In what follows, I’m taking off my hat as a human being and a US citizen and putting on my stock market hat.

I’ve been struck by the number of what appear to me to be significant leaks of information from inside the Washington establishment recently. Heather Cox Richardson points out that these seem to be cya moves–i.e., I know I’m part of a train wreck but I’m just a passenger.

Their general thrust, as I see it, is to reveal that the US attack on Iran is not going anywhere near as well as the administration is saying–in terms of control of the battlefield, the number of US casualties, or damage to civilian installations targeted by mistake. In addition, the reputational damage to the US from this war seems to be huge and the elevation of China in the eyes of the rest of the world that it has enabled equally significant. And that’s not factoring ICE into the equation.

More than that, I saw this morning an article that revived Warren Buffett’s criticism of what he has regarded as Trump’s excessive use of financial leverage. There’s even reference to the one public Trump venture we have substantial access to through SEC filings–the bankruptcy of his casino operations in Atlantic City. Of course, there are also things like Trump University, where there’s information through court filings.

There’s also the Saturday Night Live skit that’s gone viral–the one that shows actors playing Secretaries Hegseth and Patel, together with Justice Cavanaugh, drinking in a bar.

All of this makes it understandable, for me at least, why it has been a good strategy since the inauguration to overweight companies with revenues outside the US and domestic costs, as well as to avoid companies that are purely domestic or, worse, have foreign costs and US revenues.

The scoreboard: Since Trump took office, the S&P 500 is +26%. The EAFE index of non-US listed companies is +37% in $US, or 40% higher. My sense is that a portfolio of only US-listed companies, selected to have costs in $US and foreign revenues–in other words, making positive use of the damaged US economy rather than avoiding it entirely–would be at least 10 percentage points higher than EAFE.

My question: one of my bosses from the 1980s loved the expression “trees don’t grow to the sky.” He was right–nothing does. But is it time yet to reverse course and begin to neutralize the bet against relative economic growth in the US, or is it still too early to even throttle back a little?

The counter-argument has two parts:

–the damage to the rest of the world from the oil shortage is, in the short term at least, worse outside the US rather than in

–it seems to me that the purely financial damage to the US is only going to get worse as time passes. On the other hand, this increases the likelihood that the November election will run strongly against the administration–and set a reversal of the current trend in motion. On the other-other hand, that’s a long time in the future.

I’m a big fan of Heather Cox Richardson, the American historian of the nineteenth century who teaches at Boston College. Her Letters from an American is the most-read Substack, and she has spread its focus from the echoes of nineteenth-century politics in the present day to current domestic politics in general.

I was struck by a recent, multi-layered post, in which–assuming I understand it fully–she writes that Washington’s official announcements about the Iran war are presenting an inaccurate picture, by overstating damage to Iran and understating damage to the US. She believes this because leakers are revealing the true information.

Why the leaks? Their motivation is not just the apparently misleading nature of the official announcements. It’s also the leakers’ belief that Trump sold the top secret information he retained after his first term to hostile foreign powers.

Not really a good look for the president.

This is hearsay. But it has always seemed to me that there had to be some trigger that started the search for the documents Trump held. The obvious one would have been the arrest/imprisonment/death of the source that provided the information.

If any of this is correct, the city on a hill isn’t a shiny today as it used to be.

That’s what I’m thinking.

endaka = high yen

Japan’s recovery after the destruction of WWII became a model for emerging markets everywhere. The general idea was keep the currency deeply undervalued, concentrate on export-oriented manufacturing, build the industrial base. Keep wages low, domestic consumption to a minimum. The current generation would have miserable lives but their children and grandchildren would reap the benefits, in the form of living in a developed economy, of living in the advanced economy their families would have built.

The Plaza Accord of 1985–around the time I began managing my first global portfolio–forced Japan to revalue the yen very substantially. This launched the “high yen” era.

It also changed the character of the stock market, both for domestic names and for exporters into Japan very substantially. Up until then, the stars of the market were the export-oriented industrials, like Toyota, Nissan and Honda, to domestic names, like department stores, specialty retail and property companies. There was even a story back then that the grounds of the imperial palace in Tokyo were worth more than all the property in Manhattan.

So what experienced Japan investors had cut their teeth on (exporters) was now portfolio death and the discard pile (domestic names) was now gold.

Something following the same structural form has been happening in the US today, I think. The administration has chosen, it seems to me, to enact policies that, whether intended or not, structurally weaken the US economy and the US currency.

So this is the environment we as investors have to deal with–one where firms with costs in $US and revenues in foreign currency are worth their weight in gold, and those in the opposite situation are open to continuing negative earnings surprises.

Hard to know how long this situation can last. In the case of Japan, the first negative shock to the market came when the central bank began to raise interest rates. The second came a few years later when, due in part to Japan’s aversion to permanent foreign residents, the working population peaked.

My guess about the US is that what we mostly have to keep on the alert for is that tech valuations (our export sector) become very stretched. My tendency for some months has been to want to rotate out of tech and into domestic names, if for no other reason than that strong brand names might make good acquisition targets. But I also think that ICE violence makes us look too much like 1940s Berlin or Tokyo for our brands to hold the appeal they had once had.

So that has me for now anyway rotating within tech rather than into other sectors.

A fornt page article in today’s Financial Times points this out–that virtually all the performance in the US market is coming from a small number of mega-cap tech/AI companies.

The FT conclusion is that this almost always an indicator of bad news down the road.

My thoughts:

–yes, but how far down the road are we talking about?

–it seems to me that why this is the case in the current US stock market is at least as important as that it is. My belief is that rotation would long since have begun, except that, due to current administration economic policies, we’re not exactly spoiled for choice. The domestic consumer economy is unusually weak because of tariffs, efforts to reduce the work force, and by arresting and imprisoning/deporting potential workers. ICE’s very public killing of citizens protesting ICE activities aren’t exactly encouraging tourism, either. And the fact that the currency has fallen through the floor can’t be cood for cost of goods, or, for that matter, an inducement to foreign investor participation in the US market

–in a weak currency, slow growth economy, the most favorably placed firms are those with $US costs and foreign revenues. Even better if they have little or no plant and equipment in the US and/or have operations that can easily be shifted out of the country

–the worst place to be in a situation like the current one is having foreign currency costs and domestic sales. For a while, I thought that beaten down domestic consumer firms with strong brand names (measured by cumulative advertising expenditure, if nothing else) would be attractive takeover targets. But I’ve since come to think that the recent reputational damage to the US brand recently has caused potential foreign acquirers to lose interest

There are also rules on how big a position in a given company can be as a percentage of the entire portfolio, in vehicles offered to the public. These rules are typically stated as not allowing a purchase of a security if doing so raises the total position size above a specified, usually quite large, threshold. The practical effect can be that a concentrated fund will be able to sell shares of its big winners but not buy them back if the price falls. So the portfolio manager may hesitate to do so.

I was struck in reading the Financial Times the other morning that the paper ran three articles that touched on Trump administration policies.

–The first is that the world’s reserves of just-in-case petroleum are being depleted at a rate that suggests being completely tapped out occurs in about a month. No one knows for sure what will happen to the crude oil price then, but it will presumably not be a decline

–Number two is that the oil majors have told Washington that they won’t speed up their drilling plans because of the Hormuz crisis. Strange–but for this administration probably more like par for the course–no one seems to understand much about the way the world works or to have done enough contingency planning to approach them before attacking Iran. The reality is, though, that all extra drilling or faster extraction from underground would do would be to wreck the fields–meaning reduce the amount of oil ultimately recoverable–where faster pumping might be feasible

–The third is that the administration seems to be taking extraordinary steps during this possible crisis to shut down alternative energy sources. Kind of like planning to ensure an energy shortage happens no matter what rather than to prevent one. My read is that this is not a Machiavellian plot from the administration, but rather that no one is driving the bus. A more depressing thought would be that no one knows how to drive

The chief economic result of the administration’s escapades to date, as I see it, has been to crush the dollar. Yes, everyone’s poorer, but it’s hard to put a finger on who’s responsible or why this is happening. $7 a gallon gasoline is different, I think, because it’s much more concrete.

It’s unclear to me where the safe spaces are to hide. My initial reaction is that it makes AI even more attractive, because everything else will be so much worse off. The one thing that the last few weeks’ trading has indicated is the market belief, initially at least, is that the negative impact of higher crude prices will be worse outside the US than in. If so, in a weird way US tech companies are that much more attractive.