Matt King emphasizes that current US trade policies rooted in misunderstanding could create significant risks and instability in financial markets.
He highlights the value of gold amid rising market volatility, suggesting a bleak outlook for equities and traditional safe havens.
Deep dives
Market Vulnerabilities and Risk Assessment
Evaluating market risk involves identifying the vulnerabilities within the financial system, with a current focus on U.S. trade policy. A materially bearish outlook is shaped by concerns regarding the misunderstandings of balance of payments, which may lead to a risky implementation of trade policies. Historical comparisons are drawn with past financial crises, indicating a potential risk premium emerging in the U.S. bond market due to growing debt levels and the disconnect between economic announcements and market reactions. Despite the vested interest in stabilizing the economy, there is a fear that poor policy decisions could exacerbate economic declines and destabilize market conditions.
The Impact of Tariffs on Trade and Economy
Tariffs implemented under the guise of trade optimization may yield more harm than good, as the cure for declining manufacturing jobs could worsen economic conditions. The expectation that American manufacturing will rebound is complicated by technological advancements and global competition, extending beyond U.S. borders. As comparisons are made with economies like Germany and Japan, it's argued that the decline in U.S. manufacturing is part of a much larger global trend rather than a unique issue. Misguided focus on tariffs as a primary driver of economic health could overlook significant factors contributing to broader financial instability, including political polarization and an uncertain global economic landscape.
Volatility and Market Connections
Recent spikes in volatility are indicative of significant market events, with historical correlations established between sharp financial shifts. Concerns are raised that the gulf between credit, equities, and other markets may become unmanageable if current tariff strategies and related economic policies continue as they are. While the financial backdrop remains unsettling, equating the existing volatility to past major financial crises serves as a cautionary measure for investors. Current behaviors in the bond market suggest that traditional safe havens might not function as expected, as risks associated with the dollar and treasury assets intensify.
Future Outlook and Investment Strategies
Looking forward, the outlook on equities appears bleak amid potential volatility, suggesting that central bank intervention may not provide the same support as in prior years. Factors contributing to a lack of investor confidence include diminished liquidity from central banks and staggering economic uncertainty due to ongoing trade disputes. The potential for significant market corrections is acknowledged, with gold being identified as a valuable asset amidst turbulent conditions. Investors are encouraged to seek alternatives such as developed market bonds outside the U.S. or explore emerging markets like Mexico, as the interconnectedness of global trade dynamics could lead to broader asset price declines.
For Matt King, evaluating market risk is often about pinpointing vulnerabilities within the financial system. Over the many years he's been advising institutional investors, he's gone where the action is - in the dotcom era it was corporate balance sheets, in the pre-GFC period it was asset-backed CP and in the last decade it's been sovereigns and QE.
Now the founder of Satori Insights, Matt shared his current assessment of risk on this episode of the Alpha Exchange. His materially bearish take is a function of what he views as US trade policy underpinned by both a misunderstanding of balance of payments math and a failure to appreciate the risks of chaotic implementation. On the latter, Matt worries that the US is earning itself a risk premium in the back end of its bond market, a troubling development especially set against the ever-growing pile of debt outstanding. Matt shows the spike in US real rates at a time when the VIX was also surging and the dollar falling as similar to the UK's "Liz Truss moment" in 2022, an event that forced the Bank of England to act quickly.
Matt argues that while Democracy ought to be mean-reverting - where bad policy leads to bad outcomes and declining popularity, ultimately motivating a change of course, today's setup in the US is one in which bad policies impact growth and further poison our politics, reinforcing bad policy. Stepping back, he sees value in gold, noting that both gold and FX vol are still too low.
I hope you enjoy this episode of the Alpha Exchange, my conversation with Matt King.
Remember Everything You Learn from Podcasts
Save insights instantly, chat with episodes, and build lasting knowledge - all powered by AI.
