Animal Spirits Rule Today – Fundamentals Decide Tomorrow

Article from Beat Wittmann, Chief Investment Strategist @ Key Family Partners



Trump, Putin, and Ukraine: Fantasies Versus Facts

The Trump–Putin summit in Alaska resulted in a clear victory for Russia. Putin received public respect and even camaraderie from Trump, with no additional sanctions imposed on Russia—and he did not have to deliver anything in return. Crucially, Putin played for time and gained precious breathing space to continue Russia’s destructive military campaign against Ukraine without interruption. Russia simply does what it declares: relentless attacks aimed at enforcing its maximalist objective to occupy and neutralize Ukraine.

Under current circumstances, the only achievable objective for Ukraine and its European allies may be a frozen conflict—similar to the armistice between North Korea and South Korea—without any legal recognition of occupied territory. In such a context, ironclad security guarantees for Ukraine are needed. That can only be provided by European troops on the ground and a no-fly zone enforced by a Western alliance.

Unfortunately, a Putin signature on any treaty and Trump’s interpretation of NATO’s Article 5 on mutual defense are both untrustworthy and worthless. Europe—and German Chancellor Merz in particular—would do well to heed his own words from his election victory night on February 23, 2025: “absolute priority will be to strengthen Europe as quickly as possible so that, step by step, we can really achieve independence from the US.”

Germany and Europe have the resources and skills to live up to these words, but in order for Europe to punch at its true geopolitical weight, far more political will to unify and financial capital to invest will be required.

China Pushing a New World Order

This week will be geopolitically dominated by China, with President Xi hosting high-profile meetings with India’s Modi and Russia’s Putin, alongside a military parade in Beijing showcasing advanced weaponry to mark the 80th anniversary of the end of the Sino-Japanese War and World War II.

The rapprochement between China and India is a direct consequence of Trump’s erratic and disruptive policy actions. Furthermore, Beijing will host a two-day summit of the Shanghai Cooperation Organization (backed by China and Russia), bringing together leaders from across Asia and selected European states.

China is positioning itself as the leader of a new world order—an alternative to the post-WWII Pax Americana. Ironically, the biggest facilitator of this shift is the US President himself. Through appeasement toward Moscow and Beijing, a chaotic “war” on global trade and tariffs, hostility toward alliance partners, and the hollowing out of US institutions and rule of law, Trump is undermining the very foundations of America’s global success.

The result will likely be further progress toward global regionalization around three superpowers: the US, the EU, and China—politically, economically, technologically, and financially. Capital flows and currencies will reflect an accelerating home-bias, fueling the ongoing trend of de-dollarization.

US Economic Slowdown and the Monetary Easing Cycle

This summer’s top economic debates have centered on Trump’s attacks on the Federal Reserve and its independence, as well as the annual Jackson Hole meeting of global central bankers. Fed Chair Powell managed to deliver a speech in Jackson Hole that carefully balanced the Fed’s dual mandate of ensuring full employment and price stability while defending the institution’s independence.

Recent US economic data suggests downside risks to the labor market and upside risks to inflation. In this environment of stagflationary pressures, expect Trump and his team to escalate attacks on the Fed—both cyclically to obtain lower interest rates and structurally to bend the institution to the will of the White House and the Treasury.

Despite these negative developments, financial markets remain resilient, as the Fed has plenty of room to lower rates. This monetary easing cycle has only just begun, providing ample liquidity to support risk asset prices while fueling AI-driven investment booms and speculative bubbles in cryptocurrencies.

Why US Assets May Face a Historic Repricing

The key question is when capital markets will revolt against the risks of de-anchored inflation expectations, fiscal populism, and eventual financial repression. The main indicators to watch are the 30-year bond yield and any further Trump efforts to undermine the Fed’s independence or that of other economic institutions.

We expect sharp escalation in US domestic political confrontations as the economy weakens in late 2025 and 2026. The Trump administration is likely to double down in the face of growing resistance, particularly with the 2025 Presidential Transition Project (Heritage Foundation) seeking to consolidate executive power in favor of ultra-nationalist MAGA policies.

The investment implications are clear: declining trust in the integrity and quality of US institutions will drive ongoing capital repatriation by foreign investors, erode the value of the US dollar, and ultimately raise refinancing costs for America’s record-high and growing federal debt.

Liquidity Over Fundamentals – A Bubble in the Making

Global equity markets, led by record-high US valuations, continue to surge. It is clear that cheap money and abundant liquidity are overpowering corporate fundamentals. The current decoupling of financial markets from underlying economic and corporate realities is largely driven by the AI-investment boom and cryptocurrency speculation.

As Charles Kindleberger outlined in Manias, Panics, and Crashes, markets driven by animal spirits tend to overshoot in up-cycles and undershoot in down-cycles. Entering the traditionally volatile September–October period after US Labor Day, a more defensive investment stance is warranted.

Bull markets typically end with central bank tightening or major financial accidents triggering economic downturns. We do not see an imminent bubble burst yet, as a weakening US economy will likely be met with further monetary easing, tax cuts, and deregulation. This could extend the bull market for some time.

Still, capital markets rarely adjust smoothly to shifts in geopolitics, economic transformation, or business cycles. Historically, risk asset prices only adjust decisively after massive external shocks or liquidity disruptions.

Focus on European Equities – Defense, Industry, Infrastructure, and Finance

Equities remain the asset class of choice in the current geopolitical and economic environment. The dominant investment theme for years to come will be regional home-bias, with Europe, the Americas, and Asia each prioritizing their own markets.

Within our preferred region, Europe, we recommend focusing on defense, industry, infrastructure, and finance—sectors supported by attractive valuations, stronger fundamentals, and large-scale investment programs.