There's genius in Donald Trump's tariffs madness - but these factors may blow us all apart, reveals ALEX BRUMMER
Donald Trump loves shock and awe. When he proposed emptying Gaza of its population to create a new Riviera on the Med the world was aghast. Yet it galvanised Arab states into forging a multi-billion pound fund to rebuild the territory.
Most of the decisions Trump has taken on the economy since winning office have also caused consternation across the globe. Declaring a trade war on America’s nearest and dearest neighbours in Canada and Mexico is absurd. An editorial in the Wall Street Journal, which espouses free markets, described the North American trade battles ‘as the dumbest in history’.
Attacking the EU and British steel industries with punishing tariffs, at the same time as asking those countries to pick up the bill for Ukraine’s war, is inexplicable.
The erratic gutting of the federal government by Elon Musk’s Department of Government Efficiency is wreaking havoc. It was the same when Musk bought Twitter – now ‘X’ – and fired half the workforce. Across the globe the cancelling of USAid, the world’s biggest supplier of foreign assistance, threatens starvation and disease, with vaccination programmes halted.
Yet it is possible to believe that, despite the incoherence, there is some grand method in the President’s madness.
It is less about a deal to ‘Make America Great Again’ and more about sand blasting the conventional wisdom on the economy to provide a new start. In his first incarnation, New York-born and raised Trump saw a series of highs on Wall Street as a triumphal endorsement of his tax breaks for the wealthy and corporations. It was, in his view, an endorsement of Ronald Reagan-style supply side – low tax – economics.
His approach this time, inspired it is thought by Treasury secretary Scott Bessent, is to cleanse the system, burst the stock market bubble before pushing for the extension of the time-limited tax cuts from his first term.
Bessent is a financial market guru. In a previous life he was the right-hand man of George Soros, the hedge fund manager behind the putsch against sterling in 1992 when the UK was ejected from the Exchange Rate Mechanism. He thinks out of the box.
Most of the decisions Trump has taken on the economy since winning office have caused consternation across the globe
The result of the counter-intuitive approach already is being seen. Markets have been hammered. A robust rate of economic expansion has been scythed and ‘Trumpcession’ has become the word of the moment.
In January, the International Monetary Fund forecast US growth of 2.7 per cent this year, after 2.9 per cent in 2024. Over the past week Wall Street economists have cut the projections in half.
The Austrian laissez-faire school of economics has a word for such creative disruption – ‘liquidationist’. It is an unfashionable concept in the US for historical reasons.
It was last attempted by Herbert Hoover’s Treasury Secretary Andrew Mellon, who in the 1930s advised the president to let the economy decline rather than try to counter the downturn.
That, with the benefit of hindsight, was a disaster and together with the trade war sparked by the Smoot-Hawley tariff act of 1930 is blamed for the Great Depression.
Trump’s economic team, with its heavyweight Wall Street veterans, must be aware of this baleful history, but circumstances have changed dramatically and there are enough counterweights in the system to prevent a repeat.
The world after all has navigated three great economic shocks this century. The financial crisis of 2008, the Covid pandemic and Russia’s brutal war on Ukraine did not result in mass unemployment, widespread bank runs, or the grinding poverty described in John Steinbeck’s Grapes Of Wrath.
The narrower goal of the Trump administration is to restore some normality to the US economy and financial markets. There is no God-given right for share prices to always move upwards.
The Magnificent Seven tech giants have been a great force in creating riches. But nothing lasts for ever. America’s original tech champion, IBM, once lauded as ‘big blue’ is a shadow of its former self. US Steel and General Electric, both of which once enjoyed the title of the world’s largest corporation, are now very ordinary.
Joe Biden may have left Trump a growing economy, with falling unemployment, but it came at a price. Biden’s Keynesian-style big spending bills, notably the post-Covid $1.9 trillion American Rescue Act, the $3 trillion (misnamed) Inflation Reduction Act and the $53 billion Chip Act sent American borrowing and debt soaring. The fiscal deficit climbed to 6 per cent of the economy and national debt to $37 trillion or a terrifying 124 per cent of total output.
The savage cuts engineered by Trump and Musk (including shifting the cost of Nato back to the Europeans) are intended to move the dial on borrowing and debt. That, it is hoped, will create the headroom for Congress to renew Trump’s first-term tax cuts.
So far, the US has survived its big spending and borrowing ways, because of the extraordinary privilege of the dollar as the world’s reserve currency. But since the outbreak of war in Ukraine, central banks around the world have been reverting to gold as a hedge against the dollar.
The risk of a run on the dollar should not be discounted. It happened after the Yom Kippur war, oil embargo and energy shortages of the 1970s. It could happen again.
That might be brilliant for American exports, such as energy and farm produce, but would mean a huge surge in imported inflation – keeping interest rates high.
Trumpism is chaotic. Tariffs are ill-designed and the idea that, in a few short years, Trump can reshore America’s manufacturing base is fantasy land. That bird flew decades ago.
It is just possible that the assault on trade imbalances, foreign aid, the cost of overseas wars and bloated government will bring federal spending, borrowing and debt under control.
But the President is gambling with a fragile world order. The tsunami from Washington is a clear and present danger to stability.
You are more exposed to Wall St than you think
By Anne Ashworth
Few of us, if any, are immune from the Trump-induced turmoil on Wall Street, not even his ‘tech bro’ billionaire buddies.
By the middle of last week, Jeff Bezos, Mark Zuckerberg, Elon Musk and the other chiefs of the ‘Magnificent Seven’ US tech firms were together £160 billion poorer, as shares in their corporations tumbled in reaction to fears of a global trade war.
The pain of these wealthy men was shared, albeit on a smaller scale, by legions of British private investors of modest means. And many are unaware of the extent to which they are vulnerable to a fall in the US stock market.
Popular funds and investment trusts, including Alliance Witan and F&C, may seem to offer a worldwide spread of assets. Though investors might never guess from their staid-sounding, old-fashioned names, the reality is these funds and others are a sizeable bet on the Magnificent Seven: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
Experts are now issuing alerts about the level of exposure that investors face without realising.
Jacob Falkencrone, global head of investment strategy at Saxo Bank, says we are ‘emerging from a period of extreme concentration’ where most of the gains on stock markets were driven by the Magnificent Seven.
‘It’s time to balance the big tech bets with a more diversified, resilient approach,’ he says.
The upheaval should spur investors to discover what their funds contain. These details are given in the monthly factsheets, which are available online.
As the April 5 Isa deadline nears those who have yet to use this year’s tax-free allowance should check where their funds are.
F&C’s website tells you it has moved from its 19th-Century beginnings, when it invested in Amazon the river, to putting money into Amazon the retailer.
There are, however, concerns that long-standing investors do not keep pace with the shifts in their funds’ portfolios.
Scottish Mortgage may be the most obvious example of a trust that sounds conservative, but is an adventurous mix of US, Latin American and Chinese quoted and unquoted technology stocks.
SpaceX, Musk’s rocket firm, an enterprise that’s not yet listed on any stock market, is the trust’s largest stake. More than half of the portfolio is in the US.
The soberly-titled Bankers Trust sounds like it invests in... banks. But its four largest holdings are not in UK high street lenders, but in Microsoft, Apple, Amazon and Alphabet. The US makes up 60 per cent of the portfolio.
At Monks Trust, the US portion is 61 per cent, with a focus on Magnificent Seven stocks.
Many investors assume big funds that track stock market indices are a way to spread their bets over a range of shares.
Fidelity Index World does track the MSCI World Index. But MSCI’s top constituents are the Magnificent Seven and two other US stocks, whose stock market valuations dwarf those of others. The fund’s biggest five holdings are Magnificent Seven shares. Amazon and its peers produced stellar returns in 2024. But their shares have dropped as fears grow that America could fall into recession sparked by tariffs and other policies. Nvidia and Tesla are hardest hit, with falls of 16 per cent and 39 per cent respectively over the past three months.
The Magnificent Seven are spending billions to be the leaders of the artificial intelligence revolution, and the current view is that their shares are worth holding on this basis.
For those willing to contemplate further volatility, US tech shares may be worth buying at this level.
But Wall Street professionals are researching opportunities in Europe and other markets, an approach that amateurs should probably follow this spring.
