Both Sides Now
There are two things that are especially hard for me to do. One is to change my mind, and the other is to admit, “I don’t know.”
To change your mind is to admit that either your prior understanding was wrong, or that the facts have changed. But either way, changing your mind requires humility, which admittedly is in short supply for me, and for Washington, D.C.
The other is confessing that I don’t know the answer. Initially this shows weakness, but in reality, as I have grown older, I believe it indicates confidence and an awareness that I can’t know everything.
So many things in the markets today are demanding both of these very hard things – “I changed my mind,” and “I don’t know.”
Which leads us to today’s headlines. It appears that we are on the doorstep of a new world order/disorder.
We had the Bretton Woods Conference in 1944, assisting Europe and Asia to get on their feet (IMF and World Bank formed), while agreeing to peg currencies to the US Dollar to Gold at $35/ounce.
This all worked well until it didn’t, as the US spent too much, and in 1971, President Nixon suspended forever the Gold agreement.
Then, we had the Reagan Thatcher Plaza Accord in 1985, which began to open up trade all around the globe by purposefully weakening the US Dollar. This was followed by NAFTA in 1991, and then China was welcomed into the World Trade Organization almost 25 years ago.
Now, as the clouds accumulate, we are headed to the Mar-a-Lago Accord.
The intended payoff of this new world order is two-fold. First, increase the manufacturing size and strength in the USA. Covid unveiled our reliance on other countries for basic goods like antibiotics and semiconductors. The exit of manufacturing to China, Mexico, and elsewhere has delivered a huge backlash of underemployed middle Americans that have swept in a new administration intent on bringing back factories to places like Flint, Michigan and Bethlehem, Pennsylvania.
The second expected payoff is to level the playing field for American workers. The rise in populism is not just a MAGA event, as seen in many other countries, especially France and Germany. And the ever-increasing trade deficit needed to be dealt with, as our government continues to fall deeper into debt.
This new order, much like the transition from Bretton to Plaza, will be painful, may cause recession, will confound many in business and government, and will create chaos. Reagan and Thatcher faced recession and harsh critics and were both seen as outsiders with no real experience. But will this Mara-Lago Accord work? My decades’ old mind says no.
But, are tariffs good or bad? Can we shrink the size of government without causing a recession? Is global trade and the ‘just in time’ delivery of goods sustainable? Will farmers and ranchers be in a better position to sell overseas as tariffs are hopefully reduced in Europe and Canada? Can the stock and bond markets survive a trade war? Can the US Dollar maintain its Global Reserve Currency status? I don’t know, I don’t know, I don’t know….
In 1966, Joni Mitchell wrote what I believe to be one of the great songs of our my generation - “Both Sides Now.” Here is the first verse and chorus:
Rows and flows of angel hair
And ice cream castles in the air
And feather canyons everywhere
I looked at clouds that way
But now they only block the sun
They rain and snow on everyone
So many things I would have done
But clouds got in my way
I've looked at clouds from both sides now
From up and down and still somehow
It's cloud illusions I recall
I really don't know clouds at all
Looking up at clouds as a kid was fun, as we painted pictures in the sky. But then as we grew older, the clouds were a menace, just blocking and raining and snowing. Are they both fun and helpful, do we need them, why are they there at all, and who put them there?
Maybe I don’t really know clouds at all. And maybe I need to rethink tariffs. My understanding was that they were used only to level certain playing fields, and that our allies especially were open to free and fair trade. Now I am learning that I was wrong.
Free and fair global trade lifted economies around the world and thus, lifted ours. They also made it possible to buy stuff cheaper. TVs and electronics and blue jeans all got more and more affordable. Are we all willing to pay more, if it means less reliance on foreign countries? Maybe my mind needs to be open to the possibility of a new economy that works. Factories will restore a new self-reliance, and middle America will boom once again. We will pay more for stuff, but our economy will be stronger. Maybe I was wrong, or maybe I just don’t know.
Moons and Junes and Ferris wheels
The dizzy dancing way that you feel
As every fairy tale comes real
I've looked at love that way
But now it's just another show
You leave 'em laughing when you go
And if you care, don't let them know
Don't give yourself away
I've looked at love from both sides now
From give and take and still somehow
It's love's illusions I recall
I really don't know love at all
Love is a lot more complicated, so let’s go to the last verse and chorus, shall we?
Tears and fears and feeling proud
To say, "I love you," right out loud
Dreams and schemes and circus crowds
I've looked at life that way
Oh, but now old friends, they're acting strange
they shake their heads they say I've changed
Well, something's lost, but something's gained
In living every day
I've looked at life from both sides now
From win and lose and still somehow
It's life's illusions I recall
I really don't know life at all
Life experiences force us to see things differently over time, and to hopefully become a bit more humble. Paul speaks to this in 1 Corinthians 3:
“If anyone among you thinks that he is wise in this age, let him become a fool that he may become wise. For the wisdom of this age is folly to God.” (1 Corinthians 3:18-19, ESV)
I know in my own life I formed opinions and pretty much stuck to them. And in markets and strategy, this is no different. But am I capable of changing my mind, or even admitting that I don’t know?
Can I see both sides of the free trade argument? I am struggling, I admit, to see where this will end. Is the new administration trying to level the playing field, or is there something else at play?
Punish China, eliminate the flow of fentanyl, return manufacturing of specific products to the US (chips, antibiotics, etc.) – these are all noble goals, but how does one assemble a responsible approach to investment in this environment?
Here are just some investment questions that come to mind in this apparent new world order:
Will insulated, non-global US companies have a certain advantage?
• Will Bitcoin or something else replace the US Dollar as the World’s reserve currency?
• Is recession certain, not just here, but globally?
• Does the current administration have the stomach to see this new world order all the way to its completion?
• How does asset allocation adapt to this Mar-a-Lago Accord?
As we enter this new chapter, “Both Sides Now” feels like the appropriate serenade. We all knew the economy was needing some changes, as income inequality was rising to unhealthy levels, and debt in governments and households was becoming a mathematical impossibility to continue. Something had to change. But this may require some humility of our own thinking. So, what now?
I've looked at life from both sides now
From win and lose and still somehow
It's life's illusions I recall
I really don't know life at all
Joni Mitchell. (1969). Both Sides Now [Song]. On Clouds. Reprise Records.
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