North American Equities: Market Insights and Political Dynamics

Transcript

Well, "How do you like me now," says President Donald Trump.  Everyone, it's Pete Hofstra here with an update on North American equities.  We are at April 7th, 2025, approaching Liberation Day 2.0.  What are we calling the latest tariff deadline?  Anyway, that's a talk about this morning.  So, let's go back to something we addressed prior, which my wish for all democracies is that everyone in a democracy would be willing to be a swing voter.  You may have your biases and your preferences, but at any given point in time you're willing to go a different direction to do what's best for the country.  Of course, we have our federal election coming up in Canada, April 28th, so encourage everyone, let's just do what we think is best for the country and not necessarily just anchored to how you've voted historically.  Not trying to project any particular bias there, but as part of that conversation, what I'd love to see people be able to do too is put political bias aside when you talk about the context of the party.  So, in other words, you might be liberal leaning in Canada, but you should still have an open conversation about whether Justin Trudeau was actually good for Canada in his tenure.  And indicating that he maybe wasn’t as good as what he hoped he might have been.  Given his length and power and the position that he had, that should be an okay conversation.  Doesn’t mean you stop having left-leaning values and that sort of thing.  Same thing when we talk about United States.  If you would be a Republican, you're a believer in fiscal discipline and small government.  That doesn’t mean we shouldn’t be able to talk about Donald Trump and say there are things that are not going well or might be problematic does not mean you've sort of given up your Republican value.  I want to put that out there.  So, I want to talk openly about different dimensions, but all this not to espouse any views, but try to put it in the context of what we might do in the market, which is ultimately where all of this lands.  So, let's look at the what, the why, and the how of what's going on.  So, the big what's are we're renegotiating global trade.  I mean certainly the U.S. has repositioned themselves within that global trade environment.  There is a fiscal discipline that's coming that obviously the deficit spending that's been in place for quite a while that they want to reverse that.  And there's a need to support, call it that less educated, unskilled worker in the U.S. that would love to have a decent-paying job, and that seems to have been hollowed out over the last few decades.  None of those things are new.  I think the irony with the last one is that should have been a Democrat space, but they've somehow become the party of the elites.  But we'll leave that alone.  That's not so much about market.  But I want to talk more about the what, what's going on with fiscal and trade, the why, and then how we're doing it.  The thing is the what's, the fact that exists isn't new.  Remember, President Obama even had his pivot to Asia.  And he actually tariffed China initially, of which then Trump 1.0, his first term, he actually increased those tariffs and Biden kept in place.  So, trying to certainly get a different deal with China has certainly been around for a while.  And fiscal discipline, as we know, waxes and wanes.  Bill Clinton was a champion of shrinking the government and actually ran a surplus.  And I think what happened during the great financial crisis and post that era was that interest rates went to basically zero and debt didn’t matter anymore.  Because again, if you only have to cover your cost of interest and interest is zero, who cares how much that you have.  And if you have a sovereign currency, meaning you can print money in your own currency, which Canada, America, U.K., Japan can all do, places like Spain, Italy, Greece can't because they're part of the euro zone.  When you have that freedom, then debt doesn’t particularly matter, until interest rates go up.  And that was modern monetary theory, and that works with ultra-low interest rates.  It doesn’t work when interest rates go up, and all of the sudden half of your budgetary spending is going towards covering interest.  Certainly, the fiscal discipline, the concepts of what's happening, the what, is not necessarily the challenge.  The why, it kind of makes sense.  You need to bring fiscal spending down.  Canada needs this.  Both parties are positioning around this that we need less government.  We need less taxes.  We need our productivity engine working.  In any capitalist-based country, it has to be the private sector that's going to drive that.  And so, the U.S. needs that, Canada needs that.  Again, none of these things should be particularly offensive.  And the linkages through all of this, of course, is through prices and interest rates.  So, whatever you do at this policy level, government policy, it starts to really impact individual spenders, individual businesses.  Obviously comes from things like prices, and ultimately interest rates.  That short-term U.S. interest rate, most important number in all financial markets.  If that goes up or down, obviously can stimulate or restrict overall spending.

And so that's kind of the what we're doing and maybe why we're doing it.  And when you look at the central banks in that linkage on interest rates that's of course, they're opening both doors.  They're being prudent here.  And what they're saying is we don’t typically worry about food and energy.  When energy goes up, we know that's inflationary, but inflation is the continual change of prices.  And so what they worry about most is ultimately wages because wages creates that continual feedback loop of higher wages means higher prices, but higher prices means people will want higher wages.  But often can be what triggers that higher price, they have to look at.  So, if it's energy, as an example, they assume it's mean reverting.  It'll go back down, so you don’t respond with rates.  It's something that's temporary.  And so, what they've done now and says, yeah, the tariffs, we're not going to call them inflation.  They could cause a price bump up, but it doesn’t necessarily become entrenched because they could reverse.  This could all be done and turned around quickly, and that goes away.  So, they've opened the door to say we're certainly not going to have to increase rates because of tariffs because it's not necessarily truly inflationary.  And so then will they cut rates?  They say, well, we don’t want to cut rates in the face of maybe prices going up over the next couple of quarters, so they've kind of opened the door that they can do anything from sit still to cut to increase.  I think the odds of an increase are probably pretty low.  And where the Fed is left guessing, like the rest of us, is a bit on the why are we doing this tariff thing.  So one is, is it to really negotiate better trade deals for the U.S. that just make everything on an equal footing?  Which case they could be very temporary.  Or is it to spur investment into the U.S. to setup more manufacturing?  Well then, it's probably not that temporary.  You probably want to leave it in place until that investment, and that could take years, even a decade.  Or is it a source of revenue?  If it's a source of revenue, I mean how long do you want that revenue.  It could be quite something more permanent.  And central banks don’t know.  I don’t know that even those closest to Trump know necessarily why he's doing this, so why he would stop doing it.  And maybe it's some sort of blend of all of those.  But that sort of just leaves that uncertainty out there.  So, the why is important and any articulation of that would certainly be valuable.  Now let's look at the how and ultimately tying this back to markets.  But how they're doing it is obviously quite fascinating.  Any time you go into negotiation, it's always interesting to know who's across the table.  Are they a win/win person or a win/lose person?  Win/win meaning let's find something where we're all better off.  Win/lose of course is I don’t feel good about this unless I feel I beat you.  That latter one tends not to create highly sustainable dynamics.  The former, the win/win, will.  That everyone could walk away feeling this makes good sense.  We can all move ahead.  We don’t walk away frustrated, resentful, versus the other.  But I think you may have a bit of a win/lose dynamic or at least how that's coming across.  And no one likes to lose, right, and so people will fight back.  And then of course you've got things—let's just use Mr. Musk as our case study.  Reducing government spending, again, I think as a concept most people would probably want to agree with.  But waving a chainsaw around in the face of the American people whose lives you might—many lives, a million lives, you might be introducing tremendous financial instability while waving a chainsaw in their face is going to make that extremely difficult to be embraced.  And where that matters is you can get prolonged effects that didn’t necessarily have to be there.  The Elon Musk brand has certainly been shifted, if not tainted pretty significantly.  Probably that left-leaning well to do individual Democrat in the U.S. was his primary customer.  I don’t think any of those groups are going to want to touch a Tesla.  So, when it comes to investing in something like Tesla, we have to look at these second order effects of how is this changing things with regard to future dynamics.  And of course that's going to be true for the U.S.  If you go to a grocery store and you're finding things that are made in Canada will sell very well.  And putting this in restaurants.  They can't move American beef in a steak restaurant.  Of course, they should be using Alberta beef and Ontario beef and those sorts of things, but they can't move it.  They literally have to throw out beef because Canadians will not buy things coming from America.  And of course that's true other places around the world.  You're seeing protests.  You're seeing all of these things.  Really I think a lot to do with the how of the way they're doing this.  It's very much a win/lose.  It's this constant barrage of headlines, seaming this need of attention.  Again, doesn’t mean they're not good ideas.  It's just the way they're doing it is tainting this U.S. brand.  Where we have to look at this is how do we get through these dynamics and what's the prolonged impact of this.  Is it going to be harder for American businesses to win customers globally after this.  Of course, the other residual to think about is the worse things could get.  Odds of a recession are going up in all of this.  That could be true if it really is—tariffs can be higher and prices are going to have to go up, and that's impacting wallets and businesses don’t know how to spend.  I can tell you businesses are struggling.  They're holding back capital.  They're not sure what the rules are.  So, we need to get this sorted out.  But if that just happens to tip this into a recession, and the Trump administration will say that's the pain you have to take to get to the gain of where we want to get to, it can be hard to shake an economy out of a recession.  There is a hysteresis there.  Things don’t come out the way they came in.  To get that confidence back often can take quite a push.  And so that's why we're looking at the art of the deal, the things that maybe had worked well when you're building casinos in Atlantic City or you've got your own reality TV show, maybe some of those techniques of, "You're fired," kind of stuff is not the techniques you want to use when you're trying to negotiate on a global stage.  All of that does say this does create a lot of uncertainty.  It's extremely dynamic.  If you ask us to guess, my guess is you're going to start to see announcements of potential deals.  I think as of doing this I just saw a headline he might be deferring the onset of tariffs from everyone but China.  We actually talked about that late last week that he's going to say, "Taiwan, you're fine.  Yeah, Vietnam, sure.  Let's get a deal done."  Europe might take a bit longer, but China is the one where they really want to—the U.S. wants to hold their ground.  Europe is interesting because you've got, I think, the French and German who are really objecting to the how things are being done and saying no, you don’t treat a friend this way.  This is wrong.  Where you've got maybe Italy and Spain that say can we please just get a deal done.  And so, the how is really creating a split.  And so, whether you feel you've got power—and similar in Canada too, coming into election.  You've got leaders provincially and federally saying they want to position themselves as not getting pushed over by Trump.  And all of that, does that help get something done?  What do we really want to see come through this?  But again, analogy I would use is if I had a great business and you were up and coming and struggling and I decide I'm going to give you $20 a day for a period of time to help you get going and we forget about this deal, and decades later I'm still giving you $20 a day, your business is doing just fine and maybe I'm supplying to you or buying from you, whatever, but all of the sudden I want to save a bit of money and I look at that $20 a day and instead of just calling you up and saying we did this for a different reason, we need to change course.  How about we reset on this?  You'd probably be open to that conversation.  But if I go to the media right away and say you've been a leach.  You've been sponging off me, abusing me for decades, this is terrible.  I can't believe this has gone on.  That can create an animosity.  And so that does create a prolonged uncertainty we need to contemplate.  Anyway, long messaging here.  Let's take it back to markets.  This is a period of high uncertainty, so I think I do not want to diminish that.  So, what do you do?  I think I always go back to let's be pragmatic.  What are the options?  Could sell everything.  You could do that.  I wouldn’t recommend that.  Let's go to the other extreme.  You could leverage up and buy in with everything you've got.  Wouldn’t necessarily do that either.  This could get worse before it gets better, and you don’t want that margin call.  In fact, I think margin calls are starting to happen, and that can create additional volatility even with quality assets.  So, what can you do in between?  You can do nothing.  And if you've got a robust portfolio that's actually completely acceptable thing to do.  I would lean towards being a cautious buyer here.  When you see good prices and good companies, you buy.  When I say cautious buyer, cautious on two fronts.  You don’t need to pile in, but be cautious on what you're buying.  This is when quality is maximum value.  When quality meaning absolute robust business models and balance sheets that can get through uncertainty.  Ideally if you can wrap that in with a bit of growth, then companies that can be opportunistic in this environment, that's even better.  I can tell you that things like a Microsoft actually aren't cheap here.  Maybe they get cheaper where there's margin calls, but it could also be a bunch of deals announced this week and the market sort of keeps moving higher from here.  That's one way to look at quality.  But then there's others too.  There can also be the quality income generators.  Things like the infrastructure, the real asset plays.  Those are very robust businesses, economically resilient.  And if economics get tougher and rates go down, those stocks are probably going to perform well from a yield point of view as well.  There's a few—that's why I mentioned being cautious, being very selective, but not being afraid to step into this market and having a longer-term horizon.  So that's kind of where I would land on this.  We're working hard, I can tell you, in the background.  We've layered on protection.  In some cases, we're taking off bits of it.  But I think we're sort of a bit surprised by what's seemingly like ego-driven behavior here that's not really being rational.  Again, maybe there's four-dimensional chess being played, and ultimately we'll all be proven the fool  to the greater wisdom of Donald Trump.  But I think that's where we hope he's careful he doesn’t drive this down too far that getting out of the hole becomes extremely difficult.  Hopefully there's some context there.  The what, the why, and the how.  The how, I think all of us would prefer different techniques.  But ultimately, I think we would regret to not seizing some opportunities.  But, let's just be cautious the way we do it.  Anyway, long one.  Hopefully you hung in until the end.  Appreciate your time, and we'll check in with you and talk about who our prime minister is in another month or so.  Be well.  Bye now.

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