Three random thoughts.
1. WCS differential is now a bit lower ($12.32 as of 1/2/25) than was reported recently ($13s, which was a big improvement from the high teens and $20s, before TMP expansion completion), an incremental positive.
2. Exchange rate was pressured in Q4 (now at 0.6921, a 5-year low), which is one reason Cdn companies valued in US dollars – e.g., HMENF, IPOOF, ZPTAF – have declined in US dollar terms, a significant headwind recently.
I know nothing about the currency market (and what to expect going forward), except that USD Index is now very high (109) (somewhat of a headwind for WTI generally) and Canada has more problems than we in the US do. But this chart, https://wise.com/us/currency-converter/cad-to-usd-rate/history, indicates that the 5 year mean Cdn to US conversion rate is about 0.75. So, reversion (from current 0.6921) to that mean, were it to occur (?), should be upside for US holders. Continuation of USD strength and/or decline in C$ would be a headwind.
3. Tax treatment. Dividends paid by HMENF, IPOOF, ZPTAF (all are attractive, imo) held in a US, taxable account are subject to automatic 15% withholding by Canada (credit for which can be claimed on US tax return). If, by contrast, shares are held in a US tax deferred account (e.g., IRA), there is no 15% withholding, but when withdrawn from the IRA they are taxed as ordinary income. So, if one has an IRA from which substantial withdrawals won't be made for many years, it might pay to hold HMENF, et al high yielding, shares in such an account (vs. in a taxable account) in order to get the benefit of tax deferred dividend income that can compound in the IRA over time tax deferred. Even better might be to hold such shares in a Roth IRA (funded by post tax funds), where the dividends, when received and upon withdrawal, would never be taxed if the account were open for at least 5 years and the dividends are not withdrawn before age 59 ½. Here's a good article about the advantages of a Roth, particularly the compounding effect of dividends held in a Roth for a long period of time: https://www.themuse.com/advice/roth-ira-dividends .
Comments welcome.
Canadian dividend payers
Canadian dividend payers
Last edited by cmm3rd on Sun Jan 05, 2025 2:20 pm, edited 2 times in total.
Re: Canadian dividend payers
Great observations. Very insightful. Thanks for posting.
As I understand it, Canada is not far off from an election tat should replace Castro Trudeau with a very energy favorable prime minister.
Make North America great again, kick the CCP out of Panama, and harness the vast resources without burdensome regulation and watch prosperity proliferate.
Makes a lot of sense to me.
As I understand it, Canada is not far off from an election tat should replace Castro Trudeau with a very energy favorable prime minister.
Make North America great again, kick the CCP out of Panama, and harness the vast resources without burdensome regulation and watch prosperity proliferate.
Makes a lot of sense to me.
Re: Canadian dividend payers
Good stuff.
Paul Colborne, CEO of Surge Energy (SGY.TO and ZPTAF) will be joining me on an EPG webinar on January 23.
Paul Colborne, CEO of Surge Energy (SGY.TO and ZPTAF) will be joining me on an EPG webinar on January 23.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Canadian dividend payers - currency issue
Here's a worthwhile read on what is happening in "currency war": https://dailyreckoning.com/trumps-plan-to-end-currency-war-3-0/. It was enlightening re an important issue: expected currency fluctuations that have already affected the value, in US dollars, of Canadian producers, and will unquestionably be relevant in the future.
After reading the article, one might wonder how our historically high debt level, and the amount of money that will be needed to service it, compared to 1983 and 1985, affects the analysis.
Snippets:
"The critics are wrong and don’t understand what Trump is actually trying to do. Trump is not trying to start a currency war; he’s trying to end it once and for all.
....
Exchange rates fluctuate based on a number of factors including interest rates, industrial growth, exchange controls, central bank interventions, capital flows, tax rates and many other macroeconomic variables. But the idea that the president can just wave his hand and devalue the dollar is false.
Far from the reckless, inflationary process the media claim, Trump’s actual plan is based on the highly successful model developed by James Baker for Ronald Reagan and implemented in the Plaza Accord of 1985 and the Louvre Accord of 1987.
After the severe economic recession of 1982 and Paul Volcker’s policy of moving interest rates to 20%, inflation in the U.S. was finally reigned in. Inflation dropped from 13.5% in 1980, to 6.1% in 1982, and then 3.2% in 1983. Investment in the U.S. went on a tear. U.S. real growth was 16% from 1983 to 1986. Everyone wanted dollars to invest in the U.S. and the dollar boomed reaching an all-time high in 1985.
Finally, the Reagan administration decided the U.S. dollar was too strong and was hurting U.S. exports and jobs. Treasury Secretary James Baker convened a meeting of the finance ministers of France, Germany, Japan, the UK, and the U.S. at the Plaza Hotel in New York City. The purpose was not to fight a currency war. The purpose was to create order in currency markets out of the chaos that had prevailed since 1973.
The parties reached a joint agreement that would devalue the U.S. dollar in an orderly fashion versus the French Franc, Japanese Yen, UK pounds sterling, and the German Deutschemark. Once the targeted level for the dollar was achieved, the parties would use their best efforts, including market intervention as needed to maintain those levels within narrow bands.
A separate meeting in Paris at the Louvre in 1987 agreed that the devaluation phase was over, and the dollar would be maintained at the new parities. This was not currency war; it was currency peace achieved by agreement and implemented in a cooperative fashion. The Louvre Accord (this time including the U.S., UK, France, Germany, Japan and Canada) ushered in a period of global prosperity that lasted twenty years until the Global Financial Crisis of 2008.
Trump’s goal is to repeat the success of the Plaza and Louvre Accords. Trump’s advisor on this is Robert Lighthizer, who is one of the most brilliant financial minds around and was Trump’s U.S. Trade Representative (2017-2021).
Lighthizer was also USTR for Ronald Reagan from 1983 to 1985 so he’s a veteran of prior currency wars and was in the administration around the time the Plaza Accord was being developed. Lighthizer is the perfect individual to help Trump achieve the kind of success that Reagan and Baker had in the 1980s.
The media are trying to portray Trump as reckless when in fact he’s proposing something highly beneficial for U.S. jobs and U.S. industry. Don’t be fooled by false claims of new currency wars. Trump is trying to achieve a new era of currency stability and lasting prosperity."
After reading the article, one might wonder how our historically high debt level, and the amount of money that will be needed to service it, compared to 1983 and 1985, affects the analysis.
Snippets:
"The critics are wrong and don’t understand what Trump is actually trying to do. Trump is not trying to start a currency war; he’s trying to end it once and for all.
....
Exchange rates fluctuate based on a number of factors including interest rates, industrial growth, exchange controls, central bank interventions, capital flows, tax rates and many other macroeconomic variables. But the idea that the president can just wave his hand and devalue the dollar is false.
Far from the reckless, inflationary process the media claim, Trump’s actual plan is based on the highly successful model developed by James Baker for Ronald Reagan and implemented in the Plaza Accord of 1985 and the Louvre Accord of 1987.
After the severe economic recession of 1982 and Paul Volcker’s policy of moving interest rates to 20%, inflation in the U.S. was finally reigned in. Inflation dropped from 13.5% in 1980, to 6.1% in 1982, and then 3.2% in 1983. Investment in the U.S. went on a tear. U.S. real growth was 16% from 1983 to 1986. Everyone wanted dollars to invest in the U.S. and the dollar boomed reaching an all-time high in 1985.
Finally, the Reagan administration decided the U.S. dollar was too strong and was hurting U.S. exports and jobs. Treasury Secretary James Baker convened a meeting of the finance ministers of France, Germany, Japan, the UK, and the U.S. at the Plaza Hotel in New York City. The purpose was not to fight a currency war. The purpose was to create order in currency markets out of the chaos that had prevailed since 1973.
The parties reached a joint agreement that would devalue the U.S. dollar in an orderly fashion versus the French Franc, Japanese Yen, UK pounds sterling, and the German Deutschemark. Once the targeted level for the dollar was achieved, the parties would use their best efforts, including market intervention as needed to maintain those levels within narrow bands.
A separate meeting in Paris at the Louvre in 1987 agreed that the devaluation phase was over, and the dollar would be maintained at the new parities. This was not currency war; it was currency peace achieved by agreement and implemented in a cooperative fashion. The Louvre Accord (this time including the U.S., UK, France, Germany, Japan and Canada) ushered in a period of global prosperity that lasted twenty years until the Global Financial Crisis of 2008.
Trump’s goal is to repeat the success of the Plaza and Louvre Accords. Trump’s advisor on this is Robert Lighthizer, who is one of the most brilliant financial minds around and was Trump’s U.S. Trade Representative (2017-2021).
Lighthizer was also USTR for Ronald Reagan from 1983 to 1985 so he’s a veteran of prior currency wars and was in the administration around the time the Plaza Accord was being developed. Lighthizer is the perfect individual to help Trump achieve the kind of success that Reagan and Baker had in the 1980s.
The media are trying to portray Trump as reckless when in fact he’s proposing something highly beneficial for U.S. jobs and U.S. industry. Don’t be fooled by false claims of new currency wars. Trump is trying to achieve a new era of currency stability and lasting prosperity."
Re: Canadian dividend payers
Two more worthwhile articles.
First, this 12/3/24 WSJ article explains how Lighthizer did not get the USTR job (wanted Treasury or Commerce). Informative re what the agenda will likely be. https://www.wsj.com/politics/policy/robert-lighthizer-trump-cabinet-exclusion-faa56917
Second, this interesting 12/24/24 interview: https://themarket.ch/interview/louis-gave-gavekal-us-equities-are-very-much-priced-for-perfection-ld.12782
Sounds like a reprise of the 1985 Plaza Accord in the form of a "Mar-a-Lago Accord" may be the plan, where tariffs will be a tool, but not the goal, that would keep the dollar from becoming too strong. Notably, Gave is very concerned about US equity prices ("priced very much for perfection"), noting MSCI market cap to M2 ratio is at an all time high. He is bullish on commodities (including energy) and gold.
Also, Gave seems to minimize the possibility of Lighthizer influencing trade policy, but the above WSJ article quotes an observer warning not to underestimate the potential for Lighthizer influencing how things proceed re tariffs, noting that Lighthizer's protege got the USTR job.
Most of Gave interview article:
"Interview
«The U.S. Equity Market Is Very Much Priced for Perfection»
Louis-Vincent Gave, CEO and co-founder of Gavekal Research, talks about his expectations for the incoming Trump Administration, the possibility of a grand bargain between the USA and China, and his investment outlook for 2025.
Louis-Vincent Gave is an astute observer of geopolitical and macroeconomic developments and their impact on financial markets. The analyses of the co-founder of Gavekal Research are required reading for numerous investors worldwide.
In an in-depth interview with The Market NZZ, which has been lightly edited for clarity, Gave shares his views on the first decisions President Trump will have to make, positive and negative scenarios for 2025, and why he continues to focus on emerging markets, financials, the commodities sector and gold.
Six weeks have passed since the US election. Markets so far seem happy. From the perspective of an investor, what’s the most important thing regarding the next Trump presidency?
The most important thing is that markets like it. And to be fair, markets have liked everything coming out of the US for the past 18 years. Since 2007, US stocks have outperformed the rest of the world in every single year except for 2016 and 2022. Any active global equity manager who over those years owned anything other than US growth stocks was left scrambling. The main reason for this outperformance was a belief of US exceptionalism: America has the best tech companies, it has the world’s biggest consumer market, it controls the world’s finance, it controls the world’s reserve currency, it leads in AI. The narrative today is that the US is an impregnable fortress.
And the election of Trump enhances that?
Yes. He is all about making America Great Again. But now, of course, the question arises: How, concretely, will he do that? During the campaign, Trump talked about cutting taxes and reducing the deficit. He talked about increasing tariffs and reducing inflation. How will he match all these goals that seem to be contradictory? We don’t know that yet. For now, markets just believe in the narrative of US exceptionalism. What seems to particularly delight them is the idea that thanks to Elon Musk and Vivek Ramaswamy, there will be a wave of deregulation, unleashing a productivity boost like the world has never seen before. If one believes that, then buying US stocks today makes sense.
Do you share that belief?
The reason why the US has outperformed for 16 out of the past 18 years was the perception that US productivity was already superior to the rest of the world. That’s how we got where we are today. It was based on the idea that Europeans are a bunch of bozos who stop working for two months over summer, and that Asian governments keep trampling over their economies, leaving the US as the only place with rising productivity. And now, markets are giddy based on the idea that productivity will be boosted even more. But consider this: Profit margins in the US today are already close to record highs. You’d have to essentially argue that it’s different this time and there won’t be any mean reversion in profit margins. My fear is that during the campaign too many contradictory things were said, and when President Trump starts governing, he will have to start to make hard choices.
Such as?
The obvious and first question will be what he will do with the promises of tariffs. The big question here is whether he sees tariffs as a tool or as a goal.
You have written previously that Trump sees tariffs as a tool, i.e. that he uses them to gain leverage in trade negotiations.
Yes, I still have that view. During the campaign, we had two trains of thought running in the background. One was the ‹tariff as a goal› train of thought, led by Robert Lighthizer. According to that view, globalization has been a disaster for the US, leading to deindustrialization, social problems, devastated communities, the opioid crisis, and so on. This train of thought would use tariffs to protect the US from imports in order to reindustrialize. The ‹tariff as a tool› train of thought, led by Scott Bessent, would use the threat of tariffs to bring China and Japan to the negotiating table, get them to agree to revalue their stupidly undervalued currencies and to get them to build factories in America. The fact that Bessent has been appointed Secretary of the Treasury, while Lighthizer has not been given a job in the Administration, reinforces my belief.
Scott Bessent has repeatedly been talking about the need for a new Plaza Accord for the world economy. What do you make of that?
In interview after interview, he talked about the need for a Mar-a-Lago Accord. Back in the 1980s, the dollar was super high, while the yen and the deutschmark were super low. So in 1985, Treasury Secretary James Baker got all the players together at the Plaza Hotel in New York, where they agreed to bring down the dollar and push up the other currencies. And in so doing, they unleashed a massive boom all over the world. And by the way, the mid-1980s is a time Trump remembers fondly, because that’s when he started to became a big household name. Bessent today says there needs to be a grand global economic reordering, and that he wants to be a part of it.
How probable is such a grand bargain?
I can’t attach a probability to it, but it’s perhaps the right tail risk that investors aren’t pricing in today: The possibility that Trump comes in, calls China and Japan over to do a Mar-a-Lago Accord, where they agree to revalue their currencies and agree to build factories in the US. Trump can then turn around and say he made the best deal ever with the Chinese, that he’s the master negotiator and then he can sell more copies of ‹The Art of the Deal›. And everybody’s happy.
What would this scenario mean for financial markets?
If that happens, the world will take off. But ironically, perhaps we would start moving away from the US exceptionalism story, because if you have a concerted government effort agreeing to bring the dollar down, this will cause a boom in markets outside the US. I do see this as a possible scenario for 2025. I call it a right tail risk because it’s one which people aren’t positioned for at all.
What would the bad scenario be, the left tail?
You can think of many left tail risks. There are few ways things can go right, and there are lots of ways things can go wrong. Unfortunately, that’s the world we live in. One left tail risk is a re-run of the 1930s, with massive global trade wars. Maybe China is not that interested in making a deal with Trump. China may feel it got screwed over in 2018 when the US banned semiconductor shipments to Huawei. China has spent the last six years immunizing their economy from the US. Today, only 15% of their total exports go to the US. China’s higher-value-added goods, be it cars, power plants, solar panels or industrial robots, are increasingly going to other emerging economies. So maybe Beijing will tell Trump to go ahead with his tariff threats, they don’t care.
What’s another left tail risk that worries you?
The most obvious one right now is that we’re having a political void in Germany and in France at the same time. This is the first time in my life that this has happened. And of course France and Germany are the very pillars on which the EU rests on. This political void is occurring at precisely the time when France is facing a fiscal crisis, while Germany is facing a structural economic crisis linked to the fact that China has leapfrogged them in industry after industry. China now not only produces much cheaper than Germany but sometimes even better. One of my favorite anecdotal evidences for this is the fact that Audi has dropped its iconic logo with the four interlocked circles in China. For years and years, Audi was the premier high-end car. Now, they have rebranded their cars in China, because even a high-end German car is perceived as inferior by Chinese consumers. This tells you a lot about how much the world has shifted.
Before the US elections, markets were worried about a scenario where the Republicans end up with control over the White House and Congress. The idea was that the bond market could riot based on the perspective of inflationary and fiscally irresponsible policies. Was that fear overblown?
We’ll see. Bonds actually did sell off right after the election. In my view, that’s one of the reasons why Trump picked Bessent and not Lighthizer as Treasury Secretary. He wanted to appoint somebody that financial markets trust, an adult in the room. Bessent is very well regarded both as an investor and as an individual. You won’t find anybody to say bad things about him. But now, I think the bond market is in a wait and see mode. Also, this bond market stability of the past few weeks is occurring at a time when all the data in Europe is looking terrible. If Europe does hit the skids, then capital will flow into US Treasuries. Europe’s weakness strengthens the US exceptionalism narrative.
It’s not only Europe that is in bad shape. The country that has disappointed again and again in the past two years was China. What’s your view there?
If I dare say, that’s a very Western way to look at China. I think you are looking at it through the prism of the equity market, which is how we in the West tend to judge our policy makers. In China, equity markets are not the benchmark that the leadership is worried about. If you are Xi Jinping, your world changed in 2018, when the US came after you with the aim to cripple your economy. Beijing thus saw no choice but to become resilient and self-sufficient in every single industry. So when you say Chinese policy has been a failure I would say hold on: China’s trade surplus went from $20 billion per month in 2018 to $90 billion today. In every emerging market you travel to, you see Chinese cars on the road. China exports more to Southeast Asia than to the US today. How did they do that? In 2018, they told their banks to stop lending to real estate and only lend to industry from now on. China has poured capital into industry and has moved up the value chain quickly. Six years later, you find they have endured a massive real estate bust, while at the same time they have leapfrogged the West in many industries.
....
We started by discussing the narrative of US exceptionalism. Is the US equity market priced for perfection?
Yes. There are many ways you can look at this. One of course is simple valuations. The cyclically adjusted P/E is almost at all-time highs, save for a couple of months in early 2000. One of the metrics I like is the ratio of market capitalization to M2, the idea behind that being that financial markets are all about figuring out if there is more money than fools or more fools than money. Today the ratio is at an all-time high, past what we saw in 1999/2000. In addition, the US is 4% of global population, a little less than 25% of global GDP, less than a third of global profits, and it’s more than two thirds of the MSCI All Country World. Such an imbalance has not been seen since the late 1980s, when Japan’s economy contributed less than a fifth of global GDP yet accounted for 45% of the World Index.
Most of these arguments could have been made for years.
You’re right – and I did! And I have been so wrong. It’s so painful. You can go back to 2019, and a lot of the arguments were true back then, already. You could argue that in 2019, the US was priced for quasi perfection, while today it’s priced for total perfection.
What could derail this train?
A number of things could make it happen. One would be a Mar-a-Lago Accord. If there was a concerted effort to drive down the dollar, there would be a massive shift into other asset classes. All sorts of cyclical stocks and emerging markets would benefit.
What else?
Much of the US exceptionalism bull market of the past two years has been driven by the hopes for AI. Over the past couple of years, big US tech companies have invested roughly $200 billion into AI projects of various sorts. Will they get adequate returns on their invested capital? And, going forward, will they keep investing at this pace? What, on the other hand, if these big tech companies start to doubt the prospective returns on their investments and start to scale back? The internet boom turned out to be very real, but that didn’t prevent a big, multi year slump in tech stocks.
Looking at the world from an investor’s perspective, where would you invest?
Let’s start with the US, which is very much priced for perfection. Maybe US exceptionalism doesn’t end, but that would entail believing that this time is different. I see a considerable risk that it will end, either because of a Mar-a-Lago Accord, which would benefit markets in the rest of the world, or because of a change in perspective over AI investments.
First, this 12/3/24 WSJ article explains how Lighthizer did not get the USTR job (wanted Treasury or Commerce). Informative re what the agenda will likely be. https://www.wsj.com/politics/policy/robert-lighthizer-trump-cabinet-exclusion-faa56917
Second, this interesting 12/24/24 interview: https://themarket.ch/interview/louis-gave-gavekal-us-equities-are-very-much-priced-for-perfection-ld.12782
Sounds like a reprise of the 1985 Plaza Accord in the form of a "Mar-a-Lago Accord" may be the plan, where tariffs will be a tool, but not the goal, that would keep the dollar from becoming too strong. Notably, Gave is very concerned about US equity prices ("priced very much for perfection"), noting MSCI market cap to M2 ratio is at an all time high. He is bullish on commodities (including energy) and gold.
Also, Gave seems to minimize the possibility of Lighthizer influencing trade policy, but the above WSJ article quotes an observer warning not to underestimate the potential for Lighthizer influencing how things proceed re tariffs, noting that Lighthizer's protege got the USTR job.
Most of Gave interview article:
"Interview
«The U.S. Equity Market Is Very Much Priced for Perfection»
Louis-Vincent Gave, CEO and co-founder of Gavekal Research, talks about his expectations for the incoming Trump Administration, the possibility of a grand bargain between the USA and China, and his investment outlook for 2025.
Louis-Vincent Gave is an astute observer of geopolitical and macroeconomic developments and their impact on financial markets. The analyses of the co-founder of Gavekal Research are required reading for numerous investors worldwide.
In an in-depth interview with The Market NZZ, which has been lightly edited for clarity, Gave shares his views on the first decisions President Trump will have to make, positive and negative scenarios for 2025, and why he continues to focus on emerging markets, financials, the commodities sector and gold.
Six weeks have passed since the US election. Markets so far seem happy. From the perspective of an investor, what’s the most important thing regarding the next Trump presidency?
The most important thing is that markets like it. And to be fair, markets have liked everything coming out of the US for the past 18 years. Since 2007, US stocks have outperformed the rest of the world in every single year except for 2016 and 2022. Any active global equity manager who over those years owned anything other than US growth stocks was left scrambling. The main reason for this outperformance was a belief of US exceptionalism: America has the best tech companies, it has the world’s biggest consumer market, it controls the world’s finance, it controls the world’s reserve currency, it leads in AI. The narrative today is that the US is an impregnable fortress.
And the election of Trump enhances that?
Yes. He is all about making America Great Again. But now, of course, the question arises: How, concretely, will he do that? During the campaign, Trump talked about cutting taxes and reducing the deficit. He talked about increasing tariffs and reducing inflation. How will he match all these goals that seem to be contradictory? We don’t know that yet. For now, markets just believe in the narrative of US exceptionalism. What seems to particularly delight them is the idea that thanks to Elon Musk and Vivek Ramaswamy, there will be a wave of deregulation, unleashing a productivity boost like the world has never seen before. If one believes that, then buying US stocks today makes sense.
Do you share that belief?
The reason why the US has outperformed for 16 out of the past 18 years was the perception that US productivity was already superior to the rest of the world. That’s how we got where we are today. It was based on the idea that Europeans are a bunch of bozos who stop working for two months over summer, and that Asian governments keep trampling over their economies, leaving the US as the only place with rising productivity. And now, markets are giddy based on the idea that productivity will be boosted even more. But consider this: Profit margins in the US today are already close to record highs. You’d have to essentially argue that it’s different this time and there won’t be any mean reversion in profit margins. My fear is that during the campaign too many contradictory things were said, and when President Trump starts governing, he will have to start to make hard choices.
Such as?
The obvious and first question will be what he will do with the promises of tariffs. The big question here is whether he sees tariffs as a tool or as a goal.
You have written previously that Trump sees tariffs as a tool, i.e. that he uses them to gain leverage in trade negotiations.
Yes, I still have that view. During the campaign, we had two trains of thought running in the background. One was the ‹tariff as a goal› train of thought, led by Robert Lighthizer. According to that view, globalization has been a disaster for the US, leading to deindustrialization, social problems, devastated communities, the opioid crisis, and so on. This train of thought would use tariffs to protect the US from imports in order to reindustrialize. The ‹tariff as a tool› train of thought, led by Scott Bessent, would use the threat of tariffs to bring China and Japan to the negotiating table, get them to agree to revalue their stupidly undervalued currencies and to get them to build factories in America. The fact that Bessent has been appointed Secretary of the Treasury, while Lighthizer has not been given a job in the Administration, reinforces my belief.
Scott Bessent has repeatedly been talking about the need for a new Plaza Accord for the world economy. What do you make of that?
In interview after interview, he talked about the need for a Mar-a-Lago Accord. Back in the 1980s, the dollar was super high, while the yen and the deutschmark were super low. So in 1985, Treasury Secretary James Baker got all the players together at the Plaza Hotel in New York, where they agreed to bring down the dollar and push up the other currencies. And in so doing, they unleashed a massive boom all over the world. And by the way, the mid-1980s is a time Trump remembers fondly, because that’s when he started to became a big household name. Bessent today says there needs to be a grand global economic reordering, and that he wants to be a part of it.
How probable is such a grand bargain?
I can’t attach a probability to it, but it’s perhaps the right tail risk that investors aren’t pricing in today: The possibility that Trump comes in, calls China and Japan over to do a Mar-a-Lago Accord, where they agree to revalue their currencies and agree to build factories in the US. Trump can then turn around and say he made the best deal ever with the Chinese, that he’s the master negotiator and then he can sell more copies of ‹The Art of the Deal›. And everybody’s happy.
What would this scenario mean for financial markets?
If that happens, the world will take off. But ironically, perhaps we would start moving away from the US exceptionalism story, because if you have a concerted government effort agreeing to bring the dollar down, this will cause a boom in markets outside the US. I do see this as a possible scenario for 2025. I call it a right tail risk because it’s one which people aren’t positioned for at all.
What would the bad scenario be, the left tail?
You can think of many left tail risks. There are few ways things can go right, and there are lots of ways things can go wrong. Unfortunately, that’s the world we live in. One left tail risk is a re-run of the 1930s, with massive global trade wars. Maybe China is not that interested in making a deal with Trump. China may feel it got screwed over in 2018 when the US banned semiconductor shipments to Huawei. China has spent the last six years immunizing their economy from the US. Today, only 15% of their total exports go to the US. China’s higher-value-added goods, be it cars, power plants, solar panels or industrial robots, are increasingly going to other emerging economies. So maybe Beijing will tell Trump to go ahead with his tariff threats, they don’t care.
What’s another left tail risk that worries you?
The most obvious one right now is that we’re having a political void in Germany and in France at the same time. This is the first time in my life that this has happened. And of course France and Germany are the very pillars on which the EU rests on. This political void is occurring at precisely the time when France is facing a fiscal crisis, while Germany is facing a structural economic crisis linked to the fact that China has leapfrogged them in industry after industry. China now not only produces much cheaper than Germany but sometimes even better. One of my favorite anecdotal evidences for this is the fact that Audi has dropped its iconic logo with the four interlocked circles in China. For years and years, Audi was the premier high-end car. Now, they have rebranded their cars in China, because even a high-end German car is perceived as inferior by Chinese consumers. This tells you a lot about how much the world has shifted.
Before the US elections, markets were worried about a scenario where the Republicans end up with control over the White House and Congress. The idea was that the bond market could riot based on the perspective of inflationary and fiscally irresponsible policies. Was that fear overblown?
We’ll see. Bonds actually did sell off right after the election. In my view, that’s one of the reasons why Trump picked Bessent and not Lighthizer as Treasury Secretary. He wanted to appoint somebody that financial markets trust, an adult in the room. Bessent is very well regarded both as an investor and as an individual. You won’t find anybody to say bad things about him. But now, I think the bond market is in a wait and see mode. Also, this bond market stability of the past few weeks is occurring at a time when all the data in Europe is looking terrible. If Europe does hit the skids, then capital will flow into US Treasuries. Europe’s weakness strengthens the US exceptionalism narrative.
It’s not only Europe that is in bad shape. The country that has disappointed again and again in the past two years was China. What’s your view there?
If I dare say, that’s a very Western way to look at China. I think you are looking at it through the prism of the equity market, which is how we in the West tend to judge our policy makers. In China, equity markets are not the benchmark that the leadership is worried about. If you are Xi Jinping, your world changed in 2018, when the US came after you with the aim to cripple your economy. Beijing thus saw no choice but to become resilient and self-sufficient in every single industry. So when you say Chinese policy has been a failure I would say hold on: China’s trade surplus went from $20 billion per month in 2018 to $90 billion today. In every emerging market you travel to, you see Chinese cars on the road. China exports more to Southeast Asia than to the US today. How did they do that? In 2018, they told their banks to stop lending to real estate and only lend to industry from now on. China has poured capital into industry and has moved up the value chain quickly. Six years later, you find they have endured a massive real estate bust, while at the same time they have leapfrogged the West in many industries.
....
We started by discussing the narrative of US exceptionalism. Is the US equity market priced for perfection?
Yes. There are many ways you can look at this. One of course is simple valuations. The cyclically adjusted P/E is almost at all-time highs, save for a couple of months in early 2000. One of the metrics I like is the ratio of market capitalization to M2, the idea behind that being that financial markets are all about figuring out if there is more money than fools or more fools than money. Today the ratio is at an all-time high, past what we saw in 1999/2000. In addition, the US is 4% of global population, a little less than 25% of global GDP, less than a third of global profits, and it’s more than two thirds of the MSCI All Country World. Such an imbalance has not been seen since the late 1980s, when Japan’s economy contributed less than a fifth of global GDP yet accounted for 45% of the World Index.
Most of these arguments could have been made for years.
You’re right – and I did! And I have been so wrong. It’s so painful. You can go back to 2019, and a lot of the arguments were true back then, already. You could argue that in 2019, the US was priced for quasi perfection, while today it’s priced for total perfection.
What could derail this train?
A number of things could make it happen. One would be a Mar-a-Lago Accord. If there was a concerted effort to drive down the dollar, there would be a massive shift into other asset classes. All sorts of cyclical stocks and emerging markets would benefit.
What else?
Much of the US exceptionalism bull market of the past two years has been driven by the hopes for AI. Over the past couple of years, big US tech companies have invested roughly $200 billion into AI projects of various sorts. Will they get adequate returns on their invested capital? And, going forward, will they keep investing at this pace? What, on the other hand, if these big tech companies start to doubt the prospective returns on their investments and start to scale back? The internet boom turned out to be very real, but that didn’t prevent a big, multi year slump in tech stocks.
Looking at the world from an investor’s perspective, where would you invest?
Let’s start with the US, which is very much priced for perfection. Maybe US exceptionalism doesn’t end, but that would entail believing that this time is different. I see a considerable risk that it will end, either because of a Mar-a-Lago Accord, which would benefit markets in the rest of the world, or because of a change in perspective over AI investments.
Re: Canadian dividend payers
Good reading.
I think smart money managers will rotate into our very profitable upstream companies. They don't need $100/bbl oil to make money. They are very profitable at $70/bbl, especially if NGas stays over $3.00.
I think smart money managers will rotate into our very profitable upstream companies. They don't need $100/bbl oil to make money. They are very profitable at $70/bbl, especially if NGas stays over $3.00.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group