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PRINT EDITION
CIBC's Tal discusses navigating volatility, outlook for 2020
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Deputy chief economist says recession isn't likely next year, but suggests it'll still be a bumpy ride
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By JENNIFER DOWTY
  
  

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Monday, June 10, 2019 – Page B8

INSIDE THE MARKET

Escalating trade tensions and concerns about the magnitude of a global economic slowdown are causing bonds to rally and stocks to stumble, leading investors to wonder whether the bull market in equities has come to an end.

The Globe and Mail recently spoke with Benjamin Tal, deputy chief economist at CIBC World Markets, to get his perspectives on the economy and markets.

Here are excerpts from the conversation, with an expanded version available to subscribers online at tgam.ca/inside-themarket.

The bond market appears to be indicating that we may be headed for a recession. What are your thoughts?

I suggest that every economic recession over the past 50, 60, 70 years was helped, if not caused, by monetary policy error in which central bankers were adjusting for inflation that maybe was not there and raised interest rates way too quickly. The Fed is telling us maybe we are going to cut, and even the Bank of Canada did not close the door on cuts. The fact that we are talking about cutting is the reason why I am more optimistic about them not repeating past mistakes and inverting the curve in a way that will lead to a recession. I don't think there will be a recession. I do suggest, however, that 2020 will be a very difficult year.

For the U.S. this year, we are forecasting 2.4-per-cent growth, and next year - that is where the test is - 1.5 per cent, and sometimes in 2020 it will feel like a recession. In Canada, our GDP forecasts are 1.5 per cent for both 2019 and 2020.

How do you see the U.S.-China trade dispute playing out?

I believe that eventually, after playing hardball, we will see a trend that we have seen already.

The trend is the following: [U.S.

President Donald] Trump creates a crisis, he runs with the crisis, he solves the crisis, declares victory and the resolution of this crisis is only marginally different than the previous situation. Look at North Korea, look at [the United States-Mexico-Canada Agreement], which is not really different from the original NAFTA.

I believe there will be a resolution with expectations that this will rally the stock market and be negative for the bond market.

When this will happen? I really don't know, but I think within the next year, and we will have to ride this volatility.

I don't see it as a trade war. I see it as a war against China's progress, especially in the high-tech sector, against China's development.

You see, China has something called "Made in China 2025" - they give you a list of all kinds of high-tech sectors and say "we want to globally control these sectors." If you look at what Trump did, the first wave of tariffs, $50billion, most of it, almost 90 per cent of it, was aimed at "Made in China 2025."

It was not aimed at T-shirts going to Walmart, it was aimed at the high-tech sector. The purpose of this policy was to actually attack China where it is most vulnerable: its future. It's basically trying to slow down China's march toward China 2025.

That is the hidden agenda, if you wish.

How can investors make money in this uncertain and volatile environment?

I can give you all this analysis and one tweet can change everything.

The question is: Is the bond market the place to be, or is the stock market the place to be? I think the bond market is expensive at this point.

During this period of time, I would like to take advantage of the fact that interest rates remain low, that's why I like dividendpaying stocks. If your investment horizon is more than a year, dividend-paying stocks will benefit from that. To bide time, you can focus on domestically oriented companies in the U.S. and Canada that are less impacted by the volatility from the trade dispute. I think the sector that might surprise to the upside is the energy sector.

Do you believe the S&P/TSX Composite Index can rebound to a new record high after the trade dispute is resolved? I don't see it going up dramatically, I don't see it going down dramatically.

What is your outlook for interest rates over the next few years, is it lower for longer?

I think we are very close to a peak in interest rates for both countries. I don't think there will be a need to resume higher interest rates in any significant way. There is no reason to believe inflation expectations will rise at this stage of the cycle.

The No. 1 issue is wages. Wages are not rising to the same extent as they used to, and the question is why? The answer is that the wage mechanism is, in many ways, broken. I think there are some major structural issues that are unfolding. First, the fastest growing segment of the labour market now is people 55 and older. More people are working less, that's disinflationary.

Second, let's say you are in your 60s. At this point in the game you are not after the next dollar, you don't go to your boss and say I want this raise. If you are in your 20s, that is exactly what you do.

The fastest growing segment of the labour market is the one that is not asking for a raise, that's disinflationary.

The last point: The best way of getting a wage increase is to jump ship - you move to a different company. If you are in your 40s, 50s and 60s, you are not changing jobs. The older the labour market gets - and it's getting older - the less dynamic it becomes, another disinflationary force. All these forces are disinflationary and are structural. To me, that suggests that inflation expectations will remain relatively subdued and therefore peak interest rates will not be very far from where [they are] now.

Have we seen a soft landing in the housing market?

Montreal is doing well, Ottawa is doing well, reflecting many local factors. I think that Vancouver will continue to slow down.

In Toronto, most of the damage was in the low-rise segment of the market. I think that [weakness in] the high-rise segment is coming, I think that given supply and the fact that investors will not be buying as much in the highrise segment, we will see some softening there. None of it is a free fall, all of it is basically undoing a crazy environment from 2015 and 2016. This is a very healthy adjustment and when we reach this point - I think we will reach this point within the next six months - we probably will stabilize and go back to a relatively normally functioning market, not a strong market but a healthy market.

This interview has been edited and condensed.

Associated Graphic

CIBC World Markets deputy chief economist Benjamin Tal, seen in Toronto last Friday, expects a similar trend to one 'we have seen already' when it comes to the U.S.-China trade spat: '[U.S. President Donald] Trump creates a crisis, he runs with the crisis, he solves the crisis, declares victory and the resolution of this crisis is only marginally different than the previous situation.'

TIJANA MARTIN/ THE GLOBE AND MAIL


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