What can go wrong?

So, what can go wrong?

Investing is all about containing risk. It’s what my suspender-snapping, Porsche-driving, trophy-wife-proud portfolio manager colleagues (you know who I mean) are consumed with. And to know risk, you need to understand threats.

A few of them are starting to take centre stage, mid-way through this strange and unpredictable year.

First we have to ask: are stocks too expensive? Has the equity market priced itself for perfection in a world that seems to be rending asunder?

It’s confusing. Six months ago, before Trump, and in advance of the S&P zipping to new record highs, Goldman Sachs economists warned that equities were at a 20-year peak – likely unsustainable. Well, if you believed that and sold, you missed making 7.3% since then with a boring S&P 500 exchange-traded fund. The tech-heavy Nasdaq has doubled that. Even Bay Street is ahead almost 10%.

But wait. Remember Liberation Day and what followed?

When Trump tried to tariff the world, stocks plunged. The S&P went right down to bear territory (off 18.9%), and it looked like a global recession was upon us. The bond market also had a cow with rising yields and crashing valuations.

So the guy backed off, called a pause and earned the nickname TACO (Trump Always Chickens Out). Markets recovered and traders told each other the president was posturing, bluffing, deal-making, intimidating, bullying and would never follow through on anything as lame and weird as inflationary, growth-killing massive import taxes.

So here we are. Record highs again. However this time the tariffs are real. The effective rate on American imports is above 17%, the highest since the Depression, when similar levies destroyed the economy and Hoovered investors with a stock market collapse.

Meanwhile, many investors seem to shrug off risk entirely. Chip maker Nvidia just became the first company ever to be valued at more than $4 trillion (a trillion is a thousand billion, which is a thousand million). Yikes.

Research company Bespoke has found investors are (as with the dot-com frauds of the millennium) rushing into companies without profits. “This is, to put it mildly, an unsustainable dynamic. Valuations can only do so much to support markets before the trend reverses. Of course, there are other sources of market return other than multiple expansion of no-earnings companies, but this dynamic is still emblematic of a market that is starting to get carried away with itself.” (Quoted by New York Times columnist Jeff Sommer.)

Meanwhile some people fear the opposite: a melt-up. They say Trump is under-estimated, corporate profits will increase as taxes fall and regulations are watered down – and equity values could spiral dangerously out of control, setting the stage for a larger declines especially if interest rates start falling while tariffs keep rising.

So, yes, here’s the other threat: that Trump trashes Jay Powell, and seizes control of monetary policy (the way he did with the Supreme Court).

As we’ve reported, the president has called the Fed chair lots of disparaging names, including knucklehead and numbskull. He’s drafted and waved around a letter firing the guy – even though his ability to do so is in question. And Trump is campaigning hard for interest rates at the Fed to be slashed a full 3%, taking them down to near-pandemic levels.

Powell’s term is up in May. So – at the latest – a MAGA lackey will be in that globally-important position by Spring. Should we worry?

“Attacks against the independence of the Federal Reserve have reached alarming proportions,” says Scotiabank chief economist Derek Holt. “I’ll take an error-prone Federal Reserve during highly uncertain times over a politically dominated one that bends to the behest of the administration any day.”

In a note to bank clients, Holt relates the experience of places where politicians have turned central banks into vassals of their own policy – Turkey, Argentina, Venezuela, even New Zealand – and things did not end well. A Fed rate of 1%, he says, would put it at an emergency level – which may well lead to one.

So what is Trump doing this?

“Peak pressure is being applied on Powell now because of the concern that tariffs will pass through inflation in more material fashion over coming months and quarters and make it increasingly difficult to ease monetary policy. Relatively tight monetary policy along high tariffs and other Trump administration policies could present serious challenges to the fragile majorities held by the GOP in both chambers of Congress on November 7th 2026 [the midterm elections].”

Does the above mean you should bury your net worth in freezer bags under the tulips?

Nah. Not if you stay diversified (ETFs, not individual stocks), global (a third US, a third maple, the rest international) and balanced (60% growth assets, 40% safe, boring stuff).

It now looks like Trump will become more aggressive, not less. He hates being TACO. Even our prime minister says a free trade deal with the guy is impossible – and if Canada can’t get one, nobody can. As for the Fed, its days as a truly independent agency are numbered so long as 47 is in charge. Meanwhile the US is launching into new ground of tax cuts for the wealthy and health coverage cuts for the poor, plus costlier imports and a rising cost of living.

Yes. There is risk in investing.

There’s more risk in not investing. You’ll probably last a lot longer than Trump.

About the picture: “A fox on our back porch,” writes Harry. “After living in our house for 25 years we finally got a new visitor.  Squirrels and rabbits nowhere to be found. Keep up the good work, Garth. Your blog is priceless.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2025/07/20/what-can-go-wrong-5/