Share This Post Today!
Thridrangaviti Lighthouse, South Constituency, Iceland
This lighthouse was originally constructed in 1942. The construction took over 4 years. The lighthouse is located 4.5 miles off the southwest coast of Iceland. It is one of the most isolated lighthouses in the world.
St Joseph North Pier Inner and Outer Lights, Michigan
This lighthouse is one of two located on a pier in St Joseph, Michigan. The lighthouse was first built in 1832, and the two lights were reconstructed in 1904. Both lighthouses are on the U.S. National Register of Historic Places.
*Feel free to send us your photos of Lighthouses to be featured in our weekly market observations. *
U.S. economy slipping
The Atlanta FED revised its U.S. GDP growth rate forecast for the first quarter. The last number forecasted a shrinking economy, contracting by 1.48%, just a few weeks later and they now see the economy shrinking by 2.83%. This is not surprising whatsoever as the Trump administration has been rapidly slashing government spending and even firing Federal employees and cutting programs in favor of government efficiency. While this may create a stronger private sector down the line and decrease the country’s economic reliance on their government, in the short term it could lead to some economic weakness driven by a decrease in consumption. Numerous economists have been saying the economic growth that the U.S. has recently seen has purely been driven by the public sector and not the private sector. The Trump administration wants to alter that completely.
Trump’s Treasury Secretary, Scott Bessent, has been telling us this for weeks. He has said the administration will decrease spending (slow the economy) and reprivatize the economy (short-term pain for long-term gain). Google him and look for an interview over the last month, we guarantee you that he said something like what we just outlined.
The economy is quite weak, Bessent knows this and wants to solve the problem. During the 4th quarter of last year, the U.S. was running a historic deficit (6.3% of GDP) fueling their economic growth. This level of deficit has only occurred during a few times in history where extreme spending was justified (COVID-19, the Financial Crisis (2008), and World War 2). Today, there is no justification, the deficit has roared to prop up the economy. The private sector has been hurting and has arguably been in a recession for a few quarters. The only thing keeping headline numbers elevated has been unsustainable government spending and a growing public sector.
Trump and Bessent want to turn the tap off on this spending and bring jobs back to the U.S. to reenergize the private sector.
The issue Bessent and Trump will face by making these moves will be short-term volatility and turbulence which could scare many groups including consumers, the media, and Wall Street. Investors along with consumers have gotten used to things coming easy, the minute they face adversity, and they complain. Unless Bessent and Trump change course, this move could be a long-term growth driver for the U.S. private sector. If they continue the fiscal deficit they inherited, economic growth will remain robust in the short term and the public sector will continue to expand. However, the bubble will grow and the potential for disaster will also grow.
Debt issuance is not an issue when your economy is growing faster than the rate debt is growing. The minute economic growth slows down, you have a real issue. The U.S. and many other Western nations are currently facing that issue. We will have to wait and see what happens next.
Tariff time
On Tuesday, March 4th, U.S. tariffs announced by President Trump against China, Mexico, and Canada took effect. Canadian and Mexican goods will face a 25% tariff and China will face a 10% tariff increase on their goods. The reason behind the tariffs is to strengthen the domestic economy in the U.S. The policy will not strengthen Wall Street, it will strengthen Main Street in the long run. However, as Canadians, we know these tariffs will have an impact on our economy. The U.S. is our largest trading partner and ally. This trade war is shaking things up and testing our country’s relationship. According to a poll, only 24% of Canadians have a favorable view of the U.S., an all-time low for the survey.
China and Canada immediately announced retaliatory tariffs against the U.S. in response. Trudeau announced 25% tariffs on $155 billion worth of American goods. China raised tariffs on food and other farm products, they also announced export restrictions on American companies. China also filed suit against the U.S. with the World Trade Organization. Mexico has not yet announced retaliatory tariffs against the U.S. China ramped up the rhetoric on Wednesday stating that they are ready for a trade war or any type of war that may occur. Geopolitical tensions look to be heating up between the world’s two most powerful nations.
Trump took to social media on Tuesday after Canada announced their retaliatory tariffs that the U.S. will raise tariffs even further against Canada if they move forward with tariffs of their own.
These tariffs will hurt both Americans and Canadians. Prices will more than likely increase in the short term which will lead to higher inflation and the FED keeping interest rates higher for longer. There is also a worry that retaliatory tariffs could upend supply chains globally. If you do not believe us, here is a short video of the former late President Ronald Reagan explaining why tariffs are a bad economic tool:
https://x.com/mario4thenorth/status/1896758525592064284
We will warn our readers that the tariffs imposed by Canada will have a minor impact on the U.S. however they also could backfire on Canadians. Currently, 77% of Canada’s exports go to the U.S. Canada (and Mexico) is much more reliant on the U.S. than the U.S. is reliant on Canada (and Mexico) in the grand scheme of trade. If long-lasting, these tariffs have the potential to push Mexico and Canada into a recession. Ian Lee, Professor of Management at Carleton University went on CBC and reiterated this point on Tuesday claiming Canada’s retaliatory tariffs will have an impact on the U.S. like an average Canadian finding a loonie on the sidewalk.
We will warn that this trade war could get much more extreme as politicians north of the border have floated turning the power off that supply’s certain northern states as a bargaining chip. The Ford government announced that electricity flowing to the U.S. from Ontario will also be hit with a 25% tariff if U.S. tariffs remain in place. Although this would limit power for a few million people, it is rumored Trump would further retaliate and potentially try and convince U.S. cloud companies to shut off cloud services to Canadians. We are not sure about this report and could not verify it officially as of this writing but scary to think about. It also looks like retailers across Canada including alcohol distributors like the LCBO will be taking U.S. products off their shelves immediately.
Either way, things are heating up and we expect trade sanctions to increase in the coming weeks.
Trump seems fine with some short-term pain to achieve long-term gains for the American people. He seems hell-bent on improving the lives of “Main Street” and is not as focused on the stock market. During his first term, he always mentioned the stock market and used it as a performance tool for him, now he rarely mentions it. This thinking would mean stocks could have a flat year and the real U.S. growth could have to wait until 2026 and 2027. This forecast is dependent on U.S. tariffs and trade policies. We are not saying 2025 will be a horrible year, we are purely saying to not expect a year like 2023 or 2024 (two years when equity markets were on fire).
On a purely Canadian note, the carbon tax increased by another 18.75% on April 1st. This will lead to price increases across the economy. This is perhaps the worst time for an increase in the highly unpopular carbon tax. We expect the carbon tax and the response to tariffs to be the most important issue in the upcoming federal election. However, no date has been set and Trudeau said on Tuesday that his last day as Prime Minister is up in the air and not confirmed. In January, Trudeau announced he would reassign as Prime Minister once a new party leader was chosen. The leadership race is still underway. We hope for the good of our country, that we head to the polls soon and see each candidate’s platform.
As we write this during the week, things change quickly. After hours on Tuesday, Trump’s Commerce Secretary Howard Ludnick said the administration may roll the tariffs against Mexico and Canada on Wednesday. Quite volatile times we are in.
Trump and Co. want lower yields
Yes, we know this week there is a lot regarding Trump and the economy and tariffs, but this piece is the most interesting to us. It is no secret that Trump wants lower interest rates, he has pushed for them for quite some time and has consistently bashed Federal Reserve Chairman Jerome Powell. A few weeks back we said Trump and his cabinet will push the bond market to lower rates naturally. A few weeks later, they have. What has happened over that time? Uncertainty. Equity investors have rotated into bonds and pushed down the yields on Treasuries. Don’t believe us? Check out this chart that tracks the U.S. 10-year yield:
Yields have moved down as Trump has shaken up the global economy with tariff threats, protectionism policies, and comments regarding various countries. The 10-year yield has moved down from 4.8% to 4.2% in 2 months, his efforts to decrease interest rates seems to be working.
So how has he done this? He has got minimal help from the FED who now say they will delay interest rate cuts. He has utilized investors. Trump has caused investors to worry, and growth is now looking soft. Investors are looking for alternatives like bonds. Bond yields move lower with high demand. The Trump administration wants yields to move lower as they have $7 Trillion in debt maturing in the next 6 months. They have no interest in refinancing that above 4%, so they are pushing the market to lower yields without Powell’s help.
The surge in maturing debt was partially caused by the Biden administration issuing short-term debt. The Trump administration does not want to do that. We think they will try and refinance this debt out 10 years where the U.S. government has almost no debt maturing.
This is where Powell comes in. If the labor market starts to crack, the FED will be forced to begin slashing rates. Tariffs and uncertainty can lead to these cuts potentially.
We may not be one hundred percent correct with our thinking, but we think we are on the right track. This piece on debt maturity and interest rate levels coincides with Trump’s strengthening of the domestic economy. Both will have short-term pain for the American economy but will lead to potential long-term gains. Maybe, we are giving the Trump administration too much credit, nonetheless, we are looking for ways to position our client portfolios for this uncertainty.
We will also preface that these moves are quite risky and could be described as extremely naïve as creating volatility and uncertainty could lead to a severe equity market crash. Although it seems Trump’s policies are attempting to assist those of Main Street at the expense of Wall Street, we will highlight that savings accounts and 401k’s matter more to everyone across the country than ever before. Short-term pain across markets will be felt by all.
We will continue to report on these macro issues as long as they remain important to financial markets.
China announces economic forecast
The Chinese Communist Party released its latest economic data on Tuesday night. Within the package was a growth target of “around 5%”, slower than their recent growth but relative to other nations, a high growth rate. This target comes on the same day that Trump announced an increase in tariffs on Chinese goods. He has now raised tariffs on Chinese goods by 20% in his first 60 days in office. Chinese exports were a lone bright spot in China’s economy last year. The CCP has announced retaliatory tariffs against the U.S., but it does not look like the U.S. or Trump care. A deal with China on trade looks improbable while deals between the U.S. and Canada and Mexico look hopeful. We think this could be the real start of the West’s decoupling from China.
China’s economy has grown by more than 5% over the last two years, however, its domestic economy has been soft, and its strong numbers were driven by growing exports and a trade surplus. A Moody’s analyst believes Chinese exports to the U.S. will decrease by 25-33% if tariffs linger. We think this will be the case and China will have to depend on other markets. Tariffs will decrease trade between the two countries, but it will also decrease foreign direct investment in China.
China’s economic growth target will be fueled by domestic growth according to CCP officials. The CCP acknowledged its domestic weakness and announced numerous stimulus packages that will help stimulate the economy and boost demand. As a part of the announcement, China announced the issuance of CNY1.3 trillion in ultra-long special sovereign bonds, CNY4.4 trillion in new special local govt bonds, and CNY500 billion in special sovereign bonds. The Chinese government also announced and raised its deficit target (4% of GDP) to its highest level in 30 years. Talk about stimulus and the desire to kickstart a stagnant economy.
The CCP also announced plans to create 12.2 million jobs this year across cities and pledged to support high-technology industries to fuel growth.
As we have said before, Chinese stocks have risks associated with them fueled by geopolitics. If you can stomach the risk and have a long-term horizon, some Chinese names are very attractive due to their low valuations. This is a contrarian trade we continue to see pop up on our screens. However, the only direct Chinese exposure we currently have is through the overall iShares Emerging Markets ETF which has 28% of its exposure to China. As always, we encourage our readers to do their research and monitor their risk parameters.
So with tariffs, what will work?
Although the severity and length of tariffs across North America is still uncertain. We have created a small list of sectors and companies that can benefit from Trump’s policies.
The first winner is European stocks which have been on fire this year. Investors are seeking other stable areas of the world for diversification. Check out the performance of major European markets, they are blowing North American markets out of the water. The biggest winners have been European defense stocks which have been soaring since Trump won in November. Trump has vowed to force the U.S.’s allies to pay more in defense to protect themselves, and their alliances including Ukraine. The STOXX European Defense and Aerospace ETF is already up 41% this year. The ETF is extremely small in assets but provides an overall performance for the sector.
We think names in this space could have strong 2025’s as Europe increases its defense spending and private military contracts.
Moving forward, we think consumer staples in Canada with Canadian-made goods will perform well with the addition of tariffs. We also like a few utility names on both sides of the border. Both sectors are predictable and will continue to grow. The yields on utility providers also make them an attractive sector for us. We also like waste solutions companies, these companies have consistent growth and have acquisition potential as the industry remains fragmented. We have been adding to all three of these defensive themes recently.
We also like two Canadian mining companies that focus on industrial metals. One is a major copper miner and one that mines numerous base metals. Both will benefit from increased investment across Canada as well as disrupted global supply chains. If tariffs disrupt traditional supply chains, these Canadian stocks could find new opportunities to expand their market share, increase production, and capitalize on shifting global demand. There are also a few rare earth metal miners based in Canada that own a large portion of their specific global market, these metals cannot be replaced with alternatives and the U.S. will continue to require the metals as inputs for various products.
Home builders will also be big winners if rates come off across the U.S. Home builders were hit hard in the last few months of 2024 as interest rates climbed. Perhaps it a time to scoop up some exposure. We will warn all our real estate exposure for our clients comes from the private market through our MacNicol 360 Degree Realty Fund which is the largest component of our Alternative Asset Trust.
Emerging markets other than China will also be beneficiaries of tariffs as they will be seen as attractive alternative markets to China for manufacturing and investment.
We also think the continued uncertainty will benefit precious metals. Gold has outperformed silver and platinum over the last year plus. We think both could relatively outperform gold moving forward. This does not mean we have a negative view of gold. We think all three precious metals will outperform through this period of uncertainty.
There have been rumors swirling regarding pipelines being impacted by tariffs, but some energy analysts believe tariffs would need to be in place for a long time to upend the energy infrastructure industry due to demand needs and contracts. We are looking into this due to a few positions across our portfolio.
MacNicol & Associates Asset Management
March 7, 2025
The Weekly Beacon -March 7 2025
