(19:04):
So you get all that weakness and
not necessarily a lot of firepowerdirected at pulling us out.
of that.
It's taken great pains even to
explain monetary policy can't fixeverything in the economy.
This would be a structural, if allof a sudden our largest trading
partners - trying to trade this alot less, that's not really a job
(19:27):
for monetary policy to fix.
And they're trying to communicate
that, I think, as well.
So under that scenario, obviously,
the housing market would beimpacted if you've got certain
parts of the economy, certainregions that are being more
affected.
Sales are falling.
In our models, they fall back tobasically the weakness we've seen
in the past two years.
(19:47):
So sales are running pretty slow.
Prices coming down, inventorystarting to build up.
Not an awesome scenario.
It's like a doomsday kind of
scenario, but it certainly wouldmean another year or two of really
slow sales, especially if interestrates can't come down.
Is BC better off or worse off orkind of median for the country?
off or worse off or kind of medianfor the country?
(20:07):
Or like, how are we looking there?So BC exports about 50 % of its
goods to the United States,whereas the rest of Canada is
about 75%.
Ontario, I think, is around 80 %
because they have the autoassembly kind of supply chain that
goes back and forth.
Alberta, I think it's closer to
about 90 % because they send somuch oil.
The only reason we run a verysmall trade surplus with the US is
because they buy a lot of oil fromus to refine in the Midwest and
(20:31):
the Gulf Coast.
You see less exposure, not zero.
It's still 50%.
About a quarter of that is energy
products.
22 % is oil and gas.
I think 4 % or 5 % is electricpower.
That's probably pretty inelastic.
I think they'll just keep...
Buying that, they'll pay the 10 %tariff that is currently proposed
on oil and gas exports.
Products that are going to be
(20:55):
hardest hit are forestry, again,after they were already really
severely impacted by the 2018 20 %tariff.
I was reading some research from,I think it's a forestry
association in BC.
But I guess the tariff is also
additive.
It doesn't replace.
There's currently a 14 .5 % tariffalready in place on BC softwood
lumber.
And this 25 % is on top of that.
(21:15):
So apparently it would be close toa 40 % tariff on softwood lumber.
When the 20 % tariff was put inplace in 2018, lumber exports from
BC fell by about 30 % and salesand manufactured wood products
fell about 30 % and forestryemployment fell.
You can imagine those types ofimpacts applied to the mineral
sector and metals and all thatkind of stuff.
We already have, even withoutthe...
Broad -based tariffs beingannounced, they did already put a
25 % tariff on aluminum and steelimports.
(21:36):
BC exports about a billion to abillion and a half dollars of
aluminum products to the UnitedStates every year, mostly from the
smelter and kinemat.
So that community could be really
impacted if that tariff causessome real disruptions to their
operations.
So yeah, you can just imagine like
all those communities, largely inthe north and like the northeast
where our oil and gas comes from.
kind of the North Coast, where
(21:57):
Kitimat and some of the forestrykind of communities of the
interior and the island, those arethe communities that would be
hardest hit.
The Chamber of Commerce in Canada
put out a map showing like whatbig cities we most affected by
tariffs in Canada.
And none of the big cities in BC
are on that map.
It's like we have none of the kind
(22:19):
of hotspots for tariffs.
You know, if you look at
Vancouver, Kelowna, Victoria,Abbotsford, Chilliwack, and
Nanaimo are sort of the big citiesin BC.
And none of them were consideredto be like hotspots for tariff
impacts.
So we are going to be affected,
but it's less so than a lot ofother places in Canada.
Not to say that there aren't likesmaller communities for sure in BC
(22:40):
that are really going to feel theimpact.
And some of your models then, someof your models then, like
obviously we're anticipatinginflation is going to be... on the
higher side a little bit, is itgoing to be more specific to
products and goods where thatinflation's affected?
I'm just thinking like lumber.
Sure, we're going to probably
(23:01):
export much less lumber, but nowwe're going to have a bit more of
a surplus.
Would that lumber cost go down?
Would that not help housing supplyor I guess building costs?
But then my mind's just circling.
I'm like, okay, but if
provincially or federally, we'reseeing inflation everywhere.
then they're going to have torecover that cost and pay for the
wage subsidy to go up.
(23:22):
Are we going to see a decrease on
any products because there's moreof a surplus, like oil and gas,
lumber, anything?Or is it just like once we start
hitting that inflation treadmill,everyone's got to jump on board?
got to jump on board?Yeah.
On the lumber side, I would hopethat we have other export markets
we can tap as well.
(23:42):
Might not have a huge... domestic
kind of surplus, though maybe thatwould help to offset some of the
other increases in building costs.
I don't look at pro formas for
buildings, so I'm not sure howmuch of the content of, say, an
apartment building is imported andhow much might be subject to a
tariff.
But I'm guessing that a fair
amount of what we use, at least onthe equipment side too, is
(24:03):
probably imported and those costsare going to rise.
So who knows where it shakes out.
It's a really good question.
It depends on how much of a marketthere would be, I guess.
What it just means is thatproduction.
production would be a lot lower.
Maybe you'd have a temporary
surplus, but eventually they wouldjust shut down a lot of
production.
In the softwood lumber example,
they just would cancel a bunch ofshifts or shut down some mills.
They're not going to build asurplus of goods.
(24:24):
Once that inventory is worked off,they just would not be producing
as much.
Yeah.
That's why the scenarios areprojecting GDP coming down in
addition to inflation going up.
It's driving that wedge from two
sides.
And the inflation part is really
like, obviously, you're makingsomething 25 % more expensive.
That's going to drive priceshigher.
And a lot of research shows thatdomestic producers also raise
their prices to match the higherimported price.
(24:49):
Makes sense.
They pulled extra margin.
So you do get these inflationaryimpacts at a time when the rest of
the economy is really, reallysuffering.
What about something likeadjusting the foreign buyer's ban
to just...
What about something like
adjusting the foreign buyer's banto just... U .S.
only banning Americans?Yeah.
Yeah.
I mean, I think there's a good
argument for lifting the foreignbuyer ban in general.
Yeah.
Even the amount of investment we
need in housing over the next 10years.
So the U .S.
(25:10):
is a pretty deep capital market.
So I don't know if I'd want tocompletely shut out one of the
largest financial markets in theworld.
But I know they'll look at otherthings they can target other than
just using matching tariffs.
Maybe they'll be able to put an
export tariff on Canadian oil,which would be interesting.
The U .S.
has already kind of communicated.
That's a weak point given that oilonly has a 10 % tariff because
(25:32):
they really don't want drivers inthe Midwest and around those
states to see a giant spike intheir price of the pump.
That might be a pain point if thepremier of Alberta doesn't get in
the way that we could cause alittle extra pain.
It's interesting to note, though,too, like in 2018, when they put
tariffs on softwood lumber andsteel and aluminum and appliances,
it only lasted about a year beforeAmerican businesses were getting
(25:52):
really upset about the rise intheir input costs.
If you look at surveys thatFederal Reserve does, they're
already hearing from smallbusinesses about uncertainty and
how tariffs are going to affecttheir business.
And we just got over aninflationary episode, and now
we're going to have prices risingagain.
I think they could lose politicalsupport really, really fast.
And if you get a really big marketreaction as well, that could be
(26:13):
convincing to an administrationthat pays a lot of attention to
financial markets as sort of agauge of how well they're doing.
So it could be a really temporarything, but it's a little
disheartening in like how muchenthusiasm there is, I guess, at
the top for an idea that's...
So kind of stupid on its face.
I've heard the argument and I kindof agree with it.
It's like this really takes awayfrom the last year and a half of
(26:37):
our own like internal bad policy,tariffs, capital gains, inclusion,
spec tax, anti -flipping tax, likeall these other things that we're
just crushing our own economywith.
Now it's kind of like, you know,short term memory, like, oh, like
Canada's been fine.
We treat ourself really well.
The States is crushing us.
It's like, well.
We wouldn't also be in such a badpredicament if we didn't just have
like a horrendous four years ofour own economy.
What is your prediction?Like come in a week or a month,
(26:59):
whenever they actually come outwith this, like, do you feel that
like 75 % are we leaning towardstariffs being set out on both
sides?out on both sides?
Seems that way.
It's really hard to know what they
want.
Sometimes they'll talk about how
unfair the trade deficit is withCanada, even though it's very,
very small and entirely driven bytheir own purchases of oil.
(27:20):
They'll talk about how muchfentanyl is pouring across the
northern border.
And then if you look at their own
data, they see something like 43pounds of fentanyl at the Canadian
-US border.
That's clearly not the issue
either.
I don't know what would...
convince them because theirarguments for are so transparently
lame and there's data showingneither of those things are an
(27:41):
issue.
So what the actual goal is, is
really, really hard to say unlessit's annexing Canada's 51st state,
which is so batshit that I don'teven understand how it gets talked
about.
So I don't know.
Hard to have any real convictionon any of this stuff because it
doesn't make any sense, right?If it does go, it does go, I'm
just trying to summarize in my ownhead.
(28:02):
If it does go tariffs on bothsides, Canada and US, we would
likely see GDP come down a littlebit, inflation go up a little bit,
sustained for a couple of years,and likely Bank of Canada
overnight rate would react by apercent, like 100 basis points, a
percent lower for a shortduration.
If inflation is transitory, I feellike if it's really persistent, if
it's 2 .5 % and they...
Start lowering rates, then
inflation starts creeping a littlebit higher, maybe to above 3%.
(28:25):
Then there kind of gets intoexpectations.
We don't want a repeat of what wewent through during the pandemic,
where we had what should have beentransitory inflation and the Bank
of Canada treated as transitory atfirst, and then got too far behind
the curve when it turned out itwasn't that transitory and they
had to be very aggressive.
I think they really want to avoid
repeating that mistake.
(28:45):
They might be a little more
cautious this time around.
The interesting thing will be how
governments react on the fiscalpolicy side.
Also, I think probably morecautious considering how
inflationary a lot of theemergency measures and spending
was during the pandemic.
Can't see them responding with
that same kind of firepower.
So there's a lot of more caution
on the part of policymakers.
They know how much people hate
inflation, seemingly hateinflation more than they hate
(29:07):
unemployment.
And so I think we'll be a little
more cautious in treating theeconomy this time around.
There's been a lot of talk aboutour dollar getting lower and
lower.
Like when I think about that, it
seems like kind of a positivething in a few ways to me.
But I don't know, like, what areyour thoughts on that?
Positive in some ways.
I mean, it certainly helps our
(29:30):
exporters be more competitive.
It also kind of shields them from
having to do things to be morecompetitive, like increase their
productivity.
If you're only competing on low
cost and you don't have to competeby just being better at your
business, by investing inmachinery and equipment and
(29:50):
productivity and all those kindsof things and innovation, that's
not great.
And also, it's inflationary.
So the more the loony depreciates,that means all of their imported
goods get more expensive and thatgets passed through.
So you certainly don't want acurrency that's too low.
Certainly tariffs make this worse.
This is the other part of it, too,
that doesn't make any sense.
When you put a tariff on another
country, the country imposing thetariff tends to see their currency
(30:13):
increase, which doesn't help yourtrade balance because now your
exports are more expensive andimports are cheaper.
So it actually makes your tradedeficit worse.
This is like simple macro stuff.
I guess they just don't think
about it.
they just don't think about it.
The bond yields have been like afreaking roller coaster for the
last, well, quite a while now.
(30:34):
Do we predict bond yields going up
a little bit with tariffs?And then, so we're going to kind
of see like an inverse, right?Fixed rates are probably going to
come up a bit.
Variables going to come down or
like what's happening.
Do you have any predictions on the
bond yield?Yeah, it's been interesting.
The period between the electionand when tariffs were like
announced at the end of.
This is the end of January.
The five -year bond yield hit 3 .3on two separate occasions and also
(30:59):
hit 275.
It was all over the place.
I think lenders were just tryingto ride out that volatility.
We didn't see five -year fixedrates move very much because
they're not going to be constantlyadjusting their lending rates up
and down.
When the tariff was announced that
Monday, as soon as markets opened,I think the five -year bond yield
hit like 2 .5.
It went really low.
And even like as of this morning,it was like under 2 .7 briefly
(31:22):
based on tariffs.
I think five -year bond yields
will start pricing in and probablyalready are pricing in a much more
aggressive Bank of Canada.
Like if you think about any bond
yield is essentially just the sumof where do you expect the Bank of
Canada to be the next five years?And then how much risk are you
going to build in, right?So usually the term premium
between the five -year bond yieldand the Bank of Canada, so how
(31:46):
much higher the five -year bondyield is the Bank of Canada
overnight rate, is like 50 basispoints.
So at 2 .7, you could assume ifthere's not much of a risk premium
that the markets are pricing in aBank of Canada at about two and a
quarter.
So the lower the five -year bond
yield gets, the more they'reexpecting the bank's going to have
to really, really start cuttingrates.
(32:07):
What I'd be worried about, Iguess, is at least in the short
term, even if five -year bondyields are falling.
that they're falling becausethey're pricing in a recession.
The markets are pricing arecession.
And then that risk premium getsbuilt into the mortgage spread.
So a normal mortgage spread islike 160 basis points, but we've
seen in periods of crises or justaround recessions that sometimes
that spread can blow out to like200 basis points or more.
(32:27):
So you could be having a situationwhere five -year bond yields are
falling, but five -year fixedmortgage rates are rising because
there's a lot more risk,obviously, in the economy.
There's a lot more risk in lendingout to a population that might be
losing its jobs, losing jobs thenext few months.
So that'd be my worry, I guess, islike we'd have a temporary...
increase in five years fixedrates, even as the Bank of Canada
is cutting, which we've seen inthe past.
(32:47):
And then on variable rate,obviously variable rates would be
falling along with the Bank ofCanada.
Yeah.
You know what else is interesting
there is we've seen a lot oflenders in the last month or so
give like very competitive rateson a one and a two year fixed,
which historically we've neverreally had, but it kind of leads
you to think like they wouldrather have short term money out
(33:09):
because like.
they don't know what's going to
happen either in two years.
You know, they want to recycle
that instead of locking somebodyin.
Yeah, exactly.
Yeah.
I guess like right now, five -yearfix for uninsured is still like
around four, six, four, seven frommost like big lenders.
So, you know, they seem likepretty cautious about lowering
rates much more.
Yeah.
Well, and that's the thing we'rebeating that on variable now,
(33:30):
which is like only just come in,you know, which is nice to have
the option, but we thought acouple of years ago, like, yeah,
do a three -year fix.
Cause in three years, we're going
to have a great opportunity tohave a better decision.
Now it's like, Oh, what do we do?like And now like you'd think
like, well, if we're going to bein a recession, maybe the obvious
(33:50):
recommendation to clients is takea variable.
It's going to be lowering rates.
But then.
There's like a 25%, maybe higherprobability that inflation is
going to be higher.
The Bank of Canada can't count
rates, maybe has to raise rates.
And like, that's maybe enough to
scare anyone off of a variable.
Yeah.
Crazy times, man.
Sweet geez.
Yeah.
Yeah.
No, we appreciate you coming onthe show.
I mean, that's a lot ofinformation and yeah, thank you
(34:13):
for explaining it to us.
Hopefully we'll have an answer in
a couple of weeks and then, youknow.
It's hard not to talk about itwithout like tearing your hair out
because it's so nonsensical.
hard not to talk about it without
like tearing your hair out becauseit's so nonsensical.
but i've been trying i've beentrying to walk the line and
(34:34):
presentations you know not beingtoo uh been been trying to walk
the line and presentations youknow not being too uh Yeah.
You just have a disclaimer at thebottom.
You just have a at the bottom.
Like none of this will be valid by
tomorrow.
of this will be by tomorrow.
One of these days, I'm justgetting on a full on at a podium.
I'm doing this guy's lost hismind.
(34:54):
I think, you know, I've run onetoo many.
My brain will just break and I'mjust going to get to lose my mind
on stage.
Yeah.
by tomorrow.
Well, let us know when you're
ready for that.
We'd love to be there for it.
it.
Yeah.
The platform's all yours for that.
Okay.
Well, yeah.
Thanks.
Thanks for coming on, man.
We appreciate it.
Talk to you soon.
And yeah, we'll check out your
LinkedIn posts because I'm surethat's going to be updated.
(35:14):
Thanks See them getting crazierand crazier and crazier.
You need to start wearing a whitelab coat.
Okay.
Have a great day.
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