Another month of 2025 has rolled by. My first draft of this comment had me stating “seemingly, not much has happened in the world of economics and capital markets.”
Of course, now some meaningful things have happened. The U.S. and China have reached a trade deal… of sorts. And now President Trump seems to have turned his attention to escalating the fight with Europe.
Digressing for a moment, I think we all know by now that we need to get used to this sort of environment – things are shifting around quickly as the Trump administration barge around in their chaotic political style. Hardly an environment conducive to investor confidence and risk-taking, or at least one would presume that to be the case anyway.
Unless we’ve missed some important details, the “deal” with China seems confined to a mutual agreement to reduce tariffs for a period of 90 days. The U.S. will reduce their tariff rate to 30% on Chinese imports and China are reducing their tariff to 10% on U.S. imports.
Share markets have rejoiced on the news, although most of the recent gains occurred before the deal was announced. The “deal” is undoubtedly a positive development. The 145% tariffs imposed by Trump on China stood to have a profound impact.
It’s amusing listening to people debate who “won” this battle. Did the U.S. cave in, heeding the warnings the Trump administration was rumoured to have received from major retailer CEOs about upcoming empty shelves and economic carnage? Or did China cave in, worried about a wave of layoffs throughout their manufacturing sector?
It really doesn’t matter. What matters is two things:
Firstly, realise that this “deal” does very little in terms of achieving the Trump administration’s goals.
Secondly, note that with the significantly reduced tariff on China, the average global tariff now placed on U.S. imports is somewhere around 15% – up from barely 2% last year. What’s the economic impact of this?
We’ve spent plenty of time over the past month thinking, reading and reflecting. As has been the case, things remain in a state of flux. This aside, we think we have a decent sense of the big picture – or at least our perception of the big picture.
The Road to Here
Our last comment focused on the evolution of the current global economic system along with the profound changes the Trump administration seeks to make to it. It goes something like this:
The current global economic status quo has evolved since the end of the second world war.
With Europe ravaged by war, the U.S. emerged as the global superpower and this allowed it to shape the new world order.
And with Europe’s manufacturing base decimated, the post-WW-II decades saw the U.S. emerge as the global manufacturing powerhouse. This period is remembered fondly by many older Americans.
Of course, America wasn’t the “only” global powerhouse. The Russians were also in the picture. The “Cold War” period was a major influence on U.S. foreign policy – they desired to protect themselves (and to a lesser extent the world) from Communism and sought to promote and protect the virtues of democracy, capitalism and free trade throughout the world.
America set the rules. Whilst outcomes were achieved through collaboration, negotiation and (most importantly) trust., America always had the greatest influence in the outcomes.
As Europe recovered from the war and as former enemies re-invented themselves (Japan), the global economy shifted. For a range of reasons (not least being protectionist trade policies), manufacturing shifted to low-cost centres.
This provided America the ability to consume more than ever before. Lower cost imports exerted a powerful deflationary force on western nations – allowing us to buy more and increase our standard of living.
A significant trade deficit has become a “structural” feature of the U.S. (and by extension the global) economy. Here’s a snapshot of the U.S. trade balance going back to 1970:
Of course, despite a reduction in manufacturing, America hasn’t exactly suffered throughout this. The U.S. (in fact most western nations) transitioned increasingly to a “services-based” economy.
The current economic status quo has been a great outcome for the world. It has seen hundreds of millions of people lifted out of crushing poverty in nations such as China and India whilst western nations are enjoying the highest standard of living ever.
With the explosion of the services sector, the U.S. (and Australia) has nearly full employment. It has been a time of prosperity for anyone in those high-end services jobs – the lawyers, accountants, financial advisers, engineers, real estate agents, consultants, IT professionals…
Yet increasingly, there’s a view that the economy isn’t “working” for everyone. That’s true. The global economic status quo isn’t perfect. It has increasingly been seized by a bunch of politicians and rich businesspeople that are capturing the lion’s share of the wealth being generated.
Donald Trump has tapped into the despondency being felt by many ordinary Americans – this got him elected as President (twice!).
He doesn’t believe the current economic status quo is a great deal for America. To the contrary, he feels that America is being ripped off and taken advantage of. He seeks to radically change the game.
You are here
So, what exactly does Trump want to achieve? Well, in the simplest sense he aspires to lower the trade deficit, boost American manufacturing and put an end to nations leeching off American generosity in the form of aid and defence.
They certainly are reasonable objectives. Incredibly ambitious objectives. But reasonable.
But how exactly does he plan to achieve those ambitious goals?
Well, his Treasury Secretary Scott Bessent along with economic advisor Stephen Miran have offered up plenty of details as to how they might go about achieving these goals.
Essentially, they have talked about using tariffs to gain negotiating leverage to bring other nations to the table. They have floated the idea of a grand deal, comparable to the Plaza Accord of 1985. The accord would involve actions intended to specifically weaken the dollar thus making imports more expensive and far less attractive whilst simultaneously making U.S. exports more attractive, thus boosting U.S. manufacturing.
They have also floated the idea of insisting that nations swap out their U.S. bond holdings for longer-duration bonds. In return, the U.S. agrees to continue to provide the military defence protection it has traditionally provided.
Trump’s actions over the past few months certainly reflect this general plan.
The big test
Trump doesn’t like deficits. There are a few other things he doesn’t like – notably, public servants and Democrats.
In addition to fixing the trade deficit, Trump is keen to eliminate as many government (and government-funded) employees as possible.
If you are a government employee, or work at a government funded university, if you work for a non-profit, or a government-funded research institute, or are a government consultant/contractor, you are currently very concerned about losing your job and income.
From an economic standpoint, Trump’s trade goals stand to have a major impact. A lowering of the dollar will likely make imports more expensive – that’s inflationary. A reduction in imports, if not immediately met with an increase in domestic production, means lower economic activity.
In terms of the methods being pursued (tariffs), those are inflationary. They are also very disruptive – making it very difficult for businesses to make decisions.
Their economy faces a big test – can it shake off all this without a hiccup?
In our opinion…
In our view, the U.S. stock market was unattractive even before any of this tariff stuff started.
My sense is that the U.S. economy was already weakening– impacted by reduced consumption from those affected (or possibly affected) by Trump’s domestic policy goals.
Trump’s trade war is contributing to a slowdown. There’s increasing “soft data” supporting this – layoff announcements, declining home sales, rising loan delinquencies and much more…
Trump isn’t likely to back off. He wants to achieve big things and is fine to risk causing major damage in that pursuit.
I believe economic growth will not meet consensus expectations over the next year or more.
Corporate earnings expectations are high – too high in our view and will likely disappoint.
On top of that, valuations are extreme.
We are in an environment where the risk of unexpected (negative) events is higher than normal – the market “should” be demanding a higher risk premium that is in no way being reflected in current share prices.
Inflation will probably prove stickier than hoped. Somebody needs to pay for the tariffs – if companies pass it on this will help ensure inflation remains sticky. If businesses absorb them, this will significantly impact corporate earnings.
Given this, we expect the Fed to stay on-hold with regards to interest rates – only meaningfully cutting if the economy takes an appreciable spill.
Trump is broadcasting to the world that he seeks to devalue the U.S. dollar. The prospect of him actually succeeding should concern any non-U.S. resident invested in the U.S. as the devaluation will be a loss on their holdings. Global holdings of U.S. stocks are at record highs and selling pressure should be a constant as international investors repatriate funds to appreciating currencies.
It’s going to be another interesting 12 months. Will markets pass their big test?
This document contains information which is the copyright of Aviator Capital Pty Ltd (AFSL 432803) or relevant third party. Any views expressed in this transmission are those of the individual, except where the individual specifically states them to be the views of Aviator Capital Pty Ltd. Except as required by law, Aviator Capital Pty Ltd does not represent, warrant and/or guarantee that the integrity of this document has been maintained nor is free of errors, interception or interference. You should not copy, disclose or distribute this document without the authority of Aviator Capital Pty Ltd. Aviator Capital Pty Ltd does not accept any liability for any investment decisions made on the basis of this information. This information is intended to provide general information only, without taking into account any particular person’s objectives, financial situation, taxation or needs. It does not constitute financial advice and should not be taken as such. Aviator Capital Pty Ltd urges you to obtain professional advice before proceeding with any financial investment.
This document contains information which is the copyright of Aviator Capital Pty Ltd (AFSL 432803) or relevant third party. Any views expressed in this transmission are those of the individual, except where the individual specifically states them to be the views of Aviator Capital Pty Ltd. Except as required by law, Aviator Capital Pty Ltd does not represent, warrant and/or guarantee that the integrity of this document has been maintained nor is free of errors, interception or interference. You should not copy, disclose or distribute this document without the authority of Aviator Capital Pty Ltd. Aviator Capital Pty Ltd does not accept any liability for any investment decisions made on the basis of this information. This information is intended to provide general information only, without taking into account any particular person’s objectives, financial situation, taxation or needs. It does not constitute financial advice and should not be taken as such. Aviator Capital Pty Ltd urges you to obtain professional advice before proceeding with any financial investment.
Register your interest in this Fund
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.
The BIG Test
Another month of 2025 has rolled by. My first draft of this comment had me stating “seemingly, not much has happened in the world of economics and capital markets.”
Of course, now some meaningful things have happened. The U.S. and China have reached a trade deal… of sorts. And now President Trump seems to have turned his attention to escalating the fight with Europe.
Digressing for a moment, I think we all know by now that we need to get used to this sort of environment – things are shifting around quickly as the Trump administration barge around in their chaotic political style. Hardly an environment conducive to investor confidence and risk-taking, or at least one would presume that to be the case anyway.
Unless we’ve missed some important details, the “deal” with China seems confined to a mutual agreement to reduce tariffs for a period of 90 days. The U.S. will reduce their tariff rate to 30% on Chinese imports and China are reducing their tariff to 10% on U.S. imports.
Share markets have rejoiced on the news, although most of the recent gains occurred before the deal was announced. The “deal” is undoubtedly a positive development. The 145% tariffs imposed by Trump on China stood to have a profound impact.
It’s amusing listening to people debate who “won” this battle. Did the U.S. cave in, heeding the warnings the Trump administration was rumoured to have received from major retailer CEOs about upcoming empty shelves and economic carnage? Or did China cave in, worried about a wave of layoffs throughout their manufacturing sector?
It really doesn’t matter. What matters is two things:
Firstly, realise that this “deal” does very little in terms of achieving the Trump administration’s goals.
Secondly, note that with the significantly reduced tariff on China, the average global tariff now placed on U.S. imports is somewhere around 15% – up from barely 2% last year. What’s the economic impact of this?
We’ve spent plenty of time over the past month thinking, reading and reflecting. As has been the case, things remain in a state of flux. This aside, we think we have a decent sense of the big picture – or at least our perception of the big picture.
The Road to Here
Our last comment focused on the evolution of the current global economic system along with the profound changes the Trump administration seeks to make to it. It goes something like this:
The current global economic status quo has evolved since the end of the second world war.
With Europe ravaged by war, the U.S. emerged as the global superpower and this allowed it to shape the new world order.
And with Europe’s manufacturing base decimated, the post-WW-II decades saw the U.S. emerge as the global manufacturing powerhouse. This period is remembered fondly by many older Americans.
Of course, America wasn’t the “only” global powerhouse. The Russians were also in the picture. The “Cold War” period was a major influence on U.S. foreign policy – they desired to protect themselves (and to a lesser extent the world) from Communism and sought to promote and protect the virtues of democracy, capitalism and free trade throughout the world.
America set the rules. Whilst outcomes were achieved through collaboration, negotiation and (most importantly) trust., America always had the greatest influence in the outcomes.
As Europe recovered from the war and as former enemies re-invented themselves (Japan), the global economy shifted. For a range of reasons (not least being protectionist trade policies), manufacturing shifted to low-cost centres.
This provided America the ability to consume more than ever before. Lower cost imports exerted a powerful deflationary force on western nations – allowing us to buy more and increase our standard of living.
A significant trade deficit has become a “structural” feature of the U.S. (and by extension the global) economy. Here’s a snapshot of the U.S. trade balance going back to 1970:
Of course, despite a reduction in manufacturing, America hasn’t exactly suffered throughout this. The U.S. (in fact most western nations) transitioned increasingly to a “services-based” economy.
The current economic status quo has been a great outcome for the world. It has seen hundreds of millions of people lifted out of crushing poverty in nations such as China and India whilst western nations are enjoying the highest standard of living ever.
With the explosion of the services sector, the U.S. (and Australia) has nearly full employment. It has been a time of prosperity for anyone in those high-end services jobs – the lawyers, accountants, financial advisers, engineers, real estate agents, consultants, IT professionals…
Yet increasingly, there’s a view that the economy isn’t “working” for everyone. That’s true. The global economic status quo isn’t perfect. It has increasingly been seized by a bunch of politicians and rich businesspeople that are capturing the lion’s share of the wealth being generated.
Donald Trump has tapped into the despondency being felt by many ordinary Americans – this got him elected as President (twice!).
He doesn’t believe the current economic status quo is a great deal for America. To the contrary, he feels that America is being ripped off and taken advantage of. He seeks to radically change the game.
You are here
So, what exactly does Trump want to achieve? Well, in the simplest sense he aspires to lower the trade deficit, boost American manufacturing and put an end to nations leeching off American generosity in the form of aid and defence.
They certainly are reasonable objectives. Incredibly ambitious objectives. But reasonable.
But how exactly does he plan to achieve those ambitious goals?
Well, his Treasury Secretary Scott Bessent along with economic advisor Stephen Miran have offered up plenty of details as to how they might go about achieving these goals.
Essentially, they have talked about using tariffs to gain negotiating leverage to bring other nations to the table. They have floated the idea of a grand deal, comparable to the Plaza Accord of 1985. The accord would involve actions intended to specifically weaken the dollar thus making imports more expensive and far less attractive whilst simultaneously making U.S. exports more attractive, thus boosting U.S. manufacturing.
They have also floated the idea of insisting that nations swap out their U.S. bond holdings for longer-duration bonds. In return, the U.S. agrees to continue to provide the military defence protection it has traditionally provided.
Trump’s actions over the past few months certainly reflect this general plan.
The big test
Trump doesn’t like deficits. There are a few other things he doesn’t like – notably, public servants and Democrats.
In addition to fixing the trade deficit, Trump is keen to eliminate as many government (and government-funded) employees as possible.
If you are a government employee, or work at a government funded university, if you work for a non-profit, or a government-funded research institute, or are a government consultant/contractor, you are currently very concerned about losing your job and income.
From an economic standpoint, Trump’s trade goals stand to have a major impact. A lowering of the dollar will likely make imports more expensive – that’s inflationary. A reduction in imports, if not immediately met with an increase in domestic production, means lower economic activity.
In terms of the methods being pursued (tariffs), those are inflationary. They are also very disruptive – making it very difficult for businesses to make decisions.
Their economy faces a big test – can it shake off all this without a hiccup?
In our opinion…
In our view, the U.S. stock market was unattractive even before any of this tariff stuff started.
My sense is that the U.S. economy was already weakening– impacted by reduced consumption from those affected (or possibly affected) by Trump’s domestic policy goals.
Trump’s trade war is contributing to a slowdown. There’s increasing “soft data” supporting this – layoff announcements, declining home sales, rising loan delinquencies and much more…
Trump isn’t likely to back off. He wants to achieve big things and is fine to risk causing major damage in that pursuit.
I believe economic growth will not meet consensus expectations over the next year or more.
Corporate earnings expectations are high – too high in our view and will likely disappoint.
On top of that, valuations are extreme.
We are in an environment where the risk of unexpected (negative) events is higher than normal – the market “should” be demanding a higher risk premium that is in no way being reflected in current share prices.
Inflation will probably prove stickier than hoped. Somebody needs to pay for the tariffs – if companies pass it on this will help ensure inflation remains sticky. If businesses absorb them, this will significantly impact corporate earnings.
Given this, we expect the Fed to stay on-hold with regards to interest rates – only meaningfully cutting if the economy takes an appreciable spill.
Trump is broadcasting to the world that he seeks to devalue the U.S. dollar. The prospect of him actually succeeding should concern any non-U.S. resident invested in the U.S. as the devaluation will be a loss on their holdings. Global holdings of U.S. stocks are at record highs and selling pressure should be a constant as international investors repatriate funds to appreciating currencies.
It’s going to be another interesting 12 months. Will markets pass their big test?
This document contains information which is the copyright of Aviator Capital Pty Ltd (AFSL 432803) or relevant third party. Any views expressed in this transmission are those of the individual, except where the individual specifically states them to be the views of Aviator Capital Pty Ltd. Except as required by law, Aviator Capital Pty Ltd does not represent, warrant and/or guarantee that the integrity of this document has been maintained nor is free of errors, interception or interference. You should not copy, disclose or distribute this document without the authority of Aviator Capital Pty Ltd. Aviator Capital Pty Ltd does not accept any liability for any investment decisions made on the basis of this information. This information is intended to provide general information only, without taking into account any particular person’s objectives, financial situation, taxation or needs. It does not constitute financial advice and should not be taken as such. Aviator Capital Pty Ltd urges you to obtain professional advice before proceeding with any financial investment.
This document contains information which is the copyright of Aviator Capital Pty Ltd (AFSL 432803) or relevant third party. Any views expressed in this transmission are those of the individual, except where the individual specifically states them to be the views of Aviator Capital Pty Ltd. Except as required by law, Aviator Capital Pty Ltd does not represent, warrant and/or guarantee that the integrity of this document has been maintained nor is free of errors, interception or interference. You should not copy, disclose or distribute this document without the authority of Aviator Capital Pty Ltd. Aviator Capital Pty Ltd does not accept any liability for any investment decisions made on the basis of this information. This information is intended to provide general information only, without taking into account any particular person’s objectives, financial situation, taxation or needs. It does not constitute financial advice and should not be taken as such. Aviator Capital Pty Ltd urges you to obtain professional advice before proceeding with any financial investment.
Register your interest in this Fund
Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.