It has been about eight years since we had a president that changed his mind more frequently than he changes his shirt, but here we are.  Another week filled with nonsensical flailing and on and off again policy announcements. It is almost like a Katy Perry song on repeat. Tariffs that were supposed to have been imposed on Canada and Mexico at the start of this month, then pushed out, were put back on the table for March 4th (not sure what his attraction to Tuesdays is all about).  

As we head into the weekend, investors are naturally going to be concerned that Trump actually presses ahead with his threats, but Ally and I maintain that staying invested for now and reacting when there are facts on the table is the best strategy. That said, there have been other policy prescriptions coming from the Florida White House in recent weeks and one has to do with something larger than a tariff war.  I’m referring to what is being called the Mar-a-Lago Accord. 

Some of you might remember the Plaza Accord of 1985.  This was an agreement among the five largest economies to engineer a depreciation in the value of the U.S. dollar, following close to a 50% increase in the greenback since 1980 against the Japanese yen, the German mark, the French franc and the British pound. We had just come out of the high-inflation 70s and the aggressive tightening agenda by then Fed Chair Paul Volker. The rise in U.S. interest rates and yields versus other countries led to a massive inflow of capital into the U.S., resulting in an overvalued dollar and consequential deterioration in the U.S. current account. Industry groups complained that the high dollar was costing them in terms of competitiveness, and they lobbied the Regan government to jettison its “strong dollar” policy.

The agreement signed at the NY Plaza Hotel in September of 1985 (no, Trump did not acquire it until three years later) resulted in a depreciation of the dollar against these major currencies, and the U.S. did experience an improvement in net trade with Europe, though not with Japan. Two years later, the dollar’s decline reached a point where the nations had to return to the table to stem the depreciation in what became the Louvre Accord. As a student of global macroeconomics at the time, this was fascinating, though the design of each accord was pretty rudimentary, acting through coordinated intervention in the foreign exchange market (the efficacy of intervention would dwindle from this point forward).

Well, the finance ministers of America’s major trading partners did not get together at Mar-a-Lago, so there is no accord, and this proposal is as far-removed from the relative simplicity of the Plaza and Louvre Accords as one can get. Essentially, this is a three-pronged attempt to upend the global financial order. First, get America’s trading partners (even that term rings hollow these days) to go along with exchanging their U.S. government holdings for freshly minted 100-year zero coupon bonds. Second, introduce tariffs that will raise federal revenues. Third, monetize every federal asset in the country (gold, infrastructure, parks, etc.), to create a U.S. sovereign wealth fund and generate revenue.

We could go in so many directions with this proposed new world order and let me emphasize that this is simply proposed. If the man cannot stick to a weekly timeframe on a mechanical endeavour like levying tariffs, how on earth do you change the global financial machine in four years, let alone two years (mid-terms in 2026)? Furthermore, if all of this is aimed at restoring U.S. manufacturing’s importance to the U.S. economy, consider that it represents less than 11% of the overall economy, as shown in the chart above. To move this needle even a couple of percentage points will take more than a few years.

Okay, let us humour the Mirage-a-Lago Accord for a moment and focus in on the debt issue. After all, tariffs are a nonstarter in my opinion. Yes, I know many of you are worried, and justifiably so, that we are entering a tariff war, but the recoil effect on the U.S. is as real as a bad spray tan and therefore unlikely to (A) generate a net benefit for the U.S., and (B) last more than a year. Moreover, the monetization of gold or physical infrastructure is not as simple as it sounds. Are we talking of selling gold or borrowing against the value of national property to create a sovereign wealth fund. Those countries in the world that have such a fund (like Norway and middle eastern countries) feed their coffers with revenues from commodities. The U.S. is now a net exporter of petroleum products, but this is recent and not much has been put aside in the sovereign piggy bank.

What of the debt swap idea. As these so-called “century bonds” that Washington is going to give us in exchange for our existing treasury bonds, will not trade in public markets, how do we deal with mark to market? In other words, if I am running a central bank or any other investment fund, I need to know the value of my investment positions on a day to day basis. Now, a zero-coupon bond is one where you receive no interest each year you own it, but the price at issue is at a discount to what we call par. A good example of this is a treasury bill.  If say the issue price is $96 and it matures at $100, our implied rate of return is 4.2%. We agree to wait until maturity to get paid because we have full faith in the government’s ability to hand us $100.

A 100-year note is a completely different animal, mainly because none of us can with full confidence expect an entity to pay us back what we put into it. What if interest rates rise over the course of time? The intrinsic value of that note will decline. What if the country’s central bank needs to adjust its own geographical asset allocation (a given if the U.S. truly follows an isolationist path and distorts trade balances)? What if the company or country defaults?

One day back in 2006, I gave my last speech as a capital markets strategist in Dublin. I remember the taxi driver telling me that with home prices rising to unprecedented levels, they now had 100-year mortgages.  You not only bequeathed your house to your children but the mortgage as well. Well, not too long ago, some countries not only experimented with zero percent interest rates, but negative ones as well (Europe and Japan). There have been a number of countries and companies that have issued such bonds in the last decade as well, and can you blame them? With rates at generational lows, why not lock in an extremely long path of lower borrowing costs?  Back in 1993, both Coca-Cola and Disney issued 100-year bonds with coupons of around 7.5%. Mexico came next in 2010, followed by Belgium and Ireland, Argentina, Austria and then Israel, Peru and Austria in 2020.

The chart above shows one such borrower – the Republic of Austria, which issued a 0.85% June 2120 bond just under five years ago. Note, this is not a zero-coupon bond, meaning that it was sold to investors at a par value of 100. Well, given the rise in interest rates, this bond kind of lost favour and sunk to as low as 33% of its par back in 2023. Now, if one can just hang on a bit (aka, 95 years), this bond will mature in 2120 at 100, assuming Austria is still around to make good on its debt. In the meantime, it has been a wild ride for those that invested in this bond.

A number of years ago, S&P put out a report that looked at the credit quality of countries in the future. It estimated that by around 2040, the only two investment grade sovereign nations would be Canada and Denmark. The rest were dealing with such large fiscal imbalances because of demographics that they would not warrant a BBB+ rating. That report was produced a while ago, so things have definitely changed, however, the essence hasn’t. The U.S. was then on an unsustainable debt path and remains so today, which might explain the Hail Mary Pass that the Trump administration is contemplating today.

The advocates of this plan indicate it is not a long shot because there is a fourth element and that is the usual angle of the deal. Accept these terms in exchange for continued military support by the U.S.. Do not accept these terms and you might not have that support when you need it. Aside from the protection racket analogy, there is a more relevant comparison and that is back in the 1970s, when then President Nixon pressured a number of OPEC nations to invoice their oil exports in U.S. dollars in exchange for military support. In hindsight, this policy led to the overvaluation of the dollar into the 1980s.

If this so-called accord sees the light of day, it truly is a desperation move, but that is where investors need to be careful. Consumers and businesses are already signalling anxiety over the change-the-shirt policy volatility in the oval office and that is in the U.S. Markets have pulled back in line with this uncertainty and if we go down this ferret hole, then the theory of the Mar-a-Lago accord will quickly give way to the reality of higher inflation, lower demand and output, potentially higher yields and borrowing costs and valuation downgrades on risk assets.

The one thing I will say is that markets are, on average, good at forward pricing. In other words, they can look at the set of future policy outcomes and adjust. Sometimes that adjustment is not pleasant, which means we have to be prepared tactically. There is also a political self-correcting mechanism at play, or what I call the “please vote for me in the next election” dynamic. To the extent that markets, businesses and consumers vote with their feet in response to something as out there as this idea hatched in a Florida resort, the intended outcome might just turn out to be a mirage.

On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.   

Andrew Pyle