Happy Anniversary…

 

The New Greenspan…

 

For many of you, the name Alan Greenspan will likely be familiar, but fairly meaningless. Greenspan, a renowned economist, was the chairman of the US Federal Reserve from the late 80’s until 2006. While there’s much debate over his influence in the financial crisis of 2008/2009, one thing is certain, when he spoke markets not only listened…they moved on his every word. His regularly televised statements as Fed chair, were constantly met with market volatility. Fast forward to the present, and it is almost like we have a “New Greenspan” in Trump 2.0. While we are less than 6 months into the second Trump presidency, it’s becoming increasingly clear that markets are being driven by sentiment around his every word. This can be particularly challenging, however, as I have mentioned before, with crisis comes opportunity. In general, my view is that 3 basic things move markets: Earnings, Interest Rates and Sentiment. Most recently, earnings have been quite good. We have just worked through earnings of most of the US juggernauts as well as much of the Canadian market (banks / pipelines). In general, earnings were quite good for the past quarter. At the same time interest rates are starting to head in the right direction as it relates to stocks. In the U.S., the 10 year government bond rate is down over 60 basis points since I last wrote, and in Canada, we are now below 3% for the government 10 year at the moment. Which brings me to sentiment…clearly it has weakened, and perhaps for good reason. Financial markets and investors alike, loath uncertainty. When we are faced with tariff possibilities at breakfast, only to have them removed by lunch and reinstated by dinner, it’s tough to have any real consensus. Imagine being a company looking to make billion dollar investments…it becomes an exercise in futility. While it’s incredibly hard to predict what we will hear next on the news, one thing is certain…this is a bit of a wakeup call for Canada. At the same time, sentiment isn’t always rational, and in general, when looking to invest…taking advantage of irrational behaviour is something opportunists tend to look for and benefit from.

 

The Policy not the Person…

I recently attended a conference in Boston where I met with some of the smartest investment managers on the planet. Boston being a decidedly “blue state”, I felt I was safe in trusting what they felt would be some of the outcomes of the next year as well as their view of their current Commander in Chief. One thing that kept coming up in conversations was that these managers were paying attention to “the policy and not the person”. Obviously this is not easy when we continue to hear changes to policy on a daily basis. Overall the story hasn’t changed from what we first discussed in November…there’s a massive push to drive industrial production back to the U.S. by any means necessary. While this is quite problematic for Canada where we have underinvested in our largest industries, it could mean net positives for the U.S. longer term. In fact, most of the managers we talked to felt that in general, the U.S. consumer was in fairly good shape and would be able to ride out the potential inflation that could come from the much maligned tariffs. In addition, they mentioned timing of policy. In particular, much of the discussion surrounded how we could expect some short term pain for long term gain. In a nutshell…heavy tariff talk as well as spending cuts now, to be followed later in the year by the promised tax cuts that Trump campaigned on. This makes sense from a strategic standpoint. As we head into the later part of the year, I would expect the current U.S. government to start looking ahead to the mid-term elections in 2026. Without a consensus, there’s a high likelihood that Trump 2.0 could become a ‘lame duck’ in the final 2 years of his presidency.

 

Return of the ZIRP?

As I’ve mentioned before, predictions are a fools errand, however, one thing I’m pretty certain of is that interest rates, at least in the short term, are likely headed lower in Canada. While I doubt we return to ZIRP (Zero Interest Rate Policy), we may end up coming closer than most are predicting right now. There are a multitude of reasons for this, but perhaps a few that deserve our attention. First, inflation is coming down…even the most recent 2.6% annualized rate as of February is within the Bank of Canada’s guidelines. In addition, from what we can tell, many COVID era mortgages that were lent in the mid to high 1% range, will be coming due over the next 12 months. A rough guess would be that this would affect around 25% of all fixed rate mortgages in Canada. I’m fairly certain that the Bank of Canada is well aware of this, and while most Canadians don’t walk away from their homes, a higher mortgage payment would certainly curtail the amount of discretionary spending Canadians are able to afford. I do think there’s one other reason that we may not have considered…tariffs. While we have limited tools to fight against U.S. based tariffs on Canadian goods, one tool that I think carries a fair bit of weight is that of a weak dollar policy. As I’ve mentioned before, interest rates are generally the largest predictor of exchange rates. A softer Canadian dollar, while making things in the grocery store more expensive, would effectively provide a discount on all Canadian goods purchased by foreigners. While a 10% tariff may sound high, a 5% reduction in our dollar would effectively halve the financial cost of the tariff. While I’m not sure the Bank of Canada is pursuing this strategy…its certainly a possibility, depending how negotiations go. Either way, I think we get good performance over the next 12 months as it relates to bond investments. We will stay tuned, but at this point in trade negotiations…never say never.

 

Tips and Tricks from the Admins…

The admin team welcomes this new season with a sense of humour! We hope you come across these funny one liners on a rainy day…

“Does February march? No but April may!”

“Why is the letter A like a flower? Because a B comes after it!

“If it’s raining cats and dogs… don’t step on a poodle!”

“I’m pollen in love with this weather!”

“Why is spring a good time to get into good habits? It’s the perfect time to turn a new leaf.”

Happy Spring!

Angela, Helen and Gigi

 

Late thoughts…

As I write, we are learning of a Canadian election being sometime in late April. While it’s hard to predict who may win at this point, one thing is for sure…there will be a lot of promises…some of which will actually be fulfilled. That said, change is good, and it’s an important democratic right that we should all do our best to exercise. Happy voting and have a great spring!

 

“Winning the election is a good-news, bad-news kind of thing. Okay, now you’re the mayor. The bad news is, now you’re the mayor”

-Clint Eastwood