October Market Insights by James Thorne

October 4, 2024

October Market Insights: The Great Delusion

Are We Trapped in a Cycle of Change That Never Changes? A Forecast for 2025 and Beyond

“The more things change, the more they stay the same.” – Jean-Baptiste Alphonse Karr

As we emerge from the shadow of COVID-19, a narrative of robust economic recovery has taken hold. Yet, beneath this veneer of stability lies a disconcerting truth; the fundamental issues that plagued the global economy before the pandemic remain largely unresolved. French critic and journalist Jean-Baptiste Alphonse Karr’s adage resonates deeply with our current economic landscape.

The world has embraced the story of economic recovery, praising central banks for preventing collapse. However, this perceived stability masks deeper issues still afflicting the global economy. Efforts to stabilize growth since the Global Financial Crisis (GFC) have ironically resulted in greater financial market instability. The U.S. Federal Reserve’s extreme interest rate hikes have not only heightened the unsteadiness but also further damaged an already struggling monetary policy transmission mechanism. This paradox underscores our economic reality, and the global economy has unsustainable debt levels not seen since the Napoleonic wars. We’re in an age of fiscal dominance, where policy mistakes can metastasize into financial crises in the blink of an eye.

American economist Hyman Minsky’s financial instability hypothesis is particularly relevant here. To paraphrase: “Stability leads to instability. The more stable things become, and the longer things are stable, the more unstable they will be when the crisis hits.” The U.S. Federal Deposit Insurance Corporation’s (FDIC) 2024 Risk Review paints a concerning picture of financial uncertainty, pointing to unrealized losses on investment securities at the end of 2023. As interest rates rise, the market value of these securities falls, threatening regulatory capital ratios and liquidity management. Unlike the GFC, current losses are tied to investments in sovereign bonds and commercial real estate, underscoring the need for robust credit and interest rate risk management.

Monetary policy often creates an illusion of change. The Federal Reserve’s strategies—interest rate cuts and quantitative easing—are losing effectiveness. Despite aggressive measures during the pandemic, these interventions are temporary and rooted in outdated practices. The banking sector, crucial for economic growth through credit, remains unstable. Banks’ balance sheets are weaker now than after the GFC, casting doubt on the ability for interest rate cuts to stimulate growth.

The current economic environment resembles a liquidity trap, where high levels of debt, low interest rates, and low savings rates render monetary policy ineffective. Consumers and businesses hoard cash, stymying growth and complicating efforts to stimulate the economy. This scenario, aptly described as “pushing on a string,” shows central banks struggling to drive growth when interest rates are near zero and consumer confidence is low.

Canada’s Economic Reckoning

The Bank of Canada has already cut interest rates by 75 basis points, but the anticipated economic response remains to be seen. With an economy heavily reliant on real estate and lacking diversification, Canada faces a painful structural adjustment period that must prioritize private sector growth.

Canada’s economic challenges reflect broader global trends. Although the country’s pandemic response was commendable—providing over $230 billion in direct support for individuals and businesses—the aftermath is testing its resilience. Most notably, public sector growth has outpaced private sector job creation, raising concerns about long-term sustainability.

From February 2020 to June 2023, public sector employment in Canada grew by 11.8 per cent, while private sector jobs increased by only 3.3 per cent. This disparity raises critical questions about the sustainability of government expansion and its potential to hinder private sector development. In British Columbia, for instance, public sector jobs soared by 22.6 per cent, while private sector employment barely changed, rising by just 0.3 per cent. This intervention was made possible by Canada’s pre-pandemic fiscal position, boasting the lowest net debt-to-gross domestic product (GDP) ratio in the G7. But this veneer of economic robustness is a cruel illusion, undermined by a shocking reality: Canada also carries the highest consumer debt relative to disposable income, exceeding a staggering 187 per cent. Canada’s per capita GDP growth has not just lagged the U.S., it’s in danger of plummeting below the Organization for Economic Co-operation and Development (OECD) average (0.3 per cent for the first quarter of 2024). Let’s not pull any punches.

The implications of this public sector growth are significant. Critics argue that an expanding government workforce could crowd out private sector job creation, ultimately undermining overall economic productivity. If this trend continues, it may lead to continued fiscal irresponsibility and potentially higher taxes, further affecting capital formation and private sector vitality.

In response to these challenges, the Liberal Party has appointed Mark Carney as Chair of the Leader’s Task Force on Economic Growth. He will spearhead efforts to create a restructuring plan focused on both immediate and long-term growth and productivity. Carney intends to engage Canadians, seeking insights from experts in the business community, labour movement, and Indigenous leadership through a series of meetings and events aimed at gathering innovative ideas.

Carney emphasizes the need for a pragmatic and impactful vision, stating, “The world is becoming more divided and dangerous, but Canadians’ hard work can help us navigate these challenges and capitalize on the opportunities in the new global economy.”1 He believes that with a strategic growth plan, Canada can take meaningful steps towards becoming the strongest economy in the G7, ensuring a brighter future for all. A balanced approach is essential—one that embraces fiscal responsibility and targeted growth initiatives. By diversifying the private sector, Canada can better compete in this new digital age.

This initiative represents a crucial first step, acknowledging that significant changes are necessary for Canada’s economic sustainability. While these may be baby steps, they indicate a commitment to forging a new path for the country.

For investors, the interest futures market is forecasting the Bank of Canada overnight rate to be in the 2.75 per cent area by early summer 2025. A rally in interest rate-sensitive areas would not surprise. Gold and gold stocks should support the S&P/TSX Composite through this period, as they did in the early 1990s. Eras of fiscal irresponsibility, and global reflation, are conducive to gold and bitcoin appreciation. However, it’s folly for investors to ignore the hard reality of the structural changes that Canada needs to compete in the new digital world. As these realities set in, risk assets may well continue to lag their U.S. peers, but still be pulled along by a risk-on trade until late 2025. But alas, the stock market is not the economy.

The Inflation Illusion: Why Deflation Remains the Real Threat

Despite recent concerns, there are compelling reasons to believe that the world has not entered a new inflationary era. Several factors continue to exert deflationary pressures on the global economy:

High debt levels in many advanced economies act as a deflationary force.
Technological advancements continue to maintain deflationary pressures.
China is experiencing and exporting deflationary pressures globally.
Demographic factors may not necessarily lead to sustained inflation.
The global economy faces challenges, including weak demand and ongoing uncertainties.

Today’s economic landscape strikingly resembles a wartime economy. With fiscal deficits soaring past eight per cent and debt-to-GDP ratios nearing 125 per cent, we’re on the brink of a significant shift. Historically, transitioning to a peacetime economy—like after the First and Second World Wars—has required fiscal austerity. Recent signals from the U.K. and Italy hint that such measures might soon be inevitable. The status quo is unsustainable. We are entrenched in an era of fiscal dominance, where unchecked government debt threatens to devalue the U.S. dollar and render traditional monetary policy tools ineffective. As the economy slows and deflationary forces strengthen, central bankers will need to shift their focus to growth.

If the U.S. government continues accumulating debt at a rate of US$1 trillion every 100 days, projections suggest national debt could surpass US$50 trillion by the 2028 election. In this precarious economic environment, a strategy that emphasizes a balance between equities— characterized by strong low volatility factors—and secular growth, alongside gold and bitcoin, emerges as a compelling enhancement to investment portfolios.

Artificial intelligence (AI) is poised to revolutionize economic growth by enhancing productivity and efficiency. However, this promise isn’t universally felt; sectors reliant on interest rates and consumer spending are showing signs of strain. Dan Ives, Managing Director, Equity Research at Wedbush Securities, presents a compelling thesis on the multiplier effect of AI spending, particularly focusing on NVIDIA (NVDA). For every dollar spent on NVIDIA’s graphics processing units (GPUs), there appears to be an $8 to $10 multiplier across the industry, amplifying economic activity.

The long-term theme remains; will market emotions overshadow fundamentals? Can increased AI capital expenditure help the U.S. avoid a recession? In a winner-takes-most landscape, we must consider the strategic risk of falling behind in AI and whether these risks outweigh immediate concerns.

The Reckoning: Navigating the Inevitable Economic Reset

With soaring debt-to-GDP ratios, deficits surpassing eight per cent, and inflation hovering near target, the Federal Reserve finds itself in a precarious position. The Federal Funds Rate (FFR) is currently at 5.375 per cent, while the natural rate of interest (r) is estimated to be around 2.5 per cent. An inverted yield curve signals potential economic distress. The Fed must act decisively to align the FFR with r to avoid exacerbating stagnation. Recent data showing a GDP growth rate of three per cent masks the instability of the private sector caused by high interest rates. Moreover, significant downward revisions to the Bureau of Labor Statistics’ job numbers—over 800,000—linked to the birth/death assumption raise questions about the data’s reliability. This discrepancy suggests that other measures may present a more truthful picture of the economy’s health, particularly given the fiscal deficit and sluggish growth.

We are entering a period of slowing economic growth and persistently low interest rates. Investors should pay attention to the warning signs. Interest rates are forecast to bottom out in mid to late 2026, dropping below two per cent. Due to lags in monetary policy of at least 18 months, rates will remain low for an extended period. Analysts predict that S&P 500 earnings will rise by 15 per cent in 2025, reaching just over US$279.00, followed by another 12.5 per cent growth to US$315.50 in 2026. If these forecasts prove accurate, the S&P 500 could approach 7,000 by late 2025. However, it’s crucial investors pay attention to when the second derivative of growth turns negative, as risk assets have historically responded adversely in such scenarios. Fiscal austerity and potential trade wars could render 2026 earnings forecasts overly optimistic.

A slowing global economy will exert pressure on oil prices. However, with the Strategic Petroleum Reserve (SPR) needing replenishment, crude oil is unlikely to fall significantly below $60. As the Federal Reserve cuts rates, both gold and bitcoin are expected to perform well, leading to a temporary increase in market breadth. The AI theme is expected to drive solid earnings growth into 2026; however, as growth concerns increase, low-volatility companies should attract capital. While the U.S. leads in innovation, Canada faces challenges due to high exposure to real estate and private sector debt levels.

What Should Investors Do

Despite these long-term concerns, risk assets will likely perform well until mid to late 2025. As a strategic recommendation, proactive investors should consider beginning to harvest gains after the S&P 500 surpasses the 6,500 level. In this environment, a barbell investment approach focusing on secular growth and low volatility quality factors is advisable. Sovereign bonds look appealing as the FFR is expected to reach r* faster than consensus forecasts. The trade will be nuanced: as the Federal Reserve cuts rates, investors may wrongly assume issues are resolved, causing short-term rates to fall sharply while long term rates still fear inflation. Once investors realize growth is slowing and rate cuts solve little, the long end will drop, flattening the yield curve.

While the surface-level narrative suggests economic recovery and stability, a deeper analysis reveals persistent underlying issues that have yet to be adequately addressed. As we move towards 2025 and beyond, investors and policymakers alike must remain vigilant and prepared for the potential economic challenges that lie ahead.

Indeed, “The more things change, the more they remain the same.” The cycle of change that never truly changes continues, and the great delusion of progress without fundamental reform persists. The unresolved structural issues that contributed to secular stagnation and deflation before COVID-19 still loom large. Unless policymakers and investors confront this reality, we risk repeating past mistakes. It’s time to recognize that nothing has truly been fixed; we are heading back to a world dominated by extreme levels of debt deflation and stagnation. Acknowledging this is crucial for breaking free from economic stagnation and pursuing sustainable growth.

[1] Mark Carney to Chair Leader’s Task Force on Economic Growth, Liberal Party of Canada. Press release, September 9, 2024

Recent Posts

May Market Insights: Mastery and the Terror Premium

Mastery of energy, again

Winston Churchill, as first lord of the Admiralty, tied Britain’s fate to Persian oil. United States President Donald Trump’s war in Iran, centred on Operation Epic Fury, could do the same for the West by removing Iran’s nuclear shadow, resetting oil toward US$60, and finally unlocking a modern peace dividend.

“Mastery itself was the prize of the venture.” Winston Churchill’s 1912–13 case for converting the Royal Navy from coal to oil—enshrined in historian Daniel Yergin’s The Prize: The Epic Quest for Oil, Money, and Power captured the brutal clarity of a great power energy strategy: accept dependence to command the seas. That wager framed the last century. In 2026, as Epic Fury grinds through the Gulf and Brent trades above US$100, the question is no longer whether oil confers mastery, but who holds it: a revolutionary theocracy astride the Strait of Hormuz, or a West intent on stripping the terror and nuclear risk now priced into every barrel out of the energy system—finally collecting a long‑deferred peace dividend.

Churchill’s shift bound Britain’s prosperity to distant wells and narrow waterways, welding energy supply to national survival. He understood that control of energy was not an adjunct to power, it was the metric. In April 2026, with Hormuz contested and Iranian missiles demonstrating reach beyond the Middle East, the same dilemma confronts policymakers and markets. Does the West still want that prize, and what is it prepared to stake to reclaim it from a regime that has spent half a century turning oil, terror, and nuclear brinkmanship into interchangeable tools of coercion? Assume Trump’s campaign does what it is now on course to do: not merely reopen a chokepoint, but neutralize a nascent tactical nuclear threat which, left intact, would hardwire a doomsday premium into global energy prices for a generation.

Iran’s war with the West has done what decades of shocks, embargoes, and “maximum pressure” could not: it has made the hidden tax on energy legible even on a Bloomberg screen. Strip out the terror and nuclear‑risk premiums in a post‑Trump‑Iran settlement, and Brent does not belong north of US$100; it sits much closer to the US$60 level implied by underlying supply and demand and pre‑war bank research. The gap between where oil trades in a world held hostage by a nuclear‑ambitious theocracy at Hormuz and where it would trade if flows were secure and de‑weaponized is more than a volatility surface. It is the unclaimed peace dividend of globalization, the energy market analogue of the windfall that followed the end of the Cold War, when the removal of an existential nuclear standoff released capital, confidence, and capacity back into the real economy.

The choice now facing the West is whether to lock in that outcome. Ending the Cold War removed the Sword of Damocles that had hung over every investment decision for half a century; a successful conclusion to Iran’s nuclear extortion would do something similar for the 21st‑century economy, collapsing a structural risk premium that has quietly taxed households, corporates, and sovereigns alike. The question, as Churchill would have recognized, is whether the West is prepared not just to win on the battlefield but to consolidate that victory into a new era of energy mastery, and to treat the potential verified removal of Iran’s enriched stockpile and fuel‑cycle capabilities as a security gain on the scale of the 1987 Intermediate-Range Nuclear Forces Treaty or the dissolution of the Soviet arsenal.

For Europe, the stakes are not abstract. Iranian missiles and drones have already shown that European Union territory and NATO logistics hubs sit uncomfortably close to the new strike envelope, shattering the illusion that Gulf risk could be quarantined to energy prices alone. The deeper reckoning is with Europe’s own energy strategy. The choice by many Western governments to anchor industrial policy primarily on climate targets while neglecting cheap and secure supply—is now coming home to roost. Prosperity in an artificial intelligence (AI)‑driven economy rests on abundant, reliable energy rather than on cheap consumer imports, echoing Churchill’s insight that mastery of energy is mastery of power. That logic points north as well as east: Canada with its hydrocarbons, hydropower, and critical minerals—looks less like a peripheral supplier and more like a potential resource superpower if it can cut through regulatory thickets and build the infrastructure to deliver secure barrels, electrons, and metals to allied markets.

U.S. hard power, the security backstop European, Canadian, and the United Kingdom economies long treated as a law of nature, now looks more contingent, more politically conditional, and more thinly spread across theatres. One could easily imagine Washington reverting to a post‑First World War stance, turning inward to rebuild its real economy, and no longer willing or able to offer security as a global public good. A successful Trump‑led settlement that removes both the nuclear overhang and the Hormuz chokepoint as instruments of coercion would not only stabilize Atlantic world energy supply but also underwrite a more credible NATO deterrent at lower long‑run cost—replacing the ersatz “peace dividend” of underfunded defence with a genuine one built on reduced threat rather than wishful budgeting.

For investors, a decisive outcome in Iran would not just redraw maps in the Gulf; it would refashion term premia. As the nuclear and terror discounts bleed out of the curve, gilt yields and U.S. Treasuries alike would begin to reflect lower expected inflation and slimmer risk premia rather than recurring energy shocks. Credit spreads-particularly for energy‑intensive sectors and fragile sovereigns—would compress as balance of payments and default risks ease. Equity markets would reprice in turn: structurally lower input costs and a thinner geopolitical risk layer would lift margins in manufacturing, transport, and consumer names, even as oil majors and defence stocks surrender some of their crisis rent. For the Square Mile and Wall Street, the real prize is not another trade on US$120 Brent; it is the re‑rating that comes when a structural doomsday premium is finally taken out of the system and the peace dividend—deferred since the end of the Cold War and repeatedly eroded by Iran—at last starts to be paid in cash flows rather than communiqués.

Churchill’s ghost at Hormuz

On the first day of April 2026, as Brent traded just above US$100, the world was relearning what Churchill meant when he called mastery the prize. As first lord of the Admiralty, he forced the Royal Navy off domestic coal and onto Persian oil, then secured that lifeblood by buying control of Anglo‑Persian Oil. He knew the bargain: oil conferred speed and reach, but at the price of dependence on distant fields and fragile sea lanes. Hence his warning to Parliament in 1913 that “on no one quality, on no one process, on no one country, on no one route, and on no one field must we be dependent” and his insistence that safety and certainty in oil lay “in variety, and in variety alone.”

That decision created the modern energy system and placed Iran at its centre. Four decades later, as prime minister, Churchill confronted the second act of his own gamble when Iran’s prime minister Mohammad Mossadegh nationalized Anglo‑Iranian Oil Company’s assets. The 1953 coup that restored the Shah was less a morality play than a confirmation that control over Iranian oil would be contested by empires, nationalists, and, eventually, revolutionaries. Churchill’s instinct to secure supply at the source and to dominate the sea lanes that connected it to Britain established a strategic architecture with a simple premise: mastery of energy flows was indistinguishable from mastery of global power.

The twist came in 1979, when that architecture was seized by those it had previously constrained. The Iranian Revolution toppled the Shah and installed Ayatollah Khomeini’s theocracy—a regime that viewed the U.S. as the “Great Satan,” embraced terrorism as statecraft, and sat astride the Strait of Hormuz. Oil workers struck, production collapsed, and prices more than doubled. The world discovered that the geographic fulcrum Churchill had chosen could just as easily be pulled by a revolutionary fist. From that moment, the markets began to price an Iran terror premium. It was distinct from OPEC’s cartel pricing power or conventional war risk. It recognized that a state sponsor of terrorism—with a web of proxies and control over the narrow channel through which roughly a fifth of seaborne oil must pass—would periodically weaponize that position. Each tanker attack in the 1980s “Tanker War,” each Hezbollah bombing, each missile launched at a Gulf facility added a sliver to that premium. Over time, slivers hardened into a slab.

Churchill’s maxim was inverted. Variety still existed geologically, with new barrels from the North Sea, Alaska, and deepwater, but strategically the system was again anchored on a single actor most willing to turn energy into a cudgel. Where Churchill had sought safety through variety, the world lived with uncertainty concentrated in one revolutionary capital. And where he had seen mastery as the prize of bold, deliberate ventures, mastery of energy risk quietly migrated to a regime that treated terror as an operating model.

How terror became a line item

The terror premium is no longer an academic calculation; it is a visible spread. In calmer phases of the cycle, geopolitical risk barely nudges price forecasts. In crisis, as in early 2026, the gap between pre‑war expectations for oil and the levels seen when Hormuz is threatened yawns wider, and futures curves kink as traders try to price the possibility of disruption. Even if part of that is fear and temporality, the underlying message is obvious. There is a structural surcharge on every barrel to account for the probability that Tehran or one of its proxies will, at some point, take terrorist action.

That surcharge has a history. The 1973–74 oil embargo revealed how quickly geopolitics could quadruple prices, but Iran was then still an ally. The true discontinuity came with the 1979 revolution and the Iran‑Iraq War. The Tanker War saw mines in the Gulf, neutral shipping attacked, and U.S. naval forces drawn in to reflag and escort tankers. Washington’s 1984 decision to designate Iran a state sponsor of terrorism, off the back of Hezbollah’s bombing of U.S. Marines in Beirut, made explicit what markets had intuited: one of the central suppliers to the system was also its most committed saboteur.

Highlights from the 2026 Spring Economic Update

On April 28, 2026, Finance and National Revenue Minister François-Philippe Champagne released the 2026
Spring Economic Update (the Update). This was the first spring economic update after the federal budget was
moved to the fall in 2025. In the absence of a federal budget earlier this year and with the recent shift to a
majority government, Canadians have been awaiting clear direction on the federal government’s policy
focus and anticipated initiatives. Overall, the Update introduces relatively little that had not been previously
announced, while showing an improved fiscal outlook, with the projected deficit declining despite $37.5 billion
in net new spending.

April Market Insights: Bretton Woods 2.0, the New Great Game, and Trump

U.S. President Donald Trump’s second term is not just another burst of tariff theatre; it is the opening move in a new great game over energy, artificial intelligence (AI), and money. By neutralizing Iran and Venezuela, squeezing Cuba, binding Canada, and courting Russia, Washington is trying to re-anchor oil in U.S. dollars and push BRICS’ [1] monetary ambitions to the margins. Layered on top are digital rails—dollar-backed stablecoins, tokenized Treasuries, gold, and even a strategic bitcoin reserve—designed to harden, not retire, King Dollar. If it works, Bretton Woods 2.0 will arrive not as a conference, but as the unannounced sequel to a crisis-ridden decade, with the U.S. once again writing the rules.

Investment Insights Spring 2026

The Shifting (Global) Order We are living through a period of shifting order. Global alliances

March Market Insights: There is no Bronze Medal

“There’s only two cultures that are going to win in the next year. It’s going to be us or China.” The subtext of Palantir CEO Alex Karp’s widely cited speech from late 2025 sounds like tech‑bro theatre until you reflect on it. In artificial intelligence, there is no bronze medal. There will be a hegemon and a runner‑up. Everyone else will be a client.

Markets are not pricing that reality. Investors still treat the AI build-out as marginal cloud spend or another overhyped software cycle. They debate whether Big Tech is “exhausting its available capital” or whether capex “must mean revert,” as if infrastructure were optional and competition courteous. They are using valuation models from the wrong century for the wrong game.

AI is not an app store. It is a weapon system—and the operating system of the next industrial era. The capital going into it is not a bubble. It is rearmament.

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