No …and yes.

Working as an equity securities analyst at the start of my investment career, I learned quickly that there were two sure-fire tells that a person I was interviewing was essentially clueless:

–using the Dow Jones indices as a performance yardstick.

Even back in the 1970s, when I started out, they had long-since been replaced by the far more information-rich S&P offerings. The main issue with the Dow is that weightings are determined by the price of an individual share rather than the total market capitalization of the company in question. Not particularly useful in today’s world. Easy to calculate by hand, though, and better than nothing–significant attractions when these indices were introduced in the late nineteenth century.

–talking about politics as the primary mover of stock prices–one thin slice of the macroeconomic sphere, in other words, rather than the nuts and bolts of individual company operating conditions, strategy and competence.

No. Although the US abandoned the gold standard in the early 1970s and there was runaway inflation in the late decade, caused both by presidential pressure to keep money policy extra-loose to enhance reelection prospects and by OPEC flexing new-found muscles by sharply increasing crude oil prices during the period. But the oil spike was already turning into a sharp decline by the early 1980s. And Paul Volcker was beginning to attack inflation with higher interest rates–a battle that wouldn’t be decisively won for almost two decades.

On the other hand,

Yes. although President Trump is a 1968 graduate in Economics from the Wharton School, and presumably had the skills–and a front seat to observe the drama unfold–to understand the monetary disaster of the 1970s caused by having a too-loose money policy, he seems to me determined to orchestrate a repeat performance today. In addition, if press reports are to be believed, important decisions–like ICE arrests and cutting off weapon supply to Ukraine–are being made by unsupervised lower-level officials who may or may not inform their bosses beforehand.

On the other hand,

No, sort of. I was tempted to make a gambling analogy and say we’ve got to play the cards we’ve been dealt. But that isn’t right. Actually, we should do the opposite of that. We’ve got to evaluate the cards the government is dealing to us as citizens and figure out a way to construct a winning portfolio from them. The obvious move is toward companies that have costs in $US and revenues outside the US. A second is US-based multinationals, particularly tech companies, and among them software firms, which can/will doubtless be focusing expansion efforts outside the US.

There’s also the comparison between the US and China. Under Xi, as I see it, China has undergone a substantial economic collapse over the past decade or so. Sort of Mao-lite. Things have gotten so bad, however, that to remain in power Xi has been forced to reverse course and start to court entrepreneurs again, regardless of their rank in, or attitude toward, the CCP. So for China, the worst is arguably over. On the other hand, there’s no sign we’ve reached the bottom with Trump, or that there’s any will in Congress to oppose him. So for now at least, maybe China will not only continue to prosper but it will also get foreign inflows that would in another world be coming into the US.

BIGGEST issues that I see

I’m not writing as a human being, but simply as a participant in the stock market game

–on the negative side

Three of them:

–ICE shrinking the workforce. Economic growth comes from either having more people working or by the skill level of workers going up. The current administration attack on education is a long-term cultural issue, and, I think, ultimately very economically destructive (we’re already seeing the first academics fleeing what they see as a replay of 1930s Germany in the US). But the much bigger near-term issue is ICE tactics that reduce the number of foreign workers in the US, given that an aging population is barely enough to keep the current workforce from declining. Having ICE reduce the domestic workforce by, say, 1% yearly is a recipe for perpetual recession.

–Trump tinkering with the Fed. This threatens a repeat of the 1970s in the US, when politicians routinely cut interest rates to give the economy some near-term oomph just before elections and “forgot” to remove it post-election. The result was a loss of faith in the dollar and in Treasuries–by foreigners but also in larger measure by US citizens–and a mad rush into physical assets of all sorts to defend purchasing power from the runaway inflation that political control of the Fed was causing. It took a deep recession, Treasuries at 20% and almost a decade to undo the damage. Why would we want to go through this again?

–tariffs. In the near term, this is the least worrisome issue for me. All we have to do to understand the negative long-term effects on an industry of government protection is to examine Ford and GM, which have been protected against foreign competition pretty continuously for a half-century. GM is a famous business school case on how to lose market share–having gone from 50% of the US market in the 1970s to about 17% now. The generally accepted explanation for this is that tariffs lessened the need at any given time to make necessary, but painful, structural change.

How to respond

…better said, how I’m responding

–the US is likely going to remain a slow-growth economy, shifting into progressively lower gears, while ICE is in play. We can already see this thought being expressed on Wall Street in the explosive gains of the dollar stores, while more upscale retail languishes. No reason now to think this will change, in my view. Worst hit will be high-end retail. Better to have US-based firms with large export or foreign businesses, where a weakening US currency provides a significant advantage. We’re already seeing a sharp falloff in foreign tourism, too, despite the fall in the dollar. This adds to domestic weakness.

–the combination of slowing growth and increasing tax breaks for the wealthy will likely decrease expected money flows into the Treasury, All other things being equal, this worry will gradually undermine the confidence of both domestic and foreign buyers in the ability of the US to repay, either in full or on time, money it is borrowing now. We’re already seeing this fear expressed through the recent sharp drop in the international value of the dollar. I don’t see any reason to think this trend is going to reverse any time soon. This implies to me that I should emphasize the stocks of export-oriented and import-competing firms–and avoid domestic sellers of imported goods coming from strong currency countries.

–I think there’s also a substantial risk that at some point–not today, but at some point–global investors will shift from selling the currency to selling the domestic stock market. Of course, higher rates eventually induced by worries about the country’s creditworthiness imply shrinkage in the overall market PE.

Overall, a difficult situation.

What works at a time like this?

I think:

–special situations, meaning companies, usually not that big, with some unusual or unique product or innovation that will allow it to grow, even in an overall lackluster economy. Nvidia has been one of these for a long time, and may still be (I own some). The general idea, though, is that sales are not a function of GDP growth in the US. Maybe biotech, which is something I’ve typically tended to avoid.

–exporters, not importers

–value stocks. That is to say, stocks in companies that are asset-rich, have had poor recent performance but which may be turning around. Part of the idea is that you can’t fall off the floor–that they have defensive characteristics. Not my favorite way to invest, but I spent half my working career in value shops, so I think I appreciate value’s use in an environment where growth is being invited to leave the room

–China. The biggest negatives for me here are that I don’t read/speak Chinese and that I worry about the quality of the financial reporting there. Still, it seems to me that Xi has been forced to take a pro-market, pro-entrepreneur stance, given the incredible mess he has made during the past decade, after deviating from Deng’s “socialism with Chinese characteristics.” In a sense, Trump has also become the new Xi. The China idea hasn’t worked that well so far this year, though. Maybe good, maybe bad.

sales and cost of goods

Publicly-traded companies in the US market are required to make extensive disclosure in their 10-K filing with the SEC. One of those requirements is disclosure of the breakout of sales between foreign and domestic. My experience, however, is that companies want to muddy the waters on this topic, and that the numbers in the 10-K are, let’s say, imprecise. In addition–shame on me–I’ve never paid much attention to any company hedging activities. That’s because I think that in almost all cases hedging makes no difference to overall results–and that firms will always call out hedging losses (less so gains).

AI tells me that in the aggregate about 40% of sales of the S&P 500 come from abroad (my go-to number has been 50%)–and, more important for us now, the industries with the highest percentage of domestic sales are: Consumer discretionary, Staples and Real estate.

If we look at cost of goods, there are no reliable figures for the S&P 500. For the US overall, about a third of manufacturing inputs come from abroad. Imports overall make up about 15% of GDP.

currency effects are key

Take Japan in the weak yen 1970s vs. Japan in the strong yen 1980s. In the former period, the strongest stocks were the exporters (weak currency costs and strong currency revenues) were the stock market stars. In the latter, it was Consumer discretionary and Real estate–Staples less so because of import restrictions on food to protect local farmers.

If we take it as granted that the $US is going to remain a weak currency (more on this later), then even without tariffs importing anything–raw materials, intermediate goods or finished products–from abroad to sell domestically is going to mean lower unit profits. Yes, there may be exceptions and companies will gradually adjust their offerings, but overall this is not a good situation to be in.

Conversely, US firms that use domestic inputs to sell products to stronger currency countries (basically everybody) will see margins expand.

my guess is the dollar will remain weak

Four reasons, any of which I think would be compelling on its own:

–the economic consensus seems to be that the Big Beautiful Bill confirms that Washington has no intention of limiting deficit spending. Foreign central banks–and presumably the big global commercial banks, which are always ahead of the game on currency–are beginning to hedge their exposure to Treasuries by selling the dollar. This is the main reason, I think, that the dollar is down by 12% ytd against the euro and gold is up by 30% so far this year.

–the threat of higher interest rates. Trump’s view on rates, as I see it, comes straight out of the 1970s political playbook: lower rates to give the economy a little extra short-term boost and placate worried citizens. The ultimate result was runaway inflation, a deep recession with Treasuries yielding 20%, short rates at 26% and a sharp stock market decline. We’re safe from this as long as Powell is still Fed chair.

–ICE (1). Taking off our hats as human beings and put on our stock market thinking caps, I see the main economic effect of ICE as being to shrink the domestic labor force (the domestic birth rate is more or less enough to keep the workforce stable, but not much more than that). Fewer people working, all other things being equal, means lower GDP. The other way GDP grows is by workers being more productive–a product of education and/or capital investment. The attack on research universities isn’t a plus here.

–ICE (2). Imagine a place where heavily armed, masked bands of men (/women?) roam around grabbing people off the streets and holding them in domestic detention for a while before shipping them off to foreign prisons. A great place to take a vacation, go to school or work? Not so much. We know that foreign tourism is already down by 10% yoy in recent months. Hard to know how much is protest, how much fear. Probably better to go to Eurodisney or Disneyland in Japan or China instead. Yes, the odds of being caught up in an ICE sweep are likely very small, but the penalty of being wrong is so severe why would anyone take a chance. Absent a change of heart by Washington, my guess is we’re closer to the beginning than to probing the bottom on this issue.

–the threat of higher interest rates. Trump’s view on rates, as I see it, is straight out of the 1970s political playbook: lower rates to give the economy a little extra short-term boost and placate worried citizens.

what I’m doing

Exporters, especially tech, and import-competing are the order of the day for me. Special situations and value stocks as well. The biggest risk I see is investors shifting emphasis away from selling the currency to selling the S&P. More on Monday.

general stuff

One of the big mysteries/dirty secrets of Wall Street is that there are virtually no professionals with a public record of, say, a decade that shows their ability to beat the US stock market, even before fees and expenses, on a consistent basis. Hence, the attraction of index funds.

I spent a quarter century as a professional manager. As my style evolved, I began to realize that every year, in a portfolio of 50-100 names (the number shrank as I gained more experience), all the outperformance came from three or four. Usually, and luckily for me, these tended to be my highest-conviction ideas as well as the largest position sizes. I began to realize that I had to watch, say, my favorite ten like a hawk and pay enough attention to the rest in case their earnings were better than I’d imagined, and also to ensure that they didn’t punch a hole in the bottom of the boat.

Nowadays, 80% or so of my wife and my money is in index funds, with the rest in 5-10 names that I pay close attention to. That’s the current version of my former A team (the ten)/B team (the rest).

In general, though, I think it’s more important to have a few things you know (hopefully, a lot of stuff) more than the consensus does, rather than being able to make cocktail party conversation about everything.

where I think the world is now, from a stock market point of view.

–I think the continuing decline of the dollar is a very important variable. Why this is happening is ultimately an important issue, but for now the key factor, I think, is that it is happening.

Go back to Japan in the 1980s, when the country experienced a massive appreciation of its currency. Yes, this is the reverse of what’s happening now in the US, but I think the phenomenon is instructive.

Global investors had been focused for many years on that country’s export-oriented manufacturing industries. So they were up to their ears in auto, chemical, steel, shipbuilding and similar companies that benefitted from the wide spread between weak yen costs and high dollar revenues. The rise in the yen was devastating for these companies, for two reasons: in yen terms, their revenues were substantially lower than they’d been; and rival offerings from firms based in the US, the EU and in emerging economies were all suddenly much more price competitive. Domestic-oriented companies went through the roof; exporters were extremely lucky to go sideways.

Today in the US, we’re in the reverse situation with the dollar weakening. Companies that have costs in dollars and revenues in, say, euros, or even sterling or the yen, are now have revenues, translated back into dollars, that are 5%-10% higher than they were before the inauguration.

The reasons for the two cases of currency weakness are different: in the case of Japan, the world told that country that it was strong enough that it no longer warranted the currency subsidy the OECD had previously allowed. So it had to allow the yen to appreciate. In the case of the US today, there’s no formal agreement. Three very prominent worries about Washington, though:

–holders of Treasury bonds–the big international banks and foreign central banks–seem to perceive that the budget that has come out of Congress will increase the size of Federal debt, inching the country closer to possible default. This isn’t a tomorrow thing, but the risk today is higher than it was six months ago. So they’re at least hedging their currency exposure, pushing the dollar down

–the aging of the domestic US population (sort of like Japan circa 1990, though not as severe) means that the country is increasingly depending on immigrants to grow the workforce–and therefore GDP. The huge amount of federal funds allocated in the budget to deporting workers threatens to damage domestic economic growth, adding to the already considerable risk of long-term inability of Washington to repay borrowings

–the scary way ICE is acting in finding and arresting immigrants conjures up images, both here and abroad of Germany/Italy/Japan in the 1930s, or Mao, or Lenin or the Kim family. Not a good look for the USA brand. Foreign tourism already seems to be falling off considerably.

more tomorrow

warming up

The dominant stock market stories of the 1980s were:
–the emergence of China as a world economic power and

–the Japanese domestic boom triggered by a rising yen.

In the 1990s, the key narrative was the formation of the EU and the creation of the euro.

During this century so far, the main stock market-moving themes have been:

–the dominance of the US as the world technological power, coupled with

–the unravelling of the EU,

–the post-Brexit collapse of the UK economy,

–the return (until very recently) under Xi of China to an updated form of Maoism and

–the shrinking of the workforce in Japan (the aging of the local population + intense unwillingness to admit foreign workers).

key changes so far in 2025

All–two, maybe three–are in the US.

The first is the plunge in the USD, which now buys about 10% less of foreign stuff than it did six months ago. This is a huge decline in the global value of our national wealth, but something that, given the large size of the land mass and the breadth and complexity of domestic products available, has been going relatively unnoticed. Maybe tunnel vision on the part of some domestic equity (not bond) investors. At some point one would expect to see the kind of foreign purchases of real estate that have marked southern Europe and an influx of tourists of the type that Japan is experiencing. In the case of the US, though, that wouldn’t be my first guess at possible outcomes.

The second change is the huge (shoot-yourself-in-the-foot, in my view) effort, newly richly funded by Congress, to shrink the size of the domestic workforce. This is the job of ICE–bands of heavily-armed masked men using physical force to seize, imprison and deport minority group individuals they suspect of being in the country illegally. I imagine that the echoes of Hitler in this process are deliberate, to make it abundantly clear that there are now very substantial penalties for entering Reagan’s “shining city” to seek work or a better life.

How so?

In general terms, GDP growth comes either from having more people working or having existing workers performing at a higher skill level. The latter comes from better tools/machinery or better education. The native-born addition to the workforce has been about +0.5% a year, but is fading as more of the Baby Boom retires. One result of this has been that over the past decade or more, three-quarters (and increasing) of domestic labor force growth has come from immigrants.

According to the Pew Institute, 4.8% of the workforce consists of unauthorized immigrants. Even if we assume that political attacks on the university system and on science teaching/research have no net negative effect on the development of work skills, we’re close enough to zero growth from the native-grown workforce that the loss of 10% of unauthorized immigrants could push the country into recession, even with an overall economic tailwind. In a less buoyant economy, the situation has the potential to deteriorate badly.

Third, there are knock-on implications as well. It’s hard to know what effect ICE activities will have on foreign tourism in the US, for example, but early indications are that it will be a significant negative. I imagine this is part boycott, part fear of you or your family being jailed, or badly injured in an ICE melee in what for you is a foreign country. To put foreign tourism in perspective, international travelers spent $180 billion in the US last year, supporting over 200,000 jobs. That spending figure is reportedly trending 10% lower yoy right now.

more tomorrow on how I’m dealing with this situation