Disruption as a Policy – Trump And The Global Shake-Up
Article from Beat Wittmann, Chief Investment Strategist @ Key Family Partners
Trump Actions – Unthinkable Becomes Normal
Anyone who is surprised or shocked by Trump’s decisions and actions is simply not prepared, and that is irresponsible and ignorant, even arrogant. The recent and self-centered complacency of the Swiss Government is a prime example – blindsided and shocked by record-high Trump tariffs on Swiss National Day.
Trump does things arbitrarily if and when needed. So far his underlings and the power apparatus comply. Don’t like the US economic data? Fire the chief of the Bureau of Labor Statistics (BLS)! That the politicized hollowing of US institutions undermines the trust in the US as a contractual counterpart seems of little concern to the president.
Turkey’s Erdogan repeatedly fired central bank chiefs for not lowering interest rates and China abolished the youth unemployment data altogether after those reached politically unacceptable high levels. As the sayings go, “torture the data until they confess” or “only trust data you rigged or falsified yourself”. People should finally wake up to this new world of alternative facts, disruptive and arbitrary decision-making and predictable unpredictability.
Ukraine – Turning Point for the World
Russia’s war against Ukraine and Europe is the defining hard-power conflict of our times and its outcome will largely define the new world order. As tragic und intractable the MidEast conflict is and as far away an indispensable two-state solution seems these days, it doesn’t reach the same dimension for the global economy and capital markets. Russia’s war in Ukraine and ensuing military threats against Europe has in quite some ways approached a world war on a number of levels as Russia is fully backed by China and by much of the Global South – geopolitically and economically. Key to understanding this new autocrat-dominated world is that appeasement policies benefit the attackers and harm the defenders. Trump respects one peer power only and that is China.
The last turn of events is the upcoming summit in Alaska between Trump and Putin. It promises great media coverage for both presidents and their respective domestic audiences delivering more summer doldrums headlines than substance. The best outcome would be a de facto ending of the fighting with an armistice agreement to be secured by European armed forces – very much along the North/South Korea situation. This, however, would only be thinkable with Ukraine and European alliance partners being invited and central element of any US-Russia negotiations. A subsequent political, economic and security integration of Ukraine into Europe would fulfill the aspirations of the Ukrainians while hugely and positively advancing Europe’s strategic autonomy. Germany, followed by the UK, are already the largest industrial investors in Ukraine.
Europe to Unite and Act
Europe is a superpower economically, yet, needs to man-up geopolitically. We live through the age of superpower dominated politics and times of cherry picking and carve-outs for small and medium sized countries are over. It is time to shift from wishful thinking to realpolitik
– better late than never.
EU members, thus, must back away from nationalism and vested interests in key sectors such as defense and finance to overcome fragmentation and to gain efficiency by scaling up. Marion Draghi’s blueprint is there – yet unused.
Trump Liberation Day 2.0 – Crash Course for Allies and Enemies
Deals are deals, not contracts or treaties in Trumps world. Trump pursues escalating unilateral and zigzagging geopolitics and an unprecedented and continued war on trade and with his Liberation Day 2.0. His trade and tariff policies are hugely political and make no economic sense. Just think of some current targets, namely Canada, a target for US territory expansion, Switzerland, being financially rich and politically isolated,
and Brazil, manipulating politics to free Trump’s buddy and former president Bolsonaro. Also, think of Trump picking a fight with India over importing Russian oil – the story keeps evolving. Fact is, however, that US second-round sanctions might weaken India cyclically but strengthen it structurally as it happened with China regarding sanctions on technology.
The only sensible strategy to deal with Trump seems to short-term please him in order to buy time and use that time to get stronger and grow independent from the US – a strategy very much along Deng Xiaoping’s famous post-cold war foreign policy guideline of hiding strength and biding your time. The proverbial elephant in the room, geopolitically speaking, is the current simultaneous and open confrontation between China, Europe, Russia and the US.
Tariffs – Paying More, Getting Less
Fact is that US imposed tariffs are in any case multifold higher than they were since the 1930s and will lead to lower world trade, growth, income, consumption and corporate profits, while further damaging US credibility and leading to rising risk premiums on financial assets.
Trump expects corporates to absorb much of this higher tariffs rather than consumers. In any case lower profits and higher consumer prices are negative for the overall economy and markets. The result, there will be less trade but more expensive trade.
A Growing Europe-China Divide
The trade divide grows between the US and the rest of the world but also between Europe and China. If the US eliminates its deficits with China and Europe, then China and Europa will have to drastically reconsider their relationship. Europe shifting to investment in defense and critical infrastructures and China shifting from manufacturing to domestic consumption.
China’s support of Russia’s war against Ukraine is unacceptable for Europe and so is the enormous trade surplus.
Deficits, Debts and Populist Dreams
The Big Beautiful Bill (BBB) is US’ fiscal trajectory into more deficits and debts. So, it is no surprise that Trump bullies and attempts to fire the FED Chair, with the goal to make the FED a branch of the US Treasury. A financial crisis in the making. In this new age of fiscal populism the future is about highly politicized fiscal choices, while the financial sector gets further deregulated and leveraged.
Capital Markets – Cyclical Tailwinds against Structural Headwinds
In regards to asset allocation the global economic and liquidity environment remains more friendly to equities than to bonds. US equity markets keep hitting new highs led by US technology firms and an expected ai related productivity boom. Cyclical tailwinds for risk assets are easy money, liquidity, low oil prices and a weak US Dollar.
Structural headwinds are Trumps unpredictable policy and actions on tariffs and trade. Increasing protectionism and Trump’s fiscal populism regarding “BBB” with unsustainable fiscal policies lead to a loss of policy credibility and creditworthiness – neutral for bonds at best and negative for currency.
Investment Favorites – European Defense, Industry, Tech and Finance
Regarding asset allocation, global capital flows will regionalize and benefit truly important and independent central banks and their currencies, such as the ECB.
Equities remain the asset class of choice for capital gains and dividends. Focus on defense, industry, tech and finance sectors. Banks on both sides of the Atlantic remain attractive, particularly, European banks supported by higher interest rates, low P/B valuations, operational efficiency gains, growing loan books due to investment boom and M&A consolidation prospects.
Fixed income serves for yield generation in high quality credits and backed by real assets. Gold is a solid for hedging against US Dollar risks. Keep cash for diversification and optionality. And, finally, stay in your geographic region and reference currency, be it in the Americas, Europe and Asia.
Three Favored Books on Geopolitics, Economics and History
I am recommending three excellent and captivating books from true experts on geopolitics, economics and history that provide as much insight as pleasure to read:
“Sicily – Three Thousand Years Of Captivating History” by Sandra Benjamin (American writer and scholar).
“Our Dollar, Your Problem” by Kenneth Rogoff (Harvard)
“ZBIG – The Life of Zbigniew Brzezinski, America’s Cold War Prophet” by Edward Luce (Financial Times)
