WE Think: Trump's "Liberation Day": Global Capital Markets Enter Crisis Mode A Return to the "Hoover Era" or Just a False Alarm?

In March, China's stock market primarily experienced fluctuations with upward attempts followed by consolidation. The Wind All-China Index and the Hang Seng Tech Index recorded monthly gains of -0.4% and 0.78%, respectively, while their year-to-date returns stood at 1.9% and 20.74%. The "tech bull" trend and the relative strength of Hong Kong stocks remain quite pronounced.

Hong Kong equities—particularly tech and innovative pharmaceutical stocks—have demonstrated clear outperformance compared to major global markets this year. This stands in sharp contrast to the S&P 500 and Nasdaq, which have declined by -8.25% and -14.29%, respectively, year-to-date, highlighting the stronger performance of Chinese assets.

Recently, global investors have been awaiting the announcement of U.S. tariff policies, expected on April 2.

On April 2, the day Trump had previously referred to as "American Liberation Day," the former president signed two so-called "reciprocal tariff" executive orders after U.S. markets closed. The measures impose a universal 10% "baseline tariff" on all U.S. trading partners, with additional customized "reciprocal tariffs" targeting nations running larger trade deficits with America.

The new tariffs include:

· 20% on the European Union

· An additional 34% on China (on top of existing duties)

· 24% on Japan

· 25% on South Korea

· 26% on India

· 36% on Thailand

· 46% on Vietnam

· 49% on Cambodia

While market participants had anticipated some form of tariff escalation, the final scale and scope of the measures were perceived by most investors as more aggressive than expected.

On the afternoon of April 4th Beijing time, China implemented countermeasures against U.S. tariff increases by announcing a 34% import tariff on all goods originating from the United States, with no exemptions. The European Union also introduced a series of retaliatory tariff measures against the United States on April 5th.

Global capital markets and commodity prices reacted with immediate panic, triggering consecutive steep declines across worldwide stock markets. On April 3rd and 4th alone, the Nasdaq Composite plummeted 5.97% and 5.82% respectively, with European and Asian equities experiencing similarly severe drops.

Crude oil prices tumbled over 7% for two straight days, while broad-based commodities saw sharp sell-offs. Since the so-called "Liberation Day," market sentiment has abruptly turned fearful, with investors rushing to dump assets across the board - a scene eerily reminiscent of the 2008 financial tsunami.

The sudden escalation of tariff conflicts and the subsequent global market plunge after April 2nd have made the evolving trade environment and its economic/equity market implications an unavoidable critical issue for fund managers like ourselves. In this edition of WE Think we will examine potential development paths for the ongoing trade disputes and discuss corresponding strategies for each scenario.

Trump has initiated a shock therapy approach for the U.S. economy - but will this policy persist or or change?

Path One for Trade Frictions: A "Hoover-Era" Scenario

When President Trump announced the new tariff policy on the afternoon of the 2nd, U.S. stock futures immediately plummeted. Over the following two days (3rd and 4th), the three major U.S. stock indices suffered consecutive steep declines: the Dow Jones fell 8.75%, the Nasdaq Index dropped 10.67%, and the S&P 500 slid 9.92%, wiping out 6.6 trillion in market value. The "Magnificent Seven" (including Apple and Microsoft) alone lost 1.6 trillion in market value. 

Beyond the fact that U.S. stocks were already at elevated levels after a prolonged bull market, a key driver of this sell-off was investors’ sober realization of a potential vicious cycle:
Unilateral U.S. tariff hikes 

→ Retaliatory tariffs from trading partners → Sharp decline in global trade volumes → Reduced corporate revenues and profits → Rising unemployment → Severe economic recession.

In this scenario, selling U.S. stocks early might indeed be the rational choice.

Historical Parallels and Economic Misconceptions
Just as many Europeans had no living memory of war before the Russia-Ukraine conflict, some Americans—represented by Trump—view the U.S. trade deficit as unacceptable. To address this and reshore American manufacturing, tariffs are presented as a seemingly perfect solution: reducing fiscal and trade deficits while reviving domestic industry.

Yet anyone with basic economic literacy understands that every policy has trade-offs. Did policymakers consider:

· The potential retaliation from trading partners;

· And if met with reciprocal tariffs, would the U.S. still benefit?

The Trump administration’s intent to reduce trade deficits and reshore manufacturing may seem reasonable at first glance, but identifying problems is far easier than solving them—especially when solutions disrupt an 80-year-old global order. Since 1945, U.S.-led globalization has shaped today’s division of labor and lifestyles. Americans have grown accustomed to financing comfortable—even lavish—living through dollar hegemony and debt issuance. Now, abruptly imposing high tariffs, demanding lower living standards, and reviving low-margin manufacturing ("thinner-than-razor-blade profits") ignores a fundamental truth: "Luxury is easier to embrace than austerity." Can eight decades of entrenched habits and supply chains truly transform in mere months?

The Dollar’s Inescapable Dilemma
As the world’s primary reserve currency, the dollar inherently commands demand beyond trade—creating a structural "reserve premium" that perpetuates U.S. trade deficits. This privilege, however, is a double-edged sword. When stock crashes, rising unemployment, and declining living standards hit home, voter sentiment may shift abruptly. Time is not on Trump’s side to reprogram American expectations.

A Costly Lesson in Policy Uncertainty
The sudden tariff hikes on Southeast Asia have delivered a stark warning to multinationals: trade policy volatility is now a critical investment risk. While Trump touts short-term advantages for U.S.-made goods, no one can guarantee his successors won’t reverse course with new trade deals. For businesses, this uncertainty may outweigh any temporary tariff protections.

Regarding the Trade War During the Hoover Era, I Asked Yuanbao（Similar to other AI Assistants） a Question: After Hoover Launched the Trade War, How Did the U.S. and Global Economy Fare?
The Answer is as Follows (Calculation Process Omitted):

During President Herbert Hoover's term (1929–1933), both the U.S. and the global economy plunged into severe crisis due to multiple factors. Among them, the Smoot-Hawley Tariff Act of 1930 was a key policy that worsened the Great Depression. Below are its major impacts on the U.S. and the global economy:

I. Impact on the U.S. Domestic Economy

1. Sharp Decline in Trade Volume

o The Smoot-Hawley Tariff Act raised average U.S. tariffs from 40% to nearly 60%, causing import prices to soar. Other countries quickly retaliated with their own tariffs, leading to a sharp drop in U.S. exports.

o Result: Between 1929 and 1933, total U.S. imports and exports plummeted by about 70%, with agriculture and manufacturing hit hardest. For example, falling farm export prices triggered widespread rural bankruptcies.

2. Business Failures & Rising Unemployment

o High tariffs weakened export capabilities. Industrial output fell by ~47% (1929–1933), while unemployment surged from 8.7% to over 25%.

o Consumers faced shortages and inflated prices of imported goods, further depressing economic activity.

3. Deepening Agricultural Crisis

o Farmers had hoped tariffs would protect crop prices, but collapsing global demand and retaliatory tariffs slashed agricultural exports, driving prices down and pushing rural areas into extreme poverty.

II. Global Economic Impact

1. Collapse of International Trade

o As the world’s largest economy, the U.S. tariff hike triggered a chain reaction. European nations (e.g., France, Germany, Italy) raised tariffs, escalating global trade barriers.

o Data: Global trade volume plunged from ~36 billion (1929) to 12 billion (1933) in just 4 years—a 66% drop.

2. Heightened International Tensions

o Trade wars fueled distrust among nations, stalling cooperation. For instance, Germany’s economic distress and reparations pressure paved the way for extremist politics, sowing seeds for WWII.

3. Prolonged the Great Depression

o Tariffs failed to shield the U.S. economy and delayed recovery. Only after Roosevelt’s Reciprocal Trade Agreements Act (1933) began lowering tariffs did trade slowly rebound.

III. Historical Lessons

1. The Backfire of Protectionism

o The Smoot-Hawley Act proved that unilateral protectionism invites global retaliation, harming all parties. This lesson later shaped the General Agreement on Tariffs and Trade (GATT) and WTO.

2. The Need for Policy Coordination

o The Depression showed that crises demand international cooperation, not isolation. Post-WWII economic institutions emerged from these 1930s lessons.

Conclusion

Hoover’s trade war policies not only failed to rescue the U.S. economy but also intensified the severity and duration of the Great Depression. The collapse of global trade worsened the downturn, fueling social unrest and political extremism. This historical episode underscores the critical role of open markets and multilateral cooperation in maintaining global economic stability.

The Hoover era's legacy remains fresh in economists' minds, explaining why numerous U.S. economists vocally warned Trump against initiating a trade war.

Path Two of Trade Frictions: A Negotiated, New Equilibrium

After Trump gauges the resolve and firm stance of China and the EU, all parties regain calmness and rationality. Through negotiations, a new compromise is reached between historical precedents and the extreme April 2nd proposal—one that may be slightly more favorable to the U.S. but remains acceptable to all, establishing a fresh balance in global trade.

2025 vs. 1930: Key Differences Preventing a Repeat of History

While the U.S. tariff hikes bear a superficial resemblance to 1930, the context is worlds apart. A simple repeat of that era is impossible, for two core reasons:

1. Deeper Understanding of Market Economics

o In 1930, the world operated under the gold standard, lacking systematic theories to counter economic downturns. With monetary and fiscal policy constrained, governments had few tools to stimulate demand.

o Today, advanced economies have nearly a century of experience managing business cycles. Theories (e.g., Keynesianism, monetarism) and tools (QE, fiscal stimulus) are well-developed. Even if tariffs briefly disrupt trade, nations can boost domestic demand to bridge the chaos.

2. Policy Flexibility: Lessons from Britain’s 1930s Revival
Facing trade collapse and depression, the UK’s 1931 pivot offers a masterclass in crisis response:

o Abandoned the gold standard (Sept. 19, 1931), freeing the pound to float and slashing interest rates from 6% to 1%.

o Flooded the economy with liquidity: M2 surged 25% in 1932, fueling industrial investment.

o Results: Unemployment fell from 15% (1931) to 8% (1935); GDP grew 4% annually (1932–37), recovery two years ahead of the US.

It is crucial for the U.S. to establish new, mutually acceptable trade rules with its major trading partners. If key trade policies—the backbone of the global business environment—remain in a state of high uncertainty, neither corporate operations nor financial market expectations can stabilize.

However, given that the views and statements of certain key figures shift almost daily, it is still too early to predict which path the future will take. Even if a guess turns out to be correct in hindsight, it would be little more than blind luck.

The evolution of the economic environment and development in the short term is characterised by one key word - uncertainty!

How will we deal with this uncertainty?

As managers of overseas funds, we have maintained a cautious stance on the U.S. stock market this year. Our prudence stems from two core concerns: historically stretched valuations and mounting macroeconomic risks—particularly under potential Trump-era trade and fiscal policies.

1. Valuation Alarm Bells: A Market at Peak Expensiveness

· The S&P 500’s Shiller P/E (CAPE ratio) hit 37.9x in December 2024, placing it in the 98.3rd percentile of historical readings since 1981.

o Only two periods were more extreme: December 1999 (44.19x) before the dot-com crash and January 2022 (39x) preceding the 2022 bear market, both periods before economic downturn.

2. The Cash Pile-Up: What "Smart Money" Is Doing

· Warren Buffett and other institutional investors have significantly increased cash holdings while reducing equity exposure.

Our Positioning:

· Zero net long exposure to U.S. equities.

· Small short positions as a hedge against a potential downturn.

3. Macro Triggers: Tariffs, Fiscal Tightening, and the Recession Risk

If Trump's tariffs and austerity policies are not adjusted, then a recession in the US economy and a bear market in US stocks is almost unavoidable.

Critical Quote from Our Last Monthly Report:
"No economy or equity market is immune to cycles. The U.S. will not indefinitely avoid recessions or bear markets."

Chinese Equity Assets: Divergent Cycles and Strategic Opportunities

The current Chinese economic cycle is completely decoupled from the U.S., with Chinese and U.S. stock markets showing sustained divergence since 2021. This year, Chinese assets—particularly Hong Kong equities—have significantly outperformed U.S. stocks, supported by fundamental economic strength and attractive valuations. While short-term panic selling in global markets may temporarily weigh on Chinese assets, we believe they will likely stabilize and rebound first once sentiment normalizes.

Divergent Cycles: China Nearing Recovery, U.S. Facing Stagflation Risks

· China: Ample Policy Tools, Economy at a Trough

o Property market adjustments have pushed valuations to historical lows.

o A/H-shares have endured a multi-year bear market, with risks largely priced in.

o Policy flexibility (fiscal, monetary, and industrial measures) makes China’s "mild overcooling" easier to address than America’s "stagflation dilemma."

In terms of the economy, the general pattern of east rising and west falling, is still unchanged, only the rhythm has been disturbed by external panic.

Adjustments are an inevitable part of a bull market. Just as a few rain showers are needed when the weather gets too hot, it’s only natural for temperatures to dip slightly after a summer rain.

WU Weizhi

5 April 2025

本期《偉志思考》簡體中文版鏈接：

伟志思考： 特朗普“解放日”，全球资本市场开启危机模式，重回“胡佛”时代还是虚惊一场？