📈  Chart of the Week 4/27/2025

By Michael Allison, CFA

Tariff-mageddon

As my kids would ask when they were younger—and what eventually became a family meme, “Is that even a word?” My answer to which was always, “It is now.”

In my 35 year career as a professional investment manager, I’ve had the honor and privilege of being entrusted to look after other people’s money during three of the four post-WWII periods of—what felt at the time—to be existential threats to the global financial system.

In the Great Financial Crisis of 2008-9, it actually was a threat to the system as the global economy worked through what some might call the Mother of All Deleveraging Events.

The COVID period of market calamity in 2020, while unprecedented in its cause—a worldwide economic shutdown, wasn’t ultimately a threat to the global financial system as it was met with never before seen levels of fiscal and monetary stimulus. The ramifications of that stimulus are still being worked through to this day.

I was in college on Black Monday in 1987 when the S&P 500 fell 22% in one day. That dark day was more or less mechanical in nature, driven and exacerbated by an innovation referred to at the time as portfolio insurance. The options and futures markets were still fairly inefficient and not as developed as they are today. Portfolio insurance was implemented by large institutional investors e.g. banks, insurance companies, and pension funds and entailed shorting the equity market as it fell to offset portfolio losses. This was done by shorting futures or buying put options. This was all well and good when a handful of institutions were doing it, but when everyone was doing it at the same time… Well, we have all heard about what happens when someone yells “Fire!” in a crowded theater.

One item of lore I remember hearing about sometime after October 19th, which may or may not be true, is that late in the day Warren Buffett is said to have sold a $3 billion five-year at-the-money S&P 500 put option for a $1bn premium—a 33% yield. This bet meant that the market could be down another 33% over the course of five years before he would lose money on the trade. Buffett essentially bet on the global financial system surviving and that capital markets would recover over time, which they did—starting the next day.

Which brings me to the recent tariff-driven turmoil.

I don’t wish to comment on the pros or cons of tariffs. But I will say this. I do think that some progress could be made in terms reducing the disparity of tariffs imposed by other countries on the U.S. versus tariffs imposed by the U.S. on other countries. Perhaps this has been the policy goal all along. I don’t know.

However, one thing I do strongly believe is that it is simply not possible to do away with the economic concept of comparative advantage and that in the end, pragmatism will prevail.

This period feels more like 1987 to me than the other periods of extreme volatility. The role of “portfolio insurance” is now played by Managed Futures, Risk Parity Funds, and other mechanical strategies that systematically sell the market as it falls, exacerbating and extending overall losses in the market…and creating buying opportunities for those investors willing to bet that the wheels are not going to come off the global economic system.

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