Transcription
[Music] Trust is something that's very difficult to build over time, but it's very easy to lose. And I think the White House has lost a lot of trust because you just don't know what's going to change. Something announced on Monday is going to change on Wednesday. You know, you have tariffs being announced. They seem to be cast in stone. Two days later, there's carve-outs. What do the reprieves even mean?
You've got the situation where not just attack on JPAL. We've seen presidents pressure central bankers before. The famous story of LBJ pinning Machznney Barton up against the wall. We had a situation where we know that Richard Nixon gave Arthur Burns a nervous breakdown. But I don't think anybody, and this is of course the blessing and the curse of social media, when you just have to basically put stuff on or just call a press conference in the White House that you would basically threaten to fire the head of the Federal Reserve. Okay, that really happens in less developed countries. And then is it a day later because I think the markets puked that day. Oh, but we're not looking at the markets. And then the next day the president says, "I was never going to fire him." The media took that story and they're thinking, "Okay, like what planet am I from? Like what's going on here?" So trust is lost pretty easily.
What do you do as an investor? I think that right now the markets are bobbing around. It's all machines and algos and technicals. What portfolio manager CIO is doing anything right now? You know, I tried to keep an open mind when we wrote our reports comparing the Harris campaign to the Trump campaign. Head and shoulders, the markets and the economy came out ahead with the Trump campaign, but we were not expecting such a sloppy implementation. Especially, we did not anticipate trade and tariffs are going to be first and foremost. Okay, we're going to go on attack on global trade for the greater good. Okay, we thought that that would come later and we didn't think it was going to create such havoc and such uncertainty. And what's interesting is that, you know, in Trump's first term, it was his White House that was a turnstile. His White House was chaotic, but the world was pretty stable. And now in Trump 2.0, the White House is stable and it's the rest of the world that's gone chaotic.
I just saw Scott Besson today. He was on TV squirming, admitting that he knows nothing about any discussions with the Chinese. But you see, just saying we're in talks with the Chinese, that's going to get you a thousand points on the DAO. But it's like the boy who cried wolf. I mean, there is diminishing marginal utility to keep saying that when the Chinese are saying there are no discussions taking place. And at what level discussions? Because we're being told there's discussions the same day Xi Jinping is going on this Southeast Asia junket because he's inking his own deals. So, I don't know what's going to end this uncertainty. You know, I'd like to say that the midterms next year could end it, but we're seeing policy being implemented through executive order, not through legislation.
How does a market economy, an economy that is really driven by risk appetite? How does an investor or how does a business person take on risk? You have to be able to estimate the risk, calculate the risk, price out the risk. But right now, we're in risk avoidance. And for an investor, what does it mean? It means that risk premia now we're going to have these periods where things get oversold, things snap back, and you've seen that in the stock market, seen that in the credit market. But this is an environment where risk premia across all the asset classes widen and it will continue to widen until we get some clarity. And especially in the China-US situation, we'll have to wait for that "Khrushchev moment" when somebody's going to have to blink first. Because you're talking here, global trade is like a $33 trillion animal. Global trade is bigger than the US economy is. It's a third of global GDP. And that $33 trillion is under attack.
But now the focus has shifted as we're seeing all these stories about side deals and Canada and Mexico largely got spared, but not entirely spared. And we're hearing all sorts of stories, all attempt to do a quick renegotiation of the USMCA. And that's what I mean. We're just really operating every day on stories and narratives and innuendo. But the US-China relationship is a $600 billion economic relationship. Now, this is what the new story is, is that there's been this ongoing economic war that's been going on for years between the US and China. But now it's hit a real crescendo and we have a real situation here where, you know, you can say on the one hand, well, these Chinese producers flooding America with cheap goods displacing American workers. Although is that what the US does? US want to go back to Appalachia? America is a sophisticated service sector-driven economy. Medical services, financial services, technology services, entertainment services, but I guess there's some segments that want to go back, you know, to textile factories in the South. I'm not so sure that's very good economics.
But for the here and now, all that stuff, and this is what's going to happen in the next few months, you've not seen what happens when the shelves at Walmart and Target are bare. You want to go buy some clothes for your kids? Good luck. You want to go buy some toys for your kids? Good luck. And then when those tariffs really hit Mexico, when you consider that the United States imports $230 billion of food and avocados come from Mexico, and so does a lot of produce. The economy has been kept alive because you had a lot of the pre-ordering and the pre-buying ahead of the tariffs. I said before that's going to create a serious vacuum in the economy in the second half of the year. But on top of that, if all the stuff goes through, and I don't believe that we're going to be seeing a tremendous number of trade deals, maybe this will be an about-face. I'm not sure. Maybe the president walks back everything and manages to say, "I got a few deals. We tried to do this. We said we don't listen to the markets. Oops. No, we listen to the markets. Markets told us no, no, no, don't do this." And we find a way to walk it back.
But then what happens? You're trying to stay ahead of the curve in all this. What's next on the agenda is this big beautiful fiscal bill. And all of a sudden, if Donald Trump did all this for naught and just created all this havoc and volatility and uncertainty and then walks it back, he would have expended a lot of capital in Congress. And you've got these Freedom Caucus members in the House. They're not so thrilled with the big beautiful bill. So when you're asking me what, you know, we're playing a game of dominoes here. Every action has an equal and opposite reaction. As you know, we invoke Sir Isaac Newton's laws of motion. This then could impair the ability to get through the fiscal side, which could remain in a state of disarray, and that'll be the next round of uncertainty that we'll have to deal with on top of everything else because it's all connected. It's all about politics.
But a lot of the success that Donald Trump was going to have in Congress was because he had a lot of the tough arch-conservatives in the House scared that they would be primaried if they dared vote against the big beautiful bill. Well, have you noticed what's happened to the president's approval ratings across the board have taken a nose dive, and especially his handling of the economy? So, all of a sudden, considering just how thin, I mean, they don't have a lot of maneuvering room in the House. So, then this is going to come down to what it means for a new source of uncertainty that we're going to be facing that nobody's talking about right now because we're living in the moment and the here and now on trade and tariffs is going to be fiscal uncertainty that's going to be dominant in the second half of the year.
I do think that you want to have a nice stash of cash, especially since cash is giving you a yield. I'm not going to go into percentages, but I'll say how I'm investing. I want to be very thematic in my investing. The world is a troubled world geopolitically. Military spending is going up everywhere. I think I'd want to buy a global aerospace defense ETF. You're seeing defense spending going up, not just in China, by the way, and in the US, but also in former pacifist countries like Japan. And look what's happening in Germany now. And Germany has broken the fiscal tourniquet and they're not just doing aerospace defense, but also doing capital goods and infrastructure. So cash, aerospace defense. I do think that interest rates are going to come down because of the fiscal uncertainty and the inflation uncertainty. The long end of the curve will come down by less than it normally would.
But bonds do tend to make you money in recessions. You're positive. You get a positive total return at the long end of the curve or the 10-year part of the curve. Maybe you want to be in the five to 10-year part of the curve. If you're worried about the fiscal premium, I understand that. But in recessions, and even in the recessions of the 1970s when we had stagflation, bonds did not lose you money, but equities as an asset class lost you money. I think that you we talked about the Canadian election to start this thing off. Well, Canada, one of the ways Canada's going to fight back is not through tit-for-tat tariffs because that's not going to work in Canada, but through endogenous growth. And a lot of that is going to include pipelines. So, Canadian pipelines, Canadian utilities, and with a very cheap Canadian dollar for your US investors on the line, you should be taking a look. And there's plays you can make. There's ETFs, but dividend growth, dividend yield in the pipelines and utility space, they are screening very well to us.
I'd say in terms of currencies, you know, there's no such thing in our business as a no-brainer, but this is the closest thing, and it's the Japanese yen. The Japanese yen is ridiculously undervalued. The BOJ has been the deer in the headlights because of this tariff war. But inflation pressures are building in Japan in a very significant way and the BOJ is going to be forced to raise interest rates and the yen is going to be forced to appreciate. So I think it's going to go to 120, 130. I think you have 10 to 20%. You can make equity market returns just owning the Japanese yen. And that was actually my last major trade. My last major trade was buying Japanese yen naked long. It is stupid cheap. And when somebody says three SDS, three standard deviations, okay? And if you look at the historical chart of the Japanese yen, you want to buy at 150 and then get out at 120. And we're just in the early stages of a renewed bull market in the Japanese yen. No equity risk, no duration risk. Are you taking currency risk? Sure. Currency risk in a three standard deviation cheap currency. I will take that all day long.
And I think gold, 100%, the tailwinds for gold are in place. I think right now it's in consolidation mode. I mean, up until last week it was up 30% for the year. I wouldn't be surprised to see a give-back. I think the give-back is going to give you an opportunity if you miss the train the first time to get into the gold. Not just gold, but the gold mining stocks. The gold mining stocks, the mining stocks just to play catch-up to gold, to the underlying commodity. They would have to double from here. We actually have done a lot of technical work on gold and we think in the next three to five years it's going to go to $6,000 an ounce, and that's just mirroring previous secular markets in gold. Nothing unusual here, but the gold mining stocks is I think where the really big money is going to be. And of course, you know, poor man's gold is silver. Silver's got more industrial characteristics to it, but silver's lagged behind. I think silver and the silver miners, I would be gravitating into those as well. In there, you have a nice tight, diversified, not overly complicated portfolio. And that's basically what my asset mix looks like right now.