Howard Marks on risk

People want to be able to take the concept of risk and use it in a formula to do computations.  The only number that’s available to use as a proxy for risk is volatility, or the standard deviation of prices or returns.  That’s not what risk is.  Risk is the probability of losing money, [but] there is no number you can use for that because there’s no place you can look to find out what the probability of a bad outcome is today or what it was six months ago when you made the investment.  So, you can be quantitative but not accurate, or accurate but not quantitative.  You can’t do both.

~ Howard Marks, "Howard Marks on Trump, Risk, Inflation, and Tariffs," Barron's, November 9, 2024

Angelo Katsoras on Trump's deregulatory agenda

One of Trump's first actions after being sworn in on Jan. 20, 2025, will be to begin unilaterally rolling back certain environmental policies through executive orders.  These include initiating withdrawal from the Paris Climate Accord, streamlining the permitting process for drilling on federal lands, expediting approval of natural-gas pipelines and liquified-natural-gas export facilities, and removing emissions and clean energy targets.  He will seek also to lighten the regulatory footprint in the financial, IT, energy, and mining sectors.

It is important to note that repealing, implementing, or rescinding new executive orders can be a lengthy process.  It often takes months or even years to review and respond to potential legal challenges.  Typically, these challenges are first heard in federal district courts.  The more these cases are heard by judges appointed by Republicans, the better the chances that these executive orders will not be overturned.

~ Angelo Katsoras, Geopolitical Briefing, National Bank of Canada, November 6, 2024

Patrick Barron on Trump's tariffs

I also believe that as president, the Donald will succeed in implementing more widespread and higher tariffs, although I wish it were not so.  The president-elect has admired using trade as a weapon for a long, long time, even before he considered running for political office...  Unfortunately for this free market/free trade economist, the country seems to side with him.  So, just as the US and the world slide into recession, the US will repeat the disastrous Smoot-Hawley tariffs of 1930 that triggered worldwide reciprocal tariffs.  Depression, tyranny, and war followed.  So, the Donald may get his tariffs only to go down in history as the twenty-first century’s Herbert Hoover. 

Notice that it is the electorate that will get its way, perhaps not fully but at least partially...  [T]he electorate supports higher tariffs.  Despite both theoretical and empirical evidence that enacting tariffs is like shooting oneself in the foot, I think the Donald and the electorate will get them.

~ Patrick Barron, "Will the Donald, Elon and Vivek Succeed?," Going Postal, December 30, 2024

Kevin Duffy on left- and right-wing delusions

The latest bull run was kicked off by the release of ChatGPT just over two years ago.  From trough to all-time high, the S&P 500 vaulted from 3,840 to 6,090, good for a gain of 59%.  The previous high was set on January 3, 2021, with the S&P perched at 4,797.  I believe we are seeing all of the classic signs of another significant peak in U.S. stocks. 

The symmetry of this second major market top is hard to miss.  The broad market actually crested in early 2021, coinciding with the Biden victory and inauguration.  Speculative excesses were quite obvious in meme stocks and Cathie Wood’s “growth at any price” moonshots.  Left wing delusions included Covid vaccine rollouts, DEI, ESG and male athletes competing with women.  Today’s speculative excesses include bitcoin, generative AI and Big Tech.  Right wing delusions include trade wars, hot wars, deportations and American exceptionalism. 

The Trump victory was the cherry on the speculative sundae, the catalyst for a euphoric blowoff rally.

~ Kevin Duffy, "Portfolio Review," p. 17, The Coffee Can Portfolio, December 20, 2024

Kevin Duffy on Trump, trade and tariffs

Outside of Trump’s inner circle, nearly everyone seems to understand the destructive nature of tariffs, even Keynesian economists and Trump voters.  After the election, the stocks of dollar stores immediately sold off on concerns the industry would face higher costs in a trade war with China, no doubt passed on to their lower- and middle-income customers.  Investors, at least for now, are downplaying these risks.

The problem is that the very essence of Trump is that of a pragmatic, businesslike interventionist who thinks trade is “negotiable” and “reciprocal.”  In a sense, he is right: trade is mutually beneficial, but to the parties involved, its terms are negotiated by the parties involved and each gives up something to get something in return.  However, when a third party, in this case the government, interferes, it can only interject its own wants and needs.  It does so through violence, i.e. it gives up nothing and benefits at the expense of those who would otherwise trade with each other.  While the state gains power, both parties to the trade are made poorer. 

Protectionism prevents a nation’s consumers from securing the best products at the lowest prices around the world.  It also denies producers and distributors the cheapest inputs and best deals.  Trade and peace go hand in hand.  A healthy global economy and rising living standards require expanding trade, specialization and the division of labor.  Protectionism moves in the opposite direction, towards self-sufficiency, nationalism and ultimately impoverishment. 

When Trump threatens 100% tariffs on anyone who refuses to trade in U.S. dollars, he is playing with fire.  In response to the Smoot-Hawley tariff of 1930, global trade plummeted 65%, plunging the world into depression and laying the groundwork for nationalism, authoritarianism and world war.

~ Kevin Duffy, "Great Expectations: Handicapping Trump 2.0," The Coffee Can Portfolio, December 20, 2024

Kevin Duffy compares the present U.S.-China cold war with U.S. vs. Japan in the late 1980s

The present U.S.-China cold war rhymes with the U.S.-Japan clash of the late 1980s, except that in many ways the roles are reversed.  Today it is the U.S. who smacks of hubris while China lacks confidence.  Ironically, the U.S. adopted many of the pillars of the flawed Japanese model, including protectionism, industrial policy (CHIPS Act), stimulus, bailouts, zero interest rates and trusting of authority.  In the battle of ideas, Japan won.

~ Kevin Duffy, "Bull in the China Shop," The Coffee Can Portfolio, December 20, 2024

Kevin Duffy makes the bull case for Chinese equities

The bull case for China is simple: it’s cheap, hated and on course to become the dominant economy on the planet.  Even the bears will concede the first two points.  But China’s economic future, contrary to a cacophony of negative narratives, makes the 2021-24 equity bear market the mother of all fat pitches, a generational buying opportunity.

~ Kevin Duffy, "Bull in the China Shop," The Coffee Can Portfolio, December 20, 2024