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July Newsletter - Hope for the Best but Prepare for the Worst

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It is now time. It would seem we are the brink of a global trade war spawned by a headstrong President in the United States. Said person runs on gut feel and not education, intellect or experience. Naturally, we take the view for ourselves and our clients “What does this mean to us?”. Most often these kinds of political events have no material impact on unemployment, interest rates or inflation so they are not material. This time however we are concerned about the behaviour of the GOP (OK, I had to look it up too. It stands for Grand Old Party, meaning Republicans).

 

Let’s take a specific example of how these tariffs will negatively impact not just the US and Europe but also us here in “I’m sorry” Canada.

 

This comes from Barron’s June 21st issue.

 

“On July 6, the U.S. will begin adding 25% tariffs atop any existing duties, to 818 products from China, including poultry incubators, aircraft turbojets, and can sealing machines. These cover $34 billion in imports, and another $165 billion are set to be added after a public hearing period. China has already responded with $50 billion in similarly timed tariffs covering crops, cars and more. (We’re guessing there was no public hearing period). Last week, President Donald Trump asked his administration to identify $200 billion in additional Chinese goods for tariffs.”

 

This doesn’t really sound good.

 

Here is a specific example of how sideways this can go. Harley Davidson, an iconic US brand were recently imposed with tariffs on incoming bikes to Europe. (Where better to hit the Americans than in the HOG, btw, HOG is not just the Dow Jones Symbol for Harley Davidson but stands for Harley Owners Group. (little fun fact there). The company, could see dramatic reduction in sales from one of their most lucrative markets and so on the heels of this, they (HOG) were considering moving some of their production capacity to Europe to avoid import duties. The POTUS then declared “If they (HOG) move their operations overseas they will be taxed like never before”. Wait. Who are we hurting here?

 

This is also in light of previous Republican President, Ronald Reagan, who in 1983 imposed a 50% tariff on Japanese motorcycles to save Harley Davidson. In other words, Harley Davidson would not be in business today if not for the intervention of a previous Republican President and in this environment the current POTUS is threatening the iconic US brand. Seems shocking.

 

“We’re delighted” said Vaughn L. Beals, Harley Davidson’s Chairman. “It will give us time that we might otherwise not have had to make manufacturing improvements and bring out new products”. NYT Archives, 1983. Vc3

 

You can’t make this stuff up. We are in a very difficult time to make investment decisions.

 

Having said that, it is no time to fail in indecision.

 

So. Again. What does this mean to us? Here is our postulate. Hope for the best, but plan for the worst. It would be irresponsible to do anything else.

 

In order to adjust for the coming potential of trade wars and rising rates, we are in favour of the following considerations:

 

  1. Reduce traditional fixed income (bonds) exposure and move to non-correlated alternatives, such as Notes. Ergo, interest rates go up, bond values go down.
  2. Move away from those equity sectors that are susceptible to trade tariffs. What can you pay for at home and nowhere else? Specifically, to us this means moving towards Consumer Staples, Utilities (you’re likely going to still pay your hydro and fuel bill) Transportation. (Someone has to get it there.) Healthcare (just because you’re old and need healthcare, probably doesn’t mean you’ll wait until the recession is over). Our thought is to move toward domestic companies rather than multinationals to circumvent trade tariffs.
  3. Cash is still an asset class. Under the mattress is better than burning the mattress.
  4. Suck it up and take profits. Many people are reluctant to sell assets at a gain because there will be tax to pay. Is it better to wait around until there is a loss so there is no tax? Look at it this way. If you’re up $100 and taxed on $50, even in the highest bracket at 50% you pay $25 in tax so you’re still up $75. There are two expressions that come to mind.
    1. You never lose by taking a profit.
    2. Pigs get fed, hogs get slaughtered (yes it’s a thing)
  5. Don’t panic. As much as the news is alarming, and we will have a recession at some point, panic is not helpful. When talking to friends and colleagues as much as it is entertaining to discuss these things don’t confuse cocktail chat with academic and experienced calm decision making. There is an ocean of difference.

Again, and as always if you have questions, we are here for you. We will be recommending this as we connect for reviews. If you are anxious, please reach out and we can make changes.

 

To be clear, this is not a Sky is Falling moment, we are just recommending a trim of both traditional bond and equity holdings to reduce risk and consider the elements of potential trade wars and a flattening yield curve.