Tasneem Azim-Khan and Mark Dowding unpack the latest market and economy headlines, and what investors can learn from them.
Tasneem Azim-Khan Vice President and Chief Investment Strategist
Tasneem Azim-Khan, chief investment strategist, RBC PH&N IC, sat down with Mark Dowding, chief investment officer, RBC BlueBay Fixed Income, for a conversation on some of the latest news that affect investors, including:
Watch the video above to see their discussion.
Tasneem Azim-Khan:
Well, hi everyone. Thank you for joining us. My name is Tasneem Azim-Khan, Chief Investment Strategist for RBC, Phillips, Hager & North Investment Counsel. This discussion is being recorded in London, my favourite city. I have the pleasure of being joined by Mark Dowding, managing director, senior portfolio manager, and Chief Investment Officer for BlueBay Fixed Income. Welcome, Mark. Thank you for being here.
Mark Dowding:
Well, thank you very much, Tasneem.
Tasneem:
Just a little bit about you, Mark. You have over 30 years of investment experience as a macro fixed income investor, and you have been a senior portfolio manager since joining in 2010. As a macro risk taker, Mark actively pursues an open dialogue with policymakers and opinion formers, believing that proprietary research is key to gaining insights to generate strong investment returns. Prior to joining the firm, Mark was head of fixed income in Europe for Deutsche Asset Management, a role he previously occupied at Invesco. He started his career as a fixed-income portfolio manager at Morgan, Grenfell in 1993.
Mark:
Such a long time ago. I even had hair back then, Tas, can you believe it?
I do believe it. [laughter] I’m really looking forward to our discussion. I wanted to say again, thank you for our partnership. RBC, Phillips, Hager & North Investment Counsel does have the privilege of having a number of your products on our platform, both in the specialty fixed income space as well as alternatives, and it’s been a great partnership so far. We have a lot to get through. We’re going to try to solve the world’s problems in just under an hour. [laughs] What I’d like to do is maybe just start in the US, and then we can make our way through the rest of the world.
In the US, there are growing stagflationary pressures. We have a labour market which seems to be softening, not yet soft, inflation above target as far as the Fed is concerned, yet we’ve got more recently, the unleashing of massive fiscal stimulus into the economy through the One Big Beautiful Bill. At the same time, you still have a tariff narrative in the background vis-à-vis the tariff war under the Trump administration, but it’s not packing the same punch as maybe it did say in the beginning of the year. A number of cross-currents that are happening right now, can you frame that for me? How do you think about the outlook for the US economy today?
Well, there’s quite a lot to cover there, Tas. I guess I’ll look at this in two parts in terms of what it means in terms of the growth side of the equation and then the inflation side of the equation. I think the thing that I’d really observe is actually the US economy continues to grow pretty well during the course of 2025. Yes, we are seeing a slowdown in the pace of employment, but actually, part of this reflects a big change in the immigration picture.
In 2024, the number of overseas-born individuals living in the United States grew by four million people, but this year, the number is actually negative two million. That delta of flow of six million, if you run that through in terms of what that means in terms of the US labour force, that’s effectively three million workers that they were adding previously and now are not.
From that point of view, your break-even rate on the payrolls growth every month was as much as 250,000 jobs a month, every month last year. Actually, it’s currently close to zero. Although we are seeing relatively weak employment growth, we still think that we’re seeing relatively stable unemployment for the time being. There’s not a big step change in the labour market. I can tell you, if you spend any time in the States at the moment, it feels like there’s still a need for help wanted. Service standards has never been as poor as they currently are when it comes to staying in hotels or dining at restaurants. That’s something I would say in terms of the employment part of the picture.
Alongside this, we’ve actually seen an economy where so much money is being thrown at the economy because of all of this AI investment. This is actually powering a lot of spending. It’s actually sustaining economic growth, and we see a big chunk of growth in the US at the moment on the back of this investment that we are witnessing. Then you lay onto that, of course, what we are seeing in the course of the coming year, where you’ve had rate cuts, you now have tax cuts because of the Big Beautiful Bill, and you’ve got deregulation as well.
Actually, I’d contend that looking into 2026, we are likely to see the US economy accelerating, not decelerating. I think that’s the first thing that I would highlight. I think some people have wanted to declare an end of US growth exceptionalism. I don’t think we’ve seen it yet. That would be one observation I’d offer. Then on the other side of the equation, this question around inflation, I think, is interesting as well, because here inflation obviously has come down and on the back of inflation coming down, we’ve seen the Fed cut two times this year. Looking forward from here, it still looks like inflation risks are very much to the upside, not the downside. In fact, some of the analysis that we’ve done in terms of tariff imposition often suggest that the biggest hit on tariffs comes in the third and fourth quarter after those tariffs were imposed.
There’s a lag.
There’s a lag on this. You don’t move your tariff straight away because you don’t want to be the first mover and end up surrendering market share, but eventually after you deplete your inventories and those tariffs become embedded-
You have to relent.
You have to move prices eventually, and so we are still seeing that process run through. Then on the other hand, you have things like electricity prices going up as all these data centers come online, but you haven’t built all the power supply to actually support those at the moment. Everyone I’m speaking to on the policy side next year is looking for inflation, which is currently sitting at 3% in the US to tick towards 3.5%, maybe going a little bit higher. From my point of view, I don’t think that we’re looking at a particularly weak story in terms of the US economy at the moment. It looks to be relatively robust through my eyes.
It’s a good take. It’s an interesting take. Thank you for that. You did allude a little earlier in your answer about rate cuts that have happened, particularly in the US. There was this big heading into it, will they or won’t they? In October, they cut by another quarter percentage point. That was widely expected by consensus, but Chairman Powell seemed to go through great lengths to stress that the decision was not unanimous.
There has been a little bit of cold water, I’d say, thrown on this idea of a dovish path for the Fed going forward, particularly into 2026. When you think about the dual mandate that the Fed has to abide by, that of price stability and full employment, that speaking to the stagflationary pressures we alluded to earlier, they seem to be at odds with each other. Where does the Fed go from here? Can they really have any sort of high conviction?
Yes. I’d say that having expressed this more upbeat view, frankly on growth on the US economy, through our eyes, fewer rate cuts than are currently discounted are really warranted when it comes to Fed policy moving into the coming year. There has been this narrative where Fed rates have been above the neutral level of interest rates. On the back of this, it’s justified the monetary easing that we’ve seen thus far. I wouldn’t be that surprised to see another cut delivered at the December meeting, given some of the uncertainty around the economic outlook in the very short term as a result of the government shutdown. If we do see a cut in December, I think it could be the last one for some time.
Certainly, I think that looking into the middle of next year, we may have a new Fed Chair at that time, but if this is coinciding with a moment where inflation is higher than it is today, or if inflation is on a rising trajectory, I do think it’s going to be difficult to really warrant further rate cuts. Although when I spend time in the White House, I’m always told, “Of course, the president wants lower interest rate cuts.” He’s a real estate guy. This is who he is. What real estate guy doesn’t want rate cuts? At the same time, you understand through a political lens, Trump may want lower interest rates, but he really cannot afford higher inflation.
That’s a good answer. Thank you so much. Staying on the topic of the Fed, one of the other things that’s been quite topical is this idea around Fed independence. Particularly with Stephen Miran in the mix now, there are two other, I believe, Trump-appointed Fed governors. Jerome Powell, as you mentioned, could be on his way out. He’s not going to be chairman anymore. He may become governor, we don’t know if he decides to do that. How do we put in perspective Fed independence? Do you think that’s at risk at the moment?
I certainly can’t see J Powell hanging around any longer than he needs to. I think he’ll be happy to get out of there come May next year. In terms of what it means in terms of the Fed, it’s interesting having met with Stephen Miran earlier in the year. I think one of the things that I’d observed there is that his position within the Fed is actually quite isolated. He’s had a much more extreme economic view, looking for much more aggressive interest rate cuts. It’s interesting actually to observe, having met Fed insiders in DC recently, it actually seems that the presence of Miran has actually caused other members of the Fed to actually-
Galvanize.
-consolidate around a more consensual position. Even where you have other individuals aligned to Trump, like Chris Waller, he wasn’t dissenting at the last meeting, for example, in the way that, of course, Miran has done so. I think, or I wonder, that some of these stories around Fed capture, Fed losing independence, may be a bit overplayed at this particular point.
I do think that the Fed will want to assert its independence. If you look at the likely candidates for the next Fed Chair position, notionally, we’ve got Walsh, Hassett, Waller, all sorts of pretty mainstream individuals who I think will be inclined to do, largely speaking, the right thing. Ultimately, though, I’d actually say myself, I still think that Scott Bessent is the most likely person to actually come and take the job. Although he said, “I don’t want it. I don’t want it.” I think he may well be convinced to actually take that job next year, because there could be a sense that a lot of what he wants to achieve in treasury is now done. You then move into the second half of the Trump term, which is more of a lame duck administration.
The other thing that has been expressed to me about whoever takes this job as the next Fed Chair is potentially looking at a job that they could have for the next 14 years. Trump’s only got to be around for two of those, right?
Correct.
In a way, you probably have Trump chirping in your ear, “Lower rates. Lower rates,” but you’re also thinking about your legacy, your position.
Long-term.
You don’t want to end up doing something that actually causes an inflation overshoot that then you need to hike rates later. That would be pretty disastrous. From that point of view, I think that it’s unlikely we’re going to end up with Fed policy conducted in a way that is bluntly irresponsible.
That’s good to know. Staying on the topic of the US government and the US generally, we’ve now surpassed Trump’s own record of government shutdown, which was in 2018. I think it’s something like 35 days and counting now, or something like that, as of the time of recording. Typically, with government shutdowns, the markets will generally shrug them off, as we’ve seen historically.
When you’re in the moment, there’s always the chatter around how long this may go on, the lack of visibility from an economic perspective. There are some estimates out there on how this government shutdown could detract a little bit from GDP growth for this year. I’m just wondering, what’s your sense is there. Is this time is different? Is it more of the same in your view?
It does look like we’re pretty much at the end of the shutdown now. It’s interesting to see the chaos in US airports over the last weekend, for example, that was pretty shocking. In the last shutdown, it was the air travel that went bad, which actually was the catalyst for a compromise to be found. It looks like, looking at the news flow this morning, we’re at a point where compromise is about to be found.
Even the idea that I think the federal judge who ordered the Trump administration to pay the SNAP benefits.
Exactly. With that being the case, I think that soon hopefully we’ll be forgetting about the shutdown that we put behind us. The one thing it does mean is that the collection of economic data has been impaired over this particular period. Although we’ll get data being released in terms of the data that was withheld when the shutdown occurred, a lot of the data releases over the course of the coming month are also going to be impacted as a legacy of that shutdown. It does mean, for example, we may not get the November payrolls report released in December.
From that point of view, it’s the reason why policymakers may continue to be flying blind, or if not blind, partially sighted, going into the next policy meeting, which again, with that being the case with the shutdown itself being a bit of a small economic negative, it’s another reason why a rate cut becomes more likely in December. That said, having been to DC during the shutdown, the honest truth is a lot of this was pretty performative. You’re making a show, but life was carrying on very much as normal.
Fair enough. You mentioned a little bit about, I think, elections earlier. We have midterms about a year away. Sorry. Excuse me, they’re later this year, next year, right?
Next year.
I’m losing time. Sorry. Midterm elections, again, can be quite momentous depending on which government is in place. We saw over the course of the last week even, quite interesting turnouts in places like New York, West Virginia, even in California with redistricting. It was a win, so to speak, for Democrats. Many people are saying it’s a repudiation of Trump’s policies around affordability by and large.
What do you think about the imminent midterms? Do you feel that there’s a possibility of another blue wave, because I believe that’s what happened during Trump’s first term, during midterms as well. It was quite narrow in terms of the majority, but we did see a flip. What do you think might be the outcome? If we do have even a modest blue wave, how do you think that that might impact markets and risk assets?
I think that last week’s gubernatorial elections were interesting. It was, as you said, in a number of States that we actually saw more younger voters, Hispanic men, Black men, other demographics that had gone for Trump actually coming out and turning out in numbers that you don’t normally expect to see at this part of the electoral cycle. That was interesting to witness for sure. It was interesting to me, again, that affordability came back as a big topic that was coming up in these elections, which, again, is another reason why those advising Trump will be speaking in his ear.
He can’t afford to push policies that actually drives inflation materially higher because inflation is the thing that could really damage and impact his chances come next November. Those who are claiming that we’ll end up with another Fed Chair who will come in and slash interest rates, this is the reason why you can’t really potentially go in that direction because it may cost you very bad. You can even end up in a situation where inflation could be rising next October. We are talking about the Fed needing to hike rates at that time. It’s the last thing the administration would need.
He fundamentally campaigned on lowering inflation as well.
He did. That’s a sensitive issue. I think the second thing we saw last week with individuals like Mamdani, which I don’t think is a read-across for the country. I don’t think we’re going to be going in a socialist democrat direction anytime soon, but I think it does highlight that if only the Democrat Party can find someone who is a popular figure, maybe a more youthful figure, if only they can do a better job in candidate selection, they are relevant. They can compete. They can go toe-to-toe with the Republican Party.
This idea that it’s a foregone conclusion that we are having four more years of Trump and then it’s fans to come thereafter, I think, will be a narrative which is questioned. Just answering your question in terms of the midterms. It’s natural to think that things could go back in the direction in the favour of the Democrats come next fall. Bluntly, does this matter? Not very much.
As soon as you move into the second half of a presidential term, particularly a second presidential term, you are into lame-duck territory. It’s more focus for Trump around legacy. There was always this thinking that 2025 was the year where you’d be delivering big policy change, ’26 the year where you are consolidating some of this. Thereafter, I think it’s going to be a quieter period, but I don’t think that that has a big impact on financial markets.
Okay. Good to know. On the topic of tariffs, and we touched upon this a little earlier, it would seem that the rhetoric from the Trump administration versus what it was in the beginning of the year has been dialed back a little bit. A lot of countries, particularly Canada, but also the UK, have found themselves in that “better than feared” camp. In Canada, of course, there’s still questions about the USMCA and if negotiations there are ongoing.
Generally speaking, we’re in a better spot now, I think, than we were at the beginning of the year. We know that the Supreme Court is in the process of looking at whether or not President Trump abused his powers, executive powers in invoking the International Emergency Economic Powers Act, or IEEPA, and could possibly, and from my understanding, are quite skeptical about whether or not he was right in using those powers at this time. Apparently, even Trump-appointed Supreme Court justices are skeptical about whether or not he should have used those powers.
There’s a question mark on whether or not he would have to pay back some of the revenues that he has secured as a result of these tariffs. Concurrently, though, as I understand it, they’re already looking for ways around this, in terms of looking at sector-based tariffs, looking at other parts of the law that could open the doorway again to apply new tariffs. It feels like it’s just a rolling uncertainty as far as the tariff picture is concerned. How do we think about that globally and with respect to the US?
I think that when it comes to Supreme Court, I think SCOTUS probably finds against the use of the IEEPA tariffs. That’s what’s being discounted in betting markets, like polymarket at the moment, for example, on the strength of the opening arguments. Are we going to see the US pay anyone back the tariffs that have been paid? Never. Forget that idea. They’re never paying those tariffs back. Moreover, I think that if you strike down IEEPA tariffs, they get replaced with other tariffs, sectoral tariffs, a blanket tariff anyway. It probably creates a bit of short-term uncertainty, but I don’t think it really changes the picture around trade and tariffs.
The discussion was always really along the lines of the US doesn’t have a federal consumption tax. You can think about tariffs like a federal consumption tax, but one that is exempting domestic production from those tax measures. From a US point of view, when you’re in DC, there’s a clear sense that this tariff policy has been enormously successful this year. You’re looking at US tariffs collecting around $400 billion per year. This is significant. You’ve had an increase this year of around about 1.3% in payments into Treasury coffers on the back of these tariffs. Bluntly, you need these payments to help the US make its debts, is the one mechanism that is actually helping to bring the deficit level down.
That’s why tariffs are going to be here to stay. Otherwise, yes, you’re right that the noise around tariffs has gone away. Earlier in the year, Europeans and others were talking tough, almost wanting to invoke a language around a trade war. The truth is, everyone put up the white flag. They’ve rolled over. They’ve given in to US demands. There hasn’t been a trade war this year because no one ever ended up deciding it was worth fighting. This has been pushed through. The agenda has been advanced. It should be an area where we see less volatility going forward.
Yes, there’s been issues around China, but then, again, although there’s a longer-term story about China and the US going in different directions. The reality is that at the short term, these two economies need each other. That creates a bit of a pragmatism in terms of the ongoing relationship there.
Any impact to global growth, do you think, generally from tariffs itself detracting?
I don’t think that this is having a big impact on global growth probably. I think that ultimately, when it comes to the tariffs, say it’s 1.3% of GDP, around a third of that is being absorbed by consumers in the United States. The bulk of it seems to be being absorbed either by producers or in margins. This is where the impact is being fed through. We’re not seeing this having a discernible impact on global GDP. Again, think of this in the context of a small US tax-rise on VAT, but then you’re offsetting that against other big tax cuts. In the grand scheme of things, I don’t think it’s particularly relevant.
Let’s shift our discussion to debt for a minute, generally speaking. Investors seem to be concerned or have been concerned for some time around sovereign debt levels globally. More recently, we’re seeing emerging concerns around private debt. We’ll unpack the former first. Growing sovereign debt loads, particularly in the US, which boasts amongst the highest levels of debt and fiscal deficit as a percentage of GDP amongst developing countries, even in Canada, with the recent release of the budget for 2025, we’re looking at a fiscal deficit of just over $75 billion. It’s a theme. It’s a common theme with respect to some of these countries.
Is this something that we should be nervous about in the US, but also in developed countries generally? When you look at the press, some media places will have the debt that’s rolling and moving higher and ticking higher and higher.
The debt clock.
Yes, the debt clock. I can see why people would look at that and be like, “Oh, my goodness,” be nervous about that. How do we think about that ticking clock, I suppose, in the US and then we can move to the rest of the world.
It is a real issue. There’s a sense in which the US economy has been growing quite nicely. It shouldn’t be running such a large fiscal deficit, and as debts amount, you end up with a rising share of tax revenue going to support debt interest payments. It’s become a material issue globally. I’d say that at least in Canada, you might talk about a 70 billion deficit. This is still pretty small in GDP terms. Canada is definitely in the good camp rather than the bad camp in terms of fiscal saints and fiscal sinners. I think that ultimately, the concern is that as debt levels become too elevated, what is the end game?
You don’t see countries defaulting on their debt, but you do see the increased temptation to inflate away the value of those debts. From that point of view, we do see this as a factor that globally has been pushing more pressure on yield curves embedding greater term premium because it does engender this long-term inflation uncertainty.
Do you think these growing debt levels over the medium to long-term ultimately detract from potential GDP growth over time?
They certainly can do. I think one of the other things that you reflect on is how if you end up with a State sector that is too large, effectively, it crowds out the rest of the private sector in the economy. That’s a live topic for us, actually, here in the UK. As we go down a path where it seems we have government spending ever higher taxation, this idea that you crowd out the private sector is a concern because you really want the growth to be coming through the private sector of the economy.
All of this said, I’d still say that in the US the economy still looks dynamic. In the US, if you look about the big technologies of the day, this is where the US has a lead. I’m less worried about productivity growth in the United States than I would be bluntly in Europe, for that matter.
Just staying on, it’s a little bit on the topic of sovereign debt, but a thread from there is, it’s growing in the press and this idea of that debasement trade with respect to the US dollar. This moving assets out of fiat currency into “hard assets” like gold, crypto, et cetera. Typically, this tends to occur as you indicated, during periods of excessive money printing or a loss in the faith institutions, generally speaking. Can you comment on this, and what’s your broader view on the USD?
I think here that this debasement trade, as people have been referring to it, has been overstated bluntly. I think the first thing I’d say here is that some of the move into things like crypto or gold is reflecting an asset allocation shift that has been underway, really, since the weaponization of currency reserves with the start of the Russian War. We’ve seen how the Russians had their reserves frozen, individuals have had their dollars and their euros frozen.
If you are located in certain parts of the world right now, you’re saying to yourself, “I don’t want that to happen to me one day. It makes more sense for me to have part of my wealth, part of my portfolio sat in digital assets, sat in physicals like gold.” There is this asset allocation shift. That’s the first thing to say.
Sorry. Do you believe that’s structural in nature, you think on a global [crosstalk]?
I think that’s been somewhat structural. It’s hard to quantify how much of that we will see, but we still see global central banks diversifying in that direction. The second thing that I’d also say is that retail investors, the way that retail works bluntly is retail will like to jump on a trend and bid prices higher. Sometimes there’s a mindset of making speculative gains, getting rich quick. We’ve seen this a lot of time in the past in asset classes like crypto, but I think we were really seeing that in commodities like gold this year. We saw a big acceleration up in the price moves in precious metals. More recently, we’ve seen a retracement there as some of those valuations have come crashing back down again.
For me, I think this is what has been going on more than a general debasement because when I look at the border trend in the dollar, yes, we saw a moment back in April where we saw a weakening in the dollar, since then, the dollar has traded sideways. I’d say it hasn’t gone hand in hand in the last few months with further dollar weakness. To some degree, I think the fact that we continue to have a pretty upbeat view on the US economy mean to us this idea that we are witnessing the death of the dollar here, seems to be a bit of an exaggerated story just for the time being.
Just staying on the topic of private credit, the recent collapse of first brands and tricolor or tricolour, I’m not sure how to say it, has put a spotlight on private credit and raised some new questions around risk, loose lending standards and in the US specifically the health of the regional banking sector and I think it’s invoked memories of SVP, et cetera. There seemed to be mixed reviews even amongst insiders around how to think about this.
We saw CEO, Jamie Dimon of JP Morgan evoking the cockroach theory. Then Goldman, CEO, David Solomon has played down those fears since. Are you seeing cracks emerge? Is this something that, as investors, we should be wary of? This is a space that you know quite intimately. Is this systemic risk in your view?
I think the first thing, from a macro level, Tas, I’d say is that if the economic outlook is broadly benign as we think it is, and recession risk remains relatively low, credit can continue to deliver excess returns. Broadly speaking, we think we’re in a situation where things look okay in credit, and yes, Jamie Dimon can invoke a cockroach metaphor, but if you look at the things that have gone bad here, these are instances of corporate fraud more than they are examples of over levered companies blowing up and getting in trouble in a systemic way.
From that point of view, it may invoke more memories of things like what happened in N1 or Parmalat or some of those stories in the early noughties, not what was happening in the credit market towards 2007, for that matter. At a high level, I think the credit outlook for the time being, looking out in the next six, nine months still looks okay. That said, I would voice that within private credit, this is the weakest part of the credit market. It’s where we see the most deterioration in credit quality.
We’re actually expecting the default rate in private credit to keep on rising next year. It’s currently sitting around five and a half percent. Those defaults are ticking higher. When you’ve got very levered companies, you’re going to see those credit impairments more frequently and the one thing that I would keep on coming back to and voicing in private credit is that there was a time when investors were paid a lot in terms of an illiquidity premium relative to owning public market debt.
That illiquidity premium just isn’t there anymore. I don’t really get the argument for going into private credit in the same way when it comes into mainstream funds in direct lending. There may be niches within private credit that look far more interesting in distressed debt in emerging markets, other niches that we really like, but otherwise, I’d say that on a broad-brush basis, some of the private debt strategies to me– if you’re not getting paid more for owning that illiquidity, you should be asking yourself why you are investing in that space.
Yes, so important to stay quite selective in this space, I think. Admittedly, we have seen some of the bigger players in private lending come out and report better than expected numbers, which I think hopefully, assuages the market a bit. Switching gears a little bit to US equity markets. To state the obvious, we’re dealing with lofty valuations. Market index concentration has been a theme for some time, of course, with the MAG 7 or super [crosstalk], or whichever variation you want to look at these days.
We’ve seen of late some froth come off of equities in the US and interestingly enough, Canadian equity markets have actually been outperforming US equity markets, and yet US equity markets have proven still resilient. Much of this is being perpetuated through this conversation around AI and just massive CapEx cycle that we’re seeing, I think something in around the lines of 360 billion that came out in recent announcements. One of the questions that’s come up a lot is this comparison to the internet bubble. The question to you is, is this a bubble? Do you believe that the market is overestimating the probability of productivity gains and cost savings versus the probability of capital destruction in this particular cycle?
It’s a great question, isn’t it? I think there’s two aspects to this. On the one hand, what we’re seeing around AI is very real. A lot of money is being deployed. A lot of companies are making a lot of earnings. It’s not like some of these dot coms where you saw inflated valuations, but no earnings were never being delivered. You’d also voice the thought and idea that AI is technology that’s going to transform the world around us as we know it in the next five, ten years. It’s been interesting, even the last 12 months, it feels like that moment is coming closer and closer into view, isn’t it?
At the same time, when we’re looking at stock valuations, it does strike us that in aggregate, we are starting to witness something of a bubble. We’ve seen bubbles before, we’ll see bubbles again. The question you’re asking yourself is, if there is a bubble, at what stage of the bubble are we at? From that point of view, I wouldn’t be at all convinced if there is a bubble that we’re at the end of the bubble, because the end of the bubble normally coincides with a bigger buildup of leverage. It coincides with the moment where all the bears capitulate, because the bears who capitulate at the end are the ones who end up ultimately taking the biggest losses.
From that point of view, I’m minded to think back to a year like 1999. Between the start of 1999 and March 2000, the NASDAQ went up by 130%. It more than doubled. Those who were calling a bubble early in 1999 ended up losing their share in the process. Obviously, the market then collapsed 70% thereafter. From my point of view, I think that yes, it’s right to be wary, it’s right to be sober in your assessment here. At the same time, I think it would be premature to turn too bearish too early.
I think it’s interesting. The CapEx cycles are, of course, massive, but so much is also being driven through just remarkable levels of free cash flow at these companies, which perhaps wasn’t really the case in the ’90s, early 2000s, when we were basically rating stocks that had no revenues at that time. On this same topic, there’s this idea of circular financing. We’re seeing Nvidia invest in a number of companies, and then those companies invest in a number of other companies. It all seems rather interconnected, so to speak. Is that something to be nervous about?
It is. I think that circularity of cash flows is problematic, because if one bids up each other’s valuation, then that’s going to be intrinsically unhealthy at some point, and valuations will become detached. I know that a lot of professional equity investors have been citing these arguments as a reason to actually turn more defensive. The blunt reality is that retail investors don’t really seem to care about this, they’re just buying the momentum. You keep buying the momentum, you keep buying the dip. As we know, the story tends to end when those markets run out of new buyers, new capital to push those prices up. That’s when you can see a moment of more vulnerability.
Otherwise, the other thing that I think has been also really interesting to observe is how some of these companies that were the big hoarders and generators of cash in the past, they’re the ones who are splurging that cash today. It’s been interesting, corporate bond markets saying Google, Meta, others, big jumbo, [unintelligible 00:38:17]. Again, looking at credit markets, the fact that you’re seeing this frenzy of action in this particular sector is another reason why that becomes a bit of a break on valuations, further spread compression as we look into 2026.
We’re going to move out of the US now and talk a little bit about Europe, a touch closer to home for you. There was an upturn in regional sentiment at the beginning of this year, with Germany announcing plans for the biggest fiscal boost since the collapse of the Berlin Wall. Defense spending and Germany actually leading into their nation’s balance sheet is something that we haven’t seen in a really long time. How do you assess the outlook across the continent this year?
I guess in many respects, there’s probably less exciting things to chat about and get excited about in Europe than there is in the United States for the time being. In many respects, we’ve seen this big fiscal boost announced earlier in the year, but we’re still waiting for this to show up in economic growth. We do think that this fiscal spending is going to help the outlook going into 2026, and it should lift growth, but at the same time, Europe is still struggling with the fact that, bluntly, energy costs are so high, industry is uncompetitive. It’s struggling in Germany with an auto sector that has really lost its way, struggling against Chinese competition.
We struggle in Europe with societies that seem to be stuck in a sense of malaise, where no one has much enthusiasm or optimism towards the future, and that’s dampening spending, dampening investment. From that point of view, the underlying trajectory still feels fairly muted. There’s probably fewer interesting things to actually chat about in Europe than there is maybe in the United States. I’m not too sure that that’s going to change ever so soon.
It helps that we’re working off of a lower base, I suppose, [crosstalk].
We’re coming from a cheaper valuation. I would just highlight, there was this moment, there was just a moment of optimism earlier in the year. It actually felt like the MAGA agenda was going to drive the MEGA trade, Make Europe Great Again, but to this particular point, it’s not really coming through in the numbers.
It hasn’t surfaced. Just very quickly as we wrap, a couple more questions for you just quickly on China. We have secured what seems to be a bit of a temporary reprieve between the barbs that have been exchanged between the US and China of late. Yet China, domestically, still seems to continue to struggle. Fixed asset investments is down, weak property market, weak consumption. Demographically, things are still problematic. Yet the economic narrative for China, it makes me wonder, the negativity that we is so common. Is that overdone?
I think from a macro perspective, you just have this overhang of the property market bust, a bit like we saw in the US in 2008. You had that big property bust. We’ve seen it in Japan as well in the decade before. When you get one of those, it takes a long time for that to work through the economy. I would say that in China, the policy response here has been a policy response that has wanted to prioritize even more production, even more investment, when I actually think that what Beijing should have been doing has been doing more to actually boost domestic consumption.
At the moment, China is just making more goods, but it’s not clear that other countries want to take in more Chinese imports. In a way, it feels like China has been skeptical about empowering Chinese consumers because they don’t want to empower a consumer they can’t really control, and I think it’s an example of where policymaking under the Chinese Communist party is actually holding the economy back. I think it’s difficult to get too bullish about China as a macro play.
At the same time, China still has got great companies. It’s got great ideas. Look at DeepSeek, and things like that which will come from the blues. Certainly, don’t wipe China off. However, purely from a macro perspective, I still think it’s working through some challenges. There is a risk, of course, in China, it is the country that gets old before it gets rich, rather than the other way around.
Last question for you and just bringing it back to Canada. We’ll have a quick discussion here, but we have new leadership, new budget, substantial, that aims to reinvigorate economic growth for Canada, incentivize investments. There’s obviously been efforts to do with interprovincial trade barriers, further diversify our trade avenues away from the US. What’s your view on Canada?
I think the Canadian macro story, as an outsider here, actually looks reasonable. I think you look at debt levels in Canada, much lower than they are elsewhere. Inflation, again, is pretty much at or around target and interest rates have come down from previous high levels. From many points of view, I think that Canada looks like it’s doing okay. I’m actually very encouraged by what’s happening in terms of bringing down the interprovincial barriers to trade. This was always something that was holding Canada back. I think it’s a real opportunity for the new Carney administration.
I think the big challenge, of course, in Canada is that at a macro level, the numbers look okay, but you reflect on the growth in the population, and it probably means on a per capita basis, the results feel a lot more disappointing than that. It feels like standards of living are not moving in the direction that people want to see them. Still, I think that there is a lot of potential in Canada and also a lot of scope to ease fiscal policy further. In many ways, if you like, you’re the Germany of the Americas, if I put it that way.
It seem to be the case, yes.
I wouldn’t call you the Switzerland, but I’d certainly say that you are an economy and a society that can do more. We need more optimism in the world, and I’d say to the Canadian audience, be more optimistic.
Oh, that’s wonderful. Thank you, Mark. Incremental changes, hopefully making cumulatively better impacts for us.
The guys in Toronto, they nearly won the world, seriously.
Yes, they did.
There’s always next There’s always next year.
Yes, there’s heartbreak and equal amounts of pride for the Blue Jays team. That was a very unifying experience for us. I just want to take a moment—we are at time. Thank you so much again, Mark, for joining me. This has been a really, really interesting discussion. Thank you everyone for joining us today. We’ll wrap it up here. Thanks, everyone. Bye-bye.
Thank you. Thanks.
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