April 13, 2025 – We do not often hear from former Treasury Secretaries, but when we do, our ears perk up – particularly if it is to criticize economic policy.
In an interview last week, former U.S. Treasury Secretary Janet Yellen blasted President Trump’s trade policy, calling the ‘Liberation Day’ tariff strategy “the worst self-inflicted wound that I have ever seen an administration impose.” Given that she is back in academia, Ms. Yellen made sure to assign the current administration a failing grade on its handling of the economy, stating the current economic strategy is “going to be devastating for households and workers”.
What Ms. Yellen points to is an economic own goal – a policy taken by the government that backfires and hurts its own economy more than helps, often in the exact opposite way it was intended. It is like trying to help your team score but accidentally putting the ball in your own net.
The Kent A. Clark Center for Global Markets at the Chicago Booth School of Business once ran a poll featuring dozens of the world’s leading economists. The poll posited that “adding new or higher import duties on products such as air conditioners, cars, and cookies — to encourage producers to make them in the US — would be a good idea.”
As expected, the economists unanimously disagreed with the statement.
From a theoretical standpoint, it is universally understood by economists and capital markets participants that tariffs are bad for several reasons: higher prices, lower economic growth, increased inefficiencies, job losses, and supply chain disruptions.
The market has had a week and a half to digest the tariff strategy announced on April 2nd, and the resulting data has been swift and shocking.
Under every objective measure, the trade war has been a massive policy mistake. Numerous recent data points support the thesis that tariffs are harmful and economically costly:
Americans’ inflation expectations have surged to a stunning 6.7%, its highest level in forty years. Consumers know that tariffs will lead to rising prices of consumer goods. Rising inflation, or at least the expectation of higher inflation, has significant implications for central bank policy. Given that the Federal Reserve’s mandate includes stable prices (i.e. 2% inflation), rising inflation expectations make higher interest rates likely. The Fed’s credibility hinges on keeping inflation expectations well-anchored, and therefore, higher expected inflation will reduce the need for interest rate reductions.
2. The stock market has been pummeled:
Approximately $10 trillion of equity value was vaporized from U.S. equity markets, highlighted by a more than $3 trillion decline the day after the global tariffs were announced.
For context, America’s annual goods trade deficit last year was $1.2 trillion, while its services trade surplus was $295 billion, for an overall trade deficit (goods and services) of approximately $918 billion. The aggregate decline in market capitalization of S&P 500 companies was 10-fold the annual trade deficit.
In the two days after the ‘Liberation Day’ tariffs were announced, the S&P 500 dropped by more than 10%. It subsequently entered a bear market, falling -20% from its peak. There are only three other periods in the past seventy-five years in which the broad market index fell double-digits over a two-day span: October 1987, November 2008, and March 2020. All three of these market events are ‘named’ financial crises (Black Monday, GFC, and the Covid panic).
Last week, the Fear & Greed Index dropped to 4 (out of 100), its lowest level since March 2020, and the volatility of the S&P 500 became greater than that of bitcoin.
3. Treasury bond yields have surged:
In 1993, the Clinton administration struggled early on with fiscal policy. Clinton had campaigned on ambitious domestic spending, but rising bond yields (indicating market stress) forced him to pivot toward deficit reduction to appease investors and get Treasury bond yields down.
Reflecting on this dynamic, James Carville, a prominent American political strategist and commentator, stated:
“I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a 400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”
During the current trade war crisis, it wasn’t the plunging stock market or the threat of a recession that forced President Trump’s hand, but it was the bond market that twice pushed him to de-escalate the trade war and reduce tariffs.
Specifically, last Tuesday night, the U.S. 10-year Treasury bond exhibited volatile trading, with yields spiking above 4.5% (seemingly on their way to 5.0%). The day after, the President stated that the bond market was getting “queasy”, so he had to act to walk-back the tariff policy with a 90-day pause.
Subsequently, the U.S. 10-year Treasury bond again rose above 4.5% (which has proven to be a critical level) late Friday. Unsurprisingly, on Saturday morning, President Trump’s administration enacted a second tariff walk-back, exempting smartphones, computers and other electronics from its so-called reciprocal tariffs, giving a huge win to the world’s largest corporation (Apple), while unfortunately leaving small American businesses with continued uncertainty. That said, if exempting electronics from tariffs is a good policy, then the logical conclusion is to exclude every import from tariffs.
The U.S. currently spends around $1 trillion annually on interest payments to service its debt. Treasury Secretary Scott Bessent has referred to himself as the “United States’ leading bond salesman”, indicating the importance of keeping Treasury bond prices high (and yields low). In their efforts to reduce the current $2 trillion deficit, the U.S. administration is seeking to cut costs where possible (hence, the DOGE). Under no circumstances can they tolerate a spike in interest rates, which would cause interest payments to surge as government debt is rolled over, further pressuring the deficit.
The bond market humbled the current administration, and has thus far served as the best check on its policy objectives. Thirty-two years later, the bond market continues to intimidate everybody.
Investors would be wise to closely monitor the U.S. 10-Year Treasury yield, which has thus far proven to be a major catalyst for trade war relief.
4. Recession odds have risen dramatically:
According to betting markets, the odds of a U.S. recession in 2025 have spiked from 20% to more than 65% on the announcement of tariffs. Recession odds subsequently declined slightly over the past week after the two subsequent tariff walk-backs. Given that tariffs are damaging to the economy, look for recession odds to rise and fall with the magnitude of tariffs implemented.
5. Expectations of job losses have jumped:
Not this time. The U.S. dollar has experienced a significant decline this month, reaching its lowest levels in years against major currencies like the Swiss Franc, Euro, and Yen. The dollar index, which measures the greenback against a basket of major currencies, has fallen to its lowest since April 2022. The unpredictable nature of the administration’s economic policies has raised concerns about the U.S.’s role as a global economic leader. This downturn in the U.S. dollar in a time of crisis, when historically it would be rallying, showcases a concerning loss of investor confidence.
It took decades for the U.S. dollar to become the world’s reserve currency. Now, one ill-advised trade war puts this vaunted status at risk.
Where to From Here?
In addition to academic literature, various market and economic indicators, and historical precedents (last month, we wrote about how disastrous the McKinley Tariffs of 1890 and the Smoot-Hawley Tariffs of 1930 were), the realities of why countries use tariffs are clear.
Some people ask – if tariffs are so bad, why do other countries use them?
Tariffs are used by the poorest countries because they do not have income, capital gains, or wealth to tax.
Accusing poor countries of unfair trade from tariffs is equivalent to saying a homeless person who got money to eat through panhandling was “ripping you off”.
Moreover, the desire to onshore low value-add manufacturing to America, such as textiles and coffee, does not align with the data. As countries get wealthier, as exhibited through rising GDP per capita, the employment share of manufacturing declines as higher value-add services jobs are created.
Market participants have been bewildered by recent tariff policy – and who can blame them. The theoretical, precedent, and empirical data make a clear case against the implementation of tariffs. Meanwhile, the administration’s own rationales have left investors scratching their heads. Keeping track, the 2025 tariffs were implemented to: reduce illegal immigration, stop fentanyl, annex Canada and Greenland, address fairness with reciprocal tariffs, stop currency manipulation, bring back manufacturing jobs, make shoes in the U.S. instead of Vietnam, move jobs screwing together iPhones in China to the U.S., reduce interest rates to refinance Treasury bonds, lower gas prices, combat trade cheaters, beat China, or balance (goods-only) trade deficits. It is enough to make one’s head spin.
The classic economic principle states, “the cure for high prices is high prices”. When prices get too high, they trigger behaviours that ultimately bring prices back down. It is a reminder that markets often self-correct – price is a signal, and people respond to incentives.
History is littered with economic policy mistakes, along with the resulting financial market reactions that have forced governments to fix those ‘economic own goals’. For example, in 2022, U.K. Prime Minister Liz Truss’s government introduced a mini-budget featuring unfunded tax cuts and increased borrowing. This move spooked financial markets, causing a sharp rise in U.K. government bond yields and a plunge in the currency. The resulting financial instability forced Truss to reverse her policies and resign after just 49 days in office.
Over time, the current trade war shock and policy error will most likely be corrected. The administration has already back-tracked on tariffs twice in a matter of days, as the market forced its hand (primarily the bond market). We believe additional trade war relief will be coming over the near term as market dynamics and economic realities force a reversal in policy.
Until there is a clear and consistent economic policy direction, stocks, bonds, and the U.S. dollar may continue to experience volatility. Restoring investor confidence will be crucial to stabilizing risk assets.
Last week’s events exhibit how unpredictable economic policy and market volatility are, and therefore investors should remain calm yet vigilant. While things are entirely unpredictable over the very near term, we believe the trade war will de-escalate over time, and markets will find themselves on more stable footing when looking out six to twelve months. As such, we believe those with the attitude of “don’t just do something, stand there!” likely come out of this challenging period OK. Sticking with long-term asset allocations, while remaining open to capitalizing on short-term dislocations, is likely the best plan.
Accelerate manages five alternative investment solutions, each with a specific mandate:
- Accelerate Arbitrage Fund (TSX: ARB): Merger Arbitrage
- Accelerate Absolute Return Fund (TSX: HDGE): Absolute Return
- Accelerate OneChoice Alternative Multi-Asset Fund (TSX: ONEC): Multi-Asset
- Accelerate Canadian Long Short Equity Fund (TSX: ATSX): Long Short Equity
- Accelerate Diversified Credit Income Fund (TSX: INCM): Private Credit
ARB gained 0.5% in March as merger activity increased compared to the previous month.
The Fund crystallized gains in deals that closed during the month, including Silver Lake’s $25 billion buyout of Endeavor Group (in which the Fund was able to exit at a premium to the consideration), World Wide Technology’s $1.8 billion acquisition of Softchoice, and Fiserv’s $202 million merger with Payfare.
Given the increase in M&A activity during the month, with fourteen new transactions announced in North America, the Fund was able to deploy capital at attractive arbitrage yields, allocating to seven new merger arbitrage investments in March.
Currently, the Fund is 117% long and -8.4% short (125.4% gross exposure), with 48% allocated to merger arbitrage and 52% to SPAC arbitrage.
We are pleased to announce that ARB has been awarded a top 10 global performance ranking in its category in the latest BarclayHedge global hedge fund rankings.
HDGE declined -3.3% in a mixed environment for beta-neutral multifactor portfolios.
Despite widespread concern regarding hedge fund degrossing and factor unwinds in March, long short factor portfolios performed reasonably well, led by market neutral value and price momentum portfolios. The top decile long multifactor portfolio fell -5.6% for the month, compared to the bottom decile portfolio’s drop of -8.6%.
The Fund’s decline last month was a case of ‘not short enough’, as the Fund’s 50% short portfolio was not significant enough to fully offset the decline of its 110% long portfolio. In any event, the higher beta names of HDGE’s short portfolio tend to help protect the downside in declining market environments.
Top contributors to the Fund’s return in March include a long position in K92 Mining and short positions in MongoDB and MaxLinear. Top detractors include long positions in Celestica, Gildan Activewear, and Doximity.
ONEC gained 0.3% in March, in which a diversified multi-asset approach allowed investors to dodge the market volatility.
Last summer, we discussed the case for owning gold in portfolios in the memo, Why Gold Shines Bright in Investment Portfolios:
“In modern asset allocation, gold is often included in diversified portfolios to mitigate risk and enhance risk-adjusted returns. Historically, gold has exhibited low or negative correlation to traditional asset classes like stocks and bonds, making it valuable as a portfolio diversifier to increase returns while reducing risk.”
The yellow metal continues to shine bright as a 10% allocation in ONEC, as its price surged 9.9% last month amidst economic uncertainty. Other positive contributors include the Fund’s commodities allocation, which gained 3.7%, and infrastructure, which provided a 2.5% return. Several other asset classes contributed positively, with monthly returns below 1.0%, including directional long short equity, merger arbitrage, and risk parity.
On the negative side of the performance ledger, a few asset classes declined in price, including leveraged loans (-0.8%), managed futures (-1.6%), absolute return (-3.3%) and private credit (-4.9%).
ATSX ticked up by 0.2% last month, compared to a -2.0% decline for the benchmark S&P TSX 60 Index.
Canadian long short multifactor performance was positive in March, largely driven by the momentum portfolio. Specifically, stocks with top decile momentum in Canada gained 6.5%, while those with bottom decile (i.e. worst) momentum ranking declined by -6.3%. All of the other major long short factor portfolios, including value, quality, operating momentum, and trend, exhibited negative performance as the short portfolios outperformed the longs.
Top contributors to the Fund’s return include a long positions in Wesdome Gold Mines, Torex Gold, and K92 Mining. Top detractors include a long position in Celestica and short positions in Eldorado Gold and Birchcliff Energy.
INCM has been punished amidst the economic uncertainty caused by the trade war, dropping -4.9% last month as private credit investors fret about recession implications.
Private credit net asset value (NAV) discounts widened across the board in late March, with the INCM portfolio starting the month at an average 0.2% premium to the underlying value of its loans, to finishing at a -3.6% discount. Moreover, the increased volatility in April caused discounts to widen further to levels last seen during the Covid panic of 2020.
Currently, INCM allocates to twenty private credit funds, which trade at an average discount to NAV of -15.0%, with an average underlying yield of 12.8%. The underlying portfolio of over 4,000 loans and investments is 85% senior secured and 91% floating rate.
Have questions about Accelerate’s investment strategies? Click below to book a call with me:
-Julian
Disclaimer: This distribution does not constitute investment, legal or tax advice. Data provided in this distribution should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information in this distribution is based on current market conditions and may fluctuate and change in the future. No representation or warranty, expressed or implied, is made on behalf of Accelerate Financial Technologies Inc. (“Accelerate”) as to the accuracy or completeness of the information contained herein. Accelerate does not accept any liability for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on all or any part of this research and any liability is expressly disclaimed. Past performance is not indicative of future results. Visit www.AccelerateShares.com for more information.
