Plus ça change, plus c'est la même chose
Current 22 - Insights:
“The more things change, the more they stay the same”, is a French aphorism attributed to many. Personally, I like to think that Robespierre muttered this as he was led to the guillotine. But, hey, that’s just me.
When Trump was elected, the one thing we knew for certain was that the relative stability of the Biden era was over. The question was less about whether the change would be sweeping or not, and more about just how chaotic the broom would be. Now we know: more chaotic than even the most pessimistic market observer predicted.
At the time, we said - clearly and repeatedly - that markets can digest an enormous amount of turbulence. I’ve been a professional investor through more wars than I would like to count, a handful of “Black [fill in the blank] days”, a Great Financial Crisis, the dotcom implosion, several burst bubbles, and enough scandal/fraud/bankruptcies to know that markets are resilient. What markets don’t like, however, is policy uncertainty. And with Trump, we have seen policy uncertainty taken to an entirely new level.
So, now that we are far enough into the Trump administration to have a sense of what we might expect, what do we know? We know that the transactional style of his first administration is now on steroids. We know that tax cuts for the wealthiest Americans are more than a policy goal: they are an article of faith. We know that his posturing on Russia’s invasion of Ukraine was just that: posturing. We know that the bond market vigilantes* likely forced Trump’s hand on China. We know that other countries will respond in ways that Trump failed to predict. And we know that investors around the world are busy re-rating American markets. But despite this drumbeat of bearish news, US markets remain surprisingly solid and non-US markets have strengthened.
What does this tell us?
First, let’s remind ourselves that the four most dangerous words in investing are: “This Time It’s Different”. The reason this is important to remember is that financial and political developments always look different… but they rarely are. As such, it is absolutely critical to understand when the investing landscape has actually changed, vs. when it merely appears to have changed. The former requires action, the latter requires patience.
Five months ago, we identified five “canaries”, which, if they began to sign in harmony, would suggest that this time is, in fact, different:
An escalating, and ever-more irrational trade war, primarily expressed through unpredictable and punitive tariffs.
The weaponization of the US Treasury market.
Coordinated international response to Trump’s policies (China and the EU, for example, signing a trade agreement).
Broad selling by institutions of illiquid positions into an opaque secondary market.
The Fed being forced to either tighten due to rising rates, or loosen due to deteriorating economic conditions.
Of the five, the first is perhaps the most obvious. Trump’s tariff announcements were the stuff of news editors’ dreams, as they delivered daily drama and an accelerating news cycle. And the markets responded with dismay, selling fast and analyzing later. But the so-called “bond market vigilantes” (a phrase I haven’t heard in decades)* forced Trump to deescalate his tariffs, and to moderate his threats. And the markets responded well. At this point, the risk is still present that a full-throated trade war spirals out of control, but that risk is lower now than it was two months ago.
Our biggest fear was the second one: basically, that some Congressmen might trial-baloon the idea of defaulting on our national debt. That would have been entirely catastrophic. Fortunately, while we did pick up on some whispers related to default, none of them got much oxygen. The risk here, in our estimation, is extremely small.
The third canary seemed simultaneously the least likely, and the most consequential, at least from a trade perspective. Perhaps unsurprisingly, China has been an adept negotiator, signing multiple trade agreements with a variety of countries, essentially mitigating the impact of Trump’s tariffs. It will be extremely difficult for Trump to extract any concessions from his counterpart in Beijing, not the least because right now the US needs a deal more than China does. President Xi has proven himself to be a canny negotiator, with a deep instinct for weakness in his adversary. The challenge for Trump is that his only real strength is access to the US consumer, which doesn’t make for a strong hand.
While we saw some liquidations from large, presumably sophisticated, investors, that ball never really began to roll. As such, we interpret those sales as defensive liquidity reinforcement, rather than a reflection of deeper problems in their portfolios. We are watching this space very, very carefully, however, as secondary interests in illiquid positions can tell us a great deal about the strength of the exit environment.
Lastly, the Fed under Chairman Powell continues to thread the needle that it began to thread so masterfully under the Biden administration. To date, the Fed’s hand has not been forced, despite Trump’s public (dare I say “histrionic” remonstrations). The Fed’s dual mandate of solid employment and controlled inflation appears to be well in hand, despite the turmoil of the past four months.
So. Is this time different? In some ways, yes. Trump’s chaotic administration is something new, as are his attacks on his own government and on the pillars of US democracy. And in some ways, no. We’ve seen much of this before, albeit in different guises and to different degrees.
What is different, however, is how the US is being viewed by our allies, trading partners… and by our traditional adversaries. In a phrase, the post-WWII world order, defined by the agreements forged at Bretton Woods and by the role of the US as the world’s champion of free trade, is over. This is causing a “re-rating” of US markets in general, and a resulting reallocation of assets in many institutional portfolios around the world.
Notably, this will be a long-tail trend. As such, it may course-correct, or it may deepen as the midterms approach, as Russia and Ukraine struggle to control the battlefield, as the Trump administration seeks to resolve the tariff situation, and as investors weigh the probability that a durable reversal of US global leadership will take hold. As investors, we are mindful of both the risks and opportunities embedded in this moment. And, as investors, we remain committed to the idea of “think fast, act slow, build carefully”.
In other words, the more things change, the more they stay the same.
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*”Bond market vigilantes” was a phrase that surfaced in the '80’s., coined by Ed Yardeni, an economist and market strategist of some renown. It essentially described a group of large bond investors who, protesting fiscal policies they considered to be inflationary, started to sell treasuries, thus driving up yields and putting pressure on the White House to reverse policies. It worked, the White House backed down, and the term stuck around until yields began to fall under Greenspan... and the era of the "Greenspan Put" began. I saw it used in a WSJ article about a month ago, and it has surfaced elsewhere more recently (Zero Hedge, Seeking Alpha, Bloomberg, the FT, the Economist) to describe how rising yields forced Trump to back away from the most egregious round of tariffs in the first quarter.
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DISCLOSURE: The information presented in this blog is the opinion of Align Impact and does not reflect the view of any other person or entity. The information provided is believed to be from reliable sources but no liability is accepted for any inaccuracies. This is for information purposes and should not be construed as an investment recommendation. Past performance is no guarantee of future performance. Align Impact is an investment adviser registered with the U.S. Securities and Exchange Commission.
