May 2025 Update

May, 2025

Of Tariffs and Turbulence

Markets had another wild ride but squeezed out gains as Microsoft (owned) and Meta (not owned) produced good results and share prices rose. The market capitalisation global index rose about 0.9% in US$. The Value weighted index was flat so Growth outperformed Value driven by a bounce in the largest companies. The Global Infrastructure index rose over 3% in US$.

Many CEOs used the tariffs’ threat as a reason to pull guidance. We think that companies will next use the excuse to lower eps guidance. Profitability has been very high in the last few years and possibly enhanced with non-sustainable methods, so any externally provided excuse to re-set is tempting. We try to avoid these potential land mines with a Quality or Resilience quantitative factor which assesses the quality of profit growth and the balance sheet.

Much more will be written on tariffs, from all perspectives, by many fund managers. We’re compelled to comment but it’s brief.

Think of tariffs as an oil price shock a la 1973 and 1979. Those countries that accommodated this increase in input prices with monetary easing had nasty inflation - eg the UK especially, and the USA. Those that didn’t, such as Japan and Germany, didn’t. Consumers in those countries had to switch preferences due to relative price changes; the general price level did not rise, and the private sector produced products for the new environment - eg the auto industries designed much more fuel efficient cars. Nuclear Power was also bult out heavily in Japan and France to reduce the oil dependency in those countries.

Allowing demand destruction, private sector innovation, and price changes as a signal to suppliers to invest or not invest has to be allowed to return if we are to escape the very low growth and persistent inflation scenario. This will occur by not accommodating the tariff/tax increases with monetary easing. Fed Chairman Powell is correct in not cutting rates until he sees the end game from suppliers, investors, consumers, lenders, but he is misleading us with his rhetoric. It’s not the tariffs that are inflationary it would be his accommodating of them through monetary easing that would be so.

If we were asked our opinions on re-setting Western economies, which the USA administration at least has indicated it wishes to do, we would actually start with the premise that cutting wages to better raise productivity and allocation of capital is pretty hard to do or allow politically. So, to encourage private investment and allow the market to work, you have to allow workers to be sacked rather than cut wages, BUT have much better re-training labour at free or low cost so frictional unemployment is kept to a minimum. It is somewhat crazy that a society that believes it is in the 4th economic/industrial revolution and therefore will see rapid rates of job obsolescence, doesn’t have a support mechanism to re-train their people at low or no cost so the pain of job loss is kept to a minimum.

Some small tweaks to the strategies were made but nothing significant. The chances of a recession are high if you believe the Kalecki equation holds (we do).

Significant gains were seen in Andritz, Kajima, Kroger and Emcor. Oil companies Schlumberger, Chevron fell by over 15%. We remain overweight as recent power cuts in Spain and cancellation of wind power projects in the English Channel indicate that the ‘renewable’ technology is not yet competitive.

Delft Partners May 2025