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August 25, 2019 | The Moment

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

By coincidence, not design (honest), the last two posts told you not to set your pants on fire, remain calm, go for a tummy rub and be a long-term thinker instead of a timorous chicken. How’s that for mixed images? But you know what I mean. Just chill. Especially this week. It could be a stinker.

My colleagues Sinan (he was vice-president of RBC Capital Markets in New York City) and Doug (a veteran portfolio manager and Bay Street analyst) had a simple message: stay invested. The storm will pass. It’s not actually different this time. Emotional decisions have poor consequences. The headlines are more dire than reality. We are not going over a cliff. Just for a ride.

Am I making any changes to the BD portfolio that Dorothy, Bandit and I share? Not a chance. The bonds will go up as the equities go down. And later the equities will recover and the bonds fade. The overall volatility will be contained for having 40% in fixed income, with the growth assets spread between Canada, the US and overseas markets, plus some real estate trusts thrown in for more diversification. The preferred shares have lost capital value as rates decline, but who cares? The dividend is great at 4.95% (plus a tax credit) and I’m not cashing them in, so the market value is moot.

For the same reason I don’t appraise my house every day and chart it, I don’t look at my portfolio daily, either. What’s the point? Markets go up. They go down. History shows that over 70% of the time the arrow is green. It also proves during the other 30%, a balanced investing approach cuts losses in half and makes recovery time faster. I know. I’ve seen this time and again over the decades. It’s worked for us. Bandit has enough liver treats to last a lot longer than he will.

Well, now, Trump.

As I write this futures indicate a drop of several hundred points when the Dow opens Monday morning. That’s no surprise. Friday was bad enough – as China retaliated with new tariffs, Trump called the head of his own central bank an enemy of the state, he increased duties on $500 billion in imports (which Americans pay) then ‘hereby ordered’ US companies to exit China. Wow. Historic. Unmeasured. Markets like stability and order. He gave them chaos.

Then it got worse. At the G7 in France Trump let it be known he had ‘second thoughts’ about his China actions. His administration clarified, saying he regretted not raising tariffs more. And, of course, China responded. Meanwhile Trump and Japan’s PM Abe shook hands on a trade deal.

What does it mean if the war between the world’s two biggest economies continues?

Over the weekend the economics dudes at Scotiabank concluded Trump’s behaviour is that of a panicked man who is being played by Beijing:

In the last few weeks, the Chinese have seen Pres. Trump blink on imposing tariffs he threatened on August 1to impose on key consumer goods that dominate the Christmas season “just in case some of the tariffs would have an impact on US customers”. Similarly, they’ve watched him browbeat the Fed to provide further monetary stimulus while he’s also mulled additional fiscal stimulus through tax cuts—both implicit admissions that his economic policies aren’t working. Every President knows that a combination of slowing growth and declining markets is the biggest obstacle to a second term. With the possibility that US manufacturing production is contracting for the first time since 2009, Pres. Trump is showing signs of panic… China has weaponized Pres. Trump against the US economy—which could make his re-election more difficult and prospects for global growth weaker.

In practical terms, (a) Trump’s war will reduce US economic growth from over 2% down to just 1.2%. This is a disaster for Trump who boasted he could achieve 3% or more. (b) The Fed will have to cut interest rates four times, for a decrease of a full 1% from current levels, in order to bolster the economy. What Trump wanted. And, (c) the US will not be in recession as a result of this, but the odds of it happening increase.

Will lower economic growth, reduced corporate profits and cheaper stock values hurt Trump in 2020? This ‘right-wing’ president is also on track to preside over a budget deficit of $1 trillion – which has never happened before during a period of economic expansion. In fact the Congressional Budget Office is now forecasting annual shortfalls of $1.2 trillion for the next half-decade. A record.

In short, Donald Trump’s shining moment will soon arrive. “An eye for an eye will leave the whole world blind,” says Scotia of the trade war. The US president is no fool. But he is a rash, ambitious, arrogant, grandiose disruptor whose reach may have exceeded his grasp.

It’s likely things will get worse. It’s certain they will then get better. Stop looking.

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August 25th, 2019

Posted In: The Greater Fool

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