Donald Trump’s presidency is most generously described as a mixed bag. To his supporters he is the most accomplished president since Regan, maybe ever. To his detractors he is a dangerous demagogue whose flouting of democratic norms and curiously close connections to Russia (which predate his run for the presidency) threaten multiple constitutional crises. Undeniable is that his pursuit of electoral victory has meant that he’s been more than willing to entertain the support of racists and neo-nazis, and even his champions admit he seems oblivious to the importance of the traditional alliances that support the world order. Economists bemoan his understanding of economics, which seems especially dubious when it comes to international trade and tariffs. We’ve yet to discuss his own personal vulgarities.

Having said all of this, we must address the paradox of Donald Trump, and that is his ability to pursue change, and find success on issues that are seemingly set in stone. His NAFTA talks, which have ended in a deal, have brought only minor concessions from Canada and Mexico. However it should be noted they are concessions slightly greater than previously negotiated under the TPP which the US declined to be part of. His chaotic approach to governing seems to endanger many of his own goals, and when he is stymied in his objectives he is typically the source of his own sorrows. But that doesn’t mean that he doesn’t have some method to his madness.

The world order that has existed since the end of the WW II, and which went into overdrive following the collapse of the Soviet Union, has succeeded in enriching the world in ways that might be considered unimaginable by previous generations. In 2018 more free nations exist, fewer people live in poverty while crime and war are at all time lows. This is all part of a trend known as the great convergence, the catching up of developing economies to developed ones and the benefits a post scarcity society brings. This change, which is helping wipe out extreme poverty and improve the lives of billions brings with it a global shift in power. Europe and the United States, though still the largest economies, are no longer alone on the world stage and the idea of a unipolar world is no longer viable. Regional powers are reasserting themselves and that includes China whose rise has been considered inevitable by most Western nations.

But China’s ascendance is coming with a high cost. China refuses to respect international rules around intellectual property; as an economic power it’s trade practices can destabilize markets; as an international power it is busy buying access to foreign countries with large scale infrastructure projects; as a military power it is in a belligerent fight to take control of the major trade routes through the South China Sea; and in the fields of espionage it is engaged (like Russia) in extensive cyber activities. Left unchecked China represents an opposite pole in the globe that (like Russia) promotes a global order that isn’t interested in law, international agreements and global norms, but aims instead towards regional autonomy free from such restrictions.

Whether Trump believes in the “global liberal order” isn’t clear, but he seems to see that America is involved in a fight with China, one that it may not have an opportunity to fight again under terms this favorable. This is part of the paradox of Donald Trump. As political theorist Ian Bremmer has pointed out, much of Trump’s insights are not bad but the way he puts them into practice undermines his own ambitions, and hurts the alliances that are needed to sustain his goals and the liberal order. Thus, he’s as likely to upset his allies as he is to rattle America’s foes. In this respect Trump is more similar to Vladimir Putin or Xi Jingpin, who see that national interests should supersede international ones (and where national interests never conflict with the leader’s interests).

Last week I wrote an article about how Canada could lose NAFTA, only to have a new deal come into place on Sunday. I scrapped that piece, but my view remains that Trump’s only sacred cow is his own instincts and that investors shouldn’t assume that that things will work out simply because there might be some political or popular resistance. The success of the status quo is not a guarantee that things will fall back into place and history reminds us that the assumption of inevitability is folly. Things can change, sometimes irrevocably so.

Donald Trump remains a paradox, a leader who touches on good ideas but is unsure how to implement them. The head of the free world who seems far more comfortable in the company of strong men and dictators. An anti-war candidate that may be in a Thucydidean trap with China. An elitist billionaire who seems to have better understood the frustrations of the common citizen. A self-described “great negotiator” whose skill nets only small gains. Investors, take note.

I recognize that writing about politics runs the risk of upsetting or offending readers. Some may regard criticism of a political person or view as an indirect criticism of themselves. This could not be farther from the truth, and we recognize that Trump would not be elected if he didn’t understand something true about the world. We write to help explain our world view and how we believe we should approach investing opportunities and risks. If you are curious about what has informed this view we recommend the following books:

1. Enlightenment Now, Steve Pinker
2. The Road to Unfreedom – Timothy Snyder
3. The Clash of Civilizations – Samuel Huntington
4. The Return of Marco Polo’s World – Robert Kaplan
5. Every Nation for Itself – Ian Bremmer
6. Homo Deus – Yuval Noah Harari
7. China’s Great Wall of Debt – Dinny McMahon
8. The Retreat of Western Liberalism – Edward Luce
9. The Return of History – Jennifer Welsh

The Liberal government of Ontario is intending to raise the minimum wage to $15 an hour by 2019, and 40 economists have penned an open letter to back this plan, and I couldn’t disagree more.

Obviously I’m no economist and having recently finished Tom Nichols book “The Death of Expertise” I approach this subject with some trepidation. But while I may not be an expert, public policy deserves to be reviewed, debated, and questioned by the public.

The nature of the debate follows predictable patterns. On one side, enthusiasts for the hike in the minimum wage believe that this will be an important financial boon to lower income families. Sadly far more people today subsist off of minimum wage than we might guess, and raising families on such an income is really little more than wage slavery and a sentence of poverty, problems that have serious consequences for the society at large. They also cite the benefits of boosting aggregate demand for spurring economic growth that can result from a wage hike.

Opponents argue that this will put off hiring, increase prices on goods and usher in more automation. These are also valid and well founded criticisms that deserve to be seriously addressed since they represent problems that are hard to unwind one you’ve got them.

The first issue that those of on the sidelines might ask is “what is the right minimum wage?” Surprisingly that question seems to lack any definitive answer.  A quick review of the history of minimum wage tells us that neither do governments. This is partly because the minimum wage was initially established to fight substandard wages but has grown into an attempt to build “living wages”, stamp out sweat shops, provide a minimum cost for labour while still protecting businesses and growing the economy.

To accomplish those various tasks, minimum wages are really the response to lots of different inputs and therefore don’t yield correct or exact solutions. The perfect example of this has been the minimum wage experiments in cities like Seattle. Last year Seattle raised its minimum wage to $13 an hour, a substantial jump over its previous rate of $7.25. Analysis of this move has showed that people earned more per hour, but fewer hours were worked resulting in an average decline of $125.

This mixed blessing is at the heart of big jumps in the minimum wage. Attempts to make things better frequently have unexpected and unpredictable consequences, and this is largely because trying to tackle poverty through the exclusive use of adjusting the minimum wage only addresses one factor in many that contribute to debilitating wealth inequality.

I had previously written that “The Robot Revolution Will Cost $15 an Hour” and highlighted the arrival of McDonald’s new “digital kiosks” were part of that robot revolution. Across other low income work we see similar moves into greater automation, from airport ckeck-ins to Walmart E-Commerce towers and even Amazon’s recent purchase of Whole Foods. Raising the minimum wage provides the kind of creeping costs in personnel that improve the cost benefit analysis of big capital expenditures into new technology that will, in the long term reduce payrolls.

The flip side of the coin is that smaller companies that don’t have big financial resources tend to be stuck with higher costs for staff on-top of other overhead costs that may not be under their control. If that seems like an unfair hypothetical simply stop by a neighbourhood store and ask them how they find the cost of street front rental over the last few years. I promise your local grocer or bookstore seller hasn’t been able to raise prices faster than the growth in their rent.

For me the crux of this issue comes down to an old rule of thumb for budgeting: 50-20-30. If you don’t know it, it goes like this. 50% of your income should go towards essentials, including housing, food and transportation. 20% should go to savings, and 30% is discretionary. That sounds like great advice. Now check out this 2015 report from TD bank about how average renters in Toronto are paying 50% of their income just for the rent.

The story for Toronto is all about housing. Toronto is a successful growing city, but one that continues to play catch-up for its infrastructure and housing needs. The lowest incomes can be raised but the likelihood is that it won’t address the problems that continue to make many citizens struggle under the weight of burdensome costs just for living in the city. From the middle class to the working class high debt rates and expensive homes are gobbling up the economic prosperity of Canadians, and that deserves consideration before we charge blindly into making matters worse by hitting the minimum wage with steroids.

But what do I know. I’m not 40 economists.

Some time ago I wrote that it really didn’t matter whether or not there was a housing bubble, because what we actually have is a debt bubble. Houses just happen to be where the debt is. At that time many people were sceptical about the likelihood of an actual bubble. It wasn’t that prices weren’t high, it was just that people had been calling for a housing crunch for so long that most “serious” people simply didn’t think it was immediate or likely. That was several years ago now and the mood has shifted considerably. The housing bubble now occupies more mental space than any other economic challenge facing the country.

If one thing has gotten under the skin of economists and government officials, its how ineffective their attempts to lance this boil have been. Despite more stringent banking rules little has slowed the volume of cheap capital flooding the market that’s kept purchases up. We’ve even teetered into the murky xenophobic reasons for high house prices; absentee Chinese owners. Despite these initial efforts several realities have been hard to deny.

1. Banks are lending too much: With interest rates at all time lows banks have lent more for less to keep profits up. Undoubtedly some of the mortgages (possibly many of these mortgages) should not have been offered by the banks at all.
2. Secondary mortgage markets have grown substantially: If you couldn’t clear the low (low) bar that the banks had set to qualify for a mortgage you could always turn to the secondary banking market (we talked about them here) which would offer you a mortgage at a more punitive rate.
3. There is a housing crisis: I’ve done my best to connect the high price of houses to a dwindling middle class, but it deserves to be mentioned again that there simply isn’t enough land development fast enough at high enough densities to offset the sheer number of people trying to work in and around the city of Toronto.
4. Canadians have too much debt: How much debt is too much debt? I can’t say for sure but I promise we’ve already passed the tipping point on that. The numbers, mentioned so often that people can quote in their sleep, is an astonishing 167.3% of debt to disposable income at the end of 2016. Those numbers are worse when you realize that a large chunk of the Canadian population doesn’t carry any debt and so the level is actually much higher for those that do.

The response so far has been timid, as businesses and politicians are keen not upset the apple cart. But in the last two weeks several things have happened that, while not likely to lead to the downfall of the Canadian economy, put into stark relief how quickly these problems can arise and what they look like.

First, the housing crisis. This April we got headlines showing rents doubling for several people living in Toronto. While not normal it turns out that under the law, in certain circumstances, this is permitted. But as rental becomes more expensive and home ownership more unobtainable the province has felt the need to step in.

You can read Ontario’s Fair Housing Plan here if you like, but the response has been lukewarm from economists. The plan makes allowances for more development of land and attempts to give further powers to cities for things like a vacancy tax, but its unlikely that anything could be implemented quickly to change the market. The bulk of the plan is to extend rent control on all buildings in the province, capping the inflation rate on rent at 2.5%. This plan has been denounced by CIBC chief economist Benjamin Tal as “the exact opposite” of what is needed. Encouraging.

The next issue came out of Canada’s second largest mortgage provider, Home Trust Group. Dinged by the OSC for essentially misrepresenting the credit quality of borrowers on applications, they’ve had a sudden run on their high interest savings accounts (used to fund the mortgages). Investors were terrified that the company was about to collapse under the weight of risky mortgages. That may have been premature, but the fallout has forced them to seek a line of credit from a major pension and speaks to how nervous people are about the market.

But for every article worried about the imminent doom of the housing market, there is another one that is quite sure that things are still okay and somewhat stable, citing any number of structural differences between Canada and the situation in 2008. While that may be true, its important to remember that what hurts economies and makes nations week isn’t a single crisis, but a series of interlocking problems that are all connected. The Canadian housing bubble is about homes, but its also about debt, consumer spending, middle class anxiety, low yielding investments and aging populations, retirement financing and urban and suburban growth.

What Canada now has is a mortgage monster, debt so large and so important to the economy that no one is sure how to slay it without hurting the wider market at the same time. Against this shoggoth creature our politicians hurtle small stones, stern words and the promise of ever more study. These solutions will have the impact you might expect; very little. Whatever solution that exists to both increase affordability without undermining the debt situation or crashing the housing market currently exists beyond the reach of our politicians.

Facing a problem as great as this it’s a wonder more people don’t go mad.