Global Economics Archives

The State of The US Dollar, Debt, and Canada

I have been spending a lot of time reading and following the various things that are happening in the United States over the past couple of months related to the economy, tariffs, bonds, currency, and more. There were so many fascinating pieces written about Gold’s bull run, treasuries no longer being viewed as a “safe haven asset”, all the drama with trade. I’ve been reading about Germany’s economy and China’s EV dominance. Really globalizing my reading and building an understanding of world macroeconomics, rather than just North American. I even spent some time making daily update videos about the economic news @OliverFoote on YouTube. Through all that I’ve been learning and doing I have been keeping up with most of these events and today I wanted to talk about some of what I’ve learned and maybe help you learn a thing or two as well.

The major theme I want to cover today has to do with the supremacy of the US Dollar and how The Big Tax Cut Bill that just passed in the US will affect it as well as why Gold has been doing so well and what to expect for the US going forward. I’ll discuss how the Canadian Dollar will be affected by this sharp downturn in the US Dollar and when might be a good time to consider buying some US Dollars, and what to consider about the Canadian vs. American currency.

What “The Big Beautiful Bill” Means for The US Dollar:

I’m going to structure this section in sort of a timeline format of the last 4-5 months to discuss what has been going on with the US Dollar and everything that is linked to it. So back when Trump started his tariff war with the world in February, various markets began to panic. If the US was going to put tariffs on the world, then every economist projection suggested that they will see a huge hit to their GDP growth and end up in a recession. It seemed as though there was a new headline every week, and I personally was really beginning to feel the fatigue of this whole trade war news stories situation. Nothing was ever the same, every week was something new, and this is just not a good environment to do business. Therefore, some businesses decided they’ll just hold off until things calm down a bit and hold off they did. This is one of the worst job markets for graduating students since the 90s and I wouldn’t be surprised in retrospect if it turns out to be even worse. I like to advocate for students, even though I graduated with my Robotics Engineering degree in 2023 I’m still studying to become a CPA and I have a very “crazy” outlook that education should be free, you know, invest in the future workforce type of situation. Anyway, back to the timeline.

Throughout a bunch of flip flopping on yes tariff, no tariff, tariff pauses etc. Something interesting began to happen in the treasury market, while stocks were falling, the yields on treasuries went up. To understand how this works, generally, when the market falls, people will move their money into US treasuries which are essentially just US government bonds. These bonds trade on the open market, and if the demand for these bonds goes way up, then the yield, the amount of interest the bond pays to the holder, should in theory go down, since there’s so much demand. BUT, what happened, was that people were selling US Stocks AND US Bonds, additionally due to all the uncertainty and the inability of the president to commit to anything, investing in the US, keeping money in the US began to be viewed as riskier.

If you look at countries whose bonds are viewed as VERY risky right now you might look at Ukraine, where there is currently a war happening, a 1-year bond is paying 39% right now. Investors are demanding a “risk premium” on those Ukraine bonds because there’s a decent chance Ukraine might not pay it back. Meanwhile, the titan of the world, the global superpower, the USA! Is having a risk premium added to its bonds! Crazy. US 30-year bonds as of the start of the trade war were around 4.5%, and a few months later they had climbed to almost 5%. As of writing they have lowered a bit to 4.82% and the stock market has recovered and hit new all-time highs. Wall Street came up with a great name for trading on what Trump says the TACO trade or Trump Always Chickens Out. Meaning that whatever Trump says probably won’t come true.

This lack of confidence in the US and the US Dollar, is borne out by two major indicators, the Dollar Index which is down -10.6% year-to-date, and Gold which is up +28.41% year-to-date, much more than the S&P 500. The Dollar Index simply compares the US Dollar’s performance to a basket of other major currencies, so you could say that it’s underperforming by 10% this year, which is quite a shock if you look at the crazy strong GDP growth in the US just before Trump took office. Then you have Gold, which is an asset that people flock to in times of uncertainty, and there is a lot of that in our world today, for many reasons, because even if the US Dollar loses it’s value, Gold is a hard asset that won’t inflate away like a currency can. Gold will always have an intrinsic value. So these two things have been a pretty damning report card for how the world views what the current US administration is doing on top of the bond problem.

Now to present day, where does this leave the US currency? Well, it’s not looking great, the US dollar will likely continue to get weaker and eventually when the Fed cuts interest rates and bond yields go down, people will not be as willing to buy US treasuries with a low yield so the demand for the currency will also drop. The revisions and cuts to GDP forecasts will also hurt the USD if those things come true. However, that being said, I don’t expect to see 1.30 USD/CAD exchange rate because Canada, and you can extrapolate this to various other nations across the globe right now, is having a hard time with economic growth.

Our interest rates are lower than the US, oil prices are relatively low and not expected to rise dramatically, and our economic growth continues to be slow. Even though the US might be shooting itself in the foot, Canada’s economy is simply not as strong and was not starting from as strong of a point as the US economy is. However, we have seen the exchange rate come down from 1.45 to 1.35 so maybe a 1.30 is in the cards. If we get anywhere in the 1.20’s or even low 1.30s, I think I will look to purchasing a good amount of US Dollars because in the long term, I still believe that no one will be able to dethrone the US Dollar as the world’s currency and I believe that capital, and brains, and great value-generating companies will continue to be born in the US and the US will continue to concentrate global asset growth. Barring the US empire falling completely, I don’t think there is much else that can dethrone the US Dollar.

Now we get into something that might cause the US Dollar some more headache in the short to medium term, and that is this “Big Beautiful Bill” that just passed in the US. This effectively adds $3.3 Trillion Dollars to the US deficit after accounting for the spending cuts vs. the tax breaks. The total debt of the US is currently sitting at around 100% of GDP, and this is likely going to send that much higher to 120-130% of GDP in the next 10 years. The interest payments on the US debt right now are around 13% of the governments budget. Just think about that 13% of all the money the government spends, is getting lit on fire, and this will likely increase because all of this new debt that is being issued will have to be financed at today’s interest rates which are much higher than they were in 2017 during Trump term 1. All of these tax cuts will have to be financed with debt. They will have to come up with $3.3 Trillion Dollars to cover the shortfall of these tax cuts and it’s all going to be debt.

If you think of this from a household perspective, if you are paying 15% of your monthly income just to service your debts, you are likely going to spend much less on discretionary items, you are going to buy less luxury items because a good chunk of your money is going to pay down debt. In the case of the government, this debt means less spending on social services, less spending on infrastructure, roads get worse, transit gets worse, everything gets a little bit worse for a lot of people, the quality of life goes down. In addition to that, this debt will be introducing trillions more dollars to the money supply (money in circulation), and we’ve seen in the past that printing this type of money can lead to inflation.

The US will grow slower and also inflate it’s currency. If there is risk of inflation, the fed will keep rates high for as long as they can, meaning that the interest on this new debt will be expensive. In summary, what I think will happen with this US bill is we’ll see a slow but consistent devaluing of the US Dollar and a strong but consistent inflation in asset prices. If you look to other times that the US printed a lot of money, or if you provide wealthy people with a way to save more money through tax cuts, the way the world is set up these days, a lot of that money doesn’t really get spent in the economy overall, but rather it gets dumped into assets. If you hold US Stocks or real estate right now, I think you can expect to see the value of your holdings increase in the short to medium term. But if this does start to hit growth and consumer spending, then expect the market to pull back a bit.

In conclusion, I don’t think this bill passing will be a positive thing for the US and the USD on the whole, but I also don’t think it’ll be earth shattering to them. There is a slight possibility that the US might be able to outgrow the speed of the increase in the debt, and this possibility is made stronger by AI (but as with anything that has a lot of hype, this feels like a bit of an overinflated asset category right now, could end poorly if companies struggle to prove they are able to monetize their AI models). Even with the assistance of AI and the potential growth and productivity gains, I’m not certain it will be enough to make a huge difference in the story of the US debt. It is possible that whoever the next president is reverses these changes, and might actually try to reign in the debt, but for the time being it does appear that the US is on a bit of a collision course with the future, no one can really predict the long term impacts and the US does still have the fact that everyone wants dollars and looks to them for stability in it’s back pocket.

If you’re trying to compare which currency you think will do great in the future you have to consider one entire economy against another entire economy. I still believe that despite all the debt in the US, they will continue to grow at a faster pace than Canada. They hold these mega, global, high margin “superstar” firms and I just don’t see how Canada can compete with that dominance and the entrepreneurial spirit of the US and the brain drain to the US. Canadian households on the whole also have less disposable income than US households and the household debt to GDP ratio in Canada is quite frankly insane and much higher than the US largely due to the price of housing. On the individual level in Canada people are not able to spur as much growth, spend as much money, or take as much risk as their American counterparts. In the long term I think holding some USD to hedge against a decline in the Canadian Dollar is probably a reasonably safe bet, only time will tell, but that’s my verdict for now. If there are significant changes to either the US state of the economy or Canada, then this strategy may warrant updating.

Let me know your thoughts via email or in the blog comments.

Cheers,

-Oliver

Plans for Canada. When Will The Recovery Begin?

What in the World?

Well, I think we have all heard quite enough of the word “Tariff” these days, what happened to duties, or just taxes? Also, we would be at least 10 states, if not 13.

Backstory:

If you are reading this in the future, you may have no idea what I am alluding to. Tis the year 2025, May hath just begun and methinks I have heard the dastardly word “Tariff” more than one thought ever possible. Canada’s federal liberal party had possibly the quickest U-Turn to an election victory in history; everyone thought they had no chance just a few months ago. The guy running the US is convinced Canada should be “the 51st state”, among about 500 other things. What a weird timeline. I think in 10 or 20 years we will all look back on this and be very confused. At least I hope that is the case and all the world’s problems are solved, one can at least dream. For now, this is the world we live in and there are some pressing problems facing Canada and the new Prime Minister.

Mark Carney:

Arguably one of the best moves of Trudeau’s political career was knowing when to bow out. The new leader of the Liberal Party Mark Carney really appeared to come out of nowhere and swept the liberal leadership race becoming the new prime minister, then quickly called a snap election to solidify his position for the next 4 years. Looking at his resume he has been quite involved in government prior to this. Working with a what was almost certainly a defeated liberal party just months ago, he managed to come within 3 seats of a majority government. With the new US leadership and Tariff policies we are all getting a crash course and re-learning that the links between the Canadian and US economies run deep and trade policy is very important to not only the price of goods, but consumer confidence in spending money and retaining jobs. While I would love to chat about everything, my main focus is going to be talking about what plans Mark Carney has for Canada and what the future might look like if he is able to follow through on some of his election promises. A lot of the points he was touting on the campaign trail I have addressed as problems in my prior posts. Things such as the need for better trades education, lowering cost of housing, and more investment and innovation in Canada. I have also made some videos to go alongside those conversations which you can find at youtube.com/oliverfoote. Now, let us dive into the promises and what some of the outcomes might be.

One Economy:

This is an idea that has come up ever since the start of the trade war. The idea of “one Canadian economy”. Canada is made up of 10 Provinces and 3 Territories and many have local industries they try to protect, through methods such as non-compatible worker credentials, export restrictions of certain goods to other provinces, and a general higher willingness to trade with the US than ship across this massive country (understandably). Many of the provinces are on board with the idea of demolishing some of these barriers and now that there is the political will to find a way to remove them largely thanks to Trump’s trade war, I think it is likely that this will get done between Carney and the premiers. There have been some numbers quoted that if we are able to do this it would return around the same amount of economic activity to Canada as a 25% tariff from the US would cost Canada. I am of the belief that pretty much everyone is in agreement that more labour mobility, easier flow of goods, and accepting credentials across provinces is just a sensible thing to do, would improve workers ability to move to better opportunity increasing competition and wages in the labour market, filling worker gaps across provinces which could also help bring costs down in some industries. This could help provinces that need workers, and provinces that have an oversupply of workers balance out their supply dynamics a bit. We have already seen an outflow of people from provinces like Ontario to provinces like Alberta and the Maritimes. The idea would be a win-win, takes pressure off for example Ontario’s employment and housing and provides much needed workers to places that are having a hard time finding them; if people are willing to move across country of course.

Build Baby Build:

There was one line that stood out to me on housing and that was when Carney said, “we need to build homes on a scale not seen since the Second World War”. The outline of how they plan to accomplish this is multi-layered, but in essence the plan is to create a new government agency with the goal of investing in new home building technology, providing low-cost financing for affordable units, tax incentives for multi-residential unit construction and conversions, and importantly cutting governmental charges on building homes. Of all the costs of construction, (mostly) municipal-government development charges have gone up the most in percentage terms of any development cost in the past 20 years, for a variety of reasons there are a few very interesting videos done by YouTuber “About Here” covering this topic in detail. The liberal government claims on their website that cutting development costs in half will spur $8 Billion of private investment (every year!). We will bookmark that and see how it pans out 5 years from now. They also claim they will work with cities to speed up approvals and try to systematize credentials across Canada so builders can work anywhere, again I think this is a positive thing. Toronto has one of the worst approval timelines in North America at around 30 months, that is just the approval stage! The actual construction of a high rise takes about 2-3 years, but the approvals and delays add 7 years on average to that timeline. Therefore, if we can cut down these delays caused by zoning and city approvals by half, it would immensely improve affordability as every delay adds cost to the price of the end unit. My hope is that provincial and municipal governments across Canada can get on board with the federal government, simplify their processes, standardize approvals, and start rubber stamping thousands more units per year.

Innovation and Investment:

I heard a business owner once say and I think this goes for builders and housing developers, that they are running their businesses in Canada “in spite of” the local government, not because of it. I believe strongly that government has a role to play, making sure workers are safe, making sure that monopolies are not stamping out competition, supporting and championing local businesses. I believe that all levels of government should work hard to be partners with business, not roadblocks. This is where a line from the liberal platform comes in, they said “[lets change] why are we doing this” to “how can we get this done”.

When it comes to housing, when it comes to business, when it comes to trades, innovation and re-investment, we really need to start asking how we can enable things to happen, not why they should or shouldn’t be allowed in the first place. I have made videos and written about Canada’s declining business investments in the past and how a lot of our private sector business investments have moved into the residential housing sector and inflated residential asset prices. This has been somewhat of a trend across many western countries. The liberal platform addresses this as well and points to specific plans for increasing investment in Canadian companies and businesses. I read a very interesting working paper from the Bank of Canada that is related to this. They discuss global capital flows and how money historically flows to the US and their huge “Superstar” firms, which also tend to attract global talent. Canada has a bit of a history with tech firms imploding, think Blackberry and Nortel, but this is not an excuse to not compete at all. Canada needs to invest and encourage a greater start-up and entrepreneurial culture that can potentially create some of these global superstar competitors that will make Canada a more attractive place for global capital, talent, and diversify our economy. Naturally, at some point every company will expand internationally, and finding success in the US is the ultimate victory because of the liquidity of financial markets, start-up culture, the tendency of the American consumer to spend their money, all help companies to grow exponentially. I believe there is more room on the world stage for Canada to innovate at a greater pace and be more than just America’s little brother.

The Future of Canada

There is so much to talk about here and the layers go very deep. I am unsure of how much the Carney government will be able to accomplish, but I do hope that at least some of their ideas make it through. As a nation we have reached a point in time where everyone is in a very patriotic mood and seems very willing to resolve some of these bigger political issues and people are united in the idea of doing so. I hope that this new government can jump on this moment and that this can be a catalyst towards Canada become a larger player on the world stage once again. If there has even been a moment in time where the country and all levels of government seem willing to make massive changes, it’s right now. Amidst all the chaos of the past 5 years, first COVID, now a trade war with very clear signs of recession looming, I find myself feeling optimistic about what the future of Canada might hold. I no longer feel this imminent urge to pack my bags and leave for better opportunities elsewhere in the world, but if one presents itself, I will still likely make the jump if only for the experience of having done so. Only time will tell what ends up happening, but I have a lot more hope than I did a few months ago. There will be a lot of bumps in the road along the way but I am willing to give this new government a chance to see what they can do.

-Oliver

Buy The Stock Market Drop? Tariff Mania.

Let the Games Begin:

As someone who likes to purchase stocks when the markets are bleeding, I wanted to do a quick discussion since the stock market is basically in freefall after Trumps “Liberation Day”. Was the goal to liberate the US from its financial position in the world? Only time will tell.

After doing a bit of reading as it stands at the time of writing, the net tariffs the US has imposed across the globe are around 22%, which sits at a generous 19% higher than it was pre-Trump. In this Motely Fool article, they point out that every time in history that there has been a small increase in tariffs, even just 0.5-2%, the markets tend to fall around 20%-30% from previous highs within 1-2 years of said increase. This has happened countless times in history like clockwork. Meaning that these “Liberation Day” tariffs of a 19% increase, in theory should lead to the largest stock market decline potentially ever seen assuming this time is not different from history and assuming Trump actually keeps them in place.

Missed the Boat:

My investments are quite highly indexed in the US market as a Canadian. Around 80% of my holdings are in the US. Which has made this somewhat painful to watch, although I tend to ignore the market day to day around 95% of the time. I do not like to sell stocks and at this point I have not. My current plan is to ride this painful fall all the way into the pits of despair because I have a buy and hold strategy as I don’t pretend to know better than the average investor. I also do not have the time or conviction to try and time the market. Generally selling while a market is falling means you have already missed the boat, and you will likely suffer from selling at the bottom and buying back in higher. The best thing you can do when times are tough is to remind yourself that lower prices can be good buying opportunities.

My COVID Market Strategy:

During the COVID market crash I took out some loans to invest in the market near the bottom, I believe it was just after all the central banks decided to cut rates and print obscene amounts of money. The economy bounced back as it became clear that there was support during this unknown and unpredictable event. Luckily for me, the bet paid off.

Should I Do It Again?

At the moment I do not have much cash on hand, so the question I want to answer for myself is should I try to repeat what I did during the COVID market? Is this a prudent financial plan? As of writing, the prime lending rate in Canada is at 4.95% and I have access to loans at the prime lending rate. I would have to make above a 5% return in the stock market each year I’m borrowing money, to justify this plan. I would also have to evaluate the risk of interest rates increasing, which based on where I think the economy is heading overall with rising unemployment, I would consider very unlikely. Further I would have to come up with a somewhat reasonable estimate of the length of time the stock market will be in the dumps and when it will start to recover. With these questions in mind, I began researching.

Bank of Canada Thoughts:

I started with what the Bank of Canada has to say about tariffs and interest rates, as well as the speed of the recovery. This paragraph from an event in Feb 2025 does a good job of summarizing the discussion and the problem.

Initially, they are expecting excess supply in the economy as exports fall, this will likely lead to a short-term jump in inflation. Assuming this jump isn’t too bad we will then have the problem of a lack of demand, due to job losses and lack of business investment in the economy. Canada has already been suffering from poor private sector investment for the past decade or so and this trade war will only make worse.

“Smooth the Decline”:

As Tiff Macklem said they cannot restore lost supply, but they might be able to “smooth the decline in demand” which to me translates to cutting interest rates when the time is right. What might make cutting rates more challenging is balancing lower rates with upward pressure on inflation as tariffs are literally a tax that make goods more expensive.

Projections from the federal rate cuts are sitting at 3 further 25-point rate cuts as of a week ago, but today economists are projecting 4 rate cuts. Meanwhile the Bank of Canada said that they would hold rates prior to all the tariff nonsense. Projections from all the large Canadian economists were an sitting at an additional 2-3 rate cuts from the Bank of Canada in 2025. I think it’s possible Canada sees 3 cuts bringing the benchmark rate down to 2% by the end of 2025 given this tariff shock and rising unemployment. There are risks to the upside that inflation does get somewhat out of control due to the tariffs and the bank is forced to hold or even slightly increase rates. Although I think the bigger risk comes from a lack of employment and economic output, rather than a serious increase in prices.

Pandemic Inflation vs. Tariff Inflation:

Prices increased during COVID because people were unable to work, leading to supply chains getting backed up and no new supply entering the country. At the same time governments and central banks made lending basically free AND pumped trillions of dollars into the economy. This was a perfect recipe for higher inflation. Fewer goods to go around, but citizens with more money or ability to spend it for the reasons listed above. This time around, things are different. People do not have as much money, savings rates are very low, finances are stretched, and unemployment is much higher than it was 2019 or 2022. What we can expect this time is that higher prices will likely result in less demand for goods, leading to contracting GDP growth, and drawn-out recessions. Because of all the safeguards, COVID was not a traditional recession, the recovery was unprecedented and arguably quite easy. This time it is going to be different, we are in for long-term, painful, some would argue necessary, economic damage.

S&P 500 P/E Ratio:

Looking at history, what will likely happen to the stock market is a big drop, followed by years of slow climb as the economy adjusts to this new reality. The only question is how far it will drop. As of writing the Price to Earnings ratio of the S&P 500 is sitting at 23.5 and earlier this year it was closer to 27. Even at a P/E of 23 this would still be on the higher end of an “expensive” stock market, something closer to 20 would be considered “reasonable” and a “good buy”. These tariffs will likely decrease consumer spending and cause earnings to fall; it is easy to see that the stock market might have more room to fall based on this alone. If the E in “P/E” drops, the P will have to follow suit to “equalize” the ratio.

Here’s a good chart of where the stock market was right before the dot com bubble, and where our 2025 market was before this whole fiasco. It looks like the tariffs might just be the catalyst the market needed for a bit of a necessary correction.

Q1 Just Ended (safely), Q2 Will Hurt:

The earnings part of this ratio is yet to be updated as we await company earnings. We just closed out Q1 and earning hits will not show up in financial statements until Q2. It is hard to say if the market will be able to properly price this in, or if Q2 earnings season this summer will lead to another large leg down in the market as we see the real tariff reality reflected in earnings. As the market continues to try and price in the absolute worse case scenario, it is likely going to overshoot to the downside, which is when the buying opportunity should present itself. Only warning I have is to be prepared for a very long and slow climb back up and be prepared for multiple short term drops as the market begins to get more information and a more complete picture of how tariffs are truly impacting the economy.

Short-Term 4-Year Plan:

At minimum it will likely be at least 4 years before things change again. Factoring in a 4-year bleed, I somewhat hesitate to recommend the plan of borrowing money to invest. The state of our economies prior to all this was somewhat bleak, and this will completely shake up global trade. Another potential wrinkle in this policy is that this ends up being a temporary 4-year (or shorter) policy and just causes stagnation until 2029 and then everything returns to normal at that time. Which just means slow to negative economic growth for the next 4 years, as the tariffs will likely reduce trade, which is a huge part of GDP. I would consider this a very likely scenario.

Unfortunately, this being the case would arguably make things even worse in the short-term for Americans as companies will be reluctant to onshore production and invest in long-term plans to build in the US. Which will just result in these companies trying to find other partners to trade with and cut the US out entirely and overall reduce economic activity in the US. Similarly, other countries will find it easier to just circumvent the US entirely which will make things worse for Americans and possibly more expensive for those other countries as well.

Guns and a Foot:

The US will almost certainly see high inflation and job losses because of the tariffs. They will make American companies unable to compete globally and export at reasonable prices as countries start to put reciprocal tariffs in place. Equally, it is possible in my view, that this “Liberation Day” ends up being very short lived. Once the US begins to feel the impacts, markets falling. It is possible that everyone, including those around Trump in the next 6 months to a year start calling for him to revert these policies. If he does reverse course prior to the end of his term, the markets will likely react positively, although they probably won’t return to their highs of January 2025 due to a lack of trust in Trump.

Passing of Time:

As an investor you must balance the possibility of a variety of things happening. It is likely that tariffs will be long and drawn out, but it is equally likely things will go back to normal sooner than later. In either scenario, the US *should* return to a freer trade policy at some indeterminate date in the future. Since this is almost a certainty, whether in this administration or the next. The length of the downturn does not necessarily matter if you are a long-term investor buying with cash you can afford to dump into the market and you have time on your side. My belief is that in the future we will view this moment as a stellar buying opportunity. I think it is a safe bet to say that for the next 4 years, the US will no longer be viewed as a haven for capital. The long-term impacts on US economic dominance due to this policy and other intangible things, will be harder to quantify.

Modern Era Volatility:

Something you might notice looking at a chart of the S&P 500 is that in recent years volatility has increased significantly. This is partly due to the speed at which information travels these days. Reactions to world events tend to be more instantaneous than they were 25 years ago. The decline from the dot com bubble was a 2-3 year long protracted fall, whereas the covid decline was, I’m not kidding, 3 weeks. Then the fed stepped in to “save the market” and the recovery began, within about 6 months it returned to where it left off in Feb 2020. Between 2020 and 2024 there were some ups and downs, with a period of a 20% drop from 21-22, but on the whole things were more stable.

I wanted to point this out because I think the modern era will play into the speed and severity of the decline. I don’t expect the recovery to be nearly as quick as the covid recovery, but I think the sharp declines in the market will continue for a couple of weeks at most, then things will stabilize once all this tariff stuff plays out globally. This makes predicting the bottom a challenge, so the general advice would be to buy in slowly in chunks on days when the market is down over the coming weeks and months. I hesitate to think this decline will be as fast as the covid decline, but the “big” one time shock of these blanket tariffs, the “main event”, has occurred. Whereas during covid, the main event was when everyone realized the speed of the spread of the virus and then governments around the world telling people to stay home. This time it’s Trump telling America to… Well, insert your favourite expletive here.

US and China:

Another impact is that chips from Taiwan will become more expensive. Many supply chains are located abroad, especially in China, and many consumer electronics are manufactured in Chain or Taiwan. With the additional US tariffs, coupled with a lack of consumer spending, you might see stocks such as Apple drop significantly. My suspicion is that consumer spending will effectively halt for a while as people worry about what the tariffs mean for their jobs, and as many people begin losing their jobs during Q2 due to businesses adapting to the tariff shock, they simply will not have any money to spend.

To Borrow or Not to Borrow:

On balance, I think borrowing money right now to invest holds a good amount of risk. There is no guarantee that things will improve. During the covid downturn, the action of the central banks and governments supported economies rather than taking a chainsaw to them. There are many more uncertainties this time around. However, every time in history that the US market has fallen, things have eventually recovered, even if it takes 5-10 years. On top of this, there is a limit to the amount of time that Trump will be in office (for now).

US Global Dominance in Question:

The only assumption that the world has not had to question for the last 80 years, was if the US will remain the dominant economic force. After the Second World War they were riding the high on being one of the most innovative and powerful economies in the world. Today the competitiveness of the US on cutting edge tech, top talent across the world being attracted to the economic machine, is genuinely put into question thanks to this tariff policy. China was on pace to surpass the US as the largest economy decades ago if it played its cards right, and now it is sitting at #2. I suspect this policy will just accelerate the decline in US competitiveness.

I am still somewhat naively hopeful, that the US will come out of this and be able to resume somewhere near where they left off. I believe that they will continue to be on the cutting edge, the spirit of entrepreneurialism is still going to be at the heart of the US. They will continue to export tech and media to the rest of the western world thanks to the dominance of their global superstar firms.

More Room to Fall? China Hits Back:

The market is down about 15% from it’s January peak. Considering these numbers are only starting to bring the market back to realistic valuations, I still see room to fall.

On the “pricing in” tariffs front. China announced reciprocal tariffs today, which caused the already depressed market to drop even more. The United States imports $450 Billion of Chinese goods each year which have a 34% tariff slapped on them as of this morning (which escalated to 125% in the future). Stocks with large exposure to the Chinese market such as Nvidia, Apple, Tesla saw more severe drops than the market overall. Over the weekend, and starting next week, it is likely that other countries will retaliate against the US as well, namely the European Union. Which will lead to more pain in the stock market. Each time another large economy decides to fight back against the US tariffs, it will continue to hurt the US markets more and more. As this builds up, I suspect it will become increasingly likely that Trump will backpedal.

Timing:

With the small amount of cash on hand I have right now, I’m likely going to start buying in slowly. I won’t buy in all at once, I’m going to buy chunks in the next week or two once the drop is nearer to 20%. With a clearer picture now in my mind, I may also take on a small amount of loan risk that I feel I would be able to pay off successfully should that turn out to be a poor decision. When increasing your investing risk, it is also important to consider your stage in life. I am 25, yet to start a major career, but I do not particularly enjoy taking on huge amounts of risk. However, I am young, so taking on a bit more risk makes sense as I have less to lose. Regardless, prudence is important when talking about entire economies getting hurt and people losing jobs. If you are not in a recession proof job, be careful. I do not really have all that much to lose right now, but I also do not want to lose for no reason or lack of due diligence. Calculated risks are important, and I think this is a good time to take action and take on some calculated risk.

With that my analysis of the new tariff scenario concludes. Only time will tell what the outcome is, but I’ll leave you with the age old saying of “buy low, sell high… And hope the US comes to its senses”. We may not be at the eventual low yet, but buying on the way down has proven to be a winning strategy time and time again. Remember, timing the market is a fool’s errand, but if you must try it, be sensible. Trump can do a lot of damage, but I believe the US will still come out of this as a top player on the world stage, even if it takes 4 years for all this to blow over, and even if there are some irreversible problems caused. This time, the investing decision is not as easy as it was during covid, but if you drown out a bit of the noise buying in while things are looking bad and understanding that this is all most likely temporary, is how success stories are built. As always.

Keep Investing,

-Oliver

End Note:

Dividend Stocks vs. Interest:

I wanted to add a bit of an endnote here. Last time when I borrowed money to invest, I did it relatively safely. I mostly purchased stocks that had over a 100-year history of paying out dividends, in a country with a stable economy (which is a bit harder to quantify this time), and I made sure that the dividends they paid out would at minimum cover the interest on my loan, effectively reducing my risk to near zero. I considered any increase in the share price as “free” appreciation. Just wanted to throw this out there as a consideration for investing on margin. Obviously, be careful about the industry you choose. This is just an idea to mitigate some risk while increasing your overall position in the market.