From Brexit to Wrexit. Why this time is different.

In 2016 when the UK voted to leave the EU it meant we left free trade with the other members behind and it was christened Brexit.

Last week ‘The Donald’ announced a set of tariffs that effectively meant the US voluntarily put trade with the rest of the World in jeopardy. Let’s call it Wrexit.

A few years ago Disney released a cartoon titled Wreck-It Ralph. In it the title character goes round smashing things up as he is the bad guy character in a video game – a disrupter if you like. The feeling just now is we have our own real life character ‘Wreck-It Donald’ who has taken his sledgehammer to global trade with the resultant market fall out. Where is our real life Fix-It Felix, the other character in the movie who repairs all the damage?

Well the truth is Wreck-It Donald and Fix-It Felix will be the same person. Unlike Brexit which was voted on via a referendum, Donald’s Wrexit is the whim of one person and can be reversed overnight.

So why has he done this? Behind all the bluster and massive exaggerations that he spouts, there is often a germ of truth and logic. You sometimes have to bury deep to find it but it is there.

In the case of tariffs, or duties as we better know them, the EU has always made it difficult, i.e. expensive, for non-EU countries to sell food and cars in the region, as the tariffs applied are designed to protect French farmers and German auto makers. For example a $28,000 Harley Davidson in the US retails for the equivalent of $78,000 in Denmark when one takes into account VAT and Luxury tax. Not exactly a level playing field.

Also, unlike his first presidency where he was fixated on the performance of the S&P 500 this time it is interest rates that have his attention. Why? Well the US is the world’s most indebted nation and this year alone it has to refinance $9 trillion of debt. On average this debt was issued at a rate of 2.7%. On his inauguration day the 10 year treasury yield was 4.8%. If the new debt was issued at that rate it would cost the US $432bn a year in interest.

As a result of his sledgehammer tariff policy and fears of recession the yield is now down at 3.9% which means the annual interest paid will be $351bn. There is every chance the yield will fall further but even this means it will be a saving of $81bn a year in interest payments for this new debt.

He has also intimated the strong dollar is hurting the US so having a trade war will do no harm in weakening the greenback. Also his actions have resulted in the price of oil falling dramatically which should help dampen inflation worries and the Fed are probably going to cut interest rates more aggressively than was predicted which is also a positive for consumers.

Whether his tariff policy was designed to have these positive effects or it is just a lucky by-product we will never know. No doubt the MAGA brethren will proclaim him a genius and those on the left a fool. Like all things in life the truth is no doubt somewhere in the middle.

However, one thing nobody can dispute is The Donald has a good political instinct and I guess will know when to put his sledgehammer back in its box and put on his Fix-It Felix costume.

With midterm elections looming in November 2026 which will determine whether he will be a lame duck President for the last two years of his term, I suspect he will be keen to ensure the stockmarket pain we are enduring does not last too long.

As a result I would put good money on him announcing some ‘beautiful and wonderful deals’ with nations in the coming weeks and months which will allow him to reduce, or remove the tariffs. When that time comes I would not want to be sitting on the side-lines in cash as the clamour to buy shares may well see a recovery every bit as fast as the decline we have seen over the last few days.

I suspect in the long term the Disney character he will most want to be compared to is The Lion King. So until then Hakuna Matata (take it easy).