Larry Berman

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ANALYSIS: This past week, I attended the Manning Centre annual conference in Ottawa. This gathering of the Conservative movement in Canada brought together some of the key thought leaders to recharge the right. In one presentation titled ‘Wither American Conservatism,’ we heard from Michael Gerson, opinion writer in the Washington Post. He was so fearful of a Trump presidency that has many of the Conservative establishment in U.S. besides themselves. The polarizing results thus far in the U.S. primaries in our humble opinion are a big part of the new civil wars that are being fought in most countries around the world. The UK referendum in June regarding separation from the EU, and Spanish elections wanting separation from Spain are a few examples. The list goes on.

The increasing separation of class has most people mad. Whether it’s been oppression from dictatorial regimes in the East or the culture rip in the Republican right (and the 15% Congressional approval rate), far too many people are mad and want change (not unlike the voter fatigue Harper experienced here in Canada) or the Conservatives in Alberta did with the (be careful what you vote for) policies of the Notley regime. We’ve observed this tear in societies around the world manifesting in the “Cruzing” Tea Party Conservatives in the U.S. fighting with the establishment conservatives while opening a Grand Canyon gap for a “so-called” billionaire (enter The Donald) to unite the frustrated.

I expect that history will look back at the extreme polarization of the current political vote in the U.S. as an ah-ha moment that entitlements, taxes, and tort required a major CTL+ALT+DEL and rethink of what the founding fathers really intended for the great democracy they established with blood, sweat and tears. I suspect the global economy needs to get worse before it gets better. The staggering debt in the world including here in Canada at all levels of government, which hit the front pages in a big way last week, need to be controlled. After spending time at the Manning conference and the movement Preston Manning started nearly 30 years ago when I was a young, more Liberal thinker, I’ve been energized to help Canadians get a better understanding of what all this means for their retirement portfolios.

As a portfolio manager for most of the past decade, and as a market strategist for the decade before, I’ve always had a keen interest in global politics and how they impact financial markets. We are seeing an increasing element of uncertainty build in how markets react to government policies. Whether that be the new era of quantitative easing and free money or the ideological proxy wars now being fought with Russia and others. One thing I have learned is that markets do not like uncertainty and there is an increasing degree of political uncertainty all over the world. And that is a major obstacle to economic growth and smart policy choices.

Not unlike Trudeau in 2015, who ran on a populist change platform promising to make it better for Canadians, Donald Trump is promising to make the U.S. great again. Aside from insulting just about everyone on the planet at some in order to gain attention on social media, Trump has not offered one idea about how to make America great that has any economic backbone. The brutal reality is that it may take decades or longer to restructure and reform the toxicity of waste that governments at all levels all over the world have accrued with idiotic promises to get elected and this may require zero interest rates along with major structural reforms so that economic growth is not stifled by the system. If one day I’m Finance Minister of Canada (which I plan to be later in life as I don’t ever expect to retire), I will tell Canadians the truth. Did you know that your newborn baby is already $38,000 in debt today as a new citizen of Canada? We need hard economic reforms and there is no political will to do it. That’s one main reason why Trump has been so successful this far.

You can probably garner by now that I’m increasingly dismayed by choices governments have made in recent years. To some degree, they had little choice because the combination of demographics and debt is stifling to growth. I like to remind viewers that I most certainly don’t know exactly what markets will do at any point in time and no one can know with perfect certainty. I do have an educated opinion and have always approached markets from a perspective on managing risk relative to return. I do know factually, and this is not something that can be debated, the U.S. economy, the biggest in the world, is in the worst shape since the great depression. And I expect it will get worse. The economy has grown about 2.3% per year since the Lehman moment with zero interest rates and the U.S. government borrowing to spend about 1 trillion dollars per year. That means had the government not borrowed the money, the U.S. economy would have shrunk each and every year by 3 to 5%. That makes it worse than the 1930s.

Today, debt is 105% of GDP and, in layman’s terms, the size of the debt is now bigger than the economy. Looking at Japan as the lead example of just how stifling that number is economically, it does not matter much what they do except weaken the yen to stimulate exports. Their economy is likely to stagnate for decades more. The main different being the U.S. will grow with liberal immigration policies, as Japan culturally does not like outsiders. You cannot fight demographics at the policy level. We are all living longer and we need structural changes to deal with it.

Enter The Donald with his stifling ideas of putting up walls and tariffs, making it easier to sue people, and increasing the bigotry level to a point not seen since the great Martin Luther King gave his life for the pursuit happiness, liberty and equality. If Trump should somehow get lucky and become the next U.S. president, it would likely add a huge economic uncertainty for a while.

So on Super Tuesday where the polls have him leading almost everywhere, we suspect the markets will be increasingly dismayed with America’s choice. If Cruz can’t win in Texas, he should back out and support Rubio. Kasich (Ohio Governor) is in until the March 15 primaries in Ohio at a minimum. Ben Carson will likely hang it up after March 1, but we do not see him supporting Trump. If they can consolidate the vote before March 15, Rubio has a chance to beat Trump, but according to the most recent polls, consensus aggregator www.realclearpolitics.com

Cruz is ahead by a wide margin, which suggests the vote stays split with Rubio (Sen. Florida) and Trump likely walks into the ticket after March 15 in the all or nothing primaries. I don’t expect the markets to sell off on Wednesday for this reason. More importantly, investors around the world are looking to Mario Draghi and what the ECB has in store on March 10 for additional stimulus – or what Draghi recently said: “No limits to how far we are willing to deploy our instruments." It would be hard for the bears to stand in front of that seeing how powerful markets have responded in the past to his doses of adrenaline. As all should understand, it’s increasingly like pushing on a string like China’s policy response seemed to be Sunday night.

Bottom line is hang in there for the window between March 10 to March 15. But look to raise some cash and move your portfolios more to the sleep-at-night position (whatever that means for you). I’ve started to move that way in recent days having cut equity exposure late last week in my sleep-at-night portfolios. For the adventurous, an inverse ETF (no leverage) might be interesting for the next few months do hedge against some core long-term dividend payers.

There are ways to make a difference in portfolio returns with event risk evaluation like this and others that we will share with BNN viewers on my newest across Canada speaking tour. The current tour will feature the BERMAN’S CALL format where we will look at what is currently moving markets off the top, have a live segment of audience Q&A and e-mails, and as always, will finish off with an education workshop to help you make better investment decisions.

Register at www.etfcm.com

Our voluntary charitable goal this year for Alzheimer’s research is $50K. Over the past three years Berman’s Call viewers have helped Larry raise over $100,000 for Alzheimer’s research in Canada.