In this edition we‘ll discuss how the history of tariffs does not bode well for the U.S. economy and why U.S. investors might be bigly overweight equities. The diversion details a man who invented his own polls that helped him make US$50-million on the election and, as always, we’ll look ahead to the important data points set for release.
Traders work on the floor of the New York Stock Exchange during the morning trading on November 07, 2024Michael M. Santiago/Getty Images
Election aftermath
Self-destructive Trump trade policies
Canadians have ample economic reasons for concern after the U.S. election but most U.S. economists agree that the expected tariffs are bad for America as well.
George Mason University economics professor Tyler Cowen takes particular umbrage with the Trump team’s contention that tariffs in the 1800s helped the U.S. become an industrial powerhouse.
Mr. Cowen cites a paper from the National Bureau of Economic Research analyzing new local data regarding tariffs. He concludes “the results are not pretty.” Tariffs were found to adversely affect productivity, workers, inflation and political corruption (although it’s admittedly not easy to see how the latter could get much worse).
The paper noted that tariffs did result in more business in specific sectors but these operations were largely uncompetitive and unproductive and workers were stuck in jobs with low growth and not much of a future.
Tariffs were found to increase consumer prices and thus lower the standard of living. Mr. Cowen added that the paper also uncovered “lobbying, logrolling and political horse-trading [as] essential features of the shift toward higher US tariffs.” The target industries for tariffs depended on which politicians were in power and many were the result of successful rent-seeking behaviour by U.S. industrialists.
Roughly 80 per cent of Canadian exports go to the U.S. so tariff-related dangers to our economy are obvious and significant. There is considerable confusion as to when or how or if duties will be slapped on Canadian goods crossing the border. TD economist Marc Ercolao noted that the USMCA trade agreement might protect domestic exports until a scheduled review in 2026 but added, “we do not discount the very real risk that Trump could move forward with tariffs on Canada, which would have immediate negative impacts on GDP, inflation, and trade.”
It’s not very helpful for me to point out that a lot of uncertainty hangs over portfolio decision making. For now, markets are rallying on both sides of the border in hope that corporate tax cuts will spur the U.S. economy and increase American demand for Canadian goods.
Two things could short circuit the rally. One, the U.S. ten-year bond yield could rise above 5.0 per cent as a result of growth and inflation expectations – risk assets would not look as attractive as a result. Today, it’s sitting near 4.3 per cent. Two, the announcement of tariffs could not only cause an exodus from Canadian stocks that do considerable exporting, but also begin a slow decline for the American economy.
Portfolios
Demand for equities at risk
The Goldman Sachs weekly Briefings newsletter included information that gave me pause. U.S. households currently hold 48 per cent of their financial assets in equities, an amount just above the previous record set in 2000 ahead of the tech bubble implosion. The long-term median is 28 per cent.
These extremes of equity ownership are in part by design. The Federal Reserve cut rates to near zero during the financial crisis to prevent economic collapse, a move that incentivized equity investment over fixed income.
Record equity allocations seem a poor fit for an aging population. Personal finance guidelines recommend reduced risk through a higher government bond and cash weighting to protect portfolios during retirement.
It’s possible that the rules have changed and high equity weightings will remain the norm. Even so, it seems reasonable to worry about demand for equities in the decades ahead.
Republican presidential nominee, former U.S. President Donald Trump and Democratic presidential nominee, U.S. Vice President Kamala Harris take part in a presidential debate hosted by ABC in Philadelphia, Pennsylvania, U.S., September 10, 2024.Brian Snyder/Reuters
Diversions
Genius bet on the U.S. election
Alex Tabarrok, a professor of monetary policy and financial economics at George Mason University, wrote a fascinating post about the effectiveness of prediction markets in forecasting the U.S. presidential election.
As voting day approached, experts including Nobel Prize-winning economist Paul Krugman disparaged the potential accuracy of betting markets because a series of large trades were viewed as manipulation. The biggest “whale” bettor, a man who was in contact anonymously with a Wall Street Journal reporter, made US$50-million by wagering not only that Donald Trump would win the presidency, but also would win the popular vote.
The story as to why the bettor was so confident is a really interesting sociological tidbit. (Essentially, he felt official polling failed to account for the ‘shy Trump cover effect’ - and he had a solution for that.)
The essentials
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The Rundown
Ian McGugan on how financial markets will check Trump’s ambitions - and other reassuring thoughts as he returns to power
Don’t be too quick to bet against renewable energy stocks with Trump reelected, says David Berman
David Rosenberg suggests bond investors are overreacting to the inflation threat posed by Trump
Rob Carrick says this is an ideal time to check out your weighting of U.S. stocks
Larry MacDonald reports on how short sellers have ramped up their bets against Shopify - but they might regret that call as earnings are released this week
Bets in money markets are now favouring another jumbo BoC rate cut in December, reports Darcy Keith
CIBC’s chief market technician shares his latest Top 10 momentum-driven TSX stock ideas - and reasons why
What’s up next
There’s not much on the domestic economics calendar this week as September manufacturing sales on Friday is the only data point important enough for the Bloomberg terminal to post a consensus estimate (it’s a decline of 0.8 per cent month over month). Existing home sales for October is also out the same day.
Tuesday is the big day for domestic earnings reports. Shopify Inc. (US$0.269 per share expected), Power Corp of Canada ($1.153) and Suncor Energy Inc. (US$1.094) all report. Brookfield Corp. releases results on Thursday (US$0.826).
The Americans get CPI ex-food and energy for October on Wednesday - a 0.3 per cent month over month rise is forecasted. PPI ex-food and energy is out the next day and 0.3 per cent month over month is also predicted there. Remarkably, a 0.3 per cent month over month gain for October is also expected for advance retail sales that same day. Month over month industrial production for October, also slated for Thursday, is forecasted to decline by 0.2 per cent.
U.S. earnings (all in U.S. dollars obviously) include Home Depot Inc. on Tuesday ($3.644), Walt Disney Co. on Thursday ($1.101) and Applied Materials Inc. ($2.193), also on Thursday.
See our full economic and earnings calendar here (You can bookmark the page - it gets updated weekly)