KINSELLA: 2025 was bad enough

Canada experienced modest economic growth and slightly lower inflation in 2025 despite fears that U.S. tariffs would push it into recession, but broader political developments drove much of the year's risk. The U.S. presidency of Donald Trump is portrayed as highly destabilizing—through tariffs, military actions and inflammatory rhetoric—while rising antisemitism and apparent radicalization among segments of Gen Z (including notable support for Hamas in polls) have intensified domestic and geopolitical tensions. For investors, the piece signals heightened political and geopolitical risk that could increase volatility and risk premia, even as near-term Canadian macro fundamentals showed modest resilience.

Analysis

Market structure: Geopolitical and domestic-political friction from Trump-era tariffs, military actions and social unrest reallocates pricing power toward defense, homeland-security and hard-commodity producers while pressuring global-discretionary and cross-border supply chains. Expect a 3–12 month uplift in defense order visibility (benefitting LMT/RTX/NOC) and tighter supply for critical inputs (chips, specialty metals), which supports commodity and industrial cyclicals and pushes duration into Treasuries during risk-off spikes.

Risk assessment: Tail risks include a regional escalation (low probability, high impact) that would drive oil +10–30% and force a safe‑haven bid into USTs and gold, or sustained social unrest that materially reduces consumer discretionary spending by 5–10% nationally. Time horizons: days for volatility shocks (VIX jumps >10 pts), weeks for tariff/policy announcements, quarters for structural budget shifts; hidden dependencies include Gen‑Z driven consumer behavior and social-media amplification of protests.

Trade implications: Implement small, directional, liquidity-friendly positions: overweight defense and cybersecurity, hedge equity downside with short-dated index protection, and rotate away from airlines/consumer discretionary into miners and long-duration Treasuries during volatility spikes. Use pair trades (long LMT/short DAL) and options (buy 3‑month ATM puts on SPY sized to 1% portfolio, buy 6–12 month calls on LMT sized 2%) to control drawdowns and capture asymmetric upside.

Contrarian angles: The market may already price headline risk; defense multiples are rich relative to sustainable EPS growth—look for names with >6% FCF yield and order backlog visibility. Historical parallel: post‑9/11 defense re-rating lasted years, but was followed by inflationary pressure that eventually repriced rates higher; if inflation re-accelerates, long-duration Treasury and gold plays will underperform. Be selective: favor high-return, low-leverage defense/cyber names and tactical gold exposure rather than broad, permanent shifts.

Key Decisions for Investors

• Establish a 2–3% portfolio long split between LMT and RTX (1–1.5% each) within 2 weeks, target hold 6–18 months; trim on +20% price appreciation or if FY26 US defense budget increases <3% year/year.
• Allocate 1–2% to GLD (or physical gold miners with >5% free cash flow yields) immediately; add another 1% if 10‑year Treasury yield falls by >25 basis points within 30 days or oil rallies >10% in 2 weeks.
• Buy 3‑month ATM SPY puts sized to 1% of portfolio as a tail hedge if VIX <18, or initiate once VIX >20; roll or re-evaluate at 30‑day mark based on realized volatility.
• Initiate a 1–2% short position in large US airline(s) (DAL or UAL) versus a 1–2% long in LMT as a pair trade to express defense up / travel down thesis; close if oil falls >15% or airlines report passenger load factors +5% sequentially.
• Establish 1–2% long in cybersecurity leaders (CRWD or FTNT) with a 6–12 month horizon; exit if next-quarter revenue guide misses by >3% or gross margins compress >200bp.