As I watched markets such as 30-year US and UK Treasuries plummet on Wednesday night it was becoming clear that if Trump followed through as publicly proposed something in the global economy would soon break. It was concerning because without a pause or some kind of intervention, an economic or financial catastrophe was brewing. Whether it was part of his plan or due to pressure from within the Republican Party, he paused and provided the circuit breaker the market needed. It still appears to me, as I outlined last week, that there are two parts to this. It is negotiation in the short term and a strategic repositioning of the US in the long term.
While many are calling Trump pausing most tariffs for 90 days a ‘backflip’ I expect this was part of the plan. Push as hard as you can and at the point at which it looks like something in the system might break hit pause. One of Trump’s advantages in negotiations is his perceived unpredictability. I'm not sure his tactics are a great way to run a country or create stability but purely from a negotiation standpoint it’s effective. The world cheered as he hit pause but in one fell swoop, he set the minimum and maximum parameters and deadline for each country ahead of negotiations.
I'm not pro or anti-Trump in this view; I’m simply looking at it as objectively as I can. My observation is that the anti-Trump camp tends to underestimate him while his supporters tend to overestimate him. I pay attention to what he says and does but also what he doesn't say and do. There are patterns and a method to his madness. He uses hyperbole and misinformation to his advantage, and it keeps people uncertain, so they don’t know what to expect and can't get comfortable. You don’t know if he’s telling the truth or bluffing. You can’t be sure about anything. But that is how he negotiates. All of this gives him control of the negotiation.
With many moving parts to digest and many variables we either don't yet know or don’t know how they will interact. On top of all that at any moment the situation can change, and the goalposts can move. Trump could decide without warning to remove or exempt a country from tariffs. He could extend or truncate the pause in tariffs. Central Banks around the world could start dropping interest rates. The outcome of the escalating trade war between the USA and China will be pivotal. China could adjust its currency or retaliate in an unexpected manner. We don’t know which countries will retaliate, compromise or give in. At any point, there are weaknesses within the global economy or financial markets and these developments can apply additional stress.
There are mixed views on how this all plays out for the global economy. While tariffs are inflationary, they are also likely to negatively impact economic growth. Central banks will soon have to make a very tough choice to make. Do they raise interest rates to fight inflation and potentially destroy the economy or do they cut interest rates to save it and risk adding fuel to the inflationary fire? Unless inflation is running out of control, I believe that a slowing economy will be seen as the biggest pain point, and in the face of an economic slowdown Central Banks will choose to cut interest rates to stimulate the economy and deal with the consequences of high inflation later. There is a long way to go, and patience is key to taking advantage of opportunities as they unfold.
Vladimir Lenin famously said, “There are decades where nothing happens, and there are weeks where decades happen.” As this situation continues to unfold and eight decades of trade agreements are upended, it appears that this is one of those times. This is all unchartered territory. I watched an interview with the legendary investor and founder of Oaktree Capital, Howard Marks where he said this is the most significant change he has seen in his illustrious 5-decade career. When someone held in such high esteem in the investment world makes a comment like that, it’s worth being mindful that this is a significant moment that should not be underestimated.
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