Russia's next move
Host: Peter Haynes, Managing Director and Head of Index and Market Structure Research, TD Securities
Guest: Frank McKenna, Deputy Chair, TD Securities
In this episode, Frank McKenna, Deputy Chair, TD Securities, takes a post-mortem look at the G7 Leaders' Summit held in Brussels over the weekend. Frank suggests that Biden's comments on the regime change in Russia were unhelpful and may be forgotten. He also analyzes Russia's retreat from Kyiv, hinting that if Russia is acting rationally, this may signal a potential end to the conflict. With Russia facing ongoing ostracization from the Western World, Frank believes Canada should take a leading role in reshaping the global economy, with an important nod to C.D. Howe. Frank concludes the episode by examining the recent Liberal-NDP deal, and what it means for Prime Minister Trudeau's next move.
FRANK MCKENNA: 2% seems to be the marker that NATO is setting out. There's huge pressure on Canada to increase its military spending, and I think we will, significantly.
PETER HAINES: Welcome to episode 25 of our monthly TD Securities podcast on geopolitics, with our guest, the honorable Frank McKenna. My name is Peter Haines, and I'll be your host for today's episode entitled, "Russia's Next Move." But first, I want to remind listeners that this TD Securities podcast is for informational purposes. The views described in today's podcasts are of the individuals and may or may not represent the view of TD Bank or its subsidiaries, and these views should not be relied upon as investment, tax, or other advice. I think I was telling you, Frank, when we were taping recently-- I think last month-- that we're about to go public with this podcast series. So it's exciting news for listeners. You should be able to access this episode wherever you get your podcasts, on Apple or Google or Spotify. That's the plan, and it's exciting times. It'll make it a lot easier for people to listen. So, Frank, let's start with the hastily organized G7 meetings in Brussels that ended on the weekend. President Biden wanted the in-person meetings in order to ensure the West remains aligned and find all possible ways to isolate Russia through sanctions. Meanwhile, Ukrainian President Zelenskyy continues to express frustration with the lack of military support from Western nations. He's asking for tanks, for planes, and missile defense systems. And again, he's renewing his plea for a no-fly zone over Ukraine. Has the West done enough to support Ukraine, or does Zelenskyy have a point?
FRANK MCKENNA: Well, Zelenskyy has a point only in that he's leading an extraordinarily difficult situation. He's doing it with great courage. And his communication skills, I think, have been noticed worldwide. So I give him full marks. And in his spot, of course it's right for him to be constantly asking for more, because so many lives are being lost, so much damage is being inflicted. But I believe in my heart of hearts that the West has done a lot. Is it enough? I think there'll be more to be done. But I think that the West has done a lot. And if we look and separate out the things that he wants, a no-fly zone for example, almost every military expert would say that's a very dangerous thing to do. If we do that, the only way we can enforce a no-fly zone is to have a lot of planes in the air, with a lot of pilots from NATO countries, with a huge amount of potential for skirmishes and even great damage with Russian planes. And so that represents a point of escalation that's far beyond what seems to be safe. On the other hand, there are some things that we can do that Zelenskyy wants, and some things that we probably shouldn't do. First of all, he says that he wants planes. Well, we have to remember the Ukrainian Air Force really only have experience on MiGs, the MiG 29 Fulcrums. And they're flying those, and they're doing it with great bravery. And they're winning more than their share of dogfights, and they're doing great damage to the enemy. It's not commonly understood that Ukraine has a real military. They have a real Air Force with bases. And they also have an armed forces of some 200,000 regular soldiers and some 900,000 in reserves. We can't really supply them with Tomcats. Or as one ex-president told me, we should give them the A-10s, which are the Warthogs, that basically chew up an entire convoy. They've got 16,000 armor piercing rounds available to them-- huge damage. The only way you could do that would be to have US pilots flying them. To have Ukrainian pilots flying, you'd have to go with the MiGs. And what I'm told is that, first of all, the MiGs that are available aren't in very good shape. They're very old. Number two, bring those to the Ukraine, and they would be attacked on the airfield where they are. They'd be attacked with ground to air missiles. And you wouldn't have enough pilots to fly them in the first place. So for all of those reasons, it probably doesn't make great tactical sense to do that. What makes more tactical sense is to provide them with better missiles to shoot down planes. As it stands now, there are more planes, more Russian planes being shot down, and helicopters, by ground to air weaponry than by the air defense, consisting of airplanes, in Ukraine. The problem is now they're using shoulder mounted weapons, and they're terrific. We've got the Javelins, which come in on the top of tanks, for example, SAM missiles, which are the surface-to-air missiles that have brought down probably hundreds of fixed wing helicopters during the time they've been deployed. The problem is they can only go to about 15,000 feet. So you need weapons that will bring the high-flying planes into danger and force them to lower altitudes where you can shoot them down with the more conventional weapons. So what they need is access to the S-300s. They would say, look bring us a Patriot missile battery. But a Patriot missile battery has got to have trained US soldiers accompanying it, probably about 90 per battery. And that would escalate the battle beyond where we want to go. So you have to go with something that the Ukrainians are comfortable with. They're comfortable with the S-300, just because it's a Soviet system. They are available in some of the ex-Soviet countries. They're available in Slovakia, for example. You could get them even in Greece, there are some of those systems available. I believe there are some available in Bulgaria. The only problem is those countries all fear for their own defenses, so they would have to be backfilled. And that's what the US is trying to do now. They've determined that what the Ukrainians need is higher altitude ground to air missiles. And what they're trying to do is to get missiles which the Ukrainians have been trained on, but to get them from countries where they can backfill. And that's what they're actively involved in as we speak. And I think that would be helpful. Bringing tanks in-- the Ukrainians are killing tanks by the hundreds, literally by the hundreds, with Javelins, with weapons that the UK are providing, NLAWs. And the Ukrainians are capturing tanks. So why would we want the Ukrainians to have more of a particular type of weapon that looks like it's very vulnerable to attack?
PETER HAINES: A couple of times in your answer there, you've used the word escalation. It's an interesting word, given the latest trip that Biden was on went off script a few times with some of his comments that ended up having to be walked back by US leadership, or criticized by some of his Western peers, for the perception of perhaps being escalating in nature. Of particular concern were Biden's comments towards President Putin, where he referred to him as a quote, "butcher," and that he quote, "cannot remain in control." US Secretary of State Blinken was quick to say the US was not asking for regime change in Russia after these comments. And French President Macron downplayed the remark saying, quote, "we want to stop the war Russia started in Ukraine without going to war. If we want to do that, we can't escalate through words or actions." Do you think President Biden is getting a little too aggressive with his rhetoric?
FRANK MCKENNA: First of all, just a little bit of context-- there are a lot of people calling for regime change in Russia. Lindsey Graham said he thought the president should be assassinated. That is an extreme statement to make. I hear, rhetorically, from people I talk to, saying why can't we take that guy out? It's in the air. Other people are talking about it. And it is rather ripe for Russia to talk about how offensive that is when they're trying to create regime change in the Ukraine. In fact, they're trying to assassinate the president. Even this week, a group of 20 mercenaries from the Wagner Group are reported to have been arrested trying to get to Zelenskyy and assassinate him. So it's a little rich for Russia to complain about the rhetoric. But having said all of that, I think that it did, as we would say in the political world-- it resulted in Biden stepping on his lines. He had a good three days. He rallied the troops. He rallied the countries. He looked good before the world. He had a carefully scripted speech. I think it was a mistake for him to go off script and to escalate the rhetoric. I don't think that it was particularly helpful. I think it'll be forgotten in a couple of days. There's a lot of inflammatory rhetoric coming from a lot of directions. But that was not the right moment for those words.
PETER HAINES: It seemed to me like maybe he was a little bit-- he had been carrying babies around in Poland, and the refugees, and hugging women who have sent their kids off to the war. And it almost felt like it caught him, it got the better of him, the emotion of the situation. It is clear right now though, Frank, that the West is in fact at war with Russia, whether anyone wants to admit it or not. It's just at this time, it's an economic war with Western sanctions and the freezing of Russia's foreign assets, aimed at inflicting enough pain that Russia has to back off. And Russia, on the other hand, is threatening to cut off European access to its crucial energy supply. Do you think there is a red line where Western rhetoric and Western actions convince Putin that economic war is in fact an act of war?
FRANK MCKENNA: Well, it's interesting. Some of Putin's advisors in some of their narrative had said that we're at war with the West. The West has declared war on us-- and talking about the economic war. I would not be too solicitous about Putin's red lines. He's the one who started this. He's the one who took this battle to the Ukraine. He's the one who is pulverizing cities. He's the one who's impervious to the plight of children and women and senior citizens who are sheltering in place. He's the one who has brought all of this ugliness upon us. And the only weapon we have, short of engagement militarily, is the economic weapon. I think that what the West has done has been appropriate. It is certainly in the nature, if you want to characterize it as economic war. But it's the only weapon we have to try to get him to cease and desist. I think that there are a lot of the measures that we've introduced that are conventional, sanction tools. There are a couple that have been introduced that are a bit unusual. One of them would be the use of SWIFT. I was a bit surprised, as we've stated before in this podcast, that the West got to SWIFT as quickly as they did, because that's a very big weapon. The other one that I thought Putin probably would have some grounds to complain about would be effectively expropriating all of their foreign reserves. Although, they're not expropriated. They're frozen. But that came out of the blue. And I think that in particular would be deeply offensive to Russia, to say we can't even put our foreign reserves in other banks, and you're going to freeze them on us? I think that surprised them and set them back. But the direct answer to your question is I wouldn't be too solicitous about the various red lines that Russia keeps throwing out there. I think that we've got to push those lines as far as we can in order to try to shorten the pain and the suffering that this war is bringing.
PETER HAINES: To be fair to the West, Russia has done the same thing. They've frozen any foreign assets in their stock market. So in some ways, they're doing the exact same thing that the West is doing in terms of freezing assets. Do you consider Russia's recent comments about refocusing on Eastern Ukraine as a significant shift in strategy, or do you think it's more about regrouping before they take another crack at Kyiv and some of the other bigger, Western cities in Ukraine?
FRANK MCKENNA: It looked to me, if we're describing a rational actor-- it looked to me like the kind of language that you use to try to socialize your retreat, to try to put out there the criteria that you would use to claim victory. And then having set the bar at a certain level-- in this case, quite low-- could say we've achieved that and leave. I hope that's the case. The famous tactician Sun Tzu, in his Art of War, talked about always leaving a golden bridge for your enemy to cross to get back to where they came from. I hope that's true. With Putin, there's been so much irrationality. There's no guarantee of that. I don't-- and this may be more wishful thinking than factual. I don't think they're setting themselves up to simply return and lay siege to Kyiv and some of the other cities. Because I think, with the losses they've sustained on the battlefield-- I mean, we're talking about the decimation of perhaps as much as 20% of the fighting capability of the Russian military, between tanks and helicopters and planes and human lives. The estimate from Ukraine today, which is probably exaggerated, was 17,000 lives lost. And if we apply the usual factor of three injured for every one lost, that's a lot of human beings, a lot of families that will be grieving. So I think that if Putin accepts how graphic those facts are, and knows that traditionally, laying siege to a city, you're trying to take a city, involves probably three soldiers for every one that you would use in conventional warfare. He knows that the level of damage to his army is going to be dramatic, to the point where Ukraine might even prevail just by being able to continue to exist and fight back. The Americans, who have got extraordinarily well-trained troops-- when they went into Iraq, they had a third more soldiers for a territory with a third less of the population, and about 30% less land mass. And they had total air superiority from day one. So there's no doubt that Russia tried to take Ukraine on the cheap, so to speak. And there's no doubt that they are suffering extraordinarily and staggering losses in the early days of this war. They're inflicting terrible damage as well. If I were them-- or I would say, if they're rational actors, they should be looking for victories which are within the realm of possibility-- having Ukraine as a neutral state, that's being conceded by Zelenskyy; not applying for NATO, that's being conceded. the territories that Russia is claiming are arguably more pro-Russian than the rest of the Ukraine. So it'll be interesting as to whether that's something that Ukraine could agree to or not. But certainly, they look as if they are pointing their sights in a little bit of a different direction. The other piece of that they talked about was reducing the Ukrainian military capacity. Well, they've done that ipso facto because of the fact that Ukraine has suffered significant losses on the battlefield.
PETER HAINES: I've heard a few times people refer to Putin trying to create a North and South Korea type of an environment--
FRANK MCKENNA: Right.
PETER HAINES: --where you separate Ukraine with the Donbas, and give that to Russia, and end up with that type of a structure. It's clear though, Frank, that this is a battle that's not going to be ending anytime soon. And it's becoming clear that we need to keep those lines of communication with Russia open. And that's been a key theme with President Macron in particular. Your good friend, Colin Robertson, suggested on his podcast recently that one possible solution for a Putin off ramp is to broaden the discussion from just focusing on Ukraine security to perhaps all of European security, sort of like a 1975 Helsinki Agreement 2.0, where all of Europe comes together to create a post-Soviet Union security agreement. Do you consider this option realistic and doable? And what other ideas do you support in terms of finding a solution to this problem that does not embarrass Putin?
FRANK MCKENNA: Well, Colin Robertson's a brilliant analyst, and so I wouldn't dismiss anything that he suggests. I would say that the degree of difficulty in that would be staggering. Trying to get all of Europe of the same view is difficult on just about every issue--
PETER HAINES: Except the war.
FRANK MCKENNA: The most amazing thing that Putin has accomplished is to unify Europe and NATO. I mean, that is an achievement in itself, one that he should not be very proud of. So it would be very difficult to bring that together. And then it would be very difficult as well to bring something together that Ukraine can buy into that would be acceptable for that country as well. Because they're suffering these direct losses in human life. And the cost of reparations in Ukraine would have to be part of it, I think somewhere around $75 billion--
PETER HAINES: Going up by the day.
FRANK MCKENNA: --and going up by the day. So that would have to be part of it. And then you'd have to have a security guarantee for Ukraine. That seems almost beyond the capacity of the parties to respect. I talked to President Clinton this week, because he happened to call me about some things. And we were talking. And he said that people have to realize Ukraine was a nuclear power, he said, the third most significant nuclear power in the world, and that they gave up their nuclear weapons in exchange for a guarantee of security from the United States and from Russia. And this was not that many years ago, 1995 maybe. And he said that when-- raised Putin about it and said, look, what about this? Putin said, well, it doesn't really count because the Duma didn't pass it on Russia's behalf. So if I were the Ukraine, I'd be very suspicious about any guarantees of security from outside parties. I'm not saying that it couldn't be achieved. But I think they concluded, with the sophistication of the military they put together, that the best protection they could get is right at the end of their own arm.
PETER HAINES: You've spoken several times, Frank, about Putin's aggressions happening after German Chancellor Angela Merkel retired. She seemed to have a unique ability-- I know you said this a few times-- to be able to control Putin in several different languages, including Russian. Recently, Merkel's legacy is being brought into some question for her willingness to, in fact, foster those strong relations with Russia, and in particular with respect to energy dependence. Now that Germany has decommissioned several nuclear plants and is entirely at the mercy of Putin for its energy supply, do you think historians will be hard on Merkel's legacy?
FRANK MCKENNA: I don't for a couple of reasons. First of all, she did stand up to Putin over a long period of time, and perhaps the leader of the West in doing that, even though Germany is more at stake with Russia than any other country. They've got a massive trade relationship and energy relationship. So she stood up, I think, tall, and it may not be a coincidence that Putin has waited to make this move after she left office. I think the surprise to all of us has been Schultz, the new chancellor in Germany, who has reacted with extraordinary courage in my view and conviction. Germany is doing the unthinkable. They're increasing their defense budget to 2% of GDP. So this is another unintended consequences of Putin's aggression, getting Germany to start putting a huge defense budget together. And of course, Germany is now headed towards energy independence. They're going to be-- within a matter of weeks, they're going to be weaning themselves off coal. By mid-year, they think they can dramatically reduce the amount of oil being brought in from the Soviet Union, and within a year or two, natural gas. So Russia loses big, in my view, by losing that massive market where they supplied almost 40% of Germany's energy needs. And in the long run, even in the medium run, I think Putin's going to pay a bigger price there. The reason why I'm more respectful of Chancellor Merkel is that Germany, like a lot of Europe, is run by coalition governments. And the Green parties and other parties in Germany have been insistent, I think, irresponsibly insistent that Germany get out of natural gas and out of nuclear. At one stage-- 2010, let's say-- 30% of Germany's power was supplied by nuclear. Last year, it was down to 7% or 8%, and it was trending towards zero. Now, that's changing, because some of the nuclear plants that were scheduled to close are now going to be refired out of necessity, and Germany will return back to having nuclear energy as part of its energy mix, but I don't necessarily blame her for that. I blame the politics of the moment for that, particularly the Green parties, who are the ones that have stripped Europe in large measure of its energy security, and exposed it to blackmail by Russia. And that's why we all have to think carefully about what we wish for, because if we go too far, too fast in any one direction, we create unintended consequences such as Europe is facing today.
PETER HAINES: And that marginal reduction in production from Russia-- everybody doesn't understand the 700,000 barrels, or whatever it is-- it brings into the 100 million barrels of supply a day-- ends up tipping the balance to the point where we're now paying $1.75 in the United States, or in Canada here, for gas at the pumps.
FRANK MCKENNA: Exactly, Peter. It's always the marginal barrels that set the rate. This is not the topic of today, but we've got to wake up and smell the coffee on energy generally. In Canada, we've got people who would like to shut down all of our energy production. So this is not a binary choice. You don't get to say, we shut down all our energy production, and that goes away in terms of demand. The choice that you make is, we shut down all of our energy production, and it gets infilled by Russia, Nigeria, let's say Saudi Arabia, Venezuela, places that don't have terrific environmental records, and certainly do not have very good human rights records. So those are the choices that we make. So we have to be very careful that during this transition period that we simply don't vacate the market. I would prefer that we set the world on an environmentally sustainable path for our energy by being the environmental laboratory for the world, which is what I think that we are now. And we have to be very, very careful that we don't follow the siren call of simply throwing up our hands, closing down everything, and letting some very bad players move into that vacated space.
PETER HAINES: I think that's a great segue into a topic that's near and dear to your heart. For instance, in the US, Jamie Dimon was recently talking about a Marshall Plan, where we can increase US energy production in order to help Europe. You and Ron Ambrose and Colin Robertson, who we mentioned earlier, together penned an op Ed for the Globe and Mail recently calling for a quote, "CD Howe" moment. Explain what you meant in the context of that article.
FRANK MCKENNA: Yeah, so CD Howe was a kind of a non-political politician. And during the period of the Second World War, he became named as minister of everything, effectively. He was the minister who was responsible for supplying the war effort. And that's what I think we need now. Canadians need to realize that we can say tut-tut all we want about what's going on in the Ukraine. But we're not paying the price, Ukrainians are, and the Europeans are. And we have it within our ability to mobilize all the forces of this great country and supply a lot of what is missing. I'll give you four or five examples. Immigration, we have 1.3 million Ukrainians in Canada, the biggest diaspora in the world. We can end up taking more Ukrainians than our market share, and should . In terms of wheat, we're one of the great breadbaskets of the world. Can we do more, should we shift it to soybeans, is there a different kind of protein we should be producing, do we have any land that's vacant? Could governments give a guarantee to farmers if they plant it more crops that they'd be backstopped in some way? We need to think about energy. We are going to produce 300,000 more barrels at the request of the government of Canada based on the request of Europeans. Could we do more? Using rail, which is readily available to us, could we do another 400,000 barrels, as I'm led to believe that we could? Moving oil into the United States, which displaces Russian oil, or in turn allows the United States to push oil into other parts of the world, displacing Russian oil-- could we do more on natural gas? Can we find a way to get gas to the East Coast of Canada for export? We have an LNG terminal in St John, New Brunswick, which is an import terminal. How quickly could we turn that into an export terminal? How could we push natural gas to the East Coast? And you look at everything-- uranium, Russia supplies 30 or 40 nuclear reactors around the planet. We need to stop that dependency. Saskatchewan is one of the world's biggest suppliers of uranium. Can we produce more? Can we make more available to displace Russian uranium? And similarly, with other commodities, what can we do that would be more-- and that requires a Herculean effort that crosses ministries, crosses provincial boundaries, crosses political lines. And that's why we would like to see some central authority that would undertake that job of supplying the war effort. And that's-- and I use those terms advisedly, this is a war. I don't care what Putin calls it, it's a war. And we have an obligation to support the people who are at the center of this war, and we have the ability with the resources that we have available in Canada to do more.
PETER HAINES: Well, you refer to it as a war. And during a war, everything seems to be on the table. Obviously, we've seen changes in Germany, moving back to re-fire the nuclear plants that were being decommissioned. Do you have any sense whatsoever whether the US government might change its position on Keystone?
FRANK MCKENNA: I don't think they will. Look, there are two pipelines that make eminent enterprise sense, Energy East, which would have taken oil and gas all the way to the East Coast of Canada and displace 700,000 barrels of incoming foreign oil, and allow us to export gas. That won't happen, because it has to go through Quebec. And the other one is Keystone, and I don't think it'll happen, because it was a massive political issue for the Democrats. And their left base have made that almost a sacred cow. And I'm not sure-- I think Biden will go down and beg Venezuela and the despots running that country for more oil before he'll give a presidential permit for Keystone XL.
PETER HAINES: Let's talk about leadership. Let's talk about President Biden's performance. You mentioned he had a good three days in Brussels and Poland until he went off script a few times. Are you surprised by his performance ratings? I believe there was another poll out recently that suggested he's polling at the lowest point since he was elected as president of United States. What do you think of his performance, and does that surprise you?
FRANK MCKENNA: I think he's handled the situation in Ukraine quite well. He's mobilized the world, if you like. The United States just can't go it alone, but all of Europe is united, NATO is united. And none of these entities had been totally united behind other issues. Even in the United States, politically, the country is quite united. So I think he's done well there. He's made a few rhetorical missteps, but these are tension filled days. And I think the United States is doing well, and they're also putting a huge amount of resources into supplying Ukraine. So I give them full marks there. We have-- to be fair to Biden, we have to remember this. In the United States, after you have an election, somebody wins and they run the place. The other party, they go away, and so you don't have an organized opposition until the next leader's elected. And it's usually three years later. So presidents have a bit of a free ride. In this case, Donald Trump has made himself the official leader of the opposition. And his party have made themselves by proxy the replacement government. And so Joe Biden has had to govern with a leader of an opposition who is questioning the legitimacy of his very existence as the president of United States. And 40, 50% of Republicans happen to believe that he's not the duly elected president of the United States. So that gives you a heck of a kick in the pants when it comes to your popularity right out of the gate. I don't think it would matter if he had everything going for him. He's got a great percentage of the American public, led by a former President, who in my view-- and I've said this repeatedly-- is doing the most malevolent thing that one can do in public life, which is to question the legitimacy of an elected government. But they're doing it. So Biden has got to fight that current. He's got to fight the pandemic, in which you've got a very divided population in the United States of America on the issue of vaccination and of mandates. And then he's got to end up fighting a war which nobody wanted. He's got to end up fighting the inflation that has come about as a result of a lot of the measures that have been undertaken during the pandemic. And then he's got to fight what I would call a divided Democratic Party, which has been incapable of getting unified behind his agenda. So he's had a lot of battles that he's had to fight. I think in the face of that, he hasn't done too badly. He's set some unmet goals, speaking of which--
PETER HAINES: Yesterday, Jamaica--
FRANK MCKENNA: Amazing, that was so exciting.
PETER HAINES: Great stuff for Canada. See you in Qatar.
FRANK MCKENNA: Yeah, exactly. So anyway, so that's what I would say about Biden. He's had a lot of forces arrayed against him.
PETER HAINES: Let's switch gears to Canada. I know you've been quite complimentary, generally speaking, to Canada, being front footed with respect to our support for the war. One topic I wanted to just raise with you-- it's been 40 years since we had a Foreign Affairs minister in place for close to 10 years, and that was Joe Clark. Since Trudeau's taken over, there's been five foreign ministers in seven years. Do you think that at a time when we need to have a one face for the world, that the number of people that have been in that post over the most-- the last seven years-- is a source of concern to you?
FRANK MCKENNA: Yeah, I think it is. And I think it's reflected in some of our foreign policy missteps. We lost badly, in an embarrassing way, in trying to get the seat on the Security Council. I think that we put the ball in our own net in India, with respect to trying to create a relationship there. The prime minister's got to wear that. Saudi Arabia, we've made missteps on that relationship that have cost us the relationship. And I think on China, even aside from the Meng Wanzhou situation, I think that we've been offside in our messaging with China as well. So I think on a lot of fronts, we can be blamed for not having done a great job on foreign affairs, and we would be better off if the Prime Minister took it seriously, and if we had a minister who would be on the job for some period of time. And that's not a reflection, by the way, on the current minister, Melanie Joly. And my hope would be that she would have that period of time. I think she's done an amazing job in a short period of time. People don't understand the magnitude of her talent. She's not only a gifted lawyer, graduating from the University of Montreal, she's also got a master's degree in Oxford in international law. She's participated in numerous Francophone summits and international trips of various kinds, Davos, et cetera. She's participated in all of that. And she's very quickly developed extraordinarily important relationships for Canada. She's very close with the German foreign minister, very close with the French Foreign Minister, and speaks almost every day with Anthony Blinken, the Secretary of State for the United States of America. I had dinner in New York two weeks ago with Hillary Clinton. And she asked me if I knew Melanie Joly, and I said I did. She said, I spoke to her for almost an hour on the phone, and she is one of the most impressive people that I have ever spoken to in that position. So that was high praise coming from somebody who occupied that particular role for the government of the United States.
PETER HAINES: Yeah, you're right. Let's hope we have some stability. It appears as though there may be some stability in terms of the current government being able to stick it out until its term is up, and that's due to an announcement we heard last week of a partnership with the NDP, that we'll see some policy give for the NDP in exchange for supporting the Liberals for the duration of its term. Interim leader of the Conservatives, Candice Bergen, referred to this agreement as a quote, "nothing more than backdoor socialism." While this agreement is not a formal coalition, others criticize the fact that now we have a government that's not the government that Canadians elected. What's your position? Is this agreement important, and is it likely to upset centrist liberals?
FRANK MCKENNA: I think yes to the latter. I'm one of those and I'm upset. And I would make that argument you just made. This wasn't the government that we voted for. So I think that's important. I think I should also note that we've had years now, not only in Canada, but around the world of excessive spending, trying to use very blunt weapons against the pandemic. And it's hard to argue against the use of those weapons, but there is a time to take the punch bowl away instead of refilling the punch bowl. And with this NDP deal, I'd say the government is really refilling the punch bowl. And so I'm not a big fan of that. But those are personal views. When I talk to Canadians, I find there's a different view for everybody to talk to. I don't find outrage, by the way. I think that there is so much instability that people like the fact that we will have stability for the next couple of years. But I find that everybody has a different view. Is this good for the Liberals? Is it good for the NDP? Is it good for the Conservatives? Everybody's got a different view. I think it is good for Justin Trudeau. I don't personally believe it's good for the Liberals. I think in the next election, people say, look, why would we vote for the Liberals when we can just vote for the NDP? But I think it's good for Trudeau. Because I-- and I have no basis for saying this other than the passage of time. I think he's unlikely to run again. This gives him a couple of years of runway and a stable platform to get things done and exit gracefully. We'll see if he does that or not, but I think it gives them that opportunity.
PETER HAINES: So if you're an investor investing in Canada, or particularly in Canadian government debt, you now know that there is an NDP non-coalition with the Liberals. That's going to mean more spending on pharmacare and dental-- I think are the two areas that they're focused on. And combine that with-- and I'll get your take on whether you expect increased military spending at the next budget due to what's going on in the war in Ukraine. Do you worry about, say, Canada's debt rating as a result of these two things combined, or the fact that debt's going up everywhere in the world and it's all relative?
FRANK MCKENNA: The strangest thing about debt is that you have to pay it off, whether it's in your house or at a government level. So I worry about it. Look, there's an argument to be made for those social programs. Catastrophic health care is devastating to some families. And as long as they have a very carefully circumscribed program that deals with the most outrageous situations, then there's some merit there. Dental, for the poorest of the poor, also makes some compelling social sense. I just wish we could do that all in a balanced way so that we simultaneously pay attention to the economy and make sure we grow it, because hand in hand with this, we're going to get significant tax increases on certain parts of the economy. And all of those things are concerning to me. I would much rather us proceed carefully, slowly and incrementally on social programs while really trying to jet fuel the economy so that we end up growing the pie bigger. Now, by accident, we may end up with a bigger pie anyway as a result of the commodity surge. There's no doubt that the government is going to be banking revenues that it did not anticipate when the budgets were set. But I would prefer that windfall not be spent simply on shiny new baubles, that it all be part of a plan to grow the economy in a very aggressive way so that we have the money to do some of the good things that we want to do.
PETER HAINES: So if we're 1.5% of GDP currently being spent on the military, by my calculations, I think that's like $25 or $26 billion, because I think our GDP last year was $1.7 trillion. Germany is moving to 2%, or at least they claim they're moving to 2%. Do you expect, even as soon as this budget, for us to announce a move to 2%?
FRANK MCKENNA: I expect this budget will announce a significant increase in military spending. I suspect as well that will escalate over time. I don't-- it won't be a one drop. We're going to buy tanks. We're going to buy missiles and everything else. I think it'll be over a period of time. I think, in fact, I saw a news flash in the next-- very recently-- saying that it looks like that we're going to be looking towards the F-35s as our base airplane, which is a very expensive but very sophisticated airplane. Cut to the chase, I don't-- 2% seems to be the marker that NATO is setting out. There's huge pressure on Canada to increase its military spending. And I think that we will increase our military spending significantly. And this budget will be the first date for that kind of an announcement.
PETER HAINES: Frank, it took a little longer than you and I might have liked, but the signs of spring are coming here. In a couple of weeks, we'll see the Masters. Everybody who's a golf fan really views that as the start of the golf season and the start of the spring. And you and I obviously are focused on baseball. So we know that Major League Baseball parks, from the Rogers Center to other big league stadiums in North America in the next couple of weeks, will be occupied with fans watching their beloved teams. You and I talk each month on this podcast about our favorite local Toronto Blue Jays. And this year, we have a lot to cheer about. ESPN'S Buster Olney predicted on the weekend that the Blue Jays would beat the Atlanta Braves to win the 2022 election, which is I guess ironic in that we beat them 30 years ago for our first ever World Series. Are you as optimistic as Buster Olney?
FRANK MCKENNA: Look, I'm really optimistic about the team this year. But I have to confess, I am every spring before the season starts. But I can't remember ever seeing this much talent starting a season with the Blue Jays. And some of the people that have been added-- I was looking today a little bit at the track record of Tapia, and it looks like we got a speedster there, tends to get his bat on the ball. And with Chapman, we got a great glove that's going to save us some games just with his mitt, and can hit home runs. And there's no doubt our pitching staff is better. It's just plain better. I still think that we have some holes in middle relief up to closers. I think that's going to be an issue, especially now that starters don't go much beyond five innings. We're going to need more depth probably in the pitching ranks. But it's a good team, and an exciting team. These guys have swagger and it's fun to watch them.
PETER HAINES: Well, one name that you might see in our lineup, at least the most recent take I've heard a few times, is with Cincinnati essentially selling every asset they have, there is a thought that left handed bat from Etobicoke, Joey Votto, former MVP, could be a name that you would slot in as our DH for the next two years before his contract expires. That would be an interesting name to put into the lineup, and it would be great for him to be able to finish his career where he did all his young baseball, in Etobicoke. And that would be nice, I think. That would round things out nicely. But I'm with you, I'm very optimistic. And I can't wait to talk next month after we'll have three weeks worth of baseball to talk about. Thanks for your time today, Frank.
FRANK MCKENNA: Thank you, Peter.
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Managing Director and Head of Index and Market Structure Research, TD Securities
Managing Director and Head of Index and Market Structure Research, TD Securities
Managing Director and Head of Index and Market Structure Research, TD Securities
Peter joined TD Securities in June 1995 and currently leads our Index and Market Structure research team. He also manages some key institutional relationships across the trading floor and hosts two podcast series: one on market structure and one on geopolitics. He started his career at the Toronto Stock Exchange in its index and derivatives marketing department before moving to Credit Lyonnais in Montreal. Peter is a member of S&P’s U.S., Canadian and Global Index Advisory Panels, and spent four years on the Ontario Securities Commission’s Market Structure Advisory Committee.
Deputy Chair, TD Securities
Deputy Chair, TD Securities
Deputy Chair, TD Securities
As Deputy Chair, Frank is focused on supporting TD Securities' continued global expansion. He has been an executive with TD Bank Group since 2006 and previously served as Premier of New Brunswick and as Canadian Ambassador to the United States.