US stock guru Abby Joseph Cohen sounds warning on Trump-inspired market mania

One of the world’s most renowned market strategists, Abby Joseph Cohen, has warned that a tariff-wielding Donald Trump could tip key economic allies like Germany into recession, resulting in global economic and military weakness.

The former president of the Global Markets Institute at Goldman Sachs, who was described as one of the most powerful women in business by Fortune Magazine, said investors needed to “look through” the current stock market euphoria and understand a world where trade wars, tighter borders and loose regulation would set back both the US and global economy.

Ms Joseph Cohen, who is now a professor at Columbia Business School in New York, told a global alumni gathering that Trump’s tariff policies could not come at a worse time for global allies. Trump has proposed an across-the-board 10 per cent tariff on imports.

“Much of our trade is done not just with China but with our allies in Europe. We see weakness in Germany, in parts of Scandinavia and elsewhere. An across the board tariff… could be a significant problem,” Ms Joseph Cohen said.

“I just hope that the people who focus on trade policy in the Trump administration recognise that countries in Europe are dealing with their own slow growth. They are important military allies of the United States and it would not be in our interests for them to have more economic woes than they have now.”

Ms Joseph Cohen also expressed concern that Trump’s stated desire to run roughshod over the US Federal Reserve, and to wind back regulation, would put the country in economic danger.

She began her career as an economist in the US Federal Reserve at a time when President Nixon pressured the then-chairman to ensure access to easy credit to support his re-election bid.

The resulting policies helped push inflation to 12 per cent.

To get inflation under control, interest rates were raised to a peak of 20 per cent under the so-called Volcker shock of 1979-80.

“I began my career at the Federal Reserve, and there was a chairman who bent to political will: the results years thereafter were very problematic,” she said.

“I think that we need a Fed that is independent and a Fed that has credibility. If you damage the independence of the Fed, then I would be I would be concerned.”

Ms Joseph Cohen was optimistic that the finance industry would back against significant deregulation saying that many leaders she had spoken to do not favour looser rules, and explained that one of the worries that major firms often have is counterparty risk.

“’Regulation is not just on me — Bank A — but the regulation also gives me confidence that banks B and C know what they’re doing,” she said.

“Large financial institutions, global ones, have learned many lessons in recent years. They have become much more careful following the global financial crisis, even more careful, more recently, following the problems in places like Silicon Valley Bank.”

She did worry that loosening rules on mergers and acquisitions that had investment banks excited could ultimately backfire.

“Private equity are thinking less emphasis on antitrust policy might be a good thing. However, when antitrust policy becomes too lax you get too much concentration (and) a very small number of participants’ very significant pricing power. That can be inflationary and a worry if we move towards an oligopoly.”

Ms Joseph Cohen also expressed concern that government acceptance of highly volatile Bitcoin as an asset on bank balance sheets would actually limit banks’ ability to lend.

“When volatile assets are allowed on balance sheets, the bank has to put up a very significant amount of capital against it,” she said.

“Think of it as a very significant haircut. And in the case of the volatility that you might be seeing with regard to crypto, we would have a situation where we could have haircuts of as much as 90 per cent.”