SCHNEIDER INSURANCE UPDATE
There is understandable anger in Canada these days over Trump’s tariffs. The question that most people seem to have is, ‘Why us, and why now?’ I mean, haven’t we been good neighbors?
It feels personal, similar to getting an audit notice from CRA. Despite having filed on time and paid your fair share, they’re digging in to find whatever they can. Then you realize it’s not personal. They’re doing it to everybody. That’s similar to what’s going on now.
As it’s nearly impossible to keep up with seemingly hour-by-hour changes in the U.S. trade offensive, we decided to focus this update on the reasons we believe it’s going on.
Occam’s Razor
Occam’s Razor is a philosophical principle. It basically says that of all the possible reasons something is happening, the simplest one is almost inevitably correct.
So, when looking at the question of why the new administration is piling on tariffs to its most resolute allies, firing anyone and everyone in the U.S. bureaucracy, and setting up new departments such as the Department of External Revenue, it’s a pretty safe bet that they need the money. Without doing so, the U.S. government is not going to meet the bills over the next three years. Elon Musk has as much said so.
The ugly truth is that the U.S. is reaching the end of its financial tether.
Bond rollovers, the amount of debt coming due that the U.S. government needs to refinance, is reported to be nearly $9 trillion dollars due this year. It’s nearly twice as much money as it has ever needed to raise in any one year. Similar totals are due for the next two years there afterwards.
A default would prove to be an enormous global embarrassment. Failing to raise the money needed to roll over its existing maturing debt and fund the (roughly $1.7 trillion) deficit would also likely crater the dollar and, over the long term, boost the interest rates needed to borrow additional money – further exacerbating the problem. Then, there’s also that pesky problem of refinancing the renewal of the ($4.5 trillion) tax cuts for the ultra-wealthy. They expire this year.
I’m sure you’re starting to get the picture.
What this means in practice is that the U.S. will have no choice but to combine revenue from tariffs (they’re hoping to raise $2 Trillion over the next decade), federal budget cuts, and money it can find from anywhere else, with newly printed money. Yes, the FED will almost inevitably have to bring back Quantative Easing and print dollars to keep the lights on.
What does this mean for investors?
Well, to start with, let’s talk about Inflation 2.0. It ravages the poor and slowly destroys the middle class. It also exacerbates poverty and furthers the wealth gap, further increasing hardship. It’s also the number one reason people run out of money.
Inevitably, we’re also going to see some very volatile times ahead. Corporate profitability, already shaken by declining earnings in the tech sector, will be further threatened by lower consumer confidence and a lack of discretionary spending.
Interest rates may see an initial cut or two to try and ward off the inevitable economic downturn but will likely rise thereafter as other nations, who are inevitably also bidding for the same bond market buyers, are likely to put up their rates, creating a bidding war in the debt markets.
In this sense, a recession can become a self-fulfilling prophecy, as consumers are forced to spend more of their income on fixed payments, such as mortgages and car loans, leaving them less to spend elsewhere.
Combined with the slowdown that is gradually showing up in the U.S, it is likely that this will hit both stock and bond prices. It may leave us in a stagflationary environment, whereby inflation continues to rise while the economy remains stagnant.
The Challenge for Investors
As counterintuitive as it may seem amongst all of today’s chaos, the challenge for investors is to stay invested in high-quality assets while ideally continuing to maintain some levels of cash in portfolios to be able to invest during a downturn.
Ultimately, investors want to outpace inflation without taking on excessive risk. Historically, only equities strategically invested do this over the long term.
This can take the form of dollar cost averaging or things like maintaining part of one’s portfolio in cash or market-linked GICs. Guaranteed Withdrawal market investments (GWB’s) that guarantee lifetime income regardless of market performance can help ensure regular income and preservation of capital for an investor’s peace of mind.
We get that this can be concerning, especially if you’re watching it too closely. Remember why you deal with professional managers of your money. They will inevitably be looking to take advantage of the discounted securities that show up along the way and buy them at a discount. It’s also why we’re always here to talk whenever you like.
Mark, Sean, Cass
