Into the murk

The dollar slipped into the 68-cent US range today, and traders are girding their loins (how do you do that, anyway? Can I get some?) for volatility. Lots of it.

Sentiment about the Canadian dollar is swirling the drain the day before US tariffs take effect. The cost of hedging against our currency jumped the most in five years, on fears Tariff Man is about to cause a deep recession. Options premiums are at the second-highest level in 17 years. An economic downturn might cause the Bank of Canada to accelerate rate cuts, widening the spread with the Fed and plucking the loonie.

The immediate decline in the dollar, traders indicate, could be 2% or 4%, taking it down to perhaps 66 cents. If Trump indicates tariffs will be slow-rolled, the damage would be less. Our dollar might even gain a little on that news. But nobody knows. The American King is quixotic, unpredictable, unreliable and capricious.

Source: Edward Jones

Meanwhile, in frosty Canada, more big changes.

PM-in-waiting Mark Carney says his government (on March 10th) will immediately cancel the carbon tax. Suddenly Pierre Poilievre would have to find a few new slogans since ‘We need a carbon tax election’ and ‘Carbon Tax Carney’ would be kaput. Even though the tax returns 90% of what it collects to Canadian families, PP has campaigned against it the way Chretien harnessed anti-GST sentiment to get elected (and then kept the tax).

Meanwhile former non-financial finance minister Chrystia Freeland, who brought in higher capital gains taxes, saying “We are making the tax system fairer. That is the fiscally responsible thing to do,” has changed her mind. Apparently Justin made her do it. Honest. If selected the new Lib leader, she would rescind that increase (to 66% inclusion rate over $250,000 annually).

But wait. The tax has already rolled over. Paws in the sir.

The Trudeau government has announced the tax hike – announced in last year’s budget – won’t be implemented until January of next year. Which, of course, means it will never see the light of day.

No carbon tax. No capital gains Hoovering. A wonky dollar. Immensely uncertain Bank of Canada rate decisions. Tariffs and recession, or maybe not. A new prime minister in five weeks. A federal election by the summer. Variable mortgage rates could fall precipitously. Or long-term rates could rise. If Saturday works out the way the White House indicated Thursday night, consumer prices are going up. Layoffs are coming. Our BFF turns against us.

How should you respond?

First, don’t panic and do something silly like go to cash or buy a condo for $1,400 a foot.

Second, stay invested, but in a broad and diversified fashion. These are the days when ETFs make great sense, giving you oodles of diversification with low cost. Remember that a third of the TSX is made up of financials, and our banks earn a ton of money south of the border. Yes, if oil is tariffed, there may be blood in that sector, as in manufacturing, but likely short-lived. Just chill. Nobody knows where things are headed. Canada will survive.

Retain the US$ exposure this blog had advocated for years. A quarter of your portfolio, at least, hedged. And in terms of the 60% in growth assets, two-thirds of that should be in the US and international funds.

Real estate? Fuhgeddaboudit for now. Recession, unemployment, higher inflation and rising rates will squish demand and lower prices. That’s certainly a likely combo. But we could also see a rate reduction, depending on how much courage (or lack of it) the Carney government shows with tariffs – and polling leading into the coming election. If our CB panics and drops the cost of a mortgage to, say 2%, FOMO and greater fools may return. Let them be, for they know not what they are doing.

Your home loan coming up for renewal? Lock in.

GICs? Safe, sure, but these days at 3.5% the return is pathetic after 2% inflation and taxable interest. Will you be able to get 4-5% again in six or ten months if Tariff Man keeps terrorizing us and Ottawa fights back? Hmmm. Maybe.

So, it’s a murky world. The unknowns are legion. Facts are scarce. But two overriding things stand out for all Canadians.

First, if you’re unsure about what to do, best to do nothing. The odds of being wrong are high. We are no longer being led by rational people.

Second, for the love of Dog, don’t buy a Tesla.

About the picture: “I love your blog and read it daily,” writes Ingrid. “I consider you the voice of reason.  Please consider using the attached photo of my grand-doggy Terry.  He is a working dog who loves to accompany my son to work on a daily basis ….and he also loves comping in BC and Alberta.”

To be in touch or send a picture of your beast, email to ‘[email protected]’.

Source: https://www.greaterfool.ca/2025/01/31/into-the-murk/