Market commentary: 1st January to 31st March 2025
At the end of the Coen Brothers film “Burn after reading”, the CIA boss (played by JK Simmons) has a conversation with his deputy:
“What did we learn here?”
“I don’t know, sir”
“I don’t know either. I guess we learn not to do it again”
“Yes, sir”
“Though I don’t know what we did”
“Yes, sir. It’s hard to say”.
We’ve had an interesting couple of weeks. In fact, so interesting that we delayed publishing our end of quarter report on the basis that the pace of change will have made the note instantly redundant. Instead we published a brief update on 4th April outlining our views on the evolving situation. Our basic thesis was that it appeared that markets had, as they always do, overreacted to ambiguity and uncertainty, and that this presented opportunities.
So what have we learned since? Well Occam’s razor (when faced with multiple explanations for a complex problem, the simplest explanation is usually the best) dictates the following: that Trump has no clever plan and that he is not a clever man.
His acolytes demean themselves in their attempts to confect a deep strategy behind his caprice. Trump is beholden to no one other than his own conscience, seems surrounded by docile supporters and casually ditches conventional wisdom. It is an understatement to suggest that his views on economics are “novel”.
What drives him to impose tariffs is a primitive but deeply ingrained opinion that the rest of the world is unfair on trade with the US; everyone cheats and leaves an uneven playing field for US companies, robbing the US of taxes and jobs.
He appears to have a naive romantic notion of post-war industry in the US. You can imagine in his mind images of white wicker fences, summer dresses, cars on drives, food on the table and families contented with the wages from the factory. But this world has gone and that is largely for the betterment of US wages.
FT “Since 1990 America has lost over 5mn manufacturing jobs. In that time, it has gained 11.8mn roles in professional and business services, and 3.3mn in transportation and logistical activities, linked to multinational supply chains.”
It is automation, not China, that led to those job losses. American employment has moved up the value chain. However, irrespective of its merits, this is Trump’s perspective. Allied to his ego, and the mandate he believes he earned at the election, it has encouraged a significant escalation in his approach to tariffs.
Imagine being Tim Cook (CEO of Apple) having to deal with the following. “Tariffs are now at 145% on China….but we won’t tariff certain types of electronics. Just kidding, we will. Or will we?”
Where we stand today is that Trump has played his hand which created significant negative externalities: markets slumped, treasuries weakened, the dollar fell and recession was predicted. Trump then backed away, externalities receded. It seems unlikely that he will simply revert to plan A. It appears most probable that we will occupy a middle ground between where we were – high tariffs across the board, and punishment tariffs on penguins – to where we are currently – 10% global tariffs, and punishment tariffs on China. In view of the scale of the reaction, and Trump’s swift backing down, the odds suggest a likely end position at the lighter end of the tariff spectrum.
Over the quarter gold has been an obvious beneficiary, driven by central bank purchasing and as a consequence of its attraction as a safe harbour asset. Volatility has spiked as the tariff psychodrama unfolded and, while the last few days have seen a reduction, we must expect higher levels of volatility driven by geo-politics and Trump’s actions and counter-actions in the coming years.
We increased our exposure to US equity soon after the UK market opened on Monday 7th, for reasons we outlined at the time – markets had oversold, factoring in a set of circumstances that were implausible as an end position. We are content to let those profits run for now, but the actions of the last few weeks have diminished the “animal spirits” that accompanied Trump’s election.
Our investment decisions have been based on the expectation that, on the evidence of the behaviour in April, Trump will shy away from actions that will lead to a US recession, but will persist with action that diminishes growth. In the short term, the price falls and panic presented opportunities we were happy to exploit. Longer term we are less positive about US growth and expect to see growth predictions contract.
At SORBUS we believe that we are thoughtful investors, but can act with decisiveness and speed when occasions demand. We demonstrated that again at the start of Q2. For now we will hold fast.