True lifelong financial planning for the serious business of life.
True lifelong financial planning
for the serious business of life.
True lifelong financial planning for the serious business of life.
True lifelong financial planning
for the serious business of life.
Category: Financial Planning
Recent weakness in financial markets has been accompanied by a sell-off in the US dollar. Along with falls in equities and bonds, the dollar has fallen to its lowest level since 2022. At one point in April, it was down over 9% against a basket of currencies since the start of the year.
This inverts the usual relationship in which investors move into dollars in times of elevated risk. America’s vast economy, backed by strong institutions and stable government, has long been seen as a safe haven in times of stress. Yet recent uncertainties, triggered by shifts in US trade policy have seen investors shun the dollar and flock to other currencies, including the Swiss franc and the Japanese yen.
Under current plans, US tariffs are set to rise to the highest level since the 1930s, more than ten times higher than at the start of this year. This is arguably the most momentous break in US economic policy since America’s abandonment of gold convertibility in 1971. The current US administration’s departure from the free trade consensus of the last 80 years has prompted speculation about previously unthinkable outcomes, such as selective treasury defaults or the withdrawal of federal dollar swap lines to allies.
The sell-off in the dollar, shifts in US trade policy, and speculation about even more radical policies all raise the question about whether the dollar’s position as the world’s reserve currency could be threatened.
Reserve currencies are held in significant quantities by other central banks as part of their reserves, which can be used if necessary to buy imports, meet international debt obligations, or influence the domestic exchange rate. Currencies held by central banks tend to be those most widely used in international trade and finance. The essential characteristics of a reserve currency are that it is convertible, backed by credible economic policies, and has scale. For at least 80 years, no other country has come close to matching the US dollar on these criteria and as the dominant reserve currency.
The US accounts for about a quarter of global GDP, yet close to 60% of the world’s official foreign currency reserves are in dollars. The dollar is involved in 88% of all foreign exchange transactions, 70% of international bond issuance, 60% of all international loans and deposits, and over half of all trade is denominated in dollars.
Critics contend that the dollar gives the US an outsized influence in the world and provides the US government with cheap credit because foreign demand for treasuries drives down borrowing costs. In the 1960s, France’s then minister of finance, Valéry Giscard d’Estaing, famously claimed that the dollar gave America an “exorbitant privilege”.
By facilitating global trade and commerce, the dollar has created large net benefits for the rest of the world. The globalisation and economic growth of the post-war period have been built on dollar stability. It is hard to see how any other currency could have fulfilled this role – no other currency has the credibility or the scale in terms of domestic debt issuance and the convertibility of the dollar.
A potential disadvantage for the US of the dollar’s global role is that it creates excess demand for dollars, artificially inflating its value. Again, the precise effects are contested, but last year Mr Trump took up the theme, saying a strong dollar had been a “tremendous burden” on US industry.
Before he became head of Mr Trump’s Council of Economic Advisers, Steven Miran wrote a paper arguing that the US should seek to weaken the dollar to counter the effects of supposed overvaluation caused by its reserve currency status.
The central question is whether the dollar’s global status is good for the US. That has certainly been the view of successive generations of US politicians and policymakers. The current administration has not suggested that it takes a different position, but uncertainty about economic policy and the administration’s wider aims, especially in relation to trade, has reopened a familiar question about the role of the dollar.
The dollar is fundamental to the operation of the global economy and has been for many decades. The absence of any real contender for the role of global reserve currency means that dollar dominance could have much further to run.
Yet while it may lack competition, the dollar is not unassailable. Confidence in US policy and institutions is what gives the dollar its power. The sell-off in the dollar suggests that confidence has been damaged. Whether this is temporary or permanent, only time will tell.
“Opportunities are like sunrises. If you wait too long, you will miss them.” – William Arthur Ward (December 1921 – March 1994), American motivational writer who wrote over 4,000 epigrams. His sayings have been published extensively in inspirational posters, greeting cards, diaries, and wall plaques.
The second act of Hamilton, the award-winning musical depicting the life of one of America’s founding fathers, features a song entitled “The Room Where It Happens”. The scene, set in 1790, focuses on the economic arrangements of the United States as agreed by the then US President Thomas Jefferson, James Madison, Jefferson’s eventual successor, and Hamilton himself.
Fast forward 235 years, and it was President Trump, Peter Navarro, JD Vance, and who else in the room where “It” happened? Lots of people claim to have been present when the great tariff decisions, announced on 2 April, were made, but their inability to explain the rationale behind them suggests they were elsewhere – or that the policies are inexplicable.
Perhaps of more interest are suggestions that some were definitely not there but knew of the decision on 9 April to pause most of the reciprocal tariffs ahead of time and acted on that knowledge. It is certainly a short-term challenge if insiders are trading around announcements, but it does not affect long-term stock values that much.
Long-term investors can take comfort from the fact that whoever benefited from the tariff pause, it was brought on by the US debt market. This is a huge problem for Trump 2 and his tariff ambitions. The US federal debt is a staggering $36 trillion, more than 120% of GDP. The tax cuts pledged by Trump in his election campaign could add $4.5 trillion to this, taking it to 137% of GDP.
There are claims that the tariffs would raise significant revenue to fund the tax cuts, but it is more likely that there will be fewer imports to tax. Immediately after 2 April, bond yields fell, which is usually a sign that investors think a recession is coming. Well, consuming less is certainly one way to cut the trade deficit!
Since then, Bond yields have risen, but this does not mean recession fears have eased. Rather, it more likely means the bond market is eyeing up how many bonds need to be issued to finance the huge debt. It is also concerned that this will be an unusual recession with tariffs fuelling inflation, when normally a recession would cool it. In short, investors want more reward for sticking with US treasuries.
Some years ago, one of the world’s most celebrated experts opined, “Sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favourable factors. At other times he is depressed and can see nothing but trouble ahead”.
It might seem like an armchair diagnosis of the ever-volatile Donald Trump, whose first inauguration speech conjured a vision of “American carnage” while his second was “confident and optimistic that we are at the start of a thrilling new era of national success”.
“He has another endearing characteristic”, the diagnosis went on. “He doesn’t mind being ignored”. Definitely not Trump then! No, the psychotherapist was the world’s most celebrated investor, Warren Buffett, and lying on Mr Buffett’s couch was a hapless gentleman named “Mr Market”.
Mr Market, a concept first devised by Warren Buffett’s mentor Benjamin Graham, represents a vivid portrait of financial markets as being prone to frenzies and panics and periods of irrational exuberance or yawning depression. A stark contrast to the alternative “efficient market hypothesis”, in which markets swiftly fold new information into the price of assets.
In recent weeks, Trump and Mr Market have been locked together in a self-destructive spiral like two drowning men with their arms around each other’s throats.
This undignified spectacle would be funny if it weren’t so dangerous, and it raises the question: Who is panicking about whom? Are Trump’s roller-coaster tariff and interest rate policies as shambolic as they seem, or, as his supporters claim, and his opponents fear, is there some brilliant strategy behind it all?
Has Mr Market’s response reflected a cool assessment of the economic consequences, or is it the startle reflex of a financial system jerked awake from a complacent snooze?
While the current tariff situation presents a clear risk to global growth, a coordinated response from policymakers can help to avoid a Trump-cession. Unlike the last two major crises, when central banks had limited room to manoeuvre due to near-zero interest rates, today’s higher rates provide a lot of opportunity.
Never underestimate the power of the ruling elite, especially those on Wall Street. Money has a hold over US politicians and policymakers – the Federal Reserve, too. Its so-called reaction function has historically been totally skewed to supporting markets versus deflating bubbles. A 15% rally? Silence! A 15% decline? Rates will be cut. Hence, it could be a mistake to follow the narrative that the US central bank is in a dilemma. Does it lower rates to calm markets or hold them steady to keep inflation in check? As volatility increases, the phones will ring. The Fed, followed by other central banks, will support the markets and economies and cut interest rates aggressively if necessary.
In the midst of all the tariff and interest rate chaos, it is worth noting that Scott Bessent, US Treasury Secretary, seems increasingly influential in Trump’s quasi-imperial court. Reports suggest that he not only clashed with Elon Musk recently in a dispute over the Internal Revenue Service but also won.
That is encouraging. If anyone in Trump’s orbit understands market discipline, it should be Bessent, given that he worked with George Soros’s hedge fund when it famously “broke the pound” back in 1992 by betting that economic fundamentals would force the British government to abandon the sterling currency peg.
Bessent is, in other words, a financial poacher turned gamekeeper who respects bond vigilantes. Better still, there is mounting evidence that those bond market vigilantes are forcing Trump to blink. When Treasury yields surged earlier this month, Bessent (and Trump) verbally softened their wilder tariff threats. So too, when yields soared again after Trump threatened to remove Jay Powell as chair of the Federal Reserve.
Bessent is also familiar with the technical tricks he can find to maintain calm. One would be to accelerate a programme to purchase illiquid long-dated Treasuries and replace these with the type of liquid bonds that foreign investors like. “We could up the buybacks if we wanted”, he recently said, “We have a big toolkit that we can roll out”.
We can never be sure what comes next, but right now the key point is this: in Bessent there is a dragon tamer, of sorts, in the White House, clinging on to the beast’s tail.
I am not a stock market Chartist, but I do find charts interesting, and they can often be self-fulfilling. The stock market rally, since the Trump blink after the threat to sack the Federal Reserve chair, has triggered the Zweig Breadth Indicator for only the 18th time in 80 years, an almost foolproof bullish signal for the next 12 months. It only happens when the share of stocks that are rising moves from less than 40% to more than 61.5% within a 10-day period. In other words, this rally lifted a lot of boats and left many pointing in a positive direction.
Many businesses outside the US are global leaders; they are resilient and well-positioned to adapt. They have adapted before, and they will do so again. They may explore new partnerships and use alternative sourcing and trading methods, possibly from new locations. They may even enter new markets to maintain momentum, but their recovery is undoubted. Good companies last a lot longer than governments, and the strong often get stronger during crises like this.
Clarion and some others have been warning for some time about the danger of having too much wealth in a global index tracker. Years ago, US equities made up just under half of the global index, but recently that figure has risen to 70%. This seems out of kilter with the US share of world GBP of 26%.
Reducing exposure to the US and tilting more towards Europe, including the UK, and Asian equities seems sensible. Equally, it seems prudent not to abandon the US completely but to reduce exposure to the still overvalued multinational tech companies. These companies will arguably be affected most by a more protectionist world.
Geographical diversification is important in periods of economic fragmentation and requires an active approach to investing. Selectivity allows investors to avoid markets or sectors more exposed to trade uncertainty, as well as to lean into segments of the market that are cheap and may have overcorrected in response to the recent trade news. Dislocations such as these are a great opportunity for long-term investors.
As noted in Hamilton, the key to “laughing in the face of casualties and sorrow” is “thinking past tomorrow”
As always, we thank you for your continued support and we look forward to updating you regularly throughout 2025. Please get in touch if you have any questions.
Keith W Thompson
Clarion Group Chairman
April 2025
Any investment performance figures referred to relate to past performance which is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments, and the income arising from them, can go down as well as up and is not guaranteed, which means that you may not get back what you invested. Unless indicated otherwise, performance figures are stated in British Pounds. Where performance figures are stated in other currencies, changes in exchange rates may also cause an investment to fluctuate in value.
The content of this article does not constitute financial advice and you may wish to seek professional advice based on your individual circumstances before making any financial decisions.
If you’d like more information about this article, or any other aspect of our true lifelong financial planning, we’d be happy to hear from you. Please call +44 (0)1625 466 360 or email [email protected].
Click here to sign-up to The Clarion for regular updates.