That “Eases” post last week was very timely. I will discuss an additional wrinkle later in the post that may affect the ease probability distribution. But first, back in February, I outlined how Trump looks at tariff percentages (https://curveadvisor.substack.com/p/concepts-of-a-plan), and how he seems to be looking to zero out the trade balance via tariffs. I have been warning of larger-than-expected tariffs and international backlash on US products and services (and assets) for weeks now. So the major events of Liberation Day were not really that much of a surprise to me. This is not to say that there weren’t some things that I was surprised about, in particular being head faked by Trump’s “lenient” comments. But I felt confident about his eventual issuing of high tariffs. Here are my main (lengthy) takeaways from an eventful week.
· First, I have to say that I was mistaken about tariff implementation that I mentioned in the podcast I did on Thursday (https://x.com/LiveSquawk/status/1907885851465625758). I thought Trump was doing 10% at a time (based on the initial headlines I saw), but it turns out that Trump is doing 10% and then 4 days later doing the rest. I have no idea why he wouldn’t wait longer to do the rest, since for most countries, a 10% tariff is very manageable, we may not get retaliation, and we have time to get to some kind of “deal.” Doing all of it at once could be a recipe for disaster. I don’t even know if you can answer phone calls from that many countries and companies in 2 business days. Why 4 days? Especially over a weekend. I’m wondering if he plans on delaying the second part.
· People are talking about the equity selloff as some kind of disaster. Maybe it will be. To be sure, there are numerous things Trump did wrong in his first 2.5 months. I may write about the MAJOR thing Trump did wrong in a future post. But to put into context (so far), we had a massive equity run-up based on technology and foreign buying, and we gave back a small percentage of the multi-year gains. Value investors would still say we are “overvalued.” I think depending on the magnitude of the international backlash, “fair value” is some place much lower. My vol colleagues are implying we may get a bounce in the short term. I don’t know. I call equities the “Devil’s Instrument” for a reason - because I find it difficult to predict short term movements. Unfortunately, interest rate direction is keenly following equities now. But I primarily trade relative value (see Value on the Curve section).
· I hear comments like “I wonder if the equity selloff is going to make Trump stop.” Well, Trump did say that he didn’t care what equities did. Bessent said what happens to the economy the first 6-12 months is a result of Biden, so Trump clearly wants to get all the pain over with sooner to begin the rebuild. Stop looking at your 401(k) and take a bigger picture view. The key to the equity selloff is not “how much did we lose?” – it’s “how much did we lose relative to everyone else?” This sounds like something Homer Simpson would say. The whole premise of the Trade War is that we are in a much better economic situation than everyone else, and we can handle the pain better. So if we are down 15% but others are down 30%, Trump thinks we “won” and are in a better position to negotiate a good deal. At least that would be the theoretical logic behind even starting a Trade War to begin with. So it would be a shock if Trump backed down any time soon. If anything, I am expecting to see re-escalation against China. Otherwise his threats of retaliation would go down the toilet and almost EVERYONE will start retaliating. I think the relative equity results may not favor the US as much as initially thought because of foreigners targeting large US firms and the withdrawal of foreign investments.
· Speaking of China, I am assuming Trump game-planned tariffs to at least “Level 1” game theory thinking, where he goes over China’s possible initial responses. Because colossal stupidity will be confirmed if he didn’t plan for rare earth restrictions (we did impose chips restrictions after all) or the fire sale of US assets in China (like we are doing with TikTok).