After the barrage of proposals, threats and arguments in recent weeks, uncertainty is monumental, as is visible in this graph from Capital Economics. Economic forecasting in such an environment is more or less impossible since so much hinges on political and geopolitical factors impossible to quantify.  Investment decision will, consequently, be dominated by our attitude toward uncertainty and risk.

One starting point for our analysis is the Trump administration’s long-term economic strategy. Its focus is the US trade deficit, which according to Trump, Bessent and Miran (economic policy adviser to the president) is caused by trading partners having higher import tariffs than the US, and that the US dollar is overvalued. Since the USD is the global reserve currency, strong demand for dollars drives up the exchange rate.

As far as tariffs are concerned, we have already seen the opening salvos of the trade war. But they are just the beginning. Trump now threatens to hike tariffs on European exports and add "reciprocal tariffs". This means that tariffs can be used as a means of negotiation and punishment not only against tariffs and trade but against just about anything. Migration, fentanyl, undervalued currencies, protection of important sectors, etc – and as reward for investment: if you move to the US, you avoid tariffs.

The world has nearly 200 sovereign nations and millions of companies. If the US can threaten anyone with any tariffs for any purpose, the entire global trading system will be severely damaged. The uncertainty for companies about the terms and conditions that apply is increasing dramatically.

A tariff war clearly has stagflationary effects. GDP will fall, while prices rise. Also in the US, tariffs on imports may cause the US price level to rise, interest rates to be pushed up and the dollar to strengthen further. Bessent/Miran admits that such a risk exists but believe that any appreciation will help keep inflation down, and that a number of tools can then be used to dampen the effect on the financial markets.

The tariff threat could also be used for financial purposes. Countries that do not accept the American view of exchange rates can be punished with special reciprocal tariffs or the withdrawal of defence cooperation. These methods are primarily bilateral, but a vision of a "Mar-a-Lago accord" has been aired, in which the United States and other major currency countries would agree to lower the dollar exchange rate and correspondingly trade up the rates of the euro, pound, renminbi and yen.

We find it difficult to see such an agreement come true; but beyond that, the United States can intervene unilaterally in the financial markets. The Treasury and the Fed can jointly buy foreign currency and sell dollars. The central bank can regulate the fixed income market and put a cap on the interest rates the US pays on its national debt. Such methods of writing off large debts have been common historically but have not been applied by advanced economies for a long time. The Federal Reserve would certainly oppose such measures, but in a year's time, the Fed chair’s mandate expires, and it is highly likely that he will then be succeeded by someone more docile.

To this must be added plans for a new sovereign wealth fund, as well as to strengthen and activate the foreign exchange reserve by writing up the value of gold and building up a new crypto reserve. The aim is partly to write down the value of the national debt, partly to get a larger war chest on the global markets.

The important insight is that the US will not only wage trade wars against allies and rivals alike. It is preparing nothing less than a broad economic war strategy, with regulations, sanctions, currency interventions and interest rate controls. Not only the political world order is turned upside down, but also the economic one.

Obviously, this will cause severe financial repercussions. For a while, markets themselves seemed to be taking it easy. Stock markets rose in the beginning of this year, long-term interest rates remained at roughly the same level and the dollar strengthened against the euro. Arguably, this indicated that markets did not expect the US to implement more than a fraction of the measures outlined above.

However, in recent days this has changed. We have already seen how the initial “Trump trades” have fizzled and died. US stocks have tumbled in fear of tariffs, while European stocks (in particular defence industry) is up. Bond yields have fallen, fearing recession, Bitcoin and the USD are down. Right now, markets are bracing for a road ahead paved with abrupt turns for stock exchanges, currencies and interest rates. This, of course, can also push Mr Trump to reverse policies once again – which adds to the uncertainty.

Is it possible to have a more long-term view of where we are when the dust eventually settles? In a situation such as now, when both geopolitics and the geoeconomics are changing rapidly and unpredictably, a few different scenarios should be worked on for future developments.

Our base case is that the long term entails higher production and distribution costs as supply chains are disrupted and trade diverted. Ergo, inflation and bond yields will be higher than before the pandemic. Stock markets will develop in very different ways depending on sectors and geography. AI and technical change will remain the long-term driver, but the main beneficiaries will be companies who successfully use the new technology, not necessarily those who are on the forefront in inventing the tools. The mighty dollar will be increasingly challenged by a constellation of BRICS nations. And the present focus on Ukraine will gradually shift to the dominant conflict between the US and China.

The path forward will be turbulent, and several factors may cause markets to veer off. Budget deficits and debt financing will affect bond yields and geopolitical shocks will have unintended consequences for equity markets.

In such a situation, many investors – including us – will reduce risk. This can be done by reducing investments in American stocks, as well as global equity funds (since US stocks are so dominant). In general, bonds will present more of an investment alternative than in recent years, but long bond yields will rise more than short yields. In such a situation, cash and money-market funds are a good way to reduce risk and protect the portfolio.