Observations by David Robertson, 3/28/25

Political news still dominates so that’s what I’ll stick with for now. Let’s take a look at what’s going on this week.

As always, if you want to follow up on anything in more detail, just let me know at drobertson@areteam.com.

Market observations

Once again, news over the weekend set the tone for the beginning of the week. Morose markets were enlivened by suggestions that tariffs levied on April 2 would be more targeted than initially expected. Stocks shot up almost 2% on the news on Monday.

The biggest gainers in the rebound were Mag 7 stocks. The Daily Shot shows their performance:

Still, markets are mostly in a “wait and see” mode until “Liberation Day” arrives. Everyone is waiting to see if some degree of certainty can be determined in regard to nature, breadth, magnitude and duration of tariffs. Investors would also like to know if the tariffs will stick even if the market sells off. Unless some other market-moving news emerges, things should be fairly quiet until Wednesday.

Economy

News on the economic front continues to be mixed, which unfortunately lends itself to the ebbs and flows of interpretive narratives. One piece of information we got recently was the view of Federal Open Market Committee (FOMC) members by way of their Summary of Economic Projections.

Matt Klein ($) summarizes the findings:

Moreover, this [forecast] uncertainty has an unpleasant skew, reflecting worse balance of risks for all three variables [growth, inflation, and joblessness] … In fact, the average balance of risks across the three variables has never been judged to be worse than it is now … Instead, it is entirely attributable to policy choices from the new administration.

While the Fed certainly has its own biases and certainly has a less than perfect track record with economic projections, it’s views affect monetary policy and therefore are influential. It is saying things are worse now than before the election.

On the other hand, Bob Elliott observes there has been little degradation in hard data thus far. Notably, he shows “little shift” in the weekly economic index indicates weak survey data has yet to actually flow “through to shifts in economic activity.”

True enough. But there are increasingly signs that policy uncertainty is leaking into real economic performance. As PauloMacro ($) points out, the problem for corporate leaders is “Not confidence in growth per se, but in the goalposts staying still long enough to make a longer term decision.” He goes to describe, “the direction of travel and feedback from managements are simply too clear and consistent. C-suites are are cutting investment in response to policy uncertainty.” The Daily Shot captured the phenomenon below:

All in all, it feels like a lot of people are in “wait and see” mode. If tariffs (or other policies) start meaningfully hurting growth, or if stocks keep falling, they are prepared to cut back. Even if they don’t though, policy uncertainty is going to start crimping growth on its own. Corporate leaders simply cannot invest at the same clip when they don’t know the rules of the game.

Politics and public policy I

While every presidential administration has baggage that prevents it from implementing policy as effectively as it might, I find the breadth and magnitude of Trump administration failings striking.

The most recent, and notorious, example was the inclusion of an Atlantic magazine editor on a group chat that “coordinated a war plan and sent real-time operational details about US strikes on targets in Yemen” according to Gzero. The article discusses the implications:

Still, [National Security Advisor] Waltz may have broken the law by including Goldberg, and the use of Signal for official communications may have violated the Espionage Act. Both Republican and Democratic members of Congress condemned the mistake, with Democrats calling for Waltz to be dismissed and demanding an investigation.

Another subject which has gotten a lot of attention is the potential for a “Mar-A-Lago” Accord. I expressed my own reservations about the plan last month. A couple of weeks ago, Steven Kamin and Mark Sobel ($) expressed their reservations in the FT:

It is doubly amazing that Trump officials seem to be drawn to it [the idea of a Mar-A-Lago Accord] when there is another policy that could simultaneously lower the dollar, narrow our trade deficit, reduce interest rates, and put the federal budget on a sustainable path for years to come: cut spending, responsibly raise taxes, and reduce the fiscal deficit.

In other words, rather than addressing the big honking fiscal problems directly, the Trump administration is gravitating to an indirect, flawed, and less than honest approach. Why is Plan A so convoluted?

In addition, DOGE has wandered into government like a bull in a china shop. While this has caused no small amount of broken china, it has also created new vulnerabilities. As Shannon Brandao ($) reports in her Substack:

RUSSIA, CHINA RUSH TO RECRUIT FIRED US SECURITY PERSONEL: Recent intelligence reports reveal that foreign adversaries, particularly Russia and China, are ramping up efforts to recruit recently terminated or at-risk US federal employees — especially those in national security roles.

The Naval Criminal Investigative Service (NCIS) has assessed with "high confidence" that these adversaries aim to take advantage of the administration's downsizing efforts.

So, while the Trump administration may view these people as expendable and “inefficient”, foreign adversaries are seeing opportunity to gain unique insights into the country’s security apparatus.

While every administration has its share of embarrassments and misdeeds, the Trump administration seems to have more than its fair share of serious glitches.

Politics and public policy II

I find it especially interesting that much of the investment community is receiving signals of policy incompetence and incohorence mainly with either apathy or approval. This has confounded me more than anything else. People who I respect, people I know to be smart and thoughtful, are not only not picking apart bad policy plans and outright mistakes, but seem to be bending over backwards to tell a positive story about them. Why?

Adam Tooze ($) apparently had similar sentiments. For example, he describes the Mar-A-Lago Accord outline as “on its face a far-fetched policy proposal” and said “it is easy to pick holes in it.” He wants to know the same thing I do: “why are serious people taking it seriously?” He hypothesizes:

I began to wonder whether this search for a rational wing in Trump’s economic policy is not, in fact, a step towards sane-washing and whether this sane-washing is not driven by some engrained mainstream framings of America’s problems that react in sympathy with the Trump administration’s rhetoric of crisis and victimization

Even if you disapprove of the Trumpites style and lawlessness, you may be tempted to take at their word the more reasonable members of the highjack team who insist that they offer a dramatic and comprehensive plan to address the crisis you also believe in, leading you to lose track of the fact that … they are highjackers and they are holding you hostage!

The phenomenon begins with “the original framing of the problem” which is “The belief that something must be done.” As Tooze explains, “Once you are convinced that ‘something must be done’, you become vulnerable to someone hawking a big plan to ‘do things’.”

True enough. Let’s dig into that idea further.

Politics and public policy III

I have seen arguments be predicated on “something must be done” multiple times now. It is not difficult to pick them apart. For starters, in order to judge the veracity of the claim, we can estimate the consequences of something not being done. Are they immediate? Are they certain? Will they happen tomorrow? If not, the threat is being portrayed as more urgent than it really is. For example, I do believe the fiscal deficit is an important and fairly urgent problem to solve, but I also do not believe the world will end tomorrow if it is not solved today.

Even the Trump administration is tacitly admitting this. If it were so urgent to raise money from tariffs, they would have been implemented steeply, broadly, and immediately. That hasn’t happened. Instead, the Trump administration appears to be exhibiting a fair amount of sensitivity to the market. That’s not a luxury that can be afforded in a true emergency.

In addition, Treasury Secretary Scott Bessent had sharply criticized Janet Yellen’s handling of debt under Biden, but now has pulled a massive U-turn and is “doing exactly what Yellen did.” According the the FT’s Unhedged ($) newsletter:

In a recent interview, he [Bessent] said he would keep the bias towards bills in place, and that shifts in the maturity of the debt profile would be “path dependent”. In fact, he’s doubling down. Treasury projections have the department maintaining Yellen’s dollar quantity of long-term debt in the future, rather than just the share of issuance, even though the debt is projected to grow. “Proportionately, he will be issuing even less long-term debt than Yellen,” says Darrell Duffie of the Stanford Graduate School of Business.

Once again, if the situation is so urgent, why the delay? As Unhedged assessed, “Bessent may want to use the Yellen strategy to keep the market calm while that [expanded borrowing for tax cuts] happens.” That may well be right. If it is, Bessent’s actions indicate the Trump administration has a lower sense of urgency for fiscal probity than for tax cuts.

In both cases, it is fair to question what the urgency is for: Is it to solve major problems facing the country, or is it to “hawk a big plan to ‘do things’?”

Politics and public policy IV

This raises another question, “why should we be confident in the Trump administration’s ability to solve big problems?” Of course, the answer to that depends partly on partisan loyalties, but how should nonpartisan investors handicap those chances?

Peter Zeihan is characteristically blunt in his assessment: “you shouldn't expect good policy from the Trump Administration.” He goes on to explain:

Following the purging of experienced US government officials, widespread dysfunction has broken out. The traditional flows of information have been severed; it used to start with technocrats that retain their positions across administrations due to their institutional knowledge > then deputy secretaries overseeing operations > then secretaries who pass the info along to the President. Well, many of those technocrats have been fired and replaced by political loyalists, sans expertise.

Many agencies are left with inexperienced loyalists not simply at the helm, but throughout the entire senior management. The result? Dysfunction, an inability to respond to crises effectively, and weakened American power on the global stage.

By the way, this logic applies to more than just government. In virtually every instance of companies quickly and drastically reducing staff, the long-term outcome is a disaster, even if there are short-term benefits to lower costs. Even in cases of chronic overstaffing, traumatic headcount reduction tends to be massively disruptive. The “chainsaw” approach is usually a last, desperate gasp before reality hits hard.

As a result, there is another critical problem with the proposition that “something must be done.” Namely, it does not imply that doing something harmful and counterproductive is better than doing nothing at all. The impetus for change must distinguish between change for the better and change for the worse if it is to carry weight. Unfortunately, there is no good reason to believe this is the case with the policy ideas and implementation record established thus far.

Politics and public policy V

Given all the evidence weighing against the probability of the Trump administration being able to pull the country through its multiple challenges, why do so many people still seem relatively sanguine on the prospects?

The best explanation I can come up with, and a working hypothesis, is that a lot of people would rather believe far-fetched fantasies than soberly manage through adversity. After years and years of being acclimated to living beyond our means, a lot of people of very different stripes would rather be lied to than to be faced with the harsh reality.

This hypothesis explains some of the wackier things that can be observed in the investment environment. Why do so many people seem to bend over backwards trying to make sense of Trump’s policies, especially when those policies just don’t make any sense? Because the alternative of having to accept the reality that markets are hugely overvalued and most of us don’t have nearly as much wealth as we think we do is unbearable.

This hypothesis also suggests why Trump’s policies so often appear incoherent and even counter-productive. Because they are! Part of the belief system is that Trump has both the intent and the ability to fix the country’s problems. But what if that isn’t true?

Alternatively, imagine Trump has zero interest in fixing the country’s problems. Rather, he sees the desperate need of a large portion of the electorate to believe in better days ahead, without having to make huge sacrifices. So, he creates a sales pitch to that effect — Make America Great Again.

In addition, by characterizing the problems as “urgent,” he also opens the doorway to expanded executive powers. This is the real objective — to be able to hijack government and do whatever he wants. Billionaires can buy anything they want. But to be able to torment and humiliate rivals, both personal and political, now that is priceless!

While this is still a working hypothesis, the explanation becomes clearer the more evidence rolls in. Trump is neither capable of nor interested in solving the country’s biggest problems. He does, however, recognize political opportunity in the situation. People are desperate to believe things are better than they are yet unwilling to acknowledge the need for sacrifices. He offers them a chance to keep believing that, if only for a while longer. The “only” price to pay is a concession of country’s wealth, power, and prestige.

Investment landscape I

In my opinion, the most prominent issue for investors is the fiscal deficit. The deficit (as a proportion of GDP) needs to come down and organic economic growth needs to be boosted. If not, long-term interest rates will shoot up and tighten financial conditions for everyone.

While Scott Bessent has addressed the issue most directly, little attention can be found from other corners of the Trump administration. Further, virtually all of the policy points are moving in the wrong direction from this goal. Tariffs threaten to slow economic growth without meaningfully boosting tax revenues while tax cuts threaten to meaningfully lower tax revenues.

Why are investors so blasé about the lack of attention and lack of progress on a key financial goal? Worse, why do investors seem so unconcerned given the dramatic precedent with gilt yields in the UK under Liz Truss in 2023?

The potential for a serious jolt higher in longer-term Treasury yields is one of the biggest risks to the market and far too few people are paying attention to it. Sounds like a recipe for disaster.

Investment landscape II

When Trump was first elected president in 2016, it was a sign of change — away from the neoliberal global order among other things. While there are good reasons to believe such a change was needed, not enough attention has been placed on the negative consequences of Trump’s interpretation of that change.

Nobody has understood this better than Ben Hunt at Epsilon Theory. Back in 2016, even before the election, he wrote ($), “Trump breaks us because he transforms every game we play as a country — from our domestic social games to our international security games — from a Coordination Game to a Competition Game.”

In the second Trump administration we are seeing this play out much more completely. The key for investors is to appreciate how fundamentally different this approach is from the past. This is not a simple change from Democratic leanings to Republican leanings; it’s a change in the way everyone works with one another.

As an example of how different the new investment landscape is, consider this analysis from the Economist ($):

Americans who bring in less than $50,000 a year are now more likely to be Republicans than Democrats. Meanwhile, highly educated, professional voters have in recent years drifted towards the blue side. American stockmarket wealth is concentrated among high-earners: some 87% of stocks and mutual-fund shares are owned by the top 20% of earners, compared with just 57% of property wealth. Whereas a decade or two ago, a stockmarket sell-off would have been most painful for Republicans, today it is Democrats who would be worst hit.

As a result, the assumption that public policy will continue to be biased in favor of investors could be past its “use by” date. If Trump believes a stock market decline would hurt Democrats more than Republicans, how much do you want to bet he would step in to cushion it? How much would you bet he would actively encourage it?

Implications

This highlights perhaps the most important implication for investors. Investors have become acclimated to dismissing many of the most unhinged comments from Trump. Sure, he says a lot of stuff, but he doesn’t mean a lot of it, or so the belief goes.

That may be changing as Jonah Goldberg ($) highlights for the Dispatch. Goldberg argues that the most damaging aspect of the Signal screw up was the revelation that the Trump administration’s animosity to foreigners is real:

Meanwhile, Vice President J.D. Vance, deputy chief of staff Stephen Miller, and Joe Kent, Trump’s pick to run the National Counterterrorism Center, revealed that they are quite serious in their fundamental animosity toward our European allies and more than a little contemptuous of the idea that America should ensure freedom of the seas, among other things.

What this means is now everybody knows that everybody knows that the US is fundamentally antagonistic; it’s not just theater. This makes it impossible for anyone involved (foreign leaders and diplomats, for example) to pretend it is not the case — and therefore also makes it impossible to gloss over the potential for conflict.

It should also serve as a wake up call that the Trump administration may be serious about other things as well. Are tariffs really just negotiating ploys — or are they going to be more permanent drags on the economy? Are encroachments on judicial authority simply efforts to get things done, or are they part of a bigger plan to undermine the rule of law? Investors are going to need to reconsider their assumptions about each of these and recalibrate their discounting.

In short, in voting for Trump, voters voted for change. The change they are getting, however, is looking a lot different than the change many of them voted for.

Absolutely apropos of the investment environment, James Aitken recently posted some sage advice from Peter Drucker: “The greatest danger in times of turbulence, is not the turbulence, it’s acting with yesterday’s logic.” Well said.

Note

Sources marked with ($) are restricted by a paywall or in some other way. Sources not marked are not restricted and therefore widely accessible.

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