Our take on the week of March 31, 2025

Nothing happened on March 31 and April 1. The visionary and/or paranoid folks sold off USD and the U.S. market. They’re probably soaking in champagne as we write these lines. Let me be clear: our champagne bottles are still unopened—we had placed our trust…

Then came April 2 (well, the night of the 2nd to the 3rd).

One can quibble about the ridiculous nature of the calculation, or about the fact that Trump and his administration are this or that, but a few constants must be kept in mind:

• Trump believes he is always right. He won’t back down (otherwise, he would’ve done so by the morning of the 3rd, or at the latest, the 4th).

• Unlike during his first term, he no longer seems to heed external advice (not even from the markets).

• Or perhaps he’s already full of regrets—but rule #1 above still applies…

Many strategists say this radical move aimed to achieve three goals:

• Lower the USD

• Attract foreign companies to settle in the U.S., without the need for costly tax incentives like those from his predecessor (e.g., the IRA)

• Finance tax cuts promised during his campaign through tariffs.

Let’s examine these goals in light of what’s happened over the past two days and try to extrapolate, while acknowledging that we love macro-economics but are by no means certified experts:

• The dollar dropped significantly. But that’s largely tied to the massive (panic-driven?) sell-off of U.S. assets and the conversion of proceeds into other currencies.

Will the USD remain weak or even fall further to reach 1.20 against the EUR? That’s far from certain. Once the panic settles, macroeconomics regains control.

Will the USD continue weakening? We don’t think so, and we explain why below.

• It was a massive sell-off in the U.S., but also globally. Without real differentiation. So we might ask: was it the aggressor (the U.S.—oops) or the victims (Asia and Europe) that were punished?

It seems to us this sell-off was a reflexive panic response, mostly focused on exiting risky but liquid assets (equities).

The real punishment will come later, when the smoke clears.

• All the analysts are busy listing the companies most affected, ignoring two important points:

Trump doesn’t aim to maintain these tariff rates—he wants to coerce the “opposing parties” into concessions.

Moreover, nobody knows how those “opponents” will react—or even if they’ll unite against the U.S.

• We believe the big loser here will be the U.S. Not since April 2—but long before that.

This administration has shown little regard for its historic allies. Granted, those allies have often benefited from the U.S., which believed its “sole superpower” status justified financing others’ comfort. However, the allies won’t remember what the U.S. did since January 20—they’ll remember that they were betrayed, and in the most condescending and brutal way.

Sure, some of the U.S.’s actions were justified. But insulting allies to this degree will leave lasting scars.

So, will the Trump administration achieve the supposed goals listed above? Let’s take a closer look:

Repatriating manufacturing to the U.S.: Unlikely, because:

• Any industrialist considering investing in the U.S. will quickly realize there’s no available workforce:

Unemployment is at a frictional rate (around 4%), wages are rising sharply (without being justified by productivity gains—which are happening in services, not manufacturing), and tensions will likely persist, especially since this administration wants to expel “illegal aliens,” who—unlike in Europe—contribute significantly to the economy through work.

• On top of that, they’ll question the erratic nature of the administration’s decision-making.

• Finally, they’ll wonder whether the inflation caused by these insane tariffs will hurt their sales or production costs. Spoiler: steer clear of discretionary consumer goods—they’ll be the first to suffer!

Weakening the USD: Impossible to sustain!

Let’s get back to good old macroeconomics:

• If there’s a deficit, it means the country running it spends more than it produces.

• A trade deficit means you consume more than you produce.

• A budget deficit means your government spends more than it collects.

Contrary to the U.S. government’s narrative, these deficits weren’t created by other countries. They were created by the U.S. itself.

Remember Ronald Reagan’s election in the 1980s? He was elected to fight these famous “twin deficits.”. He succeeded in an impressive way. But look at the video circulating again on social media where he says all the good things he thinks of protectionism and tariffs... Ronnie speaks from the grave... Donnie ? not so sure he ever will ...

A country with deficits places itself in the hands of its financiers (hello, France!). When we overconsume, our suppliers accumulate our currency. They can keep it—or invest it back in our economy, either through physical CAPEX or by buying our government bonds. If our government is also running deficits, it really has to sell our debt to them.

By doing so, our suppliers keep our currency relatively stable against theirs. But what happens if our currency depreciates (as Trump wants)? Well, our creditors may choose not to invest in our place but back home instead. So in the short term, they sell the USD—and it drops.

But guess what? The government’s actions won’t magically improve its budget deficit! Even by its own admission, tariffs will be used to offset future (or permanent) tax cuts. Therefore, the U.S. budget deficit will remain extremely high.

So who will finance it, once America’s partners lose faith? We don’t have the answer. It won’t be domestic savers—they won’t be any richer. At best, tax cuts may offset the inflation caused by tariffs. But maybe not. Either way, there will be no way to increase domestic savings to finance T-Bonds.

So the Fed will have to raise interest rates to help the U.S. government fund its budget deficit.

And if rates rise (we don’t know how much will be needed, but with T-Bonds already around 400bps, it’s safe to assume the neutral rate will be well above potential growth—automatically creating macro risks), foreign capital will return (assuming confidence in the U.S. is restored), pushing the USD back up.

Also… Trump claims a weak dollar will boost U.S. exports. But who wants them?

Sure, we buy their energy—but we’re not going to increase volumes, especially with oil prices crashing. And if oil drops further, U.S. wells will become unprofitable, reducing U.S. supply.

Then what?

• Their cars? Not advanced enough and too power-hungry.

• Their equipment? Not better than German or Italian.

• Their consumer goods? Umm… what consumer goods are even still made in the U.S.?

Financing tax cuts with tariffs

Funny—it reminds me of Silicon Valley Bank. Brought down by a simple Asset and Liability Management (ALM) issue. You don’t finance long-term or permanent commitments with short-term resources!

And even by this administration’s own account (and judging by recent erratic behavior), tariffs are meant as a bargaining chip to extract concessions. So, if they succeed, tariffs will go down—but the tax cuts will remain. So how do you finance those long-term?

Even if tariffs were to persist, U.S. consumption would drop (since they can’t produce iPhones, cool cars, or fridges domestically). So the revenue from tariffs won’t be sustainable either—while tax cuts will be…

In short—and in our humble opinion—the biggest blunder by any government since Emmanuel Macron dissolved the French National Assembly. (Oh, that’s a recent one too? Maybe our leaders just aren’t up to the task anymore?)

Our next post will (humbly) try to assess your portfolio allocation in this new world order.