Collateral Damage

In the War of 1812, the first shot was fired by the American side. The United States' anger was actually a response to unfair trade policies, meant for a country that was an ocean away. Recent relations with Canada had been mostly peaceful and orderly. Canada was actually not the cause of war but quickly became collateral damage.

"The more things change..."

The proximate cause of the war was a British trade embargo on American goods being shipped to France during the Napoleonic wars. It was actually a continuation of the Revolutionary conflict of 1776, stoked by residual anti-British feelings. War mongers in the U.S. congress were in ascendancy, itching for a battle. New England states were actually opposed to the conflict, enjoying strong and steady trading relations with the Atlantic colonies. The country was divided ideologically along hawk/dove lines.

If those parallels are striking, so too are the similarity of potential outcomes. The war ultimately solved nothing. The strategic blunders on both sides caused a needles loss of scarce resources. The animosities lingered for decades.

The Canadian steel worker, caught in the crosshairs of this political football game that is really about China, must be reeling. How can he relate to a clumsy policy that is really meant as a backhanded swipe at China's theft of intellectual property, when he is facing a potential lay-off? The shear ignorance of basic economic concepts and the nuanced outcomes from such a blunder are lost on most Americans, most notably CNBC's resident xenophobic buffoon, Jim Cramer. They yearn for a return to the idyllic post-war economy of the fifties and no amount of reasoned argument will dissuade them. Just ask Gary Cohen.

Yesterday, the U.S. market shrugged off the entire episode and was back to chasing its tail again. The current trade issues are irrelevant to the stock market darlings that dominate Nasdaq. Unless there is a proposal to raise tariffs on smartphones or semiconductors, the market won't care.

The recent volatility spike is winding down slowly but grudgingly. Fed Chairman Jay Powell kept the market guessing last week with a thinly veiled nod to a more aggressive rate hiking policy, should the economy "overheat". I read that as a classic Fed rookie mistake of not understanding the market's sensitivity to the use of new terms. It does appear that his lack of appreciation of the eco-speak that characterized his predecessors may be a potential change that the market needs to get used to. It doesn't really mean a change in policy is axiomatic.

The U.S. administration's playing of the 'trade' card would not necessarily be all bad for my scenario. The inflationary implications and consequent weakness in the U.S. dollar that will ultimately come out of a continuation of such policies are obvious. The market will soon comprehend that a policy that ultimately is akin to shooting itself in the economic foot is not conducive to a stronger currency. Hard assets are looking better and better.

Thankfully, Canada's response to this opening salvo in a potential trade war has been to have Justin Trudeau give Donald Trump a phone call. This is the political equivalent an angry homeowner calling his neighbour to 'turn the stereo down'. Venting some steam but not taking any action is probably the right strategy given the sensitive state of the NAFTA negotiations.

The oversold position of the Canadian dollar is tempting. If the hard asset scenario plays out fully, we could be seeing a significant bounce trade into the second quarter. Recent tepid data on Canadian housing needs to stabilize first. Trump's steel and aluminum tariff ploy is classic 'art of the deal' negotiating tactic. It will be modified by a sober second thought in Congress or the Department of Trade. This year should see the culmination of a new NAFTA treaty that would go a long way to helping the loonie regain its 85 cent fair value. Another positive: Oil seasonality will shortly go positive.

For most of you, I need not point out that our domestic stock market is pathetically weak from an international perspective. The potential for recovery seems remote. Our monetary policy is hampered by the NAFTA cloud over our head. Our overpriced housing, politicized energy debates and tax-and-spend governments have instilled a justifiable fear in foreigners. Such are the conditions that typify a bottom.

The scary chart below depicts the relative performance of the Canadian market to the U.S. market with a Coppock curve overlay. I have sometimes called these "the razor blade bannister" of charts... the further down you slide, the deeper it cuts! (Greg Taylor always hated that one!)

Thankfully, the Coppock momentum measure would seem to indicate an opportunity is at hand, given the magnitude of underperformance. I would expect prudence dictates waiting for a catalyst, but it is tempting.

Sensing a bottom, I went all-in on Canada on Friday, buying the metals.

I guess I'm not very prudent, but the more things change....

TSX Relative Strength to the S&P 500

Risk Model: 3/5 - Risk On

The lack of fear in the AAII sentiment survey (Bears relatively unchanged at 23.4%) last week needs to be put in context. That survey reflects opinions polled prior to the Trump tariff announcement.

The VIX is staying stubbornly elevated. The recent blow-up of protection based products is still reverberating throughout the markets. The push by GOP doves to moderate the impact of tariffs helped calm Friday's frayed nerves yesterday, but today is not seeing follow-through.

I would like to see a definitive break-out in the copper gold ratio, so seeing copper up 5 cts this morning is encouraging.

This is still a very tricky market to trade. Looking past the tweet-storm induced sentiment shifts is difficult to do but I'm keeping the faith. Only the Fed can kill the bull.

And eventually they will.