Navigating the Trump Era: Economic Realities and Investment Strategies

As of when this was written, much has transpired:

• Equity markets have faced sharp volatility, with major indices like the Nasdaq, S&P 500, and TSX posting meaningful declines. These shifts have resulted in a considerable reduction in overall market value.
• In Canadian politics, following Justin Trudeau’s resignation, the Liberals selected Mark Carney as their new leader, bringing a renewed focus on European trade and efforts to expand the Comprehensive CETA agreement. Canada continues to align more closely with Europe, particularly in its support for Ukraine. Carney’s appointment marked a strategic shift for the Liberal Party as it positioned itself against Pierre Poilievre’s Conservatives in the lead-up to the federal election.
• Meanwhile, trade tensions escalated when Premier Doug Ford announced a 25% tax on electricity exports to the U.S., prompting Trump to double duties on steel and aluminum to 50%. As of Tuesday, March 11, both sides have chosen to back down and, at least temporarily, reverse these decisions.
• The U.S. Federal Reserve now expects the country to enter a recession this year, possibly as soon as the first quarter. Meanwhile, Trump and Musk have unsettled not just the markets but also their own citizens, particularly in red states, through the impact of DOGE. While Republican leaders remain publicly silent on Trump, they have been vocal in private opposition. A full internal revolt, however, would likely require further market declines, rising unemployment, and increased inflation—all of which are possible.
• As of April 2, additional tariffs are being applied to multiple countries— including Canada—targeting sectors such as automotive and natural resources. In response, the Canadian government has signaled plans to introduce further tariffs on a broader range of U.S. imports, including a proposed levy on U.S. truck shipments transiting through British Columbia to Alaska. In short, both the rhetoric and the tariff measures are escalating, with no resolution currently in sight.

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Understanding Trump’s Economic Approach

What do I think Trump is trying to do? Let’s examine what I think his belief systems are based on.

First, he really does think that tariffs are a great vehicle for raising taxes and are likely to accelerate the reshoring of manufacturing to the U.S. That in itself will lower the trade deficits that he believes damage the U.S. standard of living.

He also believes, as Reagan did, that lower taxes for the rich will result in the benefits of “trickle-down economics,” eventually creating benefits for the bottom 50% of the income and wealth strata of U.S. society. He, along with Musk and his Silicon Valley mafia, believes that social safety nets are a major liability that will only get worse with time as the population ages.

It was Joseph Goebbels, Hitler’s Minister of Public Enlightenment and Propaganda, who said, “Repeat a lie often enough and it becomes the truth.” Trump’s approach relies heavily on rhetoric and strong narratives to shape public perception and policy support. 

This approach, however, is proving counterproductive on the global stage. Many countries—including those in Europe, Australia, New Zealand, and of course Canada—are not just imposing tariffs on U.S. products but are also experiencing consumer-led boycotts. If these boycotts prove successful, they could have a far greater impact on U.S. businesses than any tariffs will. To put it politely, Trump's policies have turned much of the world against the USA. He is stubborn enough to double down and inflict economic pain on his allies in particular. The long-term cost to the U.S. is incalculable. At some point, I hope and expect saner minds will prevail.

Key Economic Facts to Know: A Global Snapshot

Let’s add to this some interesting facts:

• U.S. GDP is projected to reach $30 trillion USD in 2025.
• The U.S. budget deficit is projected at $1.9 trillion USD for fiscal 2025, or about 6.3% of GDP.
• Canada’s GDP in 2025 is projected to reach $3.1 trillion CAD. The projected deficit is just over $60 billion, or 2% of GDP for 2024-25, depending on the fiscal policies our next government implements. In addition, there are provincial deficits and debts, which, when combined, total approximately $2.2 trillion CAD on a net basis, or about 75% of GDP.
• The U.S. federal debt-to-GDP ratio (not including state or municipal debt) is 124% and has risen to that level from less than 40% in 1970 (Figure 1).
• China is not in a better fiscal position than the U.S. The country’s total debt burden, including individual and corporate debt, reached 310% of GDP in 2024, one of the highest in the world.
• The U.S. Social Security Fund holds nearly $3 trillion USD in assets, all invested in U.S. bonds, which earn an average return of around 4%.
• The Canada Pension Plan (CPP) has assets of almost $700 billion CAD in an economy that is roughly 1/15th the size of the U.S. The CPP has delivered a 10-year annualized return of 9.2%.

If Canada does enter a recession this year, the government and the Bank of Canada have a range of fiscal and monetary tools at their disposal. Canada’s deficit-to-GDP ratio is smaller than that of the U.S., and our combined provincial and federal debt-to-GDP ratio is also notably lower. The Bank of Canada could accelerate interest rate cuts, which would likely weaken the Canadian dollar and help offset some of the impact of U.S. tariffs.

Figure 1

The Impact of Tariffs: Winners, Losers, and Market Repercussions

The U.S. does run large trade deficits with China, Europe, Mexico, and Canada, though much of Canada’s surplus is driven by energy exports. However, the U.S. also has a $250 billion trade surplus in services, which does not account for revenue generated by U.S. firms’ subsidiaries abroad. An interesting question is how other nations might respond to counterbalance that surplus in retaliation for tariffs on goods. For example, Premier Doug Ford recently took such action by cancelling a $100 million contract with Starlink.

Currently, the weighted average of Canadian tariffs is about 1.4% on all imports, yet we impose almost 7% on interprovincial trade in goods. When services are added, that amount might exceed 20%, depending on the specifics. This presents a remarkable opportunity: eliminating these internal barriers could boost our GDP by 3-8%. This potential growth stands in stark contrast to forecasts suggesting Trump's new tariffs could reduce Canada's GDP growth to 0% this year and -2% next year. The implications are clear: we have a powerful economic offset to external tariffs entirely within our control.

Below, I have included a slide from a recent presentation showing a graph with expected revenues from U.S. tariffs (Figure 2). However, the graph assumes buying habits won’t change with tariffs. The final numbers will likely be far lower. The second chart illustrates who in the U.S. will bear the burden of these tariffs, and it is overwhelmingly the poor (Figure 3).

Figure 2

Figure 3

To avoid the impact of tariffs, some wealthy Canadians have suggested moving their businesses—and even themselves—to the U.S. While this is not a detailed analysis of the situation, consider this: the U.S. federal tax rate on C Corps is 21%, with most states adding taxes as high as 9.8%. In Canada, larger corporations face a combined federal and provincial tax rate of 27%, while small businesses benefit from a 11-12% tax rate (an advantage not available in the U.S.). Many Canadians also overlook the exit tax when changing residency, which could easily amount to 20-25% of an individual’s net worth. Those with significant wealth who relocate to the U.S. will also eventually be subject to U.S. estate taxes of up to 40% on their worldwide assets.

All of this brings to mind a line from a Laurel and Hardy movie: "Well, here’s another nice mess you’ve gotten me into."

A Historical Perspective on Economic Resilience

So, what can we do with this mess, and how will it impact markets and the economy?

History provides perspective. Over the last 111 years, we have endured two World Wars, a Great Depression, a Cold War that lasted 45 years, 20% interest rates of the early ‘80s, the Dot-Com Bubble, the Great Financial Crisis, the first Trump presidency, and multiple health crises. Despite it all, we emerged far wealthier and healthier on both a local and global scale than we were at the start. We’ll survive this, too.

That, however, does not mean we should not be proactive in our planning and investment strategies.

These are some of the outcomes we are preparing for:

Public Equities: Focus on Stability

Expect volatility; focus on value stocks and dividend-paying companies.

• U.S. equities were already overvalued when Trump was elected.
• Tariffs will likely weigh on corporate earnings, making it unlikely that we will see the euphoric returns of the past two years. It is time to play defense.
• One of our key areas of research is dividends and their durability within our Canadian equity strategies. For example, a portfolio of 25 large-cap Canadian stocks with strong dividends has a weighted yield of approximately 5.5%, which, in a taxable Canadian account, is equivalent to an 8% yield on bonds. This market is likely to favour value investors and stock pickers.
• I asked our analysts to compare the volatility of these companies’ dividends to the volatility of their stock prices, and the dividends proved to be five times less volatile. This strategy is centered on investing in sustainable cash flow. A focus on dividend investing will help strengthen our defensive position, and we plan to develop a high cash flow dividend strategy in short order.

Fixed Income: Balance Risks

Balance inflation concerns with recession risks; consider defensive allocations.

• Fixed income is trickier to rationalize because tariffs tend to be inflationary, which could force central banks to raise rates. However, tariffs are also likely to decelerate growth, increase unemployment, and possibly trigger recessions in Canada, the U.S., and Europe (China would follow closely). In that case, we could see flat or lower rates and an economy experiencing stagflation.
• Personally, I lean toward the possible recession camp and do not see much room for rates to move higher. Over the last two years, we have strategically adjusted our allocations to fixed income, which proved to be a strong move. My inclination is to stay the course with fixed income, and for those looking to be more defensive, consider increasing that allocation.
• We are looking at introducing a credit hedge fund and are currently awaiting tax advisor input before proceeding.

Private Equity: A Long-Term Play

Long-term growth potential as public markets shrink.

• I am more optimistic about the prospects for private equity returns over the next decade than public equity returns. One key reason is that private equity as a percentage of global wealth is increasing as more companies choose not to be publicly traded and remain privately held (Figure 4). Over the past 30 years, the number of public companies in the U.S. and Canada has decreased by 40-50%.

Figure 4

Real Estate: Selectivity is Key

Focus on high-demand sectors like multifamily, industrial, and specialty assets.

• This brings us to real estate (excluding housing). The past two years have been challenging for many investment-grade real estate portfolios, with a number of funds closing or gating. While we didn’t experience that, our returns for our real estate limited partnerships for 2023 and 2024 were generally lower than our historic results, which have typically ranged from 9-13% annually over the last decade. Interest rates have started to turn the corner (more so in Canada than the U.S.), and that is beginning to impact cap rates for high-quality assets. Tariffs will not help the economic environment, which I would expect to weigh on real estate returns on a net basis. 
• Our strategy remains to avoid office and retail assets, focusing instead on multi-family residential, specialty assets (such as self-storage and senior facilities), and industrial properties. Currently, our occupancy rates are relatively high and stable, so cash flows remain strong. This will continue to be the focus for our income funds.
• The Nicola Value Add Real Estate Limited Partnership, a fund of about $1 billion, has $170 million in cash to deploy, with another $300 million in cash expected in 2025. This is a buyer’s market for development assets, and we are well-positioned with the cash to invest. 

Investment Strategy: Preparing for Volatility 

We are now fully in the Trump era and should prepare for trying times. Canada has already begun implementing policies to mitigate some of the damage by seeking new export markets and breaking down interprovincial trade barriers. However, these efforts will not completely offset the worst effects of tariffs, and given Trump’s unpredictable behaviour, we cannot anticipate what further actions he may take (such as intimidating Canada into joining as the ‘51st State’).

If I were to outline my vision for Canada's economic trajectory over the next 3–5 years, it would include the following:

• Reducing trade dependency on the U.S. to below 50%, particularly in materials and services that are difficult for them to replicate (e.g., energy and potash).
• Expanding CETA as much as possible with Europe and developing a trans-Pacific trade model to double our trade with that region.
• Eliminating 90% of interprovincial trade barriers.
• Refining immigration policy to attract top global talent, including from the U.S.
• Properly fund our military commitments, as we have in the past, when necessary.
• Developing a robust industrial policy focused on R&D and productivity.

That said, as I wrote above, Trump will eventually pass from the political stage, and his policies will not endure if they fail to improve American prosperity—which I strongly suspect they will not. Some efforts to reduce government bureaucracy and waste make sense in principle, though not in the way Elon Musk is attempting to achieve that goal.

Charles Darwin’s seminal work, On the Origin of Species, explained the concept of survival of the fittest as “the natural process by which organisms best adjusted to their environment are most successful in surviving and reproducing.”

We are now in a new environment—one in which we must not only survive but also adapt and position ourselves to thrive through diligence and the right tools. While market conditions continue to shift rapidly, our core philosophy on portfolio design and management remains unchanged, offering stability amid uncertainty.

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