May 2025 Letter

The Evolving Trade Landscape

The Good
The tariffs have sparked a long-overdue discussion about the hidden costs of unchecked free trade. While it is perfectly fine to run a trade deficit with your local grocery store or barber, the stakes are likely higher when it comes to national trade. Chronic trade deficits can slowly erode national wealth. It’s not solely about swapping paper currency for goods—those dollars often flow back from foreign partners who then use them to purchase U.S. stocks, bonds, and real estate, rather than American products or services. In other words, we're effectively trading away ownership of American companies and real estate in exchange for consumption. Moving toward “balanced trade” would shift that dynamic where instead of foreign dollars purchasing American assets, more of that capital would be reinvested by buying U.S. products and services.  It might seem like a minute difference, but it is an important one.

National security adds urgency, especially with China. The pandemic exposed our reliance on foreign-made drugs and PPE, and today, China’s grip on rare-earth metal processing raises red flags. Depending on a non-ally for critical goods or military supply chains is risky, if not bordering on reckless.

Finally, China doesn’t play fair in trade and that conversation is also getting highlighted.

• Chinese companies sell freely in the U.S., but American firms in China must form joint ventures with a 51 percent Chinese-owned partner, stacking the deck against Americans.
• China’s track record on intellectual property is abysmal. When a U.S. product gains traction, it’s often copied, with manufacturers churning out cheaper versions by sidestepping R&D costs.  China hawks in the U.S. like to call this “rob, replicate, then replace” with the end result being the original business with the original idea/invention out of business.
• Beijing pumps billions into state-owned enterprises and key industries like tech, steel, and solar, subsidizing them to flood global markets with below-cost products. This “dumping” drives competitors out of business.
• China manipulates its currency, keeping the Chinese Yuan undervalued to make its exports cheaper and U.S. imports pricier, tilting the global playing field.

At the time of this writing, it is way too early to know where things are going.  If there are new trade deals and stronger integration with allies like Japan, Mexico and Canada, and potential allies like India and Vietnam, then the whole trade shake-up could be worthwhile.  Until that hope actually materializes, we must address the bad and the ugly…

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The Bad
Trade uncertainty rattled markets and sparked sharp declines. The Dow fell 1,700 points on April 3 (4%) and the S&P 500 was down 6%, logging its worst day since 2020.  The bond market followed suit with U.S. Treasury yields climbing from 3.86 percent to 4.5 percent as foreign investors sold off bonds, reflecting unease about U.S. debt.

The cause? Uncertainty. Trump’s shifting tariff plans—ramping up, then pausing—left businesses and investors in limbo. Companies like UPS cut 20,000 jobs, and GM scrapped its annual forecast, citing policy confusion. Consumer sentiment sagged on fears of tariff-driven price hikes, while higher yields signaled costlier borrowing for everyone. Luckily, most of the market declines and rate spikes have rebounded or abated as the market moves positively on every glimmer of a deal or potential “out” from a trade war.

A significant “bad” is that we are not yet feeling most impacts of tariffs. It takes ships time to cross the ocean and businesses time to adjust orders, supply chains, and prices. Some companies that manufacture solely in China have already paused operations as their business is no longer viable.

Lastly, we can be right back to the turmoil of early April come July after the 90-day pause ends if few deals are actually struck.  While we wait, many predict empty shelves by the end of the month of May for products sourced, solely or predominantly, from China.

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The Ugly
Trump’s rhetoric risks driving allies away. Xi Jinping may welcome Washington’s brinkmanship with traditional partners, seizing the chance to pull those countries closer to Beijing.

Just in the last few days, new Canadian PM Mark Carney said,

“Our old relationship with the United States, a relationship based on steadily increasing integration, is over. The system of open global trade anchored by the U.S. that Canada has relied on since the Second World War is over. We are over the shock of the American betrayal, but we should never forget the lessons. We must look out for ourselves.”

And he added,

“When I sit down with President Trump, it will be to discuss the future economic and security relationship between two sovereign nations, and with the knowledge that Canada has many other options for building prosperity.”

Canada’s government is now openly exploring deeper trade ties with China.  Constantly chiding our northern neighbor (or suggesting it should be a mere U.S. state) only alienates an ally with whom we share thousands of miles of border and opportunities for joint prosperity.

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The Reason for a Worldwide Portfolio Allocation

Year-to-date returns clearly illustrate why we emphasize global diversification. While U.S. equities have faced some challenges, with the Vanguard Total Stock Market ETF (VTI) down approximately 5% this year, international equities have outperformed. The Vanguard FTSE All-World ex-US ETF (VXUS) has risen by about 8%.

Episodes like this are the whole point of owning the world instead of betting everything on the S&P 500. An overseas sleeve can feel like dead weight when the U.S. is sprinting ahead, but when market leadership rotates as it has so far in 2025, it becomes the workhorse that keeps a portfolio moving forward.

Valuations sharpen the argument. The S&P 500 still trades near 21 times forward earnings, while developing markets (EFA) sit closer to 14 times. A seven‑point discount does not guarantee higher returns, but it tilts the odds in your favor, especially with a dollar facing headwinds from persistent budget and trade gaps.

The takeaway is not to chase this quarter’s hot region; it is to keep a disciplined, worldwide allocation so that when the tides may change you’re already there. Routine rebalancing will trim winners, top up laggards, and harvest gains turning diversification from a buzzword into a real, repeatable edge.

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Are We In a Recession?

The advance estimate for first‑quarter GDP showed a 0.3 percent contraction, immediately reigniting recession chatter. By the textbook standard, the start of a recession is defined as two consecutive quarters of negative growth. While we are not there yet, the number was a wake‑up call. Much of the decline stems from businesses accelerating purchasing (imports) to beat potential tariffs, which ballooned inventories and pulled GDP lower on paper.

So, are we in a recession? The new Trump administration surely hopes not; nothing sidelines an agenda faster than a downturn. Still, I’ll repeat a point I’ve made before: The economic growth since the pandemic of 2020 has been somewhat of a mirage.  The recovery and growth leaned heavily on emergency‑level government borrowing and spending. Strip that away (imagine a balanced budget these past few years) and the economy would look far weaker.

History reminds us that rough stretches happen (think the 1930s or the inflation‑ridden 1970s). Looking back a decade from now, I would not be surprised if we label the early 2020s as another lean period, especially for households without meaningful assets. Loose monetary policy and aggressive fiscal stimulus have supported stock, bond, and real‑estate prices which…great for asset owners, far less helpful for everyone else.

Trade deficits add another twist. The dollars we send abroad do not sit in mattresses and vaults overseas; as previously mentioned they come back as purchases of U.S. bonds, equities, and property. That reinvestment of capital, combined with deficit spending at home, has kept asset prices aloft and softened the blow of slower real growth.

Like every cycle, this one will pass. I am optimistic that AI and robotics will drive the next leg of genuine productivity gains.  There is little to do now but wait.  Timing the market around economic headlines is a fool’s errand. Diversification, discipline, and ample liquidity remain the best defenses—and the core of how we construct portfolios.

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Concluding Thoughts

As we move into the summer months, I’m looking forward to our upcoming meetings. These sessions provide a great chance to revisit your financial strategies, discuss any updates, and address any concerns that may be on your mind. It is always valuable to hear about how things are evolving in your world, whether it’s changes in your personal goals, family situation, or financial landscape. I’m eager to dive into these topics with you and ensure that we are aligning your plan with the future you envision.

During our meetings, we will take a close look at where things stand and identify any adjustments that may be needed to stay on track. Whether we’re fine-tuning investment allocations, updating retirement strategies, or preparing for any upcoming milestones, I’m here to offer my guidance and support you every step of the way.

Please do not hesitate to reach out if there is anything specific you would like to focus on or if any new developments arise before our meeting. We are here to help you navigate whatever comes your way and keep your plan on course.

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