When I was in graduate school, I wrote my master’s thesis on the New World Economic Order that has been in place since 1945. I spoke of the Bretton Woods Monetary System that esteemed British economist John Maynard Keynes designed and put into action. This has been the anchor of the global economic system since then.

In 1945, the US dollar became the world reserve currency. Other countries would exchange their currency into US dollars, and in some cases those dollars could be converted into gold. In other words, gold became the backstop for global currencies. When France wanted to convert French Francs into gold, President Nixon got scared and stopped any gold shipments out of Fort Knox and any conversion from US dollars to gold came to a halt. Currencies became free floating against one another, something that had not occurred since the late 1800’s and the global trading regime became chaotic. For ten or more years we had high inflation, recessions, product shortages, and long gas lines. The global economy was in stagflation. It was a terrible period. The stock market peaked in 1969 and did not get back to that level until 1984. Price to earnings (PE) ratios had shrunk to an average of 8. A portfolio savior during this period of time was owning mining stocks, gold, and commodities. Gold was priced at $32 per ounce in 1970, which was at the same level it was in 1932 when Roosevelt made it illegal for Americans to own physical gold.

After the fall of the Soviet Union, President Bill Clinton expanded global trade and a new renaissance was created as countries increased their trade with one on another, a new golden age had begun.

The United States was and is the biggest beneficiary because the US had the largest share of global GDP (Gross Domestic Product). Europe and Japan were essentially stagnant. The result was that the US stock market took off in the 1990’s. Price to earnings multiples increased, corporate profits grew, and interest rates kept on declining.

Comparative Advantage is an economic principle that explains how individuals, companies, or countries can benefit from specializing in producing goods and services that other companies, individuals and countries cannot. China can produce manufactured goods cheaper and, in some cases, better than we can, while the US is the global leader in technology, software and innovation. Even if one party is better in producing everything (absolute advantage) both can benefit from trade by specialization based on comparative advantage.

Now the Trump Administration appears to want to turn back the clock and have the US become a mercantilist country. This refers to a nation that follows the economic principle of mercantilism which was popular from the 16^th to 18^th centuries. Mercantile countries seek to increase national wealth by maximizing exports and accumulating home currencies, namely gold and silver. In other words, export everything and import little.

For the US to become a manufacturing economy again, wages would have to decline. The wage differential between US wages and other countries makes this almost impossible. For example, General Motors’ wage differential between themselves and Toyota is almost $45 dollars per hour. Moreover, where would all those workers come from? Americans shun those type of jobs and now that immigration has come to a halt, the source of line workers has dried up.

In the short run I am still convinced that that markets could be volatile the first 6 months of 2025, but up in the second half. Further out, deglobalization could produce higher interest rates, less product choice, and shortages. A 10% across the board reciprocal tariff may be manageable, but anything higher than that could hit corporate profits. When corporate profits decline, PE multiples shrink, and the stock market goes down.

As the Boy Scout motto says’, “Be Prepared.”

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