10 Predictions for Geopolitics in 2023
Host: Peter Haynes, Managing Director and Head of Index and Market Structure Research, TD Securities
Guest: Frank McKenna, Deputy Chair, TD Securities
In Episode 35, we challenge Frank to provide his thoughts on ten of the most important geopolitical matters impacting Canada and the rest of the world order going into 2023. Frank offers candid and realistic insight and while not everything you will hear will make you smile, there is some glimmer of hope on the horizon for both politics and the economy.
PETER HAYNES: Welcome to episode 35 of our monthly TD Securities podcast on geopolitics with our guest, the honorable Frank McKenna. My name is Peter Haynes. And I'll be your host for today's episode entitled 10 Predictions for Geopolitics in 2023. Before we get started, 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. Happy New Year, Frank. And I hope you are safe and have had a relaxing holiday season.
FRANK MCKENNA: Yeah. No. Happy New Year. I had a lovely holiday season. We had all of our children with us and grandchildren, 15 and all. So my wife and I are going to rest up for the next four or five days to recover from our vacation.
PETER HAYNES: I got one more day with my two university students before we kick them out, back to school. And I have to admit, it's probably the right time. So back at it here in 2023. And we figured it's the start of a new year. And we'd get into the predictions game here today. So here's how today's episode will run. I'm going to bring up a topic for you, some of them will be open-ended. And then I'm going to ask you to predict the outcome for our listeners. And I need you to provide some proof of your work, not just give us a yes or no answers. I know I'm being demanding here, but I know you'll deliver on that. And so, I think the best place to start here on question number one, Frank is the most important of all geopolitical events. And that's the war and Russia. So over the next 12 months, how do you see events playing out?
FRANK MCKENNA: Well, just to get into I guess, a little bit more detail. The Russian strategy seems to be basically throwing new recruits particularly in this cannon fodder, and continuously getting them out there, trying to breach the lines, the contact line with no success. And secondly, to use long-range weaponry, missiles and drones. And not only in the newspaper but I have it on good authority from people who I think know, their belief is that Russia is really running down its munitions supplies dramatically. And that's going to have an impact on their ability to prosecute that particular part of the war, which has been quite unsuccessful to date. Now, Ukraine on the other hand, have proven themselves to be very adaptive and extraordinarily courageous. And they're holding the lines where there are major points of contact. And they're making small inroads here and there. Largely, the lines are static with the capture of Kherson. I would say the next major move will be Akhmeta, which I think the Ukrainians will overtake in the next week or two, and that will allow them to pivot to perhaps move more quickly into some other occupied space. I would say the year will end probably similar to the way it started. It looks to me like we're going to have a bit of a stalemate. I think Russia is going to start feeling the financial pinch more. Now, gas prices have dropped dramatically. Europe was able to fill its reservoirs, I guess, to start with and also mild weather there. And Europe is now weaning-- it's weaned itself off of Russian oil. So Russia has to send its oil really to China and to India. And the price for euros is deeply discounted. So this is not going to create the kind of war chest that Putin needs to prosecute this war. So with all of that, I think that we're likely to see a pretty static situation in the Ukraine, and maybe even a lull in the action, and for periods of time, but not a lot of movement, and not a conclusive victory for one side or the other. So basically, stalemate.
PETER HAYNES: I don't know if that's a good or bad result if I'm thinking about it from the global sense. Is there anyone that you think is going to-- which would be more likely to happen? That some of the very limited number of supporters that Russia has will turn their back on them? Or the United States will reduce its support in terms of military aid to Russia, or to Ukraine? Which of those two events is more likely to happen?
FRANK MCKENNA: I don't think the latter. It's a cavalier way to put it. And I don't mean that to be crude. But this is a cheap way for the United States to test all of its weaponry, and also to keep Russia at bay. And I don't think that they're going to backtrack. Because quite frankly, there's a strong feeling that, if Ukraine is allowed to fold that, Russia would continue its imperialistic ambitions and move into perhaps some of the other Baltic countries. So I don't think that'll happen. I don't think the first suggestion will happen either. But that would conclude the war in my view, if China and/or India were to say, we're no longer going to buy your oil and gas because we want this war to end. It's extracting too big a price. Or consumers are paying too much for food. We're paying too much, et cetera, et cetera. I think that would literally bankrupt Russia. So that would probably end it. It's within the power of China and India to put enormous pressure on Russia to end the war. I don't think they're likely to do that. There's an element of the enemy of my enemy is my friend sort of thing here, where I think, for China supporting Russia by buying its oil is a fairly cheap way of trying to stand up to the United States. So I don't think that scenario is likely to happen either.
PETER HAYNES: So, Frank, you mentioned India. And I'm curious on your thoughts on India, because we haven't talked much about this historically. I noticed that Prime Minister Trudeau sent the nice apology, or, excuse me, a regrets note when Prime Minister Modi's parent mother died, I believe, recently. And it caught me as thinking, why are we supporting a country that is supporting our enemy in Russia? Do you think that India gets a pass with the Western world that maybe it doesn't deserve?
FRANK MCKENNA: The world is a complicated place. And India is a major trading partner. I mean, we've got a massive diaspora just in Canada alone. And it is a major trading partner. On the other hand, Russia sells weapons to India. And it has supported India at the United Nations in its conflict with Pakistan. So, in a way, I can understand-- you can understand India saying, look, we're pragmatist. And we're going to buy oil from a country that has somewhat friendly relationships with us. Remember, India is also buying oil from Iran and helping to support the regime in Iran, which is manufacturing the drones, which go to the Ukraine. On the other hand, the government of India would say that they're sympathetic to Ukraine in this dispute. So, I told you once what I was told in Washington early on in my term as ambassador. If you want a friend, get a dog. This is all about interest. And when you get to geopolitics, people pursue their interest. And the self-interest of India is to stay friendly with both sides of this. And China as well is trying to straddle that fence. So I don't think you'll see much of a change. And these countries are big enough and powerful enough that it's pretty hard to apply maximum leverage to them.
PETER HAYNES: Well, as you say, it's a balancing act. It seems like India has done a very good job of walking that very, very tightrope. OK. On the next question here, Frank, which outcome is more likely? China works to thaw relations with the US and the West? Or it saber-rattles some more with Taiwan?
FRANK MCKENNA: Well, I don't think it'll ever stop saber-rattling with Taiwan. But to answer your questions, I think there will be some effort made to thaw relationships with the United States and the West. China is going through a tough time right now. I'd say they've been weakened, their economy weakened. The Zero-COVID policy has dramatically weakened their economy. In fact, their economy this year grew at the slowest rate it has in 50 years. And now, we're seeing the flip side of that, where they haven't created natural immunity. And they have a very poor rate of vaccination. It surprised me that only 40% of citizens over 80 years of age have received the booster shot. It's a very vulnerable population. We're seeing massive, massive deaths taking place in China. It'll be over a million people that die now that they've literally opened the doors wide open and walked away from their Zero-COVID policy. So that's weakening them as well, significantly. And so I think they're going through a weakened state. Also the total ban on the export of semiconductor materials to China is going to weaken them and some of the other trading restrictions. So I think that they're may be starting to become more pragmatic and in coming to the view that everybody needs friends. And they need friends. Biden and Xi had a very long bilateral on the margins of the last G20 meeting. And we're seeing China saying nice things. The former ambassador to the United States, upon leaving, his post talked about how much respect he had for Americans, what extraordinary people they were. So rhetorically, there seems to be some dialing back of the rhetoric. And the United States, in turn, has not been poking the bear so to speak around Taiwan. So let's hope that cooler heads prevail here.
PETER HAYNES: That would be a great outcome. And that's really good to hear. OK. Next question, outside of China and Russia, what country's behavior on the world stage worries you the most or will become the most problematic?
FRANK MCKENNA: Well, it's interesting. Brazil was acting a little bit strange under Bolsonaro. But that's changed now. And there are a lot of other countries. Orban in Hungary is a bit of a disturber. And there are a few others. But the one that I would pick out if you're forcing me to, which you are, is North Korea. And simply because they have nuclear weapons. You can have a lot of countries that are irritating but don't have nuclear weapons. And they're increasingly belligerent, and feisty, and wanting to demonstrate how tough they are. I was doing an event once in St. John's Newfoundland. I was on stage with President Clinton. We were doing an event. And he had an urgent call. And he had to leave stage for five minutes and go backstage. Anyway, when we finished up, we're walking off stage. And I asked him if he could share what that was all about it. He said, oh. It was President-- I can't remember who the president was at the time. I think, President Bush, asking me if I would go to North Korea, or intervene in North Korea, with the leader of North Korea. And I said, what do they want? And he said, attention. That's what they want, is attention. And the same is true now with what's going on between China-Taiwan, what's going on with Russia-Ukraine. North Korea is not getting much attention. And they crave it. So whenever they lack attention, they get belligerent. And there's always the danger that sometimes something accidentally bad will happen and trigger a more serious--
PETER HAYNES: Well, I guess, that's why there was an affliction for President Trump, because he gave them the attention that they so much desired. And obviously, that's not happening with the current administration. So speaking of the United States, I'll turn it over to that part of the world. Perhaps we've got a glimpse this week of the future of the Republican Party, with the inability to actually be able to name the next Speaker of the House. The question is, can the Freedom Caucus within the Republican Party be tamed? Or will we see paralysis in the house for the next two years?
FRANK MCKENNA: Peter, what's happened in the last three days, in my view, is stunning almost beyond belief. I think just about every analyst knew that there would be some hell raising, because the majority is so skinny, only four seats. But I don't think anybody expected this kind of absolute total deadlock. It's not a good situation for the Republican Party. It makes them look horrible. But it's not a good look for the United States either, or for the entire world, which all would like to see more stability. So what shocks me is that they just finished a seventh vote and will be continuing to vote. And McCarthy has made huge concessions in order to get these people over. And he hasn't been able to jar them. And that's what scares me. And so that leads me to answer my question by saying-- to answer your question, by saying that these folks have maximum leverage right now. But they're negotiating for even more leverage going forward. And if they get that leverage, which they're going to be getting, it looks like, we'll probably see paralysis for the next two years. When I say leverage, what kind of leverage? Well, one of the things to start with, it used to be that it would take half the house in order to challenge the Speaker's chair and try to make it vacant. That got moved down, I think, to five. McCarthy made that concession to take it to five members could do that. He made a concession offer in the last 24 hours to take that down to one member, which means any one member can challenge the authority of the chair and force a vote on whether that chair has the support of the House. I mean, this could lead to shocking instability if it stands. And it looks like it will stand. I can't think of much more that he can offer them except to let them run the place. I think what he will offer them is positions on all the major committees, almost blocking rights on rules, and all kinds of other things. All of that will lead to giving this Freedom Caucus extraordinary power. And there's no doubt that will lead to some element of paralysis. The only way the Republican Party will get unified is if they find things to attack Democrats on; everything from border security, and immigration, to Joe Biden's son. And if Kevin McCarthy and others can concentrate their attention on attacking Democrats, maybe they will restrain themselves. But remember, we talked about the Freedom Caucus, 20 members, and so on. But there's dozens, maybe even hundreds, of congressional Republicans-- not hundreds, but many dozens, who come from more moderate districts. And every concession you make to the radicals hurts them in their own ridings, their own districts. So this is a very tough balancing act for Republicans.
PETER HAYNES: Well, I guess it's the equivalent in the House of Joe Manchin, and how he held the Democrat Party hostage in the Senate when he was the only-- he was the swing vote. I saw a funny tweet, Frank that I thought you'd get appreciation for. Somebody who is following this had suggested, I don't really like the rule but maybe for the next vote for Speaker of the House, we should start with a runner on second base. I thought that was a pretty good one, because there's really no end in sight. This could be a 21-inning game here. Because there doesn't seem to be-- there's just no movement. And the votes are the same every time that Freedom Caucus is dug in. OK. Next one here, Frank. Will Donald Trump be indicted on any of the numerous criminal investigations outstanding?
FRANK MCKENNA: I think he will. I think the more likely one is the document scandal. And by that, I mean, having classified documents at his home in Mar-a-Lago, and then essentially obstructing justice in the efforts to get those documents back into safe hands. I think that's the most likely one that he'll be indicted on.
PETER HAYNES: How does that work, Frank, if just for the non-lawyer? I know you are a lawyer by background. Can you just explain? An indictment occurs, and then they set a trial date, we literally have a court hearing. Or how does this play out? Is there a plea? Or how does the process work? Because I doubt he's going to plead.
FRANK MCKENNA: Well, I would think that would go before a grand jury. And the grand jury could return a true bill, which would essentially send it to trial. And so there's two possible prosecutions here. One would be for actually having in his possession these classified documents, which would be an offense in itself. And you either have them or you don't. And they're either classified or they're not. So it's a fairly binary choice. But the other one that's probably tantalizing to justice is obstruction. And if you remember, that's ultimately what did Conrad Black in, almost the same thing, tampering with documents. And in this case, I think it was the valet, who was ordered by Trump to actually move the documents from one place to another after the Department of Justice demanded their return. So that could be another one that they would go after. I think they have to be very careful. He can't be made to be a martyr. And it would be a shame if they went through protracted criminal proceedings, and it resulted in a mistrial, or he was acquitted. So I'd rather see something really simple where the evidence is incontrovertible. PETER HAYNES: That would certainly rev up his base certainly, as he's certainly in the process of trying to be named the next leader of the Republican Party for the 2024 election. So moving on to number six, will Joe Biden announce he is running for 2024 or bow out? And if he bows out, then who will be the frontrunners to lead the Democrats into the 2024 election?
FRANK MCKENNA: I haven't been an enthusiastic fan of President Biden's job as president. But I've warmed up quite a bit just in the last six months of the last year. And I'm feeling a little more comfortable with his accomplishments. If you try to look at it objectively, you'd have to say that he's had a pretty good year. He got infrastructure approved, which has confounded Congress for 50 years and a desperately needed infrastructure bill. In fact, he and Mitch McConnell were announcing some stuff together just in the last 24 hours. He's got a major CHIPS bill through to make sure that the United States remains the world leader in micro conductor chips, over $50 billion package; introduced an Inflation Reduction Act, which in aptly named but which will provide very dramatic stimulus for client initiatives and put the United States at the very forefront of clean technology. He got a modest gun control bill through, which we would say, what's the big deal? But it's been impossible to do now for a long time. And he ended up "winning", I put that in quotation marks, midterm elections. Actually, he made gains in the Senate and the governorships, and suffered very minor losses in the House compared to expectations. And finally, I would argue that he's prosecuted the war in Ukraine extraordinarily well in terms of keeping everybody together, the NATO community together, and the political divisions within the United States together. So you have to say, it's a fairly good record of accomplishment. Having said that, I don't think that he should run again. Age does matter. And he'd be, I guess, 86 when he finished the presidency or something like that. And it would be hard to deal with a president who during the course of his time in office were to suffer some diminishment of capabilities. So I would rather see him not run again. But I think he will. President Clinton, when I asked him that direct question, will he run again? He said, Joe Biden will run again if he's still vertical. And I'm going to accept that view and say that he will run again. Because I think that he feels like he's doing a pretty good job.
PETER HAYNES: And if you're wrong, so who would you give us as the front runners? Is it Gavin Newsom? And who else might it be?
FRANK MCKENNA: So the front runners would be Pete Buttigieg, who's the Transportation Secretary. And it would be the first gay president certainly in the United States, which would be interesting. Kamala Harris, who is not only a person of color, but of course, a woman. I don't think that she has distinguished herself terribly in office. But as the vice president, she would have a lot of support within the party. An interesting new name is Governor Jared Polis in Colorado, who's really a centrist, which is something the party needs badly. And won his governorship in a very decisive way, probably more decisive than DeSantis in Florida. So they would be three good names. An honorable mention would have to go to Gretchen Whitmer of course, the governor of Michigan, and Amy Klobuchar, the senator from Minnesota. And I would say, Gavin Newsom as well. Governor Newsom has the advantage in that he starts with a massive state and a massive number of delegates. But that's also the disadvantage. Will the country want to be ruled by somebody from California, a governor of California? I think that's going to be a hard hill for him to climb.
PETER HAYNES: You mentioned Kamala Harris. And I was speaking to a friend the other day. And I wanted to get your perspective. I recognize that the vice president of the United States tends to stand in the shadows of the president. My question for you is, do you feel as though Kamala Harris is more in the shadows than the typical vice president in terms of profile? Because it seems like we don't see a lot of Kamala Harris on the main screens of CNN, or Fox, or any other major station.
FRANK MCKENNA: Yes. I firmly believe that.
PETER HAYNES: And is that because the party doesn't think that she has done the job that they had hoped she would do? Or just to keep the profile on the president?
FRANK MCKENNA: Well, it's really the president who makes that determination. Obama actually gave, I'd say, Biden, a pretty wide berth and had him involved in lots of things. Kamala Harris, I think they wanted her to take on immigration and the border security file. And she just didn't distinguish herself on that. So it's probably a little bit of both, that maybe the president hasn't wanted to give away much of his authority. And it may be that she hasn't been hungry enough about taking it. But I'm a little surprised at how low her profile has been.
PETER HAYNES: Well, you talk about somebody who likes to control power. Let's move on to question number seven here, Donald Trump. Assuming Donald Trump is not in jail or even if he is, then who will be the three leading candidates competing with him at the Republican primary for 2024? And who will win?
FRANK MCKENNA: I wouldn't count Trump out. He's got a massive and loyal level of support within the base of the party. But, to answer your question, the candidates would include Ron DeSantis, of course, the governor of Florida and a Yale, Harvard US Navy guy. Mike Pence, the vice president, I think that he's got a ceiling that he will not be able to get beyond. The Trump people will never support him. Governor Glenn Youngkin is kind of a new name to the mix and probably in third place, governor of Virginia. I was with Carlyle Group a long time. Actually, when I was on the board of Carlyle, he was there, governor of Virginia won in a more or less purple state and would bring the Republican Party much more into the mainstream. Even though he's demonstrated pretty strong conservative values. I'd give honorable-- so those would be the three, I think. I'd give honorable mention to Chris Sununu. He's the governor of New Hampshire, a solid, pragmatic guy. I served with his father. And his father was like that solid, pragmatic guy, and he would be good for the Republican Party in the country. Senator Tim Scott, who would be an African-American, coming through the Republican ranks to be president. That would be really impressive. And Nikki Haley, of course, a woman of color would also be impressive. But right now, Ron DeSantis is clearly in the poll position. And so if I had to choose for the Republican Party, I would say that is who they will choose.
PETER HAYNES: And you've said before that if there's 15 people on stage, that's the worst case scenario if you don't want Trump back as the leader of the Republican Party. Because he has a chance to win in a crowded field. If it's a narrow field, then it might be somebody else. OK. We'll watch with keen interest. Question number eight, we'll swing into Canada here. Will Pierre Poilievre's Conservative Party lead the federal polls in Canada exit 2023?
FRANK MCKENNA: Yeah. So on this one, I've been pretty critical on this podcast of Trudeau and continue to differ from some important areas. But I did read an article just in the last week by John Ibbotson, who's not a liberal sympathizer at all in The Globe and Mail, who talked about Trudeau having a fairly impressive record of accomplishment that he can fall back on. And that includes everything from emergency measures. He distinguished himself very well in justifying the use of emergency measures. On trade, Canada's part of TPP and CETA, the European Trade Agreement. And NAFTA ended up being saved. On immigration, we've gone from 260,000 to 500,000. On gun control, even though they've handled it extremely badly, it's a popular issue in the country. And if they can get rid of a lot of the complexities and just get down to assault weapons and handguns, I think they'll have a winner in their hands. On climate, they did get a carbon tax introduced, which I think is working out across the country. In social policy we've got National Child Care, and income support for families, beginning of a national dental program, of course, the legalization of cannabis, which is something a lot of countries are struggling with, and then pandemic management, where he tends to get good marks. There are a lot of negatives as well. And they've been pointed out, having the trains run on time. By that I mean, being able to get through airports and getting visas. All of those kinds of things, the government's done poorly on. But I would say that Trudeau's probably end of the year quite a lot better than he started the year. On the other hand, I think Poilievre has improved his position as well. He's muted some of his more radical approaches. And I think that those around him say smart enough to know that he's got to, in a very responsible way, moved a bit more towards the center and not get caught out on radical positions, which the liberals can use to demonize him. So right now, I would say that both leaders have improved their position as we get into the new year. Ultimately, the question of who will win comes right down to how the economy is going to be performing at the time an election is called, and whether Poilievre can continue to dial back his rhetoric. So I think that's the problem. So I'll close just by saying at the best how the polls would be a year from now. I think Poilievre will hold a lead. And it may be less on the track record of Trudeau than it is just on his existence. Leaders become stale data. And they become stale data more quickly these days than in other days. Social media is extraordinarily cruel. And do you know that-- I couldn't believe this, Peter. But this football player for Buffalo, thankfully, is seemingly on the road to recovery, Hamlin. When he was on the field, still on the field lying there before they'd taken him off, there were over a million social media hits suggesting that the reason he was injured so badly is because he had been taking vaccine. And the vaccine precipitated a heart problem. So it just shows you that the ability for misinformation to take flight is staggering. And so it's a tough world. And it means leaders get ground down quicker than they used to. As one pretty well known hockey player told me from some years ago, he told me currently, he said, we could never have survived in an era of iPhones, in the world of iPhones, et cetera. And these young players have to learn to be on their best behavior every minute of every day. So bottom line is I think that Trudeau's biggest problem is just going to be his existence. And seven or eight years in, there's going to be a bit of momentum in Canada to trade him in, same way we trade in our phones, and our watches, and everything else around us.
PETER HAYNES: And I don't want to come to the defense of social media, but I will just take the other side, that over 150,000 individuals have contributed to this seemingly innocuous toy fund that Damar Hamlin's family has in Pittsburgh for where he went to school. And that's over $6 million that's been raised. And it was interesting to watch social media immediately after the accident occurred. What charity can we give to? Does he have a charity? You could just see the tweets going. And immediately, the good side of the world came out. And it was from all members of the world, not just those that are necessarily fans of the Buffalo Bills. So yeah, praying for number 3. And it does sound like he's going to make-- and it seems like he's on the road to recovery, I guess, is the best way to describe it.
FRANK MCKENNA: And, Peter, I'm glad you pointed that out, because it does show the yin and yang of the world that we live in now. Social media can be a force for good. It can be a force for organizing. It can be force for extraordinary accomplishment. But it also gives people anonymity, who want to rather than want to construct things, they want to tear them down. So, all of that to say is that those people that have to exist and work in that world, they have to have pretty thick skin. And their longevity is not assured.
PETER HAYNES: So this was going to be my last question, number 10. But I'll make it number nine here because it's a good segue. Because we were talking about social media, my question number nine here is on Elon Musk. Is he Lord Darth Vader Musk, i.e., lured to the dark side by power? And what does the world think of him at the end of 2023? And for that matter, does Twitter exist at the end of 2023?
FRANK MCKENNA: I think he's brilliant. It's not just Tesla, which is stunning, but Starlink, which is stunning. And he's got his scoring project, which is stunning. And he's got other things under development that are all staggering in terms of their implications. So he's an amazing human being. But he is definitely tortured in some way by the demons of his own genius. And I think the world will be very negative on him by the end of the year if he continues down this path that he's on now, of opining on everything, of sticking his nose in the war in Ukraine, of attacking the cave rescuer in Thailand, and just being a know-it-all, and a busybody. I think that will make him, over time, a Trump-like figure, highly polarizing. Does Twitter exist at the end of 2023? I think there's a real chance that it won't. He's really now turned it into kind of a political instrument, which means that you'll have some ferociously loyal people who will pay for the platform, but a lot of ferociously angry people who won't. And I don't think you ever want a commodity to be so politicized that you can lose as much as half your audience. And I think he's done that. He's got employees angry. He's got lawsuits all over the place. And I think that the path that he's on right now is probably losing-- I think he's losing $3 billion or $4 billion a year. He's got a big debt load, pretty expensive debt. I think he's going to have a hard time keeping this thing afloat by the end of the year. And it's never made a lot of money to start with. So I think he's got a tough, tough row to hoe with Twitter.
PETER HAYNES: And when you get to be that big, you tend to feel as though you're above the law. He's always given the approach that he's above the FCC, and he's above the banks, and everybody else that lends them money. An anecdote that I'd heard that when they were putting together the financing for Twitter and then the personal loans against his stock, it was like no due diligence. They just accept it. That's when you know someone or something has gotten too big. And that's when you know the froth in the market. They always talk about the high yield market. As soon as all the covenants go away, then immediately you know we're at the top of the market because something's going to blow up here. And it feels a little bit that way. And I agree with you, evil genius in many ways. So many amazing things he's done. And I really do hope he can somehow moderate. But it feels like he's going in the wrong direction. So last of the 10 questions here, will Danielle Smith's United Conservative Party beat Rachel Notley's New Democrats in the Alberta provincial election in May of 2023?
FRANK MCKENNA: I don't think so. I know both of these ladies. And I respect them both. Neither are as portrayed particularly. Danielle Smith is not as radical as people might think. And Rachel Notley is not as socialist as people might think. But at the end of the day, Danielle Smith had to-- she had to take a pretty extreme approach in order to win the nomination of her party. And she's going to have a hard time pivoting away from that to a position where a broader section of the population are comfortable with her. So I'm not one who would demonize her because I think she's got a lot of good ideas and a good track record. But she really has got herself out on a pretty big plank. And Rachel Notley on the other hand is actually quite well liked across Alberta. And even the energy sector like her. The question is, can she get her party to seem a little more mainstream? And I noticed she has a financial advisor to her party now who is a former executive with ATB, which is probably a good sign. So if her party can appear more moderate and competent, I think that she'll end up winning the election. And I think they're smart enough to know that they have to do that. The last election, I don't think they expected to win. And they were just trying to fill the nominations, and took just about anybody, and everybody. But this time, I think with a real chance of forming government, they may get a higher caliber of candidate. And that would be a good thing if that were to happen.
PETER HAYNES: I think we're going to have some interesting conversations with the honorable Rona Ambrose and yourself over the next few months as we do the rounds here, and speak to people either privately, or in general sessions. Because I know that she would be of the belief that-- and she did say that at our conference in November, that she definitely thinks that Smith will win the election. Obviously, she is a conservative. And it does make some sense. But that'll be an interesting-- I look forward to the two of you having-- because I know you have so much respect for each other. It'll be an interesting discussion to hear. And obviously, she's very close to that community. So we've done our 10 questions, Frank. We're going to finish up here with some quick hitters, just yes or no answers, or just a single number. So here they are. We'll start with Canadian CPI, 6.8% annualized. I think that was the November reading. So we'll call that the current CPI level. What will it be at the end of the year?
FRANK MCKENNA: 4.5.
PETER HAYNES: 4.5. OK. Good. Will Canada avoid a recession?
FRANK MCKENNA: Depends what you mean by recession. I think that we'll have an economic slowdown that may meet the technical definition of recession. So for that reason, I believe that we will. We can't escape what the rest of the world will go through. But I think in Canada, it's going to tend to be mild and fairly short.
PETER HAYNES: OK, Frank, so here's one that's near and dear to your heart. Quebec-based Resolute Forest Products is being taken over by a US company. There is a contingent value right that is paid out to Resolute shareholders as part of the deal price. It is based on a payout of softwood lumber duties owed to Resolute by the US of around $500 million. If 2026 is the over-under on the year Resolute shareholders receive payment, would you take the over or the under?
FRANK MCKENNA: I think that all of that money is owed to the Canadian companies and should be recovered. Will it? Well, we saw a transaction take place a couple of weeks ago in New Brunswick, where Larry Tanenbaum's company sold his forestry business in New Brunswick for some $300 million. And it's my recollection that a decent portion of the purchase price that was allocated there was on the basis of the contingent value right. So I think the belief there was that that money would come back. I negotiated the last softwood lumber deal. And during my time at the table, I was not prepared to give away a single nickel of that money, because I felt that if we won the court cases, the money was owed to us. The government, for reasons which are totally legitimate, ended up compromising on that. But my own view is that that's going to be a huge amount of money. It'll be part of the negotiation. There will be compromise. But that lump sum, which is now many billions of dollars, or a good portion of it should come back to the Canadian producers. And I hope that we-- I hope that our government stays firm on that. Because otherwise, we only encourage more litigation down the road if people think that just by litigating, they can end up getting a portion of their money back. But my view is that that's money that is owed to Canadian companies. If we end up winning the poker game, we should get the pot.
PETER HAYNES: So most people think then three years-- that's why I used 2026. Would you be bullish or bearish? I.e., would you think that money will be returned before 2026 or after? FRANK MCKENNA: No. I think 2026 was a pretty good date. This has got to wind its way through all the tribunals, and the process, and the appeals. And we've done this. We've got a lot of experience doing this. We usually win at the end. But the Americans have been playing stall ball, and refusing to appoint appellate judges to the WTO, and all kinds of stuff like that. So it's going to take a while to get to the right result. The closer we get, the more likely it looks like we'll win. Probably the more likely it is that people will go to the table and negotiate. And if they end up negotiating, there'll be some compromise on that large pool. And there are ways of doing that, Peter. One of the things we explored before was giving some of that money towards social housing in the United States, which ends up creating demand for forest products, and helps producers on both sides of the border. So there's a lot of creative ways you could deal with that. But this is a thorny issue. It's resulted in a massive attack on wealth by American producers against their own citizens, resulting in the cost of a house. It's significantly increasing. It's just really bad public policy. And it's only because America has so much ability-- Americans' so much ability to use pressure tactics on government that this is taking place. It should not be taking place. It's very harmful to American consumers.
PETER HAYNES: All right. So we got you on a push there at 2026. I appreciate that. Certainly, a lot of people in the equity world are following that closely. Will there be a major technological breakthrough to help fight climate change in the year of 2023?
FRANK MCKENNA: Yeah. I believe there will be. Fusion is being talked about. And I think that's a long-term solution with great promise. But I think carbon air capture is more immediate. There are real experiments taking place. And I think that that has the ability to be a game changer, if that were to happen.
PETER HAYNES: That's good news. WTI is around $73.50 as we tape this podcast. What will it be at the end of the year?
FRANK MCKENNA: I'm going to say, $60. I think on the one hand, Russia is going to have less bargaining power, because Europe is going to be off its oil. And so that'll take some steam out of the pricing. On the other hand, I firmly believe that we've got a demand-supply imbalance here. And without enough supply coming on market, it will set the floor under the price.
PETER HAYNES: OK. Now S&P 500, it's at around 3,830 currently. At the end of 2023, what index level will the S&P 500 be at?
FRANK MCKENNA: Well, this is a total jump ball. I'm going to say, 4,500. I think as the year goes on, if we're in a shallow recession, we'll get through it. And coming out towards the end of the year, probably see the interest rate environment change. And that should end up giving some stimulus to the market.
PETER HAYNES: That's not an uncommon view. That we might trade down in the first quarter that rally into the end of the year as we realize the recession is shallower. The Canadian number is going to be lower, Frank, with 20% of our market being in energy. If you have WTI at $60, then this will be a year likely that Canada underperforms the US for that reason.
FRANK MCKENNA: Well, yes, but we've been less correlated than we have been before in that regard. But we'll see.
PETER HAYNES: It's OK. Well, the most important question of all, Frank and this is the last one. Which team will win the World Series in 2023?
FRANK MCKENNA: Blue Jays. Although, holy cow, we're in a high rent district now. I mean, the Yankees got a massive payroll. And although the New York Mets are under direct competitor, what a massive payroll they have. But I would say, I'm warming up a little bit to the trades that have been made. Peter, I'm not-- I haven't been a huge fan. I love Teoscar. And I love Lourdes Gurriel. And it breaks my heart to give away our future with Moreno. But we did get the left-handed bat. And we did get more speed. And we did get better defensive players. So we may end up having a pretty good year as a result of that. I think longer term, a guy like Moreno, he's like a quarterback in football. They're just so invaluable. I hate to see-- giving up one that could be a five-star threat-- a five-tool threat for years into the future.
PETER HAYNES: I am very sympathetic to your views on that. But I also recognize we're in win now mode. And we're not really worrying as much about our prospects without giving away the entire farm. So I hope you're right on that one. I think at the end of the day, it'll be-- it's up to our stars or supposed stars like Guerrero, and Bichette to have career years, and for guys like Springer to stay healthy. So end of rotation obviously, he has to stay healthy as well and perform. So hopefully, a bounce back for Berríos. This was a lot of fun, Frank. We will definitely at the end of the year, look back on these predictions and see how you did. And hopefully, you score a winning grade. So we'll get back into the normal format as we proceed throughout the year. We'll talk again at the end of January, Frank. Thanks very much.
FRANK MCKENNA: OK. 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.