25% tariffs on Canadian and Mexican imports.

[SharperDingaan]

What are the thoughts ?? as this is a material disruption ... even if it doesn't actually happen, or at lower than advertised tariff rates.

 

Toss up as to whether this in inflationary, and whether it results in higher interest rates. In Canada, it's highly likely that CAD falls like a brick, and most all consumables (imported food, Costco/Walmart products, etc) become way more expensive (ie: inflation). At the same time, unemployment goes through the roof as nobody is buying anymore, and there's no money to buy those consumables in anywhere near the same quantities (ie: deflation). Ambiguous, therefore Interest rates come down at maybe 25bp every 2nd setting.

 

Strong case for lower tariffs on oil/gas, electricity, and potash; but as a lower tariff straight off ? or as a blanket 25% at start that is subsequently negotiated down over 'X' months ? Canadian election results are not going to be known until June at best; or July until new ministers are in place. 5-6 months until negotiated tariff reductions .... if any.

 

The NAFTA agreement, and Mexico, are also part of this. Are tariff gains lost to NAFTA compensation settlements?, and are Americans up to paying a lot more for what they buy? Components made in China/EU/Mexico/Canada (subject to tariff), but assembled in the US, are all immediately going to cost more.

 

None of this seems to be good in either the near to medium term.

 

SD

 

  

 

 

Edited January 10 by SharperDingaan

[LearningMachine]

Maybe time to look at history when trade wars happened between US and Canada in the past. In the past, Canada chose to build stronger ties with UK, but that won't help now as UK economy is much smaller than US economy. Maybe stronger ties with EU would be more interesting this time.

 

Imagine the scenario where the tariff does get put in place, and results in economic pain in Canada, and then there is an ask for a referendum in Canada on whether to join the US, wonder what the referendum results would be after the economic pain is put in place vs. now? 

 

If Trump doesn't put in exception for oil and gas to begin with, it will cause economic pain in the US, and US public support will go down.  So, probability is high that exception will get put in place for oil and gas out of the gate or very quickly. 

Edited January 10 by LearningMachine

[Fly]

19 minutes ago, LearningMachine said:

Maybe time to look at history when trade wars happened between US and Canada in the past. In the past, Canada chose to build stronger ties with UK, but that won't help now as UK economy is much smaller than US economy. Maybe stronger ties with EU would be more interesting this time.

 

 

Geopolitics is not my strong suit, but could China seek closer ties with Canada if the US started a tariff war? 

[Spooky]

33 minutes ago, LearningMachine said:

Imagine the scenario where the tariff does get put in place, and results in economic pain in Canada, and then there is an ask for a referendum in Canada on whether to join the US, wonder what the referendum results would be after the economic pain is put in place vs. now? 

 

I think you would be surprised. Certain provinces, like Quebec, don't even want to be part of Canada today. I can't imagine them wanting to join the US lol

[Viking]

@SharperDingaan , your post is very timely. For the past couple of years I have largely avoided thinking too much about macro. This has kept me more fully invested than I normally would have been. With hindsight, that has been a good decision - financial markets have been VERY strong the past 2 years and returns have smoked.

 

However, I decided in recent days to get much more defensive with my portfolio. Why? Macro concerns have reached a point where it seems kind of reckless to ignore them. Important: I am coming at this as a Canadian investor. My spidey sense are tingling again - and I have learned over the years to pay attention when that happens.

 

What are my concerns?

- The recent spike in interest rates in the US.

- The very weak Canadian economy - it has been weak for years. 

- The housing bubble in Canada also looks like it might be 'ending' (and these events tend not to be good for the economy).

- The threat from Trump to impose blanket 25% tariffs on Canada.

- The political turmoil in Canada - the federal Liberal party put itself and the country into a straight jacket for the next 6 months.

 

With this set-up, what could possible go wrong?

 

At the same time, the Canadian stock market (S&P/TSX) is trading near all-time highs (4% off highs). It is priced for sunny days ahead. 

 

I am much more constructive on the US economy moving forward than the Canada economy. 

 

What did I do?

 

Over the past couple of days I have moved to a 28% cash position in my portfolio. Most of my selling has been XIC.TO (my Canadian ETF/index holding).

 

In the coming days and weeks I will read/learn/process and decide how I feel about things and my decision/positioning of my portfolio. 

 

The bottom line the risk/reward seems pretty skewed to the downside for the Canadian economy. Importantly, I don't have to be fully invested. Actually it's kind of dumb for me to be fully invested. Capital preservation is more important to me these days than rate of return. Much of my portfolio is in tax-free accounts - so I can move in and out of positions and not have to worry/think about tax implications.  

 

If I change my mind I will simply start buying back XIC.TO. If it runs higher in the meantime I can live with that. At the same time, we could also see some very well run Canadian companies get taken out behind the woodshed. If I am fully invested it would be difficult to take advantage of this situation. I love the optionality that cash provides.

Edited January 10 by Viking

[SharperDingaan]

The smart thing of course is to use the threat to take down interprovincial trade barriers, and install national energy, agriculture, mining and rail/marine policies. Would never happen without Trump, but with Trump as the common enemy doing real harm to everyone, it becomes a different calculation. Survive, adapt, and your enemies make you stronger.

 

SD

 

[SharperDingaan]

We have sold 50% of our oil/gas and split the proceeds over T-Bills and a BTC-ETF. 

 

Just don't think o/g gets zero rated right out the gate, and we expect that BTC will resemble the champagne popped at the celebration. It goes our way, we could make our ENTIRE years return in maybe 2 months.

 

SD

 

[drzola]

SharperDingaan; Would you mind exposing the BTC ETF you hold?

[maplevalue]

Two comments:

- Polymarket market on probability of 25% tariffs occurring can be found here: https://polymarket.com/event/will-trump-impose-25-tariff-on-mexicocanada?tid=1736543719442. Currently trading at 18% chance of this happening.

- It's hard to grasp what the likelihood is; however, what I will say is that Canadian economic commentators very strongly assume these tariffs do not happen in a meaningful way. To me this suggests tariffs are not priced into the market right now. My personal view is the threat becomes much more effective if you implement them for a limited time, such as Trump doing them for 3 months to get big concessions from Mexico/Canada without much economic impact to the US. American voters will like this (because who doesn't like sticking it to Canada!)

Edited January 10 by maplevalue

[cubsfan]

Americans don't want to "stick it to Canada" - being our best ally.

 

Trump wants to keep drugs and illegals out, and if getting rid of Justin accomplishes that - so be it.

Tariffs are a powerful tool for foreign policy.

 

[SharperDingaan]

1 hour ago, maplevalue said:

Two comments:

- Polymarket market on probability of 25% tariffs occurring can be found here: https://polymarket.com/event/will-trump-impose-25-tariff-on-mexicocanada?tid=1736543719442. Currently trading at 18% chance of this happening.

- It's hard to grasp what the likelihood is; however, what I will say is that Canadian economic commentators very strongly assume these tariffs do not happen in a meaningful way. To me this suggests tariffs are not priced into the market right now. My personal view is the threat becomes much more effective if you implement them for a limited time, such as Trump doing them for 3 months to get big concessions from Mexico/Canada without much economic impact to the US. American voters will like this (because who doesn't like sticking it to Canada!)

 

Inclined to agree. Our own view is that everything is at 25% on Day-1; and reduced as/when he gets what we wants over the first 90-120 days or so, with no opposition from Canada. Once the new parliament is installed, things start resembling what economic commentators are expecting. For o/g we would expect a Keystone 2.0+ completed/delivering within 4 years, and an exemption from Carbon Tax on all production going south; Alberta/Canada arguing similarity to GST/HST/VAT, in that the carbon emission is attributable to the end-user and not the producers in the supply chain. Kyoto accords looking brilliant as all the CO2 produced in mining/processing travels with the end product; adults finally in the room  

 

SD

Edited January 10 by SharperDingaan

[gary17]

2 hours ago, Fly said:

 

Geopolitics is not my strong suit, but could China seek closer ties with Canada if the US started a tariff war? 

We will never foreget the two michaels. 

 

i think that relationship has soured, 

[SharperDingaan]

1 hour ago, drzola said:

SharperDingaan; Would you mind exposing the BTC ETF you hold?

 

A lot more than we would prefer; 50%+ of our equity holdings plus a bunch more in our fixed income, at a BTC cost equivalent in the low 90's. Assuming it's a great party, we do very well; we do even better if tariffs start off at a blanket 25%. Shitty way of making a buck, but a very good way of ensuring that we live to fight another day.

 

SD

 

Edited January 10 by SharperDingaan

[Spekulatius]

These tariffs would basically dismantle NAFTA. Canada best shot to keep the NAFTA stub with Mexico and seek a trade alliance with the EU, slap 25% tariffs on US imports altogether.

Perhaps turn of electric power deliveries to the US and with some luck, bad weather plunges Michigan and some NE states into darkness. Fun stuff.

[cubsfan]

That will be a challenge. 75% of Canadian exports go to the USA.

[Castanza]

Trump likes to be a perpetual wild card and a thorn in the ass to other politicians. Why? Because he knows they know he’s bold enough to “do things” (and he absolutely will) and it lights a fire under the ass of the rest of the world to make changes. Politicians are mostly happy with the status quo minus a few “PR stunts” that never seriously threaten their ability to stay in office and bolster their ability among supporters and fence riders to tilt the favor of re-election their way. 

[Viking]

Perhaps the biggest short term challenge Canada has today is we are being governed by a historically inept Liberal party/government. The policies they have put in place over the past 9 years are now throwing sand in the gears of the economy.

 

At the same time, the current government executes foreign policy based on what they think will help them in the polls. As a result, Canada's standing in the world has likely never been lower than it is today. One example? Trudeau and the Liberals have been very vocal - they think Trump is an idiot.

 

And to top it off, the Liberals just decided to suspend parliament and begin a long leadership race.

 

And in a couple of weeks Donald Trump will take office. We know he is going to hit the ground running. And he has a long memory (for those who come after him).

 

So the big problem Canada has today is our economy is already on its knees, we are leaderless, we have very publicly poked the Donald (and others) and we have very little leverage. As a result, it is very difficult to be rational and to try and figure out how things might play out for Canada in the coming months. It is almost impossible to do when the country is being run by a bunch of fools - because they are most likely to do something that will actually make the situation worse. 

 

Now before board members get nervous, no, I am not looking for a bridge to jump off of. Eventually Canada will figure things out. My guess is most Canadians want a change in government - and that will happen at some point between now and October. But in the meantime I have decided to fasten my seat belt - just in case the ride starts to get bumpy.

 

Crisis = opportunity. Well, at least it does for those who are prepared (don't lose their mind) and have cash. 

Edited January 10 by Viking

[Castanza]

Best of luck to you guys north of the border. Hopefully US and Canada can figure things out quickly in a way that suits everyone. MX included! 

[cubsfan]

1 hour ago, SharperDingaan said:

 

Inclined to agree. Our own view is that everything is at 25% on Day-1; and reduced as/when he gets what we wants over the first 90-120 days or so, with no opposition from Canada. Once the new parliament is installed, things start resembling what economic commentators are expecting. For o/g we would expect a Keystone 2.0+ completed/delivering within 4 years, and an exemption from Carbon Tax on all production going south; Alberta/Canada arguing similarity to GST/HST/VAT, in that the carbon emission is attributable to the end-user and not the producers in the supply chain. Kyoto accords looking brilliant as all the CO2 produced in mining/processing travels with the end product; adults finally in the room  

 

SD

 

@SharperDingaan  be interested in your view on this - legit or BS?

 

 

[Ulti]

https://www.noahpinion.blog/p/trudeau-was-a-poor-steward-of-canadas
 

good piece on the history on how Canada’s economy became such a shitshow under Trudeau .. the most interesting  to me was for years Canadian and US income levels grew at tandem( from 91 I think) . Until Trudeau was elected and the they diverged . The author concludes that it’s the oil prices but I wonder if it had mere to do with Trudeaun policies

[Spekulatius]

7 minutes ago, Ulti said:

https://www.noahpinion.blog/p/trudeau-was-a-poor-steward-of-canadas
 

good piece on the history on how Canada’s economy became such a shitshow under Trudeau .. the most interesting  to me was for years Canadian and US income levels grew at tandem( from 91 I think) . Until Trudeau was elected and the they diverged . The author concludes that it’s the oil prices but I wonder if it had mere to do with Trudeaun policies

Oil and Gas is like 3% (+change) of Canadas GDP, how can it have such a strong impact on growth? It is on Trudeau and perhaps other politicians. My Canadian colleges telling me that the divergence between the US and Canada began earlier - in the early 2000 post tech boom. I think the demise of tech co‘s like Nortel, RIMM! and JDSU etc has more to do with it than O&G. Those were never replaced unlike in the US where Cisco, Lucent etc were replaced with other tech companies.

Edited January 11 by Spekulatius

[Ulti]

I think the authors point was concerning the productivity stagnation that’s has occurred under Trudeau ,esp since the pandemic… even with a more highly educated workforce…  His  energy policy seems like icing on the cake..As for the tariffs…

https://www.wsj.com/economy/trade/these-border-cities-thrived-under-trump-1-0-his-policies-now-threaten-to-undo-them-41299fad?st=gojfxs&reflink=desktopwebshare_permalink
 

US border towns might suffer along with our neighbors 

[mcliu]

28 minutes ago, Spekulatius said:

Oil and Gas is like 3% (+change) of Canadas GDP, how can it have such a strong impact on growth? It is on Trudeau and perhaps other politicians. My Canadian colleges telling me that the divergence between the US and Canada began earlier - in the early 2000 post tech boom. I think the demise of tech co‘s like Nortel, RIMM! and JDSU etc has more to do with it than O&G. Those were never replaced unlike in the US where Cisco, Lucent etc were replaced with other tech companies.

Is it really only 3% of GDP? Isn't that only $70B or so?

Isn't SU + CNQ revenue = $80B..?

Yeah I agree, I think the tech sector in the US has driven a ton of growth and productivity. It's why the US is outperforming the entire world, not just Canada. 

That said, Canada's govt under Trudeau has been totally incompetent. We might not have caught up to the US, but we shouldn't be lagging so far behind either.

[Junior R]

Best way to play Canada is wait for the elections if polls show conservatives are going win ...jump back in and that's rhe point it will rally...I think for now Trump will hold off on any big tariffs until the election is done...he got Justin out so he's happy Elon likes the conservative leader so maybe they wait it out and negotiate free trade

[Spekulatius]

Of course If these  tariffs get implemented , it would cause great pain to Canada but also to the US economy. Replacing components like Linamar produces would take month and where would they even come from- Mexico is about to get tariffs slapped on as well so a no go. To build a facility like this in the US would take month and the ramp would take time too, so maybe a year without car production. Or get the stuff from China which has ironically lower tariffs than Mexico and Canada- does this make any sense at all?

 

The whole thing is completely nonsensical for all involved. I think the chances of this occurring are probably below 5% but for sure we are going to get a lot of noise beforehand.