The End of the American Empire
Dear subscriber,
The mood in the White House Rose Garden was jovial on "Liberation Day."
Up at the podium, President Donald Trump tossed "Make America Great Again" hats to some autoworkers, and he joked about the windy weather.
When he hoisted up a chart listing foreign nations and their respective tariffs, he said that he'd had bigger charts to bring... but the wind would have blown them away. The audience laughed.
The immediate reaction from markets, however, was a bloodbath...
On Wednesday, the president announced what he calls "reciprocal" tariffs on our trading partners. Put simply, there's a 10% "baseline" tariff on all imports. Then, added on to that are the reciprocal tariffs based on what other countries charge the U.S.
As Trump explained it, "They charge us, we charge them. We charge them less, so how can anyone be upset?"
Economists don't quite understand where these numbers come from... but, to name a few, the result is a 34% tariff on China, a 20% tariff on the European Union, and a 24% tariff on Japan.
The tariffs will hit fast, with the baseline 10% kicking in on April 5 and the reciprocal tariffs to start on April 9.
Mainstream economists have told Trump that tariffs are a bad idea. So did U.S. business leaders.
The market had been telling Trump the same – and now it's screaming at him.
Trump's announcement came after the market close on Wednesday. The overnight futures market immediately tanked around 3%. And as of midday on Friday, stocks are now down about 9%.
Trump and his small cadre of advisers that favor tariffs have their arguments...
They promise huge tariff revenues, a reduction in the deficit, a resurgence in American manufacturing, fresh jobs, and wage increases.
Along with that, they shrug off the market's short-term pain for long-term benefits.
But look, markets aren't stupid. Investors look ahead, and they judge the future with their buying and selling. Right now, they're telling us that Trump's grand plan simply will not work.
Importantly, evidence is piling up that America's financial empire is in decline and that the age of American exceptionalism may be over.
Let me be clear what I'm talking about...
America is still a great country. It still has the largest, most dynamic economy in the world, full of great people and great businesses.
But over the past two decades, America has enjoyed a very specific financial advantage.
Because of its powerhouse economy and dependable markets, the U.S. has been a magnet for global capital inflows.
This has particularly been the case since the global financial crisis. In general, the crisis made investors more risk averse. Many nations undertook austerity measures to balance their budgets, but that led to slow recoveries for their economies.
The U.S., on the other hand, increased its fiscal deficits... and its economy grew quicker than the rest.
That attracted the capital which has helped power our markets higher, keep our interest rates lower, and push the value of the dollar up.
In the chart below, you can see the net international investment position of the U.S. This is a sort of balance sheet that compares the foreign assets that U.S. residents own with the U.S. assets that foreign investors own.
From 2006 through today, foreign investments in U.S. assets have outpaced our investments in foreign assets by about $26 trillion...
That's a good thing for the U.S. market, as that foreign investment has driven up U.S. asset prices.
Indeed, American businesses have earned a premium valuation. Today, the cyclically adjusted price-to-earnings ("CAPE") ratio – a measure of long-term valuations – shows U.S. stocks are more expensive than any other region or category...
Moreover, to invest in U.S. assets, foreigners need to sell their own currency and buy the U.S. dollar. That has led to a huge bull run in the dollar...
This creates a virtuous loop as well. Foreign investors who own dollar-denominated assets like to see the dollar rise. It boosts their returns in their own currency.
But this is all turning around...
The U.S. dollar has started to roll over. In short, Trump wants to weaken the dollar going forward. (A weaker dollar helps domestic manufacturing, and it's the backbone of the fabled "Mar-a-Lago Accord.")
We haven't seen a full trend reversal just yet. But if a bearish outlook on the dollar is adopted by global markets, it can become a self-fulfilling prophecy.
Already, global stocks have started to outperform their U.S. counterparts, as you can see in the chart below, which shows the ratio of U.S. stocks to all foreign stocks.
When the ratio rises, it means U.S. stocks are outperforming the rest of the world. When it falls, it means foreign stocks are outperforming. You can see that for nearly two decades, U.S. stocks have put in an amazing run. But that has radically reversed since the start of the year...
There are also signs that the U.S. brand has been tarnished...
For instance, Europe has decided to massively ramp up defense spending because it doesn't trust the U.S. any longer. As Friedrich Merz, the frontrunner for Germany's next chancellor, said earlier this year, "This is no longer the America we used to know."
Historically, U.S. defense companies have dominated the global defense industry. But their stocks – as measured by the iShares U.S. Aerospace & Defense Fund (ITA) – have struggled. Meanwhile, European defense stocks – as measured by the Select STOXX Europe Aerospace & Defense Fund (EUAD) – have gone parabolic...
Now look at the Roundhill Magnificent Seven Fund (MAGS) compared with the KraneShares CSI China Internet Fund (KWEB). Our mega-cap tech stocks – the paragons of American innovation – have all slumped, while Chinese tech stocks have powered ahead...
The big question for investors is whether this is a short-term adjustment to tariffs... or if it's a bigger, more long-term shift in the global order.
What if the U.S. is no longer home to the best innovations and free trade? Or what if it's no longer seen as a friendly trading partner or a safe place for capital?
If the foreign outflows continue, it will put pressure on U.S. stocks and potentially keep interest rates higher.
Unfortunately, thanks to what's called "home-country bias," a lot of U.S. investors are overweight U.S. stocks.
That's because investors in general tend to allocate too much of their portfolio to domestic stocks.
According to 2022 data from Vanguard, the average U.S. investor has about 80% of their portfolio in domestic stocks. Yet, the U.S.'s weight in a global index of stocks is only about 66%.
While that imbalance has been very rewarding for U.S. investors over the past 20 years, it has also led U.S. investors to dramatically overlook international stocks.
Now, the world order is changing... And that'll likely be a big problem.
We're not going to have the same relationship we've had with foreign countries from now through the end of the Trump administration. It's hard to even picture what direction our country will take come 2028.
But the international community already feels very differently about the U.S. than it did just a few years (if not months) ago.
In short, it's time to revisit your opinion of the American financial empire, as well as the global composition of your portfolio.
What Our Experts Are Reading and Sharing...
On Wednesday, our colleague Corey McLaughlin covered Liberation Day and Trump's tariffs in the Stansberry Digest. The markets had been rallying into the day, as investors expected Trump to soften his tone (though that didn't happen). Ten of the 11 S&P 500 sectors finished higher. Yesterday, Corey continued his coverage, following up on how the market has handled the tariff news.
Research firm Evercore ran the numbers on what the total effective tariff rate will be on imports. It settled on 24% – the highest in more than a century. The chart of the effective tariff rate is striking. And the Economist titles it, "Sheer folly."
We've started broadcasting a This Week on Wall Street video series on YouTube. It comes out on Sunday mornings, and it'll cover the same topics I do in these pages... but with additional information and guests. Be sure to subscribe so you're in the loop when new episodes come out.
New Research in The Stansberry Investor Suite...
We don't know the market's next move. It could take some time to digest this tariff news.
But we do know that America is still one of the most innovative countries in the world – filled with many high-quality, capital-efficient companies.
And Whitney Tilson and the Stansberry's Investment Advisory team aren't resting on their laurels today – especially when many stocks are now trading at more attractive valuations...
This month, they've found a profitable, dependable company that's set to benefit from the AI boom, rather than be threatened by it like most investors think.
This company has a long history of big, bold innovation in the software industry. It has created technologies that have revolutionized our very culture (some you likely know well, if not use each day).
In 2011, it boldly revamped its entire business model into "Software as a Service" – a move many folks on Wall Street were skeptical about at the time.
As Whitney and the team explain, it was a complete stroke of genius.
Now, this company is moving fast on AI. It's embedding generative AI into all its apps through a country-wide initiative.
I can't give too much away. Again, this company is pretty much a household name. But I will say that the company helps businesses create and edit their content... and the more content that's out there, whether it's AI generated or not, the greater the demand for this company's products.
As is typical for any Stansberry's Investment Advisory recommendation, this company gushes free cash flow. Plus, it ranks as No. 46 out of the more than 4,500 stocks covered by the Stansberry Score.
What's best is that most investors consider AI a threat to this company today... rather than an opportunity. Shares now trade at their lowest level in more than a decade, giving subscribers a phenomenal "buy the dip" opportunity.
Stansberry Investor Suite subscribers can read the entire report here.
If you don't already subscribe to The Stansberry Investor Suite – and want to learn more about our special package of research – click here.
Until next week,
Matt Weinschenk
Director of Research
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