I’ve been saying for a while now that I believe we’re on the cusp of a change in “what’s working”. By this, I’ve mostly been referring to a view that the prevailing momentum trades – “AI”, big tech etc – are poised to break whilst the U.S. share market in general is exhibiting all the classic “late-cycle” signs.
It seems reasonable to conclude that a break has now happened. Candidly, the last month of turmoil has been very good for us although this is no time for hubris or victory laps. The initial correction is the easy bit. Picking the subsequent swings is harder. “Fast-moving” markets are thrilling and engaging. Opportunity abounds, but its fleeting.
As veteran commentator Howard Marks of Oaktree Capital has remarked in recent days, things are in a state of flux and it’s impossible to predict where things will go in the next 6 months. Agreed. But with financial history as our guide, we feel we have a reasonable roadmap to work with.
In trying to understand the tariff situation, along with Trump’s economic agenda more broadly, I have been heavily persuaded by two excellent notes by Ben Hunt at Epsilon Theory. Ben is without doubt one of the most insightful finance-guys out there. As an American, his “on the ground” insights are valuable to us.
Both are required reading and – at the time of writing this at least – sitting outside of Epsilon Theory’s paywall for all to access freely.
As a bit of a disclaimer (and with all due respect) properly grasping Ben’s comments requires a fairly good understanding of the global financial system and its evolution. You will appreciate an understanding of the Bretton Woods system, the Nixon shock of 1971, China’s economic evolution since gaining access to the World Trade Organisation in 2001 and so forth…
It’s also important that you set aside any political bias – you need to see things as they are without casting any judgment on whether you think they are “good” or “bad”.
In his first piece from mid-February, Ben tackles what “Trumpism” represents. Here’s Ben (emphasis his):
“For the better part of two centuries (I put the Monroe Doctrine of 1823 as my starting point) the United States has tried – sincerely tried as a common goal and as a prominent semantic signature existing through and across political lines – to be both a Great Power and a Good Power. On the Great Power side, both domestically and internationally, we have always made deals with bad guys who are willing to be ‘our guys’ to secure the oil and the money and the guns that secure our national power. AND on the Good Power side, we have always spent a lot of resources both domestically and internationally on public health, human rights and public security without a greater agenda than to do well by doing good. Being a Great Power and being a Good Power are not mutually exclusive, and it’s never been one or the other in American history. In fact, I think you can make a strong argument that the United States is much more effective in the world as a Great Power when it acts as if it is also a Good Power, and that it accomplishes so much more as a Good Power when it acts as if it is also a Great Power.
Trumpism is an embrace of America as a “Great Power” and a rejection of America as a “Good Power”, in all its forms, both domestic and internationally. More than that, it is an ideological embrace of America as a Great Power, that this is everything America “should” be, and an ideological rejection of America as a Good Power, that this is something America should “never” be.
I don’t think Trumpism is inherently evil. It’s the pursuit of great power for great power’s sake … good and evil have nothing to do with it. But I absolutely think this is a tragedy, because the pursuit of great power for great power’s sake transforms every American policy, both foreign and domestic, into a protection racket of one form or another.
Hey, that’s a nice country/company/career you’ve got there … be a shame if anything happened to it.
This is the essence of what it means to be a Great Power but not a Good Power.”
As many of us have noted for some time now, it is Donald Trump’s intent to run the U.S.A. like a business. We’ve chuckled about this, wondering what this will be like. Well, it’s now becoming clear what this will be like… and it isn’t funny.
Ben’s second piece (published 7th April) tackles the tariff situation but from a viewpoint more insightful than almost every other commentator. He addresses the current “system”, what it means and what Trump seemingly seeks to do. Here’s Ben again:
“This underlying global system has a name. It’s called Pax Americana.
Pax Americana is the Bretton Woods monetary system and the Plaza Accords and the SWIFT banking system and the unquestioned dominance of the USD as the world’s reserve currency.
Pax Americana is the NATO alliance and the Pacific Fleet and CENTCOM and the NSA and the unquestioned dominance of the US military as the world’s security arbiter.
Pax Americana is the American brands, American universities, American entrepreneurialism, and most of all the American stories that have dominated the hearts and minds of everyone on Earth for the past 50 years.
Pax Americana is the ability of the United States to set the rules for every coordination game in the world. The rules of trade, the rules of intellectual property, the rules of money, the rules of culture, the rules of war … all of those rules were made by us. Only by us! And in return we gave the rest of the world two things: global peace (pretty much) enforced by a blue-water navy with force projection capabilities anywhere in the world, and unfettered access (pretty much) to the buying power of the American consumer.
The results of Pax Americana?
The United States has seen more than 300 million citizens lifted into the highest standard of living in the history of the world, as we have exchanged intangible things like services and the full faith and credit of the US government for tangible things like oil and semiconductors and food at an unimaginable scale.
The world has seen more than a billion people lifted out of crushing poverty, mostly in China and India but everywhere else, too, as the capacity to make tangible things has shifted permanently (yes, permanently) from West to East.
My strong, unwavering belief is that Pax Americana is a damn good deal for the United States AND the world, especially as American leadership in AI opens up an entirely new realm of intangible things that the United States can trade for tangible things. Is it a perfect deal for the United States? No. Do other countries free ride on our provision of security and an end-market of the American consumer? Absolutely. Has the system been internally captured by oligarchs and professional politicians, so that the distribution of this great wealth flowing to the United States goes less and less to ‘average’ Americans? 100%. Should we aggressively prune and reform the Pax Americana system? Should we root out its foreign free riders and domestic leeches? Yes, please!
But that’s not what this Administration believes. Neither Donald Trump nor his key advisors believe that Pax Americana is a good deal at all, much less a damn good deal like I believe. They believe the United States is being cheated and taken advantage of without end, both internationally and domestically. They don’t want to fix the Pax Americana regime of coordination through multilateral rule-setting. They want to blow up the entire deal and replace it with an America First regime of competition through bilateral engagement.”
As Ben describes, the current global economic system has evolved since the end of the second world war. Broadly speaking, it is system of (relatively) free trade. A system that has evolved through co-operation and trust. A system that has benefitted (generally-speaking) the entire world. A system that – whilst not perfect – is very stable and sustainable.
Trust and co-operation are key words here. The current system evolved through trust and co-operation.
Trump – America’s elected representative – is intent on breaking all that trust… all the goodwill built up over the past 70 years. He’s intent on turning his back on the world. Instead of co-operating for mutual benefit, he wants America to compete and to win!
It’s often said that trust is hard to gain but easy to lose. And once its lost, it can take a long time to re-gain. It is inevitable we will see a lot of these tariffs negotiated away. But that doesn’t really matter anymore. The “trust” has now been lost. Trump will not be negotiating from a position of co-operation and “good faith”. He will be “playing to win” and his “opponent” will distrust him.
This is profound. The ramifications will take time to truly manifest, but they are profound.
Economically, everyone loses. In the simplest sense, global trade declines, the cost of “stuff” increases. The delicate balance that is the global economy is majorly disrupted. The financial ramifications are potentially profound and unknowable.
Geopolitical ramifications are also profound and unknowable. To illustrate, how about this scenario:
China is one of the U.S.’s biggest trading partners
Trump has picked a major fight with China – a fight he is sure he can win (whatever that means)
China is Australia’s biggest trading partner
What happens when Trump says to Australia “you need to fight China… you need to place tariffs on imports… you need to threaten to withhold your exports to them…”?
Markets Update
Let’s take a step back for a moment…
Last year we were talking about the U.S. economy and stock market enjoying one of the biggest bull runs ever. Typical of later-stage bull markets, we observed that corporate profits were strong and that profit margins were at records. The economy looked good.
One of my main messages over the last year has been to decide what you believe – do you still believe in economic and market cycles, or do you believe we’re in a new world where there are no longer cycles… just endless growth.
In terms of valuations, we have been observing that reliable long-term models have valuations reached levels never seen before. We have been saying that poor long-term returns are a given.
As evidence, I’ll share Hussman Strategic Advisers model (current as at 3rd April) – a model I’ve frequently referenced whilst noting that it is widely-regarded by many savvy investors:
In order for valuations to deflate back towards “average”, a fall of around 65% is needed – from here (S&P 500 currently around 4,900). To emphasise what Hussman also emphasises, that’s not a prediction – it’s merely an observation.
How about we look at things from a much simpler perspective. Now, of course, stocks are not a claim on just one year’s worth of earnings and should never be valued as such, but just for fun let’s think about it in that way for a moment – the way in which most market participants do.
Say that a recession results in S&P 500 earnings falling back to around $220. And say the market then applies a fairly historically-average “P/E” of 16 times to those earnings. That implies an S&P 500 price level of… [bashes on calculator]… 3,520. Right, okay…
Economic Update
In terms of the U.S. economy, many objective, data-driven analysts have noted for a while that their economy has been on the brink of recession. It has been exhibiting classic late-cycle symptoms such as strong employment, inflation and growth beyond estimated sustainable full employment potential.
Recent data has many objective analysts warning that a recession appears quite probable in the near-future. Not because of Trump per se – the data was headed in that direction anyway, however, Trump’s actions clearly have potential to exacerbate the weakness.
One aspect that’s been discussed quite a bit over the past 2 years is that the lower-income segment of the U.S. economy has been smashed by inflation and is largely in recession already. The economy has been propped up by the high-income end of town – many businesses have been openly and deliberately targeting the wealthy.
In this respect, it is worth pondering the “wealth effect”. Wealthy Americans have been feeling wealthy owing to the gains enjoyed on their assets – stocks and (to a lesser extent) houses.
It works in reverse too… As asset prices deflate, the wealthy feel less wealthy. They reign in their spending. If they have indeed been the key marginal driver of economic activity in the economy, a stock market spill will be bad for the economy.
With all of this in mind, I suggest that Trump 2.0 is happening at a very in-opportune time.
Although the economic impact would still be bad, it would be much better if we had to deal with this at a time where markets were “reasonably-valued”. Instead, we need to deal with this at a time when markets are at some of the highest valuations ever recorded.
In terms of “where to from here”, expect market turmoil to persist for some time. There will be some fierce rallies from oversold states. Some positive headlines about “tariff concessions” and probably even interest rate cuts although meaningful interest rate cuts will first require bad economic data so be careful what you wish for.
The data will be the ultimate arbiter. If the economy enters recession, look for corporate earnings to come down – that’s what happens in recessions. In that scenario, we would think that the market could well deflate back towards some form of “long-term average” – refer to the above valuation discussion for what this means. Evidently, this will play out over many months – suffice to say we do not see the recent selloff as a buying opportunity beyond perhaps a tactical trading opportunity.
I’ve long quoted Aviator’s unofficial motto as trying to make sensible financial decisions based on a deep understanding of financial market operations and financial history. We feel we have the know-how to successfully navigate this environment. We’re not just looking to survive – we think we have the tools and mindset to thrive. However, more than usual, a dose of luck is always greatly appreciated.
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.
Trump 2.0 – this time he means it (maybe)
I’ve been saying for a while now that I believe we’re on the cusp of a change in “what’s working”. By this, I’ve mostly been referring to a view that the prevailing momentum trades – “AI”, big tech etc – are poised to break whilst the U.S. share market in general is exhibiting all the classic “late-cycle” signs.
It seems reasonable to conclude that a break has now happened. Candidly, the last month of turmoil has been very good for us although this is no time for hubris or victory laps. The initial correction is the easy bit. Picking the subsequent swings is harder. “Fast-moving” markets are thrilling and engaging. Opportunity abounds, but its fleeting.
As veteran commentator Howard Marks of Oaktree Capital has remarked in recent days, things are in a state of flux and it’s impossible to predict where things will go in the next 6 months. Agreed. But with financial history as our guide, we feel we have a reasonable roadmap to work with.
In trying to understand the tariff situation, along with Trump’s economic agenda more broadly, I have been heavily persuaded by two excellent notes by Ben Hunt at Epsilon Theory. Ben is without doubt one of the most insightful finance-guys out there. As an American, his “on the ground” insights are valuable to us.
Both are required reading and – at the time of writing this at least – sitting outside of Epsilon Theory’s paywall for all to access freely.
As a bit of a disclaimer (and with all due respect) properly grasping Ben’s comments requires a fairly good understanding of the global financial system and its evolution. You will appreciate an understanding of the Bretton Woods system, the Nixon shock of 1971, China’s economic evolution since gaining access to the World Trade Organisation in 2001 and so forth…
It’s also important that you set aside any political bias – you need to see things as they are without casting any judgment on whether you think they are “good” or “bad”.
In his first piece from mid-February, Ben tackles what “Trumpism” represents. Here’s Ben (emphasis his):
“For the better part of two centuries (I put the Monroe Doctrine of 1823 as my starting point) the United States has tried – sincerely tried as a common goal and as a prominent semantic signature existing through and across political lines – to be both a Great Power and a Good Power. On the Great Power side, both domestically and internationally, we have always made deals with bad guys who are willing to be ‘our guys’ to secure the oil and the money and the guns that secure our national power. AND on the Good Power side, we have always spent a lot of resources both domestically and internationally on public health, human rights and public security without a greater agenda than to do well by doing good. Being a Great Power and being a Good Power are not mutually exclusive, and it’s never been one or the other in American history. In fact, I think you can make a strong argument that the United States is much more effective in the world as a Great Power when it acts as if it is also a Good Power, and that it accomplishes so much more as a Good Power when it acts as if it is also a Great Power.
Trumpism is an embrace of America as a “Great Power” and a rejection of America as a “Good Power”, in all its forms, both domestic and internationally. More than that, it is an ideological embrace of America as a Great Power, that this is everything America “should” be, and an ideological rejection of America as a Good Power, that this is something America should “never” be.
I don’t think Trumpism is inherently evil. It’s the pursuit of great power for great power’s sake … good and evil have nothing to do with it. But I absolutely think this is a tragedy, because the pursuit of great power for great power’s sake transforms every American policy, both foreign and domestic, into a protection racket of one form or another.
Hey, that’s a nice country/company/career you’ve got there … be a shame if anything happened to it.
This is the essence of what it means to be a Great Power but not a Good Power.”
As many of us have noted for some time now, it is Donald Trump’s intent to run the U.S.A. like a business. We’ve chuckled about this, wondering what this will be like. Well, it’s now becoming clear what this will be like… and it isn’t funny.
Ben’s second piece (published 7th April) tackles the tariff situation but from a viewpoint more insightful than almost every other commentator. He addresses the current “system”, what it means and what Trump seemingly seeks to do. Here’s Ben again:
“This underlying global system has a name. It’s called Pax Americana.
The results of Pax Americana?
My strong, unwavering belief is that Pax Americana is a damn good deal for the United States AND the world, especially as American leadership in AI opens up an entirely new realm of intangible things that the United States can trade for tangible things. Is it a perfect deal for the United States? No. Do other countries free ride on our provision of security and an end-market of the American consumer? Absolutely. Has the system been internally captured by oligarchs and professional politicians, so that the distribution of this great wealth flowing to the United States goes less and less to ‘average’ Americans? 100%. Should we aggressively prune and reform the Pax Americana system? Should we root out its foreign free riders and domestic leeches? Yes, please!
But that’s not what this Administration believes. Neither Donald Trump nor his key advisors believe that Pax Americana is a good deal at all, much less a damn good deal like I believe. They believe the United States is being cheated and taken advantage of without end, both internationally and domestically. They don’t want to fix the Pax Americana regime of coordination through multilateral rule-setting. They want to blow up the entire deal and replace it with an America First regime of competition through bilateral engagement.”
As Ben describes, the current global economic system has evolved since the end of the second world war. Broadly speaking, it is system of (relatively) free trade. A system that has evolved through co-operation and trust. A system that has benefitted (generally-speaking) the entire world. A system that – whilst not perfect – is very stable and sustainable.
Trust and co-operation are key words here. The current system evolved through trust and co-operation.
Trump – America’s elected representative – is intent on breaking all that trust… all the goodwill built up over the past 70 years. He’s intent on turning his back on the world. Instead of co-operating for mutual benefit, he wants America to compete and to win!
It’s often said that trust is hard to gain but easy to lose. And once its lost, it can take a long time to re-gain. It is inevitable we will see a lot of these tariffs negotiated away. But that doesn’t really matter anymore. The “trust” has now been lost. Trump will not be negotiating from a position of co-operation and “good faith”. He will be “playing to win” and his “opponent” will distrust him.
This is profound. The ramifications will take time to truly manifest, but they are profound.
Economically, everyone loses. In the simplest sense, global trade declines, the cost of “stuff” increases. The delicate balance that is the global economy is majorly disrupted. The financial ramifications are potentially profound and unknowable.
Geopolitical ramifications are also profound and unknowable. To illustrate, how about this scenario:
China is one of the U.S.’s biggest trading partners
Trump has picked a major fight with China – a fight he is sure he can win (whatever that means)
China is Australia’s biggest trading partner
What happens when Trump says to Australia “you need to fight China… you need to place tariffs on imports… you need to threaten to withhold your exports to them…”?
Markets Update
Let’s take a step back for a moment…
Last year we were talking about the U.S. economy and stock market enjoying one of the biggest bull runs ever. Typical of later-stage bull markets, we observed that corporate profits were strong and that profit margins were at records. The economy looked good.
One of my main messages over the last year has been to decide what you believe – do you still believe in economic and market cycles, or do you believe we’re in a new world where there are no longer cycles… just endless growth.
In terms of valuations, we have been observing that reliable long-term models have valuations reached levels never seen before. We have been saying that poor long-term returns are a given.
As evidence, I’ll share Hussman Strategic Advisers model (current as at 3rd April) – a model I’ve frequently referenced whilst noting that it is widely-regarded by many savvy investors:
In order for valuations to deflate back towards “average”, a fall of around 65% is needed – from here (S&P 500 currently around 4,900). To emphasise what Hussman also emphasises, that’s not a prediction – it’s merely an observation.
How about we look at things from a much simpler perspective. Now, of course, stocks are not a claim on just one year’s worth of earnings and should never be valued as such, but just for fun let’s think about it in that way for a moment – the way in which most market participants do.
Say that a recession results in S&P 500 earnings falling back to around $220. And say the market then applies a fairly historically-average “P/E” of 16 times to those earnings. That implies an S&P 500 price level of… [bashes on calculator]… 3,520. Right, okay…
Economic Update
In terms of the U.S. economy, many objective, data-driven analysts have noted for a while that their economy has been on the brink of recession. It has been exhibiting classic late-cycle symptoms such as strong employment, inflation and growth beyond estimated sustainable full employment potential.
Recent data has many objective analysts warning that a recession appears quite probable in the near-future. Not because of Trump per se – the data was headed in that direction anyway, however, Trump’s actions clearly have potential to exacerbate the weakness.
One aspect that’s been discussed quite a bit over the past 2 years is that the lower-income segment of the U.S. economy has been smashed by inflation and is largely in recession already. The economy has been propped up by the high-income end of town – many businesses have been openly and deliberately targeting the wealthy.
In this respect, it is worth pondering the “wealth effect”. Wealthy Americans have been feeling wealthy owing to the gains enjoyed on their assets – stocks and (to a lesser extent) houses.
It works in reverse too… As asset prices deflate, the wealthy feel less wealthy. They reign in their spending. If they have indeed been the key marginal driver of economic activity in the economy, a stock market spill will be bad for the economy.
With all of this in mind, I suggest that Trump 2.0 is happening at a very in-opportune time.
Although the economic impact would still be bad, it would be much better if we had to deal with this at a time where markets were “reasonably-valued”. Instead, we need to deal with this at a time when markets are at some of the highest valuations ever recorded.
In terms of “where to from here”, expect market turmoil to persist for some time. There will be some fierce rallies from oversold states. Some positive headlines about “tariff concessions” and probably even interest rate cuts although meaningful interest rate cuts will first require bad economic data so be careful what you wish for.
The data will be the ultimate arbiter. If the economy enters recession, look for corporate earnings to come down – that’s what happens in recessions. In that scenario, we would think that the market could well deflate back towards some form of “long-term average” – refer to the above valuation discussion for what this means. Evidently, this will play out over many months – suffice to say we do not see the recent selloff as a buying opportunity beyond perhaps a tactical trading opportunity.
I’ve long quoted Aviator’s unofficial motto as trying to make sensible financial decisions based on a deep understanding of financial market operations and financial history. We feel we have the know-how to successfully navigate this environment. We’re not just looking to survive – we think we have the tools and mindset to thrive. However, more than usual, a dose of luck is always greatly appreciated.
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.