Well, it didn’t take long for the stock market to shrug off the economic apocalypse. Most of the indices around the world, including ours, are now up a little year to date. Maybe tariffs aren’t so bad after all…
Now what?
Opinion at the office is divided into three camps…
Those suffering from Trump derangement syndrome continue to expect a crash.
The MAGA hat wearers are boasting about their gains since Trump told them to buy stocks.
And then there’s the bird watchers like me. Always on the lookout for Black Swan crises. Trump’s shock and awe strategy made one far more likely. But who overplayed their hand this time?
The price of uncertainty is lower prices
Consider the failure of Lehman Brothers in 2008. Up to that point, the financial crisis felt contained. Banks were getting bailed out left, right and centre. The economy was on life support, but it was on life support.
Then the policy makers did something really stupid. Having created the expectation of a bailout, they came up short.
The result created huge amounts of policy uncertainty that hadn’t been priced in. Let alone the catastrophic nature of a bank failure.
The result was the severe crash etched into our memory. Share prices crashed again because we didn’t know what other bad decisions might follow.
As a result, the recovery was slow. Both economically and in the market.
The good news was supposed to be the lesson we all learned. Nobody would ever be stupid enough to trying something like that again.
Even rogue politicians like Greece’s Alexis Tsipras, Italy’s Matteo Salvini and the UK’s Liz Truss could be reined in by the mere threat of another financial meltdown.
Without support from money-printing central banks, the governments of those politicians couldn’t survive. And that support was conditional on following economic orthodoxy, or else.
That’s how unelected bureaucrats at central banks came to rule the world. They decide whether to bail out a government or not.
But that’s another story for another day. Especially because Australia is one of the rare exceptions thanks to our low debt to GDP.
But it does matter to the US…
What you need to understand is that the world’s financial markets are priced on an assumption. That the likes of President Trump can be controlled by the adults in the room. Actually, they’re at the Federal Reserve up the road in New York.
But can he?
How far is Trump willing to push his luck?
Will he be strong-armed into compliance like Tsipras was? Even a referendum rejecting austerity wasn’t enough to overcome the bond market.
Will he see sense like Italy’s Georgia Meloni? She’s been suspiciously quiet.
Will he be forced to reverse his policies after they cause an actual crisis, like Salvini in 2018? That was the worst year for stocks since 2008.
Or does the bond market need to assassinate him, like it did Liz Truss?
So far, we’ve seen some evidence of each scenario.
Trump delayed his tariffs by 90 days when the bond market began to melt down, for example. That’s what several European Prime Ministers were forced to do since 2015. Pension reform, tax hikes and huge spending cuts were forced through despite political opposition.
Some commentators are already calling the tariff reversal Trump’s ‘Liz Truss moment’.
If Trump really has been pulled into line, that removes a great deal of uncertainty. It means the bond market can and will control his policies in the future too. And the stock market can continue its rally in the knowledge that its big brother, the bond market, is running the US government now. No more surprises.
But if Trump is willing to push on with the many policies he promised, as we warned last week, then the bond market will continue to destabilise stocks.
While I accurately predicted both the tariff tantrum and the bond market reining in Trump, I don’t know what happens next. That’s why I’m out bird watching for Black Swans instead.
But here’s what we do know…
Only one sector remains beaten down
Not every sector of the stock market struggles during a crisis. Gold and gold stocks surged during the tariff meltdown.
But I think there’s a better opportunity now that things have settled down and the gold price had its day in the sun.
Trump isn’t just the cause of economic policy uncertainty. He also has a decent track record of foreign policy success.
His first administration was notable for bringing peace and stability to several different hotspots.
With the bond market upending his economic plans, perhaps that’s where he’ll turn to next.
So, what assets benefit from geopolitical stability?
Pretty much everything except gold and oil. They both enjoy geopolitical chaos.
Gold rallies because it’s a safe haven. While oil can rally because its supply is put at risk.
While stocks have recovered from the tariff tantrum, the oil price remains in the doldrums. It’s down about 15% year to date.
Oil may be the last sector to recover. And that means investors can still join the relief rally at a discount.
It’s also a sector that Australian investors have easy access too. The ASX has plenty of oil and gas stocks.
But there’s a big caveat. A catalyst worth waiting for…
Peace in Ukraine and the Middle East would be a supply shock to oil and gas markets. Derisking global shipping choke points and bringing Russian energy exports back into the fold would allow prices to fall further.
That will be a buying opportunity worth waiting for.
Regards,
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Nick Hubble,
Editor, Strategic Intelligence Australia
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