In game theory, the prisoner's dilemma illustrates how two individuals, normally perfectly rational, acting according to their own interests can lead to a collectively unfavorable situation. This paradox naturally resonates particularly well in the current context, if Donald Trump's decision can be described as rational, as it seems to defy all economic logic. Faced with this unilateral decision, the responses envisaged suggest a dynamic of non-cooperation (China has already responded by imposing customs duties of an equivalent amount), where short-term responses are detrimental to the overall balance.
Seeking a syllogism or simply an Aristotelian logic in the American President's actions seems doomed to failure. His statements are more akin to sophistry: "All cats are mortal. Socrates is mortal. Therefore, Socrates is a cat." This excerpt from Ionesco's play Rhinoceros could easily have been delivered by Donald Trump, with all his well-known self-assurance. However, none of the so-called moderators we could have counted on to reassure us seem willing or able to intervene. Worse, Scott Bessent, the Wall Street man, is fiercely defending the trade war policy despite its initial effects. On the one hand, Jerome Powell declared last Friday: "We face a highly uncertain outlook with elevated risks of both higher unemployment and higher inflation. (...) While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent." The stagflation scenario is thus on everyone's mind. On the other hand, Scott Bessent declared on NBC on Sunday, with astonishing composure, while commenting on the major correction in the markets and its impact on American savers: "People have a long-term view. ... The reason the stock market is considered a good investment is because it's a long-term investment. If you look day to day, week to week, it's very risky. Over the long term, it's a good investment." It's not certain that this long-term vision will reassure the markets. All of this would therefore be part of Bessent's dear "3-3-3" theory, and the decline in the US 10-year rate and the dollar would already be tangible results. More seriously, the impact on US and global growth could be significant, and the consensus is already predicting a loss of at least one point of growth this year. Scott Bessent should ponder this quote from President McKinley: "The period of exclusivity is past… commercial wars are unprofitable. Reciprocity treaties are in harmony with the spirit of the times; measures of retaliation are not."
The adjustments made to our allocation table accurately reflect the movements made within our portfolios over the past week. At this stage, the announced tariffs represent a significant drag on US growth. They act as an additional tax on consumers, in an economy where consumption represents nearly 70% of GDP. This time, the Fed's room for maneuver to support activity in the short term will be limited by the inflation induced by these new tariff measures. The likelihood of a recession in the United States in 2025 is significantly increased, and we believe it is essential to anticipate the possible consequences for US assets. Fundamentally, the direct impact on Europe and China should be less pronounced.
However, in the current context of high volatility, the re-correlation of assets between geographic areas limits hopes of isolated outperformance. China reacted quickly with a firm and reciprocal stance, and Europe could follow suit, which would compromise D. Trump's initial strategy. The coming weeks therefore promise to be volatile, as long as the American administration does not reverse its decisions. Is it ready to backtrack, and does it have the will? Nothing is less certain. While earlier in the year, customs duties were seen as a negotiating lever, they now seem to have become an instrument of an isolationist vision, marking a real retreat from globalization. We will remain attentive to any change in Donald Trump's policy on this issue. Until then, caution remains our policy.
