CC

After the week that was, I think we can all agree that a drink would be in order. For all you know, I am enjoying some CC while I type this. Somehow we all got through the week, but not without a little volatility. Let’s break down where we go from here.

Now, I will start with a bit of disclosure on this post. I am going to sum up what I think will happen and what it all means. What I am about to post is my opinion based on 2.5 decades of experience in financial services, stock markets, and capital markets. These are not my feelings, these are not about social implications, these are just ramblings about economic winds that may blow. Emotions and feelings have almost zero place in financial markets so lets keep it that way. Whether you agree with me or not – I don’t really care. The amazing thing about writing a blog, is that there is a unsubscribe button on it, and anyone is free to hit that button at any time.

After the week that was, let’s explore the weeks that will be:

1. Clean Sweep. For a race that was supposed to close, it could not have been farther from it. The Republicans cleaned up like the Dodgers in this years World Series. With the Republicans now controlling the White House, the Senate, and the House of Representatives, it will make it pretty easy to roll through – or ram through any policy or bill they want. This could be a really good thing – or a really bad thing depending on your views. But no matter your views, the fact is that any legislation in the US is likely to move swiftly into law. Being as almost all policies implemented have an affect on markets and potentially rates, this will change markets. Tack on the winning of the popular vote by almost 5 million votes, and the American public sent a pretty clear signal that change was what they wanted – and change is what they got.
2. The ‘ why ‘ is as important as the ‘ what ‘. Democrats seemed to forget the famous saying by former Democratic President Bill Clinton from all those years ago ” It’s the economy stupid “. There were several campaign issues, but the economy seemed to resonate with voters the most. The Canadian Liberals best keep that in mind coming up on the next Federal election. Economics matters more than social issues. When people cannot feed their family or afford their day to day life, social issues go out the window. As a mortgage broker, it is important to keep in mind that economics will always trump ( no pun intended ) everything else. When speaking with your clients, money is always important. Keeping this in mind, showing your clients hope, and a potential solution will beat out others that only talk straight numbers, or brokers who talk down to their clients. This weeks election proved that someone who can show a plan, demonstrate the ability to get something done, and help move people in the direction they want to go will be triumphant.

The Future:

As we now move from calling him Former President Donald Trump to President Elect Donald Trump, there are a lot of things that will change along with it. You may like the change, or hate the change, but people who learn how to incorporate change into the business tend to outperform those who cannot. Luckily, we have a bit of a playbook from his 1st term that we can use to help hone in our predictions for his second term. Below are the things that I think we will need to do to be successful:

1. Donald is the king of the press conference. Most of the time they go a lot longer than they should, and he keeps on talking. Trump likes to talk off the cuff, and says things that can be taken out of context, or not clarified enough. Since financial markets react to all available information up to the second, look for a lot of volatility in things like stocks, bonds, currency, rates, etc. 5 year yields could be down 5 bps at 11 am, and then up 20 bps by afternoon coffee break. All Trump has to say is something like ” If Canada doesn’t negotiate on tariffs, we will sanction them”. That could send yields up or down 30 bps in a matter of seconds. Of course, we all know Trump uses this as leverage, and as a negotiating tactic, but markets are hyper sensitive.
2. Just like number 1 above, yield and mortgage rates will move – and fast. Make sure you get rate holds on anything you pre approve. Even a variable rate. You want to be locking in anything you can so that if something gets said it doesn’t derail your buyers purchase. Even variable spreads can change overnight. Prime is only one factor, the spread off of Prime is the other. Never take anything for granted in this new economic world order we will be living in. Work with lenders that allow rate drops – perhaps multiple times over the 120 pre approval window.

I also want to dispel a few myths that I have been hearing in relation to economics with a DJT administration. I think there is a lot of misinformation out there – shall I call it fake news, and I think it is important to set the record straight on a few things. Your clients will want answers to what the new economic world order is, and re telling a myth isn’t going to do anyone a damn bit of good.

Tariffs. I bet you have never heard the word tariff more in your life than you have the last 3 weeks? DJT is coming into his second term as the Tariff President. He has threatened to tariff other countries to get more things built in America. I can promise you that his first week in office he will actually implement some tariffs. They will be to get the shock and awe effect that he is known for, but I really do not think there will be as many tariffs as everyone thinks. Now, in the MSM we hear that tariffs are bad for consumers. It isn’t the importing company that pays the tariff, the cost is passed along to the consumer. This is correct. The price of the item generally increases by at least the amount of the tariff. But, and this is a major but, somehow, it was conveniently left off the other part of his plan in regards to tariffs. In conjunction with the tariffs, DJT has promised to lower taxes – Income tax, and all kinds of other taxes. I don’t give a damn if my glass of orange juice goes up by 50 cents a glass if my taxes go down by 30%!!!. Yes, prices will go up, but people will have more money to pay the increased prices because there is a much smaller bite out of their paychecks. This will also have the effect of making people go to work. If taxes are lowered, there is more incentive to work, work more, and work harder. Since prices for foreign goods will rise due to tariffs, there will also be a lot more things made in America. That will lead to more American jobs, more spending, and round and round we go. While Trump has been President elect for 48 hours we have already seen a handful of companies announce they plan to bring a large percentage of their operations and manufacturing back to America. Outstanding. He isn’t even President yet, and already companies are already making his plans work. There will be more companies that announce plans to bring manufacturing home.

The Economy. There was an Op Ed piece written by hedge fund manager Bill Ackman today. In the Op Ed he said ” The United States is about to become a vastly superior place to do business” . Never has a government raising taxes led to prosperity – ever in the history of the world. When you start to lower taxes and reduce regulation, and eliminate red tape, you attract all sorts of companies that want to do business. This will be, and is in stark contrast to the Canadian method of higher taxes, more regulation, and red tape that could go around the circumference of the Earth 6 times over. Businesses set up shop where they are treated best. Right now, that is going to be the US. The more businesses that set up shop, the more jobs, which grows GDP, which grows tax revenue ( even though the rate went down, the gross dollars applicable to tax go up ). The US will become the case study on what happens when the government gets the hell out of the way and lets industry do what they do best.

Interest Rates. Ah yes, those pesky interest rates. Rates this week were up and down more than a toilet seat at a mixed party. They couldn’t make up their mind. Get. Used. To. It. Over the coming weeks, months, and possibly years you are going to start to see a lot of volatility in rates outside of normal central bank meetings. Rates will react to what was said, what wasn’t said, and what policies may be dropped overnight by DJT. Volatility is the new normal for financial markets of all kinds, and bonds are no exception. DJT was extremely vocal about interest rates during his first term, during Bidens term, and already as President Elect. Keep up to date on rates, terms, politics, and all things financial going forward – your career may depend on it.

And now to the title of this post – CC. You all thought it was CC for Canadian Club, but it wasn’t. It was CC, but I meant the other CC – The Canadian Conundrum. Canada is going to have to get very smart, very quick to try and keep up over the coming years. I have read a lot of articles in the last 48 hours about how a DJT Presidency will be bad for Canada. I disagree. A DJT Presidency won’t be bad for Canada, but rather a DJT Presidency will lay bare for everyone to see how bad the Canadian economy actually is. Canada has spent the better part of a decade and a half trading houses to each other at ever increasing prices. Nothing was made, there was no innovation, there was no patented or trademarked technologies. Nothing. Canada allowed its productivity to plummet while everyone went and worked for the government. We used our new found housing wealth as an ATM to buy shit we couldn’t afford at prices we couldn’t resist. Canada’s economy falling behind is not the fault of DJT. Unearthing and showing it to the world will be DJT’s fault, but he certainly didn’t cause the problem.

But, Canada is now going to face the real problem: Disparity. Disparity will happen because the US will start to do well – economically. The better the US does, the higher the US dollar goes. The higher the USD, the more expensive it becomes to import many things into Canada. Prices rise in Canadian dollars making it harder to afford the daily goods. An economic boom stateside will also start to raise interest rates in the US. Contrary to what the clueless finance minister says, interest rates go down when shit is bad, and they rise when things are good. We all know that a lot of Canada’s interest rates are tied to US rates. US rates will be going up for good reason, but they will pull rates up in Canada – when Canadians can least afford it due to the higher prices due to the higher USD. When the economy is in shambles, the BOC and Uncle Tiff will drop the overnight rate more because thigs are so bad. This however will drop the CAD further causing a vicious cycle. On top of this, there may be less exports from Canada to the US due to tariffs. Less exports probably lead to layoffs and job losses at Canadian companies. Unemployed people tend not to purchase things – especially real estate. Since real estate is really the only thing left with a significant economic impact, things going down hill start to gain speed. And of course, it is expected that Canada sees a massive influx of refugees from the US. Those refugees cost money to house, and feed, and clothe and process through the immigration channels. So at the time when tax revenue is down, interest rates are up, and the CAD is getting smoked, the Canadian government will be spending well beyond its current income to process all the refugee claims.

But, every cloud has a silver lining. Perhaps this is the kick in the pants the government needs to get their shit in order? Maybe this sudden jolt of a DJT Presidency will be what Canada needs to re invent itself economically? Whether it is or not, the Canadian government needs to start realizing that action needs to be taken quickly to ward off a Canadian conundrum. DJT is serious when he says he wants to light the US economy on fire. Any person who remembers the 1st DJT administration knows that he generally does what he says. Will Ottawa sit around and continue to call each other names in the House of Commons, or will they put aside partisanship and work for Canadians to ensure that Canada can be competitive on a global stage?

The stakes are high as we embark on the new economic world order, and the US will lead the charge. Keeping up with them is going to be tough, but with the right leadership, and some progressive ideas, it may be possible. I hope that it can happen, or else we are gonna lead a lot more Canadian Club to drown our sorrows.