The multilateral global trading and monetary order created by the U.S. in the aftermath of the Second World War is now over. In their latest quarterly Market Observer, the team at Canso Investment Counsel Ltd., a leading Canadian institutional investment management firm, continues to highlight the volatility and uncertainty in financial markets—and the important implications for Canada. Click here for the full Market Observer.
Beautiful tariffs make beautiful markets
Canso’s July Market Observer begins by expressing incredulity at our current reality. After the chaos of April’s tariff rollercoaster, rising equity markets and tightening credit spreads weren’t most experts’ first choice for a likely outcome, but that’s what has happened.
The S&P 500 surpassed its February all-time high by 2.2%, up 26% from its bottom on April 8, which puts it up 6.6% for the year. The Canadian S&P/TSX Composite Index is up 8%, and the non-U.S. MSCI EAFE (Europe, Australasia and Far East) is up 19.5%.
Why? Who knows?
What fascinates the Canso team is that this equity market enthusiasm is occurring despite an unprecedented assault on the global trading order by the Trump Administration, continuing wars in Ukraine and Gaza, and a new one between Israel and Iran that the U.S. stepped into with its bombing of Iranian nuclear facilities.
Plus, the tariffs haven’t gone away. President Donald Trump backed off on his most outlandish tariffs, but only “paused” them for 90 days ending July 9. “He left many of his new tariffs in place at much higher levels than existing tariffs,” the Canso team wrote. He even raised his new steel and aluminum tariffs from 25% to 50%. And then placed a new 50% tariff on copper imports on July 8th and threatened a 200% tariff on pharmaceutical imports. But the stock markets seem to have taken this all-in stride, perhaps realizing that Trump’s trade bark is worse than his trade bite.
Bond markets aren’t bonding with Trump
Not every market is jumping with joy. The newsletter pointed out that the bond market seems to be cautious on Trump’s trade and fiscal policy goals, adding that the “self-proclaimed ‘King of Debt’ very much will deserve that title, after ramming through his One Big Beautiful Bill Act (OBBBA) that will substantially increase U.S. deficits and debt financing.”
The Canso team believes that while the tumult and uncertainty caused by Trump’s trade policies are not helping, the President’s tirades and overt threats to the U.S. Federal Reserve’s autonomy have added to the bond market upset.
“Trump recognizes that the U.S. Federal debt interest payments will increase with the OBBBA tax cuts and higher spending so he has now decided that he, as the ‘Decider in Chief,’ will also control interest rates,” the Market Observer noted, adding that it is a first for a president to overtly suggest replacing a Fed chair.
We are living in a reality TV show
The newsletter acknowledged that it is hard to understand where this all will end up. The U.S. economy has not weakened substantially, nor has inflation climbed on Trump’s policies. “Perhaps it is all about an aging reality star looking to recreate his signature show on the global stage with his new catchphrase: ‘You’re Tariffed!’” the team wrote. “Whatever it is, the multilateral global trading and monetary order created by the U.S. in the aftermath of WW2 is now over.”
Canso’s experts believe the tide of free trade and globalism is receding quickly. “Quantitative economics and finance had created the efficient markets thinking that ‘assumed away’ things like patriotism, religion and the human need for social interaction and identification,” they noted. “The political side of the old subject of Political Economy is again demonstrating that people are not the rational actors of modern economic theories. ‘Economic agents’ of theory are people, neither dispassionate nor efficient in their economic thought and downright human in their real-life behaviour.”
Don’t let ‘Elbows Up’ degenerate into ‘Turtling’
What does all of this mean for Canada? Since the last Market Observer in April, Canadians have re-elected the Liberals under Prime Minister Mark Carney, who ran on a ‘Fight’ and ‘Elbows Up’ campaign. Now, Carney seems to want to avoid angering Trump and to save Canadians from the higher cost and inflation of retaliatory tariffs.
“We point out that a trade war is indeed a war and cannot be without pain and casualties unless one side unilaterally surrenders,” the Canso team wrote. “If ‘Elbows Up’ degenerates into ‘Turtling’ (hockey for refusing to fight an opponent), which seems to be the current strategy, then we think Canada will be in a very weak position”. Canada will be in a weak position in negotiations with our neighbour to the south to begin with. Canadian companies that have scaled to serve the U.S. now send 90% of their production to American customers. That makes Trump’s “manufacture it in America” a major issue for Canadian exporters.
“As we see it, Trump respects power. His take on Canada seems to be that we are not even a real country, so Carney has a very difficult job ahead of him. If Canada is worth fighting for, then you probably need to actually fight at some point.”
The Liberals have promised much in new spending to help Canadian exporters struggling with tariffs. They have also just promised to raise Canadian defence spending by $9 billion to bring it up to 2% of GDP by the end of this year—the largest increase in Canadian defence spending since the Cold War ended in 1989. As the Canso team notes, defence spending is probably the largest economic multiplier of any government spending, making it a good way to offset tariff and housing market weakness.
However, “a slowing economy and vastly increased defence spending make for a very difficult balancing act between social spending and the necessary support programs to tariff affected industries,” the newsletter points out. “That is even without the proposed increase in defence spending to 5% of GDP. This is perhaps why PM Carney has asked all government departments to look for cost saving measures.”
Wait and watch is the approach right now
Can this trade war be fought with no losses? The Canso team doubts it.
“We have continued to upgrade our portfolios, carrying on our post-pandemic sales of securities that we bought very cheaply,” they wrote. “Yes, things sold off quickly after Trump’s declaration of trade war but then rallied hard after he quickly faded on his most preposterous positions. Just the 10% ‘Base Tariff’ on all countries is going to cause immense damage to international trade and the U.S. and other economies if they stay in force.”
They further pointed out that the Trump Tariff end game remains impossible to figure out. Given that, how can one price uncertainty into the valuation of a security? Canso’s view is that “When things are very expensive with this much uncertainty, then it is time to take profits and watch cautiously from the sidelines.”
Disclaimer: 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