When markets realise Trump is serious about tariffs and that the US is now an isolationist state seeking to cut itself off from the rest of the world, they're going to react, and we'll get a crash.
This is the audio version:
This is the transcript:
Is Trump going to crash world financial markets? There very clearly is a risk that he's going to, if he carries on in the way that he is, and I want to talk about that because although I do think world financial markets are seriously overvalued, a downward revaluation of the type Trump is threatening would be chaotic and bad news for almost everyone. So, we need to talk about what is going on right now as a consequence of what Trump is doing now in middle February.
Let's be clear. Trump is increasing business risk around the world.
He has said that tariffs are his favourite word, and everyone at first thought, I think, that he was talking about as a short-term weapon; part of his negotiations; the way in which he might enforce change in relationships between the USA and the EU, or Canada, or whoever else he might be picking upon. But now it seems that tariffs are not just going to be used for that role. Tariffs, it seems, are here to stay because despite everything that Elon Musk is doing to cut US government spending - or at least is supposedly doing to achieve that goal - Trump wants to deliver tax cuts for the wealthy that are bigger than anything that Musk is likely to come up with. In that case, he needs new tax revenues, and tariffs seem to be his answer to every question right now.
So, the latest move is that we have a 25 per cent tariff on all imported steel and aluminium. That appears to be without exception. In other words, it applies to the UK, it applies to the EU, and all the exemptions that were negotiated during Trump's first term of office, when he also put tariffs on steel and aluminium, have gone. They are now history, the tariff is here, it's really going to bite, and this is going to have a significant impact on business in the USA, where the price of steel and aluminium are going to go up, meaning that all construction projects are going to be significantly more expensive, and cars are going to be significantly more expensive, amongst many other consumer products which are dependent upon both those metals. There's also going to be a massive disruption in world trade as a consequence because these are core construction materials used in so many products, both fundamental infrastructure projects and consumer products around the world.
So, what Trump is doing is fundamentally increasing business risk. And when you increase business risk by creating uncertainty, which is what he is doing, the rate of return that investors supposedly require from the markets in which they invest is higher. There's a simple trade-off. As risk goes up, the rate of return goes up to cover for the possibility that the rate of return will not be delivered.
Now, the relationship is not precise, and things are fudgy as they always are in economic markets because the economists who come up with these relationships suggest that people are rational, and in the real world, people aren't. But there's little doubt at all that what Trump is doing is wrong. It is increasing business risk, and it will have a cost, and that is going to seriously unsettle financial markets.
And what's the likelihood of that? It is twofold. First, in the short term, we're seeing some very strange movements in financial markets. One is in the UK where the FTSE 100 reached record highs on the 10 February.
Now that is very strange because in the face of an onslaught on globalised financial markets - and the FTSE 100 is a reflection not of business in the UK but of business around the world which happens to quote its shares in London - why, when markets are under threat from Trump, the FTSE should reach a record level, it's hard to work out. It's almost utterly irrational.
And at the same time, two other markets were actually acting in what seemed to be quite unusual ways, and the messages are deeply contradictory. The gold market has seen prices reach an all-time high. This, when expressed in pounds sterling, means that gold is now at over £2,350, a massive increase on the price from only a year or so ago, when gold could be bought for £1,600 an ounce. That is an extraordinary change and must be a measure of fear.
Now, let's be clear about it. Gold is a completely worthless commodity in financial markets, representing nothing at all except what is called a supposed safe store of value. This price rise, therefore, represents people fleeing from the financial markets to buy gold to get protection from whatever Trump is doing. So, there are some clear signs from that behaviour that people are getting out of financial markets.
That's also true of the UK gilt market. You might remember that only a month or so ago, everyone was talking about the incredible hike in interest rates in the UK gilt market because prices of gilts were going down because nobody apparently wanted them. And that's now changed considerably. From hitting nearly 5 per cent interest rate on 10-year bonds in the UK only a month ago, the rate now is only a little over 4. 4 per cent because the price of gilts has gone up so much.
That's not because the interest rate changes, it's because the price of the gilt changes, and the fixed interest payment made on the gilt therefore changes the effective actual interest rate earned by somebody who buys it at today's current price, which will give them a yield of just over 4.4%.
But the point I'm making is that a fall in yields means that the price of gilts has gone up because people are buying them. In fact, Hargreaves Lansdown, the broker in the UK, has said that demand for gilts in January was more than double that in December, or from a year ago. So, in other words, people are looking for another safe haven asset.
Financial markets are, therefore, deeply confused. At the same time as the FTSE is hitting record highs, people are clearly leaving the market. And the likelihood is that what's going on is that there is more money coming into markets at present because consumers are - those consumers who can afford to save that is - those consumers who can afford to save, are saving.
Not only is business not going to invest at present because risk is high and, therefore, they don't know what rate of return they're going to get, and therefore, they won't invest because that's the consequence of that, but when people feel under personal financial threat from a situation beyond their control what they tend to do is save. They put money aside for the proverbial rainy day.
What is more, the risk might be that we are not facing a rainy day. We might be facing a storm, and not even a thunderstorm, a tornado or something. This is what I'm really worried about. Because these irrational behaviours - and they are irrational - should not be happening at the same time.
If those things are happening in that way, we are seeing confusion. And when that confusion resolves itself, and it will, because people will come to terms with what Trump is doing over time, they will realise just how bad it is. And Trump is really, really bad for global financial markets because, literally, the world's financial markets are integrated. There are seamless joins between the US market, the UK market, the European market, the Japanese market, and so on. Whether this is good or bad doesn't matter. That is how they are working. And what Trump is doing is putting decidedly big seams - absolute barriers - between those markets. And that is going to be deeply disruptive. And when the consequences of that are understood, I do not see how we are going to avoid a serious downturn in the value of stock markets.
I think the signs of that are already seen in that gold price and in that gilt price, both of which are signs of people fleeing to safe havens. The markets, the stock markets, have not yet done that. They have not seen that coming, and maybe that's because - well, who knows what it's because. Maybe it's just because they're hoping, against all hopes, that having a Republican who claims to be pro-market, and who has Musk on the team, who claims to be in favour of big business, is going to deliver results for them when in reality, I don't see how that's going to happen.
My point is, every real underlying sign coming from Trump is that we are heading for a crash.
When is that crash going to be?
I don't know.
Will it be by the summer of 2025?
I think that is likely.
It could be sooner.
Higher costs, which is what Trump is imposing on the people of the USA, on businesses, and on the world at large - because these tariffs will have knock-on effects - are going to suppress markets.
They are going to suppress the enthusiasm for buying stocks and shares.
They are going to force people to save more.
They are going to reduce investment, and they are going to lead to people fleeing to safe havens like gilts, like bonds, and like gold.
All of that suggests that we're in for deep financial trouble. And unless Trump changes his track, and I can't see that he's going to, this is almost inevitable.
Why he wants to do that, I don't know because, most certainly, in his first term, he saw the vibrancy of US stock markets as a sign of his own almost virility, his success as a president.
And this time, I think that success is going to be decidedly short-lived. Markets are going to rumble that tariffs aren't for overnight or for threat but are actually here to stay. And once they realise that the US is an isolationist state, seeking to protect itself and cut itself off from the rest of the world, they're going to react.
They're going to react, and markets are going to fall, and life is going to be very uncomfortable for a lot of people.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
Much to agree with.
“They are going to force people to save more. They are going to reduce investment”
Which means that UK gov needs to step into the breach. Oh er, hang on a sec, “Rachel from accounts” says that companies will invest to get the Uk growing. If they do, they will demand a premium, some/many/most? projects won’t get over the hurdle rate. Which means slow-growth/no-growth.
I doubt if LINO/Starmer/McSweeney are bright enough to understand this. They probably think its a trot-plot or summat.
As for the USA, I believe the opening scenes in the film “V” offered a good view of what will happen.
Well, two scenarios then come to mind.
1. The markets will help bring down Trump with a reality check.
2. The rampant corruption will smooth it all over and the poor will pay the bill.
With respect to point 2 – the tariffs on steel & ally & chinese stuff will be used to allow Trump to reduce taxes (for the rich). But it will be (mostly?) the poor who will pay for the tariffs. Thus a transfer of money from poor (mugs & maga voters) to rich maga voters.
Entirely agreed
One consequence of all this is that the DB pension surpluses Reeves has had her eyes on are going to evaporate quickly as liabilities increase as a result of a falling discount rate and asset values will fall at the same time. Deficits will be back. Local authorities have reduced their pension contributions to divert funding to front line services suffering from budget constraints. That option is going to vanish. It all adds up to more pressure on DB pensions.
Agreed
The other potential impact of this is a disruption to employers plans to transfer their DB pension schemes to pension insurers….buy outs…which are dependent on funds achieving surpluses. Also are we giving to see sress on the resulting superfunds which are of a size now where they are “too big to fail”?
Very good article about Local Authority Pension schemes in FT Alphaville, today.
Agreed
What is bizarre is poor rates of return and overfunding.
Lower interest rates will turn this ugly.
We’re not going to get back to anywhere near the situation we had pre-2022 as interest rates are not going to be anywhere near that low again. Surpluses in pension schemes have still never been bigger, so much so that an increasing number are paying a premium to pass them over entirely to insurance companies.
It’s also generally the case that the more favourable funding positions seen in recent years have enabled trustees of the schemes to (further) de-risk with respect to interest rate and inflation exposure (and with less leverage to mitigate the issues of late 2022), and therefore reversals in yields should not have quite the same impact as they did on the way up.
So, aggregate surpluses will reduce due to falling bond yields, but they will still remain large (while they are not handed over to insurance companies).
However, as I think Richard has alluded to on this blog, the bigger question is whether trustees can agree to releasing assets from schemes or to invest in riskier assets given their primary duty is to ensure that members receive their benefits in full. That issue doesn’t go away easily.
I’m trying the Donald Rumsfeld analysis (I know nothing about stock markets or business, but a little about people).
We KNOW that Trump is erratic, irrational and unpredictable – we have videos of him making incoherent speeches. That WILL get worse. “Mad”.
We KNOW that morally he and his team are bad people. We have evidence of their greed, misogyny, racism, dishonesty, and mockery of disabled people. That will get worse. “Bad”.
We KNOW that they are complicit in war crimes (as are most Western politicians), and are announcing their intent to commit more. Like our own government, they reject the rule of law, especially international law.
We KNOW that we DON’T KNOW what he will do next or what will happen next.
We KNOW that we DON’T KNOW how long he will remain in office, nor who may be appointed as the new team, if Vance replaces him, or whether Musk will survive or be sacked.
We KNOW that all 3 branches of the US government are creaking at the seams, and we DON’T KNOW whether the US Constitution will survive. The Executive, the Legislature and the Judiciary are all sicker and weaker than they have been since the Civil War.
We KNOW that America has a lot of guns and a lot of militias and a lot of fear, division and tension.
We KNOW that our own UK government is inept, dishonest and bereft of leadership. Our governing party is in meltdown, the consequences of burying the Forde Report are now in full view. We have no effective democratic opposition.
We DON’T KNOW what the outcome in the UK will be but we KNOW that fascists are limbering up in the wings, with every expectation of electoral success.
We KNOW that street violence has already happened in the UK.
We KNOW that the UK Government is currently showing videos on TV of immigration roundups and deportations, that remind me of pictures of the Nazi roundups and transports of my parents’ generation.
https://collections.ushmm.org/search/catalog/pa27537
because our government wish to harvest fascist hatred for their own advantage.
All this can be overwhelming, and leave us feeling powerless. It is difficult to know how to react to so much “uncertainty” on top of so much evil. I’ve decided that within my own v limited sphere of influence, I will adopt what Martin Luther King Jnr called “aggressive love”. That will look different for each of us, but we ALL do have a sphere of influence, where we can be aggressively loving.
After years of pain, S Africa, N. Ireland, Bosnia and Kosovo found a path to imperfect peace. It CAN be done. Stockmarkets go up and down. Markets rise and fall.
The inexhaustible, renewable, sustainable resource of aggressive love can be incredibly effective, in politics, economics, trade, business, health, social care, and ordinary daily domestic life.
Thanks
We in Scotland know that it’s unlikely that we could make a bigger hash of running our own country ourselves than has been “done on our behalf” by successive Westminster governments for decades, maybe even centuries, and, with the world seemingly charging towards ever-greater chaos, perhaps nobody would even notice our departure from the UK. What are we waiting for? There are plenty of templates of bad governance around to show us what NOT to do. We are an ancient nation is search of an identity which isn’t owned and controlled by another nation; we have our own legal, educational and health systems and services, our own Parliament (which needs a bit of shaking up), our own languages, history and culture, Tim Rideout has already set up basis for a central bank and our own sovereign currency, we have made a point of retaining good relationships with the EU and, with our green energy and water services already producing more than we can consume ourselves, we have all the ingredients for a successful nation.
Apologies for barging off-topic, but being part of the UK in these turbulent times seems a bit like being a “steerage” passenger on the Titanic and Robertj’s analysis set me off.
No problem!
I read this article this morning – The CEO of Ford says tariffs are going to cause major harm to the US car industry, which is huge for the most car-centric country in the world. https://arstechnica.com/cars/2025/02/ford-boss-says-tariffs-will-create-cost-and-chaos/
The CEOs of major companies are already warning about tariffs, and either no one is the US gov is listening, or they’re aware and just don’t care. I don’t think you will have to wait until summer for the markets to realise what is happening.
The biggest holders of gold are central banks. A lot of central banks have been increasing their gold holdings – e.g. Russia, Poland, China, India. That has been putting a lot of upward pressure on the price. They have also been removing their gold fro the NY Fed and BoE vaults. Germany has taken all its gold back to Frankfurt. Why? Very simple. It is a reserve asset and a means of international settlement that is independent of the US and the dollar. Other countries increasingly do not trust the US (or UK). We have repeatedly broken international law to seize reserves (e.g. Venezuela by the BoE), and the US has weaponised its control of the dollar settlement and payment system. Until there is an alternative reserve currency then gold will be it. You reap the whirlwind eventually!
Thanks, Tim.
It’s actually very simple. Trump and his cronies are aiming to buy cheap in the crash and sell in the upturn. That’s why he pivots almost immediately after his announcements.
Will markets crash? Who knows… “markets can remain irrational longer than you can remain solvent” (Keynes).
To be honest, I think that the FTSE might fare OK. It is an international backwater, cheap by comparison as most people see the UK has engaged in self harm. Prices are at new highs because other markets are up, UK interest rates are now falling and will fall further and foreign earnings (huge part of FTSE), when translated into weakening sterling, are rising.
The market that “matters” – the US S+P 500 is more interesting. Valuations are sky high but much of industry is paralysed by policy uncertainty (mainly on tariffs but elsewhere, too). Earnings from Tesla, Google and Amazon were not great. Rates are not falling in the US. Why we are still at these levels is odd….. but explained by “retail investors”.
They have been huge net buyers of US stocks so far this year…. they keep “buying the dip”.
Joe Kennedy famously exited the stock market on a timely basis in 1929 saying that “when the shoe shine boy is offering stock tips it is time to sell”. It does feel a bit like that now.
I agree with Joe Kennedy. I would not say that very often.
To some extent the question is what people should be doing… investing in stocks that are going to crash is likely to be a mistake. Holding currency may be a bad plan if countries like the UK are forced to allow inflation higher.
At the moment the smart money might be looking closely at what sectors and companies are going to be affected next and trying to take advantage of the volatility. This week it’s US steelmakers getting a boost. Meanwhile, Tesla shares are down significantly (cry me a river, everyone 😉 ). Next week or month other tariff plans could be boosting energy company share prices or hurting retail companies and farming company valuations as they’re pushed to trim margins. At other points the best outcomes may result from moving into another currency or (if risk appetite allows) crypto as market cycles continue.
Those that will do best will likely be moving between assets looking to benefit from the different phases of that volatility.
Arguably cyclic, volatile markets are the most beneficial to the wealthy, because they have the liquidity and support to enter and exit markets each cycle. That’s part of why regulators and governments should be aiming to ‘fix the roof while the sun is shining’ – to reduce volatility.
Otherwise, some are put under pressure during downturns and have to sell under distressed conditions, with the wealthy picking up the most assets at the bottom and granting the wealthy the greatest benefit during the upswing.
Or weather it out with cash right now.
Can someone please explain how King Donald will use tariffs to fund tax cuts for the US super rich?
My understanding is that normally an importer pays the tariff and then passes the cost on to customers and so on to the end consumer.
This will stoke inflation, resulting in the Fed putting up interest rates, in turn starting the process of a big recession.
Tariffs are taxes paid to the Fed. They increase US federal income. That then permits tax cuts for the wealthy assuming budget balances aren’t to change.
It doesn’t have to be tax cuts (although it might be). But it seems a bit of a blunt instrument.
It could, say, be more government grants for American companies, particularly those in the IT and data sectors. Or any other area dear to Trump’s investors. Then marketed as an investment in America.
Shall we be realistic?
If you shift taxation from income to tariffs, then that is a tax break for those whose income tax is reduced. This could be rich and poor alike, although the expectation is that Trump will prioritise tax breaks for the rich given that’s what he did last time around.
Additionally, for poorer people, this may be fairly neutral to negative as any tax reductions will get eaten up by higher prices (and tax allowances may mean they benefit less from changes). The wealthy, meanwhile, have the tax on their surplus income reduced and are able to save more, becoming able to save even more. That applies to investment income, too, allowing the already-rich to get better post-tax gains on their wealth, so it particularly benefits the ultra-wealthy.
Furthermore, wealthy individuals are liable to spend more of their income abroad (e.g. on foreign holidays), where they are not paying higher prices, so their minimally taxed income goes further. This, of course, both benefits them and encourages a diversion of economic activity away from the US to the detriment of less wealthy US citizens.
As you can see, replacing income tax with tariffs without also considering something like a wealth tax (which is clearly not on the agenda outlined) would serve to increase inequality.
Thanks Richard
Yanis Varoufakis, the Former Minister of Finance of Greece, has a different perspective, and suggests that “Trump’s tariff fixation is part of a global economic plan that is solid.” He writes:
“Central to this new global order would be a cheaper dollar that remains the world’s reserve currency — this would lower US long-term borrowing rates even more. [..] He knows that the markets will never deliver this of their own accord. Only foreign central banks can do this for him. But to agree to do this, they need to be shocked into action first. And that’s where his tariffs come in.
“This is what his critics do not understand. They mistakenly think that he thinks that his tariffs will reduce America’s trade deficit on their own. He knows they will not. Their utility comes from their capacity to shock foreign central bankers into reducing domestic interest rates.”
Article in full: “Donald Trump’s economic masterplan: He is plotting an anti-Nixon shock”
https://unherd.com/2025/02/why-trumps-tariffs-are-a-masterplan/
I think that is far fetched. Sorry.
Varoufakis is often ‘on the money’ but here he’s way off piste (to mix metaphors )
Reduced US imports, if that’s what Trump achieves, will reduce demand for USD and weaken dollar hegemony; and countries and blocs like BRICS are already looking for alternative reserves, given the chaos in DC, Main Street and, when they really think about it, Wall Street.
[…] Right now, they're being snapped up even though the effective interest rate on them is falling, as I noted here very recently. So, to claim that private money must be used makes no sense whatsoever. Cheaper public money is […]