Too much cheap money. Debt exploded. Speculation rife. Rich got richer, the poor didn’t. Welfare spending rising.
Sound familiar?
This was Rome, AD 33.
The bubble popped of course, and prices collapsed.
The bust led to profound changes which ring very loud bells today. The sprawling empire and free trade network began to break down, and slowly the walled cities of the Middle Ages began to emerge. Eventually the Italian city-states of Milan, Venice and Florence emerged, ferociously competing with one another, and driving rapid progress, just as in the city-states of Ancient Greece centuries before. We look at this issue in much more detail in today’s blog from Joe and Ruairi, When Trust Breaks Down.
When trust breaks down in a political structure, when people find there is no longer any benefit for them, they want to take back control – they want the centre of control closer to home, and more accountable.
Today the reaction will not be walled City states developing over centuries. Rather we might just see the (rapid?) revival of moribund existing states, where the political classes had lost touch with the voters/taxpayers for many years – they are being given one last chance, the length of the electoral cycle. Germany is the first to move, more on that in a moment, but first the US.
No doubt most of you will have seen the Ray Dalio generated headline “Trump will drag US into a full blown debt crisis within three years”.
In a very haphazard fashion the Trump administration is trying to tackle the debt problem, but their approach is so full of contradictions it is difficult to see success any time soon. For example, DOGE, led by Elon Musk, is creating a lot of headlines and upset, but barely touching the debt load. As one researcher put it:
“Without major reforms to Social Security, health
care, defense or tax laws, DOGE’s cuts will remain little more than a political stunt” (Ryan Chapman)
Some of Trump’s team have a dramatic solution for the perception that the US is not being well served by the global financial system, which has been christened the Mar-a-Lago Accord.
The strong dollar which has prevailed makes US exports less competitive, and imports cheaper, hurting domestic producers. Nonetheless, the oversea suppliers of those imports are paid in US dollars, which are reinvested back into US dollar-denominated assets, whether Treasury’s (to finance a US government living far beyond its means) or the US stock market (helping inflate the S&P 500 stock market bubble).
Despite the latter benefits, Trump has decided that he wants a weaker dollar. The idea is this will encourage buying of more competitively priced domestically produced products, US businesses will relocate back to the US, and overseas companies will be encouraged to expand their bases in the US. From where the workers for these enterprises will appear is unclear, as labour markets are already tight and valuable migrant workers are being deported – that sounds like a recipe for wages going up, and higher inflation.
Of course, that weaker dollar would also mean less buyers for US government debt (Treasury bonds), resulting in bond yields needing to go higher to attract interest, which in turn would push up US inflation. Those higher bond yields will also make the S&P 500 less attractive.
This is a simplification, but it does illustrate that Trumponomics includes a number of objectives which are not compatible with reality.
There is a precedent for the US acting to get the dollar lower, the Plaza Accord of 1985. The US co-operated with Japan, France, the UK, and West Germany to intervene in the currency markets. The result was dramatic, the dollar devalued by 40% within two years.
The mood music today doesn’t imply that there will be enthusiasm to help out the US on this occasion, whether in the currency markets or to buy its government debt. The suggestion is that the US will offer its security to those who play ball, and remove all tariffs. Who might respond positively to this carrot and stick, this bullying and cajoling? We should find out in 2025. Global trust in the US was breaking down pre-Trump, and is now multiples worse.
There are a lot of moving parts, and the reality of the present situation is far more complex, and less predictable, than I have set out above. Nonetheless this approach by Trump and his team, christened the Mar-a-Lago Accord, does seem to accept that boosting the US domestic economy will come at the cost of higher inflation, a tumbling stock market, and higher Treasury yields. This creates considerable uncertainty, and in particular the possibility of a nasty accident in financial markets.
Trump advisers such as Stephen Miran can unfurl juvenile slogans as much as they want (“It’s about Main Street, not Wall Street”). But it’s about something else. Confidence. When that unravels, so does the US economy, the S&P 500, the Treasury market, the dollar, and Trump and his administration.
These risks, an ugly combination, send global investors scampering for alternatives, which is why gold has increasingly attracted buyers in 2025, and which has just enjoyed another decent week.
Meantime, over in Europe, the German parliament has voted for a historic change, raising their (very low) debt ceiling to boost defence and infrastructure spending (the latter being the demand of the Greens to vote in favour).
It’s worth re-capping that our asset allocation will typically be driven by value i.e. where are the underappreciated assets which should outperform? The difficult bit is when. “When” is invariably an unknown, and patience is required…
…then “when” begins to come into focus, often with some fundamental change. Such an epochal change, or “Zeitenwende” as Joachim Klement put it, has just occurred in Germany, with fiscal stimulus “dwarfing anything the country has ever seen.” If this dramatic shift feeds not just in Germany, but across Europe, we should expect Europe to outperform the US for some years to come.
The German stock market had led European markets higher in recent weeks in anticipation of this fundamental change. This has evolved in the last week, with European smaller companies taking a lead, which is a very significant sign of widespread confidence building.
If a multi year bull market is ahead for Europe, we should expect smaller companies to continue to outperform. On the other hand, if this reverses it is a valuable litmus test of waning confidence.
Following on from last week’s observation re UK smaller companies, this pattern has persisted, with smaller’s outperforming the other UK indices every morning bar one. An interest rate cut in the UK would have been helpful, but it hasn’t deterred buyers.
Such epochal change has also been occurring in China, albeit more gradually since the Autumn, with the Chinese leadership undoubtedly keeping some powder dry for the next move by Trump. Again we should expect the Chinese stock market to continue to outperform the US for years to come, something which has been occurring most weeks in 2025 to date, as we have regularly highlighted.
STOP PRESS: Investors dumped US stocks at the fastest pace on record last week, according to Bank of America. BofA's weekly survey of fund managers revealed a 40% reduction in clients’ long positions on US stocks in March, the largest drop in the history of the survey.