March 11, 2025 - 1:15pm
The market slump at the beginning of this week came about, simply, because prices were unsustainable. Robert Shiller’s famous CAPE (Cyclically Adjusted Price Earnings) ratio was approaching its historic peak in December — almost as high as during the dot-com bubble, and already higher than during the crises of 1929, 1987, or 2008. This is the only reason why markets ever crash. Everything else is folklore, airtime filler for CNBC or Bloomberg.
Donald Trump plays into this to the extent that his policies will end the long and unsustainable era of massive monetary and fiscal expansion. Team Trump seems serious about cutting the deficit, with Treasury Secretary Scott Bessent providing a target reduction from 6% to 3%. His predecessor Janet Yellen, in contrast, said 6% was perfectly sustainable. When she was a central banker, she also advocated quantitative easing. The markets loved these reflationary policies, and hate it when they end.
Such policies fall into the sustainable-for-long-but-not-forever category, with which we Europeans are only too familiar. Into this box we can also place the vast majority of Angela Merkel’s policies during her time as German chancellor, the euro should it continue with a fiscal union forever, and transatlantic dependencies in security and economics. What makes these cases so treacherous is that the resulting delusions can be sustained for very long periods, as with Merkel’s 16-year term, and still prove unsustainable.
Markets remain a superior method of organising capital allocation, but they are poor judges of sustainability. What’s more, they are prone to herd behaviour. Take interest rate markets, which were optimistic in 2022 when rates started to rise, and over-optimistic on the way down. During both phases, they biased in favour of lower inflation and lower interest rates. The Harvard economist Jason Furman was therefore wrong to suggest yesterday that “if you are implementing a credible plan that entails short-term pain for long-term gain, the stock market will go up not down.”
By that definition, the markets should have reacted to quantitative easing with a downturn, on the grounds that these policies lead to inequality, political radicalisation, the end of globalisation, and possibly even the breakdown of Nato. At the time, however, markets were entirely unreceptive to any notion of negative long-term consequences from these policies.
Trump’s policies should then be seen as a trigger, not a cause. He is closer to the proverbial central banker who takes the punch bowl away before the party gets going, rather than the perpetrator of a wantonly reckless political act. Bessent’s four-year deficit reduction plan may well trigger a market crash, but ending an unsustainable policy is not unreasonable, even in these circumstances.
The jury on Elon Musk’s DOGE experiment is still out, but the forecasts that it would go up in smoke early on have clearly not been vindicated. Tariffs may be a crude way of addressing global imbalances, but it’s also true that nothing else has worked. The question which remains is whether the US President will fold. Trump said this week that he was willing to accept a recession and a one-off hike in import prices due to tariffs. This was an interesting comment, at least in how different it was to the politician to whom we’ve become accustomed over the last decade. Is it possible Trump recognised that, in order to implement his policies, he cannot just roll with the markets?
This is an edited version of an article which originally appeared in the Eurointelligence newsletter.
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SubscribeUnHerd has found itself a new Trump sycophant who will bend himself into any shape to justify the latest idiocy. Pretty funny!
You not only voted for Joe Biden but surpassed even Morning Joe in Cognitive Dissonance. You waved the Biden Flag while the old man was clearly unable to even find his way off a stage.
Another Trump sycophant! The cult is strong in this one! Maybe I should remind him that nobody has voted for Biden for anything since he annihilated Trump in 2020!
This putz clearly can’t defend his tangerine cult overlord so for some reason is commenting about Biden. Stick to the topic, gramps!
You carried the mantle of not only Biden but Harris. You predicted massive landslides. You’ve been wrong about literally every prediction you’ve made but still somehow retain full confidence in your predictive abilities.
How many times do you need to be majestically wrong before you reassess?
Do you think this comically lame attempt at deflection is fooling anyone, old timer?
Here’s a clue for you – it isn’t!
Now, do you want to try to address the matter at hand? Why is this writer trying to blame anything and everything for the Trump meltdown except for the catastrophic policies of the orange moron?
I can’t wait to see your next attempt to avoid the question – should be pretty funny if your previous stupidities are anything to go by!
Because they’re not a catastrophic policies. If it was March 2026 and the market was still down, you might have a point. But you can’t let anything play out because you’re not trying to be a serious person.
Will you apologize if the market skyrockets in a few months. Of course not. You clearly can’t grasp the concept of Pyrrhic Victory which is why you will continue celebrating short term narratives at the expense of long term persuasion.
The markets would seem to disagree with you, pops!
Of course the markets will recover but it will be despite Trump’s stupidity, not because of it.
And of you are going to use terms like Pyrrhic Victory then at least try to use them correctly. I already think you are dumb – don’t make it any worse!
Yes, my intelligence clearly pales next to your own. Everyone can attest to that. Your self-awareness is off the charts.
Well, I do know what a Pyrrhic victory is, old chap! Benefits of a classical education.
Maybe don’t try using big words until you have taken the time to learn what they mean?
It’s a whopping seven letter word and perfectly describes your Narrative Warfare trolling against Trump.
Every time you exaggerate the relevance of an event to propagate a narrative about Trump’s eventual downfall, you lose credibility when your description of that event turns out to be irrelevant or inaccurate.
This is emblematic of virtually all Anti-Trump narratives and why we have TDS to thank for his return to office.
Name one such event. If you can…
And you still don’t know what a Pyrrhic victory is!
It’s when you “win” a short term battle but hurt yourself in the long term because you’ve used up your supplies or in this case, your credibility.
Kamala Harris’ “debate victory” over Trump discredited the Mainstream Media because the Moderators IE the Mainstream Media were seen as clearly working on her behalf. Therefore the MSM were no longer effective surrogates for the Harris canpaign.
It’s funny when socialists advocate that markets are always correct.
Don’t bother arguing with Champaign Socialist. He’s learned the old Alinsky truism that ridicule is more effective than argument, and that’s what he uses. It’s fortunate that he hasn’t learned to make his ridicule amusing, because then it might be effective, but since his ridicule is merely hackneyed and predictable he’s the only one entertained. Don’t bother being his straight-man, at least until he’s got something funny to say.
That’s the same strategy Trump and Farage use though, isn’t it.
Nobody says it doesn’t work!
Absolutely funny, wait a while and see how people feel about Trumpanomics when recession starts, unemployment rises, global trade crashes and stock markets crash. Tariffs were one of the leading causes of the great depression, in conjunction with Hoover’s restrictive fiscal policy. These bozos don’t know their history and are leading the US and much of the world towards economic disaster. At least it will be fun to watch Tesla stock crash to 50$ or less. China will be laughing as the US crashes into turmoil
Tariffs on imports that are in most cases a fraction of the tariffs on our exports are unlikely to be the second coming of Smoot Hawley.
Tesla leads the electric car market, as well as the market for charging stations, and has over 40 billion in cash. They’re unlikely to be taken down by the usual crowd of campus radicals.
Please explain why Trump is violating the USMCA that he negotiated and signed just a few years ago? He’s given so many stupid reasons that nobody believes. Why do you think he wants a trade war with Americas biggest trading partner? Why is he willing to crash both economies to get that trade war?
Can’t wait to see Wolfgang tell us about Trump’s economic genius as he destroys one of the most successful trading relationships in world economic history. Because Trump has to be right and the markets are wrong of course!
This would all be hilarious if it wasn’t so tragic.
Can one Trump cultist explain to us why this all makes sense? Just one.
The only thing I know for sure is that if the U.S. continues spending $2 trillion per year more than it takes in, the consequences will be a lot more serious than a stock market correction.
How dumb do you have to be for the only thing you think you know “for sure” to turn out to be completely wrong?
Broken clocks show the right time twice a day. You can’t even manage that.
Yep. Yep.
I think we are now in the foothills of what is likely to be a very long, very horrible and very painful global market correction – we are seeing the first tremors. Having said that one final ramp upwards (across all asset classes) is *still* possible – it would have no reason except herd sentiment, but media pundits will peg the reasons to whatever geopolitical events are ongoing – some sort of settlement is reached in Ukraine, or Putin goes on to meet the Great Kossak in the Sky, or Xi suddenly decides to take holy orders and join a monastery in Tibet – who knows.
When the markets do eventually start to slide, depending on how quickly things move, the whole of the Trump administration will have their hands full because of the scale of the value destruction inherent in such a crash, and their ambitions and options will be severely reduced.
It is either do it now or wait for a debt market crisis that would be a lot more painful..It will come to the EU as well with their debt spending. The UK or France could have a failed debt auction this year…that would not be good at all
The comments here from Champagne Socialist are a classic exercise in pre-judice.
Wolfgang Munchau for years now in Britain has been an exemplar of that different tradition of weighing evidence dispassionately and fearlessly. What a benefit it is to the UK to have this man’s economically literate journalism based on the solid rock of rationality. As Ben Jonson said of Shakespeare, Munchau “seems to shake a lance, as brandish’t at the eyes of Ignorance.”
Another cult member unable to see what is so obvious to the rest of the sentient world.
Hey, Johnny, your hero is a moron and is collapsing the US economy because of his child like petulance, and there’s no excuse that you or this writer can come up with that will change that.
And if you are going to quote someone then at least try to spell their name correctly, you dimwit.
Champagne Socialist is simply a bored troll mate, best ignored.
And resorting to insults and name calling is a sure sign you (ie Champagne Socialist) have lost the argument
It could be worse. He could be a Champagne Socialist, never knowingly right about anything
One interesting theory is that trump and his team are deliberately roiling markets to force money from stocks in to bonds. The US clearly has unsustainable debt trajectory and it seems they want to do what they can to refinance the debt mountain. Pushing money from stocks to bonds would certainly help.
You people are amazingly gullible! You’ll really anything the cult tells you, won’t you?
A lot of assumptions there my friend. Im no trump supporter as it happens. And i also think that the debt is unsustainable no matter what happens without a huge devaluation of the doller. Id say stock up on the old champagne there and put the socialism to one side. The champagne is a luxury you can afford
Devalue the USD, move investment from the US to other countries.
Makes US exports more affordable.
More investment in non US markets increases foreign demand for now much more affordable US goods.
That investment flows back into the US.
As a strategy it’s a possibility but it’s one hell of a risky one.
I think markets are reacting to Scott Bessent’s comment about how this administration is for the main street rather than Wall St. There has been tantrums like this in the past about interest rate increases if I recall correctly. There’s a Barron’s article on a global “paradigm shift” which does a fairly good job of explaining America’s transition out of deficit spending and how others will need to come out of export-led growth because of this. Germany has been saving up for many years throttling all but necessary spending. It’s time to open up that war chest now, and I suspect the market is sensing a big spend coming.
On a separate note, it’ll be interesting if China will be able to follow up with that growing on consumption. Well-off middle classes and totalitarian regimes don’t tend to get on well together.
If the UK or German (for example) Prime Minister were to announce that there could well be a recession this year whilst the Chancellor announced firmly (at the same time) that there was not going to be a recession, the verdict would be hopeless incompetence, comparable to a labour government of the 1970s. That’s what happened last weekend.
Whilst prices are/were indeed at their peaks and overvalued and debt in the west is hopelessly out of control (for many, not all countries), markets tend to detest a lack of coherent policy which creates increased uncertainty, even if it was perhaps intentional.
Trump promised a comprehensive, whole-of-government retrenchment. It’s underway and working remarkably fast. This month, the DOGE effort will double from 100 “tech support” legionnaires to 200.
Restructuring an obese, unsustainable, profligate government economy into a prosperous private economy is accelerating. Attracting $2T (sic) of private capital in 50 days is downright historic. Opponents are apoplectic because of Trump’s “Promises Made, Promises Kept” tagline.
Our personal investment portfolio is one we’ve had for well over thirty years. While some stocks, and bonds, have come and gone, we’ve never been aggressive, or active, investors. And the equities we own now are hardly novel, representing any number of companies instantly recognizable.
Nevertheless, I was a bit surprised when I finally took the time to look in on how our investments have weathered the Dow Jones’ recent 6%, or so, decline in the last month. Instead of seeing losses, I saw we’d had a modest 3% gain.
All of the above is to say that, like most things in life, what happens around you doesn’t necessarily happen to you. Fate, Chance, Kings and desperate men impact our lives, just not always.
Yes. Definitely. And generally we can’t really blame Trump for bringing to the surface the deep contradictions lying there before. Rather give him credit in that respect. The Federal government has been broke for far too long. Doesn’t pay to make stuff there anymore and the Dollar is flipping, just look at Gold.