For the last eight decades or so, we have lived under Pax Americana – an era shaped by US military dominance, dollar supremacy, and an interconnected global economy built of American-led institutions. One might describe Pax Americana as the US acting as the dominant global power politically, militarily, and economically, shaping international order, promoting free trade, maintaining open sea lanes, and sometimes intervening in conflicts to maintain balance.
Before the US, there was Pax Britannica (1815-1914), with British naval power and the gold-backed pound ruling the waves. Going further back, you will find Pax Hispanica (16th-17th Centuries), when Spanish silver fueled global trade, and Pax Mongolica (13th-14th Centuries), when the Mongol Empire connected East and West via the Silk Road. The sequence begins with Pax Romana, where Rome’s roads, laws, and currencies unified the ancient world.
There were also multipolar periods between these hegemonies. After Pax Romana, we saw a fragmented Europe and the rise of feudal powers; after the Mongol collapse, the rise of Ming China, the Ottoman Empire, and European states; as the Spanish lost power, the Dutch, French, and British were vying for the balance of European power; and after Pax Britannica, the rise of fascism, the Great Depression, and interwar chaos.
There is a school of thought that argues that we are transitioning from Pax Americana to a new, less stable, multipolar world. Others argue that the US still holds crucial advantages (military power, alliances, cultural influence, and dollar dominance) and therefore any suggestion of its decline is premature.
It seems to me that the current administration in the US under President Donald Trump is doing whatever it can to dismantle Pax Americana and replace it with an American First regime of competition. Pax Americana is a globalist system of rules, institutions, and alliances that co-ordinates the flow of capital, labour, goods, services, and culture. Blowing up that system without winning any head-to-head relationship will be a system that is worse for both America and the rest of the world. America First is a game of winning, usually at the cost of other players in the game. Once you get into a global competition game, you have to keep playing to win. If you’re Cambodia or Argentina, you might back the winning player, but if you’re China, Europe, or Canada, you might push back and where you’re both worse off, but at least America doesn’t win. It’s better than losing outright. It’s a bit like turning state witness on the mob boss – you’re both going to jail, but at least you may get a more lenient sentence!
So what happens if Pax Americana ends, and America First wins? The US dollar becomes a choice, not a necessity, and debt issuance on everything (not just by the US) becomes more risky and more expensive. Global growth and productivity become permanently diminished versus their potential, and highly efficient, but not robust, systems, both political and economic, break.
As Ben Hunt from Epsilon Theory states:
Or rather, we’re now experiencing the first leg of that moment. Because as bad as last week felt, you could still tell yourself that this was all a bad dream, that we’d get most of this negotiated away, that we’d get a sense that there was actually a sensible plan to all of this. But with China implementing its own tariffs and Europe not far behind, we all now know that there’s no easy walk-back from this. There is no reset button here. There is no resolution of ‘uncertainty’. There is only a more or less existential threat against every US company of every size and every industry, with an indeterminate path and duration. We all now know that we all now know that we have to brace ourselves for a Long March of ‘all at once’ for months and months. Just like in 2008. It won’t be a straight shot down in 2025 anymore than it was a straight shot down in 2008 (I mean, markets almost got back to their highs in May 2008 on the heels of the Bear Stearns execution), but ultimately it is a big move down in … everything … as the United States reneges on the global regime of Pax Americana.”
This is real life. Will a lot of the tariffs be negotiated away? Most likely they will. Will the economic engine of the world seize up and never be restarted? No, definitely not. But we can never return to where we were before the Trump tariffs. We are on a road to a permanently lower ‘sticking point’ for growth, productivity, wealth, standard of living, because that is what the America First competition game brings, and it’s not an equilibrium that can be negotiated away.
This is not positive news for markets, but as always, with great change comes opportunity. Skill will come to the forefront again as investors will have to find the companies that can best adapt to the changing environment and find ways to benefit from it. The age of passive investing is possibly drawing to a close, as we return to an era of global macro analysis and stock picking ability. Some of the themes that we will be watching are:
- De-dollarization. As more countries settle trades in non-dollar currencies, the dominance of the dollar could be eroded gradually. This may lift alternative assets such as gold and bitcoin, which are hedges to currency debasement.
- Higher Geopolitical Risk Premium. As the US control weakens, markets may price in more volatility globally – especially in energy and commodities.
- Defence and Energy Stocks. Rising demand for defence spending and energy independence fuels sectors like aerospace, cybersecurity, and renewables.
- Commodity Supercycle. In a multipolar world, there would be more resource nationalism, which would lead to higher prices for critical resources such as copper, lithium, or oil.
- Bitcoin / Hard Assets. In an unstable and fragmented world, store-of-value assets gain appeal. Bitcoin, gold, and certain real assets would benefit from global distrust in fiat systems.
The Rise and Fall of Global Orders
For the last eight decades or so, we have lived under Pax Americana – an era shaped by US military dominance, dollar supremacy, and an interconnected global economy built of American-led institutions. One might describe Pax Americana as the US acting as the dominant global power politically, militarily, and economically, shaping international order, promoting free trade, maintaining open sea lanes, and sometimes intervening in conflicts to maintain balance.
Before the US, there was Pax Britannica (1815-1914), with British naval power and the gold-backed pound ruling the waves. Going further back, you will find Pax Hispanica (16th-17th Centuries), when Spanish silver fueled global trade, and Pax Mongolica (13th-14th Centuries), when the Mongol Empire connected East and West via the Silk Road. The sequence begins with Pax Romana, where Rome’s roads, laws, and currencies unified the ancient world.
There were also multipolar periods between these hegemonies. After Pax Romana, we saw a fragmented Europe and the rise of feudal powers; after the Mongol collapse, the rise of Ming China, the Ottoman Empire, and European states; as the Spanish lost power, the Dutch, French, and British were vying for the balance of European power; and after Pax Britannica, the rise of fascism, the Great Depression, and interwar chaos.
There is a school of thought that argues that we are transitioning from Pax Americana to a new, less stable, multipolar world. Others argue that the US still holds crucial advantages (military power, alliances, cultural influence, and dollar dominance) and therefore any suggestion of its decline is premature.
It seems to me that the current administration in the US under President Donald Trump is doing whatever it can to dismantle Pax Americana and replace it with an American First regime of competition. Pax Americana is a globalist system of rules, institutions, and alliances that co-ordinates the flow of capital, labour, goods, services, and culture. Blowing up that system without winning any head-to-head relationship will be a system that is worse for both America and the rest of the world. America First is a game of winning, usually at the cost of other players in the game. Once you get into a global competition game, you have to keep playing to win. If you’re Cambodia or Argentina, you might back the winning player, but if you’re China, Europe, or Canada, you might push back and where you’re both worse off, but at least America doesn’t win. It’s better than losing outright. It’s a bit like turning state witness on the mob boss – you’re both going to jail, but at least you may get a more lenient sentence!
So what happens if Pax Americana ends, and America First wins? The US dollar becomes a choice, not a necessity, and debt issuance on everything (not just by the US) becomes more risky and more expensive. Global growth and productivity become permanently diminished versus their potential, and highly efficient, but not robust, systems, both political and economic, break.
As Ben Hunt from Epsilon Theory states:
This is real life. Will a lot of the tariffs be negotiated away? Most likely they will. Will the economic engine of the world seize up and never be restarted? No, definitely not. But we can never return to where we were before the Trump tariffs. We are on a road to a permanently lower ‘sticking point’ for growth, productivity, wealth, standard of living, because that is what the America First competition game brings, and it’s not an equilibrium that can be negotiated away.
This is not positive news for markets, but as always, with great change comes opportunity. Skill will come to the forefront again as investors will have to find the companies that can best adapt to the changing environment and find ways to benefit from it. The age of passive investing is possibly drawing to a close, as we return to an era of global macro analysis and stock picking ability. Some of the themes that we will be watching are:
Asset Class Returns
The table below represents a rolling year view of the major asset class returns that we track. It offers a view of the asset classes we use to diversify your portfolio.