Financial markets and the world of yesterday.
Is it enough to hope that President Trump will be more 'transactional' or that the Fed will step in to stabilise markets?
Writing in a self-imposed exile in Brazil in 1942, the Austrian novelist and intellectual Stefan Zweig reflected on the moment that the news of the assassination of Franz Ferdinand, heir to the crowns of Austro-Hungary, reached Vienna in the summer of 1914. It was the event which proved to be the catalyst for the start of the First World War:
“So my mind was instinctively distracted from my reading when the music abruptly stopped…A change also seemed to come over the crowd promenading among the trees like a single pale entity flowing along. It too stopped walking up and down. Something must have happened.”1
Zweig was writing nearly 30 years after the event, reflecting on the loss of a world of security, progress, stability and high culture. In economic terms, he made clear on the first page of his memoir ‘The World of Yesterday’ what was lost:
“Our currency, the Austrian crown, circulated in the form of shiny gold coins, thus vouching for its own immutability. Everyone knew how much he owned and what his income was, what was allowed and what was not.”2
For financial markets still reeling from the reality of a real trade war, the 2nd April, ‘Liberation Day’ according to President Trump, seems to be one of those days in history which, like the day Franz Ferdinand was shot, marks a turning point.
There is still some hope that the White House is just using tariffs as a negotiating or bargaining tool rather than as a revenue-raising exercise or a blunt hammer to reorganise the system of world trade. At the time of writing, more than 50 countries are supposed to be hoping to negotiate down the reciprocal tariffs imposed on them last week3.
With the credit markets starting to show a worrying increase in spreads, particularly at the junkier end of the spectrum, the rates market is now pricing in four additional Fed rate cuts in 2025 in order to bail out an economy that some are feeling is about to head into a recession4. In some corners, and despite inflation remaining stubbornly above the Fed’s 2% target, there is talk of the need for more quantitative easing to keep asset prices inflated.
Much like Stefan Zweig sitting in a park in Vienna in 1914 listening to an ensemble tinkle away on the band stand while reading a book, the world of investing that has been sustained since at least 2010 (and probably since the late 1980s) seems abruptly to have come to a halt. Trends in global trade that can be traced back to the establishment of the General Agreement on Tariffs and Trade (GATT) in 1947 appear to have been permanently ruptured, even if the level of tariffs are rowed back.
If anyone had known what World War I was going to be like, it is likely more efforts would have been made to avoid it. Notwithstanding the mass slaughter, it started political revolutions that ended several European monarchies, led to the rise of communism and sowed the seeds of fascism. The comfortable free-trading world of the gold standard was the other major casualty.
The euphoria with which the US stock market and crypto markets more generally greeted President Trump’s second term seem a distant memory. Asked yesterday if he cared about the stock market, Trump said, “I think your question is stupid. I don’t want anything to go down, but sometimes you have to take medicine to fix something.”5
Trump’s real concern is America’s trading relations with the rest of the world: “We have to solve our trade deficit…Unless we solve that problem, I’m not going to make a deal”. The tone couldn’t be more different from the ‘tired of winning’ banter of his 2016 election campaign.
While there are still hopes that eventually tariffs could be reduced to a base level of 10% say, the longer the higher tariffs remain, and the longer the negotiating period continues, the greater the damage to global trade and prosperity and the higher the risk of a severe global recession. Vietnam’s immediate willingness to ditch tariffs could be a sign of things to come6. But the biggest dog of all, China, has responded with a 34% retaliatory tariff on US imports while the EU has announced an initial tariff on $28b of US goods. The guns of August giving way to stalemate in the trenches perhaps.
What should investors do now? Unfortunately, despite the sharp sell off in US equities since President Trump’s inauguration, valuations remain at historically high levels. Credit spreads are still very tight, and given the proliferation of private credit in recent years, the quality of much lending will be called into question. This perhaps explains why US bank equities sold off so sharply lasts week (the KBW Bank Index fell 13%). Valuation doesn’t matter until it does.
When markets get really choppy, people inevitably start talking about Minsky moments. This is the idea put forward by the economist Hyman Minsky about the event of a sudden fall in asset prices that marks the end of a credit or business cycle. Certainly the wealth destruction that is ongoing is extraordinary, as is the pace of the sell off.
Eulogising about the pinnacle of high culture that characterised pre-1914 Vienna, Stefan Zweig’s ‘World of Yesterday’ does come across as highly complacent, if not effete. Likewise, what leads to the Minsky moment is over-confidence produced by an increasingly irrational period of bullish speculation based on ever-expanding credit. What happens now is in a sense driven by what has gone before, especially if one thinks in terms of valuations returning to their long-term averages, at least in the US.
The French aristocracy never saw it coming? It is quite clear that a number of the biggest and most successful investors have been paring their exposure for some time now. Back in August last year, Market Depth noted not only that Warren Buffett was taking profit and buying T-Bills, but also that CEO’s such as Jensen Huang (Nvidia) and even Jamie Dimon (JP Morgan) were cutting their holdings in their own company’s stock (see link below).
If anyone claims they know what’s coming next, then their investment advice ought to be treated with extreme caution. In fact, extreme caution (as opposed to a knee jerk buy-the-dip response) ought to be the order of the day. There should always be hope that tariffs can be negotiated down, but this overlooks President Trump’s belligerent style and hubristic approach to politics, and perhaps an overestimation of America’s real economic strength. With an excess of debt and deficit financing, there is always a reckoning at some point.
What investors ought really to focus on is why the world of yesterday has gone. Populism and nationalism don’t come out of good times but bad ones. Relying on low interest rates and growing leverage through easy credit and large government deficits has helped the world on from the global financial crisis in 2008, but we are now in an era of higher rates due to higher inflation, and the investor playbook has to change. Once the carnage is over, the future may well prove to be one where hard assets dominate financial assets as investors’ area of focus.
The pre-1914 era was one of simmering class tension domestically and great power rivalry externally which burst into the open when war started. Wealth inequality, indebtedness and a shift towards growth in the ‘global south’ are comparable trends today.
The result could be that the era of American exceptionalism, globalisation and the dollar as the reserve asset of choice may be coming to an end. President Trump’s approach may be violent and often anarchic, but that isn’t to say that fundamental change wasn’t coming or wasn’t needed, and that is the question investors really need to get their head around.
Stefan Zweig, The World of Yesterday, Memoirs of a European, Pushkin Press, 2024, p238.
Ibid., p23.
Kevin Hassett: ‘More Than 50 Countries’ Want to Negotiate Trump Tariffs, Wall Street Journal, 06/04/2025.
Sarah Min, Traders betting Fed will cut rates at least 4 times this year to bail out economy, CNBC, 04/04/2025.
Donal Trump, Fox news interview, 06/04/2025.
Nguyen Dieu Tu Uyen, Vietnam Offers to Remove Tariffs on US After Trump’s Action, Bloomberg, 06/04/2025.