“We used to take big, bold risks in this country. It is time to swing for the fences again.” -Mark Carney, Prime Minister of Canada, November 2025
On behalf of all of us at Avenue we hope you had a wonderful holiday season, and we want to wish you a Happy New Year and a healthy and prosperous 2026.
This past year was eventful for financial markets and the global economy. In our year end letter, we are going to examine the theme that had the biggest impact on 2025 and will continue to be a key driver for the year ahead. This theme is the global push towards something referred to as National Capitalism. We will also provide a current assessment of the United States, and finish with a discussion on the Artificial Intelligence (A.I.) capital cycle and its investing implications.
There are significant shifts happening at a policy level across the world, and these economic policy changes have an increasing role in driving investment outcomes. As long-term investors it is important to be conscious of these policy shifts and understand the impacts they have on different sectors within the economy. As investors in high-quality businesses, we care about the impact on our individual investments from these policy shifts.
As we highlighted in our year-end letter twelve months ago, the incoming U.S. administration had very strong opinions about imbalances in the global trading system, particularly with China. These structural trade and capital imbalances between the United States, Europe, and China have root causes that we have explored in some of our previous quarterly letters. We are not going to re-examine the cause of these imbalances in detail in this letter but suffice it to say that these imbalances do exist and they are having a very distorting impact on the global economy and financial markets.
The question is no longer this: Do global trade imbalances exist? The question has moved to: What are countries going to do about them? The onslaught of U.S. tariffs announced in early 2025 has pushed the average U.S. tariff rate to levels not seen in over 100 years. It has long been our view that tariffs are going to remain elevated and stay in place for longer than expected.
In January 2026 it is expected that the U.S. Supreme Court may rule on whether current tariffs, as implemented, are legal. Even if the current U.S. administration loses this court case, they have made it clear they will attempt to find other legal maneuvers to keep the tariffs in place. In short, tariffs, or the threat of tariffs, are now a permanent reality for the global economy.
The Economic Wake-Up Call Canada Needed
The last ten years in Canada was a period of stagnant economic growth coupled with misguided economic policies. This decade witnessed an overarching policy focus on redistributing economic activity rather than growing economic activity. Overburdened regulations, excessive taxation, and animosity towards the business community, specifically our resource economy, left Canada economically adrift as we began 2025. This weakened position left Canada particularly exposed to external shocks in an increasingly dangerous global economic landscape.
The aggressive tariffs levied on Canada by the United States and the brutish manner they were announced in the spring of 2025 served as both a shock to the system, but also as the economic wake-up call Canada needed. As a country we had no choice but to circle the wagons by beginning to fix our past economic policy mistakes while charting a new economic policy path forward. But this will not be an easy task.
Burdensome regulations and high taxes have created substantial barriers to new investment.
The flat lining of real non-residential investment in Canada has weakened Canadian productivity and economic growth.
Encouraging new investment is critical if Canada is going to remain economically relevant in the global economy.
It is time for Canada to reorient its national economic priorities. The key priorities should be focused on regulatory reform for the energy sector, prioritizing key infrastructure investments, and recommitting to defence spending. These are achievable goals, but they require strong leadership both in the government and the private sector, and a commitment to working together for the sake of the future economic health of Canada.
The truth is Canada has been neglecting the prescribed NATO defence spending levels for the past decade. With the release of the recent national budget in November 2025, there has been a clear shift in direction of where the national economic focus must be moving forward. The new budget announced a significant step up with regards to defence spending, both directly on military equipment and personnel, along with related infrastructure investments.
This new level of defence spending would bring Canada back above its 2% NATO spending target in 2026, on the way to 5% of GDP by 2035. This is a potential sea change in the level of investment in Canada. When viewed in cumulative terms the change is striking.
Below is our approximate calculation of what Canadian defence spending might look like over the next decade in billions of dollars:
When defence spending is viewed on a longer historical timeline the change in trajectory is noticeable:
With regards to the Canadian energy sector, we view the recent Memorandum of Understanding between the Federal Government and Alberta as a step in a positive direction. At Avenue we have many clients and friends who are leaders in the Canadian energy sector and from our conversations we are optimistic that the Alberta energy sector can be unleashed and returned to its true potential.
It is worth highlighting directly some of the key summaries from the November 2025 official press release between Alberta and the PMO:
Preface
At this pivotal global moment, Canada and Alberta, working closely with Indigenous Peoples and industry, must work together cooperatively, and within their respective jurisdictions, to foster the conditions necessary for infrastructure, including pipelines, rail, power generation, a strong and integrated transmission grid, ports and other means that will unlock and grow natural resource production and transportation in Western Canada.
The Objectives
The Governments of Canada and Alberta are focused on achieving the following objectives and have developed the following clear actions towards this goal:
- Increasing production of Alberta oil and gas to reach Canada’s export and national security goals, creating hundreds of thousands of new jobs, while simultaneously reaching carbon neutrality by, in part, reducing the emissions intensity of Canadian heavy oil production to best in class in terms of the average for heavy oil by 2050.
- Increasing electrical generation for consumer and industrial use on Alberta’s electricity grid, including meeting the needs of AI data centres, while simultaneously reaching net-zero greenhouse gas emissions for the electricity sector by 2050.
- Creating electricity and energy policies that address consumer affordability, electricity grid stability, economic competitiveness and long-term competitive certainty, that attract Canadian and foreign sources of private sector capital investment.
- Reducing layers of regulatory overlap and simplifying regulatory systems to ensure a maximum 2-year time-frame for permitting and approvals with the goal of shorter project approval timelines where feasible.
These recent developments in Canada are encouraging as it feels like the country is beginning to turn the corner with regards to economic policy. It is time to take these policies from ideas to action.
As investors in Canada, we remain focused on looking for businesses who can benefit from these elevated levels of infrastructure spending, should they materialize.
One such business that continues to rank as one of the highest quality industrial businesses in Canada is Toromont Industries (TSX: TIH). This is an investment we have owned in our equity portfolios since early 2023.
Toromont is the largest Caterpillar equipment dealer in Canada with the bulk of their business operating in Ontario and Quebec. They have been in business since 1967, and they have a long track record of profitable growth.
Caterpillar (NYSE: CAT) operates their business with a complex dealer network across North America.
This is partly because of the regional nature of the business and the requirements for local expertise and service.
Large scale infrastructure investments require high quality machinery and equipment that is reliable and fit for purpose.
Caterpillar is a leader in their industry because of the quality and reliability of their product, and their ability to source parts and provide high levels of service to the machinery being used in local markets.
Toromont has a long history of earning high returns on its invested capital, and they have a strong position in the industrial market because of the quality of Caterpillar products.
They have demonstrated a strong track record of reinvesting in their business with strong growth in their parts and service business, along with their network of equipment rental locations which is called Battlefield Equipment Rentals.
If Canada is to see heightened levels of investment over the coming decade, then we expect Toromont to be an industrial business that is critical to make this infrastructure investment possible. The shares performed well in 2025 and likely some of this positive development about new infrastructure investment is already priced into the shares at current levels.
We continue to evaluate other Canadian businesses who would stand to benefit from this increased level of investment in Canada.
Canada’s pivot to National Capitalism
When governments begin flexing their muscles and increase fiscal spending in the economy there can be a noticeable boost to economic growth in the short run. This can feel good for the population especially when it is created on the back of increased national unity and patriotism.
However, from a purely economic perspective, this can create a slippery slope. It can blur economic incentives, lead to misallocation of resources, and in the more severe examples lead to outright cronyism and political corruption. There is a very delicate balance that needs to be maintained both at a political and social level to keep things in harmony so that a country’s true national economic interest can be pursued by its political leaders. As we move farther away from a market economy, both in Canada, the United States, and beyond, these risks will continue to grow.
The term National Capitalism has made a resurgence in the past few years as governments around the world have begun to refocus on domestic economic priorities given the breakdown in the global economic order, the rise of protectionist trade policies, and the persistence of economic uncertainty.
According to Google Gemini, a precise definition of National Capitalism is:
“an economic model where the state actively prioritizes national economic interests over global integration, reshaping capitalism around sovereign priorities like self-reliance, using tools like tariffs, subsidies, and industrial policy to support domestic production and strategic sector.”
The below sliding scale highlights the progression occurring in many countries around the world:
In times of economic uncertainty citizens look to their government to protect them and to look out for the economic interests of the nation.
However, the transition from a market-based economy towards greater intervention by the state is not a new concept. National Capitalism, as it is currently described, is a refresh of an economic policy that also emerged in post-World War I Europe. That period of history saw the rise of an economic model referred to as Corporatism, or Interventionism, which made its first appearance in Europe when the young political activist Benito Mussolini returned home to Italy from the trenches of World War I and formed his political party, Fasci Italiani.
As this wave of revolutionary nationalism emerged in 1920’s Europe the question of how to re-organize an economy along nationalistic aims became a key question for political leaders. Benito Mussolini recognized that the kind of economic coordination required to achieve grand nationalistic rejuvenation could only be achieved if the government co-opted and coerced the corporate sector into submission, because they owned all the capital and resources within the country.
When the government does not control the means of production, as is true in a market economy, it must commandeer the corporate sector to help the government obtain its national economic goals. As this occurs you start moving further away from a market economy. If the transition to National Capitalism is not implemented successfully what follows next can start to look and feel more like National Socialism.
A Poignant Critique of National Capitalism
Of all the economic history and analysis that emerged through the World War I and II period, there was no greater voice than Austrian economist Ludwig von Mises. As a public intellectual and economics professor in Vienna, Von Mises had firsthand experience as a witness to the economic collapse of the 600-year-old Habsburg Monarchy in Austria after World War I.
Von Mises’s focus in the post-World War I period was on analyzing and critiquing Europe’s descent from a market economy into economic nationalism and the eventual transition towards Fascism and National Socialism.
Von Mises witnessed the credit bubbles, inflations, hyper-inflations, and subsequent deflationary depressions that occurred throughout Europe between 1917 and 1940 as governments gained increasing control over their national economies.
As a proud member of the Jewish community in Vienna, he also experienced the rise of antisemitism in Austria and was forced to flee Vienna before the Anschluss in 1938.
Von Mises was a key intellectual target because of his poignant criticism of the economic failings of government intervention in the economy, and particularly National Socialism. After leaving Austria, Von Mises eventually ended up in the United States in 1940.
Upon arriving in the United States Von Mises wrote one of his most succinct critiques of this new kind of economic nationalism in a book titled Interventionism.
In this book he provides a clear perspective on ultimately why Corporatism, or National Capitalism as it is being described today, is not a feasible long-term economic policy.
His core argument is this type of economic arrangement does not work because the State and the corporate sector have different objectives and incentives. The State wants to remain strong and powerful in view of a population who increasingly feel economically vulnerable.
Meanwhile, the corporate sector remains focused on courting favour with the government to ultimately extract monopoly profits from the economy, and to maximize profits for their shareholders.
To quote directly from Interventionism:
“individual corporations do not have motivation in this economic arrangement to make their production as efficient as possible. They are interested in reducing output so that they may realize monopoly prices. The position of the corporations will be the strongest the more urgent the demand for their products, especially when they are dependent on state demand. The entire economy eventually leads to unrestricted despotism of the industries producing goods which are deemed vital by the State.
Interventionism is not an economic system that enables people to achieve their aims. It is merely a system of procedures which disturb and eventually destroy the market economy. The interventionist measures may give certain individuals or groups of individuals advantages at the expense of others. Minorities and powerful special interests obtain privileges which enrich them at the expense of their fellow citizens.”
National Capitalism in the United States
In our current highly partisan political environment we continue to believe that we must remain objective and non-partisan in our economic analysis. If our perspective is going to remain clear, we need to remain objective. What follows below comes from a non-partisan perspective and is simply an observation of current developments in the United States.
The United States continues to progress in an alarming direction. The current administration’s rampant cronyism, self-dealing, and coercion of the corporate sector is creating a dangerous set of conditions both domestically and abroad.
Just this week, the current administration’s Department of Justice threatened Federal Reserve Chairman Jerome Powell with a criminal indictment and served grand jury subpoenas to the Federal Reserve.
This is an unprecedented escalation of weaponizing the legal system against the Federal Reserve.
As Jerome Powell stated, this indictment was created on false pretexts in an attempt to intimidate the Federal Reserve into further lowering interest rates.
This type of attack on the Central Bank of a country was historically reserved for third-world despots, but it is increasingly aligned with how the political system in the United States is progressing. The U.S. administration is set to announce a new chair to the Federal Reserve board in early 2026 and this will effectively put the White House in charge of monetary policy.
The corporate sector in the United States remains very strong and corporate profits remain at high levels. The increased merging of the government and the corporate sector means that the corporate sector has more power than ever, while at the same time, it increasingly has no choice but to be aligned with the current administration on its key policy initiatives.
For sectors of the economy that are at odds with the current U.S. Administration and their economic or ideological imperatives, it increasingly puts those sectors at risk. The best example of that would be the clean energy sector, specifically offshore wind, which has recently seen federal leases canceled on the U.S. east coast, a move that has stranded tens billions of dollars of recently invested capital.
Industries that are deemed to be essential by the U.S. administration have never been in a stronger position, at least in their relationship with the government.
Venezuela & the U.S. Energy Sector
In early January 2026 the U.S. administration sent in an elite group of special forces to topple the regime of Nicholas Maduro in Venezuela. In a move that was initially explained as an attempt to “stop the flow of drugs from Venezuela”, it now seems clear that this military action was aimed at getting access to Venezuela’s oil sector.
The below is a direct quote from the current U.S. President’s press conference on January 3rd 2026 discussing the military action again Venezuela:
“As everyone knows, the oil business in Venezuela has been a bust, a total bust, for a long period of time. They were pumping almost nothing by comparison to what they could have been pumping and what could’ve taken place. We’re going to have our very large United States oil companies, the biggest anywhere in the world, go in, spend billions of dollars, fix the badly broken infrastructure, the oil infrastructure, and start making money for the country. And we are ready to stage a second and much larger attack if we need to do so.”
In the days following the capture of Venezuelan President Maduro, the U.S. President invited the CEOs of the U.S. energy sector to the White House to discuss his plans for Venezuelan oil. The President subsequently asked them to invest $100-billion of capital in the country.
The response from the U.S. energy executives ranged from excitement at the thought of seizing a foreign nations natural resources to a more measured response from others who stated that Venezuela remains un-investable.
The comments from Exxon CEO Darren Woods were the most direct. He highlighted that after having their assets in Venezuela seized twice in the past, unless changes to commercial frameworks, the legal system, and durable investment protections were made, Venezuela would remain un-investable. This comment apparently struck a nerve with the current U.S. President who responded that he “didn’t like Exxon’s response, and now he’d probably be inclined to keep Exxon out of Venezuela.”
This episode in Venezuela is confirmation of Ludwig Von Mises’s analysis and presents an illuminating view into why Corporatism, or National Capitalism, when pushed too far, ultimately becomes unworkable. This is because the incentives of the government and the corporate sector can never be fully aligned. The government wants to focus on its political agenda and remain politically popular, meanwhile the corporate sector is focused on maximizing profits and returns on its capital.
The incentives of the government and corporate sector can never be fully aligned unless, or until, the government fully seizes control of the corporate sector. It is important to recognize the scale we are sliding on.
Technology’s Romance with MAGA
Of all the industries in the economy there is no sector more fully aligned with the U.S. administration than the technology sector.
In the previous two administrations, there was an increasing regulatory threat against Big Tech companies in the United States because of their growing monopoly power, their inadequate policies and protection of children on social media, and their anti-competitive practices.
The push for anti-trust regulation of Big Tech from the Federal Trade Commission (FTC) was a key priority of both the first Trump Presidency and the Biden Presidency. This has largely fizzled out under the current U.S. administration.
Now that these companies have fully embraced the current President, there is no longer the desire to attack them for their monopoly practices.
The technology sector, and now the Artificial Intelligence industry, recognized that it was more profitable to kowtow and attempt to gain favour with the government. These businesses have made an insidious effort to gain political power over recent years.
Similarly, Elon Musk is back courting favour with the current President in recent weeks. Musk, who had previously expressed concerns about the profligate spending in the “Big Beautiful Bill” the runaway accumulation of government debt, and the current President’s close ties to the late convicted sex-offender Jeffrey Epstein, is now renewing his close relationship with the current President.
It should come as no coincide that this newfound re-admiration of the President has come along with the announcement that Musk’s AI chatbot Grok is now being implemented as part of the Pentagon’s technology system.
Musk had previously railed against out-of-control spending at the Pentagon. He now seems enthused at the prospect of the U.S. increasing its defence budget by an additional $500 billion per year, as it would benefit his company SpaceX before its planned IPO next year.
Elon Musk’s Department of Government Efficiency (DOGE) campaign increasingly looks like an attempt to redirect government spending at the benefit of his businesses. Now that his potential $1-trillion pay package was approved by Tesla shareholders, the incentives are clear.
Individual Americans continue to be concerned about the rising cost of living and lack of affordability in their daily lives, according to the most recent Gallop survey.
Inflation and the economy in general continue to rank as the top economic concern for individual citizens. This was clear during the 2024 election as inflation was the top issue at the time and remains so today.
According this recent Gallop polling 47% of Americans describe current economic conditions as “poor”, and 68% of Americans say the economy is getting worse.
The A.I. (Artificial Intelligence) Capital Cycle
Since Chat GPT was released in November 2022 we have witnessed a monumental acceleration in the Artificial Intelligence capital cycle, as companies have rush to make large scale date centre investments to enable these newest waves of technological adoption.
As an industry, the capital spending of the technology sector has gone from $100-billion in 2020 to more than $400-billion expected in 2026.
In the global race to A.I. dominance these large technology companies are being forced to invest more capital than ever before.
These technology businesses have gone from essentially having monopoly power within their segments of the tech sector to being in an all-out competition with one another over the implementation and datacentre requirements of Artificial Intelligence.
The question hanging in the air is will these companies earn a return on this investment?
A useful framework for understanding major technology and industrial cycles like A.I. has the potential to become was advanced by economist Carlotta Perez in her 2002 book Technological Revolutions and Financial Capital.
This book is a tour-de-force when it comes to analyzing the major technological advancements that have occurred since the late 1800’s. Perez highlights the recuring waves of technology that have occurred, dating back to the Industrial Revolution including the Steam Engine, Railways, Electricity, Automobiles, and Information Technologies.
Her focus is on the adoption, implementation, and eventual maturation of each of these major technology waves and their subsequent integration with the economy. Incumbent on these technology waves is their relationship with financial capital and financial markets, which are needed to undertake the substantial investments required.
Although each of these technologies had significant long term positive impacts on society, they also enable major boom and bust cycles in financial markets as capital races in to profit from these ‘golden era’ opportunities. Once the inevitable financial crash and bust arrives then the next phase of the cycle emerges where these technologies becoming implemented and synonymous with everyday life. The Artificial Intelligence cycle currently playing out in financial markets is likely on this same trajectory.
The specific timeline of what happens next is unknowable, but this A.I. capital investment cycle is guaranteed to drive rates of return on capital lower in the technology sector because of the monumental investments required in physical infrastructure. This will lower overall profitability for the technology industry. This is simply a mathematical fact, as much of this capital investment will depreciate over the next 5-8 years, which will lower corporate earnings.
If we look at the overall U.S. stock market, we continue to see valuations at the highest level since the dot-com bubble top in 2000.
The orange line to the left is the S&P 500 corporate earnings, and the black line is the current S&P 500 level.
The gap between the two highlights the valuation level of the market, which currently sits at close to 30x earnings for the S&P.
In terms of investor positioning and behaviour we also see margin debt at record highs per the above graph. Investors continue to be “all-in” on U.S. equities and are increasingly doing so on leverage.
Despite the increased risks in the market, we continue to look for, and find, high-quality investments to compound our capital over the next many years.
As we highlighted above, we believe the investment environment is beginning to change in Canada and we are seeing more opportunities to benefit from this potential turnaround in the Canadian investing climate.
Canadian policy makers and leaders in the private sector need to continue to focus on our national priorities and take the new policy initiatives and turn them into action.
As we enter 2026, we believe there are better days ahead for the Great White North.
January 2026
Bond Portfolio Update
Over the past two years, Avenue has taken a deliberately defensive approach to the bond market. This positioning reflects an unusually complex economic environment and several structural challenges facing global fixed income markets.
Since 2022, the economy has moved from supply-chain–driven inflation to stagflation in 2023, followed by the introduction of U.S. tariff policies in 2025. At the same time, governments across developed (G7) economies significantly increased spending, resulting in materially higher fiscal deficits. In this environment, maintaining a strongly bullish outlook on bonds has been difficult.
In 2025, the Avenue Bond Portfolio employed two distinct strategies:
The ‘Steepener’ Trade
A yield curve steepener occurs when the yield curve becomes steeper—meaning short-term interest rates (2–5 years) become significantly lower relative to medium-term (7–10 years) and long-term rates (10–30 years). This dynamic was clearly visible when comparing the yield curve in 2024 versus 2025.
As bond managers, we must remain fully invested at all times. By allocating more heavily to short-term bonds, we were able to earn attractive yields while reducing exposure to potential declines in the value of long-duration bonds. Longer-term bonds are more sensitive to supply-and-demand imbalances and inflation expectations, whereas the short end of the yield curve is more firmly anchored by central bank policy from the Bank of Canada and the U.S. Federal Reserve.
In 2025, both central banks cut interest rates aggressively. As a result, the short end of the yield curve performed meaningfully better than the long end.
High-Grading Credit Exposure
We also chose to take a more conservative stance on credit exposure for two key reasons.
Firstly, credit spreads are extremely tight. In practical terms, this means the yield difference between risk-free government bonds and corporate bonds are very narrow. Investors are not being adequately compensated with additional yield to justify a more aggressive allocation to high-yield credit. As a result, we high-graded the portfolio by increasing exposure to higher-quality corporate bonds—primarily A-rated bonds and above.
Second, given the potential impact of new U.S. tariffs, we were concerned about companies that could be negatively affected by these policies. In response, we shifted the portfolio toward more defensive sectors, such as groceries and utilities, and toward companies with strong balance sheets, conservative leverage, and consistent free-cash-flow generation.
A Unique Market Dynamic
A notable and surprising dynamic has emerged over the current economic cycle: corporate credit spreads have remained remarkably resilient compared to government bond yields.
There are several possible explanations for this. One emerging factor is the rapid growth of private credit funds. The substantial and ongoing inflows into private credit have created a excess “wall of money,” sustaining demand and supporting spreads relative to public credit markets. Notably, during the equity market sell-off in April 2025, credit markets weakened but did not exhibit meaningful distress.
Another possible explanation is a shift in perception around government bonds themselves. Investors may be starting to question whether government debt is truly “risk-free,” particularly in light of persistently large fiscal deficits in the United States, Canada and Europe. If government credit quality is gradually deteriorating, this raises an important question for future bond investors:
Is it less risky to own a Loblaws 2030 bond than a Government of Canada 2030 bond?
We may soon find out.
January 2026
