Economy

President Donald Trump’s controversial plans for tariffs and comments about Canada becoming a state has angered the country’s consumers and politicians.
Canada has long been a key ally and trade partner for the U.S., with residents shopping American brands and flocking south of the border for vacations.

A “Shop Canadian” sign is seen at the entrance of a supermarket in Vancouver, British Columbia, Canada, March 4, 2025. 
Liang Seng | Xinhua News Agency | Getty Images

Canadians are swapping their friendly auras for a fierce sense of nationalism amid U.S. President Donald Trump’s attacks on the country’s trade and sovereignty.
Trump’s mostly delayed plans for 25% tariffs on Canadian goods and his calls for the country to become an American state has spurned citizens of the U.S.’s northern neighbor and key trade partner. As a result, Canadians have rejected American imports and issued other economic punishments in an unusual show of patriotism.

“It really feels for most Canadians like we’ve been backstabbed, that the person that we trusted the most is now sort of turning on us and attacking us for no apparent reason,” said Joel Bilt, an economics professor focused on international trade at the University of Waterloo in Ontario. “That has really unified people.”
Grocery stores have encouraged visitors to “shop Canadian” with signs and special labels in aisles alerting them to which products were made domestically. A popular Facebook group focused on buying Canadian-made goods first reported on by NBC News has seen its membership more than double since early February as the on-again-off-again tariff policy played out.

A “Shop Canadian” sign is seen at the entrance of a supermarket in Vancouver, British Columbia, Canada, March 4, 2025. 
Liang Seng | Xinhua News Agency | Getty Images

More than 60% of Canadians reported buying fewer American products when shopping either in store or online, according to a survey from market research firm Leger of more than 1,500 residents conducted between March 7 and March 10. Just over seven out of 10 said they upped their purchases of goods made within the country, which has the ninth largest economy in the world.
The Liquor Control Board of Ontario went even further, barring its members from ordering American alcohol. Because the LCBO sells upwards of $1 billion in American liquor each year, the move has raised alarm for U.S.-based spirit makers like Jack Daniel’s parent Brown-Forman.
“That’s worse than a tariff,” said Lawson Whiting, chief executive of Brown-Forman, on the Kentucky-based company’s earnings call this month. “It’s literally taking your sales away.”

Empty shelves remain with signs ”Buy Canadian Instead” after the top five U.S. liquor brands were removed from sale at a B.C. Liquor Store, as part of a response to U.S. President Donald Trump’s 25% tariffs on Canadian goods, in Vancouver, British Columbia, Canada, February 2, 2025. 
Chris Helgren | Reuters

Ontario also said it would implement a 25% surcharge on electricity exported to Michigan, Minnesota and New York. But Ontario Premier Doug Ford said that he would temporarily halt this tax after U.S. Commerce Secretary Howard Lutnick agreed to restart negotiations.
Trump initially responded by calling to raise tariffs on Canadian steel and aluminum to 50%, but the White House told CNBC that he backed down following the conversation between Lutnick and Ford.
Still, Trump’s now-withdrawn plan for higher taxes on the metals put the United Steelworkers union — which represents about 850,000 people in the U.S., Canada and the Caribbean — on alert. USW International President David McCall said in a March 11 statement that the North American arms of the international trade organization would “fight together” against the proposed levies, which he said threatens jobs on both sides of the U.S.-Canadian border.

A ‘pushback’

Even as the tariff negotiations remain in flux, travel to the U.S. is already taking a hit. Return trips by Canadians from the U.S. by vehicle tumbled around 23% in February from the same month a year ago, according to government statistics.

Government data also showed the number of Canadians flying back into the country from international locations declined in February from a year ago, signaling a pullback in tourism abroad. That comes as Air Canada announced plans to cut capacity to warm U.S. locations like Florida, Arizona and Nevada beginning this month.
Trump’s threats have prompted some cancellations to the Wildwoods in New Jersey, a popular beach destination for travelers from places like Montreal and Quebec, according to Ben Rose, marketing and public relations director at the Greater Wildwoods Tourism Authority. But he said these rescissions haven’t been as widespread as initially expected. Canadians are also weighing concerns around the exchange rate, he added.

Air Canada planes are seen at the gates at Montréal-Pierre Elliott Trudeau International Airport in Dorval, Quebec, Canada on April 2, 2024. 
Daniel Slim | Afp | Getty Images

At consumer travel shows in Toronto and Montreal, the authority received some comments from potential Canadian travelers about how Trump’s plan for levies has deterred vacationing in America. Rose said his team reminds uneasy Canadians that it has been a welcoming destination for them over several decades and provides unique value as a location within driving distance.
“Some of the pushback we’ve been getting is that: ‘You know we love Americans, and we know they love us, but we’ll see you in four years,'” Rose said. “They can’t go along with the administration.”

Political, cultural efforts

Canadians’ stance against Trump’s policies has spilled into culture and media as the issue captured the country’s interest.
Canadians booed the U.S. national anthem before major-league sporting games against American teams. During an appearance on Saturday Night Live this month, Canadian celebrity Mike Myers donned a shirt that reads “Canada is not for sale” alongside the country’s red-and-white flag.

(l-r) Musical guest Tate McRae, host Shane Gillis, and special guest Mike Myers during Goodnights & Credits on Saturday, March 1, 2025.
Will Heath | NBCUniversal | Getty Images

Tariffs have become a focal point of Canada’s government, which saw ex-central banker Mark Carney clinch the prime minister title this month. Carney succeeds Justin Trudeau, who Trump had begun referring to as “governor” in reference to his hopes of making Canada a U.S. state.
The British Columbia government and its power operator said they would exclude Tesla products from certain green-energy rebates as of March 12, an action done to give “preference” to Canadian-made alternatives. Tesla is run by CEO Elon Musk, who has come under fire from critics for his leadership of Trump’s controversial government efficiency initiative.
Waterloo’s Bilt said Canadians’ anger is focused mainly on Trump rather than Americans at large, meaning personal relationships between citizens of each country likely wouldn’t be frayed as a result. However, he said American businesses should expect Canadians — once known as a laid-back, polite group that didn’t think twice about shopping U.S. brands or vacationing south of its border — to rebuff them until Trump backs down.
“It really has elicited the kind of response that I have never seen before,” Bilt said. “Canadians are not fundamentally nationalistic, but this really sort of hit something strong at the core of the average Canadian.”
— NBC News and CNBC’s Dan Mangan and Laya Neelakandan contributed to this report.
Disclosure: Saturday Night Live is part of NBCUniversal, which also owns CNBC. More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.China’s President Xi Jinping has declined an initial invitation to visit Brussels for a summit to mark the 50th anniversary of ties, as the EU questions the sincerity of recent Chinese overtures.Beijing told EU officials that China’s second-ranked leader Premier Li Qiang would meet the presidents of the European Council and Commission in Brussels for the summit rather than Xi, two people familiar with the matter said. The hosting of EU-China summits traditionally alternates between Brussels and Beijing. The premier usually attends the summit in Brussels, and Xi hosts it in Beijing, but the EU believes the importance of this meeting — to commemorate half a century of diplomatic relations — means that China’s president should attend, the people said. Both sides said talks continued, but the initial snub has confirmed the view among many in Brussels that China will not add concrete action to its warm words about the need to co-operate in the face of US President Donald Trump’s assault on the multilateral world order.This year’s summit comes at a particularly sensitive time for EU-China relations. Tensions between Brussels and Beijing have grown since Russia’s full-scale invasion of Ukraine in 2022, with the EU accusing China of backing the Kremlin. The bloc has also imposed tariffs on Chinese electric vehicle imports, claiming they are subsidised. EU officials say China, which last year had a €304.5bn trade surplus with the bloc, is not doing enough to rebalance trade by reducing subsidies for its industries and lowering trade barriers for foreign companies doing business in the world’s second-largest economy.“The relationship is on ice,” said a senior EU diplomat. “It is a change of tone not substance. Their policy is not going to change and the same is true for us.”Lu Shaye, China’s former outspoken ambassador to France who is now Beijing’s special representative for European affairs, said China’s policy towards Europe had always “advocated peace, friendship, co-operation,and mutual benefit”. “This has never changed. It is just that the contrast with the current US policy towards Europe makes China’s policy towards Europe appear even more visionary, fair and reasonable. I hope this could serve as a wake-up call [for Europe],” he said. Known as a “wolf warrior” diplomat for his aggressive diplomacy, Lu caused an uproar in Europe last year when he questioned whether Crimea was part of Ukraine and the sovereignty of former Soviet republics such as EU members Latvia, Estonia and Lithuania.His appointment to manage China’s diplomatic relationship with Europe was seen by some commentators as a hardening of Beijing’s stance, but at the same time, another EU diplomat said, “there is a Chinese charm offensive under way”.“China even said that they expect Europe to have a seat at the negotiating table [in Ukraine peace talks],” the diplomat added. “I also hear less talk about EU-China trade frictions. They still exist, but there is less focus on it.”The EU’s trade chief Maroš Šefčovič is set to visit China at the end of this month. Spanish foreign minister José Manuel Albares told the Financial Times last month that the EU should also see potential opportunities. When China “can be a partner — let’s take advantage of that”, Albares said.Ursula von der Leyen, European Commission president, said in February that while the EU would keep “de-risking” by protecting its industry, “we can find agreements that could even expand our trade and investment ties”. Trump’s 25 per cent tariffs on steel and aluminium have forced the EU to respond, even as industry groups warn of the damage it will cause. But a senior EU official said a critical focus when it came to China was defensive measures to keep out “a wave” of Chinese products displaced from the US market by the tariffs.On Friday the EU opened an anti-dumping investigation against Chinese exports of adipic acid, used to produce nylon and many other products. It is the 11th case since October, including those regarding sweetcorn, metal screws and candles.“Informal discussions are ongoing both about setting the date for the EU China summit this year and the level of representation,” said an EU official.China’s ministry of foreign affairs said it did not have “any information to provide” regarding the matter. More

Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldHalf of all Mexican exports to the US last year did not arrive under North America’s free trade deal and therefore still face an immediate risk of 25 per cent tariffs imposed by President Donald Trump, according to US government data and trade experts.Most of those goods could meet USMCA trade deal terms by filing extra paperwork, but about 10 per cent of Mexico’s exports to the US — worth about $50bn — will struggle to comply, leaving companies with a dilemma: scramble to switch their supply chains, or wait and see if the tariffs stick. Trump agreed this month after two days of market turmoil to exempt goods sold under the USMCA from the tariffs he says are needed to restore fairness to the US’s trading relationship with Mexico and Canada.But a chunk of those likely do not meet rules for minimum levels of North American content, according to Mexico’s economy ministry, casting a pall over the economy of America’s largest trading partner. Under Trump’s current plans, those products will face bigger fees than goods from China, his trade nemesis, which are only subject to a 20 per cent tariff.“Losing the market in the US is not an option for Mexican manufacturers,” said Andrés Díaz Bedolla, chief executive of Yumari, a manufacturing platform that exports to the US. “What people are doing right now is adjusting their supply chain in order to meet the rules of origin that are required — even if it’s more expensive.”Sellers of about half of the $505.9bn of goods exported to the US last year did not go through the sometimes costly process of complying with USMCA requirements to prove what proportion of components originated in North America.However, about 40 per cent, worth roughly $200bn, went through duty-free anyway, because the US imposed no tariffs on goods such as medical devices, beer and tequila — meaning there was no incentive to complete the extra paperwork. The remaining 10 per cent did face tariffs, but they were mostly fairly low before Trump’s move to increase them. This bucket included goods such as cars, auto parts and electronics that may not comply with USMCA requirements, but also some oil, which had such low tariffs that companies chose to pay the duty instead of dealing with compliance costs, according to Trade Partnership Worldwide, a consulting firm.The new 25 per cent tariff has changed the calculation, pushing businesses to figure out if their goods already are, or can become, compliant.Meeting USMCA regulations is straightforward for many products — Mexico’s economy minister, estimated that 85-90 per cent of exports should meet the rules by April 2. “We’re talking about one or two days,” said Javier Zarazua, a partner at JL Nearshoring Mexico. “It’s a quick process.”However, the remainder is more complicated. The rules are particularly strict for the politically sensitive automobile sector. The Mexican Automotive Industry Association has said 8.2 per cent of cars exported to the US do not comply. For car parts, the figure is 20.4 per cent.For electronics, more than 50 per cent of components generally have to be from North America.“I suspect many electronics will be less likely to qualify,” said Jason Miller, a professor of supply chain management at Michigan State University. “A lot of the components are likely coming from Asia.”Businesses are being forced to make these existential decisions with no certainty about which of the boomeranging policies Trump has proposed will stick.That uncertainty is its own burden, said Díaz Bedolla.“Everything comes to a halt, no one takes decisions,” he added. “If you’re going to impose tariffs, just do it already.” More

Audrey Louail has finally managed to hire the technology workers she needs. That is only possible because her rivals are cutting headcount. “I had a lot of problems recruiting last year, but now there are enough people on the market,” said the chief executive of IT services group Ecritel. A poll of the Croissance Plus network of high-growth companies, which Louail leads, shows a third of its 11,000 members planned to cut staffing this year amid a weak economic outlook and impending fiscal squeeze.“This is the first time it’s been this bad since Covid,” she said of the poll. Official data and business surveys paint a worsening picture of the labour market in the Eurozone’s second-largest economy — undermining President Emmanuel Macron’s years-long efforts to push France to full employment, often defined as a jobless rate of about 5 per cent. The employment rate contracted for the first time in a decade late last year, according to statistics agency Insee. The figure for those aged 16-25 has fallen more sharply, though youth joblessness remains much lower than before Macron took office.“We are at a tipping point,” said Olivier Redoulè, a director at Rexecode research institute. Although job losses had not yet surged, he added, “we’re starting to see the first signs of the labour market going the wrong way — and if that happens, it can take a long time to repair”.Some content could not load. Check your internet connection or browser settings.Households’ fear of unemployment is climbing. PMI surveys point to widespread headcount cuts, while France’s wage growth has been the weakest among major economies over the past year, according to job search site Indeed. “The labour market weakening is very clear,” said Charlotte de Montpellier, senior economist at ING, who believes France’s jobs market will underperform Germany because of greater political uncertainty, and spending curbs on public sector hiring.Corporate bankruptcies are mounting and lay-offs are piling up, including at big companies such as retailer Auchan and tyremaker Michelin where they are closing two factories. The flow of bad news prompted a relaunch on March 1 of the state-subsidised furlough scheme that helped companies hang on to workers through Covid-era lockdowns. Some content could not load. Check your internet connection or browser settings.The only indicator that remains stable is unemployment, which on Insee’s measure stood at 7.3 per cent at the end of 2024, almost the lowest level since the early 80s.The hiring slump marks a break in a jobs boom that began well before the pandemic, as earlier reforms cutting labour costs, loosening job protections, and lowering corporate tax bore fruit. Since 2020, the workforce has grown by more than a million, fuelled by the rising pension age and subsidies for apprenticeships and vocational training. Those gains have not reversed. “Ten or 15 years ago, unemployment would rise [into double digits] if growth fell below 1.5 per cent,” Stéphane Carcillo, a senior economist at the OECD, said. “Now, even with GDP growth below 1 per cent, unemployment is below 8 per cent. That is pretty new.”A protester holds a placard reading ‘Looking for a fair budget!’ More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Europe needs a “big bang moment” to boost long-term investment in companies and capitalise on this year’s surge in the region’s stock markets, according to the head of Germany’s stock exchange.Stephan Leithner, chief executive of Deutsche Börse, told the Financial Times that EU officials should make the most of investors switching into European markets away from the US as worries over tariffs rise.He wants Brussels to speed up plans to make the bloc more competitive by pushing forward on reforms to encourage domestic investment in the region’s companies.“Many small things have been done but the big bang moment was missing,” he said. “It’s now a moment for a big bang . . . the sense of urgency is there.”Germany’s Dax index has outperformed the US S&P 500 this year as investors dump American equities in favour of European stocks, which are less exposed to the impact of Donald Trump’s tariffs. The Dax has risen 14.8 per cent since the start of the year, while the S&P 500 has fallen 3.9 per cent.The EU has largely escaped the worst of Trump’s barrage of tariffs, which have pushed America into a trade war with major trading partners including Canada and China. Stephan Leithner: ‘It’s now a moment for a big bang . . . the sense of urgency is there’ More

President Donald Trump’s tariffs on Canadian products, along with the escalating trade war and rhetoric between the two nations, is starting to squeeze some small businesses in Vermont.
Concerns for those small businesses include a decline in merchandise shipments to Canadian customers, a drop off in Canadian tourism and higher prices from imported products.
“I would rather take the position of being proactive and not just thinking about absorbing the problem,” said Bill Butler, a co-owner of Artisans Hand Craft Gallery in Montpelier.

Ryan Christiansen, president and head distiller at Caledonia Spirits, giving a tour in Montpelier, VT.
Courtesy: Ryan Christianse | Caledonia Spirits

President Donald Trump’s tariff rhetoric against Canada has only started to heat up, but Vermont’s small businesses are already feeling some pain.
A shipment of spirits, ordered by the Société des alcools du Québec – an entity that’s responsible for the trade of alcoholic beverages in the province – has been sitting on a shipping dock at Montpelier-based Barr Hill by Caledonia Spirits for about a month.

The SAQ called off the order shortly after Trump announced the tariffs against Canada in February, according to Ryan Christiansen, president and head distiller at Caledonia Spirits.
“Customers are ready to buy, and we are in the peak of slow season – it’s an annual cycle for us, and we were looking forward to shipping the order. Now, it’s sitting on the dock,” he said. “To have this hit our business in the slow month of February? We missed our financial plan in February because of this.”

Exports at Caledonia Spirits in Montpelier, VT.
Courtesy: Ryan Christiansen | Caledonia Spirits

Vermont has a special relationship with Canada, as the Green Mountain State exports $680 million in goods to the U.S.’s northern neighbor annually, according to data compiled by Connect2Canada. Vermont imports more than $2.6 billion in goods from Canada each year, with electricity and fuel oil among the top imported goods.
Because of the state’s close business ties to Canada and their shared borders, small businesses in Vermont began seeing some fallout as early as February – when Trump first announced a round of 25% tariffs on goods from Mexico and Canada, triggering 25% retaliatory levies from then-Canadian Prime Minister Justin Trudeau. At the time, Ontario also said it would pull American alcohol products from its shelves.
Ultimately, Trump granted a reprieve on Canadian and Mexican goods covered by the North American trade agreement USMCA until April 2. However, many products are still subject to the duties.

“We worked really hard to maintain this relationship with the Canadian government,” Christiansen said. “How do I get them to buy as much as the Canadian customer wanted to buy? Even if the tariffs go away, I think it’s overly optimistic that this order gets resubmitted.”
Tourism worries
It didn’t take long for Steve Wright, president and general manager of Jay Peak Resort, which is about 10 miles from the Canadian border, to begin seeing the impact of the rhetoric around tariffs.
He noted that spending from Canadian tourists showed signs of softening particularly in two key weeks: Quebec break week, which ran from March 3 to March 8, and Ontario break week, which kicked off on March 10.
Though Canadian visitors generally account for about half of the resort’s market, they make up virtually all of it during that two-week stretch, Wright said.

Arrows pointing outwards

People ski at Jay Peak in Jay, VT.
Courtesy: Patrick Coyle, Darla Mercado | CNBC

“The Quebec break week sold really well, and we had great conditions, but what was missing was the day market,” he said. “We did not get the day traffic we usually see from Montreal, that part of the market softened up.”
Tariff rhetoric has only been the latest pressure point for Jay Peak. The resort’s manager also pointed to the reduction in hours of operation for the nearby North Troy, VT border crossing. It went from 24 hours a day to 8 a.m. to 8 p.m. in January.
To accommodate its Canadian clientele over the past two decades, Jay Peak has been offering at-par options for these tourists on non-margin products. “Say a lift ticket is $100, you can give us C$100,” Wright said. “That has insulated the business a little bit.”
“They have an affinity for Jay Peak; they have been coming here for a generation, but there is a point where they will decide to stay home despite their love of the place,” he added.
In Montpelier, which is a roughly two-to-three-hour drive from Montreal, worries about tourist traffic are already bubbling among small businesses. This corner of the state tends to see weekend visitors from up north, particularly in the temperate summer and fall seasons.
Bill Butler, a co-owner of Artisans Hand Craft Gallery, has been in talks with fellow entrepreneurs in downtown Montpelier to propose promotional deals for Canadian visitors to keep the foot traffic coming.
“My idea is to have something like ‘Canada Days,'” he said. “We’d have a deal for Canadians who want to come down, have a little tour of the city and go from place to place, and get a free beer or coffee.”
“I would rather take the position of being proactive and not just thinking about absorbing the problem,” Butler said. “We have a great relationship with Canada, and we see a lot of Canadians in the gallery.”
The price of imported goods
For Sam Guy, owner of Guy’s Farm & Yard in Morrisville, tariffs are raising concerns over higher prices for certain products.
Wood shavings, wood pellets and peat moss sold at the local chain store all come from Canada, while animal feed – though made by an American company – includes ingredients that come from Canada, he said.
A 25% tariff tacked onto imported products would inevitably have to be passed on to shoppers.
“We can’t eat this,” Guy said. “We’re going to pass on the tariff. We’re not going to add a margin or anything like that, but a lot of these are low margin products.” More

Five years on from the first pandemic in more than a century it is salutary to recall how working habits were upended, leisure was curtailed and family relations severed because of the Covid-19 lockdown — except, of course, in Boris Johnson’s riotous entourage in Downing Street. Likewise, now that restaurants, theatres and holiday travel are vibrant again, to appreciate how the investment landscape has been radically transformed, leaving us with important questions about how we manage our money.In pre-pandemic days there was little volatility in output and inflation. But everything changed with the Covid-19 lockdown. While central bankers have done well to bring down the ensuing inflationary surge without inflicting big increases in unemployment, inflation is proving difficult to return to target levels. At the same time, higher volatility has become endemic in the markets. Much of that reflects chaotic policymaking by the new Trump administration in Washington, most notably in relation to on-off proposals to impose 1930s-style tariffs on the US’s friends and foes alike. As Steven Blitz, chief US economist at TS Lombard, remarks: “The sum of Trump’s actions can yet skew the economy in any which way, including an implosion of capital spending.”Notwithstanding Donald Trump, and his capacity for economic self-harm, there is no escaping the reality that geopolitics poses a much increased challenge to investors, with Russia’s invasion of Ukraine and an evermore aggressive China combining to raise volatility. Yet one immense benefit of the Trump administration’s wavering commitment to Nato is that it has caused a dramatic policy shift in Europe, especially in Germany. Friedrich Merz, winner of the German election last month, has pledged to retreat from his country’s long-standing fiscal conservatism and aversion to defence spending by amending Germany’s constitutional debt brake.This is a remarkable watershed and is part of a wider recognition in Europe that military and infrastructure spending has to be increased significantly. A postwar settlement whereby Europeans enjoyed a peace dividend that helped finance generous welfare systems while defence spending declined under the protection of a US security guarantee has been reversed.After years of economic stagnation in the Eurozone, this sea change holds out the hope that fiscally expansionary rearmament will put Europe back in business. And after years of low European stock valuations relative to the US, surging share prices, led by the European defence sector, suggest that global capital is reappraising European prospects.That said, an important factor weighing on markets is the debt legacy of the pandemic and the earlier period of ultra-low interest rates. Across the developed world public debt is now at record levels.Government budgets will be further stretched by the need to support health spending and pensions for ageing populations along with higher defence and climate-related spending. With interest rates having normalised since the inflation rise, borrowing costs on all this debt have risen and will cause pain and mounting defaults as debt is refinanced over time.The good news around this interest rate normalisation is that defined contribution pension scheme members can now earn respectable returns as they de-risk their pension pots by shifting from equities into bonds and cash before retirement. This is in contrast to the pre-pandemic period when bonds — supposedly safer investments than equities — were seriously overvalued.The bad news is that these levels of debt could be financially destabilising. In the judgment of William White, former economic adviser at the Bank for International Settlements, continuing inflationary pressures and higher real interest rates are likely to endure for much longer than most people currently envisage. Thus, he says, a serious global debt crisis seems likely.He also observes that the three recessions preceding the pandemic were all triggered by financial disturbances, each following a long period in which debt was rising faster than GDP and asset prices were also rising rapidly. This is a salutary reminder of how finance has become the Achilles heel of the real economy.Another striking change in the investment landscape over the past five years is the outright victory of passive funds over actively managed funds in terms of market share. This has been a boon for private investors because the very low fees on indexed funds ensure enhanced returns over the long run relative to higher charging active funds which have on average underperformed the indices in recent years.A further advantage of passive investing is that with most defined contribution pension funds investing substantially in benchmarked global equity portfolios, home bias — investors’ preference for assets in their own domestic markets — is eliminated. That tends to enhance performance, although there is growing political concern about pension funds’ neglect of UK equities.Yet with indexing there is a new risk of investment concentration. The percentage of US stocks in the MSCI and MSCI All Country World indices has long been at all-time highs. This partly reflects the enormous market capitalisations of big US tech stocks, notably the so-called “Magnificent Seven”: Nvidia, Apple, Amazon, Alphabet, Meta, Microsoft and Tesla. It follows that markets are vulnerable to the performance of just a handful of corporate giants. This also raises questions about systemic risk.Note here in addition that Elroy Dimson, Paul Marsh and Mike Staunton in the UBS Global Investment Returns Yearbooks have established that over more than a century investors have placed too high an initial value on new technologies, overvaluing the new and undervaluing the old. Also worth noting is that while US equities outpaced European markets from 2010 to 2020 US performance was worse in the decade before, because of the bursting of the dot.com bubble and the subprime mortgage crisis.In sum, we are in a new world of geopolitical friction, increased volatility, greater vulnerability to inflation, excessive debt and heady equity valuations. How should investors respond to this toxic mix?The first priority has to be diversification and a more defensive portfolio stance. Modern portfolio theory (MPT) tells us that if investors add non-correlated assets to their portfolio they can enhance returns and reduce risk. This, according to the late Harry Markowitz, the pioneer of MPT, is the only free lunch in investing.The snag is that even a very diversified portfolio cannot make money in a steep market decline. In a market crash equities and bonds tend to move in lockstep. They cease to be negatively correlated.This makes the case today for an asset that was anathema in the pre-pandemic period, namely cash. Back then the return on cash was dismal. And over the long run cash underperforms equities and bonds. But in periods of extreme volatility it offers genuine diversification against bonds and equities. And in periods of low inflation it is a solid store of value. For private investors, cash is thus a vital portfolio hedge in current circumstances.Another obvious hedge against the plethora of post-pandemic risks is gold. The yellow metal is, in one sense, a paradoxical safe haven. It yields no income and is thus a purely speculative asset. As the great investment sage Warren Buffett once remarked, “Gold gets dug out of the ground in Africa, or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”Well, yes. But gold has form going back to the ancient Greeks who associated it with the gods. And, as the economist Willem Buiter has pointed out, gold has had a positive value for nigh on 6,000 years, making it the longest lasting bubble in human history. That pedigree means it is a genuine hedge in the present financial turbulence against future inflation and geopolitical risks.  The trouble is that the gold price keeps hitting new peaks, despite the fact that the opportunity cost of holding a non-income producing asset has greatly increased with the normalisation of interest rates.This is probably not the time to head for the exit, not least because central bank reserve managers around the world are seeking alternatives to the world’s fiscally challenged reserve currency, the dollar. But investors should recognise that the gold price tends to overshoot both upwards and downwards over long periods. Those who bought at the peak of the 1971-81 bull market in the metal saw a loss on their investment in real terms of much more than half over the next 20 years.What, then, of the qualities of crypto as a portfolio hedge? The key point is that there is even less underlying value than in gold. Saul Eslake and John Llewellyn of Independent Economics point out that these instruments neither represent a claim on assets (unlike shares or mortgages), nor have they any alternative use (unlike gold, other commodities and property). Their primary uses, they add, appear to be to enable payments by criminals and to scammers, and to provide speculators with more fodder. They are only worth what people in their collective wisdom think they are worth.Meantime, Maurice Obstfeld, former chief economist of the IMF, argues that a fundamental problem with most cryptocurrencies, aside from stablecoins, are that they are disconnected from the real economy and operate beyond the reach of public policy. They thus introduce significant uncertainty into financial transactions, making them an unreliable foundation for economic decisions. Even stablecoins, he adds, are only as good as the assets backing them.So this, compared with gold, is a very immature, low-quality bubble. But judgments about it are complicated by Trump’s declaration that he wants the US to be the “crypto capital of the planet”. This is accompanied by much talk about the creation of a bitcoin reserve to purchase US government debt. Once again, investors and speculators are hostage to potentially chaotic policymaking. Be well advised to leave this minefield to criminals and credulous retail investors taking time off from punting in frothy meme stocks.Is my advocacy of essentially defensive portfolio positioning unduly cautious, you might ask. Good reasons to raise this question include the prospect of almost certainly unsustainable debt-driven expansion in the US under Trump and, in the light of Europe’s shift to a defence build-up, a fiscal lift across Europe. Equally important, we live in a world of asymmetric monetary policy where central banks rush to put a safety net under markets and banks when they collapse, but impose no caps on soaring asset prices. This is potentially a general anaesthetic for permabears.Yet the level of debt in the developed world is extraordinarily high. According to the Institute of International Finance, a bankers’ trade body, global debt hit a record high in 2024 of $318tn. The implication is that bond vigilantes may be due to make a comeback. If this is right, as the British experience of the short lived Liz Truss government suggests, we are heading for an era of greater interest rate instability and potential financial shocks.In this new world, value no longer looks a disaster relative to growth. Government bonds, offering positive real yields, are no longer the pre-pandemic graveyard they used to be. Boring equities look modestly interesting relative to whizzy tech stocks. But in the face of unusually high uncertainty, the mantra has to be diversification. For many private investors, it has been a wild, lucrative five years; now cash should definitely be back on the agenda               More