Ugh, Canada

Some of you hopefully noticed that I didn’t publish anything last week.  That was intentional – I was on a long-planned vacation to the Canadian Maritimes (Nova Scotia, New Brunswick, Prince Edward Island), hoping to see the Bay of Fundy tides and to unplug in a combination of small cities, unspoiled beaches, and sparsely populated towns.  I happily checked all those boxes except one – I could not escape the news about the US-Canada trade negotiations.  After spending the bulk of my professional life trading in the Canadian markets, I was unable to avoid pondering the ramifications of their breakdown.

If the usual patterns of news flow prevailed, this was likely a relatively minor story in the U.S., except for the 11^th-hour extension on Tuesday and the actual cessation on Friday.  It was hardly the case north of the border.  We did a considerable amount of driving through sparsely populated areas in a car that had only terrestrial radio.  That meant a lot of time listening to CBC Radio, their national broadcaster.  The tariff talks were the lead story on news broadcasts and the main topic of conversation on public affairs shows. 

To put it bluntly, they are seriously pissed off, and that anger extends across the political spectrum.  Political enemies appeared to unite behind the idea that this was an unprovoked attack on their sovereignty.  As it was reported up north, the US demands changed throughout the negotiations and included a say on with whom Canada can sign trade agreements, and limitations on the use of the French language.  As a result, at least for now, they are professing a resolve to withstand the pain, and the Prime Minister’s team is undoubtedly planning measures to retaliate strategically.  (Considering that US media is widely available throughout Canada, their citizenry tends to know much more about our country than most of ours does about theirs.) 

A major US complaint is that American liquor is essentially unavailable in Canada.  Most of their provinces sell liquor through their own stores, like what is done in Pennsylvania, New Hampshire, and other states.[i]   We found this to be the case at the provincial liquor stores in Nova Scotia, New Brunswick, and Prince Edward Island. (Those channel checks were purely for research, by the way.)  Unfortunately, their federal government has no say in those decisions.

This promises to be a slow-moving confrontation that probably damages both countries.  While I fully understand the necessity for strategic tariffs on specific countries or products, I am not a fan of wide-ranging tariffs between well-intertwined trading partners.  Considering that the President already upped the auto tariffs this morning, and that the Canadians are taking a couple of weeks to plan a response, this should be a source of friction and background noise for the coming months.  Today’s minor dip in US stocks and the modest rise in the Canadian benchmark (TSE60), have this issue simmering on the back burner rather than boiling right now.

Among the other things I noticed while paying only minor attention to markets were the declines in the S&P 500 (SPX) and Nasdaq 100 (NDX) indices last week, and the relative stability in longer-term Treasury rates.  The latter is particularly interesting in light of last week’s intervention at the long end of the yield curve, where the Treasury will be engaging in open market purchases of long-dated bonds using T-bills and the like.  This is reminiscent of the Federal Reserve’s “Operation Twist,” which used a very similar methodology as part of a stimulative policy. 

Two ramifications come to mind:

• First, is this at odds with the Fed?  Chair Warsh has devoted much of his rhetoric to more restrictive policies, so this seems to counter that approach.  Perhaps we’ll learn more about this during his Jackson Hole address on Friday.
• Second, with his interventions into the yen and bonds, is the Treasury Secretary forgetting his own playbook?  Scott Bessent was said to be assisting George Soros during the time when the latter “broke the Bank of England.”  Surely he should recognize that barring a major change in fiscal or monetary policy, markets are going to overpower governmental intervention. 

If the tides are moving in one direction or another, it takes an awful lot to shift them.  I experienced this firsthand while kayaking in the Bay of Fundy last week.  Unless you’re paddling furiously and continuously, the tides, whether monetary or market, will take you wherever they’re going, whether you like it or not.

[i] Ridiculous anecdote: a couple of years ago, I happened to meet Chris Sununu, the former governor of New Hampshire, at a party and started the pleasant conversation with, “I’ve bought a lot of liquor while passing through your state over the years.”  He responded with, “yeah, I didn’t appreciate that one of my key responsibilities would be managing a large liquor business.”  Considering that his father was also governor of N.H., I found that a bit disingenuous.  But it could not have been the first time that some random guy approached him with that comment.