Markets have some hellish traits.

Fear, and

Greed.

When greed takes over, markets over-shoot on the upside.

When fear takes hold, markets over-shoot on the downside.

This past week markets are rightly in a cycle of fear in response to the tariff war initiated by America.

Fear is what the President wanted, and fear is what he got. Share markets have over-reacted, just as he would have expected.

Now that he has our attention …

What was he thinking?

This is the opening salvo of a much bigger plan that the President has in mind, according to Dr Jennifer Burns, associate professor at Stanford University.

His plan, called the Mar-a-Largo Accord, has tariffs as the opening shot. By wielding the big tariff stick he is driving countries to the negotiating table.

The plan, according to Burns, is to make American exports cheaper for the world to buy, by reducing the value of the US dollar.

US dollar devaluation is the goal.

This is how he plans to change the negative balance of payments for goods that the US has with the rest of the world. Not just by adjusting a few tariffs here and there.  America as a victim of tariffs is a Presidential conspiracy theory used to attract attention and playing around with tariffs will never fix a balance of payments on its own. 

“Buy made in America” will become the new mantra.

Countries are already lining up to do trade deals with the US, about 50 of them at last count, and imagine their surprise when the US requires them to peg their currency at a high level against the US dollar in exchange for reducing or eliminating tariffs!

They are known as “currency agreements”.

It was set out in a paper by one of the authors of the Mar-a-Lago Accord, called “A Users Guide to Restructuring the Global Trading System,” by Stephen Miran, chairman of the White House Council of Economic Advisers, in November 2024.

This is not new. Japan held their currency down after WWII, and China did it in the 1980s through into the early 2000s.

Expect defence agreements to also be a part of the American negotiating tactic.

How long is this going to take to play out?

There is a time constraint for the President. There are elections in November next year known as the “mid-term elections” with all 435 seats in their House of Representatives up for re-election along with 33 of the 100 seats in the Senate. He must show positive results for the American people within the next year, or he will lose control of the House of Representatives and the Senate. In other words, he would be ripe for impeachment. Judge (the House) and jury (the Senate) could be in the hands of the Democrats, and he won’t want that.

If there is anything positive to show for the Mar-a-Lago plan, it should be obvious within the next  few months. Meanwhile, markets will be looking ahead to anticipate any turning point as they will not want to be left behind.

For this reason, I believe this issue will continue to move along at a fast pace. Once fear has done its job on America’s trading partners and they have succumbed to the pressure by changing their foreign currency practices to benefit America, once the President has some successes to show the American people and how it will help them, I expect a new normal will result and markets will calm.

Greed will replace fear, and off we will go again on another virtuous cycle.

All of that depends upon America’s trading partners agreeing to peg their currencies at a high enough level against the US dollar to satisfy the President.

That is the gamble he is taking.

Is the American game plan likely to work? Will it be good for America? Will it be good for the rest of the world? We will have to wait and see, but my position is always for a strong currency, a floating exchange rate and bi-lateral trade agreements. They give us access to world-wide goods and services, feedback from the market on our performance, and lastly fairness between nations. 

How should we react to this market pull-back?

Pull-backs in share markets are normal and this one, so far, is no exception. The average annual peak to trough from the last 29 years in the US share market was -16%. Only 6 of those years posted an annual loss for the year. The other 23 produced positive calendar year returns.

Remember the Covid Crash in 2020? Look in the graph above. The US share market fell -35%, yet for the calendar year 2020 the market was up 21%.

In the meantime, it is the same message that any wise person will give you -

• Stay invested
• Stay diversified
• Stay focused on the long term plan.

Ignore everything else, other than for entertainment.

Keep asking great questions ...