To my clients:
It was an up week for North American stock markets with the Canadian TSX finishing up 2.1%; the U.S. Dow Jones Index up 2.5%; and the U.S. S&P 500 up 4.6%.
markets this week was a softening of tariff rhetoric from the White House with respect to China, as well as reports of advanced trade talks with multiple nations – most especially South Korea. On South Korea, Treasury Secretary Scott Bessent said the country “brought their A-game” to trade negotiations and expects a deal in principle as soon as next week. Further, Apple has announced that it will be shifting all production of U.S. destined iPhones to India, fueling speculation that India may also be in advanced talks on a trade deal. A separate, though also significant contributor to market gains this week was President Trump explicitly stating that he has “no intention – never did” of firing or otherwise replacing Fed Chair Jerome Powell before his term expires in 2026.
Moving on, I want to make very clear that I am not supportive of how Trump has proceeded with his tariff agenda. The approach has been both arrogant and erratic. As the very influential hedge fund manager Ken Griffin said this week, with such a strident and haphazard approach “the United States is eroding its brand”. I thought this was a very succinct way of describing the current state of affairs. But, that said, consider that the U.S. national debt (i.e. the total amount owed) has reached a whopping ~$36 trillion, more than 100% of GDP, and expected to keep rising. The U.S. deficit (i.e. the amount the U.S. goes further into debt each year) is expected to add another $1.9 trillion to the debt this year and currently sits at 6-7% of GDP. Outside of recession years, these levels of deficit spending are notably elevated. Net interest expenses have been the fastest growing item (up 25% in 2024), hitting a record $900 billion (approaching 50% of the budget deficit). Making matters worse, the interest on the debt is approaching the rate of economic growth.
The status quo is clearly not sustainable, and I was writing about this as long ago as 2008 during the Great Financial Crisis. Since then matters have only worsened. So, be it Trump’s so-called “Mar-A-Lago Accord” (more or less that policy that the Trump Administration is presently, and loosely, following) or an alternative framework, some level of restructuring or realignment is clearly necessary. So, again, whether you agree or disagree with the approach (and I strongly disagree with much of it), what we are seeing now are the first steps towards such a realignment.
along the same vein, influential market strategist, Jim Bianco, of Bianco Research stated “if we are in the process where the status quo cannot hold, then we have to move forward with either this radical policy or another radical policy, and I think that too many people get buried in the [tariff] weeds”. Or, as Treasury Secretary Scott Bessent (himself a highly successful and influential hedge fund manager) said on June 6th, 2024 (i.e. well before he was tapped to be the U.S. Treasury Secretary) “in the next few years, we are going to have some kind of grand economic reordering. Something equivalent to a new Bretton Woods. There’s a very good chance that this happens in the next 4 years and I’d like to be a part of it.” My point by highlighting these two quotes is that there could ultimately be some beneficial end result to the current economic turmoil…
… but in the here and now, the U.S. brand is being eroded. Most “soft” economic data (soft data being things like opinion polls and expectations) reveal that both businesses and consumers have had their confidence severely shaken. On the flip side, most “hard” economic data (hard data being actual economic results such as employment numbers, consumer spending numbers, economic output numbers etc.) show that the economy has remained reasonably resistant. While there has been some slowdown in many of the hard numbers, nothing alarming has yet arisen in the collective data. In particular, employment has remained robust. But while the “collective” numbers remain resilient, certain sectors appear to be the early stages of rolling over (notably housing).
IF deals with trade partners begin to be announced, and meaningful advancement of trade talks with China emerge, then a positive path forward can begin to take shape. But I think the window of opportunity is narrow, otherwise the hard data may begin to collectively follow the soft data sharply lower.
That’s it for this week. All the best,
Nick
Nick Scholte, CIM, FCSI
Senior Portfolio Manager
Scholte Wealth Management
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