Panic Journal – Trump II: “There might be blood”

Fast Abstract:

This put up accommodates extra random musings concerning the present scenario, plus an up to date “portfolio verify” on the finish. So be at liberty to leap to the tip if you’re solely within the portfolio verify.

Background:

On the finish of 2024, I wrote a primary put up about what may occur following each a Donald Trump win within the US election and a breakup of the German coalition. My takeaway was that possibly US shares weren’t the nice deal they have been presupposed to be.

Since then, two main developments have modified:

1. The promised 7–10% US progress has was an virtually sure recession.
2. The end result of the German election has been barely higher than initially feared.

All of this has led to a big outperformance of European large-cap shares, particularly in Q1.

Trump / US

I’ve completely no thought the place that is all headed. However one factor is definite: uncertainty. Particularly concerning the longer term path of the US authorities, uncertainty has elevated considerably.

I believe this interpretation by CNN anchor Fareed Zakaria summarizes the “new world” fairly realistically:
📺 https://www.youtube.com/watch?v=3xz7BGAJYhg

A extremely advanced tariff system for the world’s largest financial system—the place exceptions will be granted or revoked by a single particular person—will undoubtedly create vital collateral harm, even when a couple of gamers handle to profit.

Whereas it’s arduous to check instantly, Trump II seems simply as chaotic as Trump I. However there may be one key distinction: the folks round Trump now appear way more ideologically pushed than throughout his first presidency. Watching them on TV, it more and more resembles a cult—very similar to the cult round Elon Musk, solely with a lot deeper penalties.

The overarching ideology appears to be that America has been taken benefit of by your complete world, and now it’s payback time—by way of tariffs, land grabs (Greenland, Panama), or compensation for army help (Ukraine’s uncommon earths).

They might concentrate on China, however they don’t appear to care if the remainder of the world goes up in flames.

The Position of Buyers within the US Commerce Imbalance: Free Money Movement and Capital Effectivity

From Trump’s perspective, the narrative is commonly that China, Europe, and even “the Penguins” have stolen manufacturing jobs by way of unfair practices—primarily by providing cheaper labor.

However one angle is commonly forgotten: investor strain on firms to remain “capital gentle” and generate vital free money stream.

Whenever you discuss to buyers about European shares, one argument all the time comes up: “Look how weak free money stream is to your European firms, and the way poor their returns on capital are. US firms, alternatively, are money machines with large buybacks.”

Warren Buffett himself defined this intimately in his 1985 letter to shareholders, when he shut down his textile enterprise. Right here’s the important quote:

“Thus, we confronted a depressing alternative: big capital funding would have helped to maintain our textile enterprise alive, however would have left us with horrible returns on ever-growing quantities of capital.“

Buffett—and lots of capital allocators after him—acknowledged a tough fact: mass manufacturing is capital-intensive, cyclical, and aggressive. And that mixture simply doesn’t produce nice shareholder returns in the long term.

It’s far simpler to create free money stream from providers (GEICO), sugarwater & caffeine (Coca-Cola), or branded sweet (See’s Candies).

In my view, the relentless US concentrate on capital effectivity and the outsourcing of capital-intensive, aggressive manufacturing is a key driver behind the unparalleled efficiency of US shares during the last 40 years. The quicker you ditched manufacturing, the quicker you bought wealthy—or super-duper wealthy—as an investor, PE man, or company CEO.

Sure, a couple of nice US manufacturing firms stay, however most are area of interest gamers with high-margin merchandise.

In distinction, in most main exporting nations—Japan, South Korea, Germany, and even China—returns on capital are considerably decrease. Why? For Germany not less than, a part of the reply is likely to be that many firms have been family-owned, with house owners much less desirous to get wealthy quick and extra content material with getting wealthy slowly—or simply staying wealthy.

It’s no coincidence that Apple or Nvidia—who don’t really manufacture themselves—have far increased returns on capital and free money stream than Samsung or TSMC, who nonetheless do quite a lot of their very own manufacturing.

This is without doubt one of the fundamental the reason why US markets have massively outperformed everybody else for many years.

The Large Query

Who will present the capital—and settle for the low and risky returns—to convey manufacturing again to the US?

Perhaps some Chinese language firms can be prepared to construct factories within the US for low returns, however the Individuals doubtless gained’t permit it.

European corporations may not have the capital—particularly if a recession is triggered by US tariffs. The identical may go for non-Chinese language Asian firms.

Even absolutely automated factories are capital-intensive and much much less environment friendly than outsourcing to a associate who’s glad with a decrease return on capital.

This is only one flaw within the “tariffs will convey again jobs” technique—however I haven’t seen a lot dialogue round it.

Germany / Europe

All in all, the end result of the German election—not less than from an financial perspective—could also be fairly near a “best-case” state of affairs, no matter which means.

A CDU/CSU and SPD coalition is prone to ship a extra pro-business, pro-growth agenda than a authorities that features the Greens or extra radical events.

The unhealthy information is that about 35% of voters nonetheless supported radical events (AfD, Die Linke, BSW).

They now have 4 years to point out whether or not they can stabilize Germany and Europe. If not, there’s a excessive likelihood these events will enter authorities subsequent time.

What they’ve accomplished thus far seems… okay. Not nice, however okay.

On the EU degree, the response has thus far been measured and affordable. Nonetheless, the Trump administration clearly harbors deep resentment towards Europe. Assuming a “no tariffs” consequence can be naive.

I see actual potential for escalation—possibly not fairly as unhealthy as with China, however Trump’s affection for Putin ought to make Europe cautious of anticipating honest therapy. What we will simply see from the Japanese and UK “negotiations”, an this Buffett quote involves my thoughts: “It’s inconceivable to make a great cope with unhealthy folks”.

Thus far in 2025, European—and notably German—shares have considerably “decoupled” from the US. However I don’t consider this might be sustainable.

“There Will Be Blood”

It doesn’t matter what occurs within the subsequent weeks or months, for my part, quite a lot of harm has already been accomplished.

The tariffs proposed by Trump are so excessive that no severe businessperson can confidently allocate capital with out understanding the place issues are headed. And because it stands, there gained’t be readability anytime quickly.

Should you put money into the US, who’s to say these tariffs gained’t disappear in 3 months? You may as soon as once more end up competing with low cost imports.

The one query is: who will get hit hardest?

Proper now, it appears massive firms with sturdy lobbying (Apple) and highly effective curiosity teams (US farmers) is likely to be spared or compensated.

However many smaller companies—each within the US and overseas—will undergo.

In fact, there might be winners, too. Smuggling—or “optimizing provide chains”—may grow to be massively worthwhile once more. Subtle logistics corporations that may reroute and repackage items will do nicely.

Native gamers who profit from lowered overseas competitors can even revenue. Something that guarantees “independence from China” will doubtless do nicely within the brief time period.

However once more—this could possibly be short-lived.

Consensus Trades & Structural Winners

The present consensus trades are:

• Gold (inflation hedge)
• European protection
• Uncommon earth mining

We’ll doubtless see extra of those “winners” rising—however to profit, you’ll want to remain nimble and act quick when the tide turns.

Some sectors may gain advantage structurally, as an example:

• Infrastructure with inflation-linked pricing energy (changing it will be pricey)
• Round financial system gamers—recycling important uncooked supplies may grow to be a key benefit if commerce wars intensify.

“Protection First” – Up to date Portfolio Examine

I’ve stored the outdated replace from final yr and made modifications the place wanted, together with new positions