What to make of the first month of Trump 2.0?

Pierre: Hello everyone and welcome to the “In Your Interest!” podcast. My name is Pierre Dolbec and today I'm joined by my colleagues, Sébastien Mc Mahon, Chief Strategist and Dominic Siciliano, Senior Vice-President and Head of Fixed Income. Hello, Dominic.

Dominic: Hello, Pierre.

Pierre: Hi, Sébastien.

Sébastien: Hey, Pierre. It's nice to have you with us for the first time here on the podcast. And hey, Dominic. I mean, we spend a lot of time discussing markets, discussing politics, geopolitics, what's going on with Trump. And we thought, you know, who better to have as a guest today to try to make sense of everything that's going on than you. So, thank you for being here.

Dominic: Oh, it's my pleasure. Thank you.

Pierre: You just mentioned it, Sébastien. It's been the topic that everyone's talking about. Everyone wants to know what's going on with Trump. And he's been sworn in for a little more than a month now. So since then, his comments and policies have flooded the news. Literally. Can you help us make some sense of what happened and where we're currently standing?

Sébastien: Yeah, sure. So, as you said, it's been only a month, but already Trump has signed 60 executive orders so far. So, that's the most in the president's first 100 days in more than 40 years. And executive orders are special powers that the president has that he can just sign away in order to give directions to government agencies. So, the most important topics that he's been working on so far is the immigration reform; trade policy. Of course, all of those tariff threats that we've heard, there are some tariffs that have been put in place on China: 10%. Other than that, it's only threats for now. And of course, downsizing the government. So, Donald Trump came out of the gates running and still, you know, lots of work to do on his end. So, we should have what we could characterize as a busy year ahead of us.

Pierre: And, Dominic, can you tell us a little bit about geopolitics?

Dominic: Yeah. It's been a very, very intense beginning to the U.S. presidency.

Territorial rights, I mean, if we talk about his foray into us becoming the 51st state, Greenland, the Panama Canal, his comments on Gaza and ultimately the conflict in Ukraine, I just draw everybody's attention to, geopolitical situations are all about equilibrium, and we have sometimes very like shock, short-term impacts. But the impacts are really felt over the long term.

And the U.S. has played a role in the world geopolitical scene where it's been the police force. It's helped their economic plan, because if you're able to influence countries through your military and influence them with your political system, you're able then to have better commercial exchanges with those countries. And it's been really part of the plan since the 1950s and 60s from the U.S. Trump's first foray into this is completely opposite to that, and this is going to cause a lot of disequilibrium, if you like, in the system.

Notably, you know, if you look at his comments with more alignment with the Russians, his weakening comments on Ukraine, these are all things that are going to have huge mass repercussions on the geopolitical scene for years to come if this rhetoric is maintained.

Pierre: And, you know, leading up to his election, Trump also promised to deregulate and cut taxes. Sébastien, how is this progressing so far?

Sébastien: Well, on the tax cut side, no tangible progress has yet been seen. Congress and Senate are working on budget drafts right now, and what we're hearing is that there would be an extension to the Tax Cuts and Jobs Act of Trump 1.0, so in his first mandate, and that would lead to $4.2 trillion of less income over the next ten years. So, $4.2 trillion is $4,200 billion over ten years, and they would add $300 billion dollars in new spending again over the next ten years for immigration enforcement and military support. So, this is not what we would call stimulative because you would just be extending tax cuts and spending a little bit more, but more on the immigration and military front.

Spending cuts also need to be part of that bill. And here it's getting complicated because the spending cuts that have been circulated so far are at $1.5 trillion over the next ten years, but this is way below what the conservative Republicans are looking for, which is more in the vicinity of $2.5 trillion. And remember that yes, Trump does have a strong mandate—he has a majority in the Senate and in the Congress, but the majority in the Congress is very slim. It's 218 seats for the Republicans versus 215 for the Democrats. So, it makes it a very complicated situation, and I would expect that we have some inner fighting in Washington about the budget situation. So, this is for taxes. Deregulation, it's a bit different. So maybe, Dominic, if you can expand on that.

Dominic: Thanks, Sébastien. Yeah. The deregulation aspect is really targeted on energy, infrastructure and financial markets. I think some of the areas that are going to be hit the most, also, in terms of not benefitting from what was under Biden's administration, is really on the environmental side of the equation.

And once again, I spoke about equilibrium, but there's a lot of balance that's needed in deregulation. I'm not one for heavy regulation in the industries, but I think you do need to have regulation, and it has to be really thoughtful on how you implement it and really look at all the consequences. So, I'm a little concerned that if we have broad-stroke deregulation in certain sectors, you could have situations once again, like we had in 2008, when, you know, a lot of the crisis came from a lack of supervision on what some financial markets were doing in the marketplace. This is something that is a concern.

We don't—on the opposite side—want to become like certain European countries where it's impossible to conduct any business because of the red tape that's involved in doing that. But we have to strike a balance. And Elon Musk also with his cuts that he's doing through the DOGE program is also a concern because, you know, in this deregulation, you want to have those agencies involved in the deregulation process. And by doing wide cuts across those agencies, you might also have a greater shock or less understanding of what the impacts are. So, balance is needed. Once again, I'm not one for heavy regulation, but we need to have an equilibrium here in the system. And I'm afraid that Trump is going a little too fast on his wish list.

Pierre: And in terms of trade relations, I think we have to talk about tariffs or looming tariffs. What's been announced, Sébastien? And where do we stand right now?

Sébastien: Sure. So maybe just tariffs 101. So, tariffs are paid by the importers. So, if Donald Trump announces 25% tariffs on imports from Canada, it's the U.S. importers that will be paying a tax to the government and that gives them an incentive to look for a supplier in the U.S. rather than importing the goods that they are importing.

So, it's not Canadians that would be paying that, and it's not a guarantee that the importers would stop doing business with Canadians. You know, they could take a hit to their profit margin. They could raise the prices of what they're selling to consumers. So. it's a bit complicated. But so far, it's mostly threats, although in China the 10% tariff is in place. But for Canada, for Mexico for cars, steel and aluminum, so far, it's only threats. It hasn't been put in place.

And so far or so, we have a trail of negotiation off ramps that we've seen for most of those threats. So, likely this is the Art of the deal at work. So, the Art of the deal, if you've read that book or other books by Donald Trump, it's just a strategy where you ask for a lot. You try to shake your opponent as much as possible to see where weaknesses are, where you can negotiate, and in doing that, you hope that you get a better deal than if you go the more diplomatic way.

But again, we can't say that all of this is a bluff, because by definition, if you play poker with someone and they're bluffing, that means that they're acting like they have a pair of aces, but they have a pair of threes. Here, Donald Trump does have the pair of aces in his deck but, you know, will he play them? When will he play them? Can we negotiate a way out? So, that's a complicated situation. But uncertainty is created by all of this and uncertainty by itself has some economic impacts.

Pierre: Dominic?

Dominic: Well, on that concept, you know, it's difficult to negotiate these things in the short term. You can have a lot of victory for Trump in the short term, but Canada, for example, is a great example. What are our options here moving forward? Should we sell more oil and gas, more products to Europe and other countries? Will we open up other markets? We've been very dependent on our U.S. partners because we've had a great partnership and there was no reason to break that. But if that confidence is no longer in place, well, it takes years, but we can build a system where we do decide to sell our products elsewhere and that ultimately be detrimental to the U.S. economy. So, once again, a lot of short-term impact. And I like Sébastien's analogy that he's holding the aces now, but the game might be totally different in five or six years if we have the political willingness to make the right decisions for Canada's growth in the long-term view.

Pierre: And beyond U.S. tariffs, we need to take into consideration retaliatory measures, right?

Sébastien: Yeah, of course. And this is, you know, what could lead to recessionary impacts here. It's not just the U.S. putting tariffs, but it's the retaliatory measures that could come or that should come from other countries. Because, you know, this is an attack on the sovereignty of other countries when you just start to violate trade deals that you signed yourself, like the USMCA. And of course, the language that is used by Donald Trump. So, we need to expect with good reason that there will be retaliatory measures. So, this is where, you know, we don't think that a recession is guaranteed. It depends on if the tariffs are put in place and how long they're in place. But the Bank of Canada has done some work on this: if we do see the worst-case scenario come in, permanent 25% tariffs on Canadian imports and Canada does the same thing on U.S. imports, well, that would lead to the equivalent of a loss of 3% of GDP for Canada in the long run. And the first year it would be -4.5%. So, that means a recession in 2025 in Canada, if we go there. In 2026, it would be a shock of 1.5%, so basically no growth in the country. And then after that, you're seeing some growth, but on a very different trajectory.

So again, it depends on if the tariffs come, what kind of tariffs come and how long they are put in place. All of these for now, we don't really have any answer to those. So, it's a very serious risk. We cannot minimize it. But again, so far, it's still just a risk.

Pierre: Final thoughts, Dominic?

Dominic: Well, just on that particular concept, you know, we have to give in this political negotiation the way Trump finds resolution is through a win, a political win. So, in the first round with the Trudeau government, we didn't give him a lot more than what was already planned, I would say. And some of the concessions were, you know, pretty easy for us to accommodate. And he saw it as a political win, and he delayed the tariffs for 30 days. So, we're going to have to continue to negotiate on those terms, not only about finding the appropriate deal for both nations, but also giving him a political win, unfortunately, in this environment.

And another concern of mine is that, you know, we are kind of in a weak political situation here. We are about to have elections in Canada and we’ll have a new government or, you know, if the existing government remains, we'll have a new leadership. And how is that going to work in the negotiation process?

So, there's a lot of moving parts here. And as a Canadian person, a consumer like everyone else, I am extremely concerned about the impact for everyone in our country. So, we'll keep monitoring the situation and hopefully have some better news in the future.

Pierre: Thank you both, Sébastien and Dominic, that was a great discussion! That's such a loaded topic, I would say. There's so much to unpack.

Thanks to all our listeners as well. We'll carry over the discussion on our next podcast in two weeks since there's so much to talk about. So, see you in two weeks time for the next episode of the “In Your Interest!” podcast.

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