Long read: Marko Papic: “Trump Has Popped the Bubble of American Exceptionalism”

This interview was published ahead of the Liberation Day. So, please be mindful this may not be factor in updated thoughts on the same. But nonetheless, Marko Papic, chief strategist at the well-regarded BCA Research, is someone we should listen to. And as he explains in this interview with the Market the end of American exceptionalism was overdue and Trump with his tariff wars has only catalysed it:

First, he reminds us that the only thing predictable about Trump is that he is unpredictable:

“Let’s set two important ground rules about Donald Trump first. Number one, I think it’s dangerous for investors to assume that he has a stable set of preferences. I say this because a president who listens to both Peter Navarro and Scott Bessent on trade issues is not necessarily going to have coherent, stable preferences. He feels his way through material constraints and settles on the political path of least resistance. This is going to lead to volatility because you have to price in the probability that he actually does want to take America back to the McKinley presidency of the late 19th century where the government financed all of its outlays through tariffs.

And second ground rule?

It’s that you must not extrapolate the first 60 days of his presidency into the future. If we observe the situation with Ukraine, Canada or Mexico, Trump goes up and down, he ratchets the pressure up and then he decreases it. Back and forth.”

How Trump wants tariffs to fund his tax cut plans and why it is unlikely to work?

“Trump primarily wants to deliver large tax cuts, and his plan is to pay for them through tariffs. But there are two material constraints that he cannot work against. One is the bond market which is not going to allow him to get as many tax cuts as he wants. Why? Because the bond market rightly recognizes that tariffs are not a sustainable source of revenue. Revenue from tariffs will decline over the course of time as global trade patterns change. So the bond market is going to keep rioting every time Trump proposes large tax cuts.

The other constraint is geopolitics and the fact that the Trump administration is operating in a multipolar world. While you can bully some countries, bullying all countries will lead to negative consequences for America, both geopolitically and economically. Countries are going to make public procurement decisions that are not in favor of America, whether that’s deciding on where to buy equipment for defense, whether to buy planes from Airbus or Boeing, or whether it’s American AI infrastructure versus Chinese AI infrastructure. President Trump’s plan to force the world to pay for his tax cuts won’t work. It will be whittled down. And in the process of being whittled down, it’s going to become a non-event for financial markets.”

Why we should care about what the bond market is telling us?

“…worry right now should be that 10-year Treasury yields are not really coming down, even though the economy is experiencing a growth scare. Two years ago, after the Silicon Valley Bank scare, many bears thought a recession was coming – and 10-year yields dropped below 3.5%. The same thing happened in late summer of last year, when markets went through another growth scare. But this time, 10-year yields didn’t drop below 4.2% and are creeping up again. This tells me that the bond market is putting constraints on Trump’s policies.”

The best guide to get a sense of Trump’s plans people are relying on, is this research paper by Dr Stephen Miran, the Chairman of Council of Economic Advisors to the White House. Like several other economists (see Dr Rajan’s critique here), Papic has misgivings about the paper:

“I’m doubtful of some of Miran’s conclusions. For example, he claims that the reserve currency status of the dollar is a burden, as it causes the dollar to appreciate, thereby killing America’s competitiveness. This is objectively incorrect. From 2001 to 2008, for example, the dollar was in a bear market. I’m not sure how Stephen Miran would explain this. And again, in a multipolar world, I don’t quite see how Washington should be able to strong-arm other countries into paying for American tax cuts because they somehow owe America for their liberty. Nobody owes America for anything. Strikingly, in the first forty pages of his report, Miran keeps talking about how tariffs are a way to solve all of America’s problems. And in the last ten pages, Miran admits that applying large, across-the-board tariffs would lead to much dislocation and that a currency depreciation may be the far easier path. This, I believe, is what the Trump administration will actually be able to achieve.”

He reckons the dollar will give way not because of what the Trump administration did but because it was over valued in the first place bid up by the excessive fiscal spending in the past eight years. That, he reckons will prick the bubble of American exceptionalism if it hasn’t already:

“The realization that the bubble everyone has been looking for was in America. American exceptionalism is the bubble. I’ve had sophisticated CIOs, managing hundreds of billions, ask me repeatedly over the past years why they should ever own anything other than American assets. Many investors have mistaken fiscal profligacy for innovation and productivity. America’s fiscal profligacy has come to an end, which means that American exceptionalism has come to an end.”

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