I’ve been talking to many folks recently in light of what has been going on—ahead of the historic announcement and, of course, since then.
I don’t know about you, but this weekend, like many others, is about a lot of research and reading. This weekend in particular, I spent more time trying to think of the bigger deal that is being bargained with these tariff announcements.
I try to zoom out and look at things from an investor-minded point of view. In this case, the investor mindset is that of a U.S. Treasury holder who is being asked to sign up again for new bonds. I imagine, like Corporate Treasurers, Sec. Bessent will be on the road listening to bondholders and trying to secure a new deal. With 30% of U.S. debt held by foreign owners, it seems these new trade deals and the rollover of some of our trillions of debt may be tied together.
I’m reminded of a class I took back at UT—it was a business law class. We were given “made up” cases, and we needed to determine what we thought the outcome would be based on prior case law, etc. I spent a great deal of time going to the UT law library to see if I could do deep research and thread together a possible verdict based on prior cases. I was surprised to find, in my research, that the case we were given in class was not a made-up case like we were told, but the actual case. Therefore, I knew what the actual outcome was and the reasoning behind it.
I went to the professor before turning in my paper. I approached him and let him know I realized this was not a made-up case and asked if the test was to see if we would do the research or if we were trying to guess. He just smiled. I told him, “Well, I think you are trying to get us to do deep research—and determine the actual case law. I will include that in my write-up and submit my findings.”
I tell you this story to say: I think I found another such situation hiding in plain site if you have not already found it. I have been trying to figure out what is really going on here in the macro environment, geopolitically, and how the markets are responding. A theory is forming, taking that investor mindset view. Take a look at the below video where Bessent was speaking last spring, ahead of Biden dropping out of the race and before the selection of JD Vance as Trump’s VP pick.
Zoom out of the details, and let’s look at the big picture. The tariffs discussion is just one part of the equation. The trade deficit, the debt, and military power are also part of the bigger issues at play.
Listen past the political commentary and criticism. Listen for what is probably the roadmap of what is going on here.
Then-private-citizen Scott Bessent is talking about creating a new trade reorder. He references Bretton Woods and the Treaty of Versailles. If you were like me and not familiar with the details of either, here is a quick summary, thanks to my AI assistants:
Overview of the Bretton Woods Agreement
Context and Purpose
Timing and Setting: The Bretton Woods Conference took place in July 1944, during the latter stages of World War II. It was held in Bretton Woods, New Hampshire (United States) and brought together delegates from 44 Allied nations.
Motivation: The primary goal was to avoid the economic destabilization and competitive currency devaluations that had contributed to the Great Depression and the rise of global tensions in the interwar period. Allied governments wanted a stable international financial framework to support postwar reconstruction and growth.
Key Outcomes
Fixed Exchange Rate System: Most currencies were pegged to the U.S. dollar, which was in turn backed by gold at a fixed rate (USD $35 per ounce of gold).
Creation of Institutions:
International Monetary Fund (IMF): Established to oversee the international monetary system, encourage currency stability, and provide short-term financial assistance to countries facing balance-of-payments difficulties.
International Bank for Reconstruction and Development (IBRD), which later became part of the World Bank Group: Created to provide long-term loans for reconstruction and development projects.
Leadership and Influence: The United States emerged as the central economic power. Notably, two figures were highly influential in conceptualizing the system:
John Maynard Keynes (United Kingdom)
Harry Dexter White (United States)
Strategies Used to Build New Commercial Relationships
Multilateral Cooperation: Instead of piecemeal or bilateral deals, the Bretton Woods framework encouraged multilateral engagement. This meant countries were encouraged to reduce trade barriers and maintain stable exchange rates.
Economic Interdependence: The use of a fixed exchange rate system was intended to foster predictability in trade and investment, tying each nation’s currency stability to collective rules rather than unilateral actions.
Financial Assistance and Reconstruction: Through the IMF and World Bank, member countries could access financial resources to stabilize their economies, rebuild infrastructure, and lay the foundation for international trade networks. This lending system was critical for war-torn nations looking to reintegrate into the global economy.
Comparison with the Treaty of Versailles (1919)
Context and Objectives
Treaty of Versailles:
Ended World War I and was signed in 1919.
Primarily focused on determining postwar territorial settlements and imposing punitive reparations on Germany.
Dominated by Allied powers (especially France and the UK), with a central aim of preventing Germany from regaining military strength.
Bretton Woods Agreement:
Emerged before World War II had fully ended, in 1944.
Aimed to build a collaborative, stable monetary system and enable broad economic recovery instead of focusing on punishing any single state.
Emphasized constructive economic growth and financial stability for all participants, with the United States playing a leading role.
Philosophy and Tone
Versailles: Centered on retribution and assigning blame. Reparations and punitive measures dominated negotiations.
Bretton Woods: Focused on cooperation, reconstruction, and preventing another global depression. Although power dynamics were still unequal (the U.S. had great influence), the ethos was more about shared prosperity than punishment.
Mechanisms and Enforcement
Versailles: Enforced through political and, if necessary, military pressure. Failure to comply with reparation demands led to international tensions and economic isolation, exemplified by the French occupation of the Ruhr when Germany defaulted on payments.
Bretton Woods: Enforced primarily through economic and financial incentives—countries that did not adhere to the IMF rules risked losing funding, credit, and the stability benefits of the system. The reliance was on cooperative rules-based governance rather than punitive enforcement.
Similarities
Multilateral Negotiations: Both the Treaty of Versailles and Bretton Woods involved multiple Allied nations gathered to shape the postwar order.
Dominance of Certain Powers: In both cases, the victorious or leading Allied powers (notably the United States and United Kingdom) had a disproportionate influence over the agreements.
Differences
Intent: Versailles sought to settle the issues of World War I through territorial, military, and financial penalties, whereas Bretton Woods aimed to proactively shape the global economic and financial future in a collaborative manner.
Outcome on Global Stability: Versailles is often cited as a contributor to long-term instability (especially within Germany), whereas Bretton Woods established a framework that arguably underpinned decades of global economic expansion and relatively fewer international currency crises in the immediate postwar era.
Longevity: Bretton Woods lasted from 1944 until the early 1970s (when the U.S. abandoned the gold convertibility of the dollar), leaving behind permanent institutions like the IMF and World Bank. Versailles, by contrast, did not produce long-lived international structures for collaboration and soon gave way to renewed tensions.
In Summary
The Bretton Woods Agreement represented a cooperative, rules-based approach to rebuilding a war-torn global economy, tying national currencies to the U.S. dollar and providing shared financial mechanisms (IMF and World Bank).
This stood in stark contrast to the punitive and reparation-focused Treaty of Versailles, though both resulted from major multinational negotiations following world conflicts.
Over the long term, Bretton Woods proved more effective at nurturing international trade, financial stability, and economic growth than the measures instituted by Versailles, which contributed to lingering economic and political resentments.
So, is this the beginning of the new Bretton and Wood or Treaty of Versailles or something in between?
It sure does feel like the approach is more akin to the Treaty of Versailles than the cooperative nature of Bretton Woods.
Everyone cannot be the enemy, and even if people bow down, there will be economic and political resentment. There is a way out forward, but the question is whether mature heads will prevail.
What Else to Watch:
Howard Marks is a famous value investor. He is a great investor on the bonds side and a great educator on risk.
Some good insights. I have similar thinking, and perhaps my more direct thoughts include:
Cooperation is being strained. There will be economic impacts.
Rates may not go lower as everyone is expecting… If so, then the cost of capital will potentially increase and that has longer-term impacts on economies, business investments, etc.
If we have a “one-time” increase in costs—make no mistake, that has HUGE impacts on retirement safe withdrawal rates, and we should expect lower valuation multiples on equity investments.
The U.S. is still strong—we have incredible innovation, great capital markets, and talent that is attracted to the U.S. and rule of law—although it is showing cracks. However, what I used to not question about our ability to be magnetic, I now have to ponder.
Prices for everything seem to be changing. Worse scenarios could be:
The price of ownership in companies may be repriced down materially and going forward not worth as much as we would all like or have grown accustomed to.
Prices of everyday products are going up. How much is anyone’s guess. I think the ending number the administration may be going for is 10%—mostly eaten by others (countries, manufacturers, companies through a reset of lower profit margins), and we as consumers take a 2% to 3% increase. Consumer prices will probably be higher than that. They are the ones with the least economic power. Unless consumers coalesce and unite, I suspect more of the financial impact will fall on consumers. So buy the best quality you can so you don’t have to keep buying again and again. Multiple purchases are an even bigger destruction of retirement portfolios and personal budgets than higher inflation.
Extra Homework for those interested in the great thinking of risks by Howard Marks
If you are not familiar with his works, he has published a great series on risk. It is worth watching to get up to speed—and then look at your portfolio to see how much real risk you have in your investments, whether in public markets, private real estate, or personal finances.
Closing:
What is ahead for all of us will not be like the last 24 years. I’d recommend getting really engaged in thoughtful reflections, formulating your own worldviews, and having conversations with people who are open to lots of ideas and ways of seeing the world.
“Macro Investing: We live at the edge of geopolitics, economics, and gravity…and eventually gravity wins.” - Scott Bessent 2024
Things are different now, and I think it is safe to say that nobody likes the forces of gravity at this moment.
Finally, people can strengthen themselves and prepare, but give folks some time to get their heads, hearts, and minds around a new way of doing things and to shore up fiscally. Every home has done this at one time or another. Every business has had to. People can prepare if they are trusted to know what the real plan is.
Next article—With $36.7 trillion in federal debt, which has grown under both political parties, we should also pay attention to what is going on in Congress.