Hoard cash; buy gold; ride it out

That sums up the advice of Investor’s Digest of Canada columnist T. Edward Gardiner. “If you’re holding utilities stocks, they’re probably as safe as anything else, and resource stocks may be less risky than manufacturing stocks, but overall, I’m too scared to invest in the stock market these days.”

Alternative_Investments Now that income tax season and the Ontario election are behind us, it’s time to focus on two other issues: Donald Trump’s trade war and interest rates. Fortunately, we are not the US president’s only trade war targets—he’s wildly attacking everybody.

I’ve said it before and I’ll say it again. Americans in general, and Mr. Trump in particular, do not understand the concept of a win-win situation. To these people, a negotiation is only successful if the other guys lose something. Agreements reached with such people rarely last and often end acrimoniously. If at all possible, they should be avoided.

Unfortunately we (and the rest of the world) have no choice but to deal with the Americans. Some people believe we should just give in on Mr. Trump’s ‘most important’ issues and hope that he will let us keep a few crumbs. That is not the way to deal with a bully. He’ll just come back again in a year or two, wanting even more.

To his credit, Justin Trudeau is doing the right thing, slapping countervailing duties on a wide range of US goods in response to Mr. Trump’s tariffs on steel and aluminum. And he’s keeping the total value of these comparable to the value of the US tariffs.

Retaliation without escalation

That is a measured response: retaliate but do not escalate. Meanwhile, he’s keeping the lines of communication open with more intelligent Americans who—one hopes—will bring pressure to bear on the president to back off his more unreasonable demands. The only other thing that the prime minister could do is start drawing attention to the massive government subsidies that go to the US industries that Canada has targeted.

These subsidies, notably to the agriculture sector, come from taxes, and Americans (like the rest of us) don’t like paying taxes. Let’s see if we can get some consumer backlash on our side.

Mr. Trump is also one of those people who has no concept of the meaning of the word fair. He uses it as a synonym for ‘I like’. If he doesn’t like something, he immediately labels it as ‘unfair’. Maybe that works for him in negotiating business deals, but to me he comes off as a whiny little baby.

So there you have it. The leader of the most powerful country in the world is a whiny bully. This does not bode well for the world economy.

As noted above, we are not President Trump’s only, or even his main target. That is China—and they know how to play rough. Despite this, the collateral damage to the rest of the world is likely to be significant. The 1930s may start to look like ‘the good old days’. About all Canada can do is keep its head down and respond when attacked. All in all, this is not a good time to be an investor.

Higher interest rates are a good thing

On a more positive note, interest rates are finally starting to go up. The Bank of Canada recently raised its benchmark rate by another quarter of a percentage point; banks are quietly raising mortgage rates (along with tightening other lending terms and conditions); and car dealers are warning customers that their ridiculously low interest rates are coming to an end. Maybe the people who pay cash for a car are getting tired of subsidizing those who borrow or lease.

To put this in perspective, car companies are paying between two per cent and three per cent for commercial paper (or credit). If they then lend it out to buyers at one per cent or less, they are losing money.

The only way they can stay in business is to bury the extra interest in the base price of a car. This means that those buyers who pay cash are overpaying. The car companies get away with it because it is still a little cheaper to pay cash (roughly $1,000 on a $30,000 car) and because they all do the same thing. This smells like collusion to me, but the government doesn’t seem to care. Or maybe they do care and have quietly told the car dealers to raise their rates to a more reasonable level.

Whatever the reason, I have long maintained that higher interest rates are needed and I am glad to see them finally start to rise. Admittedly, higher interest rates will put downward pressure on stock prices, but the markets are still overdue for a further correction.

Stock market still due for further correction

Share prices are high, not because people believe corporate profits are likely to go up, but rather because they have little confidence in money. As President Trump’s trade wars expand, corporate profits are going to decline, and share prices will fall accordingly.

All this makes life quite difficult for retail investors. Most of Canada’s manufacturing sector is so closely tied to the US that the unravelling of NAFTA means that virtually everyone involved would lose money. This situation is not likely to correct itself until someone new gets into the White House.

Losses in the resource sector can probably be partially offset by increased sales to China, but its economy is slowing down even before we factor in the impact of Mr. Trump’s tariffs. The financial sector seems to be doing well but with the housing market beginning to appear more rational, and with corporate investment in plants and equipment expected to fall as demand dries up, this sector is not all that safe either.

About all I can suggest is don’t buy anything just yet. If you’re sitting on cash, wait a little longer. If you’re holding utilities stocks, they’re probably as safe as anything else, and resource stocks may be less risky than manufacturing stocks, but overall, I’m too scared to invest in the stock market these days. I’ll repeat the advice I’ve been giving for a while: hoard cash, buy some gold and hope you can ride it out.

T. Edward Gardiner is a keen observer of the markets who lives in Ottawa.

This is an edited version of an article that was originally published for subscribers in the August 10, 2018, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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