Moving Fast & Breaking Things

The news cycle can’t catch a break these days. The New Normal is that Donald Trump has put us all into a constant 24/7 treadmill fuelled by his insatiable attention seeking and relentless hurry before the limits of a presidency in its second term catch up to him. It’s a gravity-defying rush with all of us struggling to keep our balance.

Trump’s sweeping tariffs and China’s stinging retaliatory measures are symptomatic of a new contest for global leadership that is reshuffling the geopolitical and economic world order. This tectonic transition is upending the dynamics of free trade, globalization, and the absence of great power conflict that underpinned the steady state of the post–Cold War era. A major rethink of the way investing is approached is more than due.

One has to be living under a proverbial rock to not notice that the U.S. is imposing 145% tariffs on China in addition to levies on many other countries, while China is putting up 125% tariffs of its own (though things are moving so fast by the time you read this those numbers may have changed). But the trade war goes beyond tariffs. In this bipolar world the two largest economies are in a fierce competition for leadership in technology and innovation. This race, and the U.S. move to a more transactional foreign and economic policy, are pushing China to embrace and strengthen the BRICS+ coalition.

Originally a loose alliance of Brazil, Russia, India, China, and then South Africa, BRICS+ now extends to an array of partner countries representing almost half the world’s population.

This maturing alliance serves as a mechanism for China to reach important markets that aren’t politically aligned with the U.S. and its coalition. Beijing’s relationships help it secure access to crucial resources, and to extend its influence, all while hedging against restrictions on access to U.S. and European markets, or potential future sanctions.

Indeed, BRICS+ presents a formidable challenge to the West albeit a still nascent one currently. Its members benefit from technology, energy resources, a broad range of commodities, control of major maritime and trade chokepoints, expanded military capabilities, and favorable demographics.

These compelling assets explain in part the Trump administration’s focus on changing the established practices of the global economy. Under Trump, the U.S. is seeking to slow the ascent of BRICS+ and China before they could become the dominant alliance in a new geopolitical era. The unipolar, post–Cold War period, centered on the U.S. as the sole hyperpower, has ended. What comes next isn’t certain, but for now as previously covered in this blog, it resembles at least a bipolar competition between the U.S. and China, each with its respective coalitions.

This global competition is the context in which we should view Trump’s interest, among other things, in rare-earth deposits in Greenland and Ukraine (perhaps even the Democratic Republic of the Congo, though that would be a much more fraught proposition), his focus on the Panama Canal, and arresting the expansion of China’s fleet and shipbuilding capabilities, as well as the end of regional wars which could divert American attention and resources.

Globalization and free trade were the underlying conditions in which capital markets and investing practices were established. Those conditions are changing, and so should the investment playbook.

For one, the distinction between developed and emerging markets is becoming blurred. No longer are developed markets the sole pioneers of technological development, the beacons of international trade, and the champions of regulatory stability and predictability. Technology besides being borderless, is being created and enhanced in countries from both the developed and emerging markets groups; trade is growing faster within coalitions than between them; and regulatory uncertainty is most evident in the U.S., among other Western countries.

Economic fragmentation could make the cost of capital more localized to each bloc, raising its cost and implying higher interest rates. In this new uncertain and unpredictable environment, volatility is likely to remain elevated in this ongoing transition to ‘whatever’ form the new global economy will eventually end up resembling, some risk models that are based on historical data may underestimate the level of risk.

Fierce global competition means that companies have less reason to go public. They must prioritize protecting their intellectual capital and will be drawn to financing opportunities in private credit within the orbit of their geopolitical and economic coalition group.

Investment opportunities may be better harvested through both private and public markets rather than one or the other.

• Economic resilience will be a national priority for many countries. They will be prompted to diversify and focus on their industrial strategies—as evidenced by Trump’s promise to “supercharge our domestic industrial base.” Efforts to bring production home are potentially inflationary in the short- to medium term.

• Policy uncertainty and political risk are rising. Investors will need to think thematically about countries’ exposure to the drivers of future growth: technology, energy supply, commodities/resources and productivity advantages.

• Relationships within and between coalitions are bound to evolve. Less globalization and more restricted capital flows imply lower liquidity in the markets. The effect may be further intensified by the bigger role that private markets will continue to play.

This new world will also have less risk-sharing and a lower capacity to absorb supply-chain shocks, or other disruptions. With higher volatility, the risk exposure of portfolios may need to be reduced going forward, thereby reducing the overall leverage that needs to be employed.

Navigating this complex environment will require a more dynamic approach to investing. The global order is undergoing a regime change to an endpoint that isn’t yet known. The passive approach of past decades is no longer relevant. To effectively realize opportunities, investors will need to be more thematic and active in their investment process: Their portfolio playbooks need to adapt accordingly.

The State of Play

Much of the news over the last few days has focused on the 90-day U.S. tariff pause.

Markets initially rebounded; many traders seemed relieved to avoid the worst-case scenario of a prolonged and unsustainable tariff regime. But that ignored the reality that significant tariffs still remain in place. The effect even after Trump’s partial pause is nothing less than a 10-fold increase in levies on goods imported to the U.S. At the start of the year the nation’s overall average effective tariff rate stood around 2.5 %. With the recent moves, it’s hit around 27 % — the highest for the U.S. in more than a century. The U.S. imported about $3.3 trillion worth of goods in 2024, so taxing all of that amounts to a substantial tax levy on consumers and businesses buying from overseas.

The levies vary among the largest U.S. trading partners. The president’s moves leave 10 % tariffs in place for most countries. Those on Chinese imports — ironically America’s No. 3 trading partner — now sit at the aforementioned 145%. That’s a tax on every import hitting U.S. companies that buy either finished goods or parts from the world’s second-largest economy. Canada and Mexico also face a high 25 % tariff rate on some goods (steel, aluminum, autos) and are spared tariffs on goods that comply with a 2020 trade agreement he signed with the two countries. It’s already upended the dynamics of the upcoming Canadian election and with more to come.

Winners and Losers

The president is deploying a risky strategy, characteristic of his “go big or go home” approach to, well, almost everything. The Trump tariffs will reshape the U.S. economy, the world economy, foreign policy and global financial markets as long as they remain in place.

• In the long run, the president hopes the U.S. will benefit through investment in the U.S. — more factories and jobs — and higher tariff revenue.

• In the short run, U.S. companies large and small will need to decide whether to keep purchasing products from countries hit by those tariffs or switch to goods from other countries. They’ll also need to decide whether to pass any added costs on to consumers. Some companies will shut down because they can’t eat the cost of a 10 % tax on many goods, much less a 145 % tax on their products from China. Business leaders will also be weighed down by the uncertainty — Trump has shown he can change his mind at any time. Who will build a long-term business plan, or invest in capital-intensive projects, with the sword of Damoclean uncertainty hanging over one’s head?

U.S. consumers will quickly face higher prices for all sorts of goods. Some economists put the initial estimate at the equivalent of $4,700 per American household. Even after the pause in some of the tariffs, we can expect inflation to rise due to higher prices and unemployment to rise through business failures and layoffs. That’s a stagflation scenario — at least in the short run.

Are the Recession Warnings Warranted?

Whether a recession arrives depends largely on whether Trump backs down even further in the coming weeks. A walk-back could restore confidence enough to save the U.S. economy from entering a recession. But the uncertainty from sudden tariffs, even lasting a few weeks, will exact an enormous toll around the world.

Every sizable business that imports anything into the U.S. is likely holding emergency meetings this week to decide whether, and how, to reshape their purchasing and investment plans. Even those that don’t import goods will need to react to the realities of lower purchasing power for consumers (because of the tax on the goods Americans buy) and the volatility of the stock market. A lower stock market often translates into cost-cutting measures, including layoffs, to raise profitability in an attempt to shore up EDBITA. Higher borrowing costs — due to inflation — will also weigh on consumers and businesses.

Trump, thinking long-term strategy, appears prepared to take the recessionary hit to reshape American manufacturing and trade. It’s unlikely he can accomplish such a rapid, sweeping restructuring of the nation’s industrial base while keeping the economy above water over the coming year. He knows that. But he is gambling on inevitable recovery which comes after to be a ski-jump-like upswing.

Trump’s Long-term Trade Motivations

The president is fulfilling a lifelong dream to fundamentally alter the balance of power in the world economy. He’s breaking from most of his predecessors (from both parties) who pursued ever-freer trade conditions over the last century. His deep interest in trade in general (and what he perceived to be unfair practices imposed upon the U.S. by its purported allies) developed during the rise of Japan throughout the 1980s and persisted through the national debates about NAFTA. “What I would do if elected president would be to appoint myself U.S. Trade Representative,” Trump wrote in 2000 as he weighed running for president on the Reform Party ticket. “I would take personal charge of negotiations. … Our trading partners would have to sit across the table from Donald Trump and I guarantee you the rip-off of the United States would end.”

We can’t say we didn’t see this coming. Indeed, unlike most politicians, Trump is actually doing what he’d said he’d do.

He made trade — and himself — the center of the global policy agenda, weaponizing it to a greater extent than ever before . And, as long as the Trump tariffs remain in place, they will reshape the American economy and the global economic order in unpredictable ways.

How Does Trump React to Markets?

The markets seemed rather giddy on Wednesday on perceptions of Trump pulling America back from the cliff edge. Then they sobered up on Thursday and tumbled as the reality of a new world order on trade set in. An old adage on Wall Street is that bear markets make fools of both bulls and bears. Expect continued volatility as long as the China tariffs remain in place.

How much that moves Trump remains to be seen. Outwardly, he’s adopted a surprising openness to the notion that a recession could result and a willingness to message to Americans that pain is ahead. But his decision to scale back his trade war grew out of concern about disorderly moves in bond markets, following both an appeal by top aides and the realization that he could afford to declare at least partial victory as countries sought bilateral arrangements with the U.S. Furthermore, he is savvy enough to know that whereas in many cases, stock fluctuations are temporary and recoverable, bond market upheaval can exact deeper damage to the broader economy by freezing credit for consumers and businesses who aren’t even invested in stocks.

In his three presidential campaigns (2016, 2020 and 2024) Trump warned us that stocks would crash, and a depression would result if any of his opponents won. Instead, those risks have only appeared in his tenure, and he is now engaged in a colossal game of chicken waiting for others to flinch. Despite the global hand-wringing, it might actually be working.

At least he has our attention.

Donald Trump has always been a lucky guy. His legacy – and the Republican party’s performance in next year’s congressional elections (which in turn will determine how quickly or slowly he becomes a lame duck) depend on that luck holding out.