Welcome to the new World Order

We thought our clients might be interested in the views of Nolan Stanton, who we worked with as Chief Investment Officer for many years. In this piece he wrote yesterday he gives his take on what Trump’s tariffs could mean for markets. The news overnight was that some countries are seeking to defuse the situation, but China in particular is looking to retaliate for Trump’s new 34% on top of the existing 20% by imposing 34% on American imports, Trump responded by threating to escalate with a further 50% taking the rate on Chinese goods imported by the USA to 104%. China accused the US of economic bullying and said it will fight the end. Where does this chaotic spiral end for the two global economic superpowers? Governments and businesses watch and wonder how to react. Markets hate uncertainty, so volatility could prevail until Trump’s new World order unfolds. 

Andrew Twells

8th April 2025

—–ooooo—–

An erroneous tweet (are they still called that?) on X led to a $2.5 trillion rally in US equities this afternoon before it was shot down by the White House. No quarter on tariffs remains the message from the Trump administration whether you are China or an island inhabited by penguins in the South Pacific.

What is the major market worry now? Most clearly to us it is the prospect of upending what is being suggested is the rationale for the tariffs being imposed in the first place, which is an attempt to being down the cost of borrowing for the US government, following ‘sleepy’ Joe Biden’s administration’s massive government deficits. Whilst the market can ignore what is being ‘refinanced’ in the US treasury market this year, given it’s mainly short-dated bills, when we see the yield on 10-year bonds going up, at the same times the US stock market is falling, then we should be worried. Why? Overseas holders of US government bonds may well be giving up their positions due to the declining nature of US government bonds defensive appeal also in the world’s reserve currency. They could be concerned about what comes next (from Trump) such as closing the capital account, swapping coupon bearing bonds for 100-year duration perpetual issuance or outright devaluation/cancellation via inflation or Presidential diktat.

What is the esoteric area of finance that could blow up under the law of unintended consequences perhaps requiring the Federal Reserve (Fed) to step in and save the day? Last Friday the Fed chair would tell you nowhere or at least nowhere he and the FOMC were prepared to act as white knights to defend. However, the Fed may want to look up ‘funding agreement-backed notes’ (FABNs). Why are FABNs and similar securities a potential systemic problem particularly for insurance companies? According to the Institutional Risk Analyst publication it is “because the biggest players in private equity are unloading their mistakes onto the shoulders of investors, including insurers, and running for the door. Like the securities lending SPVs, which blew up ABCP conduits, SIVs and insurers like AIG in 2008, the underlying credit is doubtful at best. There is no such thing as risk-free matched funding for risky assets. Yet for some reason, Fitch (one of the players who in 2006/2007 ‘rated’ mortgage backed securities pristine) and other ratings agencies and the banks are fully onboard with enabling and financing this dubious racket.”

So, what is the thinking today? Since WW2 the median US stock market fall into a recession has been 24% when forecast. We are not far off that now with an acknowledgment and humility in Trump world the S&P 500 could fall a lot further. However, what we could be missing is the opportunity presented to investors by the ‘sequencing risk’ of Trump’s plans if you have longer term objectives and the stomach to endure high volatility. Tariffs first and last it may seem to the press, but we may have missed that oil has weakened significantly via OPEC supply going way up, the dollar has weakened, and US mortgage rates are presently declining. If Congress delivers tax cuts this year and the Federal Reserve delivers the five rate cuts presently forecast by markets, then stocks bottoming out around 4,800 or so on the S&P 500 index could be an attractive buying opportunity. Trump remains a non-ideologue with everything we have borne witness too these past few days merely being the ‘Art of the Deal’ and a post tariff landscape favouring the US (again), reducing various trade balances and righting the government deficit being the ultimate objective. Got gold?

Nolan Stanton FCSI

7th April 2025