Journalist: “Mr Gandhi, what do you think of Western Civilisation?”
Gandhi: “I think it would be a very good idea.”
In April, at the beginning of the last quarter, stock markets around the world fell rapidly on the announcement of Trump’s tariffs. Then for the rest of the quarter most bounced back to around where they started, some a bit less, some a bit more. That’s the high level picture.
The message from this appears to be one of a lack of direction, even tedium. Yet such a conclusion misses the extremes in volatility. There is a battleground in financial markets which is typical at extremes, when those cognisant of historical valuation extremes fight with those who think “this time is different”. It always ends very badly for the latter. Only the timing is unknown.
Nonetheless we see excellent opportunities. For example, in Asia there are countries and markets which can plough their own furrow e.g. cheap Japan and China equities.
Even the UK is attracting buyers, despite the gloomy headlines. The bad news is good news for the prospect of lower interest rates. In the Global Investment Returns Yearbook 2024, old acquaintance Professor Elroy Dimson, and his colleagues, showed that the majority of returns from stock markets are earned when interest rates are falling. Global investment institutions know this, and they know the UK is relatively cheap, so they will not be shot for increasing their UK allocation.
Despite this clear rationale, one frustrated UK fund manager protested that despite the extraordinary value which he uncovers scouring the UK stock market, it can all be nought with another ill-thought-through tweet overnight from Trump. This is why gold still has considerable upside midst extreme global uncertainty.
There is nothing new when investing. One constant is the behaviour of investors, swinging from extreme fear to extreme greed and complacency – these are the bookends of cycles approximating a decade. Fill your boots at one end, take care at the other end. These periods fit within much larger cycles, which don’t have any magical fixed timescale, but can be recognised by certain characteristics.
Below we have brought this together – the message from investor behaviour and the tell-tale signs of the end of an era, of a kind which has occurred regularly over centuries.
The Big Enemy? Complacency
After four decades of relative global and market stability, many assume this is the norm. But history says otherwise. Crises — financial, political, geopolitical — have a tendency to erupt in tandem every few generations. The evidence is compelling that we are now in such a phase.
Where We Are Now
Following Trump’s April tariff announcement, we warned the US stock market bubble may have been pricked. While markets rebounded, the deeper issues remain. Trust in the US — its markets, currency, bonds, and leadership — is weakening. The world can no longer rely on ever-lower inflation, falling interest rates, US fiscal discipline, or US support for the global institutions which have kept the world relatively stable since 1945.
Why This Matters
The 2008 crisis revealed how unprepared institutions were for extreme financial crises. Today’s risks are greater: even greater stock market overvaluations, surging corporate and government debt, and rising geopolitical tension — with the US at the centre. Unlike in 2008, the US is now withdrawing from global cooperation and leadership.
We Saw It Coming
As far back as 2007, we warned that economic growth was not being broadly shared. Rising inequality, stagnant wages, and debt-fuelled prosperity were building social and political instability. By 2016, we highlighted how central banks, not politicians, were propping up markets — a fragile, short-term solution.
Voters who felt left behind looked to populist leaders and turned against “elites”, migration, and globalisation. Social unrest and political unpredictability were inevitable, as we highlighted regularly e.g. various editions of our TopFunds Guide.
The Trust Breakdown
Today, the US faces a stark choice. Either Trump (or another leader) takes real action to reduce debt — unlikely — or the bond market forces a reckoning. With rising deficits and falling investor confidence, the US may struggle to fund itself. Higher bond yields, reduced trust, and inflationary policies (e.g. tariffs) will strain the system further.
China, a major holder of US Treasuries, is watching closely. Any move by the US to weaponise debt — such as withholding interest payments — could trigger a major rupture.
Ray Dalio’s Framework
Ray Dalio, in his book The Changing World Order, outlines a six-stage cycle which has repeated with some clarity across 500+ years of history. The US is now in Stage 5 — marked by extreme debt, internal division, and rising global conflict. Capital flight, potential capital controls, defaults, and even wealth confiscation are possible as trust erodes.
History is clear that such imbalances typically end painfully.
How Far Could Markets Fall?
Valuation models point to significant risk in the S&P 500:
- Median fair value implies a 30%+ drop.
- Shiller PE suggests a fall of over 50%.
- Hussman analysis shows potential for a 70%+ decline.
The first two are based on a return to “fair value” and make no allowance for the sharper falls which typically occur midst a panic. All three are sober analyses based on a range of calculations and historical precedent – these aren’t plucked out of thin air nor are they alarmist figures, they simply reflect how disconnected current prices are from fundamentals and “the norm”.
Have We Been Here Before?
Yes. Complacency in 1929 led to a degree of over-valuation in the US stock market not far removed from where we are today, and was followed by an 89% crash. What’s new is how much central banks have inflated US asset prices since 2009, and, in recent months, the extent to which Trump is fundamentally at odds with the US central bank, the Federal Reserve, creating even more uncertainty.
What Should You Do?
Have a plan to avoid major losses — they can derail life plans. For opportunities midst the uncertainty, focus on value (such as UK, Japan, China), real assets (e.g. gold), and all-weather/absolute return funds.
If you’re already using our Discretionary Fund Management (DFM) service, we are actively managing these risks and opportunities. You will be receiving the specific portfolio commentary within the next two weeeks. If you are not using our DFM service, speak to your adviser urgently to ensure your portfolio is protected.
And if you are comfortable with greater risk and have a high capacity for loss, we can tailor a portfolio to suit. Feel free to get in touch, and we’ll be rolling out a new addition for high-risk investors in the coming weeks.
“Western civilisation, unfortunately, does not link knowledge and morality, rather it connects knowledge and power and makes them equivalent”
Vine Deloria
“It is a tale told by an idiot, full of sound and fury, signifying nothing”
Macbeth, Act 5, Scene 5.
