U.S. Economy is Strong But Canada is in Trouble | Daniel Lacalle and Jimmy Connor

Key Concepts

US Economy: Stronger than anticipated, with robust GDP growth driven by consumption and investment, not government spending.
Global Economic Stagnation: Developed economies like Japan, UK, France, and Germany are experiencing stagnation, contrasting with US growth.
Canadian Economy: Hindered by regulatory, fiscal, and administrative burdens despite having significant opportunities.
Inflation: Primarily a monetary phenomenon, exacerbated by government spending and money printing. Food inflation is a specific concern due to regulation.
Federal Reserve (Fed): Criticized for past mistakes in denying inflationary pressures and for placing the burden of monetary restriction on the productive sector.
Argentina: Undergoing significant reforms under Milei, showing positive signs in inflation reduction, poverty decrease, and economic growth, despite a challenging inherited economic situation.
Venezuela: A "narco-dictatorship" under Maduro, characterized by hyperinflation, corruption, and reliance on illicit activities.
Colombia: Facing economic decline and institutional erosion under President Petro, mirroring the path of Venezuela.
Monetary Policy: The impact of interest rates on inflation is contingent on a simultaneous reduction in money supply and government spending.
Fiscal Policy: Deficit spending and high government debt are significant concerns for future economic stability.
Investment Outlook: Bullish on equities and gold, with potential opportunities in energy commodities, driven by money supply growth and a more accommodative central bank stance.

US Economy: Strength Amidst Global Stagnation

The US economy is performing significantly better than many predicted at the start of the year, defying recessionary forecasts. The Atlanta Federal Reserve estimates a robust 3.8% annualized growth for the third quarter. A key positive is the improved "quality" of GDP growth, with a reduced reliance on government spending compared to the previous year. Consumption remains strong, and investment is performing well.

Employment Figures: Despite a notable reduction in immigration and government jobs, private sector job growth is considered relatively strong. However, it could be stronger if the Federal Reserve had not maintained elevated interest rates without sufficient justification, particularly in light of the "tariff tantrum" narrative, which the speaker dismisses as a cause of inflation.

Comparative Performance: In contrast to the US, other developed economies like Japan, the UK, France, and Germany are experiencing stagnation. Canada, despite its potential in commodities, is also underperforming due to significant regulatory, fiscal, and administrative burdens. The speaker criticizes the Canadian government's policies over the past decade for leading to near-zero economic growth.

Stock Market Valuations and Inflation Concerns

S&P 500 and NASDAQ Valuations: While the S&P 500 might appear expensive in absolute terms, this is misleading when considering the substantial global money supply growth (estimated at over $38-40 trillion). The speaker notes a divergence between technology giants, which are highly optimistic, and other sectors. He is not overly concerned about the overall S&P 500 valuation, though he acknowledges potential overvaluation in a few "magnificent four" tech stocks.

Inflation and Food Prices: The speaker expresses significant concern about food inflation, particularly in Canada, citing examples like a 20% year-over-year increase in coffee prices and a substantial rise in beef tenderloin prices. He attributes this to "stupid regulation" globally that harms consumers and the primary sector. While overall US inflation has seen limited year-on-year increases since 2021-2024, the speaker worries about the lack of government willingness to reduce spending, curb money creation, and alleviate regulatory burdens on the agricultural sector. He believes that "net zero" policies and excessive regulation have decimated farming and agriculture, contributing to inflation beyond monetary factors.

Federal Reserve Policy and Monetary Errors

The Federal Reserve's dual mandate of full employment and inflation control is discussed. The speaker criticizes the Fed for a "chain of mistakes" over the past four years, including denying inflationary pressures in 2021 when money supply increased by 21%. He emphasizes that interest rates alone are insufficient to curb inflation without a simultaneous significant reduction in money supply and government spending.

Burden of Monetary Restriction: In 2023-2024, the burden of monetary restriction fell disproportionately on the productive sector (small and medium enterprises and families), while the government continued deficit spending. This led to increased inequality, as wealthy individuals were less affected than those with lower incomes.

Fed's Mistakes: The speaker identifies two key mistakes by the Fed:

Falling for the narrative that tariffs cause inflation.
Believing that maintaining "anchored inflation expectations" through their actions would be sufficient.

He argues that the Fed needs to cut rates to allow the productive sector and families to recover. He points out that a 25 basis point rate cut can significantly impact average mortgage rates and access to borrowing for small and medium enterprises, which were struggling due to elevated government bond yields causing banks to hoard bonds.

Argentina: Reforms Under Milei

Javier Milei's victory in Argentina's midterm elections with 41% of the vote is seen as a clear mandate for his austerity plans. Despite inflation still being elevated at 32% (down from 200%), the speaker views Milei's performance positively, considering the "poisonous heritage" he inherited.

Inherited Economic Crisis:

Central bank with $12.5 billion in negative reserves, indicating bankruptcy.
Economy destroyed with negative real GDP growth and 50% poverty.
Monthly inflation at 25% to 50% upon Milei's arrival.

Milei's Achievements:

Reduced inflation from 25% to under 3%.
Massive reduction in poverty, lifting 10 million people out of it.
Real wages have started to increase.
Budget surplus achieved.
Deregulation is allowing small and medium enterprises and exporters to operate more freely.
Economy is growing at approximately 5% annualized, recovering the inherited slump.

Future Reforms: The speaker believes Milei needs to continue with reforms, including a complete overhaul of the labor market, taxation reform, and lifting monetary limitations due to the inherited negative central bank reserves. He dismisses criticisms of Milei's approach as misunderstanding the severity of the inherited economic situation and the "poison pills" left by the previous administration.

Venezuela: A Narco-Dictatorship

The situation in Venezuela is described as a "narco-dictatorship" under Nicolás Maduro. The speaker believes Trump's focus is on ensuring election results are honored, as Maduro has allegedly cheated and maintained power through violence and repression.

Maduro's Regime:

Embraced partnerships with drug traffickers and cartels, leading to a situation where criminals are the de facto authorities in many regions.
Has repeatedly lost elections but remains in power through violence and repression.
The US and EU's approach of seeking negotiated solutions with the Maduro regime between 2016 and 2024 is deemed a mistake, as it allowed Maduro to retain power.

Economic Devastation: Venezuela's economy is in a dire state, with hyperinflation rendering the currency worthless. While the economy appears to be booming in some areas due to a hidden economy fueled by drug trafficking and government collusion, this is seen as a "hostage state." Civil servants are still paid in a worthless currency, while the informal economy thrives on illicit activities.

Colombia: Economic Decline and Institutional Erosion

The speaker expresses surprise that Colombia, which received immigrants fleeing the Venezuelan crisis, would elect a government pursuing similar policies. President Gustavo Petro's actions are seen as mirroring Hugo Chávez's initial approach.

Petro's Policies:

Demolishing independent institutions.
Destroying the economy internally.
Providing subsidies with a currency that is expected to devalue significantly.
Elevating the power of terrorists, armed groups, and drug dealers.

Economic Weakness: Colombia's economy is performing poorly, with a recent downgrade. The government continues to spend beyond its means, following a pattern similar to the Chávez regime. The speaker attributes this to leaders at the top benefiting from corruption and an "extractive and confiscatory system."

Opposition Challenges: The opposition in Colombia, like in Venezuela, is criticized for clinging to past beliefs and expecting electoral changes without addressing the erosion of independent institutions, the legal system, and the vote count system. The speaker is not optimistic about Colombia's future.

Canada: Regulatory Burdens and Policy Failures

The speaker reiterates his criticism of Canada's economic performance, attributing it to a decade of "zero economic growth" under the Liberal government. He argues that the issue lies with the "recipe" of interventionist policies, not the specific leader implementing them.

Policy Recipe for Stagnation:

Consistent destruction of the productive sector through increased regulation and taxes.
Increased burdens on investment and economic growth.
Assumption that the private sector can always adapt.
Simultaneous increase in immigration and public spending.

This combination is described as a "monster recipe" that inevitably leads to stagnation and social discontent. The speaker highlights the difficulties faced by businesses in Canada, such as lengthy permit processes and excessive taxation, making it impossible to achieve the country's potential growth rate of 2.5% to 3.5%. He uses the analogy that socialism is judged by its intentions, while capitalism is judged by its worst results, leading people to believe that failed policies would work if implemented by a different leader.

Outlook for 2026 and Investment Strategy

US Economy in 2026: The US economy is expected to perform well in 2026, with headwinds from trade negotiations and investor animosity likely to subside. The speaker anticipates growth comparable to or better than other developed economies.

Key Concern: The biggest concern for 2026 is the potential failure of the new administration to sufficiently reduce deficit spending. While government spending has seen some reduction and tariffs are generating revenue, more needs to be done to control the deficit.

Stock Market Outlook: With global money supply projected to grow between 10-13% in 2026, risky assets are expected to rise. The speaker remains bullish on equities and gold, despite current corrections. He also sees potential in energy commodities, which have been weak.

Risks for Equity Markets: The primary risk for equity markets in 2026 is inflation. If inflation moves from persistent to rising, it could lead to margin calls.

Oil Prices: The current price of oil around $60 is seen as a stabilizing factor. A significant increase in oil prices (to $80 or $100) would be "exceedingly negative," especially for commodity-importing nations like the UK, Germany, and France, potentially plunging them into recession. The speaker notes that OPEC and US producers are comfortable at current levels, and OPEC is increasing production to support the Chinese economy. However, a strong shift in supply/demand or a secular upward trend in oil prices could significantly impact developed economies.

Daniel Laya's Online Presence: Daniel Laya can be found on Twitter (English and Spanish), YouTube (Spanish and English), and his website da.com (Spanish and English).