First Eagle Looks Outside the US for Returns

So many steps there. Obviously, we heard the news about or the tweet about the Japan framework the other day the Japan dealed, and so maybe there's a fair amount of optimism because there are signs that there is some flexibility on the sectoral tariffs this. You know, the negotiations to date have largely been about the reciprocal tariffs. I don't really like using that words since they aren't technically reciprocal, but about the reciprocal tariffs with the sectoral tariffs being

in place. But what we saw from the broad outlines of the Japan deal, and it's rumored to be part of the deal with the EU is that there's flexibility on the sectoral side for auto So I think that is what is providing some good news and maybe a bit more certainty. That said, I am still very skeptical that we sort of have heard the last about tariffs. I think it's still not sure exactly where tariff levels

will settle. We have uncertainty about how the US courts will handle the reciprocal or ie EPA tariffs when they start the arguments surrounding at the end of the month. And then you know, there's still talk of new sectoral tariffs that the administration is looking at pharma, perhaps semiconductors, you know, so there's other potential sort of knives to fall.

So I realized the market is happy to see some flexibility, and I'm happy to see some flexibility on the sectoral tariffs, but I'm not convinced this is sort of the end all when it comes to tariffs. So that's step one. You know, some news, maybe a little more certainty, but still a lot of open questions for me. But then the question is how does it affect the economy. We

have some initial signs. If you look at Q two data, the US collected about sixty five billion in tariff revenue, which was about a nine percent effective teriff freight for June. What we see in the data is that it doesn't appear that foreign exporters into the US are paying much of the tarraf Yes, instead, most of it's being absorbed

by the US. Some seems to be having been passed on to consumers, and consumers in terms of inflation in certain sectors we see it showing up, but for the most part at this point, and again it's early days in tariffs, it seems that firms are absorbing the tariffs.

the inflation data. So that's the good news. But as I said, since it seems like for now, given the uncertainty the early days of the tariffs, the US firms importing firms have absorbed those tariffs. I think the question is over time, what happens At some point do they begin to pass those on to other firms to end consumers. Do they need to cut other costs to support their margins,

you know, canceling and vement projects, potentially firing workers. That's the unknown, and so I think it's going to take time to work through the system. So maybe it shows up through prices, maybe it shows up through more growth, through weaker investment, weaker employment. But I think we have to wait for thousands of individual firms to make their

decisions about how they're going to handle this. It's perhaps helpful that they're getting maybe a little more certainty that maybe the equilibrium tariff rate might be around fifteen percent. Maybe that's something we can sort of the sign maybe we're getting from these deals. You know, compared to the pre tariff level or pre April level of about one and a half percent, that's a huge increase. And so you know, I think we have to wait for firms

to make their decisions. So as an economist, you know, we always want to plug in our models and this sort of gets to the asset prices and all that. But the real world is far more complex than our models correct. And so you know, thinking about like the pandemic, none of us had lived through a global pandemic before we weren't sure what the impacts on the economy would be. None of us have lived through a massive increase in terrorists from the largest economy in the world, the biggest

sort of importer in the world. I think we have to be humble that we're just not sure what the impacts are going to be and the timeframe.

All economists are expecting tariffs to lead to inflationary pressure, but we're still not seeing that yet.

of factors there here. You know, I think you're absolutely right, firms are going to have to decide how to respond. If the end consumer can't absorb the price increases, then there'll be less more of a demand shock. Firms may cut back production more. We may see more reductions and investment, we may see job losses. So it is possible that it ends up being more weighs more on growth, and so therefore the inflationary effects in certain products are more

than swamped by the sort of weaker growth outlook. The other challenge to me that I'm watching is, at the same time we're having something that's receiving less attention, but another bold experiment with our immigration policies, which it would also tend to be in the direction of higher prices weaker growth. So, you know, the combination of these two is why I think it can be very difficult, you know.

I think also why you see the Federal Reserve is waiting for data to decide how to respond, and they face the same uncertainty that we do. Is this inflationary, is it more of a growth shock, is it stagflationary? We kind of have to wait and see.

interest of the US economy. Whereas I would have thought there's very little chance of the FED losing its independence, I'm increasingly worried about the political noise surrounding the FED, and it's another factor that could be weighing on inflation forecasts, And certainly it is coming into my thinking about inflation

inflation forecasts, medium term inflation expectations. We don't see it in market pricing yet, but I know it certainly is affecting our views on the way we are investing in our portfolio.

and share. And Sticking with the US, are you worried about the fiscal position of the government. The US spends more money on interest expense than the defense budget.

into higher cost debt. And of course the passage of the One Big Beautiful Bill, by our estimates, should add to the deficit over time. The challenges with the bill is it's some deceptive. It's much larger than sort of traditionally scored because the tax cuts are front loaded, the tax hikes and expenditure cuts are backloaded. And I have my doubts. And that change really happens after twenty twenty eight, So after the next administration comes in, you'll have a

new president, new Congress. At that point, are they going to suddenly tighten fiscal policy dramatically? I think we've learned over time that no politician wants to take that on. So it's actually a much more expensive expansive bill than written on paper and reduces the flexibility. As you said, interest expenses growing, the discretionary parts of the budget are

being squeezed, discretionary spending being squeezed. At the same time the sort of entitlements, the mandatory spending keeps growing, and then you've reduced your tax intake further. So again, as a sovereign analyst, these are all sorts of things that you don't want to see when a government puts together a budget. I am definitely nervous about the fiscal trajectory. And when I look across sort of the long end

of the yield curve, there is concern. You know, we hear from US Treasury, the Treasury Secretary that they want to skew issuance to the shorter end of the curve. They want to reduce long term rates. When you look sort of across in the past twenty years or so, long term bond yields are still not that high, considering the level of debt, the uncertainties in the economy, and so there's always the chance that long term rates rise

from here. Additionally, when you look at the term premia, which is the difference between long term bond yields and the expected path of short rates. The term premia has increased. It used to be negative. It was negative for many numbers of years. It's become positive, which I think is a healthy development, suggesting that you're getting paid for taking

some duration risk. But it's still below sort of historical averages of term premia, even though, as you highlighted, sort of the credit quality, the credit standing of the United States has deteriorated, so you know, we see scope that there could be further increases in term premia. And when you couple that with questions about the FED and their commitment to inflation fighting, that's sort of another risk for the long end of the yield curve.

portfolios overseas. Internationally, emerging markets were hit quite hard during the pandemic, and so again it's not surprising that you know, if we can find a good business or a sovereign or an asset that we like that we want to own, that we take advantage. When it's unloved by the market, that's typically when we will enter into positions. So, yes, we have been shying away from US assets adding more international assets to the portfolio for a number of years.

I will say, not all sectors of the US markets are loved, and so again we'll use flexibility. So when we see a very nice business that we believe is trading below its fair value, you know, we will enter

those positions. So then coming to currencies, you know, we have to think about the impact of taris on the economy, and then we think about the impact of currencies, and the thing, you know, if you had asked me this question out my outlook for the dollar in December, I would have said, well, we're unsure about tariffs, but all else equal, everything in equilibrium. A good economist answer means that the dollars should appreciate to offset the change in

relative prices coming from tariffs. And indeed we did see that in the twenty eighteen nineteen period, when tariffs were mainly focused on China, the China dollar exchange rate really shifted. The dollar appreciated and offset quite a lot of the tariffs. This time around, of course, we've had the exact opposite again, proving that economists can be wrong and are often wrong. And the dollar has depreciated, and so I think you have to start to bring in you know, not everything

else is equal. What else is happening? Our investors losing confidence in the dollar in US assets? And is that changing behavior? Is there more concerns about growth in the US versus the rest of the world. Is there more concerned about inflation in the US compared to the rest of the world.

country being China. And the other thing that I've been talking to some economists about is when it comes to inflation in the US, we now have a situation where supply chains are potentially going to become even more complex and inefficient, and the potential for companies to start offloading those even higher costs throughout the world, not just in the US. So I wonder how you're thinking about this trade war versus the.

talking fifteen to twenty percent. I mean, it's just a different order of magnitude, and then over time that effective tariff rate sort of crept back down to you know, in the twos as firms reoriented supply chains, as Chinese firms changed the sort of structure of their exports to the US through third countries, and so you could see how over time businesses were sort of optimizing around those tariffs.

A trade war against everybody. Again, as an economist, you know, free trade, it's like a core tenant and part of the religion of an economist, sort of comparative advantage gains from trade, and so we're conducting war against everybody else. It is likely to make the US first and foremost

less competitive, grow more slowly. There have been studies done on the first trade war, you know, for instance, washing machines and dryers where there were high tariffs and posed there were studies that were done that showed that US firms raise their prices just as much as imports. Studies done on the steel industry where steel tariffs were quite high, that US steel using firms importing firms became much less

competitive after them position. So there's a number of reasons to believe that this is going to make the US less competitive grow less quickly, and it will be bad for the global economy, both because the US is such a large consumer, so a weaker US obviously not great for the rest of the world. And to the extent that the US is poor consumes less, perhaps there's some shifting of production. It also begins to hit other economies, and of course Asia, which is the world's largest exporter,

especially to the US, will be hit by that. So everybody else is worse off. To your point about complexity, and I think again this sort of gets at in the US. We haven't seen really the results yet. Firms unsure of how to respond. You're not sure where ultimate teriff rates end up. You know, it's hard enough for a supply chain manager to deal with suddenly much higher tariffs on China, but suddenly you have to look at,

you know, terif rates around the world different industries. Yeah, I think it's going a lot of wasted time in this space, you know. I know there was a lot of hope with this administration that they pursue a deregulatory agenda, but they are creating a massive regulatory burden surrounding trade.

Both for the government who suddenly has to enforce a wide range of tear of schedules and for firms that suddenly are going to be faced with this difficult optimization problem of how to rejigger supply chains in an ever changing world.

more tweet form than full of trade agreements. But also to the extent that they do reduce tariffs, a country like India or Indonesia again that have relatively high tariff rates, to the extent they help bring down their own domestic tariff rates because again, as an economist, we think lower tariff rates are actually very good for your economy and your business sector to improve sort of the competitive landscape. And so you know, that could be an added bonus.

But also when I think about the rest of Asia, it is looking like that perhaps everybody is going to face about a relatively similar teriff rate. With respect to the US, we seem to be sort of in the fifteen to twenty percent, So in that case, maybe the relative competitiveness doesn't change among Asian economies or between Asia and Europe and the rest of the world. And quite frankly, I find it hard to believe that the US, especially initially, is going to be able to produce everything that we

import from Asia. Quite frankly, we won't be able to. So, you know, at some point, I'm sort of left with if Asian economies are facing similar teriff rates, you know, maybe in a relative perspective, they're no worse off. So again, very competitive economies like a Korea or Japan, or China or Taiwan don't end up being that much worse off.

Maybe they see somewhat weaker growth, weaker demand for their products because the US is somewhat poorer buying less, but from a competitive position doesn't make much of a big deal.

coming back to the dollar. The unknown is even with the dollar having depreciated, you know, ten percent year to date against the broad currencies, the dollar is still overvalued. The question that I'm particularly focused on is whether this weakness in the dollar persists, if there's a change. When you look over time over history, the dollar moves in large swings. They're strong dollar regimes, week dollar regimes. Are we moving into a weaker dollar regime? Are we moving

away from that period of US exceptionalism? Foreign investors into the US have become very overweight US assets in their portfolio. Those their stock and bond investments to the share of US GDP have reached record highs. If we begin to see just a small shift away from the US, or just less flows moving into US markets, or even just more hedging of dollar exposure in those US investments, that could cause weakness in the dollar and weakness in US assets.

And a lot of that capital has come from Asia, to the extent we see capital flow back to Asia where valuations are more compelling across Asian equities and currencies. You know, again, do we get more of that capital flow coming back? That remains to be seen. But so if we're investing based on valuations, that's where we're headed, because we do see those opportunities.

lot of risks out there. And I think I've been surprised, and you touched on this as well, but sort of the surprising strength in equity markets, and also we continue to see really tight spreads kind of globally, so our investors being a bit too complacent here or are they kind of waiting for something to drop, like it just seems like a lot of this risk is not really priced into markets.

decision about how do they address those costs. I'm of the view that once it begins to show up in the data, either in the form of higher inflation or weaker growth, weaker earnings, or a combination of all of those, that equity markets, credit markets should begin to reflect those risks. On top of that, you know, if they're concerns about the FED, and if there's questions about whether the Fed's actions if they're viewed through a political lens, that could

sort of add to those market fears. So I do think there's a fair amount of complacency here. And finally, you know, when you look at again the US fiscal position, we're running deficits around six and a half percent of GDP, which will only grow over time, and we're at full employment the top of a business cycle. These don't sort of correlate. The markets are priced for that. We're sort of in this perfect world, goldilocks world, but there's a

lot that could go wrong from here. So that's sort of how I'm thinking about it.

is above sort of where we think it's equilibrium. Level is then that hopefully provides some protection in a very volatile unknown world. And then because you know, our crystal ball is so foggy and the world has been so chaotic and volatile the last several years. As an active manager, it does provide you a lot of opportunities. The world

is always changing, the market is moving. It can give you those opportunities to invest in excellent businesses or currencies or sovereigns at a very attractive price if you're willing to look through the noise of you know, things may move up or down or not. The other I think unique aspect is that first eagle. We use gold in all our portfolios as a portfolio hedge. That is something we've done for a long period of time. It's useful.

It performs well in inflationary and deflationary environments. It has sort of a zero percent correlation with equities, except in times when in very risk off events, that correlation term sharply negative. So that's why it's very useful as a portfolio hedge.