Tied to the Whipping Post

I've been run down

I've been lied to

And I don't know why

I let that mean woman make me a fool

She took all my money

Wrecked my new car

Now she's with one of my good-time buddies

They're drinkin' in some crosstown bar

Canadians must feel like Greg Allman after the tariff u-turn of the last 24 hours - tied to a whipping post. But what did you expect now that our foxy MAGA, DJT, has been officially installed in the Washington henhouse? Unpredictability is so on-brand for Trump. A sense of confusion mixed with fatalism is pervading Canadians. Some are quick to say bend over and take it. Many more have just turned off the channel.

Alberta Premier Danielle Smith's default response was, 'If you can't beat 'em, join 'em'. There are apparently more Maple Magas in Western Canada than we thought. Flanked by her broker, Kevin O'Leary and her spiritual advisor, Jordan Peterson, she publicly embarrassed Canada in a craven attempt at appeasement that would make Neville Chamberlain jealous. Sucks to be Albertan.

But fear not Canadians; I say Doug Ford has it right. Threaten to fight fire with fire. Start with bluster and hyperbolic rhetoric, but in the end, negotiate the new deal and get on with your life. If we come back at him hard, Trump, unlike he did with Stormy Daniels, will at least respect us afterwards. I predict we will come to a solution that is irritating but survivable. Peter Navarro (fresh from his hiatus in jail) said on CNBC this morning the ultimate goal is a 10% tariff level, which is punitive but not apocalyptic. Navarro is to economics what RFK Jr. is to science, so expect more of this jingoistic bafflegab from the Trump economic team.

In the end, all Trump wants is a 'win' for his team to brag about on Fox News. Soon, he can say, "I stopped fentanyl and illegal immigration without even missing my tee time."

By increasing the cost of energy, wood products, auto parts and basic materials, he is looking to shift the tax burden from the incomes of Americans to the after-tax cost of everything they purchase. All this is in a vain effort to replace revenues from extending the Trump tax cuts set to expire next year.

But not for a minute do I believe he will achieve his goal of balancing the budget on the back of higher receipts at the customs office or the newly created (and seemingly duplicative) "External Revenue Department". By using the term "External," Trump hopes to deflect attention from the fact tariff costs are actually borne by the 'internal' consumer. Any reading of economic theory would support such a conclusion. Proof that 54% of Americans read at less than a grade 6 level was never so evident.

Additionally, market responses, exemptions and various workarounds should lower the expected tariff bonanza, leaving the deficit problem to fester. But kicking the budget can down the road is an art form in the U.S. Congress, so don't expect a quick fix. This is just another reason to shun the bond market once this current rally runs its course. The bond crop - a bumper one at that - will never fail under the current GOP reign of fiscal terror.

And why is there no China tariff talk? Easy, tough guys turn on the weakest first. And who is weaker than Canada, now suddenly leaderless and economically depressed? With Justin Trudeau now stuffed into his locker, Canada seems like easy pickings for Trump's unrestrained bullying. China is likely to be a more formidable opponent. Trump's TicTok turnaround shows his hesitance in poking the dragon.

All this is a preamble before the real fight begins - immigration. Stormtroopers are being deployed as we speak, looking to root out illegals who are "taking American jobs". Unfortunately, Americans don't want those jobs, but stop using logic. The rising cost of unskilled labour will be the hallmark of the next 4 years. So it is cost-push inflation that Trump should be worried about, not low-wage service workers operating under the table for untaxed cash. American xenophobia remains a powerful political weapon, and Trump knows just how to wield it to best advantage.

Does the market care about any of this? I guess it will, at some point, conclude that the hoped-for benefits of deregulation and easy fiscal policy will fade and be replaced by rising costs and punitive interest rates. But the swing higher that I called for last week should continue until the sentiment setback evident recently (chart below) is restored to a more balanced or even bullish level. Fear is always more significant than reality.

Bull/Bear Ratio

Trump's policy ADHD should continue to whipsaw market sentiment for a while longer. So enjoy the whip as it tears another piece out of the economy and, ultimately, the bull market. For now, trade from the long side.

That's the end of my whipping post.

Risk Model: 3/5 - Risk On

As predicted, the volatility spike is wearing off, and the market's new focus on earnings can begin. So far, so good for last week's call - 'Banks, Thanks" indeed!!. While everyone is talking about the tech-bro love-in with Trump, Jamie Dimon and company are busy back on Wall Street coining it. The turn in relative earnings momentum is still in its early stages.

Narrow markets are so 2024! Apple stock is in free fall, even before China cuts them off in retaliation to Trump's tariff tirade. The promise of a surge in demand for iPhones based on AI functionality was wildly over-estimated. Tesla is short-able again after the crypto ball ended, and Cinderella Musk did not get a proposal from Prince Trump that moved the needle for his overvalued EVs. Even with Zuck's bulging pipes, Meta is something I wouldn't bet-a.

The broad market continues to rally despite the drag from the Mag 7, and that's good.

Trump has succeeded in building another wall - of worry, and climb it we must.

Financials vs Tech