Greg Newman A Comment -- General Comments From an Expert A Commentary COMMENT May 30, 2025

Not surprising, given the tariffs. We also saw a lot of pre-buying before tariffs took place. Expectations for May and June are also negative. So we'll probably have negative GDP growth for the quarter as a whole.

A softening, but not necessarily a recession, which is defined as 2 consecutive quarters of negative GDP growth. BOC has been on hold for the last 2 meetings. Arguably, if it were not for the potential impact that tariffs will have on inflation, they may have continued to cut. But they're on hold now so they can see the impact of tariffs.

Despite the negative number, stock markets have actually been quite healthy. TSX at all-time highs, and now US markets are hitting them too. That tells her that expectations are that trade deals will be announced, and they'll be manageable. Corporations will either adjust their supply chains or absorb some of the costs. Potentially not as inflationary as some expected. If so, and especially in Canada with its slowing economic growth and rising unemployment, that gives central banks more leeway to continue cutting interest rates.

Kind of moot. Trump administration has conveyed that if they're talking to the various trading partners, and they can't get a deal signed by that date, there will likely be extensions. Prime Minister Carney announced that Canada hopes to have a trade deal of some kind within 90 days, which would take us beyond July 9. She has the feeling that we'll see extensions.

The US employment numbers at the end of the week are far more important than the digital services tax, which was nevertheless a big issue for many Canadians. It was also important for Trump, as he cancelled all negotiations on Friday, but today it's all good again. 

We're going to see a lot of volatility around trade discussions in the coming weeks. Companies still don't have a better handle on the uncertainty ahead. We just heard that the EU is going to accept the tariff rates. We'll have to see how it all plays out. Those tariff policies are still inflationary.

We are seeing a decay in the employment situation for both economies. Demand for labour is softening, as well as the supply of labour. Starting to see an increase in how long it takes Americans to find jobs. That will matter far more to the Fed cutting rates than what President Trump says.

The Fed has a dual mandate -- inflation and full employment. It's balanced 50/50, though at times it skews. If we were already starting to see job losses, it would be far more weighted to the employment situation than to the inflation fight. If job losses are here and now, then inflation's going to come down because demand will fall dramatically.

Right now we're around 50/50, but there's concern that the inflationary policies of tariffs are going to be a factor. Things change by the hour these days, and we have no visibility. President Trump's policies put the Fed on the sidelines, it's just that simple.

Over the last couple months of uncertainty, we saw forward expectations on earnings flatten out for the US. They didn't come down in a big way, but they became flattened to slightly down. Recently, now that markets are at all-time highs, we're starting to see an uptick again.

He doesn't follow the Canadian marketplace for earnings as much. Canada is 3% of the world economy, whereas the US is 65%. We have a structurally weaker economy, and so our earnings will be structurally weaker in general. But our market multiple isn't expensive to the same degree that the US market is. There's still better value in Canada.

RY has been the Cadillac of the Canadian banks for years. But it trades at a premium. TD recently has had some idiosyncratic issues. BNS has perennial issues with Latin American exposure. National Bank has more of a growth story. BMO and CM are just average, doesn't see a lot of growth.

He doesn't like any of them right now for new money. They're all pretty expensive. Loves them long term, measured in years and years. If we are going into a harder economic landing (which is still his base case), these banks aren't going to maintain current levels. Need to buy them when they're cheap and there's blood in the streets.

You take the market capitalization of the entire US equity market, and then you compare it to the GDP. The market cap is $58T, and GDP in the US is $29T. So it's 2:1. Buffett says that when that ratio gets high, it's a bad time to invest. Remember, he's a value investor. 

If you look at this ratio going back decades, you'll see that timing markets on valuation is a bad idea. Markets can stay irrational far longer than you can stay solvent. BRK.B has the most cash it's ever had, but the individual investor can't think that way. We don't have the same timeline to infinity that he operates on.

GDP

Last week, he talked about the cost of funding all the debt in the US. What we heard last week from President Trump is very disturbing; he said that any of the new debt we need to issue to pay for the "big, beautiful bill" should be 9 months and less. So he wants to finance all the new debt with bills. That's literally like printing money, which is inflationary.

Scott Bessent spoke this morning. He could have walked back what President Trump said, but did not. Looks like the Treasury is going to manipulate the way it's financing the debt, so that it can lower the cost of interest rates.

US total debt today sits at $36.2T; that's the debt ceiling, can't issue any more. That will change in July, and the debt's going to go up. The dot-com boom was the last time they had a surplus, and it's been deficit financing ever since. The GFC and Covid both added to the deficit, with the rate of overall debt going up. Now at the point where it's choking off natural economic growth.

So, what does the administration want to do? Manipulate the market, spend more money, get re-elected. 
 
Historic US economic growth was 2.4%. Today, the number is 2.2% and they've racked up a lot of debt. And the cost of that debt is sucking away from future potential growth. The system's broken, and there's no political will to fix it. A few brave souls are standing up to speak out, but they'll be coerced into voting with the team.

Government bonds in your portfolio, that historically have been thought of as safe, are riskier now more than ever. The Fed will only lower rates when the economy starts to slip, and remember that the debt:GDP ratio will increase because deficits go up when an economy's weaker.

The S&P fell 20% in the first half of this year and is back up 25%. Sentiment is improving along with more constructive trade talks, but things change every time Trump tweets. Be diversified. Tech remains a huge theme, seen in big ETF inflows. Also, investors are looking beyond the US and are using more covered calls. Last year was a record year for ETFs and this year is even better.

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