Canada’s Leadership Crisis

Happy New Year! We wish you a healthy and joyful 2025.

As we entered 2025, Canada ran into conflicts with our neighbour and trading partner, America. The incoming U.S. President, Donald Trump, vows to eliminate “subsidies” to Canada and wants to apply a 25% tariff on Canadian goods. In addition, he repeatedly said Canada should be America’s 51^st state and called our Prime Minister, Justin Trudeau, a state governor, both in public and through social media. These comments were obviously not funny to all Canadians and, most importantly, were disrespectful. One may ask the question, why does Donald Trump target Canada? Donald Trump was a businessman. In the business world, people compete; the strongest and wealthiest survive. If you view Canada as a business, it is losing talent, behind on technology investments, and does not have the reserves to sponsor growing spending. Our own pension, the Canada Pension Plan, has been shifting investments out of Canada. Trump knows that our government has no choice but to be silent.

Over the last nine years, under the leadership of Justin Trudeau and his coalition partner, the NDP, Canada has effectively adopted an extreme socialist model, blaming businesses for making too much money and polluting, increasing the tax on hard-working Canadians for working hard, and spending money on short-term “vote pleasing” initiatives by running a deficit in every single year since 2015. Remember, Trudeau once said the budget will balance itself—that is unfortunately a dream that was never realized for Canada. The bullying by Trump is an unfortunate wake-up call. Canada needs to have a bigger and stronger economy, and have its own competitive advantage, before we can afford to be socialist.

As people around Trudeau recognized the party was over, they began to disassociate themselves from him. Finance Minister Chrystia Freeland resigned after being in the job for four years, knowing it would probably be over for her soon with an election in 2025 and the Conservatives set to win. Her departure does not unwind Canada’s deficit and national debt. Trudeau was forced to resign shortly after as his partner, NDP leader Jagmeet Singh, finally agreed to a non-confidence motion originally proposed by the Conservative party. Canada will likely have a federal election in the spring. The polls are suggesting a Conservative win at 44% approval, with 20% for the Liberals and 19% for the NDP.

It is widely expected that the Conservative party will unwind many policies that were initiated by the Liberal and NDP parties and make growing the economy and shrinking deficits their priorities. Those are necessary to make Canada a good and fair place for our children. It is nice to have an objective, but things will not turn around overnight to allow us to negotiate with a bully. The next 12 months or longer will be challenging for some businesses that export to the U.S., if a 25% tariff is indeed applied, and if so, it will be big enough to affect everyone. The Bank of Canada will have to cut rates and run a wider rate differential with the U.S. This suggests the loonie may depreciate even further, helping the performance of USD-denominated assets. Equity value is the present value of future cash flows; provided that investors see a stronger economy ahead, Canadian equity may perform surprisingly well.