The Age of Geoeconomics

[Excerpts from a Letter to Investors published May 13, 2025]

Some thoughts on a busy few months in the market.

Where We Are Now

Monday’s [May 12] temporary lifting of triple-digit trade levies between China and the U.S. prior to kicking off formal trade talks has removed the threat of an immediate stagflationary hit to the U.S. economy. It was a welcome relief – and a bigger-than-expected U-turn.

Broader global U.S. tariffs are here to stay, however – likely at a 10% rate for most countries, and something higher but now less extreme for China. And that 10% across-the-board tariff rate is still four times higher than U.S. policy prior to Liberation Day.

So, significant uncertainty remains for many people and businesses, and tariffs will still be a bit of a drag on economic growth.

The good news is that the U.S. economy should be strong enough to absorb it.

And perhaps the even better news, at least for long-term investors, is that uncertainty is a precursor for outperformance.

To be sure, the market doesn’t care how we might feel about the challenges it presents.

At times it resembles a machine engineered almost perfectly to exploit our biases.

Most folks are aware of their own political biases, of course, but there has also long been a common unspoken assumption among Americans that markets were separate from – or bigger than – politics.

That while politicians inside the Beltway thought they ran the show, the world was really run by capitalists in Manhattan.

I think part of what made the last six weeks so jarring is that tariffs violated biases and assumptions that many people didn’t even know they had.

Myself included.

I mean, I don’t fully understand why – but on more than one occasion lately, at night, alone in the living room, I have caught myself rooting for the New York Knicks.

What. Is. Happening.

In any case, it’s during those fuzzy and unfamiliar times in the market where the best opportunities tend to cluster.

They also speak to the thing I love the most about this job:

The chance to be handsomely rewarded for an accurate understanding of the world.

If we can find a truth that others are slow to recognize, the market can be an amazingly efficient and gratifying way to – slowly but surely – turn that knowledge into large amounts of money, over time.

Even better, we don’t have to build any factories, negotiate any contracts, or spend any afternoons stuck on a group Zoom to capitalize on it.

We can just click a few things on a screen and eventually turn that knowledge into money.

Kind of like crypto – only, you know, real. And a positive for society.

Greatest country on earth!

Recent Changes

Regardless of whatever surprises may come, our priorities here continue to be protecting your wealth through a historically turbulent time – and looking for opportunities for long-term capital growth.

The most notable change I made to our accounts in the aftermath of Liberation Day was to move all our energy positions to cash due to concerns about the impacts of tariffs on energy markets, specifically.

Lower economic growth from those surprise reciprocal tariffs meant lower demand growth for oil, too. Within hours of Liberation Day, OPEC also announced a surprise increase in production that was three times as large as anticipated – a notable fundamental risk in a market where the difference between bull and bear markets can be less than 1% of daily production. Finally, once the Administration announced new steep tariffs on China in particular, the level of disruption and risk to U.S. energy companies had in my view risen to a significant enough level that it qualified for swift action.

So, for that reason, too, I reduced all of our exposure to the energy sector.

Since making those changes, the probability has increased that a downcycle in oil has begun.

U.S. tariffs are hitting the parts of the world where oil demand was projected to grow the most in the near term. Independent of China, six countries in Southeast Asia were projected to make up more than 25% of energy demand growth over the next decade, with oil demand alone projected to grow by 28%.

Tariffs also mean American oil companies will be paying higher costs for key inputs needed to drill more wells – steel pipe, motors, condensers, valves, and more – and a large share of those goods come from overseas. In the month before Liberation Day, the Administration had already initiated a 25% tariff on steel and aluminum – and U.S. drillers had watched the price of tubular steel pipe rise by roughly 30%.

Independent U.S. oil companies are among the most recession- and China- sensitive stocks in the market. Their burdens have increased significantly of late. And while oil companies may soon be attractive again, I am currently in no rush.

Outside of those changes to the energy sector, we have been sitting tight – and looking for opportunities, across all of our portfolios – while keeping in mind the potential for the economy to start slowing moderately in the coming weeks.

Now, some more detailed thoughts on recent events.

So Many Headlines

There are a number of important things going on at the intersection of the stock market, geopolitics and macroeconomics – and likely game theory, too – that deserve some attention.

In recent years, whenever we as investors have been forced to shift our gaze from the primacy of company valuations, the right short-term approach has been to look for new opportunities to capitalize on the volatility – and then to wait for the uncertainty to inevitably decrease as the world got back to normal.

That is still the case today.

The normal we come back to, though, may look a bit different. And it may take a little extra time to get there.

On Liberation Day, the U.S. began the process of re-orienting global trade. 

That’s a heavy lift. It’s going to take some time.

And we are taking the Administration’s efforts on trade seriously.

To be sure, mosh pits at Metallica are more organized than the rollout of these surprise tariffs. The U.S. bond market very narrowly avoided a disaster on April 9th. The VIX index, which tracks stock price volatility, also spiked above 40 – a level reached only a handful of times in history.

Both of those reactions should give everyone some pause.

But the White House’s goals also appear to extend well beyond just tariff revenue.

The Administration has broader policy aims emphasizing energy independence, domestic manufacturing, deregulation and tax reform – all part of a larger corrective to address what it believes are long misdiagnosed and growing economic problems that have hollowed out the American middle class.

In other words, tariffs are the first part of a much broader plan. While tariff headlines will eventually fade away, it’s also important to recognize that the economic and geopolitical web the U.S. built around the world over the last few decades is now gone. As a new web is built, volatility and uncertainty will likely persist.

The Cone of Uncertainty

The White House’s goals do not appear to be limited just to U.S. domestic policy.

In addition to tariffs, we’re seeing an effort by the Administration to rapidly and aggressively disassemble the post-World War II order – the geopolitical ties, the defense system, and the economic linkages – to the frequent astonishment of our traditional allies.

It is controversial and complicated and for some reason seems to include a lot of Tweets.

In the backdrop are two big structural challenges – often at odds which each other when it comes to trying to solve either one alone. The first is our country’s fiscal condition. We are running an approximately $2T deficit on government revenues of $4.5T. The U.S. national debt has ballooned to $37 trillion – and is reaching 125% of U.S. GDP. Interest payments on that debt are approaching $1 trillion annually, surpassing what we spend on national defense.

We are fortunate that none of that is an immediate challenge, but it is clearly on an alarming trajectory. It is a problem that will inevitably need to be addressed.

The second related challenge is the trade deficit. For the past 30 years, the chronic trade deficit that the United States has run with the rest of the world has been the biggest imbalance in the global economy.

Today’s trade deficit is the result of a combination of factors which result in us importing much more than we export. We consume more than we produce and invest more than we save.

Said another way: we Americans live beyond our means.

And that, too, is unsustainable. As Warren Buffett wrote in 2003, the U.S. trade deficit is like selling pieces of the family farm… while increasing the size of the mortgage on the shrinking portion we still own.

Both the trade deficit and the budget deficit demand large inflows of foreign funding. The simplest solution to address both problems simultaneously would be for we American citizens to live more within our means.

Our inability to do that, however, has meant these long-simmering economic problems eventually became politically unsustainable. Especially after the Great Financial Crisis of ’08-’09. The differences between the winners and losers in America sparked a populist revolt – with folks on the short end of the stick demanding a new economic deal more favorable to them. President Trump won two elections by giving voice to those resentments.

And now the Administration appears determined to try and fix them.

Wall Street, too, is frantically attempting to predict the next moves of the White House.

Many strategists and pundits are obsessing about a “Mar-A-Lago Accord” – the work of Council of Economic Advisers chairman Stephen Miran, who last November wrote a 41-page paper on restructuring global trade. You don’t need to bother with Miran’s paper to discern the Administration’s intent here, though. President Trump has been clear since 1987: he believes strongly that America’s trading partners are ripping us off, and he’s determined to stop them.

If the consensus on Wall Street about tariffs is that they won’t work very well – the consensus on Main Street seems to be that they won’t be an issue for very long. My conversations and emails with many of you also underscore that same belief: that President Trump will blink on tariffs, roll them back, and this episode will all be in the rearview soon enough.

You’re not alone. Recent economic surveys suggest that most small business owners also appear to have been updating their assumptions throughout April to assume that the Administration will, when pressed, capitulate on trade.

That very well may prove to be the case. It’s a logical conclusion. But I am a bit skeptical, nonetheless.

I think it’s a mistake to conflate the bewilderment of Wall Street economists with the conviction the Administration has to use tariffs as a tool in a broader plan to attempt to reboot the American economy.

It seems clear we now have enough evidence to confirm that tariffs will be an instrumental policy instrument for President Trump. In some way, shape or form, it appears tariffs will be part of life in America from here on out. To argue that we shouldn’t be using tariffs at all no longer seems tenable.

More to the point – the risk of viewing all of this through the lens of consensus is that we underestimate the probability of a longer and more uncertain path ahead. 

Ironically, one way to reduce the anxiety of this current uncertain period is to take at face value what the Administration has been saying about its broader economic plans.

Specifically: the goal of its recent actions around trade is to help balance the budget with tariffs – while also balancing the trade deficit and moving some manufacturing back onshore to the U.S., in order to help the Americans left behind by globalization over the last few decades.

And while the Administration clearly has one eye on the markets as it moves ahead with its plan, it is also not saying any of this will be easy. Just that, in the long-term, it should be worth it.

The Age of Geoeconomics

In all the noise around tariffs, there is a signal, too, that I think is being underrecognized – in a couple of important ways.

Longer-term, I think it speaks to the potential for some fundamental changes in the nature of free markets.

In the short-term, it may imply more volatility over a longer period of time than may be expected.

A caveat here, before I hypothesize further:

We will always be focused on trying to exploit gaps in the market that undervalue longterm free cash flow per share in the companies we own. Full stop. The thoughts below relate to just the sectors where I think we are most likely to find those new long-term opportunities. Our evaluation of them remains the same.

Also, some of my biases include the following:

I am a value investor and an energy specialist. Hold your jokes. I have long hoped corporate America might one day push back on the short-termism and discouragement of long-term capital investments that Wall Street has demanded for decades. So, I may be misinterpreting signs that suggest that may be finally happening. 

I am skeptical of the value of most economists’ opinions. History seems pretty clear on this: economists are usually worse than nothing when it comes to prediction. See Dr. Alan Greenspan, obliviously marching us all into 2008. Still, economists can dissect the past with some value – and in that regard can be valuable in avoiding obvious mistakes. So, I could be making a mistake in muting them on the television.

I am also a former military officer. Among other things, I believe in the importance of policy, the principle of not leaving anyone behind, and am a bit of an institutionalist, too. The free market cannot do everything. (See Greenspan, 2008, again). So, I may be biased to be overly sympathetic to the idea that systematic, targeted government policy support for important industries – what D.C. wonks call “industrial policy” – could legitimately help the economy function better for more Americans.

With that in mind, asterisk this next point however you see fit:

I believe we are starting to see signs of a combining of technology, trade, finance, military and foreign policies into a governing philosophy that hasn’t been seen in the U.S. since before the Cold War.

Specifically, it appears the U.S. government intends to deliberately support American industry – and deter foreign competition – by using broad policies like tariffs, exchange rates and tax breaks, while also using more targeted policies to bolster critical sectors and technologies.

This resurgence in “geoeconomics” seems to indicate an increasing acceptance – by both political parties here, and other friendly governments abroad – that even classically liberal democracies like the U.S. should be doing more to shape commerce to benefit their own citizens and national interests.

If that hypothesis proves true, then it’s going to challenge the assumptions that many investors have long held about free markets. 

And perhaps create some compelling opportunities in previously overlooked areas of the market.

What Comes Next, Probably

Trade barriers in some form are here to stay. Those will by definition slow global trade, to a degree – which will slow the economic growth that follows, too.

So while we are now through the worst of the uncertainty over tariffs, in the short-term, we should still expect the impact of existing tariffs to result in some degrading U.S. economic data over the next quarter or two – and more stock market volatility.

Our economic outlook at the moment is somewhat boring compared to many headlines of late:

As the impact of tariffs soon begins to trickle through the economy, we should expect declines in hiring and business investment, somewhat higher costs that will prevent short-term rate cuts by the Fed, and moderately falling earnings that will continue to cause the air to slowly but erratically come out of previously overvalued stocks.

So while we believe tariffs will ding U.S. economic growth this summer, and some disruptions to supply chains are likely, our economy can probably withstand them.

That said, risks exist and tweaks to that base case scenario could happen any time. There are multiple limbs on the decision tree, with a number of path-dependent probabilities subject to rapid revision – particularly on the branch related to China.

Reputable economic modeling shops like the Yale Budget Lab currently estimate tariffs will reduce GDP between .05% and 1.0% – which is not great, but is not a recession, either.

You don’t really need a formal model, either, though, if you step back a bit.

The U.S. is a relatively closed economy. Total imports are just under 15% of GDP and exports are approximately 11% of our GDP. Plus, most of U.S. GDP is also in our domestic services, not goods – and those are unaffected by tariffs.

U.S. imports from China specifically are also only 1.5% of our GDP. China exports to the U.S. every year total 15% of their GDP. So in a confrontation with China focused exclusively on tariffs, the U.S. would win.

And in the grand scheme of things, the import shock of tariffs is a relatively small lever when it comes to the ability to push our economy into recession.

In other words – if Americans would just behave exactly like economists think they should, there should be no recession.

That said, the world is not necessarily full of rational people. Shoot, I myself recently paid good money to see the Miami Marlins. A team that lost exactly 100 games last season.

In the near-term, the psychology of spending may be more relevant to what happens to the economy than academic forecasting tools.

In the U.S., the top 10% of households by wealth make up roughly 50% of consumption – and that consumption is almost 70% of our GDP. In other words, the high-end U.S. consumer does most of the spending that keeps our economy growing.

The sentiment around spending is harder to predict, especially if you presume the Fed will be late to responding to a slowdown, the yield curve will steepen, and the economic outlook may temporarily look like stagflation.

In other words, when wealthy folks feel bad, the economy slows. It’s hard to tell how much that impact might be because sentiment is fickle and can sour easily. That means there is a small but real risk to the economy that could be triggered by a barrage of hyperbolic headlines about empty shelves at Louis Vuitton due to tariffs.

So while tariff-based recession fears – and the risks of sustained high inflation – seem a bit overblown at the moment, there is also the potential for us to worry ourselves into a recession, too.

The solution, I trust, is obvious:

Quit doomscrolling and go see a Marlins game instead.

It will be awful. I mean, a real Field of Nightmares. Still, somehow, you’ll feel better.

Less Obvious Risks

The Administration’s tariffs appear to be the first phase of a larger attempt to reorient the world geoeconomically – in a way that could be much more beneficial to the U.S. in the long-term… but which is also not without risk in the short-term.

If this plan succeeds, things could look very different and positive a little further out.

That point, too, is obscured in the noise. The White House clearly believes the future benefits of its plan will outweigh the current costs.

But the pursuit of this agenda won’t be easy. It will also take a while. It is complicated, so the risks of unintended consequences are high.

Tariffs are also a predictable drag on economic growth, which means the Administration will be looking to tax cuts and de-regulation to counter those headwinds with even stronger economic growth.

Unfunded tax cuts, though, risk exacerbating the country’s current fiscal woes even more.

And the bond market will get a vote, too.

The global financial system is extremely complex – and doesn’t exist in a vacuum. Both domestic and foreign politics can impact that system in material ways. 

There are three risks in particular I am watching closely:

1. The potential for negative unintentional consequences of an economic confrontation with China.

China is currently navigating a number of simultaneous crises of its own – from a housing bust to a banking crunch to a youth unemployment crisis. Too much geopolitical pressure could backfire.

Five months ago, during his New Year’s speech, Chinese President Xi Jinping also asserted that “no one can stop China’s reunification with Taiwan.” This was a year after pronouncing that China’s taking of Taiwan was “inevitable”.

And an invasion of Taiwan – given its prominence in semiconductor fabrication – would be a severe threat to U.S. technological dominance.

2. Lingering uncertainty and slower growth caused by tariffs will make the economy more susceptible to shocks in the future.

The Administration’s agenda also requires political capital. Incentives on both sides point towards more divisive rhetoric. Polarization also makes the country less resilient to any serious challenges that may arise.

3. The misallocation of resources by government.

History tells us there are clear downsides to overdoing it with governmental tools of industrial policy like tariffs.

Whether tariffs now under President Trump, or the Inflation Reduction Act under President Biden, the potential for unintended consequences from industrial policies is high. Insider dealing, regulatory capture and the rise of special interests can become problematic regardless of which party is in charge.

There is wisdom in remembering the valuable role of markets, entrepreneurs and capitalism. And that politicians and technocrats are not, generally speaking, skilled at long-term economic planning.

Exhibit A: that $37 trillion in U.S. federal debt.

In the Hall of Fame of Capital Allocation, Mr. Market is the GOAT.

Though Buffett is a close second.

The Opportunity to Look for Opportunities

Until this past Monday, the near-term direction of the global economy and financial markets hinged to an unhealthy degree on the ability of U.S. and China to avoid a protracted trade war.

The two sides are now talking, thankfully.

In the end, the same national-self-interest that brought the U.S.- China conflict to a head over tariffs should also drive a broader deal on trade – eventually, in some fashion.

It seems reasonable to expect the U.S. to alter our current trade relationship with China – by “de-coupling” on critical industries, and allowing moderately-tariffed trade on everything else.

That list of critical industries is long, however, and includes semiconductors, robotics, pharmaceuticals supply chains, and armaments.

Negotiations could take an uncomfortably long time.

And Wall Street traders are not known for their patience.

So, when it comes to capitalizing on new investment opportunities over the next few months, we intend to proceed slowly and thoughtfully.

We are also – through mostly luck and maybe a little foresight – particularly well-prepared to help you all navigate this new world of geoeconomic tensions.

I am undoubtedly biased, but I feel pretty strongly that our actively managed strategies are particularly well-suited for this new era. 

We have expertise in AI and energy – arguably the two most important areas where the U.S. has comparative advantage – and which should benefit the most from future trade deals.

International stocks, long overlooked, now have multiple catalysts for growth – and the case for diversifying overseas has grown considerably stronger of late.

Industrial companies aligned with new government priorities – whether by reshoring production, partnering with domestic suppliers, or tapping into new federal subsidies to lower their cost of capital – also stand to be the major winners in the coming years. We’ve done that research, too.

We also feel like combining that expertise in actively managed strategies with our capabilities in index and specialized ETFs will be a powerful and unique combination for all of you.

Perhaps most notably – our new financial planning services may be particularly useful in helping insulate yourselves and your family from much of the current noise in the market.

Please reach out anytime if we can be of help.

Thank you – and please let me know if you have any questions on the above.