Plaza Accord 2.0?
How can 1985 help us understand 2025?
Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes.
TLDR Summary
This is not the first time that the US is lashing out at trading partners to address trade imbalances. In the 1980s, the US trade deficit accelerated sharply. The Fed’s tightening leadership had strengthened the US Dollar. As a result, other countries were happy to sell goods and services to the US and buy its assets in return.
This made US companies struggle with a lack of competitiveness in international trade. While unemployment had come down from the 1980-82 recession, it was still at 7.5%, higher than it had been in the past even during recessions.
The US administration responded to this issue by threatening their trading partners with tariffs and other trade barriers if they did not agree to appreciating their currencies. Japan, Germany, the UK and France obeyed and bought large amounts of their own currencies with their US Dollar reserves over the coming years.
This was effective in bringing the US Dollar and the US trade deficit back to their 1980 levels. Unemployment dropped sharply as well. The stock market reacted positively with a 76% return in the S&P 500 in just two years as a weaker Dollar boosted corporate earnings.
This might trigger cautious optimism assuming that trade deals can be struck soon. However, an equally positive market performance is unlikely this time for several reasons. Firstly, the S&P P/E ratio was 12x at the time the Plaza Accord was signed, barely half of where it was in 2024. This made a continuation of the bull market much easier.
Secondly, after adjusting for FX, the US stock market underperformed other markets, most importantly Japan which was the primary beneficiary of redirected global investment flows and went into the final phase of its epic stock market bubble.
So, if an investor wants to bet on a resolution of the trade conflict in 2025, the best bet might not be the US, but international markets instead, preferably those that will receive the asset flows that America doesn’t want anymore.
What was the Plaza Accord?
As you probably know and as I discussed in more detail in the article below, the US had to deal with several inflation waves in the 1970s.
In 1980, the Fed finally addressed this problem with verve through massive rate hikes to more than 20%. This was highly effective in curbing inflation because the 1970s inflation problem was a credit impulse phenomenon. Liquidity was mostly created through bank borrowing which - in contrast to the 2020s fiscal impulse - is sensitive to interest rates.