I am writing to provide commentary and context to the recent market developments and volatility that we have been experiencing in recent weeks with the uncertainty surrounding tariffs being the primary factor. These bring on the risk of supply chain issues, increased inflationary risk and heightened geopolitical tensions. As a result, we have seen significant fluctuations in equity markets particularly with sectors that would be negatively impacted. I think the why is particularly important.

To clarify, I am not agreeing that these policies are correct, but understanding this creates further clarity that we can position portfolios around.

 

US Tariff & Policy Context

 

The US is currently incentivized to push interest rates lower, this is something my colleague Andrew Lacas points out very well in his memo, and I will address here. The large US deficit has reached over 35 trillion with approximately 30% due for refinancing this year via the US Congressional Budget Office website. With interest payments being such a prominent issue, reducing this expense and liability is the treasury secretary Scott Bessent’s main priority. In addition to interest rates, Scott Bessent’s recent comments surrounding trade deficits and US subsidization of world defense spending, as Peter Lacas cites in his memo, confirms the US intention to change how they approach international relationships.

I believe the new US administration’s aggressive approach to trade policy is a result of their view that China is a major geopolitical and economic threat. In their view, the longer this threat is not addressed; the larger the threat becomes. That is why the most severe tariffs have been targeted towards China and in turn, China has placed a more intensified reciprocal tariff on the US. Also, do not be surprised if this ignites further geopolitical tensions between the two. The new US administration sees international trade relationships as a significant issue that has been compounded year over year for a long period of time.

 

Timing is Crucial

 

It is my belief that Trump implemented these tariff policies early in his presidency in an effort to project the appearance that these are Biden problems he inherited and must fix. I anticipate a transition of policies that will stimulate and offset the negative impacts tariffs have for corporations (i.e.. likely tax cuts and deregulation). In other words, it seems like Trump will give favourable policies to US corporations before the mid-term elections are a concern.

 

 Potential Outcomes

• A real push to devalue the US dollar. It is overvalued by historical standards. We have already seen Trump’s unconventional and odd urging of the fed to reduce rates and attempting to challenge their independence. Yes, a portion of this is to provide relief to the consumer and lower recession risk. The other reason I believe is to try and devalue the US dollar. As I was reading Lighthizer’s book, I thought he exuded a level of jealousy to the yen and their ability to manipulate the currency to stimulate exports. If they intend to balance the trade deficit this will likely be one of the factors.
• Increased volatility is expected while upcoming earnings and guidance will likely magnify market fluctuation.
• US attempts to incentivize and reignite their manufacturing industry by onshoring labour. In their opinion, a strong consumer and population is more important than driving lower cost via trade agreements and globalization. I have my reservations on the execution of this, but this thesis is highlighted in Trump’s former US Trade Representative Robert Lighthizer’s book No Trade is Free.
• I expect increased headline risk as negotiations develop because there is likely flexibility on the enforcement to certain countries. We have already seen the EU and Taiwan extend a zero tariff agreement proposal. However, I do not believe this completely accomplishes what the administration is trying to do and this will lead to further negotiations. At this stage, I would be surprised if there were any concessions made on the severity and harshness of the tariffs on China.
• When reading Lighthizer’s opinion of the USMCA deal, he is both proud of it and believes it works effectively. This could signal that the tariffs have been more of a bargaining chip to negotiate further; whether it be for Canada to increase defense spending, discourage trading activities with certain countries or get ahead of the renegotiation. It will hopefully signify an avoidance of prolonged and harmful tariffs.

Consistency is Key

 

This is both a difficult and unfortunate environment to navigate. We do not have to agree with what has transpired, but we certainly all have to adapt to it. I believe the best way to navigate the above is to:

• Continued defensive approach to investing is prudent for the time being with an ability to be versatile when the opportunity presents itself.
• Hedging where possible as I have concern on the strength of US dollar going forward.
• Looking for a narrative switch that will provide outcomes that offset, or at least partially offset, the negative results that tariffs present. I anticipate this to be via tax cuts for corporations and a more flexible environment to operate via deregulation.

In the meantime, I am always available for a discussion so please reach out at any time.

CIBC Wood Gundy

 

Jordan Bastarache

Investment Advisor

Lacas Advisory Group

 

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Jordan Bastarache is an Investment Advisor with CIBC Wood Gundy in Halifax, NS. The views of Jordan Bastarache do not necessarily reflect those of CIBC World Markets Inc.

 

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