Cart Before The Horse

Today is likely to be the day that we all look back on. Today we saw the announcement of tariffs from the US to the rest of the world. In what was quite possibly the most haphazard, mismanaged, misunderstood presentation in a long time, we finally know who will have what tariffs.

I am pretty confident that even financial geniuses will not be able to figure out where, what, who and how, but there will certainly be a lot of theories, rumours, ideas, plans, and concepts flying over the next few days. Here is a couple of things that I think we can be pretty certain on:

1. The proposed tariffs are a lot higher / worse than markets had feared. We know that because I am currently looking at the equity futures markets, and there is a lot of red. Dow Jones futures are lower by 1,000 points, the S and P 500 is in the red a little over 3%, and the tech heavy Nasdaq exchange looks ready to shed about 5% of todays closing value. Had tariffs been about what the market expected, or less worse ( is that even a phrase ) than feared we would be seeing a lot of green, but no, no, we are awash in red. Look for heavy selling in stocks at the open, and a lot of trading volume, and we will see where we go. There is a chance that buyers step in if things get too bad, and actually drive markets higher. Sure we could open looking down the barrel of a gun, but I have witnessed the markets do a lot of strange things, and it would not surprise me to see a rally mid day tomorrow.
2. In that same vein, bonds have caught a bid, and they are up almost 2% which, for those of us worried about interest rates is great news. Look for bond yields to drop at the open, and there could be some heaving buying of bonds. Conversely if the equity markets start to rally mid day, then bond yields will also truck higher along with any rally in the stock markets. Just because you see the 5 year bond yield down at 9:30, doesn’t mean it won’t be up by close of business. Volatility will reign supreme over the next couple days, and could spill over into next week. Don’t get too cocky thinking mortgage rates will automatically come down – you may be surprised.

Canada seems to have avoided the worst of the tariffs and threats, as is witnessed by the Canadian dollar holding its own right now. It is marginally down vs the USD, but nothing more than a normal days activity. This tells you the forex traders see that the damage for Canada may not be as bad as feared. It appears, at least based on todays announcement that Canada may come out a little better than previously thought ( at least in terms of Donald and the tariffs ). Now, hopefully that tariffs are not the headline, we can get back to focusing on the other problems in the Canadian marketplace. I really don’t care if you love or hate DJT, you can’t blame him for every problem. Canada had a housing crisis long before DJT was elected. We had record food bank usage before Trump was even running for his 2nd term, young people couldn’t afford a home long before Trump was sworn in, and the cost of living was out of fucking control long before DJT became President. I supremely hope the ‘ elbows up ‘ crowd remembers that these problems existed long before Trump came to be.

The other item that we can also lay to bed, at least for now, is the news that broke today about tariffs being removed completely by both Canada and the US. Of course, Fox and CNN had Doug Ford on for a segment and he gave his talk about both countries removing tariffs completely. Now, first of all, I really hate that Doug Ford is the spokesperson for this. I really think we could find someone better than Doug. But, and I really want to drive this point home – the removal of tariffs for both Canada and the US will not be the panacea that everyone thinks.

For a minute, lets just say that DJT and Mr. Former central banker Carney have a meeting and agree to drop any and all tariffs between the countries. Okay, cool. The Elbows Up crowd would be over the moon. But, this would be far worse than the current tariffs. You see folks, and I am about to give a very unpopular, unpleasant truth here, but Canada has had tariffs in place against the US, and many other countries for a very very long time. Tariffs that amount to hundreds of percentage points in some cases. If all tariffs went away, you could kiss a lot of your clients jobs goodbye. If all tariffs were dropped tomorrow, the Canadian dairy industry would be out of business by Easter. Many farmers would grow their last crop ever this season, and auto manufacturing would be a ghost town by Labour Day. While it may be hard to swallow, tariffs and subsidies are something that Canada has relied on to protect a lot of industries for a very long time. Canada recently won a lot of EV plants, battery suppliers and the like, and the reason they won those contracts is because the government – Federal, Provincial and Municipal, all agreed to throw in tax abatements, rebates, and subsidize the plants. A subsidy is a form of a tariff. If, as the news today claimed, tariffs just went away, that means that Canada could no longer offer subsidies, tax abatements, grants, rebates, and anything else to lure in auto manufacturers. This is the part where people get downright angry with me, and argue, and feel free, but without tariffs and subsidies in place, Canada will have a very hard time competing on the global stage. Canada productivity has fallen almost every year for the last 20 years. Canadian workers are not very productive. If you remove a barrier to entry ( tariff ) or you remove subsidies, then the auto manufacturers will find it hard to pencil out the numbers. Canada has a very high cost of doing business with things liek income taxes, industrial responsibilities, carbon levy’s, and a whole list of other items that Makes Canada a very expensive place to do business. Canada was able to make it work because it kept competition out through the use of tariffs.

The reason all of this matters is that, while it is super easy to point fingers at a government leader – whether in Canada or elsewhere, the fact remains that Canada has some really high barriers for competition, and as such, Canada benefits more from tariffs than it loses. Sure, if you remove tariffs, your milk, cheese and eggs get cheaper, as do a lot of other consumer products, but the unemployment rate would go much higher once everyone started to lose their jobs.

While I highly doubt that tariffs will be removed by both countries in a sort of ‘new deal’, I am also glad that it wouldn’t happen. We are already seeing a lot of houses on the market, the DOM are getting longer, the selling prices are creeping lower, and at some point we will hit capitulation, and the housing market takes its next leg down. This is positive, and means the market is healing. We need the market to be able to correct and find its fundamentals again. Now, I am sure that with a Federal election, some politicians will meddle and make promises we cannot afford, and not allow the market to really find its balancing point, but the market is trying to find its level right now.

While markets will be a bumpy ride for a while, and everything could change based on one comment, a small change in tariffs, the path for things currently looks lower. This will give Uncle Tiff a lot to think about as we head into the next BOC meeting. With demand waning, inflation rising, unemployment creeping up, and a tariff war on the go, it is really difficult to manage an economy through that from a central banker perspective. The BOC only controls the monetary part of the equation and not the fiscal part of the equation. We are currently seeing a parade of liars – sorry politicians throwing idea after idea out to try and garner the vote. No matter who forms government, all of the ideas I have seen so far seem to be pretty inflationary, and someone will have to print the money to pay for it all. Tiff would be hard pressed to be dropping rates into a time when money expansion looks likely.

We are getting close to full on stagflation in Canada. You need the 3 key ingredients to make it happen – falling GDP, rising inflation, and growing unemployment. Well, inflation is rising, unemployment is ticking higher ever so slightly, and GDP per capita has been sinking consistently. GDP topline may still be flat to up, but per capita ( what really matters ) certainly meets the definition. If Canada tips over into full on stagflation, the housing market will continue to struggle.

My hope is we can see some politicians with actual costed out plans that can really move the needle, and get Canada firing on all cylinders again – tariffs or not. Removing the carbon tax – whether temporarily or permanently is a great first step. Let’s see more of these great steps towards bringing back Canada economically. If we fail, and there is a chance we might, you may not be able to afford the cart – or the horse.