Disintegration in the US and Reforms in Europe
Article from Beat Wittmann, Chief Investment Strategist @ Key Family Partners
Trump is about Radical Disruption
Walter Lippmann, a highly influential US journalist, respected thinker and informal advisor to past US Presidents, remarked in the revolutionary 1920s and 1930s that “we have exited from civilization without quite knowing how we did so”. In his article “The Basic Problem of Democracy” he elaborated how wars and revolutions both depend on repression and propaganda and serve as “supreme destroyers of realistic thinking”.
Sounds familiar? It is precisely how autocratic leaders such as Trump, Xi and Putin, relentlessly seeking personal power, strive for geopolitical, economic and societal dominance, unconstrained by institutional checks and balances, while enriching themselves and their cronies. Trump’s election is the final act in the departure from the post WW ll multilateral order and security architecture. It is the rolling back to hard-power “Realpolitik” exemplified by 19th century Bismarck or, more recently, by Nixon and Kissinger in the US.
Three months after inauguration day in January and we can already see where Trump 2.0 is going – no need to wait for the typical first 100 days in office to judge. The second Trump term is much less about restructuring and reforms than disruption and disintegration. The Trump administration is actively putting nails in the coffin of the democratic separation of powers, the multilateral political system and the economic globalization order and, instead, has already amassed a long list of domestic and international offenses and casualties.
US – Short-term Pain and Long-term Loss
Trump’s destructive actions and inconsistent policies are visibly and factually punished by falling business and consumer sentiment, weakening economic data, sticky inflation data, declining equity markets and a depreciating US Dollar. It is clear, however, short-term pain will not be long-term gain, as Donald Trump likes to think. Long-term loss all around awaits as a result of nationalism, protectionism, high deficits, challenges to the rule of law and of independent institutions, media and academia alike and inflicting losses on foreign investors in US financial assets – including equities, corporate bonds, real estate, private markets and US Dollars.
Crucial events to watch this week are Trump’s pre-announced ‘liberation day’ regarding additional tariffs and Trump’s pressure on the FED to lower interest rates in order to mitigate the negative economic effects of his punitive tariffs imposed on all trading partners. Further damaging trust in US risk assets are the deliberations about forcing foreign holders of US treasuries into longer term instruments. Even more outlandish are ideas of a Mar-a-Lago meeting between the US and the world’s largest economies for capital market and currency negotiations – ultimately benefiting the US.
Sell US on Strength and Buy Europe on Weakness
We clearly stay negative on US financial assets as we believe that Trump will continue to double-down on his damaging and inconsistent economic policies, US investors will be more defensive and foreign investors will repatriate their assets at an ever faster pace. Expect major rebalancing away from the US. The big question remains when, if, and at what levels of market loss Trump will ‘blink’ and halt, adjust or reverse his policies. Even policy reversals no longer help, we believe, as seen after the confidence destroying zig-zagging on tariff policies and often the flawed and sloppy execution.
Our fundamental strategy and opinion for 2025 and beyond, therefore, is simple – sell US assets on strength and buy European assets on weakness. The decisive game changer for Europe and, finally, also for Germany was a wave of unprecedented US hostility, the US support for European radical
far-right parties, and the siding with Europe’s military enemy Russia attacking Ukraine. JD Vance said it all in his infamous speech at the Munich Security Conference. Ironically and unintended, however, Trump has become Europe’s strongest unifying force.
Europe is determined to engage in overdue reforms and achieve strategic autonomy in military security, economic, energy and critical infrastructure resilience. I highly recommend to read the comprehensively and concisely formulated European Commission’s “Joint White Paper for European Defense Readiness 2030”. The White Paper encourages the treatment of Ukraine as a member for EU defense instruments. Clearly, Ukraine has much to offer in regards to defense-industrial production, innovation, battlefield deployment and experience.
We currently experience an overwhelming and positive shift in sentiment across Europe, mostly impacted by Germany’s decision for major fiscal expansion and adjustment of the debt brake to allow for unprecedented investments in defense and infrastructure. Constructive and productive coalition talks between the conservatives and social-democrats are ongoing and the new government led by a conservative Chancellor Friedrich Merz is expected to be confirmed around Easter. This hails Germany’s political comeback into Europe and its role, yet again, as Europe’s economic motor.
We remain strongly convinced that undervalued and under-weight European equity markets will continue to outperform in 2025 and beyond, thanks to the positive multiplier effects of a massive infrastructure investment program and the rehabilitation of the defense-industrial complex with positive effects on growth, employment, productivity and innovation.
Brace Yourselves..
Expect highly disruptive, unstable and unpredictable geopolitics originating from Washington in weeks to come, leading to an economic slowdown and sharply increased capital market volatility. We recommend a barbell strategy of defensive investments like cash, government bonds and gold on one hand and on the other overweight Europe, critical infrastructure, defense, industry and financials, in particular, for superior and sustainable capital gains.
