“Se vogliamo che tutto rimanga com’è, bisogna che tutto cambi.” Giuseppe Tomasi di Lampedusa
President Trump professes an allergy to the written word, so he can use this spoken version of Machiavelli’s work. Chapter 7 begins: “those who by good fortune become princes from being private citizens have little trouble in rising, but much in keeping atop; they have not any difficulties on the way up, because they fly, but they have many when they reach the summit.”
What a week! When chaos reigns, quotes help frame the disorder. I’m not a regular reader of Machiavelli, but sound political advice is desperately needed. The words of another Italian also sprang to mind. The quote above is from Il Gattopardo (The Leopard) and translates as ‘if we want things to stay the same, then everything needs to change.’ There’s a very good Netflix version of The Leopard which I heartily recommend – see the opening scene here. Another appropriate quote: “there are decades where nothing happens; and there are weeks where decades happen”. Conflicting quotes from a Sicilian aristocrat and Vladimir Illich Lenin compete for the most apt description of the disorderly events of the past week. Eventually, there is likely to be reconciliation of both thoughts. For the ‘tariffs’ episode has revealed both the threat and the limits of the Trump revolution. The new administration look in need of serious advice. If they want things to stay unchallenged politically, they need to change.
Who is the biggest loser from last week’s fiasco? With a 90 day suspension of almost all tariffs announced, the biggest immediate economic loser is China, which has had its tariffs increased to a combined 145%. The other big loser is Mr Trump himself, who was subject to almost immediate ridicule for both the formula for calculating tariffs and for announcing tariffs on islands inhabited only by penguins. More importantly, the ridicule was compounded by the spectacular suspension of the new tariffs as soon as the Treasury market showed signs of misbehaviour. For, be under no illusion, the equity response may have been savage but it was the uncharacteristic and sharp rise in long-term yields which forced the 90 day suspension. Other losers will emerge in coming weeks as the whiplash effect of markets on hedge funds (and individuals) is revealed. In dollar terms, I expect these losses to be extensive.
As readers will remember, we warned that April may be the ‘cruelest month’. We had warned of repo disruption at quarter-end (which failed to materialise) to be closely followed by tariff disruption – which most certainly did materialise. In market pricing terms, the outcome was more-or-less as we predicted even without repo problems. That is gratifying, but what are the key takeways?
Firstly most will concentrate on the immediate economic effects – and the likelihood of future disruption. A suspension of tariff imposition is not a withdrawal. The suspension does, at least, frame the limits of policy. The formula used to allocate the tariffs was shown to be almost comically simplistic (trade deficit divided by total exports to the US) – though, in its defence it has the virtue of precision. I would expect the next 90 days may lead to some ‘refinement’ of the formula.
Do we stay at 10% on all countries except China? That seems the baseline from which there can be no deviation. For the 10% base seems required to bring in the revenue needed to offset tax cuts. The Tax Foundation calculates that a 10 percent universal tariff may raise $2.2 trillion over the 2025 through 2034 budget period. But they also point out that tariffs at that level are likely to suppress GDP by 0.4%, and therefore the overall a fiscal effect is reduced to $1.7 trillion (at 10 percent tariff). Others believe the overall fiscal effect is negative.
There are other losses to consider – both economic and political. If tariffs are not abandoned, then a growth model founded on exports, accepted by many emerging economies in addition to China, will have to be revised. The shock announcements of last week have revealed how vulnerable the dominant growth model of the last eighty years is under the new regime. In the original announcement, Vietnam would have been subject to a 46% tariff. Exports defined the basis of the growth model for the entirety of economic policy for Vietnam and others. There is a sense of injustice at the imposition of costs by the most wealthy nation on earth on relative trade minnows, where average income levels and social provision remains far from developed countries. The blow is especially hurtful as tariffs are used to justify domestic US tax cuts. China’s geopolitical ambitions will gain in the region as a result.
So, last week’s actions will incrementally undermine confidence in the dollar. Not that an alternative is discernible. Which is why there has been a sudden reappearance of the ‘Kindleberger Trap’ – the thesis advanced by Charles Kindleberger to explain the severity of the Great Depression as (partly) the result of the sterling reserve status finding itself unable to defend its ascendency while the rising dollar status was unwilling to assume the reserve mantle. The result was international payments confusion in the 1930s at exactly the time leadership was needed, prolonging and worsening the downturn. The rise of Nazism and the Second World War followed. President Trump assures us he supports the dollar’s reserve status. We should believe him. Yet his custodianship is no strong advertisement for confidence. Confidence in any matter is based on consistency and good will. Both are signally absent in the new administration.
But perhaps the greatest loser is a sense of probity. The basis of any long-standing political legacy is probity. Since the first announcement of tariffs in February 1st 2025, there has been an impression of manipulated news flow. The sense of manuipulation is only reinforced by this week’s events. There is a brazenness about possible impropriety.
To recap, Trump announced tariffs on Canada and Mexico on 1st February. It appears the president of Mexico had already discussed tariffs with the president-elect before his inauguration, which allowed a swift announcement of an agreement over the weekend to allow a suspension for a month. The result was a massive spike (weakening) in Mexican peso over the weekend, followed by an equally spectacular collapse (appreciation) on Monday as news of the agreement was made public. Anyone with any knowlege of that settlement would have been able to make a great deal of money.
That sense of impropriety was endorsed with this week’s tariff announcements. The president countered the equity crash he had unleashed by the tariffs in early trading on Wednesday on his own social media platform by writing “THIS IS A GREAT TIME TO BUY!!!” He followed this later in the day by announcing the 90 day suspension. Which, of course, meant anyone taking his advice to buy would have benefitted mightily from the resulting rise in equity prices. Presumably, some in his entourage may have taken his advice. Perhaps he took his own advice.
Such antics do not engender respect. Even if the prompt for the policy reversal was the bond market, a president is ill-advised to be giving public investment advice on matters his own actions affect so deeply. It does not look good even if no untoward behaviour takes place. The whipsaw nature of the last week has apparently damaged many investment funds, including hedge funds. Few tears will be shed for highly paid professionals who are are caught out. But alienation of investment professionals is a perilous endeavour – especially if they believe they have been misled. There’s a distinct aura of unrest in the Treasury market. With so much debt to be issued and a tricky debt negotiation ahead to resolve the Debt Ceiling, unsettling actions combined with open questions about probity are not helpful.
So the actions of the last week have alienated:
China (especially)
Any country in receipt of a tariff – even if it was later subject to a 90 day suspension at the lower rate of 10%.
Any country whose original tariff of 10% remains at 10%
Emerging economies whose entire growth strategy now appears in jeopardy.
Professional investors who have lost
Professional investors who didn’t loose but don’t understand the direction of policy.
And these losses of respect have been paid for by a blanket (excepting China) tariff of 10% which had it been announced in the first place may even have led to a equity rally.
We began with Niccolo Machiavelli. Later in chapter 19 of The Prince he advises:
It makes him (the Prince) hated above all things, as I have said, to be rapacious, and to be a violator of the property and women of his subjects, from both of which he must abstain.
It makes him contemptible to be considered fickle, frivolous, effeminate, mean-spirited, irresolute, from all of which a prince should guard himself as from a rock; and he should endeavour to show in his actions greatness, courage, gravity, and fortitude; and in his private dealings with his subjects let him show that his judgments are irrevocable, and maintain himself in such reputation that no one can hope either to deceive him or to get round him.
What we have seen in the last week are signs of rapaciousness, irresolution, fickleness and, in the face of bond disturbance, some cowardice. There seems to be little or no violation of women.
A final word should be allowed to di Lampedusa. The Leopard ends with a riff on the quote given at the top of this article, but subly changed: “Se tu non cambierai il tempo saprà cambiarti.” (“if you don’t change yourelf, time will change you.”)