

“They smashed up things and then retreated back into their money or their vast carelessness, and let other people clean up the mess they had made.”
This quotation from The Great Gatsby, shortened slightly, came to mind listening to Trump on Wednesday. Here is a selection of headlines and one-liners from a sober selection of sources in the last 48 hours:
World reels – America’s astonishing act of self harm – It would be absurd not to attribute this in large part to Trump - US pathology is unleashed upon the world – The risk is that the virtuous circle will turn vicious and upend the US financial system - Flawed economics, inaccurate history and cockamamie calculations used to justify the most wrong-headed and damaging policy decision in decades – Mindless tariffs will cause economic havoc.
Someone called it “cowboy economics”, but that is deeply offensive to cowboys. It is possible to move straight into rant mode and challenge every act of stupidity by Trump (and his sycophants). But I will leave that to others who are more eloquent.
Time is also short today (as I’m sure you can imagine) so I will try and stay focussed on the investment angles.
Today China has announced its retaliatory tariffs, and the UK’s FTSE 100 index, already down 2%, then fell a further 2%, and China funds have fallen 4-5% intra-day. Before this news a number of investment banks were moving the odds of recession to 50% (a recession which would be global in nature), and this now looks more likely if action out of China is the first stage in heavy blows being landed from around the globe.
The EU must now step out from behind China. Will they retreat to warm words or hit hard? What is the best way to deal with the bully in playground? Everyone act together.
Better still, a cooler head might emerge and provide global leadership, and turn Trump away from his absurd tariff policies, without making him feel the idiot he is.
Right now the latter feels like the least likely outcome, so the former, an accelerating trade war, is probably the path of least resistance.
If so, the US market will continue tumbling. You already know about the extreme valuations. You know about the investor mania, particularly over-excited investors borrowing record sums to throw at the S&P 500. If this is the US bubble well and truly bursting, and the beginning of the much anticipated “reset”, we also know that history informs us to expect falls in excess of 50%. Here are some other observations from this week.
Apple was a notable casualty yesterday, down 10%, as it is utterly dependent on China for the parts which go into the iPhone. Perhaps surprisingly, US banks were also a surprising weak spot, with rising concerns over recession and bad debts growing rapidly.
Tesla is an interesting case study. The shares are already down 45%, but the downside remains considerable.
Musk might be Trump’s “First Buddy” and the world’s richest man, but now rumours abound of Musk’s removal from DOGE and Trump’s inner circle. If Musk knew of the China tariffs to be announced on Wednesday evening, he would have been extremely unhappy.
Although Tesla car sales have collapsed in Europe, in China, perhaps surprisingly, they have held up… so far. Are you old enough to remember the “Buy British” campaign of the 1980’s? Or the 1960’s slogan “I’m Backing Britain”?
Don’t be surprised if the Chinese authorities act to encourage this kind of patriotic consumerism Tesla would be screwed.
Their valuation remains extreme even after share price losses stretching towards 50%. The valuation of Tesla is nearly 6 times that of their big Chinese competitor BYD. The latter is rapidly gaining market share, the former is losing it. One relies on a wobbly cult following, the other makes decent cars, which are getting better. In the first quarter BYD became the world’s larger seller of electric vehicles. Hmmm.
As trust in the US continues to deflate, sales of the S&P 500 will persist. Geared investors, if they have any sense, will be first to head for the exit. US based institution dare not be seen to sell for fear of a Trump tribe backlash, but they will find ways to do so. The foreign investors into the S&P 500 are an interesting bunch. Full of enthusiasm, buoyed by the idea of America exceptionalism, largely oblivious to the considerable valuation risk, let alone political risk, they piled in.
European investors hold about 17% of the value of the US stock market according to the FT. That’s not far off the value of all European stock markets combined. Now the problem is not so much that European investors are horribly over-exposed to the US, but the US stock market is very sensitive to the whim of European investors, who are increasingly nervous.
Over the last 5 days, China is down a touch, though some of the high flying funds are 10% off recent peaks. The rest of Asia, including Japan, was obviously hurt by the tariff news, but falls were contained. Of the big economies, India was down 9%. Gold held steady, and gold miners are down a bit, but nothing terrible, less than 3%.
UK stock market indices showed a little relative outperformance against the rest of Europe, down approximately 6% versus 8%. I wish you could take this as a big positive for the UK, but economically Britain is most certainly not an island. So keep applying your stop-losses when they are hit!
Next week is assured to be extremely volatile. Be prepared to apply your stop-losses.