That’s one metaphor the UK financial press–the best of which is owned by Nikkei of Japan–uses to explain the import of the election of Donald Trump. It’s a surprisingly apt comparison, at least so far.

In a rainy midweek special election in 2016, in which almost three-quarters of eligible voters cast a ballot, the UK voted to leave the EU. England overall voted Leave, although London and environs were predominantly Stay. Wales voted Leave as well. Only in Scotland did a majority opt to Stay.

The two motivations for Leaving, as I recall them, were unhappiness with the flow of migrant workers from elsewhere in the EU and nostalgia for the days of yore when Britain was a major colonial power and its navy ruled the waves.

Things turned out as everyone outside the UK understood would happen–and, actually, maybe worse. All the multinationals that had made the UK their EU headquarters, on the strength and transparency of the UK legal system and the usefulness of English as the dominant language, left. So did the workers. …as well, the publicly-traded companies that wanted the more global audience that EU membership gave them a chance at.

The other, more recent comment is that this is also our “Liz Truss” moment. During her brief time as prime minister of the UK, Truss proposed a Trump-like “trickle down” budget that consisted of tax breaks for the wealthy, cuts to social programs for the poor and a larger budget deficit. Immediately, interest rates rose and sterling fell. In addition, financial engineering schemes adopted by pension funds dealing with illiquid assets blew up, conjuring images of their insolvency (think: Long Term Capital, but not nearly as bad).

For the US so far, damage has mostly been hard to detect. The S&P 500 is flat, NASDAQ down by less than a percentage point, as I’m writing this. However,

–the EAFE index of major foreign companies is up by 17% in USD since January 1.

–the dollar is off by about 8% vs. other currencies. This has to be part of the explanation for EAFE’s unusual strength. The issue is complicated, though, since a weak dollar is good for US-based export-oriented firms and bad for exporters from EAFE.

I’m a big fan of the Nobel Prize-winning economist, who recently resigned as a columnist at the New York Times to start his own Substack. It’s refreshingly blunt.

Today he calls out the intentional cruelty in Congressional budget negotiations, which will fund small gains in after-tax income for the top 0.1% of earners with taxes/service cuts that will pare 10%+ from the after-tax incomes of the poorest 20% of the population.

It’s hard for me not to connect this behavior with the similar cruelty in ICE’s seizure and deportation to foreign prisons of non-citizen residents like Kilmar Abrego Garcia. In Mr. Garcia’s case, the administration is also refusing to obey court instructions to return him to the US.

What does institutionalized sadism have to do with the stock market? It’s certainly not a plus for the vast majority of foreign tourists–and by extension for the hotels, airlines and areas that cater to tourism.

There are two more important issues, though:

–reputational damage to the idea of the US as the land of the free and the shining city upon a hill. This likely already playing out in PE multiple contraction and currency weakness.

–economic growth comes from having more workers and from giving workers better skills. Given that the domestic population is barely growing, arresting and deporting immigrants is shooting yourself in the GDP foot. So too is attacking universities and dismantling federal education assistance.

round one

The iron law of microeconomics: price is ultimately determined by the availability of substitutes. Advertising is all about spreading the word, or creating the illusion, that product A is a substitute (although better/cheaper) for product B. So it may have a significant influence, for a while, at least, particularly for things that are hard to compare with one another.

Tariffs on imported raw materials or final goods upset this initial equilibrium by making goods brought into a country more expensive and/or reducing the quantities available. Ultimately, a new equilibrium emerges–typically a combination of higher prices for the product, more limited availability and consumers being less well off.

Trump has launched the current tariff regime on the idea, and with the implicit claim, that consumers won’t be hurt at all, so voters won’t object to the fact that the tax revenue collected is going to fund continuing tax cuts for the ultra-wealthy.

round two

The idea that tariffs don’t hurt an advanced economy like the US is a deeply non-consensus view in the world outside the MAGA movement. But it may be hard to see the real negative economic impact of tariffs, at least initially.

That’s because:

–-Amazon has mused that it might break out in its selling prices on its website the part that’s payment of the tariff tax being imposed by Washington. It, however, has been told in stern terms by the administration not to do so

—Apple makes phones in both India (low tariff with the US) and China (high tariff). The company has been planning to lower the tariff due in the US by shipping phones made in India to the US market, while supplying the Indian market with products made in China. This would minimize the tariff hit. Trump has warned the company not to do that, either

–Trump has also warned Walmart that it should “eat the tariffs” rather than mark products up in price to cover the tariff cost.

In other words, there’s a significant administration effort to obscure the economic cost of tariffs and to arm twist companies into absorbing part of that rather than simply passing it on. The fact that the administration wants to hide from citizens how big the tariff tax is speaks volumes. This coercion effort may not be successful. Of course, even if it is, a major consequence of the resulting shrinking of corporate profits will likely be lower compensation for company employees. But apparently that’s not as important to Washington as obscuring the direct line connecting Trump to consumer financial struggles.

a confrontation between two weak leaders

Xi Jinping, the president of the Peoples Republic of China and successor of Deng Xiaoping, reversed many of the latter’s reforms, which had moved China away from central planning toward Western capitalism. Unsurprisingly, to everyone except maybe Xi, this has reinforced the central role of the Communist Party, but has precipitated a property/banking disaster.

Donald Trump ran on a platform of restoring economic growth, skipping over the details that this would be built on a foundation of: tax reductions for the ultra-wealthy; tariff walls to discourage imports; arrest/deportation of immigrants; and reduction of social programs like Medicaid. Instead of growth, we’ve had a collapse in the dollar, a slowdown approaching recession and higher prices for lots of things.

My initial thought was that an incipient trade war was a plus for Xi, because Trump would end up being an external threat to China that would unite the country behind its current leader. That may still be true. But Trump may also have worked out that the recession his trade wars would engender has the potential to result in his Republican congressional enablers being tossed out of office and his being impeached and removed. This would presumably revive the lawsuits halted by his election, and result in his wearing a striped jumpsuit before long. If so, the weaker party is certainly Trump.

To my mind, this is the implicit message in today’s stock trading–which seems to be assuming that tariff rhetoric will tone down rather than expand in verbal volume.

I’m in the school of don’t count your money when you’re sitting at the table. Nevertheless, a couple of words on the Trump era so far. My strategy has been, and continues to be, to look for growth in Hong Kong-traded China-based companies and to try to find US stocks that have earnings growth potential, a value tilt, and earnings gains not based on overall domestic GDP growth. Yes, barring a complete change of policy from Trump, I’m expecting GDP to be at least mildly in the minus column. So far that focus has worked surprisingly well, although I’m about 75bp behind the S&P 500 as of 3pm today.

–As I understand it, Trump’s theory of trade, which appears to me to be the functional equivalent of belief in phlogiston or that the earth is flat, is that if you have a trade surplus with another country you are an economic winner; if you have a deficit you’re a loser. Therefore, erecting tariff barriers that prevent foreign goods from entering your country will de facto make you better off.

Why, then, should your first trade agreement be to raise tariffs that will reduce dealings with the UK, a country with whom the US enjoys–until now, anyway, a trade surplus. Sounds very shoot-yourself-in-the-foot-ish.

–the new pope is an American. If press reports are correct, he’s not a fan of the LGBTQ+ community and doesn’t want to allow women to become priests (in contrast to the Episcopal church, where over half the priests in the US are women and sexual orientation isn’t an issue, provided you’re open about it and monogamous). On the other hand, he’s apparently a champion for migrant rights. I wonder whether the latter is why he was elected, and so quickly. If so, is this is the first step in the Vatican signaling disapproval of Trump’s anti-immigrant, anti-Latin America policies, and the massive support for Trump that American Catholics showed in the presidential election.