Macro Minute: Week of June 2, 2025
I want to cover some macro topics today. I keep reading and hearing so many market pundits talking about how the market is shrugging off the Trump tariff’s and that this is not a paradigm-shifting event. I want to give my perspective as someone that studies market history and has been investing for 25 years. To me what is and has been happening is a big deal.
First, I want to lay out what I see as the biggest thing at stake. The dollar has been the global reserve currency since World War I and II. The dollar was backed by gold. You could exchange your dollars for a certain amount of gold. That system had limitations, when economic growth slowed it prevented the Treasury and Federal Reserve from increasing the money supply. President Nixon abandoned that standard in 1971. In 1999, the Euro was introduced and began being used in 2002. After the Great Financial Crisis, the dominance of the dollar became even more acute. The dollar has become ever increasingly dominant from 2008 to 2025.
There has been an unwritten rule in global trade. The U.S. will supply the world with dollars and the world will supply the U.S. with stuff. We consume foreign goods and in exchange they buy our assets. This is at the heart of the U.S. twin deficits. U.S. consumes; the rest of the world produces. The rest of the world recycles the excess dollars into U.S. treasuries, corporate bonds, and stocks. This has kept U.S. interest rates lower, credit spreads tight, and stock valuations higher. It has exacerbated inequality in the U.S., but it has boosted our capital markets. The current administration is attempting to tackle these dynamics, which is going to create changes to this established system. Even if the worst of the tariffs are walked back, the path is clear that international trade is changing.
I am not here to say that this is the end of the U.S. dominance in capital markets. What I am saying is that these new dynamics open the window for this “U.S. exceptionalism” we have experienced the last couple of decades to end. It appears that a U.S. slowdown and recession is possible. The factors creating this are many, including: tariffs creating business uncertainties, investment and hiring decisions delayed or cancelled, state budgets less flush after COVID monies have dried up, and a Federal Reserve with a mandate for stable prices and full employment in conflict. This leads me to believe that at the minimum the U.S. will be growing more slowly.
I am an optimist, and I take no pleasure in writing the above paragraph. However, this leads me to outline what could be a massive opportunity. What has happened in the recent annals of history is that when the U.S. struggled a little the rest of the world struggled a lot. I know we are not supposed to say this, but I think this time it could be different. You could have a slowdown in the U.S. at the same time the rest of the world is outright stimulating.
Let me outlay what is happening in the rest of the world. First you have Germany, the third largest economy in the world. It has been in a recession for the last two years. They have recently taken off the debt brake in the government to allow an increase in fiscal spending. They appear set to accelerate out of the economic malaise they have been in and are likely to pull along several other European countries with them. Next, let’s look at Japan the fourth largest economy in the world. The Bank of Japan is determined to let inflation run hotter after a decade of deflationary pressures. This would be good for economic and nominal growth for the country. Then you have China, the second largest economy in the world. While the most adversarial with the U.S. economically, they have been actively stimulating domestically. So, the next three largest economies in the world after the United States are in a pro-growth phase.
This leads me back to my earlier statement; these new dynamics open the window for this “U.S. exceptionalism” we have experienced the last couple of decades to end. I don’t know if the U.S. capital market dominance will end or not, but I do think that we can have, and are probably already in, a period of dollar weakness and international market strength. This last happened back in the 2000’s. The dollar fell about 40% and international markets greatly outperformed U.S. markets. As investors, this does not have to be a doomsday scenario. We just need to recognize the current environment and position accordingly. As I always say, being diversified in this scenario allows for a level of comfort in your investments.
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