Is there any method in the madness? Donald Trump’s mid-morning announcement yesterday that tariffs on Canadian steel and aluminium would not be 25% but 50%, effective from today as of when the 25% will be implemented on all imports of the materials, took markets totally by surprise. But not by as much as the backtracking later in the day when the White House let it be known that the doubling would not happen.
In the midst of this -and this is not verified – President Trump is said to have intervened in what was dubbed by NBC as the Great Tesla Chainsaw Massacre (even after yesterday’s bounce of 3.79% the stock is down 42.9% year to date) by announcing that he will personally buy a Tesla in order to support his friend.
And what is the real Ukraine policy? Was the big spat with President Zelensky real or was it staged in order to lay a trap for Vladimir Putin?
I have always been loathed to draw comparisons between what is happening in Washington now and what happened in Berlin in the 1930s. It is too easy to simply paint a moustache on Donald Trump and to declare that history is repeating itself. The situations could not be more different but there is one feature that does deserve to be looked at closer.
I had the huge privilege to have had as my tutor at Manchester a young historian who was to go on to become the world’s leading experts on the life and times of Adolf Hitler, now Professor Sir Ian Kershaw FRHistS FBA, who had himself learnt his craft under Martin Broszat at the IFZ in Munich. It was from Ian that we learnt to look at events in the period and to ask which were planned and which occurred rather more unintentionally.
In the study of the Nazi seizure of power, the two schools of thought are those of determinism and circumstantialism. Was “Mein Kampf” a blueprint or did one event simply and rather randomly lead to the next one? I refer back to the concept of pre-emptive obedience that has appeared in my writing over the years but has become more frequent of late, especially in the context of Putin’s Kremlin, and now also Trump’s White House.
Is there a masterplan – whether right or wrong is a matter of taste and time – or is the US administration stumbling from one random policy announcement to the next with little to no hope of joined up thinking?
I for one am neither in a position to offer an answer to that question nor would I even try. But markets and above all real businesses need to position themselves and what I can do is to attempt to divine how they are going to do so in anticipation of the unpredictable.
I’m not sure there’s a really good way of looking at how markets see the future. One is brought up to believe that stock prices are forward-looking although, after many decades of hanging around in the City of London, I concluded that that is rubbish. It was the Austrian American humourist Georg Kreisler who coined the phrase than not even the future is what it used to be.
Note maybe that even after the halving of Tesla’s share price its P/E ratio remains at 113 times. That compares with Toyota at 7.13 times or Mercedes Benz at 5.73 times. The comparison between Tesla and other automakers has been drawn too often and yet they have still not really converged.
Elon Musk’s position as First Buddy seems to be under pressure and not from the Oval Office but from Capitol Hill where, in less than a year from now, a third of the members of the Senate and all of those of the House will once again be girding their loins ahead of the midterm elections.
Musk’s insensitivity to the way in which the civil service actually works has been epic. Sure, there is an argument that too much sensitivity over too long a period has permitted the growth of an uncontrolled, uncontrollable and ultimately unaffordable administrative monster but smashing it without a clear and visible plan of what will be put in its place is not a way forward.
My dear friend Morris Sachs at IBWOC.com used to love to quote the line that if my neighbour loses his job it’s a recession whereas if I lose my job it’s a depression. The full extent of Musk’s plan to reshape the civil service, assuming there is one, remains unclear although what is becoming progressively more obvious is that the chaps and chapettes on the Hill who will have to face their electorate are not as happy as they either were or should be and pushback from the GOP end of Congress is, so it would appear, building.
It has often been commented upon that President Xi was unlucky with the timing when he swung himself into the role of autocrat. The years of exponential growth were behind the Chinese economy and a period of consolidation was necessary. From time to time all economies need to halt, to regroup, and to cleanse themselves of boom-time passengers. Xi got to the top of the CCP just in time to find himself presiding over such a consolidation of which the country is still in the midst. Might Trump unwittingly be in the same position?
The low interest rate rebound from the GFC, the massive cash injection offered by the period of quantitative easing and finally the extension of ultra-cheap credit through the pandemic are gone. As much as Trump clamours for a return to minimal interest rates, the world has moved on. Economically, he is fighting windmills.
That said, politicians do not make the economy. They talk about it – It’s the economy stupid – but in the end it is up to individuals to get up in the morning, to spit in their hands and to go to work. Markets don’t lie. Or not for long. We are experiencing the deflation of the post-election asset price bubble, the Trump bump. As hard as it is to grasp, equity investors are not losing money, they have simply been giving back what in the first place should not have been theirs.
I have a feeling, entirely unscientific and purely intuitively, that the recent downtrend is running out of steam, and I would expect a floor to start building. It is here that markets will give Trumponomics the benefit of the doubt. If, however, the softening trend in the economy continues to manifest itself in releases, then another bout of repricing might follow. Has Trump been as unlucky as Xi in that the great cyclical downturn in the US economy, the one that has been postponed and postponed by way of nearly two and a half decades of loose monetary policy, is about to finally set in?
With or without the ructions caused by the Trump administration, there are plenty of post NIRP (Negative Interest Rate Policy) and ZIRP (Zero Interest Rate Policy) imbalances in the economy to be rectified and brought back into equilibrium. That many of them are hidden in private equity and private debt funds is I believe not only one of my foibles. For all its failings, strict mark to market does help to reduce the number of hiding places. Taking both debt and equity out of the public domain increases them again.
Either way, the greatest risk to markets remains the uncertainty which the White House is delivering. I read a piece yesterday that suggested that President Trump is intentionally engineering a recession. I think not although it’s equally certain that, if one does set in, he will instantly declare it to have been part of his masterplan to make America great again. His second favourite words to “tariff” are rapidly becoming “pain” and “transition”. Say no more.