The White House publicity apparatus, with help from the President himself, has been underlining Trump’s negotiating success in his dealing with tariffs on EU products. If I understand correctly, though, the net result of the recent talks are that tariffs on EU autos imported to the US will be lower than before, and that the EU will consider buying up to 10x the amount of hydrocarbons from the US that it currently does. No firm commitment, however. So this sounds like a substantial negotiating win for the EU.

Of course, this may not be all that surprising. The EU is no babe in the woods when dealing with contentious trading partners. Just look at its own history of internal discord. There was the case of Greece, which faked its national accounts for years, so that it would continue to qualify for membership. Then there’s the right-wing quirkiness of the former Warsaw Pact members. The lunacy of Brexit is maybe the icing on the cake. In any event, however, Brussels is not lacking in experience with difficult negotiations. And it may have concluded from watching Mr. Trump in action elsewhere in the world that public deference to his perceived negotiating ability may have been at least as important a US objective as the actual outcome.

I’m not sure what to think about the results. They seem to be bad for GM and Ford. That said, continual protection from foreign competition hasn’t done anything positive that I can see for their world market share. I also think we’re either at, or more likely past, peak world hydrocarbon usage. So any agreement that encourages development of new supply in a mature market is most likely going to exert downward pressure on prices. Worst hit will likely be firms that answer the “drill, baby, drill” call.

I saw a news video the other day in which President Trump, after noting that he had attended the prestigious Wharton business school, explained to a reporter (the reporter noted he is a Wharton grad, to) that the key to the administration’s economic growth plan was to achieve low interest rates and a weak currency–to look just like Japan (which I assume him means Japan during that country’s economic boom of the 1970s and 1980s, rather than today’s parlous state).

My thoughts:

the Japan of today

–Japan’s working population has been shrinking for more than the past twenty years. This is due to a decades-long decline in the domestic birth rate, coupled with a continuing unwillingness to recognize women as career workers. There’s also a strong bias against admitting foreign laborers top the country or allowing them to stay. This can be seen as sort of an Asian version of what ICE does, only without the terror apparatus of masks, violence and foreign prisons. The result of all this has been an extended period of economic stagnation, with no end in sight. It’s hard to fathom this as being a signature Wharton vision for the US, but it nevertheless does seem to be the road Mr. Trump is taking us down.

Japan of the 1970s-80s

–pre-WWII Japan was an agrarian economy, with farmers making up a third of the working population. As Japan rebuilt during the post-WWII years, that figure shrank to about 5%, as workers shifted from farm to factory. This boosted the number of industrial workers by about 40%. This huge increase accounts for much of the economic miracle that lifted the Japanese economy out of its end-of-war ruins. After all, GDP growth comes from either more workers or productivity gains (= better tools, more education). In very crude terms, x% more industrial workers leads to GDP growth of the same x%.

Taking workers off farms and putting them in factories is now a standard part of the emerging markets’ playbook. So, too, is the second element of the emerging markets story–the call for low pay and long working hours for workers, the idea here being that the first generation of rebuilders will sacrifice their well-being and happiness for the common good–to make a better future for their children.

In the case of the US, however, farmers are only just over 1% of the working population are. So this route to economic growth isn’t really open to us. This leaves wage suppression.

–large chunks of Japan’s industrial base were destroyed during WWII. As the country rebuilt (with a lot of US help), it ended up with state-of-the-art plant and equipment. The geographical isolation of the US from the WWII battlefields meant that its older plant remained untouched. Managements here, as well, were nowhere near as modern, or as forward-looking as their foreign counterparts were forced to be. Reading corporate histories, they seem to have preferred higher current profits (meaning higher performance bonuses) to innovation that would have meant investing in modern plant and equipment. When I began my stock market career in the late 1970s, US Steel was still using nineteenth-century blast furnaces, and trying to compete against Germany and Japan, both of which had state-of-the-art foundries.

The story of much of US industry, certainly cars and steel, has been its pattern of seeking government protection from more modern foreign competition through tariffs and quotas. In theory, this protection is temporary and buys time for the local company to up its game. But the US Steel situation, to say nothing of automakers like GM, Ford and Chrysler, shows that this doesn’t always happen.

This traditional kind of tariff, which in theory is supposed to be temporary, contrasts with the Trump tariffs, which are in effect an admission ticket for potential sellers of stuff to US customers. To the degree that a foreign firm operating in the US passes this cost on to consumers, it’s essentially a taxation shift away from what we–either individuals or companies–earn to what we spend. Given that the wealthy tend to consume smaller portions of their earnings than the less well-off, this shift has the added wrinkle of making the rich richer and ordinary Americans poorer.)

–during Japan’s post-WWII glory years, and especially in the 1980s, the yen was actually a strong currency, not a weak one. This wasn’t voluntary–the Plaza Accords of 1985 arm-twisted Tokyo into letting the yen rise. This, of course, triggered the subsequent very strong growth in Japan’s national wealth, as well as the concurrent explosive rise in the Japanese stock market.

In contrast, I read the current decline in the $US as something different–an expression of fear that Washington is scheming to avoid repaying government-issued debt in full by devaluing the currency. In the video I watched, it sounded a little like the president wouldn’t mind that outcome too much.

All in all, I think I understand what Mr. Trump is doing. I just don’t think the conditions of for Japan-like industrial renaissance are in place in the US, or that ordinary US citizens have signed up for a generation of hard work and poverty–especially without any apparent end game other than low taxes for the ultrawealthy.

The S&P 500, which is chock full of multi-nationals whose revenues are (my guesstimate) half from abroad, is up by about 8%, year to date. The Russell 2000, a much stronger indicator of the vigor of the domestic economy, in my view, is up also, but only by about 2%.

Over the same time period, the dollar has fallen by around 13% against the euro and the Swiss franc. It’s even off, by a bit less than 7%, against the Japanese yen, an economy that has been on the economic ropes for over three decades.

In contrast, the EAFE (Europe Asia and the Far East) index of non-US markets has risen by 20%+ in dollars so far in 2025. A reasonable guess–or at least my guess–is that this breaks out into half local currency stock price gain/half currency gain against the $US.

If the dominant world stock market stories of the 1980s were the flowering of the domestic Japanese economy and Deng’s “socialism with Chinese characteristics, and during the 1990s the promise of the EU, the overwhelming narrative of the 21st century, so far, has been the technology revolution led by US companies. So this sharp reversal is particularly striking. …less so for investors narrowly focused on the US, however, than for those with a global view, since dollar weakness has disguised the full extent of the US market decline.

I find it significant that the US stock nose dive began after the inauguration rather than after the election. I think this indicates that concerns are not about Trump’s past or the policies he outlined during his campaign.

Instead, it seems to me that investor worries center on whether the US will be able to achieve any real GDP growth given a shrinking workforce and an anti-education vibe; and whether the combination of trickle down economics and cuts to government services will be enough to ensure repayment of government borrowings.

My sense is that investors see the caterers removing the remains of the food and drink, and the band packing up its instruments, but no one wants to head for the door because it’s been such a great party–and for so long–and it’s not clear where to go next.

…for how long, and

…what are the implications for us as stock market investors?

Typically, the overall stock market mood tends to be dominated by either concept or valuation. This isn’t exactly the same as the contrast between growth and value investing styles, but it’s in the same general direction. In a concept-driven market, the key question is “How fast is Company X growing?”. In a valuation-driven market, the mantra is “How much am I paying for that growth?”. In the first case, faster is better; in the second, cheaper wins.

As I see it, Wall Street has been focusing so far this year on the dramatic drop in the dollar since the inauguration, making companies with costs in dollars but a significant percentage of revenues in other currencies big winners. On the other hand, companies with costs in foreign currencies but revenues in dollars have been big losers. My sense is that over the past few days sentiment has been shifting away from the first group toward the second, on the idea that they’ve been beaten down too much.

The rhythm of typical rising market is two steps forward, one step back–the step backward being a period when the market’s focus shifts to valuation and away from possible earnings expansion.

My biggest worry today?

It’s what I see as the administration approach to domestic money policy. This has two aspects:

–I think foreign holders of Treasuries have been reading the administration’s push for lower interest rates as an attempt to create inflation, in order to reduce the real value of outstanding government debt. Put a different way, they think Washington wants to repay with eighty-cent dollars

–Washington seems to want to emphasize short-term borrowings, as a way to minimize the negative effect of the interest on Treasuries on the budget balance. If so, this will magnify the immediate effect on overall government debt service of changes in the world’s perception of Washington’s creditworthiness. Great if the road is smooth, not so much if there are bumps and potholes.

It seems to me that if anything sends bulls away from US securities markets this will be it. I find it hard to figure how to quantify this risk, though. So I haven’t done much more than to have collected a samll number of value-ish names.

If I understand the situation correctly, yesterday President Trump flashed a letter in front of Congressional visitors that he said was his termination notice to Fed Chair Powell.

What I find most interesting about this is the reaction of financial markets as they learned of this. According to Bloomberg, within a half-hour:

–the S&P had fallen by 1%,

–the dollar dropped by 1.2%, and

–the 30-year Treasury yield rose by 0.1%.

So investors factored this news into prices by selling stocks and the dollar. Bonds, however, remained virtually unchanged.

This isn’t what I would have expected, since I think that while the near-term result of an unnecessary rate cut might be a boost to local economic activity, the ultimate result would be to raise the rate of inflation. Of all the asset classes, this would have, I think, the most negative effect on bonds.

One possibility is that it’s easier/cheaper for traders to express their worry through stock and currency derivatives than through bond market instruments. More likely, though, is the belief is that Trump’s plan (assuming there is one) is to debase the currency, thereby repaying government borrowings with in effect 75 cent dollars. So hedging that risk is the appropriate response.

In any event, this is what Wall Street is doing.

Two other thoughts:

Although Trump appears to me to be obsessed with what he regards as the shortcomings of Powell, who he now says never should have been appointed, he has apparently no memory of the fact that he, Trump, appointed Powell in the first place

Another oddity: Trump also told a story about how his MIT professor uncle John told him about teaching the unibomber, Ted Kaczynski. Apparently, though, Kaczynski didn’t go to MIT and Prof T. retired while Kaczynski was still in high school

Looks to me like a replay of the Biden decline and a replay of the partisan effort to conceal this increasing incapacity.