Is Trump creating trade uncertainty to attract investment into the U.S. ?

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The Trump administration has lifted exemptions for Canada, Mexico and the European Union on its punishing steel and aluminum tariffs. Former Bank of Canada Governor David Dodge says the United States is deliberately creating global trade uncertainty to drive investment to its shores.

“The White House and the people around the president look at the world in a way that, if they can create uncertainty about investment elsewhere in the world, then both Americans and foreigners will come and invest more in the United States,” Dodge told BNN Bloomberg on Monday.

This strategy has partially worked over the past 18 months as unsuccessful NAFTA talks have caused companies to postpone or delay important investment decisions. Current Bank of Canada Governor Stephen Poloz said in an interview with BNN Bloomberg last Friday that the ongoing NAFTA negotiations threaten to drive investment in Canada away for good.

President Trump is headed for a showdown with America’s allies at a Group of Seven summit today in Quebec, with the European Union and Canada threatening retaliatory measures unless he reverses course on new steel and aluminum levies. The EU has threatened to retaliate with duties on everything from American motorcycles to bourbon. Canada and Mexico have also promised to levy their own tariffs on U.S. goods.

The White House appeared unfazed by threats from allies. Top economic adviser Larry Kudlow said Canadian Prime Minister Justin Trudeau was “overreacting” in response to the tariffs, and said the blame for any escalation lies with the U.S.’s trading partners. He said Trump is simply responding to decades of trade abuse.

The president believes that the tariffs being charged against other countries would help to fund the U.S. government and also believes that the U.S. could not lose a trade war in an international climate where the rules were already stacked against American business.

In my humble opinion, Trump’s bullying tactics may have worked in real estate negotiations with contractors and financial institutions. However, it seems to me that world leaders are not going to allow Trump to win concessions without a serious fight.

This trade dispute has triggered one of the biggest crises in the G-7 since the group’s formation by Canada, France, Italy, Germany, the U.K., Japan and the U.S. In a rare rebuke of a member nation, G-7 finance chiefs said the U.S. duties could “undermine open trade and confidence in the global economy.”

Trump’s “America First” policy could turn into “America Alone” as trade tensions escalate with allies.  So far the world stock markets have not reacted to the fact that tariffs will boost the inflation rate. Leading to higher interest rates and slower global growth.

Lets hope that cooler heads prevail and the world avoids another great recession.

 

 

 

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Why China will outlast the U.S. in trade war

In the political terms, President Xi Jinping runs a communist country that has just granted him the ability to rule for life. He enjoys advantages that may allow him to cope with the economic fallout far better than President Trump. His authoritarian grip on the news media and the party means there is little room for criticism of his policies, while Trump must contend with complaints from American companies and consumers before important midterm elections in November.

The Chinese government also has much greater control over their economy, allowing it to shield the public from job cuts or factory closings by ordering banks to support industries suffering from American tariffs. It can spread the pain of a trade war while tolerating years of losses from state-run companies that dominate major sectors of the economy. In addition, China is also sitting on top of about $3 trillion in surplus cash.

At best, the American actions could shave one-tenth of a percentage point off China’s economic growth. Not enough to force a drastic reversal of policies, given the enormous benefits that Chinese leaders see in the state-heavy economic model they have relied on in recent decades.

Chinese tariffs on the American agricultural sector is very influential in the Congress. Many states that have voted republican in the past will be hardest hit by these tariffs.

Hopefully the president is just blowing off steam again but, if he’s even half-serious, this is nuts,” said Senator Ben Sasse, a Republican from Nebraska, “China is guilty of many things, but the president has no actual plan to win right now. He’s threatening to light American agriculture on fire.”

In addition to agriculture, China threatened to retaliate with tariffs on American cars, chemicals and other products. The 106 goods, many produced in parts of the country that have supported Mr. Trump, were selected to deliver a warning that American workers and consumers would suffer in a protracted standoff.

The mere talk of a possible trade war has sent investors on a rolling coaster ride of uncertainty. The six month chart of the S&P 500 below clearly illustrates increased volatility.

China also has the upper hand because it holds $1.2 trillion dollars of American debt. Trump’s tax cuts and infrastructure spending will require issuing more debt. The U.S. government has relied on foreigners to purchase treasuries to finance their spending because American saving rates are so low and they can’t participate fully. Add the fact that the biggest buyer of treasuries was the Federal Reserve which has started to sell it’s holdings.

What would happen to the bond yields if China doesn’t buy additional American debt?

The economic law of supply and demand dictates that more supply will cause prices to fall. If bond prices fall then yields will go up, causing interest rates to raise. Wage and price pressures are already rising, higher tariffs would only intensify these pressures forcing the Fed to raise interest rates even more.

A worst case scenario, the talking war turns into a trade war that could slow U.S. growth, tank the stock market and cause a U.S. recession.

 

President Trump is approaching this like does everything else, by talking tough and expecting his opponent to give in. Unfortunately for Trump, it’s not the 80s anymore. China was dramatically underdeveloped then and it wanted access to Western technology and manufacturing techniques. China is relatively mature today and it can easily obtain what it needs from other vendors outside the United States. While the U.S. market looked enticing a few decades ago, Beijing is more interested in newer emerging market countries.

Trump is not only gambling his political future but the financial well-being of Americans if he starts a trade war.

Trudeau is whistling by the Canadian graveyard

According to Wiktionary:  “whistle-past-the-graveyard” is to attempt to stay cheerful in a dire situation; to proceed with a task, ignoring an upcoming hazard, hoping for a good outcome.

In my humble opinion, this idiom describes our Prime Minister perfectly. The Canadian government missed a golden opportunity to respond to the Trump tax cuts in the February 2018 federal budget.  The United States, our largest trading partner, has made investing in the U.S. more attractive than Canada. Corporate tax rates in the U.S. are 5% lower than Canada and more important is the 100% deduction for new capital spending.

The Canadian dollar has fallen in value from $1.2586 at the end of February to $1.3079 today. A clear sign that foreigners are taking their money out of Canada.  The uncertainly regarding the successful re-negotiation of NAFTA is hurting our dollar and is also responsible for the lack of capital spending in Canada.

Our factors that make Canada less competitive than investing in the U.S.

  • Carbon taxes have increased energy costs.
  • February budget increased taxes for small businesses and individuals.
  • Canadian oil is being sold at a discount by $20 to $25 a barrel costing billions of dollars in lost revenue to Canadian oil companies and loss of tax revenue.
  • Kinder Morgan’s Trans Mountain pipeline expansion is being delayed by protesters.
  • Many LNG projects have been scrapped. Meanwhile, this sector is booming in the U.S.
  • The housing market is slowing down due to a 15% foreign buyer’s tax, tightening mortgage rules and higher mortgage rates.
  • Tariffs on softwood lumber, pulp & paper and solar panels. (Steel & aluminium tariffs could become permanent if Trump doesn’t like the NAFTA deal)

No surprise that the Toronto stock exchange is down 4% year to date while the S&P 500 is flat and NASDAQ is up 6%. The Trump tax cuts have already boosted employment and capital spending should kick in the second half of 2018. However, there are still are plenty of risks investing in the U.S. with the Trump circus in Washington. Possible trade wars leading to inflation and higher interest rates.

It is going to be very challenging to make money in 2018!

I am still a Canadian Bear

Market correction when Trump sends a NAFTA withdrawal letter

FILE PHOTO: Canada’s Foreign Minister Chrystia Freeland (centre) Mexico’s Economy Minister Ildefonso Guajardo (Left) and U.S. Trade Representative Robert Lighthizer (right) REUTERS/Chris Wattie/File Photo

I disagree with most media and political pundits that believe Trump is unpredictable. He campaigned on America first which includes being tough on illegal immigration and ripping up NAFTA. His voting base believes that these two issues are responsible for low wages and poor job opportunities in the United States.

It was obvious to me that the U.S. government shutdown was caused by Trump who set the March 5th deadline for DACA (Deferred Action for Childhood Arrivals). He is using Dreamers as a bargaining chip to get funding for more border security and for his idiotic wall. Eighty per cent of Americans don’t want Dreamers to be deported. If Trump really cared, he would have informed the House of Representatives to draft a by partisan bill to solely deal with DACA.

In my humble opinion, Trump is just looking for an excuse to rip up NAFTA. Donald Trump’s protectionist leanings have been obvious since before the U.S. presidential election. U.S. negotiators are showing few signs of backing down from unrealistic demands on automotive content rules, the chapter 19 dispute mechanism and a five-year sunset clause that have left NAFTA teetering on the brink.

Canada and Mexico have rejected most of the U.S. proposals for NAFTA reforms, leaving officials with a big job if they are to bridge the large differences in Montreal. Negotiations are due to wrap up at the end of March.

Protectionist moves as U.S. imposes tariffs on the following imports

  • Softwood lumber (Canada)
  • C-series planes (Canada)
  • Pulp & Paper (Canada)
  • Washing machines (South Korea)
  • Solar cells & modules (China)

Canada is firing back by bringing a trade complaint to the World Trade Organization (WTO) despite the fact that the president has been particularly critical of the WTO and its system for dispute settlement.

A former U.S. trade representative says he’s hoping that a recent wide-ranging trade complaint launched by the Canadian government against the United States won’t “end up blowing up in their face” at the NAFTA negotiating table.

Adding more fuel to the fire, Canada has agreed to a resurrected a version of the Trans-Pacific Partnership (TPP) and will sign on to the deal. The deal, renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, comes after talks in Japan this week with the 11 countries (including Mexico) that are still committed to the deal.

“We are happy to confirm the achievement of a significant outcome on culture as well as an improved arrangement on autos with Japan, along with the suspension of many intellectual property provisions of concern to Canadian stakeholders,” said International Trade Minister Francois-Philippe Champagne in a statement.

Will these moves strengthen Canada’s position at the negotiation table with the United States or will it force Trump to play his withdrawal card?

My bet is that picking a fight with Trump will result in him sending a NAFTA withdrawal letter to both Canada & Mexico which will cause a stock market correction.  In my humble opinion, it is only a question of when!

Scary Financial Facts for Halloween

 

It’s that time of year when scary things come out on Halloween. However, when you open your door on October 31, will you be confronted by anything scarier than these hair-raising financial horror stories?

Will debt destroy your future?

  1. Student loan debt has reached $1.45 trillion dollars in the U.S. and $42.9 billion in Canada. U.S. graduates owe on  average of $37,712 and $27,000 for Canadians.
  2. Credit card debt is increasing in both countries. Americans carry an average of $16,000 and $4,100 for Canadians
  3. 107 million Americans have auto loans for a total outstanding debt of $1.2 trillion. It is estimated that 40% of the 120 billion dollars in auto loans in Canada are financed for 7 years or longer.
  4. Mortgage debt in Canada is a bigger problem than the U.S. because mortgage interest is not tax deductible. Average mortgage in Canada is around $200,000 (much higher in cities like Toronto & Vancouver) and $192,000 in the U.S.

Will someone steal your identity? 

First we find out that the Yahoo hack in 2013 exposed the information of every single one of their 3 billion accounts and then we find out that a data breach at Equifax exposes the personal information of 145.5 million people. Is there a single American who hasn’t been hacked yet?

The odds are great that your personal information is for sale to identity thieves or already in their hands. Can you foil them with credit freezes and other ID protection measures before it’s too late? Is it already too late? Does your VISA card contain mysterious purchases for 10 large screen TVs from Best Buy?

U.S Health Care Nightmare

Who knows what horrors await you if you become sick and your insurance premiums are too high for you to afford? Average out-of-pocket medical costs continue to rise, topping $10,000 in 2016. Meanwhile, premiums continue to rise on the health care exchanges.

Over the past four years, premiums in the individual marketplace have more than doubled. As insurers back out of some markets and political uncertainty reigns, premiums on the state insurance exchanges continue to rise rapidly. For example, rates in Georgia are up by 57%.

Scary lack of retirement savings

According to a report from the Economic Policy Institute (EPI), the mean retirement savings of all working-age American families, which the EPI defines as those between 32 and 61 years old, is $95,776. Almost 40 million households have no retirement savings at all.

Only 65% of Canadians are saving for retirement and on average have about $84,000 in retirement accounts. (RRSP & TFSA)

Frightening Canadian Energy Policies

  1. No access to foreign markets for oil & gas (besides the U.S.)
  2. Cancellation of Energy East pipeline (buying oil from the Middle East, selling discounted oil to the U.S.)
  3. Construction delays in Trans Mountain & Keystone XL pipelines
  4. No accountability for carbon tax revenue (how is this money spent?)
  5. 4 billion dollars of extra interest payments for reduced hydro rates in Ontario

Release the Nukes

What list of potential horrors would be complete without the prospect of nuclear war? The current tense relations between the U.S. and North Korea make that horrible concept more plausible and in addition to the terrible death toll and destruction of property, the financial impact on the world economy would be hard to imagine.

Remember the famous quote of Albert Einstein, “I know not with what weapons World War III will be fought, but World War IV will be fought with sticks and stones.”

Now remember the leaders who have their fingers on their respective nuclear buttons. ARE YOU FRIGHTENED YET?

HAPPY HALLOWEEN!

 

A big disconnect between the Stock Market and the Canadian Economy

Canada’s economy is expanding at its fastest annualized rate in six years according to Statistics Canada. That’s a quarterly expansion rate of 4.5% which is the highest figure since the third quarter of 2011. It was led by the biggest binge in household spending since before the 2008-2009 global recession.

Economists had predicted Canada to grow around 3.7% and the Bank of Canada latest forecast was for GDP to expand at 3% in their July press release. When combined with the 3.7% expansion of the first quarter, it’s the strongest six month start in 15 years.

Why isn’t money pouring into the Toronto Stock Market?

Often times the equity market is moving well before the economy does and of course the Canadian equity market had a robust year in 2016. Investors may already have priced in all the good news last year, when Canada’s stock index gained 18 percent, one of the world’s best performances.

Part of the problem is that Canada’s stock market isn’t totally reflective of the economy, since it’s heavily reliant on energy and financials. Those two sectors account for 54 percent of the S&P/TSX Composite Index.

The outlook for oil is very subdued, it is still trading below $50 a barrel even with the shutdown of refineries due to hurricane Harvey. Global inventories continue to stay high and OPEC’s has lost its influence in cutting production. Crude oil prices in the future’s market are still below $50 a barrel for all of 2018 and part of 2019. Foreign investors are taking money out of the Alberta’s oil patch.

Continued growth in residential investments which was up an annualized 16 percent in the first quarter is also likely to fade as the impact of government measures to cool housing markets kick in. Although, bank earnings have beat expectations by a wide margin, loan growth going forward is expected to decline and loan losses are expected to increase. U.S. hedge funds are still shorting Canadian financials expecting the housing bubble to burst.

Investors believe that this robust growth will force the Bank of Canada to continue raising interest rates this year. It could add extra pressure to lowering consumer spending due to high indebtedness of Canadian households. It will also add a cooling effect to the hot housing prices in both the Vancouver and Toronto real estate markets. The rapid rise in the value of the Canadian dollar is added proof that currency traders are betting that a hike in interest rates is coming soon.

Uncertainty over NATFA  renegotiation

Global political developments aren’t helping, with renegotiation of the North American Free Trade Agreement which started in August, created a new spat with the U.S. erupting over aerospace manufacturing.

Already, data suggest investment into the country is cooling. Foreign direct investment in Canada dropped 25 percent to C$8.68 billion in the first quarter, according to separate data released Tuesday. The country relies heavily on foreign funding to finance spending — totaling C$130 billion over the past two years, according to balance of payment data.

Canada has benefited from a convergence of developments that include a coordinated global recovery and rising trade volumes. The bottoming of the oil shock in western Canada, along with federal deficit spending, rising industrial production in developed economies. Canadian consumers have benefited from a buoyant jobs market and rising home values, resulting in a surge in consumer spending.

Is this Sustainable? I think not!

Economists had been predicting a slowdown in growth to about 2 percent in the second half of this year, but are revising numbers up after the GDP report. I believe this surge in economic growth is temporary. The higher value of the Canadian dollar and higher interest rates will dampen economic growth.

The Toronto stock market returns for all of 2017 are flat which could indicate that foreign investors also believe the future going forward isn’t so rosy!