By Mike O'Sullivan, Senior Contributor

WASHINGTON, DC - On April 2, 2025, U.S. President Donald Trump held a significant event in the Rose Garden of the White House, where he announced a series of new trade tariffs aimed at goods imported into the United States. He dubbed this occasion 'Liberation Day,' framing it as a pivotal moment for American economic independence. This announcement is part of Trump's broader strategy to reshape the global economic landscape, a strategy that has sparked intense discussions among political and economic analysts.

As someone who has spent considerable time traveling across Europe and the United States in recent months, I've been struck by the rapid pace of change occurring on the world stage. A phrase from Vladimir Lenin keeps echoing in my mind: 'There are decades where nothing happens; and there are weeks where decades happen.' This sentiment has been a recurring theme in my conversations, reflecting the urgency of current events. With Trump’s return to the White House, a multitude of developments have unfolded, prompting me to take stock of emerging trends across four distinct areas.

Bonfire of Diplomacy

One of the most notable trends is the metaphorical 'bonfire of diplomatic relationships' igniting in various corners of the globe. This shift was starkly evident at the recent Munich Security Conference and has continued to escalate since then. The era of a cozy, globalized world, characterized by leaders like Bill Clinton and George W. Bush, appears to be fading. In those years, America was seen as a benevolent giant championing peace and prosperity while intervening to resolve financial crises. In contrast, my observations suggest that the current Trump administration is reforming the U.S. into a hyper-charged nation-state, prioritizing its own interests over traditional alliances.

Interestingly, while this shift is causing considerable concern among European and Asian allies, many Americans seem relatively unconcerned, indicating a possible shift in the national sentiment towards foreign relations.

Aux Armes!

The ramifications of this diplomatic evolution have been felt most acutely in Europe, where a sense of urgency has emerged regarding defense collaboration. Echoing the sentiments of French President Emmanuel Macron, many European nations are now embracing the idea of 'strategic autonomy.' Significant steps have already been taken, including the publication of the European Union's pragmatic White Paper on defense and the establishment of a new €800 billion loan facility aimed at bolstering defense spending. Additionally, Germany's recent decision to relax its debt brake provisions for defense expenditures marks a notable shift in policy.

Some intelligence agencies, particularly in Denmark and Finland, have forecasted that if a peace agreement is reached in Ukraine, Russia could be poised to launch military actions against a European nation within two years. They predict that, within five years, Russia could have rebuilt its military capabilities to threaten the EU directly. This has alarmed nations such as the Nordics, Baltic states, Poland, Germany, France, and the UK, although countries like Spain and Ireland have been slower to respond.

Despite this growing awareness, I observed a general lack of urgency in addressing security concerns. During my time in Vienna, for instance, I noted the pervasive presence of Russians in local cafes, which raises questions about the adequacy of responses to governments that appear sympathetic to Moscow, such as Hungary. Furthermore, I remain unconvinced about the commitment to fostering a pro-growth socio-economic environment in France, particularly regarding the pressing need for capital markets union (CMU), which while not a popular political issue, is crucial for strengthening the European economy.

Oops – Muscle Not Fat

The economic policies under the Trump administration are complex and often obscured by the cacophony of market fluctuations. However, a pattern of nihilistic fiscal conservatism is emerging—a clear desire to reduce the fiscal deficit and alleviate the enormous national debt burden, which has led the U.S. to expend significant resources on interest payments. Sadly, the efforts to rein in economic growth appear to be undermining essential sectors, including education, research, and the scientific community. This is especially troubling as it impacts veterans, who are increasingly feeling the negative effects of these policies.

Moreover, the politicization of justice and the erosion of the rule of law could yield detrimental long-term effects on the economy, a scenario that has been evidenced in places like Turkey. While much media focus has been placed on the adverse impacts of tariffs, there has been insufficient attention on how corporations react to such policy uncertainty. As discussed in a previous analysis, macroeconomic uncertainty often leads companies to adopt a 'wait and see' approach, which could stifle growth and innovation.

Exceptionally Expensive

As many investors are beginning to realize, American assets, including the U.S. dollar, stocks, and corporate bonds, are becoming increasingly overvalued. This reality poses a significant concern, especially in light of Trump's 'Liberation Day' announcement, which has further exposed the administration's lack of analytical rigor and concern for economic stability. Trust in the current administration is waning, and investors are beginning to second-guess their exposure to U.S. assets.

Despite the prevailing atmosphere, many in the investment sector continue to cling to traditional portfolio structures that may not be well-suited for the rapidly evolving landscape. A thought experiment I often share with investors illustrates this point: examining how portfolio compositions have shifted over time. For instance, in 1900, nearly 50% of equities were held in railway companies, while the UK represented 25% of the global stock market—now reduced to about 3%. Today, American stocks account for approximately 68% of global equities, raising questions about the sustainability of this dominance.

In light of a still relatively strong dollar, I encourage asset allocators to rethink their reliance on 'American exceptionalism' as a basis for stock valuation. Reflecting on Lenin's insights, it’s worth remembering that during the first wave of globalization (from 1870 to 1900), Russian equities often outperformed their American counterparts. However, after the Russian market was closed for much of World War I and then faced the upheaval of the Revolution, it plummeted to zero and remained shut for 75 years. This historical perspective serves as a poignant reminder that political risk is a crucial factor to consider in today’s investment climate.