April 2025 Tariff Turmoil

Fundamental Value suffered a distressing -16.5% fall in 2024, while the S&P returned a stellar 24.9%. Through April 4th, FV has managed to claw back a chunk of that lost relative performance in 2025, with a 3.1% return vs the S&P at -13.5%. FV is now up 371.3% net since inception in 2016 vs the S&P at 182.1%, an annual outperformance of 6.7%1. For monthly performance see our tearsheet.   There is nothing worse than losing the hard-earned money that our clients have entrusted us with. We hope that after watching us tilt against windmills for the better part of two years, the past few months have provided some validation for our view that the US equity market is deeply unhealthy and at risk of sharp declines, while there is much greater opportunity overseas.   Our comments below are focused on tariffs. This is not our regularly scheduled programming; we will send out another letter in a few days with our typical market and portfolio commentary. We have much to say about the unhealthy market of 2024, artificial intelligence, our Japanese investments, and the speculative extremes we see in our short book. But today's pressing issue is the brewing trade war and we would be remiss if we did not weigh in.

Market commentary   We introduced our letter last June by saying:   Our 2024 returns thus far have been extremely disappointing. However, despite this underperformance – in fact, because of it – we are feeling increasingly encouraged about the prospect of strong relative returns in the future. We have doubled down on our strategy of differentiating ourselves from the S&P. We have increased the scale of our investments outside the US, and added to our short book inside the US.   We picked up over 600 basis points of relative performance the day after Trump's tariff plans were announced. Although we weren't positioned for the tariffs per se, we were positioned for a downturn in the overextended US equity market, whatever the cause. After a painful and interminable wait, the unwind is happening quicker than even we expected.   While Trump's announcement was an exogenous event, the extreme valuations leading up to the announcement left stocks perilously exposed to uncertainty.   When markets are priced for perfection and sentiment is euphoric, even a small amount of negative news flow can trigger substantial declines. And truly bad news can trigger historic crashes.   Liberation Day    The S&P fell over 10% in two days last week, one of only four times in the post-war period that has happened. The proximate cause of the market's epic collapse last week was Trump's "Liberation Day" announcement of massive tariffs on nearly every country in the world. If his goal was to liberate Americans from their retirement savings, he succeeded.   High, broad, and indiscriminate tariffs are an objectively terrible idea. We're not even sure what else needs to be said, but we'll say our piece regardless. Under Trump's currently proposed plan, the average effective tariff rate will increase from about 3% to somewhere in the mid-20s (estimates vary). This would be the highest rate since 1909. A tariff increase functions as a tax increase on consumers and businesses. Estimates suggest it will be one of the biggest tax increases ever as a percentage of GDP, certainly the largest since the 1980s and potentially since WW2. The average household will see several thousand dollars in immediate cost increases. Businesses will see profit margins squeezed. Some products in particular will see large input cost increases; apparel COGS will rise roughly 17%.   Trade barriers also create enormous deadweight losses. Comparative advantage dictates that, for maximum efficiency, countries should specialize in producing goods where they have a relative advantage. Tariffs will lower potential GDP by reversing the worldwide specialization process and suppressing global trade. We will turn to higher cost domestic sources for goods and away from lower cost foreign sources. Furthermore, some countries will inevitably retaliate with tariffs on US exports; China has retaliated already, Canadians are boycotting American goods, and the EU is threatening regulatory action on American big tech. Trade war escalation will decrease our exports, inflicting further damage on both American incomes and corporate profitability.   It has been disquieting and dystopian to watch erstwhile free-market Republicans defend Trump's protectionism. The last broad tariff hike in the US, the 1930 Smoot-Hawley Tariff Act, is widely considered to be a major cause of the Great Depression. (And the 2025 tariffs are more extreme than Smoot-Hawley.) Globalization over the post-war period has ushered in an unprecedented era of worldwide prosperity. Arguably no country has benefited more from increased trade than the US. Our large and perpetual trade deficit with the rest of the world is testament to that point. We import physical goods from abroad, and export intangible goods like capital and services (software, consulting, etc). Essentially, we get to consume more than we produce, and the rest of the world subsidizes it.   As advantageous as this situation is, there are good reasons to be concerned. American manufacturing has been hollowed out over the past few decades at the expense of local jobs and in some cases our national security. Many countries have unfair trade practices that restrict American firms' access to their markets.   However, there are other ways to address these issues that are less disruptive and costly and more targeted and efficacious. For example, production in particular desirable industries can be targeted and nurtured via tariffs or subsidies or some other method. Surely no one wants to reshore apparel manufacturing, which is laborious and low value-add. Producing textiles in the US would be prohibitively expensive – and Americans don't want those jobs anyway. Our most pressing manufacturing need is in semiconductors. Taiwan produces essentially all of the leading-edge chips in the world. This is a grave national security concern given China's stated goal of reincorporating the island nation. Yet bizarrely, the new tariffs (including 32% on Taiwan) do not apply to semiconductors, so there will be no reshoring benefit for this crucial industry. Equally bizarrely, Trump has bashed the bipartisan CHIPS Act, passed in 2022, which seeks to ameliorate the situation by subsidizing onshore chip production.   Deeply unserious   Not only are broad tariffs intellectually discredited, this particular plan is deeply unserious.   The Trump administration claimed they would go country by country and enumerate reciprocal tariffs in the interest of fairness. These reciprocal tariffs would consider both tariff and non-tariff trade barriers such as industry subsidies, currency manipulation and quotas. Trade deals are typically devilishly complex, as negotiators go line-by-line through individual products; the US's Harmonized Tariff Schedule enumerates 13,000 categories.   Instead, the Trump administration used the most simplistic possible formula and targeted friend and foe alike. For each country, they took the trade deficit as a percentage of imports, and divided by two. This simplistic formula leads to perverse outcomes, like in the case of Lesotho. Lesotho is a tiny, impoverished nation in Africa. Lesotho exports a few hundred million dollars of goods to the US (mostly diamonds and apparel), but imports less than $5m. Why don't they import from the US? Not because of pernicious trade barriers, but because they cannot afford expensive US goods. Average GDP per capita in Lesotho is less than the cost of an iPhone. However, because Trump's simplistic formula just relies on the size of imports relative to exports, Lesotho ended up with a 50% tariff rate, the highest in the world. This would be comical were it not so embarrassing to us and costly to poverty-stricken Lesotho.   The goal seems to be to eliminate trade deficits with every country. But there is no reason to have balanced trade with every country in the world. That's not how multilateral trade works. Every citizen runs a massive trade deficit with their grocery store, and we don't think the grocer is taking advantage of us.   There are other signs of haphazard and unprofessional policy. For example, Trump included a tariff on Heard Island. Heard Island is near Antarctica, one of the most remote places on earth, accessible only by a two-week boat voyage. Nevertheless, Trump deemed it worthwhile to slap a 10% tariff on the island's unfortunate inhabitants: penguins. (It hasn't even been visited by humans in a decade.)   This is no way to be conducting one of the most consequential reorderings of the global economic system in living memory. It also endangers the mission.    Justification   One of the purported benefits of the tariffs is to substantially increase American manufacturing. However, we believe it is unlikely that companies will be rushing to invest in new US factories due to this action. Investing is fundamentally in exercise in long-term planning. Building factories, training employees, and reordering supply chains to a new location takes years and enormous amounts of capital. If companies do not have confidence the world will be stable and predictable, they will not invest. Imagine owning a factory in Vietnam. One day Vietnam is not subject to any tariffs; the next day the country is hit with a punitive 46% rate; the next day it seems like some future negotiation might lower or even eliminate the tariff. How can you make long-term plans? Are you really going to go to the considerable trouble and expense to move your production to the US? Trump could change his mind tomorrow. Or Congress could repeal the tariffs. Or the next administration could (and likely will) revoke all these tariffs in 4 years, well before your plant pays itself back. In addition, the factors of onshore production (capital equipment, input materials) are all subject to tariffs themselves, which will drive up the cost of new facilities.   There is a world in which high tariffs result in significant capex in the US. If we had universal consensus that tariffs were necessary and desirable, if they were signed into law via an act of Congress rather than through executive action, and if they were carefully planned and slowly implemented, then there could be a substantial increase in investment. This is not that world. Instead, uncertainty is higher than it has been in our lifetimes. It is dubious at best to believe that this uncertainty will lead to substantial investment.   We've also heard other justifications for the tariffs other than reshoring.   Some believe that Trump is secretly a pro-business, free-trade maximalist, and these tariff announcements are actually an exercise in "madman theory," a game-theoretical approach where one credibly acts like a madman to gain concessions from one's opponents. According to this theory, Trump will use these tariff threats for leverage in negotiations to lower trade barriers. We desperately hope they are right, but that kind of strategic irrationality seems implausible: this action reeks of amateurism, not galaxy-brained 4D chess. Nevertheless, Trump may be forced by the political and economic fallout to belatedly adopt this tack.   We have also seen some Trump apologists seek to rationalize the tariffs by pointing out that Treasury yields dropped last week, so now our debt is cheaper to service, and this is a benefit of the tariffs. That's a non sequitur. Treasury yields fell because of a temporary flight to safety out of risk assets and into safer ones, not because of a beneficial change in interest rate fundamentals. Tariffs will create a stagflationary environment with rising prices and a recessionary economy. A smaller and less productive economy is not going to make it easier to pay off our debt.   Another purported benefit is the tax revenue tariffs will raise. We have long worried about profligate fiscal policy and the ever-increasing national debt, and so we aren't necessarily opposed to responsible tax increases. Tariffs, however, are a terrible way to increase tax revenue, due to the deadweight losses we discussed above. And Trump still has many tax cuts on his 2025 agenda, as he wants to extend the expiring 2017 Tax Cuts and Jobs Act as well as enact new cuts. In fact, the budget plan currently in front of Congress is attracting Republican opposition for being too profligate. So the idea that this action is part of a plan to reduce the deficit is implausible.   Furthermore, lower trade deficits means foreigners will run a lower current account surplus. That is, foreigners will sell us less goods and thus will receive less dollars in return. Many of the dollars received by foreigners are invested in US assets, including federal debt: about 25% of public debt is held by foreigners. Foreigners with less dollars to invest will increase upward pressure on Treasury rates. This pressure will increase to the extent the US decouples from the global economy and is seen as a less reliable actor and business partner.   Where to from here?   We believe it is unlikely that the tariffs as currently announced will persist. They are far too economically damaging to be politically tenable. We expect one of three things will happen. First, Trump may blink: he could roll back the bulk of the tariffs after negotiating some concessions from foreign governments and spin it as a win. Second, Congress could block implementation. Trump only has unilateral tariff powers at Congress's delegation. The Constitution grants Congress ultimate tariff authority, and Congress could revoke the president's powers at any time. Though Democrats are powerless to effect change and Republicans in Congress have been effectively neutered for the first few months of Trump's term, a gaffe of this magnitude could galvanize enough Republican opposition to derail Trump's agenda. Congressional Republicans fear Trump's wrath, but they also know that a deep, self-inflicted recession would doom them in the midterms. Third, the courts may block it. Trump’s claimed statutory authority is questionable. For expediency, Trump invoked a statute that has never been used for tariffs – in fact, “tariffs” is notably absent from the list of granted powers. The constitutionality of the statue itself could also come under scrutiny in light of the nondelegation doctrine.   Were Trump to capitulate or be forced to abandon his plan by Congress or the courts, the market would undoubtedly rally explosively. However, it bears repeating that our predictions for poor long-term equity returns are not predicated on a trade war that causes corporate revenue and profits to plunge. As we have detailed in the past, we believed that the US stock market was expensive – and is still expensive, despite giving up a year's worth of return in a few short days. Even if we assume there will be no profit recession, the S&P still trades at a trailing PE multiple around 25 today, a level consistent with a market top, not the beginning of a sustainable bull market. If tariffs are actually implemented and maintained, corporate revenue and profits would plunge. Thus any relief rally may prove short-lived.   Even if tariffs are rescinded shortly, one effect of all this drama will be more permanent than the tariffs themselves: heightened political and economic uncertainty. It's become clear that Trump conducts a kind of transactional policy-by-deal, where social media posts and impromptu calls to news media can swing the fortunes of individual companies and global markets. This capriciousness is not limited to tariff plans. He has also pressured law firms to adopt his administration's policies, shut down entire government agencies overnight, granted tariff exemptions for favored industries, and pushed the limits of unilateral executive authority, which can be reversed at the stroke of a pen and is thus inherently more volatile than acts of Congress.   This is a dramatic departure from previous practice. Previous administrations generally followed a more deliberative, principled and rules-based approach to policy and were more concerned with balancing the interests of constituencies with their own goals.   There are downsides to the process obsession of a more administrative state. There's no question that the US economy and government has become more sclerotic and less dynamic over time, and Trump's promise to break those constraints was a big part of his electoral appeal. Policy-by-deal does not necessarily lead to better or worse outcomes than a more deliberative policy approach, but there are real risks: namely, it is inherently less stable and predictable than the rule of law. Currently, quantitative measures of economic uncertainty are at record highs. As we discussed above, an environment of high uncertainty is not conducive to long-term investing.   We worry that businesses will be loath to make the big, bold, long-term capital expenditures necessary to grow while operating under such uncertainty. We also worry that this environment will cause equity multiples to contract. To buy a company trading at a PE multiple of 25 requires you to believe you have visibility on company earnings decades from now. You are only getting 4% of your capital back in earnings every year. If you don't have confidence in a stable operating environment – let alone a global trade collapse – then you would never make this investment. Higher uncertainty demands higher discount rates, and thus lower multiples. This all has concerning implications for the ability of capital allocators to invest for the long term and grow the economy.   Conclusion   Though we've been bearish on the US stock market for many years, it gives us no pleasure to predict doom and gloom for the American economy and stock market. The majority of our investments are in foreign markets today, but that is a measure of calculated investment value, not a measure of our allegiance. We are proud American citizens and want nothing more than for the US to prosper. We hope Trump will use this episode to negotiate lower trade barriers for American businesses around the world, and then shift his focus to implementing the pro-growth, deregulatory agenda that garnered him so much business support in the recent campaign. Unlike an atavistic protectionism that foments a global trade war, that could actually usher in an era of American greatness.   In the meantime, we will continue to invest in a long-term, value-conscious manner, and expect to benefit – especially in relative terms – from any continued turmoil.   Please watch your inbox for a more traditional letter with market and portfolio commentary shortly.

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1 FV performance is shown net of a 1% management fee and 10% performance fee. Available for Qualified Clients only as SEC rules do not permit performance fees for nonqualified investors. Fee structures and returns vary between clients. FV inception was 6/14/2016.

Advisory fees and other important disclosures are described in Part 2 of Bireme’s Form ADV. Reported performance is a dollar-weighted average of the securities in the Fundamental Value L/S Model Portfolio maintained at Interactive Brokers from inception through October 2023. From November 2023 onward, reported performance is a dollar-weighted average of the performance of all client accounts invested solely in the Fundamental Value L/S strategy with no client-directed customizations to the portfolio composition. Performance is shown net of a 1% management fee and 10% performance fee. Available for Qualified Clients only as SEC rules do not permit performance fees for nonqualified investors. Past performance is not indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. The SPY ETF seeks to track the performance of the S&P 500 Index, and the performance described includes both fees and the reinvestment of dividends and other distributions. Registration does not constitute an endorsement of the firm, nor does it indicate that the advisor has attained a particular level of skill. See biremecapital.com/disclaimer for important disclosures. Sources: Bloomberg Finance LP, Interactive Brokers LLC, S&P Compustat, Bireme Capital LLC.