The quickly executed first phase of the U.S.-China deal was done in a very reasonable manner (yielding justified optimism about the negotiations going forward), Donald Trump and team are now in Saudi Arabia on a trip through the Middle East to do investment deals (which I am confident they will succeed at doing and it appears that other reasonable trade deals will follow), and it won’t be long before he and his team will be trying to make a good budget deal with those in Congress (which I am less confident about going well). Meanwhile, an Iranian deal and a Ukrainian-Russia deal are brewing, which I suspect will lead to some progress.

As I see it, there are a) the day-to-day issues that tend to grab people’s attention, affect people’s sentiments, and cause short-term market swings, and there are b) the big issues and forces that are driving the big changes in the world order. While it’s important to stay on top of both, the big issues and forces that are driving everything are most important, so we mustn’t let the short-term, attention-grabbing events cause us to lose sight of the big forces and issues that will drive how the story unfolds. That perspective is especially important when betting on what will happen via one’s investments.

As for the big issues and forces, I will reiterate the 5 big forces that are driving just about everything and what they look like to me. They are:

1) The debt/money force that drives markets and economies and determines what the monetary order is like.

2) The domestic wealth and values gaps force that determines what the political order is like,

3) The international order/disorder force that determines what the world order is like,

4) The acts of nature force (droughts, floods, and pandemics), and

5) The force of man’s inventiveness, especially new technologies.

On the Brink

Each of these forces is in the shape it is in, which makes circumstances much different than if these forces were in different shapes. The shapes that they are in determine what circumstances the leaders have to deal with and the choices they have to make, regardless of who these leaders are. More specifically:

1) Re: the debt/money force that drives markets and economies and determines what the monetary order is like.

The U.S. government and a number of other governments now have large debts and deficits, and what happens in the markets and economy will primarily be a function of those conditions, even more than the daily news and specific leaders’ choices. In other words, this over-indebtedness will require governments to get more money via fiscal moves (i.e., taxes and spending) and/or via more debt monetization, which will have big impacts one way or another. That is because it is a law of monetary reality that when there is already a lot of government debt and the debt is being added to at a faster rate than there is demand for the debt assets (e.g. bonds) it creates, there must be some mix of cutting spending, getting more tax revenue, and/or having an easier monetary policy (that is bad for creditors). This is true regardless of who is president. There will be lots of fights (e.g., between President Trump and Congressional leaders and Fed Chairman Powell) about what should be done. This will make lots of news and cause lots of short-term swings. In any case, for reasons I lay out in my new book, How Countries Go Broke: The Big Cycle, either the budget deficit will be reduced to about three percent of GDP or it won’t, and that will produce huge consequences for the value of debt and money. At the same time, the United States is the one and only big market for capital (nearly half the world markets) as well as the world’s largest buyer of goods and it has proven a steadfast capitalist environment that respects investment vehicles as store holds of wealth, and still has rule of law, a culture of entrepreneurship and innovation, and relatively free speech that together is called “American exceptionalism.” Investment deals that keep money flowing into the U.S. and create mutual benefits can greatly help the situation. What happens all depends on how well this is managed.

2) Re: the domestic wealth and values gaps force that determine what the political order is like.

These are resulting in irreconcilable differences with little willingness to compromise that is manifest in rising populism and populist leaders and the classic rise in more autocratic leadership, the weakening of democracy, and the weakening of rule of law as the more populist and autocratic leaders fight the opposition in order to do what they believe is necessary to make the changes they believe are needed. The relative powers of the president and the judicial and legislative branches of government, and, with them, U.S. democracy as we know it, will likely be tested. Also, the problems of the bottom 60 percent of the population have yet to be addressed, and the inevitable political and media opposition will almost certainly increase soon.

3) Re: the international order/disorder force that determines what the world order is like.

The lack of a single dominant world power—together with more countries having strong-minded populist leaders facing the previously mentioned problems who are inclined to fight for their self-interests and favor winning over harmony—is leading to more unilateral and less multilateral decision making and greater conflict. During this time, trade, tech, geopolitical, and military wars are of greater risk, which leads countries to behave more aggressively and defensively. This leads to ensuring domestic production and other secure sources of needed items. Multilateralism is fading while bilateralism (bilateral deals) is rising, and the U.S. and China are each trying to play this in their own ways. Those who offer other countries the best deals will have the bigger and better results. How well this is dealt with will be critically important in how the world order changes.

4) Re: the acts of nature force (droughts, floods, and pandemics).

Conditions are clearly worsening, which will be financially very costly as well as tangibly costly in terms of damage done. How well people and countries adapt will be key.

5) Re: The force of man’s inventiveness, especially of new technologies.

This will vastly increase man’s abilities to think in most areas that will most likely be used to produce both great improvements and great harm.

In a nutshell, the big picture that shows up in numerous unbiased measures is that there are deteriorations in and declines of the existing monetary, domestic political, and international geopolitical orders, accompanied by increasingly threatening acts of nature and huge advances in technologies. At the same time, most of these forces are being recognized and dealt with by a unique rightist/capitalist U.S. president and his administration.

What is being done about these things?

• Doing deals including: a) having tariffs that are designed to both bring in tax revenue and yield better business for domestic producers and American exporters to other countries, b) attracting lots of foreign capital into the United States, and c) fostering better global investments.
• Reducing government regulations to enhance productivity.
• Reducing waste in government and improving the management of government assets.
• Reducing budget deficits and dealing with the government debt problems, though it’s not yet clear how.
• Using power to challenge the established legal and regulatory system to achieve the president’s and his hard-right constituency’s goals without losing needed swing voters.

How Will These Circumstances and Forces Be Dealt With? That’s the Biggest Question.

Will these circumstances and forces be handled well or poorly—i.e., will there be sound reasonableness or will there be erratic craziness in dealing with these circumstances? Does Donald Trump’s deal-making style of taking extreme positions and enemy/ally style of negotiating reveal a man and an administration that can deal with our problems well? Was his “Liberation Day” announcement that escalated to 145% across-the-board tariffs on China just an effective head-fake that led to two days of productive meetings and a very sensible short-term deal that will be followed by serious negotiations? What has happened so far supports the view that Donald Trump is dealing with the previously mentioned important, long-neglected issues in a relatively erratic, yet productive way. But frankly, it’s too early to tell.

A Couple of Suggestions: On the Brink

• Remember that the news, to be of value, should be viewed in the context of the conditions of the big forces that transpire together to determine the direction of big cycle changes, most importantly changes in the monetary order, the domestic political order, the world geopolitical order, climate changes, and technology changes (i.e., the Big 5).
• Remember that we are on the brink of big changes in the monetary, domestic political, and international orders and that everything depends on whether or not these things are handled in smart, cooperative ways.
• Remember that, in your investing, it is important to 1) have a well-thought-out investment game plan that includes smart diversification that you’re sticking with and to 2) not respond after the fact to news and market movements without careful consideration.

The views expressed here are my own and not necessarily those of Bridgewater.

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