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Act two of Hamilton, an award-winning musical that depicts the life of one of America’s founding fathers, features a song entitled “The Room Where It Happens.” This scene focuses on new US economic arrangements, as agreed by Jefferson, Madison and Hamilton himself in 1790.
Fast forward 235, it’s Donald Trump, Peter Navarro, and who else is in the room where it happened? While many people claimed that when the big tariff decision was made, which was announced on April 2, the inability to explain the rationale behind them suggests that they were elsewhere, or that the policy is inexplicable.
Perhaps more interest is the suggestion that some people who were undoubtedly not there were known before the April 9th suspension of “mutual” tariffs and the decision to act on that knowledge. When insiders are actually trading around announcements, that’s certainly a short-term challenge, but it doesn’t really affect long-term stock value.
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Long-term investors can be even more comfortable with the fact that those who benefited from the tariff suspension have been brought by the US bond market. This is a major issue for Trump 2.0 and his tariff ambitions.
The US federal debt is an astounding 36tn, more than 120% of GDP. The tax cuts Trump promised in the election could add 4.5-4.5 tonnes to this, increasing the debt to 137%.
There are claims that tariffs will make a significant profit, but there is a high chance that imports into taxes will be reduced. Right after bond yields fell on April 2nd – usually a sign that investors think a recession is coming. Well, less consumption is certainly one way to reduce the trade deficit.
They have been rising ever since. This does not mean that the fear of the recession has been eased. Rather, it means that the bond market is paying attention to the number of bonds that need to be issued, and we are concerned that this will lead to an extraordinary recession. In short, they want more rewards to stick to our Treasury Department.
I started investing in the early 1980s, but neither of my colleagues saw anything like the day before Trump’s partial climb on April 9th. We’ve seen crises, crashes, and inflation shocks. Sometimes we opposed US economic policies. We’ve never been to until we called it “crazy.”
Maybe Trump will backtrack even more. But even if a wise compromise is found, events in the past few weeks have certainly been permanently damaging, with businesses dealing with the US and having access that American companies have in other parts of the world.
So, how should investors act? Me and others have been warning global index trackers for a while about the risk that your wealth is too much. Decades ago, US stocks fell below half of the global index. Recently, that figure has risen to nearly 70%. This appears to be out of the US share of global GDP and quilters.
US companies are often more profitable than their peers in other countries, but some of the higher margins may be large in the domestic market and may come from easy access to overseas markets. Probably those days are over. It seems wise to reduce US exposure and lean more towards European and Asian stocks.
Some investors may be tempted to buy collapsed US tech stocks at dip. I don’t want to bite an apple. It seems extraordinary to me that this huge company had no substantial plan B to move production outside of China. Nervous investors may look at Nvidia and ask why Taiwanese chipmaker TSMC is not encouraging them to build factories in the US faster. TSMC is about to start production in Arizona, but this will only be created with 5 million chips and will be delayed. The fast chips of Nvidia’s need could cost over $50 billion and come from the next-generation manufacturing plant, which is estimated to open in 2029, but Trump is trying to reduce his contributions.
The tech stock gathering could be challenged by the EU’s response to tariffs. “Bazooka” may include EU sanctions against US companies. Perhaps the EU would suggest that these companies pay some tax.
Is there too much risk? Rather than abandoning it, it makes sense to leave the US and the multinational high-tech companies of superpowers. These will undoubtedly be most affected by a more protectionist world. Instead, you can search for “regional champions” that are less susceptible to tariffs.
One example I’ve had for a while is Wolters Kluwer. It is a Dutch information services company that provides digital access to European case law lawyers, among its services.
Before all the tariff disruptions, we purchased Visa’s European rival, Adien, and Mitsubishi Electric, which manufactures Japan’s defense systems. Both hope to benefit from the changing landscape.
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You might expect reasonable tariff advocates (probably contradictory expressions) to move easily into pharmaceutical companies. Drug manufacturing will take at least five years to move, so simply blaming drug tariffs will add it to the Medicaid bill. I’m currently refraining from drugs.
Finally, let’s go back to the “cockroach” strain we discussed last month. These are resilient businesses that can overcome disasters and stupidity. Telecommunications stocks, reinsurance holdings and UK real estate stocks are well maintained.
Trust and trust were damaged on April 2nd. Protectionism began during Trump 1.0 and was not rewind under Biden. It made a leap under Trump 2.0. However, great companies last much longer than governments, and strong people often become stronger in these crises.
In the next few months, we may see a tough downgrade and a start to recession, but cockroaches and regional champions will overcome it. As mentioned in Hamilton, the key to “laughing in the face of victims and grief” is “passing tomorrow.”
Simon Edelstest is the fund manager for Goschok Asset Management
