May 9, 2025 – By popular demand, and because it’s been a while since I wrote my last such post, here are a few thoughts on the current market conditions, especially the economic and financial uncertainty. Some of the issues I like to cover:
- Is there a recession around the corner?
- What’s my inflation and Federal Reserve policy outlook?
- What are my views on the Trade War?
- With all this financial volatility, is the FIRE movement finally finished?
That’s a lot to cover, so let’s get started…
Are we in a recession already?
The most recent GDP number, released by the Bureau of Economic Analysis (BEA) on April 30, came in at -0.3%. Ouch! The street definition of a recession is “two consecutive quarters with negative growth,” so some folks pointed out that we already have half the necessary evidence to prove a recession. I’m not convinced for (at least) three reasons…
1: The street definition differs from the NBER recession definition
As I pointed out previously, the (Wall) Street recession definition differs from what is actually used by economists. The National Bureau of Economic Research (NBER) calls the business cycle turning points, considering more data series than plain old Real GDP. In the past, we’ve seen at least two wrong calls from the 2-quarter GDP definition:
- The 2001 U.S. recession never had two consecutive quarters of negative GDP growth.
- In 2022, the NBER (rightfully) didn’t call any recession, but the initial GDP releases pointed to two consecutive quarters of GDP declines. That said, Q2 of 2022 was eventually revised up to slightly positive growth.
Thus, with the Street recession definition, we’ve already experienced a type 2 error (false negative in 2001) and a type 1 error (false positive in 2022). So, don’t get your underwear in a knot over that single negative GDP growth number!
2: The underlying detail is still solid!
I always like to dig deeper into the underlying numbers in each GDP release. What caused the large drop from 2.4% growth in 2024 Q4 to -0.3% in Q1 of 2025? To that end, I always consult Table 1.1.2 published by the BEA, i.e., the contributions to GDP growth attributable to the different major subcomponents. In Q1, two components displayed unusually large swings: “Change in private inventories” with a +2.25% contribution and “Net exports of goods and services” with a -4.83% contribution. And the -4.83% is due mainly to the -5.03% in Imports, which in turn is primarily due to goods imports. Do you notice a pattern here? In preparation for the trade war, America imported massive quantities of goods before the April deadline. About half of that landed in inventories, but the net effect of those two components was -2.58%. If we add this trade war impact back into the GDP number, we will get -0.3%+2.58%=+2.28%, very close to the Q4 growth number.
In fact, GDP outside of those two volatile components is “Domestic Final Demand,” i.e., a measure of how strong actual businesses and consumers feel and how much they want to buy, which is a better indicator of economic health than overall GDP, which sometimes makes significant and noisy adjustments due to inventories and trade.
That said, not everything looks too rosy outside of the two volatile components either. Personal consumption expenditures appear a bit weak. Services only contributed 1.1% to quarterly growth. Durable goods even had a negative contribution, albeit after a blockbuster Q4, so there is a chance that this is just temporary: Americans prioritized their TEMU wishlists over buying cars and washing machines to beat the tariff deadline.
Let me dive a bit deeper into the Inventories and Net exports issue. Of course, pessimists will still accuse me of sugarcoating the GDP numbers. Net exports have detracted substantially from GDP in the past quarter, raising the question of whether a negative net export contribution has ever pushed the economy into a recession. The answer is no. Quite the opposite. Net exports usually rise (i.e., become less negative) during a recession, primarily because consumers short on cash want fewer imported goods. The chart below shows the (monthly) trade balance since 2000: The deficit narrowed in the 2001 and 2007-2009 recessions. In 2020, the recession was too short (only 2 months!) to see that effect. True, there was an eventual trade deficit expansion, but that happened after the recession ended when consumers were flush with stimulus money. So, the record trade deficit in March 2025 is the opposite of a recession indicator. It indicates economic optimism when folks still want to buy foreign goods and services.
Another way to present the data is to examine how the different GDP components and their contributions correlate with the total GDP growth number. I added another column with that correlation in the 1.1.2 table above. Note the strong negative correlation of imports with GDP. Also, notice the significant positive correlation of inventories with GDP. There is usually a substantial inventory depletion during recessions. This would put additional pressure on growth and cause GDP to decline even more because production will fall even more than final demand during a recession. The substantial inventory accumulation during Q1 would seem unusual during an economic downturn.
Also, a fun fact: federal non-defense spending negatively correlates with GDP. So, if you ever took my Introduction to Macroeconomics class, you will know what it is: economists call this effect an “automatic stabilizer,” i.e., means-tested government programs that kick in when household incomes drop, like unemployment benefits, stimulus programs, etc.
To sum up, the stereotypical mechanics of an unfolding U.S. recession are 1) a widespread(!) drop in demand in both consumption and investment, 2) an inventory decumulation, which exacerbates the GDP drop, and 3) an increase in net exports driven by a significant drop in imports, which cushions the GDP drop. In Q1 2025, we observed none of item 1 and the exact opposite of items 2 and 3. We may even see a considerable rebound in GDP in the second and/or third quarter of 2025 GDP when we likely get much lower trade deficits. So, while the headline GDP number of -0.3% may look shaky, I’m not too worried about a recession around the corner—at least not yet.
3: My favorite economic indicators still look OK
My three favorite economic and financial indicators that I’ve consistently used over the years are as follows:
- Weekly Unemployment Claims
- The ISM PMI
- Shape of the Treasury Yield Curve
First, unemployment claims are still subdued. What I like about this indicator is that it’s released weekly, so we have a faster-moving indicator than the monthly payroll employment numbers. Further, there are only modest revisions, unlike in the payroll numbers. Currently, the unemployment claims are still in the low-200k range, so none of the tariff uncertainty has caused a meaningful disruption in the US labor market. Please see the chart below. I’d need to see this figure surge to 300k+ to set off my recession alarm bells. Of course, this picture can change quickly, but the current situation still looks like an expanding economy. I would give this indicator an A- grade.
The second indicator is the ISM-PMI indicator. It tends to be a slightly leading indicator, and it has the advantage that it’s released on the first business day of the month, so the data delays are minimal. The current reading is 48.7, so it’s a bit below the 50 line, so technically, we are in the “contraction” range. But we have been in the 45-50 range for extended periods, even during solid GDP expansions. I would worry about a recession if we drop below 45. I would give this indicator a C- grade.
The third indicator is the 10y vs. 2y Treasury bond yield spread. In the past, it has been a reliable leading economic indicator, i.e., every recession saw a yield curve inversion (i.e., 10y yield below the 2y yield). This indicator gave us a bit of a headscratcher: what should we make of the 2022-2024 yield curve inversion? Some argue that the recent inversion predicts an impending recession in 2025. But it’s odd if the yield curve inversion from three years ago causes a recession now. True, the yield curve has historically been leading the business cycle, but usually not by three full years.
The more plausible explanation would be that the 2022 inversion coincided with the 2022 slowdown. That slowdown wasn’t a full-blown recession because US consumers were still high on stimulus money and post-pandemic pent-up demand. So, the yield curve inversion from three years ago is now water under the bridge, and with the renewed yield curve slope normalization, we’re out of the woods. Well, maybe not 100% because the slope is still a bit low in absolute value. To account for that residual uncertainty that my theory about the inversion causing the 2022 slowdown is wrong, I still give this indicator only a C- grade.
So, I’m not saying that the economy is particularly robust. Two of the three indicators look shaky, while only one is rock solid. But it certainly doesn’t look like the wheels are coming off the economic engine.
Inflation and Fed Policy
We just had another Fed policy meeting on May 7—no rate cut. The Federal Reserve still thinks inflation is too high, and they may have a point. CPI and PCE, both headline and core measures, are still stubbornly above the Fed target of 2%. For example, let’s look at the CPI chart below.
Y/Y inflation measures: CPI
But again, the underlying data look much better than the headline numbers. Please take a look at the chart below. If we split CPI into rental inflation (green line) and everything else (blue line), we see that CPI outside of shelter has been about 1.5% on average, ranging from around 0.8% to 2.2% since the middle of 2023. The only reason inflation is still so high is the rental component. Even though rental inflation is finally falling, it’s a slow process because rental inflation is “sticky;” both the pandemic trough and the post-pandemic inflation peak occurred with significant lags. And let’s not forget what one component in rental inflation is: the interest rate! Rental real estate is an asset, the rental rate is an asset return, and that asset competes with other investment choices, like bonds. So, if you want to lower that green line faster, lower interest rates may achieve that. The Fed’s current philosophy of “keeping interest rates high until (rental) inflation comes down” is the same logic as the classic “the beatings will continue until morale improves.”
Below is the same chart for PCE inflation. It tells the same story—rental inflation is stubbornly high but finally falling. Without that component, PCE and core PCE would already be closer to 2%.
Long story short, I think the Fed should deemphasize the inflation portion coming from housing inflation. Even peer-reviewed academic research justifies putting a low weight on housing inflation. It’s written by yours truly and my esteemed coauthor, Zheng Liu. The paper is available as an (early version) working paper at the Federal Reserve Bank of San Francisco or in the printed final version in an academic journal (Macroeconomic Dynamics). I have included the abstract here:
“Housing is an important component of the consumption basket. Because both rental prices and goods prices are sticky, the literature suggests that optimal monetary policy should stabilize both types of prices, with the optimal weight on rental inflation proportional to the housing expenditure share. In a two-sector DSGE model with sticky rental prices and goods prices, however, we find that the optimal weight on rental inflation in the Taylor rule is small—much smaller than that implied by the housing expenditure share. We show that the asymmetry in policy responses to rent inflation versus goods inflation stems from the asymmetry in factor intensity between the two sectors.” Emphasis added. From: Jeske K, Liu Z. SHOULD THE CENTRAL BANK BE CONCERNED ABOUT HOUSING PRICES? Macroeconomic Dynamics. 2013;17(1):29-53. doi:10.1017/S1365100510001021
So, I would have preferred a rate cut at this week’s meeting. But it’s not the end of the world if the Fed holds interest rates at 4.25-4.50% a little longer. You know, beat up everyone some more – maybe morale will improve this time!
So, do I agree with Donald Trump? He may be correct on substance, but certainly not on style! I’m a blogger who can criticize the Fed all day. However, a president has no business publicly criticizing the Federal Reserve. Central banks should be free of political pressure. Every historical example of inflation getting out of control comes after politicians get their hands on the proverbial monetary policy “cookie jar.” If the president has any disagreement with the Fed, he can certainly talk to the FOMC members, but privately. For example, one of the fiercest hawks at the Federal Reserve is Fed Governor Michelle Bowman, who Trump himself nominated to the Board in 2018 and reappointed in 2020. Maybe Trump should start discussing his grievances with her.
This current public discord with the Federal Reserve is extremely unhelpful. Even worse, by making this public ruckus, Trump might even hurt his case. Any FOMC voting member who might have been amenable to a rate cut at the May 7 meeting would have been hesitant because we don’t want to create the impression that Trump’s political pressure had an effect on the committee’s work. The FOMC is like a parent dealing with a terrible toddler; after the toddler throws a tantrum at the store, the parent can’t buy that toy. Even if you would have entertained the idea of purchasing the toy, you need to stay strong, put your foot down, and teach the toddler a lesson. Just like in that parenting analogy, the toddler-in-chief does not get to make monetary policy decisions!
The Trade War
I debated whether this is a good idea to discuss in a blog post because this will inevitably go into a political discussion. I like to keep things apolitical and family-friendly on the blog, so I hope this doesn’t turn into a shouting match in the comments section. This is neither an endorsement nor criticism of Trump’s trade war. I merely look at some economic theory, specifically game theory, to understand the strategic interaction in trade negotiations. Trigger warning: there could be a game-theoretic justification for Trump’s trade war. So, after I stepped on the Trump lovers’ toes in the monetary policy section above, let me now be an equal opportunity offender and, well, offend the Trump haters as well.
Let me begin by stating the obvious: I like free trade with low or zero tariffs and no other implicit or explicit trade barriers. It’s one of the cornerstones of economics, going back to David Ricardo and the benefits of specialization and comparative advantage. Nearly 100% of economists agree on this.
But we also live in a world where the US is now running trillion-dollar annual trade deficits as the worldwide consumer of last resort. Historically, we’ve had only relatively modest trade barriers. At the same time, many other countries are much more protective. This goes from explicit tariffs to other non-tariff trade barriers and even outright criminal behavior like some countries stealing intellectual property.
How do we get from the status quo to that economic Nirvana state of universally low or no tariffs and trade barriers? The approach of every single past administration has been just to be nice to other nations and try to talk them into lowering their trade barriers. That never got us anywhere.
The big question is, what’s Trump’s plan? If this is Trump’s plan, please see the diagram below, then I’d be fiercely opposed: If Trump raises tariffs and if we keep those tariffs permanently, that would be a problem. We don’t want to live in a world with permanently higher tariffs in every direction. In this scenario of worldwide protectionism and mercantilism, we’d all be worse off than the status quo.
On the other hand, if Trump’s plan is the scenario in the diagram below, then everyone should be on board: We may have higher tariffs temporarily, but penalizing other countries for their anti-competitive policies will entice them to lower their trade barriers, after which the U.S. also lowers tariffs. And everyone lives in a happy place afterward, with mostly free trade.
Americans should love this scenario! Almost every Hollywood movie follows that script, i.e., things will get worse for our hero before we reach that happy ending. You know, like (spoiler alert!) Frodo nearly got eaten by the giant spider creature in that cave. But after going through all sorts of tribulations and challenges, everything works out in the end.
I know of two examples in economics, specifically game theory, where the “it has to get worse before things get better” logic is at work. These are two examples where it is economically optimal to (temporarily!) accept dire conditions for all players (including myself) to attain better outcomes in the long run. Let’s take a look…
Example 1: A repeated Prisoner’s Dilemma game
Every economist and probably non-economist must have heard about the Prisoner’s Dilemma. It’s a dilemma because cooperation fetches the highest combined payoff for the two players. Still, each player has an incentive to defect and screw over the other player for an even higher personal gain. To put this into a trade context, both countries would benefit the most if we had zero tariffs. However, for short-term gain, a country may defect and erect trade barriers, eke out a slightly higher individual payoff (e.g., $4 instead of $3 in the numerical example below). Still, it will be suboptimal because the two countries combined now get a payoff of only $5 instead of $6.
In fact, if two players interact in a Prisoner’s Dilemma only once, “Defect” is the dominant strategy because no matter the opponent’s action, you do better by defecting. So the “A=Defect/B=Defect” with the lowest possible total payoff of $4 is the only Nash Equilibrium in that game. Bummer!
But this game gets quite interesting if we repeat it. Now, it’s indeed possible to get to that “Cooperate/Cooperate” Nirvana outcome. If we agree on cooperation, we receive the maximum combined payoff of $6. But what prevents people from shirking? It’s very simple: players punish bad behavior with, for example, Tit-for-Tat or some variation of it. Punishing my counterpart’s bad behavior, even if it temporarily hurts me, is the optimal route in this repeated game to get the “Cooperation Train” back on the rails. Appearing weak and meek is suboptimal because other players will abuse my weakness.
The second game is even more relevant for the trade negotiation debate…
Example 2: The Chain-Store Game
Another intriguing example from game theory is the so-called Chain-Store Game. Imagine an incumbent firm faces a potential entrant into a market. If the entrant stays out, the entire economic surplus of $4 goes to the incumbent, and the entrant gets nothing. If the new firm enters, the incumbent can coexist or fight the entrant. If the incumbent fights, it will get a payoff of only $1, while the new entrant will lose $1. If the incumbent does not fight, both firms share the profit opportunity equally, and they each get $2.
What should the entrant do? Well, thinking strategically, the entrant could argue that once it’s the incumbent’s turn in the game, it will choose to coexist because a payoff of 2 must be preferable to a payoff of 1 from that ruinous price war. So, entering the market seems optimal. (side note for the game theory buffs: there are two Nash Equilibria in this game: 1: Enter/Coexist and 2: Stay Out/Fight, and only equilibrium 1 is subgame-perfect. Equilibrium 2 is not subgame-perfect because the incumbent would have to commit to an action that’s not optimal after a theoretical Enter move of the first player!)
So far, so good. But what happens if we play this game sequentially, with one incumbent facing a series of small potential entrants in many different markets? That’s where the game got its name because we can think of the incumbent as a large nationwide chain store brand facing local competition from smaller players in various geographical areas. Imagine the first small competitor enters and gets whacked by the incumbent. So does the second entrant. Future competitors will eventually get the message and stay out if the incumbent builds a reputation as a tough guy (or gal). Thus, by making an example of a few recalcitrant opponents, we signal that we call the shots. Other players facing us in future iterations of this game will treat us much more respectfully. Do you think that sounds familiar? It sounds like putting 100%+ tariffs on China to signal to other countries that we have the appetite and staying power to penalize bad actors. We can take the needle pricks from a trade war with a subset of countries but then force the majority of countries to lower their tariffs. And by the way, eventually, the recalcitrant subset will also fall in line!
But to be honest, I had my doubts in early April. In the beginning, it sounded like Trump wanted to start a trade war with all global trading partners simultaneously, in which case that sequential Chain-Store Game logic wouldn’t apply so easily. Of course, everything changed on April 9, when tariffs were paused on countries that hadn’t retaliated yet. So, China walked into that trap, but almost everyone else got a reprieve from the retaliatory tariffs. That plot twist on April 9 certainly looks like the perfect replication of the incumbent player in a Chain-Store store game. You made an example of a few unlucky victims; subsequently, everybody else will comply with our wishes. The stock market certainly liked it and rallied by about 10% that day.
Of course, other countries could have blocked this plan by colluding. We had some indications that this is what China tried. For example, on April 1, Reuters reported that China had formed a united front with Japan and South Korea against US tariffs. However, Korea and Japan denied such an agreement. Duh! South Korea, Japan, and China can’t usually agree on anything (pro tip: study some Asian history). Was this an April Fool’s prank?
Chairman Xi also visited Vietnam and Malaysia to unite with them against the “evil USA.” How did that work out? Just a few days later, Vietnam bought 24 U.S.-made F16 fighter jets. Malaysia Airlines announced it wants to scoop up the Boeing 737 airplanes that China returned as “retaliation” against US tariffs. India wants the remaining 737s.
It’s obviously too early to tell if this all works out. I hope that we will get more trade and lower tariffs worldwide as a result. It’s not because I want Trump to win; as a patriotic American, I want our country to win. And with lower trade barriers worldwide, all countries will win. China could eventually be the biggest beneficiary. And I mean the Chinese people, not the Politburo thugs. If China eventually retires its mercantilism and encourages more domestic consumption, the people there can finally enjoy the fruits of their labor. Everybody will be better off!
Can you still retire in this volatile world?
If you’re a regular ERN blog reader, you might sense a bit of snark and sarcasm. And you would be 100% right. I find it amusing how even modest volatility sparks panic in the FIRE community. I suspect that the “One More Year” syndrome is often not so much about accumulating more assets for another year but rather the false hope that the markets will be calmer next year. This quest for retiring when the market is peaceful is futile. Here’s a chart of market volatility events since I retired in 2018. We had a near-bear market in Q4 of 2018 right out of the gate, followed by two actual bear markets, one in 2020 and one in 2022. Every two years, something goes sideways. After a quiet 2024, we were overdue for a correction, folks! In April 2025, the low point for the S&P 500 Total Return Index was -18.7% from the February 19 peak. So far, we have narrowly avoided a bear market. How will this current episode work out? If I had to choose between another garden-variety correction a la 2018, and a potentially retirement-ending financial crash like 1929-1932, I would still pick the former.
The talk of doom and gloom is overdone. I think the folks who talk about the impending end of the stock market are the losers who sold when the S&P 500 dipped below 5,000 in April, and they are trying to talk the market down to get a better entry point. Like these two Twitter/X experts:
If I had to pick between some guys on Twitter who breathlessly pronounce doom and gloom vs. Warren Buffett’s “Never bet against the USA,” I’d have to side with the Oracle of Omaha. I know people who got out during the pandemic at an S&P 500 level of 2,500 and never got back in. They, too, are still waiting for an entry point. Good luck, folks, but I hope you’re wrong!
Of course, the 2025 cycle could easily turn sour again. For example, the 2022 bear market had a fake recovery, only to turn into a full bear market with a trough in October 2022. But my prediction is that a sequence of trade deals will be announced over the next few months, and even some progress will be made with the worst trade offenders like China and the EU.
Conclusion
So, there you have it: it doesn’t look like a recession is around the corner. Inflation is getting better (not the price levels but the rate of increase, to be sure), and the Federal Reserve can likely lower rates later this year. The trade war may induce some temporary pain before international trade improves. And that little bit of volatility in 2025 is modest compared to the past few market cycles. Have a great and relaxing retirement, everyone!
Thanks for stopping by today! Please leave your comments and suggestions below. Please keep it civil. I will put political rants into the spam folder!
Title Picture Credit: WordPress AI
An excellent article. I think that tariffs are an own goal but like you I believe Trump is using them to extract concessions. The fact that he is applying them to countries that have balanced trade as well as imbalanced perhaps indicates his character but what is important to our finances is that this destabilising policy period is as short as possible.
Historic modelling shows that my asset allocation has worked so I need to stick with it. There isn’t an alternative without foresight and without foresight one must accept volatility and do the thing that has reduced volatility in the past, which is to diversify.
It’s a negotiating tactic: initially ask for unreasonable concessions. Then get a good deal.
Most of the countries with balanced trade or trade deficits with the US got only the the minimum 10% tariff, according to the shadow price formula theu used to determine the tariff.
Well, maybe other countries got a good deal.
US consumers now pay TRIPLE the previous rate for imports from the UK & QUADRUPLE for those from the EU.
EU imports are still at the reduced tariff rate during the 90-day window. UK just struck a trade deal with the US. Where is this 3x and 4x figure coming from?
I enjoy the article as usual. A minor typo in date here
“-0.3% in Q1 of 2024”
should be
“-0.3% in Q1 of 2025”
Fixed that typo. Thanks for letting me know!
Thanks for this article. In your opinion, what is the likelihood that US dollar will no longer be the world’s reserve currency in the future? Would you consider that situation to be problematic if it did happen?
Zero probability. What currency would replace it? The Euro or Yuan? There is no other reliable economic region that could pick up the role of supplying a reserve currency.
I have to agree with that, even as some nations seem to be stocking up on gold. And no, I do not see bitcoin as a replacement either.
My impression (probably from Ray Dalio) is that the country issuing the reserve currency tends to/always has a trade deficit – otherwise there is no way for other countries to accumulate reserves. Perhaps Trump et al did not get that part of the memo?
I liked your article, but find you passed the wobble in the bond market a bit lightly (lack of buyers to US debt!), to me that was the most significant thing that happened.
I’d have to disagree with you and Dalio on that one. The reserve currency isn’t automatically forced to have massive decadelong (or even permanent) trade deficits. For someone who’s otherwise quite smart, I’m shocked that Ray would confuse not one but two important economic concepts: net vs. gross and flows vs. levels. There are plenty of USD-denominated assets already sloshing around in global markets. Central banks can easily accumulate a few 100b or even a few trillion dollars of US Treasuries or agency debt. They give us some of their government debt and we sell ours (net vs. gross). We don’t need to add more every single year to facilitate that (flows vs. levels).
So Trump et. al. didn’t receive the memo because that’s just economic bogus.
Hi, this maybe a dumb question but I don’t get it why: if US wants to get rid of deficits with China, it can do it easily: 1. allow more semicon chips going to China, which will be billions $s; 2, resistance on low-cost products from China thus reducing US import: US can decide what & how many to import if US wants, right?
While one way US doesn’t want to export more semi to China and then not limiting itself from importing from China, why US blaming China on trade imbalance? Isn’t it the good that US just utilizing its $ & military power to enjoy the relax life without too much CPI concern? Even China has a big surplus of trade, but then using those trade $ to buy US TBs, why does US want China not to do it anymore?
I don’t think the trade deficit with China is solely due to a lack of semiconductor trade with China.
US wants access to China with the same conditions as China’s access to the US market.
In my opinion, only something that no government controls would be able to supplant the US dollar as a reserve currency. Why would any country trust any other country’s government (including their financial governance like the Fed), besides the USA as current status quo? I agree there is no other economic region that could pick up this role. Only something that is region-less would work.
Besides, the thought experiment Dana posed is interesting even if it has zero percent probability. What would happen to the USA if the currency weren’t used as a global reserve anymore?
Yeah, maybe some crypto coin could supplant the USD. But you’re right, no other country will outdo the USA anytime soon.
How did your options trading hold up during the tariff meltdown of April? Mine personally took a huge hit, and I feel like anyone selling puts would have been hurt.
It did well under the circumstance. A slight plus in April, after a blockbuster month in March.
Intriguing: In April, I made record profits with the put selling. The call selling had several painful losses that ate up almost all of the gains, though.
Regarding the losses with the call selling, is this because generally the upside volatility is less than downside volatility, so that for a given delta you’re less OTM for the call vs. the put? Would this imply that one should do less call selling in very high volatility periods, like in early April?
Correct: Usually the upside vol is less. Daily returns tend to have negative skewness. Until they don’t! Most of the large intra-day moves went up, e.g., April 9. That knocked out the STPs for a small loss.
Another “Beautiful” Post! Thank you Karsten.
Thanks, Karl! Glad you liked it!
He he “toddler-in-chief” he he
That’s all I have to add to the discussion. Carry on. 🙂
Have to throw some red meat to both sides of aisle here. 🙂
I’ve reframed the way I think about market drops. Instead of letting them create angst, now I view them as ROTH conversion opportunities. So I now cheer for it whether it’s going up or going down. I can make hay out of it either way. Go Market, Go!
Yes, good point. I did that too! That’s the one type of market timing I can endorse! 🙂
Thanks for your rigor, ERN. I’m with you on the Fed pressure, but—respectfully—the justification for the tariffs feels a bit generous. I wouldn’t go so far as to say you’re portraying Trump as having a genius plan, but to gently push back, this almost reads like there’s a bit more method to the madness.
Trump’s loathing of trade deficits is nothing new—he’s been hammering that point for decades. He only eased off tariffs when the markets started to nosedive and bond yields climbed—or, as he said, got “yippy.” To me, the whole thing looks chaotic, and there’s plenty of reporting that supports the idea of White House disarray on trade policy.
If this ends up working, I’ll chalk it up to a happy accident. And honestly, I’d be glad if that’s how it plays out—intentional or not. Thanks for the thoughts!
That is certainly possible. I don’t claim that this was the plan all along. It’s likely that the White House had that “Holy Crap!” moment and reversed course after the market melted down in April.
What counts is how will it all work out in the end: We may have snatched victory from the jaws of defeat. Which is another Hollywood plot line, by the way. 😉
If “reversing course” ends up at baseline 10% tariffs on everyone (which seems like the absolute rosiest scenario) then at best we’re worse off than where we started.
Not true. In the rosiest scenario, other nations will reduce their barriers to zero. Then we reduce the tariff to 0% and we’re significantly better off than where we started.
What if the tariffs aren’t intended to negotiate but rather to create a new source of revenue that will allow other taxes to be cut?
Tariffs are a regressive tax. People need to understand this. *Tariffs are a regressive tax.*
The scenarios I see are:
1. High tariffs, tax cuts
• Still regressive (cutting progressive taxes to implement regressive taxes), even if we entertain the fantastical notion that tariffs can adequately replace tax cuts
2. Low tariffs, tax cuts
• Huge deficit increase OR huge spending cuts (which always end up being regressive)
3. High tariffs, no tax cuts
• Scenario 1 but even worse and more regressive
4. Low tariffs, no tax cuts
• Closest the status quo and least damaging, but also the one option Trump isn’t entertaining
Karsten outlines a… let’s say “rosy” view of the trade war in this post. I get that it’s partly intended as a “Gee, it’d be really swell if this happened” but there’s no reason to think that it would happen, or could happen, or is even what Trump wants to happen. And how much inflation, job loss, and damage to trade relationships are we willing to risk along the way to take this ridiculous gamble? It’s all so absurd. People are trying to decipher a 5D chess game that isn’t even being played. This is not a strategy, it’s a temper tantrum.
“*Tariffs are a regressive tax.*”
And? A regressive tax is better than a progressive tax on income, which stifles hard work, investment, innovation, etc.
I always find it so heart-warming when folks warn about distortions of government policy but they never get excited about the most damaging tax, i.e., the income tax. God bless your heart!
A regressive tax is worse because it leads to more human misery because it disproportionally impacts low-income families.
Innovation and investment are lovely, but I’ll take less human misery over those any day.
Misery is a harsh word. So, folks can’t buy as much cheap crap at Walmart, Amazon and Temu. My heart is broken…
If you genuinely believe this I have to question your consistency. You spent this entire article talking about how tariffs are bad, then once someone mentions that they’ll primarily hurt the working poor, your response is “oh wah wah cry me a river, they can by as much temu crap”. But if this is your position then why would tariffs be bad at all? And you of course as a credentialed economist you know that tariffs will disrupt the entire supply chain, meaning everything, including bona fide American made products and high quality imported products, will all see price increases that disrupt supply and demand curves. Amazon basics desks and American mahogany desks will both get more expensive. It seems to me the thing your consistent about isn’t any sort of bona fide economic commitment to lower trade barriers but just that the working poor should pay higher taxe rates than the capital class. If that’s your position, I’d disagree, but you should at least be consistent and just say that’s what you want instead of trying to dance around it.
People who accuse me of inconsistency are (intentionally?) misunderstanding and misconstruing what I wrote.
Let me explain again:
1: tariffs are bad.
2: there is evidence from game theory in favor of threatening and even implementing tariffs to entice others to reduce their tariffs. Both in the time series (repeated prisoner’s dilemma) and the cross-section (chain store game).
3: in the short-term, you may suffer some pain, but it’s for the benefit of long-term gains. (where have we heard this phrase before?)
4: even our current short-term pain isn’t that painful.
5: if tariffs are so bad for the working poor, why don’t you want to reduce those tariffs in other countries? The working poor there are even poorer than our working poor.
All 100% perfectly consistent.
That would be bad, as I outlined in my post. I even went all high-tech to symbolize this with my two diagrams:
Bad:
Good:
The theory does work, but it’s missing a very big key point that puts the entire thesis into question.
Why exactly do you base this whole reasoning on the assumption that tariffs from other countries (particularly EU and China) on US goods are significantly higher than the past US tariffs on their goods?
This assumption is not something that is particularly backed by data and is far from consensus among economists.
And why assume the administration responsible for this is actually acting in good faith and is playing 5D chess, despite all elements (including their own radically changing statements, often in the same day) pointing to the contrary?
Glad we can agree on that.
There is consensus among economists about high tariffs being bad and low tariffs being good.
There is consensus among economists about the findings about the repeated games.
What exactly is outside the consensus? How can there be non-consensus if you just just admitted that the theory works?
My data: the market didn’t like it when the US starts a trade war against all partners simultaneously. The market recovered when this transformed more into a sequential Chain Store Game. Seems to be consistent.
What data do you have to refute my theory?
Why do you automatically assume this administration is actually acting in bad faith? I think out of reverence and respect for the office we should always assume a US President is acting in good faith. If you want to argue “bad faith” then the burden of proof is on you, not on me.
Finally, I portray how this trade war could theoretically finish in our favor. It doesn’t have to. But at least readers of my blog won’t be surprised if it does.
It could work if the base assumption that other countries have massively higher tariffs on US products than the US on them in the first place. That is simply a false premise and I’m very surprised to see someone so knowledgeable look past that. The reciprocal tariff numbers are made up and have nothing to do with tariff from other countries. They’re calculated based on trade deficit, which is largely irrelevant here. No country is “charging” the absurd rates that have been imposed (and then paused) by the administration. This is a unilateral bully move.
The market did not “recover”. A 10% gain after a 20% loss is merely a partial relief of uncertainty and if the market is your guide, it is still very much of the opinion this whole thing is bad, as evidenced by the fact it’s still 10% down from before this mess, a month after the tariffs being lifted.
You are proposing a rationale that would actually be better for the US market after the tariff pause, compared to before Trump, and if this was remotely close to market expectations, one would expect a price increase above the pre-tariffs all time highs to price in such scenario. We also both know the market is irrational especially in such a short timeframe as a few weeks and when volatility is through the roof, and is a poor argument for policy judgment. The market literally had +/- 2% moves on a daily basis from single tweets vaguely related to the economy.
As far as deals are concerned, there has been almost nothing announced, and there are actually more major countries who came out officially saying they were not open to this type of bully ‘negotiations’ than countries who struck a deal. There’s very evident policy decisions from China and the EU that goes clearly in the opposite direction of “Trump will make deals and USA wins”, such as EU defense programs, Chinese rare minerals and (actually reciprocal) tariffs…etc…
I think “reverence for the office” is based in nothing rational and the recent political events have proven that. Beyond the economic discussion, the “office” is currently ruling by executive order and ordering illegal policies on a daily basis that also get struck down by courts on a daily basis, with no comparison in US history (and the foreign historical comparisons aren’t the good ones).
So yes, this trade war “could” play in our favor if things turn out in the most unlikely way possible, just like me finding a ton of gold under my backyard woud play in my favor despite me not having a backyard. This article is very very generous on the administration that caused this, and the only thing that seems unbiased is the statement that “no, FIRE isn’t over”.
I don’t discuss politics here. Please air political grievances elsewhere, i.e., Twitter, TikTok, etc. This post is about trade negotiations and the game theory around it. I don’t care about anybody’s views about executive orders, immigration, education policy, etc.
There are explicit tariffs and non-tariff trade barriers. China and EU are notorious for that. I actually considered economic concepts wayyyyy past the naive raw tariff percentages that others look at.
Folks who are scared that +/-2% is too much volatility shouldn’t be in the stock market. But even that point is really a red herring. Comments like yours make the CCP Politburo really happy. Your comment shows that you still haven’t grasped what my post is about. A good negotiator will credibly convey that he/she can suffer some pain. Examples: I want to buy a car or house. I convey that I can walk out of the deal, even if I lose the car/house that I really liked. You can’t negotiate a trade deal without credibly conveying that you’re willing to take some pain yourself. The salesperson who senses that I am too enamored with the product and not willing walk away will take me to the cleaners. The Chinese communists and other bad actors prey on our weakness: the U.S. has become too soft, not willing to suffer even temporary and modest pain. This kind of attitude got us into a $1t+ trade deficit. Changing that takes a different approach than our past 30+ years of US admins.
You’re right: there isn’t that much progress. Even the China “deal” is just temporary. Trade deals take time. This will not happen overnight. I wish we could have let China simmer a little bit more.
Tarrifs and other trade barriers have littel to do with the $1t+ trade deficit. The causes for the trade deficit are that the US needs more capital than it can provide by their own savings. So to lower the deficit you can balance the goverment buget, invest less or conume less and save more. Restricting trade will only help if less dollars from your trade partners are recycled into the US capital marked and restrict investments. That would lower the deficit, but would not be really helpful to the economy. That the current administation seemingly don’t understand these facts is worysome for their future course of action.
That’s demonstrably false. If we can’t even agree on that simple fact from International Econ 101, then there’s nothing more to discuss.
That’s another false narrative finding happy customers in the US. The US can easily satisfy the demand for growth and investment from its own GDP. It did so post WW2 and during the roaring 1990s with much higher GDP growth and a much lower average 1992-2000 trade deficit (as a percentage of GDP). What changed since then is that we increased our consumption, all debt-financed. That has to stop at some point. The best time would have been last year. The second best time is today.
“If we can’t even agree on that simple fact from International Econ 101, then there’s nothing more to discuss.”
That is a statment about the current trade deficit of the us, not about trade deficits in general and if seems that you agree with me that the underlying cause of the current trade deficit is overconsumption.
Agree: the trade deficit is just one item. Government waste needs to be fixed, government deficits need to be reduced, and US consumers need to change their behavior, too. We need higher savings rates.
And of course, I dispute your claim that trade barriers have a major impact on the trade balance, and the consensus among economists seems to agree with me. For example, Davide Furceri and others state:
“In addition, there are strong theoretical reasons that economists abhor the use of
protectionism as a macroeconomic policy; for instance, the broad imposition of tariffs may lead to offsetting changes in exchange rates (Dornbusch, 1974; Edwards, 1989). And while the imposition of a tariff could reduce the flow of imports, it is unlikely to change the trade balance unless it fundamentally alters the balance of saving and investment.”
And their own research shows:
“we do not find an improvement in the trade balance after tariffs
rise, plausibly reflecting our finding that the real exchange rate tends to appreciate as a
result of higher tariffs.”
https://www.imf.org/en/Publications/WP/Issues/2019/01/15/Macroeconomic-Consequences-of-Tariffs-46469
Based on some regression model where it’s impossible to separate the effects of trade and other policies? I’m not convinced.
Of course, tariffs and other barriers reduce imports. That’s why everyone is shrieking in panic now; have you heard the horror stories of empty ports on the West Coast? How come when the US imposes tariffs, all the trade theory from the textbooks works like clockwork? But when China and the EU do it, people find some empirical junk science to weasel out of it.
And just to be sure, the paper is correct in that tariffs hurt even the country imposing them. So, the world should be thankful to the US for negotiating lower tariffs in the long-term. As I noted in my post: even China will benefit from lower tariffs, long-term.
Thanks for another excellent column, especially the game theory refresher.
As a person who voted for him while holding my nose, I find the current president’s overreaching concerning and his snarky tactics appalling, but I’ve suspected there’s method to his seeming apparent madness when it comes to tariffs.
Thanks! Yeah, like you I hope for the best. Would be best for everyone if this madness is not due to some other sinister reason.
I would be more optimistic if the president understood that trade deficits are not fiscal deficits.
If you want to get other countries to lower their barriers, great.
If you want to eliminate trade deficits, you do not understand trade at all.
Nobody claims that the two are the same. But most economists understand that large twin (budget and trade) deficits that go on for many decades are unhealthy. If you don’t understand that you don’t understand economics.
I think today’s investment environment is like any time – choose an allocation that works for your needs and be willing to adjust as needed.
If you felt nervous during April, now is a good time to put some thought into what’s right for you and your family.
The tariffs are a blunt instrument and it will hurt. I don’t personally see them working but Trump could easier declare victory after getting his tributes and the market pops. I also could see him and Xi not backing down, and leading to all sorts of darker outcomes. There is quite a range of possibilities!
But instead of wrapping yourself around the axle, adjust your allocations if needed and get back to life.
Yeah, that’s my philosophy, too: A diversified portfolio will get me through this.
Fully agree, but is there something you can say about a diversified portfolio? Stocks vs bonds? Which stocks and which bonds?
I recommend 75/25. The 25% in bonds would be in US Treasury bonds, something like the ticker IEF ETF (7-10y gov bonds).
Surprised not to see a ton of replies to this comment.
Is this for current retirees, or more broadly? Any international part of that 75%?
75/25 is ideal for retirees.
International stocks for diversification works as well. This doesn’t have to be all US stocks.
Karsten: I was surprised to hear you say that international stocks can work well for diversification (for a US-based investor), especially in light of your blog post on “How useful is international diversification?” where the conclusion is that a) it helps least when we need it most (ie. during a crash) and (potentially) helps the most when we need it the least (ie. post-crash), and b) ex-US may (most likely?) have lower valuations for good reasons.
Interestingly, this recent 2025 US sell-off (and fairly rapid recovery) was accompanied by strong ex-US performance, which provides a counterpoint to the observations in that blog post. Having ex-US at the beginning of this year provides a perfect example of the benefits of total-world diversification+periodic rebalancing. On the other hand, the past 15+ years provides a perfect example where ex-US was terrible, and it didn’t take that long for US to recover from this recent sell off. But is that just falling into recency bias?
So I’ve been struggling to come to a conclusion for myself on inclusion of international equities (ie. VXUS or similar). For example, the majority of (though not all) bogleheads strongly push for international, but you made a reasonable case against it.
So assuming a 75/25 portfolio for a US investor (with the 25% in US 10-yr treasuries), I have two questions:
1) can you provide some thoughts on how to think about adding ex-US equities into the portfolio? Would you suggest a certain weighting to ex-US in the 75% equity portion? And should that weighting be adjusted over time based on the relative CAPE for US vs ex-US?
2) Does the horizon to retirement (ie. during accumulation or already retired) matter for allocating to ex-US? You mentioned retirees above, but what about those in the 5-10 year pre-retirement glidepath, as well as those with longer horizons before retirement? Should they look at the ex-US portion differently than a retiree?
Yeah, I mentioned that on that post because of the recent recovery. It’s conceivable that Intl. recovers the recent underperformance.
Historically, there have been a few episodes where International helped quite nicely: 1970s and post-Dot-Com. So, I wouldn’t discard it.
CAPE as relative valuation measure between markets is very difficult. Not very reliable.
FWIW: I am very underweight non-US. I have serious doubts about the economic future of Europe. It’s run by dimwits.
I’m also very negative on China.
You mentioned in another reply that you are personally very underweight on non-US (and you mentioned back in your 2017 post that it was low single digits percentages). If you are low single-digits personally, would that even move the needle for diversification?
Given that market weight of world equities is approximately 60/40 US/non-US (just using per Vanguard VT as baseline, although I see VT has crept up to 62.8/37.2), would you instead recommend 80/20 or 90/10 (for the 75% equity portion)? How much is enough to provide some useful diversification but not too much given concerns over non-US economies (Europe, China, etc.)?
It’s a catch-22, as you insinuate: If the weight is too low, you don’t get much diversification. If too high, you have too much exposure to low-growth Europe and fascist China with an economy that will eventually slow down. I’m OK with an international weight in the low single digits.
Ok, so I assume “low single digits” means something like 70/5/25 (70% US equities, 5% non-US equities, 25% US 10yr bonds), correct?
And in terms of non-US funds, would you recommend something like VXUS/VTIAX (FTSE Global All Cap ex US) or FSGGX (MSCI ACWI ex-US)?
But 5% (or less) seems really low to make much of a difference in a down US market, not sure if that is worth the hassle.
Correct. About 4-5%.
Vanguard and Fidelity have those low-expense funds. These are great funds.
Well, these days *ANY* thing I read that takes shots at both sides instantly raises their credibility in my eyes. Thanks for the post.
Thanks! I’m calling it like I see it! 🙂
Data, data, data. What about sentiment? What about what real people, not charts, feel and pay when they go eat out or visit the grocery store?
Yeah, data is only half of the story and always a picture of the past
The ISM PMI is a sentiment indicator.
But you’re right: a lot of people still feel the pain from inflation. For them, the price levels matter. Right now we only see the CPI % increases moderating.
Hey Karsten, thanks for the insightful article. I’m a long time reader and first time commenter. I think your logic is sound and arguments make sense. If we take everything at face value I have no issues with your analysis. My only concern is that I’m not sure the data you are basing your analysis on is taking into account the big picture. Many “trade deficits” that the current administration is claiming are in reality surpluses if you include both goods and services.
I don’t think it’s realistic to expect the USA to ever be a net exporter of goods. We are an ideas and services based economy. I don’t buy the rationale of bringing manufacturing home. Perhaps it’s just a smokescreen like you suggest to get others to play ball and drop their trade barriers, but I’m not sure a smokescreen is effective if everyone can see through it. Not to mention, for decades the surpluses of other countries have come back to the USA in the form of investment in US assets. This has contributed to the USD being the global reserve currency (and we saw what consequences it can have for the bond markets). This puts the USA in a difficult situation as they are at the mercy of many foreign treasury holders. Heavy is the head that wears the crown, as they say.
China seems willing to negotiate based on this morning’s announcements which is a positive development. Though I’m not convinced they will cede much.
Not true. We have a surplus in services. Massive deficit in goods. The net effect is a roughly $1t deficit when including goods and services.
We don’t have to get to a trade surplus. Simply reshuffling international trade (away from China and toward more reliable and friendlier countries). If we even cut the trade deficit in half, it would already be a huge success.
Like you, I’m concerned that China will be difficult to deal with and even with an agreement it will cheat again.
This is the heart of the matter. Whether you accept that there is rational and sensible economics behind the Trump strategy on tariffs, which I have not seen from Trump or his cabinet thus far, the national security issues with China trade should be the focal point. Suppose this were the focus of the trade war, and were done intelligently. In that case, I suspect that negotiating trade productively with allied countries, rather than a bullying approach that may or may not work in game theory, would have created a far more effective counterbalance to China and would increase U.S. leverage in the negotiation.
I agree wholeheartedly. The end game in the tariff war should be to isolate China and other bad players in geopolitics. We may not make this implicit but I hope that people behind the scenes do that. I definitely like the idea of prying away countries like Malaysia, Vietnam, etc. from China and pushing them to more cooperation with us. All the business we do with China is only going to end up as China building up its military, which threatens world peace. Just ask Taiwan, Philippines, etc.
Ausgezeichnet wie immer, ERN!
Besten Dank und Viele Gruesse!
I just love this blog! Ph.D mind with real world experience. You cut through all the noise and present the facts. Most of the math and graphs are above me so I skim until I get to your conclusion which I always read. Thanks for a jewel of a blog.
Thanks for the kind words! 🙂
Thank you for being there. Please keep doing this forever.
Lots of love to you and yours, you have no idea the piece of mind you provide some people.
Thanks for the words of confidence! Lots of love back to you too! 🙂
The consumer has a Personal Savings Rate of about 4%.
WalMart has an operating margin of about 4%.
Neither can “absorb” or “eat” tariffs of 25% to 30%.
Prices will have to rise, and consumers will have to buy less stuff.
Interestingly, this lifestyle reduction will not show up in GDP or corporate earnings because the consumer is still spending all but 4% of their paycheck.
Amazingly, the countries that put high tariffs on US goods haven’t been wiped off the face of the earth yet, despite tariffs being so terrible. What happened?
But you’re preaching to the choir: I don’t want high tariffs either. But I love the idea of threatening the high tariffs until other countries improve their trade terms.
Hello Karsten, really appreciate your insight on the current situation. I hope you don’t mind a question that’s a bit off topic. I’ve been successfully doing your options strategy for a few years now and have also invested in a number of preferred shared with the brokerage where I do the options trading and makes up about 30% of my portfolio. Question: how do you account for the preferred shares on the Google Sheet tool? I assume they are not considered bonds. I thought maybe I put them as custom series with the average return? Curious as to how you do it. Thanks again.
I have done factor regressions on a few different ETFs (PFF, PFFV) and individual Preferreds. See tab “ETF Factor Exposures” in category “2 Fixed Income / 1 US / 3 Corporate / 3 Preferred”
Fixed rate preferreds tend to behave like 50% stocks, 35% 10y bonds, 15% cash.
Variable rate like 40% stocks, 60% cash.
Awesome, makes sense. Thanks for pointing that out. I never noticed the ETF Factors tab so I’ll dig into that!
Been hoping to read your thoughts on tariffs and recession, so happy to see you in print again. Been puzzling to me why we haven’t see a recession despite the persistent yield curve inversion. I rely on your adjusted CAPE updates even when you’re not publishing text, so please keep that up. And I still owe you a beer when we finally meet: Make that two.
Glad you found this useful. I look forward to that beer! 🙂
Thanks for giving us a positive view on these things. Obviously most of what is presented in the media is a decidedly negative perspective. I would be interested in your thoughts regarding the seeming inability of our nation to move in the direction of balancing our budget. How should we be thinking about the longer term impacts these massive deficits will have on bonds? At what point is the floor going to collapse under us? What do you think we should anticipate for inflation in the next decade? I’m much more concerned about our budget deficits than I am about tariffs, because those can be undone with the stroke of a pen. Getting out of our $40 trillion dollar debt is a much harder lift.
You point out an important issue: politicians are crooks. It’s a well-known problem in economics: the “Principal-Agent Problem” where politicians maximize their short-term benefits that often interfere with the country’s long-term best interests. Term limits would help.
“as a patriotic American, I want our country to win”
And that right there is why GTO logic fails in the real world.
It’s beautiful to believe that “with lower trade barriers worldwide, all countries will win” but unfortunately, those other countries generally have those trade barriers in place because the USA has shown itself to be a win at all cost player time and time again in the past.
But maybe I’m just too cynical and this time it really is different as the saying goes. lol
Not sure what you mean by that. We’re a very generous, friendly and forgiving country. I don’t see a reason for other countries to exert revenge on us through tariffs.
Not revenge, simple protection. No country wants their local industry decimated.
The USA has, in most economic aspects, very significant advantages over almost every other country. USA corporations have shown time and time again that given free rein, they have no problem playing win at all costs and destroying local industry and competitors. Classic example, deliberately underprice goods and services, taking a loss knowing that you have the financial backing to continue doing so until you have destroyed the competition and then jack up prices to become profitable again.
And let’s not even talk about some of the outright lies being peddled in support of these tariffs. Claiming, for example, that Australia “bans” USA beef and pork. There is no ban, it’s just that the USA chooses not to meet our food safety standards. If the USA needs to outright lie in defence of the tariffs, that should be taken as sign of their true intentions, and it isn’t about making sure the whole world wins.
GTO is great in games but, like a lot of economic theory, when it is applied to the real world it relies on people being completely rational and people are anything but rational.
You give the USA way too much credit. We are not the best in class in everything:
Watches: we can’t beat Switzerland
Cars: we can’t beat Germany
Cheap electronics: we can’t beat China
Garments: we can’t beat China, Vietnam, Philippines, etc.
But even if we were better at producing every single good. There would still be gains from trade. Look up your Econ 101 notes again, especially the distinction between absolute advantage and comparative advantage.
About GTO: They don’t have to be all rational. As long as we are rational, and we punish a few irrational foreign players, that’s fine. The others will soon start acting rational again, believe me.
Hey Karsten, I’ve been implementing a leveraged diversified portfolio since 2021, in part inspired by your article “Lower risk through leverage”. Of course it’s been painful due to the stock/bond correlation from the inflation shock, but I’m still holding and contributing. What’s your opinion on this strategy going forward and over the long term? My portfolio is 100% global stocks (etfs), overlaid with 70% US 10 year treasuries (ZN futures), and 30% gold (MGC futures).
Wow! That must have been painful in 2022. But the damage is now water under the bridge. With current 10y yields you should be doing well going forward. I think this leveraged strategy will do well over the next 10 or so years.
You mentioned Buffett – what do you think of his historic high cash position right now?
Warren is a smart man! With today’s equity valuations so expensive it’s not a bad idea to keep some cash for an upcoming shopping spree if (when?) the market unravels again.
“If I had to choose between another garden-variety correction a la 2018, and a potentially retirement-ending financial crash like 1929-1932, I would still pick the former.”
Well this statement certainly aged like fine wine. This entire piece did tbh in light of recent EU deals.
As they say: “Forecasts are difficult, especially when forecasting the future”
But in this instance my forecast worked out pretty well. Thanks for acknowledging! 🙂
I just got in to the FIRE journey after the birth of my second daughter during Covid-19 and by the end of 2023. I think I just get the hang of this and it would be an easy journey leading me retire early in my late thirties. Now, the markets are telling me otherwise even though the companies are trading stocks at all time high but the fear of recession looming over the economy is making me think if I should pull out my funds and invest them to less volatile schemes. As some wise men said: “Just go with the flow and time will reveal the future itself”.
Wat less volatile schemes do you envision? Most of the time, low-vol also means low return. If you retire at such a young age without much equity exposure you will likely run out of money in old age.