Strategie Update August 2025

Strategy Update: August 2025

Agreement for now in the tariff dispute, overcapacities in China and unchanged interest rate policies

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THE FINANCIAL MARKETS IN JULY

At the beginning of the month, the Senate passed Trump‘s „Big Beautiful Bill“ – but as it turned out, not everything is quite so „Beautiful.“ The numbers speak clearly:

  • $7 trillion in annual spending with only $5 trillion in revenue
  • $2 trillion deficit per year
  • Government debt rises to 130% of GDP
  • Each US family carries a calculated $425,000 in government debt

The problem: Trump believes massive tax cuts would finance themselves through economic growth – a dangerous illusion. Even conservative estimates see additional debt of $3.3 trillion over the next ten years.
The consequences:

  • Loss of confidence in US government bonds
  • Weakening of the dollar as reserve currency
  • Threat of currency devaluation through money printing
  • Possible financial crisis

Experts warn: The US risks its „exorbitant privilege“ of being able to borrow cheaply in its own currency. Without drastic deficit reduction from 7% to 3% of GDP, systemic risks threaten global capital markets. Trump‘s policy is an „affront to economic reason“ – basic arithmetic cannot be suspended.

At the end of the month came the agreement with the EU in the tariff dispute – 15% tariffs on most imports. While the automotive industry benefits from a reduction from the previous 27.5 percent, this still represents an increase compared to the previous ten percent base tariffs. For strategic sectors like aircraft or certain agricultural products, zero tariffs are to apply in the future. Contradictions between both sides were already evident at the announcement. Trump announced new tariffs on pharmaceuticals and insisted on 50 percent tariffs for steel and aluminum, while von der Leyen declared that 15 percent was a „clear upper limit.“

The EU made significant concessions: $750 billion is to be spent on US energy imports to replace Russian gas, another $600 billion flows as investments into the US. Additionally, Europe opens its market to US cars and agricultural products and promises defense purchases in „large quantities.“

The agreement meets with complete incomprehension in the energy sector. Gas market expert Anne-Sophie Corbeau from Columbia University: „The deal simply makes no sense. The White House has a problem with numbers. The same apparently applies to the European Commission.“ The agreed $250 billion annually exceeds previous US energy imports by a multiple. Last year, the EU imported energy worth a total of $438.6 billion, but only $75.9 billion came from the US – not even a third of the now targeted sum. Even if uranium imports are added, the goal appears unrealistic, especially since Europe needs uranium worth at most 10 to 15 billion euros annually. However, the fundamental problem runs deeper: Politically mandated import quantities don‘t fit with free energy markets. Energy purchases are largely the business of private companies like Shell, Total, or RWE, not political institutions. The EU cannot dictate to companies where they should buy energy.

OUTLOOK

AGREEMENT FOR NOW IN THE TARIFF DISPUTE, OVERCAPACITIES IN CHINA AND UNCHANGED INTEREST RATE POLICIES

Despite the agreement in the tariff dispute with the US, economists expect negative consequences for the EU economy. The Kiel Institute for the World Economy forecasts a 0.15 percent lower gross domestic product for Germany, and a minus of 0.1 percent for the EU overall. As an industry representative aptly said: „When you expect a hurricane, you‘re grateful for a storm.“

An agreement between the US and China is still pending. So far, however, overcapacities are worse for China than Trump‘s tariffs. China reports economic growth of 5.2 percent for the second quarter, putting it on track for the annual target of around five percent. But the seemingly good numbers cannot disguise the growing unrest in the state leadership. Experts urgently warn of problems that will emerge in the second half of the year. The main problem is homemade: massive overcapacities lead to ruinous price competition. The previous growth drivers are proving fragile. The rising exports that supported growth in the first half could collapse in the second half. The private consumption stimulated by state subsidies is also likely to prove short-lived.

Analysts see „no recognizable growth drivers“ for the second half. The risk of deflation is particularly threatening: producer prices have been falling for 33 months as companies produce significantly more than is demanded. The negative price spiral threatens to trigger economically dangerous deflation that tempts buyers to abstain from consumption. Even state and party leader Xi Jinping has recognized that countermeasures are necessary and announced the reduction of outdated production capacities – especially in the area of electric cars.

The European Central Bank has temporarily ended its series of eight interest rate cuts and kept the key rate constant at 2%. But behind the unanimous decision to stop rate cuts lies a growing split in the ECB Council that is likely to lead to controversial debates in the fall. ECB President Christine Lagarde announced a „wait and see“ mode and emphasized that the central bank is „in a good position.“ She could not provide guidance on further action as this is „not possible under current circumstances.“ Inflation currently stands at the medium-term target of two percent. However, the return to target inflation has resulted in stronger camp formation. ECB Director Isabel Schnabel sees „high hurdles“ for further rate cuts, Bundesbank Chief Joachim Nagel advocates for caution. They face council members who fear inflation that is too low – triggered by the persistently strong euro or the consequences of the trade dispute between the US and EU.

The US Federal Reserve maintains the key rate at 4.25- 4.5% despite massive pressure from President Trump. Trump had repeatedly attacked Fed Chair Powell and demanded drastic rate cuts. For the first time in decades, two Fed governors voted against the majority and for a rate cut. While the US economy grew by 3%, the Fed sees a slowdown. Trump‘s import tariffs (15- 25%) create additional uncertainty for monetary policy. Powell remains calm and emphasizes the independence of the central bank.

FOCUS

HOW TECHNOLOGY MADE THE STOCK MARKET DUMBER

Technology was supposed to make markets smarter. The opposite has happened. A strange anomaly permeates modern financial markets: the more information available, the faster computers calculate, the more sophisticated algorithms become – the more irrational prices become. Why do markets fail precisely when they should be at their most intelligent?

 

VALUE SPREAD

The „Value Spread“ is a measure that quantifies the valuation differences between expensive and cheap stocks. When it is high, investors pay a lot for their preferred stocks compared to those they dislike, and vice versa. For about 50 years, from 1950 to almost 2000, the Value Spread was stable and fluctuated between 6× and just over 3×. This remarkable consistency reflected relatively stable market dynamics where valuation differences remained within predictable boundaries. Then the Value Spread exploded in 1999-2000 to never- before-seen heights. This period marked a fundamental turning point in how markets valued stocks. What could have been considered a temporary anomaly proved to be a harbinger of a new era of market dynamics.

Even more shocking was that in 2019-2020, the spreads reached or even exceeded the values from 1999-2000. COVID amplified the spread even further beyond the 1999-2000 level. Simply put, this trend means that investors are willing to pay increasingly higher valuations for their favored stocks while, conversely, valuations of cheap stocks become even cheaper. Particularly alarming is the duration of the wide Value Spreads. During the dot-com bubble, spreads remained above the historical median for 5 years. The previous record of 6 years from 1976 was achieved at much more moderate levels. Currently, spreads have been above the historical median for 10 years already, and at high values or large valuation differences. This unprecedented persistence exceeds all historical comparisons and suggests a fundamental change in market mechanisms.

 

VALUE-INVESTORS

Investors who based their investment decisions on fundamental data faced extreme headwinds. Expensive companies became increasingly expensive, and companies with strong fundamentals and cheap valuations (Value stocks) became increasingly cheaper. This resulted in these investors (Value investors) underperforming compared to their benchmark indices and ultimately capitulating or giving up. Interestingly, these Value strategies made up for their relative losses within a short time after both extreme phases of high Value Spreads. These rapid recoveries confirm the thesis that the extreme spreads represented inefficiencies that ultimately had to correct themselves.

 

REASONS

What influences and factors lead to these high Value Spreads and cause market efficiency to fail?

  1. Passive Investing: The theoretical question is: „How much of the market can be indexed and still lead to reasonable prices?“ The growth of passive investing leads to fewer active price discovery mechanisms. When more „rational investors“ switch to indexing than „irrational investors,“ the latter have more influence on price formation. This can lead to larger valuation deviations as less competent actors dominate the markets.
  2. Extreme Interest Rates Over a Very Long Period: Very low or negative real interest rates over extended periods can tempt investors to make „crazy“ decisions. Investors accept irrational valuations even when this is not mathematically justified. This explanation has a crucial weakness: it only applies to the 2019-2020 episode with very low interest rates, but not to the dotcom bubble of 1999-2000.
  3. Technology: While technology has increased the speed of information processing, it has paradoxically worsened the accuracy of price discovery:
  • Social media destroys the independence of the „wise crowd“ and transforms it into coordinated, uninformed groups.
  • Gamified trading via smartphones makes investing addictive like „video poker with better odds.“
  • 24/7 trading and seemingly „free“ trading promote impulsive, poorly thought-out decisions.

These technological developments have created more irrational market participants while simultaneously making their behavior more extreme, leading to larger and longer-lasting market inefficiencies.

 

EFFECTS

While low interest rates and passive investing contribute to less efficient markets, new technologies and the resulting investment behavior of investors seem to have far more influence on increasing market inefficiency. While new information flows into stock prices faster today than before, this doesn‘t mean that prices were particularly accurate before or after the new information. For most medium- to long-term investment strategies, this nanosecond speed is completely irrelevant. This is also shown by the example of our internal models, which are based on algorithms. When you build in any time span between trading decision and execution in backtests, the results of the models deteriorate only marginally, sometimes they even improve.

The apparent availability of „all world data at your fingertips“ leads to overconfidence among investors. Yet the availability of data was never the most difficult part of investing – it‘s about filtering the crucial data from the endless sea of data and making rational decisions from it. These developments have created more irrational market participants and made their behavior more extreme. At the same time, due to the „death of value investors,“ more rational investors have switched to indexing.

Since prices are a money-weighted average of opinions – behind every seller is a buyer – a larger share of misguided actors leads to more inefficient prices. Warren Buffett confirms this observation: „For whatever reasons, markets now exhibit far more casino-like behavior than they did when I was young. The casino now resides in many homes and daily tempts the residents.“

 

IMPLICATIONS

If markets have become less efficient, rational value strategies should be more lucrative for those who can stay the course long-term, but also harder to stick with. The underperformance periods will become larger and last longer. That would be fair in theory – more profit for those who manage to hold on longer. In practice, the flight from rational investment strategies will likely continue. Despite the theoretically better opportunities, investors avoid value strategies („death of value investing“). This is also due to career risk. A long period of underperformance can lead to job loss, so one wouldn‘t even be around anymore, even if the investment paid off after years. Therefore, many investors will no longer take this risk at all.

Some investors hide in illiquid investments, so-called „Private Assets.“ The flight into Private Equity and Private Credit also occurs because such investments show only very low volatility due to illiquidity. However, this flight has already left traces in the markets. Previously, these investments often contained a so-called „Illiquidity Premium“ (higher returns for illiquidity), which has partially transformed into an „Illiquidity Discount.“ Basically, illiquid investments can also offer investors a certain protection from themselves – since the investments cannot be traded. Since costs remain very high, an „Illiquidity Premium“ must absolutely be present in order to achieve a satisfactory return.

 

INVESTMENT BEHAVIOR

How can investors profit from this market inefficiency and where should they not attempt to do so?

  1. Really study history: Understand the difference between „statistical time“ and „real-life time.“ Backtests look easier than reality – difficult periods feel much longer and are harder to endure.
  2. Understand valuation changes: Don‘t be fooled by long-term valuation shifts. Example: US stocks have beaten other markets since 1990, but 85% of the outperformance came from valuation expansion, not fundamental superiority.
  3. Total portfolio instead of individual positions: „Line items“ (individual parts of the portfolio) will always disappoint – this is normal with diversification. What matters is the performance of the total portfolio.
  4. Interpret 3-5 year horizons correctly: At 6-12 months, momentum is legitimate, but at 3-5 years, one should be diversified across different risk factors. Investors often do the opposite.
  5. Improve processes: Use machine learning, alternative data sources, and adaptive models. Diversify pure value strategies through other alpha sources.
  6. Longer time horizons: A long-term horizon is the best recipe toward an investment superpower.

 

CONCLUSION

  1. Rational active investing – for those who can withstand the volatility and where excess returns can be created long-term.
  2. Indexing – completely reasonable option for part of the portfolio – one shouldn‘t bet against the herd everywhere.
  3. DON‘T hide in „Private Assets“ – only invest where an illiquidity premium exists.