Charlie Jamieson, Chief Investment Officer

^{This article was also featured in the print version of The Australian, 15 April 2025.}

As you showered this morning, chances are you didn’t give much thought to the complex plumbing required to deliver the steady flow of water – and why would you? Similarly, few consider the intricacies of the financial ‘plumbing’ that allows the smooth flow of capital and credit, providing market stability and order, thereby allowing investors to make assumptions about future outcomes.

Last week US President Donald Trump issued an executive order aimed at increasing the water flow of shower heads, a move that has sparked both amusement and concern. While this may seem like a niche regulatory change, it intersects with broader environmental and economic issues.

Over the week, Trump was forced to think about the plumbing of the financial system, as his policies caused chaos in markets and severely impacted market liquidity with huge uncertainty. While Trump may have pushed for higher water pressure in American shower heads, he has ratcheted up pressure in financial markets, whipsawing assets with unprecedented volatility around a relentless stream of headlines, policy actions and counter reactions.

Imagine the financial markets as a complex network of pipes and valves, where the flow of credit is akin to water pressure in our homes. Too much pressure can lead to leaks and bursts, while too little can result in stagnation. Trump's executive order, while seemingly focused on a mundane household issue, highlights the importance of balance and regulation. Just as a powerful shower head can disrupt the delicate balance of water distribution, an unchecked blockage of credit can destabilise financial markets.

Working out the end goal here is difficult, but this certainly feels like a deliberate detonation to reset the system, one that appears to be unfolding in multiple stages to achieve this outcome.

The initial approach appears to involve tough rhetoric, crushing investor confidence, being unpredictable, and imposing higher tariffs — all driving ongoing uncertainty to shock the markets. It’s no wonder that such actions will very likely crush economic activity, thereby taming inflation expectations. While tariffs are inflationary in isolation, when combined with hugely negative growth, inflation is likely to quickly fall after any one-off adjustments.

Negative growth paves the way for the US Federal Reserve to slash interest rates, enabling the refinancing of both government and corporate debt built up during the pandemic at significantly lower levels than current rates. The final piece of the puzzle is likely to be fiscal stimulus in the form of tax cuts, aimed at priming the economy ahead of the midterm elections.

The heightened uncertainty surrounding these developments has likely caused the economy to experience a sudden halt, with financial conditions tightening extremely quickly. Trump’s 90 day ‘reprieve’ for nations other than China only prolongs this uncertainty. How can a business confidently place an order with an international supplier when it has no clarity on the eventual landed cost of goods?

Markets have reached an inflection point, after three years of elevated bond volatility and a somnambulant equity volatility complex, risk has shifted from interest rates to equity and credit.

Markets have rushed to exit crowded investor positions, forcing chaotic price revaluations as market makers are overwhelmed by the new risk environment. Corporate credit has been a particularly difficult asset, as liquidity has evaporated and spreads have blown out, unsurprising given valuations were at the highest levels against government bonds since the pandemic.

With the macro landscape quickly darkening, many investors who were expecting to make a slight amount of additional income now find themselves inadvertently stuck in a clogged financial market ― facing a material credit blockage and a sudden lack of liquidity. The asset they expected to be a defensive counterweight to riskier assets has become highly pro-cyclical. Drawing connections between household maintenance and the health of our financial markets reveals the importance of understanding the interplay between these seemingly disparate elements. By examining the flow of credit and liquidity, we can identify potential risks and implement measures to mitigate them. Just as we would not ignore a leaky faucet, we must not overlook the signs of financial instability.

Ordinarily, the recent market turbulence would result in supportive policy action to stabalise conditions and help contain volatility. This time however, that just isn’t coming. US fiscal policy is in reverse, with efforts to remove a trillion dollars in spending from the economy. Monetary policy is stuck, pending a financial accident to force action, and liquidity policy has been put back on the shelf.

Markets have been obsessed with ‘landings’, but this moment feels more like a mid-air engine failure. We can glide for a little while, but Trump is risking a catastrophic acceleration in market blockages to a point where a highly stimulatory policy response will be necessary. That doesn’t guarantee immediate market performance, especially if the environment is too far gone. For context, during the GFC, the US Federal Reserve slashed rates from 5.25% to 2.00% by April 2008, yet equity markets didn’t bottom until March 2009.

Investors face a more volatile and uncertain environment, with diminished policy support, rising liquidity risks, and the need to reassess portfolio resilience as traditional defensive assets become increasingly pro-cyclical. Let’s hope the 90-day reprieve brings some dealmaking to provide more certainty and unclog the system ― restoring function to a critical part of the financial plumbing.