Peter Piovic is a Calgary-based senior portfolio manager at Wellington Altus Private Wealth Canada and a regular contributor to the Western Standard. In this special edition of the show, he talks about the impact of President Trump's latest trade war with China and why he thinks there's still hope.
00:03:56.480So, you know, when talking to people, if I took the approach that, you know, Trump doesn't know what he's doing, Trump's an idiot and so forth, then I would probably become even more popular.
00:04:10.340You see, you have to almost just rewind here and see, you know, what are they trying to accomplish and why?
00:04:17.320So, you know, so first of all, and this is a very complex topic, but at the end of the day, the crux of the problem are deficits.
00:04:25.820So a couple of deficits in particular, you know, one is the fiscal deficit.
00:04:31.000So if you have a fiscal deficit of, say, $2 trillion on a $37 trillion debt, that would mean that the national debt is growing by $2 trillion a year.
00:04:51.260And then when you look at the interest payments on that debt now basically approaching, and if you extrapolate its growth rate, possibly exceeding $1 trillion a year by the end of this year, then you've got a real problem on your hands because now that starts to, say, exceed the budget of the U.S. military in terms of interest expense.
00:05:15.580So that's one deficit that they wish to reduce.
00:05:20.380And then the other one, which is contributory to that, would be the trade deficit.
00:05:26.000And that's what we've been hearing a lot of recently in terms of the trade deficit of the U.S. to China and to the rest of the world, which is where the statecraft comes in.
00:05:36.460So, Nigel, do you want to talk a little bit more about the trade deficit and how that might work?
00:05:44.180So the trade deficit and also the Department of Government Efficiency, and it does sound comically bureaucratic, but in actual fact, that's an agency of government with a limited span or sunset clause in it, and it is actually uncovering enormous and ridiculous expenditures.
00:06:03.140again if you take your eyes off it for a day you lose it but the last time i heard they'd
00:06:09.880identified something like a trillion dollars that is just foolish expenditure so are you
00:06:17.180are you saying that taking the sum total of what the u.s administration is doing and not just being
00:06:27.040focused on tariffs they are in fact seeking to save money in government and appear to be succeeding
00:06:35.440that they have um that they are working on the trade deficit through tariffs
00:06:44.880and that of course when you apply a tariff anything that does come in is revenue to the
00:06:49.760the government. And then I recall that we were speaking a while ago about the import of gold and
00:06:57.920the possible revaluation of gold as a way of reducing the severity of the national debt,
00:07:08.720the total national debt. I think you use the analogy of if you have a house that's a million
00:07:15.000dollars and you're worth a million dollars and you have a hundred thousand dollars in the bank
00:07:19.720uh a debt of a hundred thousand dollars you don't worry too much but if the debt is a million and
00:07:24.440the house is a hundred thousand then you've got every reason to be concerned so the so taking
00:07:30.840all of these things together can you place the tariff actions within the overall u.s approach
00:07:37.720and maybe rate how well it's working for them yeah so it's it's going to be too early to say
00:07:44.040how well it works, although they've been in these similar places before, and similar policies have
00:07:50.100worked historically, post-World War II, post-World War I, and also post-Civil War. Now again, it's
00:07:56.700just important to almost kind of refocus on what the main goal is, and that is to reduce the deficit,
00:08:02.460the fiscal deficit, and to reduce the trade deficit. So now going back again to the fiscal
00:08:07.500deficit, you know, very simple, if you have a deficit, if you're running a deficit, say in your
00:08:11.460household. And what does that mean? It means you're spending more money than you're making.
00:08:16.220So how do you fix that? You know, it's difficult, but simple. Obviously, you need to make more on
00:08:22.540one side, so increase your revenue. And you need to spend less on the other side, which is decrease
00:08:28.320your expenditures. And that's exactly what the US administration is trying to do. So on the revenue
00:08:34.120side, you already mentioned it, Nigel, you know, tariffs increase revenue. And, you know, currently
00:08:40.760they're targeting anywhere from $300 billion to $600 billion of increased revenue through tariffs.
00:08:49.140And then on the expenditure side, you already mentioned Doge. So that's one way they're trying
00:08:55.840to reduce the expenditure. But then the other way is going to be to reduce the interest expense
00:09:01.300that I referred to earlier. And how do you reduce interest expense? And there's really only a couple
00:09:06.400of ways. One is to reduce the national debt, which they're nowhere near accomplishing at this point
00:09:13.260in time. They'd be happy if they can just reduce the deficit before they could even begin to think
00:09:18.480about reducing the debt. But if they can get interest rates down, so if they can somehow get
00:09:25.800interest rates down, which they have been coming down, and when I say down, I mean, and when I say
00:09:31.020interest rates, I mean the bond market. You see, the Federal Reserve tracks the two-year
00:09:36.360treasury bond as one of its main targets in terms of how to set their overnight interest rates.
00:09:44.200And currently, that two-year treasury bond is hovering just under 4% and has been trending
00:09:50.600downward now for weeks. So one of the ways, one of the reasons it's been trending downward,
00:09:56.960ironically, is all this uncertainty that we've been seeing. So in a very strange way, and this
00:10:02.860now again goes back to statecraft, in a very strange way, all this uncertainty, all this fear
00:10:08.280and so forth that we've been seeing is bringing down interest rates in the bond market. And as
00:10:14.380those rates come down, when treasury bonds come due, and the US government needs to renew those
00:10:21.740treasury bonds, and there's trillions that need to be renewed this year. They've six trillion in
00:10:27.520June, and there's more towards the end of the year. Those bonds get renewed at a lower interest
00:10:33.100rate. And when they get renewed at a lower interest rate, the US federal government saves
00:10:38.040money. When they save money, they reduce that fiscal deficit. So is that an accident or is that
00:10:46.720planned. Well, if it's not an accident, then Trump is obviously a superior intellect to most of us
00:10:55.260because sometimes it's hard to follow, even when you have it explained to you. Especially in the
00:11:00.100last couple of days, there's been quite a few articles, mostly from the left-wing media,
00:11:05.640emanating from the United States. Like I noticed that the lead article on this yesterday on the
00:11:10.340National Post came from an American author. I don't know where they stand politically, but they
00:11:16.140certainly were delighted to write that Trump had blinked when he suddenly removed these tariffs.
00:11:24.480And I've had the argument advanced as recently as yesterday that, in actual fact, bond rates
00:11:29.080are going up. So just because of those uncertainties and the different things we're being told,
00:11:34.060are bond rates going up? You just said they were going down. That sounds better.
00:11:39.760And did Trump blink? Okay. So just to answer the question on bond rates, first of all,
00:11:45.540it depends on the time frame you're looking at.
00:12:10.100But at this point in time, it's still down,
00:12:11.860although this week, yes, it did tick up.
00:12:14.560So then back to statecraft. So, you know, once again, it'll be very popular if I, you know, said that he blinked. And who knows, maybe he did blink. But here's the thing that I've been thinking about for several weeks now with respect to these tariffs.
00:12:30.700So let's just kind of back up again and take a bird's eye view of the trade deficit, first of all, which is one of the reasons we're going to tariffs.
00:12:42.440So if you look at, if you just look at goods and not services, the U.S. trade deficit to the world is something like $1.2 trillion, which is, by the way, is a colossal number.
00:12:57.380Now, if you include services, because the U.S. does a lot of services, that number drops probably from $1.2 trillion to somewhere around $800 billion.
00:13:09.360It's still a very, very big number, even when you include services.
00:13:13.420Their trade deficit to China, on the services side, the data is really not clear.
00:13:19.640It's very poor data on services with respect to China.
00:13:22.660But on the good side, it's a little bit more clear.
00:13:25.040it's probably just a little bit under 300 billion dollars so so net net if you're looking at goods
00:13:31.000about one quarter of the u.s uh trade deficit um is with china and then three quarters is with the
00:13:39.340rest of the world so and china is also um you know the uh the competitor let's just say to the u.s
00:13:47.260with respect to economic and political power.
00:13:50.940So I've always suspected that really the main target
00:13:55.380in these so-called trade wars really is China
00:14:01.180Sure, everybody else is involved as well,
00:14:04.360but if you start with tariffs on everybody
00:14:08.420and then you slowly reduce those tariffs
00:14:12.540on most countries with the exception of China,
00:14:15.940you might what might be happening here is you might be left with essentially uncovering the
00:14:22.180the main target all along and and that could be an element of statecraft right there well that
00:14:28.280okay so because I'm old I remember this happening in real time but back in the in the last century
00:14:37.800at the at the end of the 80s at the end of the Reagan area it was deemed that it would be a good
00:14:43.160thing for the world if china were brought which had been sort of excluded from a lot of things
00:14:49.080was actually brought into the mainstream exposure to the the world trade uh organization and
00:14:56.840international trade would be good for them it would raise their raise their hopes raise their
00:15:01.960standard of living they would become more peaceful and less dangerous and as it was written so it was
00:15:07.080done. Well, they didn't play by the rules. This is the sort of the conservative view of history
00:15:14.360here. Obviously, if you're a leftist, you won't think like this. But the Chinese didn't play by1.00
00:15:18.760the rules and instead, aided by unpatriotic business owners in America, they offered
00:15:25.160America offshore production to China and is now in a vulnerable position, both militarily and
00:15:31.640economically and president trump was saying has decided that he is going to do to china what
00:15:38.680reagan did to the ussr with star wars and tariffs are part of it and so are the other things that
00:15:45.400we were talking about so there you are there's a there's a sort of a little potted history
00:15:51.000uh and an explanation for all things uh which may be completely wrong but is there any truth in any
00:15:57.720of it there the short answer is there may be uh truth truth in that we don't know yet but certainly
00:16:03.720we'll be paying attention to how that progresses uh over time and but let's back up again and just
00:16:08.360say how we got here um you know why did uh the united states offshore production uh to china
00:16:14.440you know back in the day let's call it in the 70s and the 80s uh to start and there are many reasons
00:16:20.280uh but one of them was um you know in the united states we had very high inflation like very very
00:16:26.520high inflation, which led to very high interest rates, which were causing all sorts of problems.
00:16:32.920You may remember that. I was pretty young at the time, but even I remember that as it was occurring.
00:16:39.960Kissinger and the US administration at the time had this grand idea with costs. It was
00:16:47.400no idea is not without consequence. The idea was essentially to export the inflation outside of
00:16:55.320the United States essentially to China by exporting production of goods and factories
00:17:03.480and manufacturing and so forth outside of the United States to China in the effort to bring
00:17:08.760down interest rates by bringing down inflation. And to a large degree, it did work. And again,
00:17:16.920just a quick little mechanism. Obviously, if jobs are being exported overseas, there's less
00:17:22.440money in the US system after that is complete, which means less demand for goods and services
00:17:30.660as there's less money to chase those goods and services. Furthermore, if China is exporting
00:17:36.720goods into the United States, that means we are exporting money outside of the United States
00:17:41.740and Canada. Canada wasn't all that much different. And when you export money out of a country,
00:17:48.960That means that wealth is essentially being taken out of that country and sent over to the exporting country, in this case, China, which long, long, long term makes the Chinese obviously very wealthy and slowly but surely, you know, makes, you know, the average middle class American poor over time.0.73
00:18:08.120So that is what Trump is now targeting because fast forward now several decades, what has occurred is essentially too many, there's too many people in the United States that are not doing well as a result of all this.
00:18:23.840They don't necessarily have as many good quality, high paying jobs as they would like.
00:18:29.880And there's now a concerted effort to bring that production back into the United States, to bring those jobs back into the United States.
00:18:37.300and then to have more wealth accumulate
00:23:44.020And beyond that, even if the price did perpetuate higher,
00:23:47.760eventually we might just figure out ways to grow grapes more locally,
00:23:52.280say in Kelowna, for example, and avoid the tariffs outright.
00:23:56.740Yes, you look like you might have vineyards behind you, actually.
00:24:04.500Yes. Well, I mean, that's certainly the way that they taught me economics at university.
00:24:10.500In practical terms, I'm still waiting for the price of Marmite and certain other British1.00
00:24:14.500specialties to come down in just the way that you have described, and I will take hope from
00:24:21.460what you've just said. It's just theoretical, of course.
00:24:24.980Yeah, life happens. You in the past recommended hard assets. Do you still recommend hard assets
00:24:35.700for people who are looking for a safe place to put their money?
00:24:38.820Yeah, no, absolutely. You mentioned earlier about the potential of gold becoming something bigger,
00:24:45.620possibly in this financial system. And that's always been the case. And that's still the case
00:24:50.340today. For example, we talked about trade, we talked about deficits. At the end of the day,
00:24:59.460the goal is to reduce the deficit, to manage the debt better, because if it continues on,
00:25:05.860then the interest expense simply gets too high in the long run, and that could lead to a far,
00:25:10.580far worse situation than we see currently here today. As much as none of us particularly like
00:25:17.220what's happening. The reality of it is there is an effort to fix certain problems that exist in
00:25:24.900the system, the financial system, to avoid a much larger problem down the road.
00:25:30.980And one of the ways to fix this, so to speak, is gold at some point may, we don't know,
00:25:39.620we don't know for sure, but it may play a much larger role in the financial system.
00:25:44.700It's already a reserve asset at multiple, you know, multiple central banks around the world and Treasury departments.
00:25:52.780If the debt situation at some point becomes a little more untenable, let's just say, one option is always going to be to simply take those take that gold that's sitting on the balance sheets of different central banks like the U.S. Federal Reserve or the Treasury Department and revalue it at a higher price.
00:26:12.580And if you revalue it at a higher price, then all of a sudden the debt that that country has may not seem so big in relation to the value of gold that's being held in reserve.
00:26:25.800So for that reason and many other reasons, we've always held a broad-based portfolios that yes, have equities, stocks, yes, have fixed income bonds, cash and cash equivalents for liquidity.
00:26:41.400and then some precious metals, mostly gold,
00:26:44.940possibly a little bit of silver and other commodities as well