Trump’s “reciprocal tariffs” have repudiated years of efficient markets theory, financial economics, free trade and globalization. In their latest quarterly Market Observer, the team at Canso Investment Counsel Ltd., a leading Canadian institutional investment management firm, highlights the volatility and uncertainty in the financial markets and explains why they are awaiting further developments on the “Political Economy” front. Click here for the full Market Observer.
Does anyone know what the plan is?
Canso’s April Market Observer started with an undeniable truth: irrespective of what is or was written about it, whatever happened in the first quarter of 2025 will bear no relevance to what’s happening now.
Two days into the second quarter, the Trump administration announced “reciprocal tariffs” on April 2, dubbed “Liberation Day,” and unleashed an unprecedented assault on the global trading system. The Canso team writes: “It reminds us of the 3rd quarter of 1987, when the October 19th Black Monday stock market crash of 22.6% happened just over 2 weeks later. It also is reminiscent of the 3rd quarter of 2008 when 3 weeks later in October the credit markets had ceased to function. Portfolio managers still visited their clients but what they were telling them about ‘performance’ bore no relation to what had happened to their portfolios only a few weeks later.”
Instead, the newsletter focuses on what happened next, noting that it “was quite apparent that even Trump’s cabinet secretaries have no idea what the end game truly is. Some said it was part of Trump’s master plan to get leverage for ‘negotiations’ and the tariff tumult would pass. Others said that there would be no relenting on the tariffs because they were part of Trump’s ‘liberation’ of the U.S. economy.” To the Canso team,
this didn’t give one much confidence that the Trump tariffs were well thought out and planned. Then the financial markets called Trump’s bluff.
Did Trump trump tariffs? Or did tariffs trump Trump?
The equity markets crashed after the Liberation Day tariffs went into effect on April 3. By Wednesday, April 9, the markets were still going down and then Trump blinked. That afternoon, under huge pressure, he suspended his most egregious tariffs for 90 days and the stock market soared in relief.
And then the Trump administration announced that consumer electronics and its supply chain were exempted after a furious lobbying effort by Apple and other companies. As the Observer points out, faced with the politically dire consequences of the huge increases in mobile phone and computer prices that the manufacturers predicted, Trump backed down, appreciating that mobile devices were now “consumer essentials.”
However, as the Canso team notes, the “problem with Trump’s Tariffs is that they don’t separate out the short- and long-term effects. Mobile devices built in China with a supply chain and parts dependent on China can’t immediately be replaced by American produced equivalents. Labour is more expensive in the United States, if you can find it. If there’s no factories, that’s a problem.”
As the Canso team points out, the Trump administration seems to want to break things, but it is not at all clear that they have considered how to put them back together. Neither is it clear what his threshold for economic and market pain really is, or what his goals are. Even his senior trade and economic advisors point out their lack of control over policy. If the past couple of weeks are a guide, even Trump does not know what he’s going to do, and that’s little comfort to those along for the ride.
“Uncertainty is not a friend to financial asset values and what we are very certain about is the current high levels of uncertainty in financial markets. This was brought about by the Trump Tariffs and by their ever-changing application, level and relief are causing immense economic harm. This is quite obviously Trump’s initiative, and he will own its aftermath,” the Canso team writes.
On the fixed income side, despite what the President says, the bond market is not “going good.” The good news is that long Treasury yields are down slightly from the peaks, but the bad news is they seem stuck at higher levels.
“From the pandemic lows of nearly 1%, the long Treasury yield has moved in stages to 3% and has been steadily increasing to well above 4% since 2023. The recent jump is all Trump Tariffs, but the continuation of massive U.S. Federal government deficits is increasing the supply of Treasuries. The extension of the Trump tax cuts is not likely to be accompanied by an increase in other revenues or major cuts, despite Musk’s and Department of Government Efficiency (DOGE)’s best intentions, so there will likely be deficit spending and substantial Treasury issuance for many years to come,” the Observer notes.
If you break it, you own it–whether it’s trade or trust
The Canso Team remarks that despite Trump’s bravado and declaration of bond market victory, long Treasury yields are still near their highs, consumer and business sentiment is plunging, and polls are showing that voters are now questioning Trump’s economic competency.
In this environment, and given his reluctance to admit error, the team notes that Trump now seems to be looking for ways to reduce the economic damage he has caused before his political capital suffers too much further. “This trade war seems to have got out of control for the Trump Administration, with allies and enemies alike questioning the flimsy rationale for such a grievous assault on the world trading order. It wasn’t perfect, but as they say in retail stores, ‘If you break it, you own it,’” the newsletter observes. “The very success of the western democracies stems from the rule of law, the idea that a person or a business doesn’t exist at the pleasure of the ruler who can capriciously act to the detriment of an individual, company or society as a whole.”
Whatever the explanation, the Market Observer notes that the second Trump term is opening with more chaos and “Sturm und Drang” than anyone expected, other than possibly President Trump: “Our point here is that the current tariff war repudiates years of efficient markets theory, financial economics, free trade and globalization. And there’s no going back to the way things were.”
The Canso team writes that trust is a hard thing to restore and there is not much sympathy for Trump’s complaint among allied countries. “By treating allies on the same basis as enemies, they have taught the rest of the world a lesson about the perils of overreliance on the United States,” Canso notes, likening it to a self-inflicted injury or an “own goal”.
Where do we go from here? Wait and watch
The newsletter says it is impossible to predict or divine where all this Trump tariff tumult will end. Risk has reared its ugly head, and the jubilation of the post-pandemic market frenzy has now run into a brick wall.
Canadians have witnessed the leader of a valued ally and trading partner suddenly turn to disparaging our country, threaten to inflict serious economic havoc, and express a desire to absorb it as the 51st state. “The economic and political Trump threats come in the middle of an election campaign and are drowning out other very real and pressing issues like housing, immigration and health care,” the Market Observer notes.
The Canso team has been selling into strength for a few years now, expecting the jubilant and bubbly post-pandemic markets would eventually end, and that has put their portfolios into higher-quality and better-valued securities.
“That doesn’t mean that our portfolios aren’t exposed to the downdraft, as illiquidity affects even the best and/or the cheapest securities. Corporate bond yield spreads were far too tight for our liking, and that means our sales were invested in government bonds and Mortgage-Backed Securities,” the team notes, adding that the equity portfolios have substantial cash positions.
So, when to buy? The Canso team has not seen the major distress and illiquidity that they would have expected to see, given the huge potential impact of the U.S. tariffs that have been announced. For now, they continue “to take advantage of opportunities and await further developments on the ‘Political Economy’ front.”
This story was created by Canadian Family Offices’ commercial content division on behalf of Canso Investment Counsel Ltd., which is a member and content provider of this publication