Kingsmill's Investment Miscellanea: Friday, February 5, 2021

Feb 05, 2021 | Joshua Kingsmill


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Key Takeaways

  • The new US administration isn’t as aligned with Canada, as many might think
  • 80% of Canada’s exports go to the U.S., and it’s mostly auto parts and Oil and Gas and Mining
  • The Superbowl, though it has some Canadian content, and is a massive event for advertisers, still

The President of the US and the Canadian Prime-Minister's policies and relationship matter a lot to the Canadian economy. Many Canadians believe that if the U.S. president is a Democrat and our Prime Minister is Liberal, then economic relationships will be strong. In short order, Mr. Biden ought to have changed this prevailing wisdom.

First, the cancellation of the Keystone pipeline, while not at all a surprise, fits with his narrative of wanting a “green” economy and is certainly a blow to our economic interests.

The second significant consequence, whose ramifications will take longer, is President Biden doubled down Donald Trump’s “Buy American” campaign, signing a Jan. 25 executive order that will increase international trade burdens. Mr. Biden’s new order will keep Mr. Trump’s mandate that the federal government buy goods made domestically. But it adds a new, highly disruptive mandate to raise the threshold for foreign components going into those finished goods, along with the establishment of a panel to reduce the many exemptions. Despite its anti-trade image, the Trump administration hadn’t even finalized its own “Buy American” rules until two days before leaving office, suggesting a gap between rhetoric and economic reality that the new administration seeks to close.

This second consequence is more severe. This is because components are key to Canada’s exports to the U.S., which make up around 80% of all of Canada’s exports.

Canada doesn’t have a diversified export economy: it trades with or what we actually export in either country. Canada’s two largest exports are natural resources and automotive components, together accounting for nearly two-thirds of Canada’s total exports. To break that down: half of all our exports: Oil and gas, mining and auto components, represent 50% of our total exports to the U.S.: a worrisome concentration.

North American supply chains integrate industries on both sides of the border, especially in the automotive sector. For instance, U.S. scrap steel is exported to Ontario, where U.S. manufacturers such as Ford and GM use it to produce vehicles for export back to the U.S. Mandates on where components are made pose a risk to the existing supply chains. Dictating where components can be produced harms both workers and consumers even in normal times. Given Covid-19-related disruptions to supply chains, such measures are compounded paired with already increasing commodity prices. Scrap-steel prices are already up 60% since November, while order backlogs have hit a 2½-year high.

One of the significant take-aways from this is highlighting the importance of Canadian investors to be diversified in terms of the types of companies and their exposure to other markets than just Canada.

Now back in the U.S., this Sunday is the Superbowl. Really though, they ought to change their name to “Super Commercial.”

SuperBowl 2021 Brands

 

The Super Bowl is the 2nd most popular sports event globally. While the World Cup is larger, there isn’t one country that pulls in the Superbowl's massive viewership. It’s one of the last “made-for-TV” spectacles, and over 100 million people will watch it in the U.S. I found it interesting that for the first time since 1983, when Anheuser-Busch introduced Bud Light, the beer giant isn't advertising its iconic Budweiser brand. Instead, it’s donating the money it would have spent on the ad to coronavirus vaccination awareness efforts.

The Anheuser-Busch move follows a similar announcement from PepsiCo., which won't be advertising its biggest brand, Pepsi, to focus on its sponsorship of the halftime show, which by the way features the Canadian group “The Weekend” (so we still can export entertainment to the US!)

Other veteran Super Bowl advertisers like Coke, Audi and Avocados from Mexico are sitting out the game altogether. The pandemic has cut sharply into sales for many Super Bowl advertisers. With pricey ads costing an estimated a record $5.5 million for 30 seconds during the Feb. 7 broadcast, some have decided it's not worth it this year.

But that doesn’t prevent me from making my prediction, which is the elder statesmen Tom Brady will win another Superbowl, his first with his new Tampa team.