“You cannot buck the market.”
– Margaret Thatcher
I didn’t want to go near politics again this week. By Tuesday I’d pre-written some thoughts about the FCA’s plan to increase the FSCS deposit limit to protect up to £110,000 of saver’s cash.
A sensible bit of technocratic rule-tweaking to marginally improve consumer protections. How lovely!
But then Donald Trump threw a wrecking ball into the markets – and, worse, the global economic system – by unveiling a tariff policy so moronic that even his critics were left momentarily meme-less.
The tariffs themselves are the least of my concerns, dreadful though they are on the face of it.
Trump has been clear about his love of tariffs for decades. He told everyone he was going to go hard on them. They were in his election pitch. His opponent Kamala Harris told voters he was serious.
Of course I’m concerned he’s declared a national emergency to grab the power to enact his tariffs. They are supposed to be set by Congress.
But nobody – least of all voters or the tech oligarchs who backed him and whose companies lost hundreds of billions of dollars in value this week – can say they weren’t warned.
At this dreadful juncture for American democracy, perhaps it’s even a small positive that Trump has followed through on his campaign promise.
Decline and fall
No, what really bothers me – terrifies me – is the ongoing ramifications of stuff like this:
Source: BBC
On the face of it, that’s a list of eye-watering tariffs that Trump plans to deploy against any countries that don’t come grovelling back to him begging for access to American markets.
That’s bad enough, given that if nothing changes it’ll plunge the world into a recession if not a depression.
But what should be troubling to everyone – but which while widely-covered by the wonks is being lost in the mainstream noise around trade wars and crashing markets – is that Trump is brazenly lying.
Lies, statistics, and bullshit
Trump stated to the American people that those countries imposed the tariffs he listed.
America was being kind, he suggested, by only reciprocating in half measure.
But I watched the Rose Garden speech live and like many I knew his figures were absolute garbage.
Soon enough author James Surowiecki and others had figured out that the numbers represented trade balance ratios. A short while later the administration put out a confirmatory statement.
Now, obviously such imbalances are a ridiculous way to measure the fairness of trade between the world’s richest country and, say, Cambodia.
Even more disturbingly, there are signs the paper might have been devised by leaning on ChatGPT.
But what should really frighten us all is that this is the erstwhile leader of the West lying to his own people in the baldest possible terms.
These numbers are not tariffs. He is lying.
Yes I know it’s Trump. I know everything he says is bullshit until fact-checked.
But when I was growing up this kind of theatre was the preserve of totalitarian communists, banana republics, and frontline reports from toppling dictators.
Not the US, of which I and most of the rest of the world expected far better.
Top of the populists
When this blog became radicalised in 2016 into covering politics, it wasn’t because I was a sore loser or even because I rued the self-harming decision of 52% of the electorate.
It was because that vote – and shortly afterwards Trump’s first win – were based on fabrications that the mainstream parties proved unable to counter.
Even worse, despite the manifestly terrible outcomes from that first flowering of an industrial-fabrication complex – a permanent hit to the economy here, an attack on the Capitol there – the anglophone populist leaders continue to make ground. And their supporters aren’t for turning.
Reform is topping the UK polls. We are on-track for mob rule – in both sense of the word – and too many people are still dismissing it all as larks.
Yes I’m aware politicians always stretch the truth, and lie now and then. Unlike some of my critics I was interested in politics long before Wetherspoon’s started putting slogans on beer mats.
But this wholesale deceit – and the lack of any accountability when it’s exposed – is from another category.
I’ll leave the history of where this could take us for a later escalation. Feel free to do your own research.
Unmade in the USA
Many optimists believe that the $6 trillion wiped off Wall Street valuations in two days this week will prompt a change of tack from the Trump administration.
Others speak with faux-sophistication about how these tariffs are just an opening gambit for deals. As if that’s its height of second-level thinking to understand that Trump is a bullshitter.
Yes I’m sure we’ll see deals and backtracking. But that will only undo some of the economic damage.
Besides, even taken seriously as a tool to drive Trump’s vision of a US manufacturing renaissance, this is a witless way to go about it.
One could imagine a less reckless US president who had vaguely the same aims constructing a new scaffolding of trade barriers, particularly targeting the likes of China and its proxy manufacturing bases.
Such an administration would set out a clear policy direction, show its sums, offer concrete timeframes, and give business some measure of certainty to plan the re-shoring of an element of production.
It would do so understanding that you do not re-work your global supply chain based on this week’s latest negotiating wheeze, let alone relocate physical factories from Vietnam to Kentucky on policies that might change tomorrow.
That’s because besides the sheer profit-wrecking cost of doing so – and the ongoing uncompetitiveness of your new factory once you’ve stood it up – the whole damaging exercise risks being done for nothing, and thus rewarding competitors who did nothing.
So without any certainty, Trump’s policy-making is likely to change very little.
Which is ironic because identifying certain unfair trading relationships, particularly with China, is one of the scant sensible planks of the Trump agenda.
True, far from being “looted, pillaged, raped, plundered” as Trump put it, the current arrangements have made America the world’s richest nation. No surprise when America set it up that way.
But the world has changed a lot, and the terms of trade with Asia in particular are up for renegotiation.
Alas many years of multiple rounds of intricate trade talks aren’t of any interest to a regime set upon creating maximum instability, along with a diet of bread and circuses for its credulous supporters.
Markets in MELTDOWN (Copyright CNBC)
Okay, that’s enough about these tariffs. Everyone who knows anything knows they’re disastrous, and has said so this week. I’ve included more links below.
If the tariffs do somehow persist then the rest of the world will just have to come together to trade more closely among themselves, sans the US, and so enjoy the benefits of free trade while America regresses.
But what about the markets?
Well on the one hand, here’s where UK investors are year-to-date:
A global tracker (dark blue) is down about 13% since 1 January, mostly due to falls in the US, with the Nasdaq now down 15% year-to-date (light blue).
The UK market (orange) is pretty flat though. And the iShares core UK gilt ETF (yellow, long-ish duration) is up nearly 3%. (Both excluding any dividends).
So that gives a bit of a broader perspective after the shellacking portfolios took this week. Indeed if you’ve been following your portfolio closely, then you’ll have seen the US markets fell as fast on Thursday and Friday as five years ago when Covid swept the world.
But we might look back a year (same assets as above) as follows:
On this view everything is pretty flat. You could say all we’ve done is blown the exceptional exuberance off the US market.
Remember many of us were already queasy about US valuations a year ago. So while earnings for the best US companies have advanced mightily over the past 12 months, from this perspective we can’t complain too much that a bit of a reckoning has taken place.
Fall in line
I don’t say any of this to make light of the pain of losing money.
Most people with risk-on globally-tilted portfolios will have seen at least 5% of their invested wealth wiped out in the past seven days or so.
Maybe a lot more. I know people who invest only in small-caps and growth stocks who are down double-digits.
The Magnificent Seven were already in a bear market – so more than 20% lower – even before Trump walloped them further on Wednesday.
But we know markets do this kind of thing, fairly regularly. They take the stairs up and drop down mine shafts.
Volatility and drawdowns are the price of admission for the higher returns we’re all so tempted to dial up when doing our long-term calculations.
Rationally irrational
Will the decline continue? I think it’s quite possible (although like everyone I know nothing).
You might remember a couple of weeks ago I explained why I wasn’t penning the ‘do not sell’ type post that some readers had requested, warning we could expect:
“a lot worse given the potential lasting damage to growth and cooperation that we’d see from a Trump administration that truly did what it’s saying it’s going to do.”
Well on the face of it that’s what we got this week.
The mob is into the machinery of the global economic engine that brought us wealth and prosperity for the past 80-odd years, and they’re wrecking it.
Set against that though, I think for the first time there was an element of panic in Friday’s sell-off.
The S&P 500 being down nearly 6% in a day isn’t actually irrational if we are going back to the 1930s – it’ll be an under-reaction – but markets don’t reset on a dime. There will be counter-reactions, usually after short-term plunges.
And on Friday a disorderly element was creeping in.
For instance, gold actually fell after climbing for months. That makes little sense unless it’s because over-leveraged hedge funds and the like were having to sell to meet margin calls.
What to do next
As always the time to prepare for a crisis in the markets is before it happens.
Hopefully you kept some bonds and other safety-first assets.
And hopefully you didn’t go all-in on the Magnificent Seven. Maybe Moguls bought some of the boring British stuff I’ve been writing about rather than loading up on Palantir and other wunderstocks.
The riskiest portfolios should still do better in the long-term. But portfolios and investor psyches have to survive the short-term to get there.
For most of us that requires balance, whether it be a passive investor properly diversifying across assets, or a stock-picker diversifying across sectors and geographies (or both!)
Naturally if this sell-off continues we’ll be revisiting these classic themes in the months to come.
But for now put on your special T-Shirt or make a comforting brew and then go out for a walk in the sunshine.
Markets are bad and the politics is worse.
But our portfolios will still be there on Monday.
More tariff talk:
- What tariffs does the UK impose on US goods? – This Is Money
- Trump’s aggressive push to rollback globalisation [Search result] – FT
- What Trump’s tariffs could mean for UK consumers – Guardian
- Learning from Smoot-Hawley – Scott Sumner
- Trade deficits do not make a country poorer – Noahpinion
- American foreign economic policy is being run by the dumbest motherfuckers alive – Drezner’s World
Have a great weekend.
