Trade War Starts

The upcoming week has the potential to be very wild. After all, we have the new tariffs that Donald Trump has levied on both Canada and Mexico, and then again we have the reprisal tariffs. Quite frankly, if we start to get into a "tit-for-tat" trade war, things could get rather destructive in very short order.

That being said, though, the reality is that at the end of the day, Canada sends something like 78% of its exports into the United States, while the Mexicans send closer to 85%. Furthermore, the GDP of the United States is close to $26 trillion, while Canada is roughly $2 trillion. Further down the food chain, Mexico has a GDP of roughly $1.3 trillion. While it's not impossible for the United States consumer to feel some of this, the reality is that sooner or later, this ends only one way, and that is Trump getting what he wants before it's all said and done.

There is only one real asset to own. Maybe two.

The current chaos in the markets will continue to favor the US dollar. Furthermore, a lot of traders out there will be paying attention to the fact that most debt in the world is denominated in US dollars. When you look at Canada and Mexico, their debts are denominated in USD, so there is going to become a bit of an issue when it comes to US dollar demand. It doesn't really matter whether or not you believe the tariffs are correct and just; it becomes more of an issue with supply. After all, if you are in Canada and not bringing US dollars into the economy, this has a major detrimental effect.

In fact, Justin Trudeau, during his announcement of 25% tariffs on US goods, has suggested that he "did not want to escalate further.” Unfortunately for him, Donald Trump has already said that he would raise tariffs another 25% if there's any retaliation. At this point, you must assume that the United States is about to slap 50% tariffs on Canada. The same thing goes for Mexico. What's interesting is all of the nonsense that you read online about what kind of damage this does to the United States. In reality, while some things may become slightly more expensive as a result, the battle is ultimately unfair.

For example, one thing that I hear a lot of is that the United States imports electricity from Canada. While this is true, it ends up being just north of 3% of total consumption. Yes, you read that correctly, 3%. Furthermore, there has been some discussion in the automotive industry about the assembly of certain parts in Canada and Mexico. However, Trump has already warned of dire consequences if these operations remain in Canada or Mexico. In fact, we have already seen several announcements that this, in fact, is going to happen with multiple automotive companies.

Because of all this, I anticipate that the US dollar will strengthen for some time. I obviously recognize that we should see a bit of noise going forward, but ultimately the US dollar has been on a very strong trajectory since October, and I think the recent pullback is looking a lot like a buying opportunity.

Keep in mind that we are talking about Donald Trump, and of course he is somewhat unpredictable, but if you pay close attention, you can see what it is he is most likely to do. I can guarantee that he won't back down from either Canada or Mexico, making the current situation a significant game of chess. For those unfamiliar with the term, "chicken" refers to a situation where two individuals attempt to escalate the situation until one of them falters. For example, you could have 2 people driving a car directly at each other, and sooner or later one of them has to swerve away. This is essentially that; only one of the cars is a small Honda, and the other one is a dump truck.

The United States will ultimately prevail in this argument. The question then becomes whether or not it gets to be rather ugly between now and then. If there's one thing you can say about Donald Trump, it's that he has a strategic approach. People who fail to look beyond the potential erratic behavior don't understand that he is very focused on what his goal is. If he were anything different than that, we wouldn't even be talking about him because he would have been retired, shot and killed, or perhaps even in jail. Just think about how resilient the man has had to be over the last few years, regardless of how you feel about him.

Gold.

The other asset to own is going to be gold. During the Friday session, and all of the nonsense and media manipulation that we have seen about the potential tariff situation, gold showed itself to be rather strong. However, there was a moment when somebody manipulated the market by suggesting that the tariffs would not take effect until March 1, and it had both the US dollar and the gold market selling off rather drastically as people assumed this meant that Trump was willing to negotiate further. He squashed that late in the day after futures markets closed, so this will be interesting to see how it all plays out.

Quite frankly, gold has been very strong for quite some time, and during the Friday session, it managed to break out to a fresh, new, all-time high. That is reason enough to be interested in this market, and I believe that any dip in value on this chart is something that you need to be looking at for a bounce so you can start going long again.

A few thoughts about this week.

On Friday, we get the employment numbers out of both the United States and Canada. While this would typically set up for a lot of drama at the end of the week, I think, quite frankly, this might end up being the least of our concerns. Ultimately, this is going to be about the next thing Donald Trump says or does. Do not be surprised if you witness a sudden "risk-off move" during the week. All one will have to do is look at Truth Social or X and see where he just slapped more tariffs on the Canadians and Mexicans.

If you don't think he's serious about this, you aren't paying attention. In fact, Justin Trudeau himself has stated that he has tried to get in contact with Donald Trump, but Trump isn't willing to speak to him.

It's been interesting to see the reaction in Canada, because there has been a massive bifurcation of what people think about this. Some individuals align with "Team Canada", viewing this as an external conflict they must engage in, while others, on the other extreme, openly advocate for certain provinces to secede and become part of the United States. That being said, though, the reality is that Canada has quite a few problems to worry about internally without the United States adding to them. Liking it or not is irrelevant; the reality is that Trump has seen an opening and is taking full advantage of it. I anticipate that sooner or later there will be some trade deal worked out that also includes the RCMP being a bit more stringent on the US/Canada border.

This coming week, I think position sizing will become even more crucial than usual, and therefore I would advise anybody who doesn't understand what's going on to either stay out of the market or perhaps cut your position in half. But frankly, there are a lot of opportunities here, but unfortunately, some of those opportunities will end up being opportunities to lose a lot of money.

If you are a longer-term investor, certain things should give you plenty of value sooner rather than later. One example: Bitcoin. I'm looking to buy a bit more if it continues to fall, which it has done so rather significantly over the weekend, as you would expect. However, I would also point out that's not a trade, rather it is an investment so it plays under a completely different set of rules.