Exceptional, elastic, or just erratic?
Markets pushed beyond their comfort zone
For anyone involved in markets (or trade negotiations!) it’s been a rough couple of weeks. Even my crystal ball broke. Despite correctly predicting the ambitious scale of the Trumpian Revolution and warning that markets significantly underestimated the magnitude and permanence of coming tariffs, my portfolio recommendations blew up as a combination of growth fears, loss of faith in US policymaking and cascades of deleveraging wrought carnage in markets. (Don’t cry for me: my top recommendation for 2025 was to be long volatility of volatility, which has performed spectacularly.)
The greatest irony is that when I correctly forecast Mr. Trump’s unexpected 2016 win – and more importantly what he represented – I wrongly expected markets to react as they did this past week. Instead, they rallied on perceptions that, however obnoxious, he is just another Republican. This time I wrongly assumed that after eight years and a detailed Jacksonian campaign platform that was validated as more than rhetoric by radical cabinet picks, that markets had come to understand, as I have consistently warned, that President Trump is not a Republican but MAGA. He embodies the Politics of Rage’s complete rejection of both the center-left/right consensus that has ruled Western democracies for 80 years and the post-War liberal order (PWLO) that it created. Markets got a painful lesson in those statements’ truth while I got (another) lesson not to assume my own views as common knowledge.
The PWLO is dead! Long live La Cosa Nostra Americana!
As I’ve written before, President Trump is not the PWLO’s destroyer but instead a manifestation of its death. Markets’ reaction to the arrival of the Trump Comet announcing the PWLO’s passing mirrors the Kübler-Ross stages of grief. Initial mockery of the Trump Administration’s “reciprocal” tariffs – “Stupid!”, “Economically illiterate!”, “Generated by ChatGPT!” – reflected elites’ and markets’ shock and denial. But denial rapidly evolved to anger and bargaining as it became apparent the Trump Administration was serious. Throughout, a background chorus arose that has been cited to justify markets’ panic: “The end of American exceptionalism.”
But what exactly does American exceptionalism mean? As Mark Farrington, one of the sharpest observers of markets I’ve met in my three-decade career, observed, the phrase has become vacuous. To most Americans it is a belief that America was destined by God (or perhaps Gaia) to be a “shining city upon a hill,” a beacon of virtue and an example of propriety for both the corrupt “Old World” and the unlearned savages of less developed countries. To most of the rest of the world American exceptionalism was a free guarantee of security and unfettered trade that earlier generations, who had suffered the insecurity that characterized most of human history before World War II, appreciated as American beneficence but that later generations have come to take for granted. Some, like the French, even jealously resent it as “exorbitant privilege.”
American exceptionalism, as Mark notes, is multifaceted and its foundations are not easily assailed, even by President Trump’s Jacksonian assault (recall that 200 years ago a much younger America survived the original Jackson). The Trump administration’s torrential, erratic and poorly messaged attempt to force through a new world order of La Cosa Nostra Americana has rightly strained faith in the US policy framework. Yet the underlying shock, markets’ long-overdue recognition of the death of the PWLO, is even greater. Unfortunately, that realization doesn’t appear complete. Markets’ short-term rallies on each tariff pause or reversal suggest that they believe that, just like Elvis, the PWLO lives. Until markets accept that the old order is irretrievably gone – Kübler-Ross’s final stage of grief – it will be difficult for them to find a bottom.
Another source of confusion and panic stems from catastrophizing over the tariffs’ impact. Because large-scale tariffing by the world’s final consumer and hub economy within the complex web of modern supply chains is unprecedented, markets’ expectations are unanchored and many assume the worst. A personal anecdote illustrates the uncharted territory we’re entering. On “Liberation Day,” coincidentally, I happened to be at a dinner of about a dozen illustrious economists – all top academics including a Nobel laureate and a few former senior policymakers – gathered to discuss, of all things, fiscal policy. Yet, when asked, none could answer whether income taxes or tariffs had a greater effect on growth per dollar of government revenue raised. Markets don’t appear to have greater insight.
The answers to both of these questions – whence American exceptionalism and what effects tariffs will have on whom – are necessary inputs to resolving the final Uncertainty markets must overcome: how much further do markets go? Is this a standard (albeit ferocious) washout of overlevered positions? Or is it the start of a broader asset allocation shift?
I’ll tackle all three questions here: what happens to American exceptionalism in the post-PWLO world; how to handicap tariffs’ fiscal and economic effects; and how much further market adjustment needs to go.
