Oh Canada

As the U.S.stock market continues to blithely march ahead, seemingly unmoved by the continued societal devolution unfolding weekly on the streets of America, one has to wonder when or if it will ever matter to Wall Street what Main St is feeling. When I lived in the U.S. as a teenager, the Vietnam War was raging, and youth disaffection with the business community was palpable. Today's youth has a similar disdain for the establishment, as they see a disconnect between the elites and their daily struggles dealing with an increasingly uncertain future. What was the solution for many young people back then? Move to Canada.

In fact, that was the decision my father made in the fall of 1970 when we moved from Cleveland to Mississauga after a draft notice came in the mail addressed to my older brother. Being back home felt like the right move back then. It was also a time of economic strength in Canada, reflecting the war's impact on economic growth and inflation. The benefits to a hard asset-rich, resource-based economy like Canada from global conflict are axiomatic.

Canadian stocks did much better than their U.S. counterparts during the '70s, as did the Canuck buck. I note that the Canadian dollar has done relatively little over the past decade after the twin economic whammies of the GFC and Covid. But note how the periods of strength have coincided with economic booms, such as the post-WW2 Baby Boom, Vietnam inflation, the consumer Eighties, and China's global reengagement during the 2000-07 reintegration.

Candian Dollar 1951-2023

The U.S. debasement trade I spoke of last year has gained fresh impetus following Trump's recent alienating, dysfunctional actions. Gold is the default option for many, as cryptocurrencies seem to have dropped off the radar amid government involvement in regulation and even in competition. There is still a digital currency use case to be developed, but it is currently on hiatus.

I wouldn't count Bitcoin out entirely. Meme-based investor attention spans being what they are, the AI mania has siphoned away some of the juice from that trade. Losing 98% in an NFT will do that to you. But the tokenization of real-world assets supports the ongoing digitization of the 20th-century analogue financial system, which is still in desperate need of remodelling. What that means for Bitcoin, I don't know, but it can't be as bad as owning U.S. treasuries.

The case for continued economic expansion in an orderly global economy is a prerequisite before advising to fully commit to the Canadian dollar story. Hard to do when our largest trading partner is hell-bent on destroying our manufacturing sector in order to extort cheap resources. So the bet here is that a loss of momentum in the Trump agenda will lead to a return to sanity in trade policy. Smart CEOs are paying lip service to the Trump - Tim Cook's attending the Melania-based remake of 'Pretty Woman' qualifies - but the smart money is on waiting him out.

The post-Davos retreat on Greenland and yesterday's Bovino decision are indications that the tide has begun to turn in Washington. Calls for an investigation into the Pretti ICE-assassination by some prominent GOP members show hints of the growing opposition to Trump's reckless mishandling of the domestic agenda. A strong whiff of TACO is in the air now that mid-term electioneering has begun for many a previously mute Republican seeking re-election.

But my confidence in a restoration of Canadian economic outperformance is not solely predicated on the waning of Trump's power, but in the successful expansion of the non-U.S. options being successfully explored by Mr. Carney. His pragmatic approach to the new global reality, while still in its early stages, offers hope for a post-Trump era of improved growth prospects, especially in the resource economy, so key to C$ prospects. Carney's next trip should be to India, as the EU-India free trade deal shows Modi's increasing willingness to defenestrate America's hegemony. (Mark, please don't ask Justin for wardrobe tips!)

I have called for the outperformance of cyclical and hard assets this year. Previously similar periods have coincided with an improved relative equity market performance in Canadian asset returns. The effect of higher commodity prices on terms of trade and domestic employment growth has often coincided with dollar strength. (See chart below) Similarities are not exact, but the general environment is shaping up as the same outcome. Is it chicken or egg - you decide.

TSX vs S&P 500; $CADUSD

Further deconcentration of asset allocation away from the U.S. by global asset pools can also help Canadian asset performance. Have you seen what the KOSPI has done this year? America used to be the cleanest dirty shirt. Now they are just another smelly piece of laundry in the global stock hamper.

I did many years ago, it's time to come back to Canada - with your risk assets!

In a post-Trump world, you will be glad you did.

Trip of a Lifetime

The closest I get to the U.S. this year might be 36,000 ft above them as I fly over Costa Rica and on to South America next week. Pat and I are heading on an excellent adventure to try and decouple from the current madness for a while. Worry not while I'm gone, it will take time for the markets to top out and correct now that the Fed is on hold. We need a hawkish signal or two for that. And if the JGB markets can blow up without contagion to Treasuries, the path of least resistance is still up.

Back in two months or so, Cheers!

Risk Model: 3/5 - Risk On

A knee-jerk response to the Japanese turmoil got the gold and silver markets wildly over-bought this week, cancelling a nascent Copper/Gold rally signal. Perhaps the Fed hawks can talk traders into taking some profits, allowing my favourite indicator to rebound. Copper has checked back enough for a resumption of the uptrend through $6.

The TSX is overbought on a longer-term basis but has cooled off a bit on an RSI basis. Maybe some recycling of gold stocks' profits can reignite the TSX this week. U.S. Tech is rallying into earnings reports - always a good sign. The TSX Banks still look higher here after their post-earnings pause.

I recall my stock savant brother-in-law, Rob Panes, adding GM to his portfolio this time last year at around $60. They reported blow-out numbers this morning. I wish I could pick stocks like him!