Be Prepared
Written by Paul Siluch
February 7th, 2025
- Boy Scout motto
Sometimes you get snowed in by an unexpected blizzard. It never snows in Victoria, right?
And sometimes you get snowed by a friend. The US, in this case.
Stock market history tells us the first year of a new president’s term is positive for markets. But as we were reminded this week, a year is a long time. Sometimes the unexpected happens.
“It may be dangerous to be America's enemy, but to be America's friend is fatal."
- Henry Kissinger
Canada, unfortunately, isn’t as prepared for winter as I am in the photo above. Tariffs will hurt Canada far more than they will hurt the US.
Approximately 77% of all Canadian exports head to the U.S. and 50% of all our imports come from our large neighbour (source: Congressional Reports). Raymond James analysts calculate that a full 25% tariff could reduce our expected growth of 2% this year to -0.5%.
If American buyers suddenly find Canadian products too expensive because of the added tax of a tariff, they will demand discounts or shop elsewhere.
This is the price of an integrated economy. A too-integrated economy.
Canada’s “cushion” may have to be lower interest rates and a lower Canadian dollar. The Bank of Montreal’s chief economist predicted Canada’s bank rate falling to 2.5% from 3% this year. Now? He now sees the Bank of Canada forced to slash rates down into the 1+% stimulus range with our dollar falling to as low as US $0.65.
Whomever leads Canada as our next prime minister will have their work cut out for them.
I skate to where the puck is going.
- Wayne Gretzky
Meanwhile, where do we hide? What companies and industries fared best as tariffs were introduced on Monday?
- Start with what suffered most:
- Auto parts and domestic manufacturers
- Dairy
- International oil services
University of New Hampshire
These are key U.S. tariff targets. The U.S. competes with all of these directly. They are likely to stay weak until this blows over.
- These sectors dropped and then recovered:
- Railways
- Banks
- Mines and fertilizer
- Oil companies
Why did they recover? Oil and commodity prices rose, which could offset any tariffs. Bank earnings are mostly domestic. Our railways price mostly in U.S. dollars.
- These sectors barely budged:
- Telecom
- Utilities
Phone and power are mostly domestic industries. Tariffs don’t really apply.
- Did any companies rise?
- Gold companies
Gold just hit 5,000-year highs and few noticed. Domestic gold companies have costs in Canadian dollars and revenue in U.S. dollars. And there are plenty of buyers for bullion if the U.S. applies a tariff to ours.
Raymond James mentioned these firms as examples of good companies that can weather the storm:
CP Rail: 35-40% of rail traffic is cross-border, so CP is impacted. But CP is the nimblest railway in terms of adjusting and passing along costs.
Nutrien: A lower US dollar is helpful to Nutrien. The U.S. is uses just 10% of the world’s fertilizer (Nutrien Factbook) and as the world’s largest fertilizer producer, Nutrien sells everywhere.
Finning: Finning supplies heavy equipment to oil and copper producers. Tariffs hurt, but Finning sells little to the U.S. market and the company is in the middle of a productivity turnaround.
In the end, the best advice when we run into a selling frenzy like the Tariff War is to do nothing. Some companies will get hurt, and then they find new customers or figure things out. Some won’t feel a thing.
A Balloon in Search of a Pin
(Pixabay)
As if tariffs weren’t enough to cause investors heartburn, just a week ago the world was rocked by something called DeepSeek.
Artificial Intelligence – AI – companies have been the world’s fair since late in 2022 when Microsoft partnered with OpenAI and introduced ChatGPT. Facebook, Google, and a host of others followed with their own AI algorithms, all racing to deliver better answers, images, and creative output.
Billions of dollars were committed to new chips. Old nuclear plants were resurrected to guarantee the power for acres of new data centres.
And then an obscure Chinese company unveiled DeepSeek. This is a homegrown AI that reportedly cost just $6 million to build, versus over $1 billion for Open-AI.
Every chip and software company related to AI plunged. If the Chinese could do this so cheaply, what good are the multi-billion investments made by the US tech titans?
Make no mistake, DeepSeek used clever programming tricks never seen before. They innovated with older chips and copied whatever they could. Necessity is the mother of invention, as they say.
Part of the reason for the craze is the vast scale of AI and the other is the excitement of it all. It seems like growth will never end. Valuations of the Magnificent Seven are high, and none higher than Nvidia, the king of the chip makers.
In 1996, a technology called Dense Wavelength Division Multiplexing (DWDM) appeared. It enabled almost 10x the amount of data down a fibre-optic cable. Suddenly, many router companies found themselves almost obsolete. A few years later, they were.
It was the users of the 10x improvement that benefitted most. YouTube, Facebook, and Uber used the higher density to transmit vast amounts of data in highly creative ways. And they made fortunes along the way.
It was the same story for electricity at the turn of the century. The electric utilities selling power produced more and more for less and less. It was the radio, air conditioning, and elevator companies that profited most by harnessing cheap electricity.
AI will be an amazing new productivity tool and we can’t wait to see the new companies that will harness it.
Meanwhile, all bubbles look like this. Growth is exponential until it isn’t. The AI balloon will end with a pin that pops it. Is DeepSeek that pin?
In the weeks following DeepSeek’s announcement, experts concluded that the cost was far higher than reported. The algorithm likely used thousands of Nvidia chips illegally. And the program learned from other AI algorithms, rather than from scratch. Like having a dedicated tutor for a week rather than just reading encyclopedias for a month.
The question now is, what do the US giants do to respond? Do they scale back their investments because they are being undercut? Or do they double down and spend more to stay ahead?
So far, the answer is “spend more.”
We will see how that turns out.
