When Free Trade Falters: This paper examines the dramatic shift in U.S. trade policy toward protectionism. Weldon (the author) contextualizes this change by drawing historical parallels, not with the often-cited McKinley era in the US (which is a bad historical comp in our opinion), but with Edwardian Britain's early 20th-century debate over "tariff reform." He argues that both episodes were driven less by pure economic rationale and more by geopolitics, domestic politics, and a pervasive sense of national insecurity. Sounds familiar to us.
Africas Energy Transition and Recent Geopolitical and Policy Turbulences: Overview of the challenges Africa faces in financing clean energy projects. We would highlight, as the paper does, that the core problem for African energy remains the same regardless of the type of energy, namely, bankable projects. The potential is there, but the political-economic context necessary to make projects easy to finance is not. This translates, in our opinion, to a significant investment opportunity for those willing to tackle the hurdles of operating in challenging markets.
Global BYD - The international expansion of Chinese electric vehicles
We will be publishing our 1st Quarter 2025 Letter to Investors next week, the following is an excerpt from that letter:
As we noted earlier this year, we believe, along with many others, that we are now in a period in which investing from the position of political and geopolitical naivety has ended. As such, what has worked in markets is unlikely to work in the future. This transition has been years in the making. Still, a confluence of events in recent years, starting with COVID and ending most recently with a rollout of an effort by the US government to reshape global trade, has sharply accelerated the transition. This new political-economic paradigm will require investors to adapt fast. Whereas the last three decades have been dominated by globalization, rising trade, and capital liberalization, the next decade will be dominated by the use of trade as a tool of government statecraft and a rapid, disorganized unwinding of a complex system of interdependency.
Whether or not this unwinding produces the desired outcomes is far from certain. The complexity of the organically grown international economy is far too complex for anyone to fully understand the secondary and tertiary impacts of the sweeping changes currently underway. In the case of the US, the Trump administration aims to wield geopolitical strength and the US consumers' endless appetite for consumption like a club to extract trade deals that support increased economic self-sufficiency and reduce trade deficits. Whether they will succeed or not is an open question.
What is less uncertain, in our opinion, is that far from driving the US economy towards a future less encumbered by government, the government is now taking a leading role in shaping our economy. We find little to argue with in Ken Griffin's recent comment that “President Trump has an incredibly good sense of where the problems lie, but we’re moving too quickly, we’re breaking a lot of glass in trying to solve some very real problems.” We would add that the ability to identify problems does not mean one can also solve those problems.
There is no question in our mind that the idea of “free trade” is a mirage, and that we have continuously operated in a system that was less than free, that is unbalanced, and has unending barriers to the free flow of goods and services. Furthermore, there is little question in our mind that at times the result of less than free trade has been to foist upon people least able to adapt, the burden of rapidly adjusting to changes they could not foresee, and did not understand. At the same time, we cannot allow ourselves to respond to these unfortunate circumstances with a cure that is worse than the disease.
The current path risks replaying some of history's more disastrous economic policies. The most striking, least discussed, and most uncomfortably rhetorically similar being Latin Americans' experiment with import substitution. Starting in the 1930s, Latin American political leaders, seeking to extract their countries from what they considered unfair and unbalanced trade relations with former colonial masters, enacted heavy tariffs and domestic protectionism. These policies, known as import substitution, were supposed to lead to manufacturing growth, boost exportable goods, and increase wealth. The policies instead led to protected economies that were globally uncompetitive, rampant inflation, and poverty.
The US is far from that outcome; we are not proposing that the US is on the cusp of becoming the equivalent of a failed Latin American country, but we believe history should serve as a cautionary tale. The current path is slippery, and caution is critical in economic policy because economic reflexivity produces runaway feedback loops outside government control. For investors, there is already the penumbra of disconcerting trends that could spiral in the form of a weakening dollar, falling equity prices, and rising yields. This triple threat is rarely seen outside of emerging markets. It may foreshadow a loss of trust in US economic exceptionalism, a loss that is mirrored in the emerging perception of the US as an unreliable partner by our allies. That trend, while different, is related, as the ability to confront foreign adversaries is linked to the strength of a country's domestic economy and the breadth of resources it can call upon in a fight. Given the literal scale of the foreign policy challenges the US faces in the form of countries like China, even poorly equipped European allies are essential.[1]
The loss of trust in US economic exceptionalism has significant repercussions for investors. For at least the last twenty years, US assets have been the winning investment, buoyed ever higher by rising growth, US dynamism, and, at times, especially since 2008, a proactive Fed and profligate government. The resulting shift away from the US presages underperformance for US assets, a painful transition we expect will be most acutely felt by passive equity investors, who have benefited dramatically from the relatively gentle and positive glide path that globalization created for the overly financialized US economy.
US equities comprise 70% of the MSCI World Index and need strong capital inflows to maintain that overweight status; the pain will be significant if those flows change direction. According to a recent report by Bridgewater, discussing many of the same themes discussed here, “US stocks need to attract ~65 cents of every dollar that flows into stocks [globally] just to keep rising.”[2]
In this environment, it is critical to carefully examine the fiscal policy and political constituencies of the countries one invests in to find opportunities. The global shift underway is not about achieving broad, undirected economic growth but instead restructuring domestic economies to support self-reliance, national security, and aggrieved political constituents (please see our previous discussion of these themes in When Markets Meet Mercantilism). These are specific national goals that will produce specific national and international economic outcomes. Charlie Munger famously said, “Show me the incentive and I will show you the outcome.” That is truer today than at any time in recent memory.
We believe Massif Capital's investment focus is well-suited to this environment. In an increasingly fractured world, significant investment in natural resources, critical infrastructure, and heavy industry is highly likely if the incentivized goal is self-reliance and national security. Furthermore, if economies worldwide pursue these same goals simultaneously, as they are presently, our opportunity set dramatically increases. Picking winners in this context will not be without challenges, but we believe strongly that being in the right place at the right time is half the battle, and as far as we can surmise, the right place and right time for liquid real assets is the here and now.
[1] One should never underestimate the scale of the challenge posed by one's enemies, especially when they have proven themselves, as China has, for example, to be cunning operators. Note that the word enemy in relation to China is a specific word choice, not a flippant one. China and its social and economic model pose a very real and legitimate threat to Western democracies of all flavors.
[2] https://www.bridgewater.com/research-and-insights/global-economies-converging-on-equilibrium-confront-a-geopolitical-regime-shift
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