Investing in Government Policies: Environment, Taxes, Jobs…and More

As a macro-based investor, I’ve always been much more focused on top down policies and themes that move economies— tax policies, regulations, job growth, environmental impact, all the way to the uncertainty of leadership change— rather than the minutiae of the latest quarterly report. In Canada, for example, we would have a vastly different regulatory climate under the Greens or NDP than we would with the Conservatives. That, in turn, impacts the value of trade and growth. In the US, the political landscape under Trump has not been as interesting and disruptive since Nixon in the 70s.

Before viewers accuse me of political bias, and just to be clear, I’m a fiscal conservative and a social liberal. I believe in smaller government, more personal freedoms and the pursuit of happiness. In Canada, I tilt to the Conservative side. (In the US, I’d tilt to the Republican side.) I believe the government should make policy with the goal that each individual has equal opportunity— not equal outcome. I believe policy decisions need to be balanced, not motivated by virtue signaling or extreme ideologies. I’m also president of my Conservative riding association and I would not be unhappy if we saw a change in leadership in Ottawa on October 21.

So, when the Liberal government policy kills foreign investment in Canada (read: lots of jobs), it bothers me. Not only that, from an investor standpoint, it tells me Canada is short, relative to places that support business development. On that score, the US economy and government policy has been a relative winner. (But the coal jobs are not coming back Mr. President.) Now, I dislike Donald Trump. I think he’s an awful person and I’m embarrassed that he is the president of the free world. His current policies are toxic and will most likely push the world into a recession and move globalization progress back decades. That said, Elizabeth Warren, is a lovely person as far as I can tell, but her ideas for the economy are much worse than Trump’s. Policies matter! Populism, instead of quality decision making, seems to be driving politics today.

There is a US based ETF (PLCY) EventShares US Policy Alpha that picks stocks based on current US legislation and regulation themes. This ETF is currently overweight Energy and Industrials. They are not overweight Big Oil, as you might think. LNG terminals, refining, energy infrastructure, and utilities are the regulatory plays. This fund is long uranium (CCO). If Warren wins in 2020, you can bet those positions get killed since she wants to (virtue signaling) ban fracking rather than consider a smarter way to deal with climate change. On the Industrials side, defense contractors, suppliers, aircraft parts, and outsourced IT & consulting are thriving under Trump’s boost to military spending. The fund is also long potential winners in the pending cannabis legislation. It’s very negative on companies affiliated with the opioid crisis. They are very negative on big tech and that may get worse under the Democrats.

Each quarter their research team produced a policy tracker, which they base the portfolio on. You can review it here.

So, how are they doing after one year? I compared the total return of the Vanguard Total Market index ETF (VTI), and they are lagging. The risk of a portfolio measured by beta is a bit lower than WTI, but, so far, they have not beat the market.

Bottom line, policies matter for markets. And while this ETF has not yet shown the Alpha it seeks, as macro investors, we love the concept. As we get closer to the November 2020 election, I believe the odds of a full-on recession are high and, in just about every scenario but one that I model, Donald Trump loses the election. At this point I don’t think it matters too much who the Democratic candidate is.

One thing that stands out to me is gun policy. In 2016, there were about 4 million teenagers that could not vote that now can in 2020. I’d bet heavy, that they hate Trump’s environmental policy and his response to the ongoing mass gun deaths that have been ignited, in part, by the hatred he promotes with his border rhetoric. About 80% or more of those kids will move the needle enough and vote against Trump, not necessarily for the Democratic candidate.

Mathematically, he’s only President because 107,000 swing voters in Pennsylvania, Michigan, and Wisconsin combined believed he would bring their jobs back and Make America Great Again! He has not (in my view) and America, while a great nation, is never going to be like it was in the 1950-70s. It will be interesting to watch this ETF and policies as the market prices the risks of the 2020 US election.

I’d be remiss if I did not mention the Canadian election on October 21. The battle between the environment, bigger government and higher taxes is raging. Tonight’s debate could move the needle and all Canadians should tune in. I’ve said for several years and I doubled down (as a Canadian market bear) when Trudeau bought Canadian taxpayers a 40-year-old pipeline. Canada will most likely underperform under a Liberal government because of their anti-pipeline policies. They can call it other things and try to paint it with the environmental brush, but it’s unequivocally bad for Canada. I much prefer the Conservative support for developing a new carbon capture technologies industry that will create jobs, not lose them, and that we can export to the world.

We are likely going to see a minority government that may fall in under 2 years. And it looks too close to call, though the Liberals have a seat edge while the Conservatives lead in the popular vote. This could leave many business leaders uncertain about the future. Certainly, foreign capital won’t come back. Canada and the Canadian dollar will likely continue to underperform.

Come out to my Fall roadshow starting this week in Hamilton. I’ll show you the important role fixed-income will play in your portfolio and some strategies for how to deal with the current low rate environment. I’ll also elaborate on US Fed policy and how that may affect your portfolios heading into the 2020 US elections.

Click here to register for free and as always we ask for volunteer donations to one of our two favourite charities. Children’s cancer research at the Sick Kids Hospital and Alzheimer’s and dementia research at the Baycrest Hospital.


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