Liberation Day: The End of Globalization as We Know It?
Apr 03, 2025President Trump’s long-awaited ‘Liberation Day‘ proved to be more draconian than most investors expected. Stocks and the U.S. dollar both responded by falling sharply. While many of the details need to be worked out, tariffs of 54% on goods coming from China (34% from reciprocal tariffs and 20% for fentanyl) and 46% from Vietnam, for example, may lead to demand destruction and supply chain disruptions. Many on Wall Street are now beginning to increase the odds of a recession.
Federal Reserve Chairman, Jay Powell, gets our nomination for facing the most difficult job. The Federal Reserve (the Fed) is between a rock and a hard place. The economy is softening while inflation remains sticky. While the economy is slowing, we do not expect the Fed to come to the rescue with aggressive rate cuts, unless there is a major economic downturn. Rather, they will rely on fiscal stimulus to drive the economy. This puts the onus on the President and Congress to enact the tax cuts that were among the cornerstones of the President’s campaign agenda. If the government manages to pass lower taxes on social security, tips and overtime that will provide some stimulative effect for the economy; however, if they only manage to extend the 2017 tax cuts, that is just extending what is currently in place and will not provide nearly enough offset for the money being taken out of the economy due to tariffs.
White House Press Secretary Karoline Leavitt, said earlier this week: “Certainly, the President is always up to take a phone call, always up for a good negotiation.” We suspect the White House switchboard is lighting up like the sky on the Fourth of July, with countries lining up to strike a deal with the Administration to lessen the tariffs. While some countries are threatening retaliation, we believe that most will be seeking to strike a compromise. Part of that compromise may involve letting their currencies rise versus the dollar. The strength of the dollar over recent years has caused angst for American companies and farmers trying to sell their products abroad. The dollar raced ahead of the Japanese Yen and Chinese Renminbi by nearly 23% and 14%, respectively, during the period March 31, 2022, through March 31, 2025. The strength of the U.S. dollar serves as a major hindrance to U.S. companies trying to sell products abroad. The dollar experienced two major depreciations over the past few decades, one when the U.S. moved away from the gold standard in 1971 and then again with the Plaza Accord in 1985.
Yet to come is the response from the nations affected by the tariffs. For those unable to strike a deal, we may see those countries place tariffs on U.S. intellectual property and services, which are driving forces of the U.S. economy. The headlines will undoubtedly be changing fast and furiously over the next few months. Those headlines will come with additional volatility. Ultimately, we believe that tariffs will not be as severe as initially announced. But we do believe they will be higher than they were prior to the announcement. We will remain disciplined and will not jump on the last tweet/post but rather maintain our conviction that the U.S. dollar will trend lower over the next few years. In such an environment, we believe foreign shares should outperform domestic names and shares of select commodity-related firms would be expected to outperform, realizing that such moves will not come via a straight line. We remain overweight Western Europe and have added to Mexico and South America over the past several quarters. We will seek to take advantage of dislocations in the market, as we strive to deliver superior risk-adjusted returns.
We encourage you to contact your MAP representative with any questions or concerns.
Managed Asset Portfolios Investment Team
Michael Dzialo, Karen Culver, Peter Swan, Zachary Fellows, John Dalton, and Nicolas Vilotti
April 3, 2025
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