The big blow

As Milton slams into Tampa it’s harder and harder to fathom America.

In the midst of natural disaster – Helene and now this monster – with hundreds dead and millions at peril, all some people can do is play politics. Donald Trump spreads lies that federal aid has been withheld from ‘red’ areas that usually vote Republican. Disaster money has been diverted from shattered families to housing migrants, he adds.

FEMA says crap. The relief agency has taken to the Internet to dispel the misinformation. Lives are being put in danger, it says, as people come to believe no help is forthcoming. Sad and weird. Like the televised debate ‘fact’ that newcomers to Ohio eat dogs and cats.

As Trump gets further out on the limb (he called Kamala Harris “mentally disabled” a few days ago), the poll numbers still show either candidate could win the presidency, although she is edging forward in the popular vote. (Who wins the Electoral College is another matter.)

So what impact will US politics have on your portfolio? If you think the answer is ‘none’ you’re wrong. This is an election unique in our lifetimes. Not only for the candidates, but the timing – coming after a once-in-a-century pandemic and the inflationary/high-rate bubble that ensued.

After all, we’ve been through a storm. Unemployment during Covid was 13% in the States and 14% here. Interest rates went to zero. Real estate went nuts. The jobless rate then plunged to a 50-year low of 4% in America, where it remains. Rates spiked wildly from 0% to 5% – the most aggressive tightening in history. And house prices stayed insane. Along the way, in both Canada ad the States, government spending went wild. Inflation shot from negative to 8% here and 9% there. Now back to 2%. The roller-coaster rise has been historic.

Investors who stayed cool and remained invested have done well. Portfolios have grown exponentially, despite the rate explosion that temporarily tanked bonds and other interest-sensitive assets. Anyone who slept through Covid, unemployment, central bank tightening, inflation and political misadventures has done great.

So now, what?

If Trump wins and does what he promises, corporate taxes will drop, regulations will fade, green initiatives will be fewer, migrants will be deported and tariffs will wall off America. Stock markets will probably surge until the inevitable inflation caused by higher consumer and producer prices (from tariffs) brings another CB response while Trump’s trade war feeds a global recession. That’s what most economists are telling us. It includes a load of bad news for Canada, which is massively dependent on unfettered trade with the States.

But Maybe President Trump won’t deliver on those things, being convinced to moderate. Or perhaps he will lose to President Harris. But will he concede?

In any case, let’s look at interest rates – the most pivotal factor (along with employment) to the housing market which has an outsized influence on Canada’s economy.

Right now we’re on track for a soft landing. Thus the US Fed and our Bank of Canada can gently reduce rates, erase the prospect of recession and keep the jobless rate under control. It rarely happens, but seems likely this time.

The smarties at bond fund manager Pimco ($1.9 trillion under management) say, “Cash rates are set to decline alongside policy rates, while high government deficits may drive long-term bond yields higher over time.” In other words, CBs will continue to cut in 2024 and through 2025, feeding bond prices – but that inevitably this will reverse and rates climb again. Yes, because of politics.

In the short term (a year or so) the central bankers want a Goldilocks economy and rates in the neutral zone, like 2-3% (now over four). So we are entering a gilded age of cheaper mortgages. But it won’t last.

Whether this American election is won by the lady or the guy, the long-term outcome will be the same. They can’t stop spending. The debt is $35 trillion. The annual shortfall is $3 trillion. Taxes are absurdly low, and lawmakers seem incapable of increasing them. “US deficits will be the biggest loser no matter which party wins,” says Pimco, because of a “lack of political will to curb entitlement spending.”

And let’s remember than 92% of the time, the Bank of Canada ends up doing what the Fed does. Ditto in the bond market – where the yield on the benchmark Canada 5 (which influences fixed mortgage rates) apes the trend of the US ten-year Treasury.

Trump in November? Expect higher stocks, a goosed economy and stalled rate cuts, followed by inflation and more tightening. Harris next month? Markets should be more neutral, economic growth and profits subdued and the Fed keeps easing. Then more spending and inevitable rate pressure.

If you have investments, stay invested. If you want to buy property, wait for snow.

About the picture: “Ozzy is my brother’s dog,” writes Erin. “I text him daily asking if he’s read the blog (we are both millennials… investing and real estate!!).  But Ozzy, she is a queen boss who is sweeter than any dog I know.  Stubborn, strong, and quirky.  She was adopted from the pound and had a tough start.  She’s self confident now and loves nothing more than knowing her people are in the house watching her display a master class in squirrel hunting.  Thank you for the advice and the blog.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2024/10/09/the-big-blow-3/