Scott Bessent (Treasury), the man who wrote the report that identified the contradictions in the UK economy that made George Soros $billions, certainly must see the dangers, and yet, he is the source of one of the major contradictions, when he says the Fed shouldn’t lower rates while Trump demands the opposite.
Is Fed independence under attack and how will investors read this?
Are tariffs, as claimed, for revenue or to reduce imports? They can’t be both.
But if the tax cuts are to be permanent, $3 trillion in revenue has to be found somewhere.
Will Trump let a gnat like the Parliamentarian, or the Chairman of the Federal Reserve, stand in his way?
If, at some point, investors focus on the issues around tariffs-as-revenue, or threats to Fed independence they may begin to worry, and decide to sell equities.
The cost to hedge against such an event would be prohibitively expense given one wouldn’t know whether or when it would occur.
I’m sure 5i is considering these issues, but here is what I am pondering. How does an investor with a large equity portfolio manage this kind of risk? Would growth stocks be hardest hit? Are etfs better than individual stocks? What defensive stocks are likely least affected? Are there equities that would do well in such a scenario? How would bonds perform?
Markets seem to be taking a wait and see approach with a lot of this where they are waiting to see the actual policies that get implemented opposed to the hadlines that come out. So far, this has appeared to be the right approach. Regardless, risks and uncertainty have been rising but a lot of the risks seem to be more structural/longer-term in nature (like global relations) that will have implications but at least are harder for markets to invest on for the time being. These more nebulous types of risks, as mentioned, also make it harder to position a portfolio in a way that addresses them. As always, increaseing cash levels is often the simplest and most relibale way to address the risk but we would still caution going 'overboard' here. The other approach is also simply adding diversification to a portfolio and maybe reducing concentration in names that have higher weights. With added uncertainty, you never know which day some headline is going to be focused on a certain company/sector, which can impact higher concentration in names (conviction can't protect against policies out of left field that change industry dynamics, but can work both ways), so we think diversifying across sectors and geographies will prove valuable as well.