Beyond the Tariff Turmoil: A Strategic Long-Term Perspective

What happened

The recent introduction of broad tariffs by the Trump administration has sent shockwaves through global markets, creating significant volatility and raising concerns among investors worldwide. While the immediate market reaction has been severe, we believe this moment represents an acceleration of trends that have been developing for years rather than a fundamental paradigm shift.

The Trump administration's recent moves aren't random policies, but a strategic necessity given the significant refinancing needs of US debt: approximately one-third of US government debt is now rolling every 12 months and the "debt wall" is impending (end of the refinancing cycle that took place during the Covid-19 pandemic, at extremely low rates). Indeed, the officially stated target of Trump's economic policy is a real focus on "lower rates and weaker USD".

The seemingly disruptive tariff announcements have had the dual effect of weakening the dollar while simultaneously driving capital to the safety of US bonds, pushing the 10-year yield down from nearly 5% at the beginning of 2025 to around 4% currently.

As we've noted, focusing on the impact of tariffs is a bit like focusing on the finger when it's showing the moon. The larger transformation involves a fundamental restructuring of global economic relationships, with fiscal policy taking precedence over monetary policy: "don't fight the Fed" has now become "don't fight the Trump" (and similarly for other major economies: "don't fight the Xi Jinping," etc.). 

Impact on our Investment Case

The shifting landscape from globalization to deglobalization has been unfolding for years, with the Covid-19 crisis serving as the initial catalyst. The pandemic exposed the fragility of extended global supply chains and accelerated the trend toward localization and self-sufficiency. Today's market turbulence is not a deviation but a validation of this structural shift.

The United States enters this transition from a position of relative strength, particularly thanks to its energy self-sufficiency. This energy independence provides a crucial foundation for the administration's broader economic agenda, allowing for more aggressive trade policies that might otherwise be constrained by energy import dependencies. This may not be the case for either Europe nor (to a lesser extent) China. Beyond energy, the US is now prioritizing resource security across multiple domains, from reshoring semiconductor production to securing supply chains for battery materials and other critical minerals needed for the green and digital transitions.

In this rapidly evolving environment, we see several key implications driving our investment thinking.

Beyond politics, global financial forces at work

It is important to understand that the policy shifts we are witnessing are not simply the result of one administration's preferences or a partisan agenda. Rather, they represent a necessary response to fundamental changes in global capital flows. Over recent years, major creditor nations (most notably China) have significantly reduced their appetite for recycling their dollar surpluses into US government bonds. This structural shift has effectively pushed the United States against a wall, necessitating policy actions to maintain the sustainability of its debt.

Our analysis is not about favoring one political party or another, but rather about coldly assessing facts and steering our portfolios through significant political turbulence. The current administration's policies, while sometimes portrayed as unpredictable, are in many ways logical responses to these underlying financial pressures that have been building for years. Any administration would be forced to address these issues, though specific tactics might differ.

Regional power blocks are forming

The global economy is reorganizing into three major blocks. Each is pursuing greater self-sufficiency, particularly in critical areas like technology and energy. China presents a compelling investment opportunity: it remains under-owned, has a strong fiscal policy, and a firm political commitment to becoming self-sustaining. All this is translating into economic recovery and impressive earnings growth (JPM reports 23-29% YoY growth for 4Q24 across various indices). Similarly, European fiscal initiatives (such as Germany's ~€1tn investment program) signal a profound shift in attitude toward government spending. It remains to be seen if and how the announcement will translate into reality and how the European continent will handle its lack of energy independence.

Resources are key

Beyond energy independence, there is a broader imperative for resource security that extends to critical minerals, agricultural capacity, and water resources. As regional blocs solidify, control over essential resources becomes both an economic and national security priority. Trump's electoral mantra "Drill, baby drill" is a testament to the US policy, while Europe faces greater challenges in securing both energy and raw materials. China's aggressive investments in African resources and its dominance in rare earth processing highlight how resource competition has become a central feature of geopolitical rivalry.

Winners of yesterday may be losers of tomorrow

Companies that thrived in the era of globalization, with far-flung supply chains and global reach, may struggle in a world emphasizing local production and strategic independence. Companies producing close to their points of sale with strong balance sheets will likely command premium valuations. This creates significant dispersion of returns across markets, requiring careful selection rather than broad market exposure. The competition for resource security is intensifying this trend, as companies with guaranteed access to critical inputs (whether energy, semiconductors, or raw materials) gain competitive advantages over those reliant on increasingly vulnerable global supply chains.

Liquidity will drive markets

The Federal Reserve will eventually need to provide liquidity to support US debt refinancing: it's a matter of when, not if. The FED's role is pivotal in ensuring sufficient bank balance sheet capacity to absorb new debt issuance. When this occurs it will serve as a powerful catalyst for equity markets, particularly for higher beta exposures.

Real assets as protection against monetary expansion

With policymakers prepared to flood the system with liquidity to manage growing debt burdens, we're entering an environment of potential monetary inflation. When fiscal and monetary policies combine to devalue currencies, equities and other real assets offer better protection than fixed income. As we've observed before, in a world where money itself is being devalued, tangible assets become the logical shelter. While some investors might see gold as the asset to own if inflation expectations are picking up, we believe stocks (and cryptocurrencies) offer a better value proposition.

Unintended consequences

In the US, while federal spending might be constrained by deficit reduction efforts, we anticipate increased state-level fiscal activity partially offsetting these cuts, creating localized investment opportunities that may not be immediately apparent in national-level economic data. Paradoxically, the longer-term success of these policies creates its own challenges: should the administration succeed in significantly reducing federal deficits through spending cuts and increased tariff revenues, we could eventually see a stronger USD, contrary to current short-term objectives but consistent with improved fundamentals. This potential reversal underscores the importance of maintaining flexible positioning.

Our Takeaway

Based on this strategic analysis, our investment positioning continues to focus on the beneficiaries of these structural shifts.

• Technology: As nations prioritize self-reliance, advanced technology becomes a critical strategic asset. Domestic production capabilities are essential components of economic sovereignty but re-industrialization will be based on Automation, AI, Robotics and more in general, digital infrastructure.
• Renewable Energy: Energy independence is a cornerstone of economic autonomy. Countries seeking to reduce external dependencies must secure stable, domestic energy sources, making renewables strategically important beyond their environmental benefits.
• Healthcare Technology: The pandemic clearly demonstrated that healthcare security is national security. While potentially facing near-term headwinds from policy uncertainty, healthcare technology remains vital for national resilience in the long term.

While volatility may persist in the near term, our investment approach is designed to capture the opportunities created by these deep structural shifts. The current environment of uncertainty may unsettle markets in the short run, but it ultimately reinforces the strategic direction we have been following since the pandemic.

The apparent contradictions in current market dynamics (tariffs that simultaneously weaken the dollar while strengthening bond prices, or fiscal tightening at the federal level coupled with expansion at the state level) reflect the complex transition underway. These cross-currents create tactical challenges but strategic clarity: the world is moving toward more regionalized economic blocs with greater emphasis on self-sufficiency in critical sectors. Our portfolios are structured to benefit from this fundamental reorganization while maintaining the flexibility to navigate the inevitable volatility along the way.