On April 2nd, President Trump announced much anticipated sweeping tariffs. The good news was that details were finally released, ending weeks of speculation on how serious this administration was about tariffs as a central tool of its economic policy. The bad news was that President Trump’s aggressive tariffs are taking the US average effective tariff rate to one not seen since the 19th Century. Furthermore, the announced tariffs would raise the average effective tariff rate above the notorious Smoot-Hawley tariffs that preceded the Great Depression. The announcement did not spare either allies or adversaries, and the reactions from global financial markets were swift and unambiguous.
We disagree with the characterization of the selloff in global markets that followed the tariff announcement as a “panic” reaction. Rather, the reaction we observed last week was, in our opinion, exactly just that: a “reaction” to the newly presented facts; namely the fact that the tariffs announcement immediately points to both downward pressure on global economic growth and upward pressure on inflation. And with more uncertainty ahead, the most likely scenario is that of more market volatility in the foreseeable future.
Reactions from our trade partners are trickling in, with China swiftly announcing their version of retaliatory tariffs. The two largest economies in the world going toe-to-toe in a massive trade war cannot bode well for the global economy in 2025. Neither side is likely to back down quickly. Europeans are not as rash but have flouted retaliatory tariffs in response too.
Generally, when staring at an economic slowdown, special attention is directed towards central banks responses. President Trump himself has already called on the US Federal Reserve Chairman, Jerome Powell, to lower rates. Mr. Powell, however, stated clearly that he is not inclined to lower rates any time soon and that he would seek further clarity in the administration’s trade policy. “We are well positioned to wait for greater clarity before considering any adjustments to our policy stance. It is too soon to say what will be the appropriate path for monetary policy” he was quoted as saying on April 4th. That clarity in this trade war may not come any time soon, and should this administration remove Chairman Powell as it did with FTC commissioners earlier this year (the legality of this action being disputed), more volatility is to be expected.
Where does this leave us? We’re of the opinion that what lies ahead is an increased chance of a pronounced economic slowdown and heightened inflationary pressures. And if we are able to avoid a full-blown recession, we will likely still hit a prolonged patch of no growth and higher inflation (“stagflation”).
This is precisely why we have been positioning our clients’ portfolios according to Argos’ Store of Value Protocol. The elevated uncertainty permeating every corner of international relations (the economy, geopolitics, security, etc) is nothing short of a seismic shock to the world order as we have known it for decades. Simply put, we are just not getting paid enough to take on the risk of betting on most likely outcomes, as that range is too wide, and the timeline is too uncertain.
From a practical standpoint, we are actively monitoring the short end of the US treasury market, and the 10-year bonds in particular, even more so than before. We are not alone in following closely the 10-yr, as both President Trump and Treasury Secretary, Scott Bessent, have been laser- focused on the behavior of the front end of the US’s borrowing market. It is far more beneficial for the US government to have the 10-yr with a 3-handle (around 3.5% is what is reported to be a desirable level for the administration) than to hit it out of the park in terms of additional revenues the US might be able to bring in with the new, aggressive tariff plan. There as on being that, given the outsized level of our national debt (now standing at $36 trillion and over 120% of GDP—higher than even the level following the end of WWII), controlling interest costs on the US debt is the single most effective measure to reduce our internal balance of payments. So, in addition to the old saying of “don’t fight the Fed”, we have recently also adopted a new adage: “don’t fight the Treasury”.
In conclusion, a lot still has to be decided in the battle between “short term pain” versus the desired “long term gains.” In the meantime, we remain committed to the managers (like our managed futures managers) and instruments (like precious metals) which we have employed to carry out our Store of Value protocol and which have shown resiliency in times of heightened uncertainty.
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