“In calm water every ship has a good captain” – Swedish Proverb

Note that the contents of this memo are all my thoughts, and not the views of RBC Dominion Securities. As well, no part of this content was AI-assisted or created.

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You can also now listen to this month’s abbreviated podcast version HERE.

Friends & Partners,

Well, things got interesting pretty quickly in April, that’s for sure. And highlights this month’s headline quote in spades. There’s lots to talk about this month, and is the most thought and time I have ever put into my Partner Memo – I encourage you to read it all or as much of it as you can, there’s lots to dig into and consider given all that’s going on in the world.

Trump hasn’t had the smoothest execution I’ve seen, considering the US turned around and suddenly punched most of her allies in the face. And I’m not sure that the American view of ‘America First’ includes the attempt to repatriate all the lost employment to poor countries in textile sweatshops and mind-numbing assembly lines.

I’m not here to pontificate what’s right or wrong, I simply aim to decipher the facts as they are and give an unbiased view of the implications moving forward.  But I will just note that It does not appear that things are going quite as well for the countries ‘ripping off’ the US in trade deals as they are for the US who has supposedly getting ‘getting ripped off’…

Perhaps the Trump Administration will finally conclude that maybe it’s actually been getting a good deal out of being nice to their allies historically?!

The good news in all of this is that Trump cares about markets (interest rates more than stocks which is unsurprising considering there’s a mountain of US debt that needs refinanced soon), and is using tariffs for negotiation purposes. The challenge for investors is that Trump has the power to resolve many of these issues if he chooses. And while a 90-day pause on higher reciprocal tariffs is a welcome reprieve, it will almost certainly not be the end of this story. And expect continued noise in stocks, treasuries/bonds, and the USD.

I have been touting for some time very strongly that we are in a different environment than we have been the past 10-15 years, and the investment landscape has and will continue to evolve with that. I have to include 2 relevant quotes on this front – and I would ask, do you still think we’re in the same place we were prior?...

“The 2010s will go down in history as the easiest environment asset owners have ever seen. You just had to buy anything. It didn't matter what you bought. The more of it you bought, the better it was. When you look at vol-adjusted returns of bonds, stock, tech stocks—they all ended up at approximately the same thing. You just had to buy a lot of them f it was bonds and less of them if it was tech stocks. On a risk-adjusted basis, buying anything worked. Anytime there was a dip in the price, you just bought more of it. When you look back in history, that's a unique environment.” – Luke Ellis, Man Group CEO

"Investors diligently prepare portfolios based on the last 30 years of market behavior while remaining unaware of the potential for the return of devastating patterns that occurred outside their working lifetime. With changes in the geopolitical and economic landscape occurring today on a scale we haven't seen in decades, it may be wise for investors to study history beyond the recent past in order to truly understand the ramifications.” – Phillip Toews

The world of finance, markets and banking is ultimately all about trust – and once the trust is broken, it is very difficult to rebuild. If Trump ripped up a deal that he himself negotiated, why should anyone assume that he will honour the next deal? Another example is Howard Lutnick threatened to withhold already awarded subsidies from the IRA and CHIPS Act unless companies contributed even more – this is not conducive to attracting long-term company commitments.

I believe that in time (a few months to a year), the majority of this noise will be behind us – but it will be a bumpy ride along the way, and hard to hang on for many. It reinforces the old adage that "when it comes time to buy, you won't want to."

Trump is a binary negotiator – he’s not one to make many concessions given the American position of power. All countries will agree to Trump’s terms to some degree. Just look at Canada – our trust in the US made us largely depending on them to purchase our products, and our oil, even going so far as to refuse to build a pipeline to get our oil abroad and instead selling it to the US at a heavy and persistent discount.

One positive thing will come from all of this: Canada will hopefully (likely) change its ways. As will most other countries. The trust with the US is now broken, and is unlikely to go back to exactly the way it was. The tides have shifted. And so should most portfolios – this has investment implications. Everyone has fallen all over themselves to own America everything which has worked until 2025, but don’t expect that ‘American Exceptionalism’ will continue to prevail. One financial writer puts it well in noting that “there is no going back. US financial assets will be for sale for years to come. We took decades for the world to get this overweight American stocks and bonds. It won’t be unwound in a couple of weeks.” The more the US administration weaponizes trade and the US dollar, the greater the risk that it prompts active capital repatriation as well.

In my experience, diversification gets talked about but rarely implemented well. Thankfully, in our portfolios we have been underweight America since well before April.

The market noise is unnerving, but the holy grail lies in positioning well for one’s risk appetite, and preserving capital during volatile times. The natural reaction for many is to react, to sell, and to attempt to avoid and protect from further decline. Any investor who is worth his/her salt knows that short-term timing the market is a fool’s errand, and the chart below reiterates why.  Of the 50 best days in the market over the past 30 years, 50% of them occurred during a bear market (like we saw some of in April, for example). If one were to have missed just 10 of those days, returns declined by a stunning 54%! Missing the top 20 cost investors losing 73% of their return and missing the top 30 days led to returns 83% lower than long-term averages. Higher long-term returns can only be achieved with both good AND bad markets – you can’t have one without the other. This isn’t to say that portfolios shouldn’t be actively managed, tactically positioned and capital preserved during volatile periods. It’s just a simple reminder that it’s not about ‘Timing the Market’ but ‘Time in the Market’. While it might be tempting to precisely time the market peaks (sell at the top) and troughs (re-entry at the bottom), the probability of doing so across multiple cycles is likely to be extremely low. The more suitable approach is to stay disciplined and invested, which can help keep investors on the trajectory towards achieving their long-term financial objectives. For those that commit to a plan, less anxiety awaits, and goals planned for get achieved.

 

 

 

Other Interesting Things To Highlight

I recorded our second podcast just last week, and you can listen to that HERE. It’s only 8 minutes long, so take a listen. I aim to keep these impactful, concise and fun. This one is entitled ‘The Perils of Investing: It’s All About Risk & Your Behaviour’. Here's the punchline: good investing isn’t actually about earning the highest returns, which may seem controversial at first. But it’s all about the RISK taken to achieve that return. And behaviour matters – I’m a pilot, and investing can be a bit like flying, which is hours and hours of boredom punctuated by moments of sheer terror. We experienced this in April, and the typical investor behaviour that goes along with it. Hopefully you didn’t have to panic sell out of fear…

Earlier in the month, we hosted a number of family offices in downtown Toronto for an event entitled "Alternatives and Family Offices: Strengthening the Asset Mix". We spent an afternoon speaking to various esteemed diligence experts and single family office representatives on assessing alternative investment fund managers. Our attendees gained insights on the basics of alternative fund due diligence, with a focus on hedge funds and private market alternatives. They also learned how family office and ultra-high-net-worth investors can assess and integrate these investments into their exposures. We had some heavy-hitter speakers from across the industry who were very insightful.

I am honoured to be the presenting partner and title sponsor for My Friend’s House this year, a wonderful and important charity in our community. My Friend’s House is a non-profit agency offering support for abused women living in the Georgian Triangle. Their first big event of the year is coming up soon, and is the “Ultimate East Coast Kitchen Party”. A house party in the Maritimes is simply called a “Kitchen Party”, and this one offers an evening of casual fun and entertainment, complete with East Coast-inspired food stations, high-energy Celtic music from local band, Strange Potatoes. May 14th at Harbour Street Fish Bar, sign up HERE.

 

 

 

What Is Trump’s End Game Anyway? Making Sense Of All Of This & A Focus On The Big Picture*

When there’s political noise, we usually don’t opine on why that is, we simply assess what are the implications for markets and portfolios. But these are unique times – many of the issues today are ‘man-made’ (i.e. Trump) and we need to try to understand what the drivers are and the end goal here, as random as some of it may seem. This can inform where the puck may be going as well.

I find that few are opining on a ‘better solution’ to Trump’s playbook here, but Ezra Klein and Tom Friedman discuss that here, it is one of the best listens out there currently on this issue (thank you for the heads up here Kevin Muir). Too many (including Trump et al) are focusing on battling the China of 2015, not the China of 2025: https://www.youtube.com/watch?v=UqBa0hBAQBA

China takes a long view (much longer than 4 years that Trump will be around for), and has an authoritarian system which is tightly controlled by the Chinese Communist party. They’re likely better prepared to absorb a period of political and economic pain than the US due to this, as economic turmoil swiftly translates into political pressure. The Chinese have been preparing for a trade showdown with the US for a long time, while Trump is spit balling this a bit as he goes.

There are moving parts daily, and the Administration says a lot of things (which is part of their strategy here). Details are constantly changing, but I will summarize selected high level points on the big picture from Greenlight Capital (if you’d like their full note let me know):

• The Administration is a disruptive entity. It is not upsetting the proverbial apple cart. Rather, it is upsetting ALL of the apple carts at the same time. These are ‘go-fast and break-things’ people. It is a very high-risk strategy that they hope will lead to large transformations in many areas. It may or may not work out as they expect, but in the meantime, it creates a lot of chaos. It may turn out that going fast and breaking things is not the greatest idea when it comes to geopolitics and the global economy.
• The present foreign relations strategy is called America First. There are many isolated grievances (some quite legitimate) that America has with other countries. Rectifying unfairness is being prioritized over previous themes such as promoting democracy and supporting capitalism, economic development and freedom around the world. Some actions might go beyond the grievances and seem more like conquests. This can mean alienating allies and bullying anyone perceived as weak. Perhaps, this will lead to Europe paying for its own defense and Japan importing American automobiles. Perhaps, America First could turn into America Solo.
• The Administration is leading economic policy with trade, and its policy is Protectionism, a traditionally left-wing position. The goal appears to be to use tariffs to raise revenue and establish barriers that create economic incentives to produce in the United States, rather than abroad. While this re-industrialization may be well-meaning, there are serious problems with this thinking:
  • First, a trade deficit doesn’t necessarily mean that we are being ripped off. We buy goods and the other country gets money. They can do whatever they want with the money including lending it to the U.S. government, which needs to borrow. We get the benefit of enjoying the goods. It’s not that different than going into a deli and buying a sandwich. You get the sandwich, and the deli gets your money and can do with it whatever it wants. Nobody is getting ripped off – even when the pastrami isn’t that great.
  • Second, while we have nostalgia for manufacturing, it is not clear that having workers in poorer countries knit our socks is such a bad thing. We have migrated to a service economy and have nearly full employment. As manufacturing jobs have been lost, other jobs have been created. Yes, the transition has been uncomfortable for those displaced and there are things we could do to ease their pain (starting with dramatic improvements in educating their children), but there are better solutions than trying to bring back low value-added manufacturing jobs.
  • Third, there is a large lag between introducing tariffs now and when factories could even be built domestically. In the meantime, we will suffer the immediate harm of the tariffs without the benefit of the new manufacturing.
  • Fourth, the Administration may be underestimating China. The Treasury Secretary has repeatedly said that China “is playing with a pair of 2s.” Presumably, he thinks this is a weak hand. As a first matter of poker, if 5 cards are dealt, a pair of 2s is almost exactly an average hand. As a second matter of poker, it is a strategically unwise tactic to tell your opponent what cards you believe he holds. As this plays out, both countries have strengths and weaknesses
  • Fifth, there are serious risks to the highly protectionist trade policy – not to mention the Administration’s preference to wield tariffs (and the threat of tariffs) to achieve foreign policy ambitions beyond trade. The continually shifting demands and possible alienation of our allies risk causing a loss of trust.
    • A reserve currency requires a sense of trust, and we gain tremendous benefit from having the U.S. Dollar as the world’s reserve currency. If we lose the world’s trust, reserve currency status is jeopardized. The Biden administration took a large step in this direction by freezing $300 billion of Russian reserves. Reserves are supposed to be just that – there when you need them.
    • The Trump administration has floated the idea of a revised system based on the so-called Mar-a-Lago Accord. One idea that has been publicly hinted at is for foreign countries to exchange their existing holdings of U.S. debt into other U.S. debt on less favourable terms. Countries that might become alienated or might be asked (and ask may be a euphemism) to compromise their U.S. bond holdings have a large incentive to sell U.S. debt before that happens. They certainly aren’t being compensated for taking substantial risk. Ultimately, this puts the risk of global de-dollarization on the table.

Over the last 25 years, US companies have benefitted from increasing globalization of both trade and capital which enabled secular disinflation and increasing profitability. As Goldman Sachs points out, "US equity valuations are difficult to sustain structurally if there is a trend towards higher inflation and lower corporate profitability," as the result of a shift to deglobalization.

So, if Trump engineers a recession from all of this, even with rates going down, if history is a reference then inducing a recession would likely have a negative impact to the budget. The US is in a sticky situation with this one:

Source: Apollo

 

 

 

What is ‘American Exceptionalism’ And Is It At Risk?*

All of this drama is inflicting damage on the idea of American economic exceptionalism, which has been a major tailwind on U.S. assets for decades. You likely have heard the term “American economic exceptionalism” and here’s what it means in plain English: The U.S. economy is the most resilient and innovative in the world and U.S. markets are the most liquid, transparent and well run in the world. It has been that way for decades with virtually no competitors (China is not an economic competitor other than in sheer size). American economic exceptionalism in practice makes the U.S. dollar the reserve currency of the world (which gives the U.S. massive power globally) and U.S. Treasuries are the biggest global “risk-free” asset. American economic exceptionalism is the fuel that feeds investors’ insatiable demand for U.S Treasuries and allows the U.S. economy to feel virtually no ill effects of its deteriorating fiscal condition – because there are always more buyers of additional debt. No other country in the world enjoys this privilege.

At the heart of U.S. economic exceptionalism is the unwavering rule of law and rock-solid structure of the U.S. government. Put plainly, global investors buy U.S. assets and come to the U.S. to innovate because 1) They know the rules (the court system is well established and broadly viewed as impartial) and 2) These rules don’t change based on the latest elections or on which power is in control in Washington. Compare that statement to China (their next closest economic competitor) where neither the courts nor the structure of government is safe from whoever is in power. Trump’s attacks on Fed Chair Jerome Powell erode this idea of solid structure of the government and as such, erode the idea of American economic exceptionalism.

On the bright side, one president, regardless of how aggressive, has only so much time to change things (most only have about 18 months before midterm elections flip the Congress). Even a showdown between the president and Fed chair can’t erase decades of history, especially when both men will be gone from power in the next three and a half years (at the longest). But it can erode a sense of American exceptionalism and that means less support for U.S. assets (S&P 500, US dollar and US Treasuries). Trump knows markets and his advisors (Bessent) know the market will react very negatively to an outright war between Trump and Powell. And as I have noted, Trump is not one to practice self-immolation (and we saw that again when he backed off on tariffs). Hopefully, the most likely outcome is Trump is abusive in the media but stops short of actually trying to remove Powell.

But this all injects more uncertainty into the structure of government as it relates to monetary policy and that uncertainty will pressure the markets. Additionally, the destruction of demand for U.S. assets from foreign buyers will push Treasury yields higher and that will 1) Further weigh on the stock market multiple via higher yields and 2) Increase borrowing costs for the U.S. government at a time when the U.S. is trying to reduce its deficit (and that will make it more difficult to do so).

And don’t think that foreign investors are underexposed to the US either today.

 

 

 

Assets Are Not Acting As They Normally Do In Times of Trouble – Here’s Why*

Normally, when things get noisy for stocks, there’s a flight to safety – bonds (particularly those government bonds also known as Treasuries) and the USD usually find strength as capital flows to those safe haven assets during turbulent times. That hasn’t been happening lately.

There are a few reasons for this – the main one being that Trump is breaking the playbook by upsetting most countries and investors across the globe. Safe haven bonds/Treasuries should be acting well, but have been doing the opposite, for a few reasons:

• Foreign dumping of U.S. Treasuries in retaliation to recently announced tariffs
• Tariff-induced inflation fears (1-year Inflation Expectations Survey hits the highest since 1981 for example)
• Profit taking in safe bonds, one of the few asset classes that has done well so far in 2025. When there’s market stress, sometimes everything just gets sold regardless of quality
• A more troublesome U.S. national debt picture warranting a larger yield premium on U.S. Treasuries (which I have written about extensively over the past year!)
• Unwinding of something known as the ‘basis trade’, here is what that is in summary:
  • I don’t want to overly complicate things here, so let’s just say that there are two ways one can buy treasury bonds – they can pay cash and buy the bonds, or they can put up only a little cash and buy a futures contract that is tied to a treasury bond.  Hedge funds will often sell those future contracts to those who want to buy their treasury exposure this way, and buy the underlying bonds outright, as a way of collecting free spread between how these bonds and futures contracts trade.  You still with me?  No harm, no foul here; it’s highly liquid, highly transparent, highly efficient stuff in a massive market.  This “spread” is teeny-tiny, but at the large size of this market, it can equal a lot of “risk-free” return for those with a balance sheet adequate to be a liquidity provider to the largest financial market on earth (U.S. government debt).  But when there is some event that hits the treasury market, the out-sized leverage in this particular trade means a lot has to be unwound at once, and the selling of underlying bonds from hedge funds is mismatched to demand (or market capacity) for corresponding buys, so prices become distorted, and/or the Fed intervenes to buy (as in 2020). 

So the recent rates sell-off wasn’t driven by a single culprit, but rather a confluence of potentially secular trends that had long flown under the market’s radar – now resurfacing in the wake of the recent Trump stir.

There is also noise about the USD losing it’s ‘reserve currency status’ potentially. It may remain the global reserve currency, but its dominance has taken a bit of a hit to be sure.

UBS summarizes this dynamic well: “There are certain things that turn a currency into a reserve currency. No reserve currency has to be perfect—it just has to be better than the next best alternative. There are five criteria that can contribute to a currency achieving reserve status: liquidity, access, stability, geopolitical influence, and rule of law.

The US dollar's dominance as the leading reserve currency is likely to continue to fade as its relative advantages lessen. The fading importance of any reserve currency's status is also likely to continue, as global trade in goods falls as a share of global economic activity. The dollar as a reserve is therefore likely to be a falling share of a falling market. However, the dollar is not going to be replaced, and it is very unlikely that any single alternative will emerge. The parallel is perhaps to the declining importance of sterling in the 1930s with several other currencies playing a larger role, rather than the replacement of sterling as the leading reserve currency in 1947.”

Source: UBS

 

 

 

Is The Economy Falling Off A Cliff? Short Answer: Not So Far*

Despite warnings of stagflation and surging recession worries, economic data has so far stayed remarkably resilient.

Over the past 3 months, a very wide gap has been created between investor/consumer sentiment and actual, hard economic data. Most major sentiment readings including University of Michigan, Conference Board, AAII and others have plunged because the expectation is that trade volatility and policy chaos will create (at best) an economic slowdown and at worst stagflation or a deep recession.

But hard economic data has not shown any significant deterioration, despite these warnings. And while most of the data is still from March, when the trade war escalated, the policy uncertainty began in February. And given the very negative expectations, one would have expected to see at least some deterioration in the data. So far, that hasn’t really happened. That underscores the importance of focusing on hard economic data, not just sentiment readings.

The U.S. economy has twice, in the past five years, defied expectations and stayed resilient through 1) Covid and 2) the interest rate surge of 2022. In both instances, analysts and experts predicted a loss of momentum and even a recession. However, both times the U.S. economy proved more resilient than expected.

Now, this is a different time and these are different circumstances, and I am not saying that a slowdown won’t happen. But recent history tells us we must look at hard data, and the reality so far is that hard data is not confirming slowdown fears. That may change in the coming months, but so far it is not. Stay tuned.

 

 

 

So Is It Time To Panic? Or Should I Prepare To Panic?!*

No, you don’t need to ‘prepare to panic’ (I love that line, as ridiculous as it is). Market noise could persist for days, weeks or months – no one knows what the future holds, and I would not listen to anyone who convinces you with authority that they do. We know where we are today, however, and we can prepare accordingly. But we don’t need to prepare to panic….

Economic impact is different from market impact because markets discount into the present beliefs about the future, and economic impact is measured based on what just got done happening (the market is leading vs. economic readings are mostly lagging). We don’t know how things will unfold on the economic front yet, there are simply too many unknowns and variables at this point. What I can tell you is that markets began recovering after COVID lockdowns and the most violent 30-day sell-off in a generation (which featured all three of the worst days in the market since Black Monday in a 10 day period) within weeks, and months and months and months before the actual COVID news improved.  Black Monday in 1987 was down -22% in ONE DAY, and the market was up that year, a bit like 2020 when COVID hit hard. There are simply too many factors that make market action unpredictable. But the one predictable thing is the foolishness of trying to predict. The differentiation is in how we prepare.

We have to remember that investors often fixate on the short-term risks and engulf themselves with headlines that portray an image of maximum discomfort. We focus on the now, we feel like we have control in the now. In contrast, short term volatility tends to compare to detours on a scenic drive, with a long-term perspective providing comfort to ongoing dismay. This chart shows that historically the odds of experiencing a positive return drastically increases with longer holding periods. In summary, time and patience remains the greatest asset. You can see that even if you hold just TSX stocks (not a recommended portfolio!), you haven’t lost money in any period since 1977 if you held 5 years or longer:

This doesn’t mean that the outlook is certain – far from it. RBC economics sums up the current outlook for the economy and stocks succinctly I think:

“Shrinking the trade deficit through tariffs exposes the U.S. to a weaker economic picture through lower investment that can force an increase in the savings rate, risking lower consumer spending. Combined with an outsized vulnerability to foreign investment and what may be a handicapped policy response should growth meaningfully slow, downside risks to the U.S. economy are mounting at the same time price pressures are re-accelerating, increasing the risk of a stagflationary environment. Such an economic backdrop typically acts as a headwind for risk assets, specifically equities, all else equal.”

Bridgewater notes that things are changing rapidly:

The portfolio construct and exposures need to adapt accordingly for this uncertain outlook, keeping the long-term in perspective. There will still be opportunity, just in different places than in the recent past.