Holy shit. That pretty much sums up what's been happening in the market. After my last post, the market made a marginal new high before getting the biggest rug pull of all time. In my previous post I mentioned that if the trade war escalates again, it would create market turbulence again. Well, it started off as moderate turbulence as Trump went back and forth making threats and then backing down/modifying them. Then he dropped the bombshell when he announced his "liberation day" reciprocal tariffs with his idiotic chart showing what tariffs other countries were supposedly charging the US, when in truth the "tariff" for each country was their trade deficit divided by imports. This was far worse than what the market was expecting and the market has imploded since dropping 20% from the recent peak making this the 3rd bear market decline (20%+) in 5 years which is unprecedented. This weekend Trump explicitly stated what he has always believed going back 30+ years which is he wants to eliminate trade deficits with all other countries, due to the US being "ripped off". Very few people, me included, thought he would go this far and this is why the market has collapsed.
Noted tech permabull Dan Ives provided a very dire assessment to the consequences of these punitive tariffs which take effect April 9 due to the global nature of the supply chain for tech companies. It would also be terrible for autos and lots of other businesses. Trump just basically dropped a bomb on the economic plumbing of the world which took decades to develop all because of his boneheaded belief that trade deficits are bad, as it means you are being "ripped off". Trump, Navaro, Lutnick and the rest are clueless stooges.
Take a step back and look at the stats. The US is the most dominant, and arguably most prosperous country in the world. Median American real personal income has been in a rising trend for decades and is one the highest in the world all while having a trade deficit every year since the mid 70s. "But it's unsustainable" is the rhetoric. Really? Why? Look folks. don't believe in the bs that Trump and Co. are spewing. Here's a simple example to understand why a trade deficit is not necessarily bad, and can actually be good. A real estate agent has a "trade deficit" with his assistant, paying him $50,000/year to book appointments, answers emails, do marketing, ect. This allows the agent to focus all his time on meeting clients and closing deals which results in him maximizing sales resulting in $400,000 in commissions/year. So, the agent wasn't getting "ripped off" having a trade deficit with his assistant. In fact, he benefited from it. If instead he eliminates this "trade deficit" and does all the work himself, he will have to spend a significant amount of time and effort doing admin and marketing himself, which means less time to spend meeting clients and closing deals. Also, he will probably not be proficient in doing the admin and marketing which will further decrease his deals. In the end, he is worse off. This is obviously a simple example, but you can see the point. By using comparative advantages, countries establish trade which in the end is a win for everyone in aggregate. Yes, I know that there's unfair trade practices (which should be addressed), and people can lose jobs to workers who do it for cheaper in foreign countries which forces them to find another job. It's not a perfect system, but it's the nature of capitalism which has led to the prosperity and standard of living we enjoy today which is far better than what we had several decades ago. Of course, there are still major problems we face today like housing affordability to name one, but again, look at the stats overall. Anyhow, I digress.Trump and his stooges wants the US the manufacture everything again. No chance that is going to happen. Tariffs or no tariffs, the economics don't make sense. And do they want Americans to go back to working in shoe and textile factories again? Come on man. It's asinine. With the more value added manufacturing jobs, again, the economics have to make sense. If you want those jobs to return, focus on tax reform and other incentives targeted to specific industries if it's feasible.
Over the weekend a lot of folks including guys like Bill Ackman were begging Trump to reconsider these ridiculous, punitive tariffs, but he didn't budge and told everyone to "take their medicine". People are still holding their breath that this could all still be a big bluff as per Trump's Art of deal tactic of asking for the moon and then settling for less. It's obviously still possible as there has been reports that countries have reached out to Trump but I'm not going to hold my breath at the this point. This clown needs to be reigned in by his own party and that's going to require 2/3 of congress to vote on a bill that would cede Trump's power to issue these tariffs. That's a huge ask as it would require a significant amount of Republican senators to turn on Trump. Some have already start to consider it as they are being pressured by business and farmers, but again, I won't hold my breath. It would probably take considerable damage and time for them to act which by then would be too late.
This is an orange swan event, I'm not going to lie, this has a 2020, 2008 feeling to this. If I just look at the indicators, despite seeing some extremes, I also saw too much hope and desperation over the weekend which told me we weren't done yet with the selling. To get a true washout you need to see capitulation. I'm not sure if today's crash opening was it. The VIX did hit 60 which is obviously quite high and ticks the box of being an extreme, but keep in mind the VIX hit 80-90 in the GFC and Covid meltdown. Today, even the safe havens of bonds and gold have been selling off. There's no place to hide. I have a nauseating feeling when I look at the market. In the past that meant that a ST low was probably not too far off from a time perspective, but again, I won't hold my breath. If this post ends up marking the bottom or close to it, I will gladly accept this post being the ultimate contrary indicator, but deep down I don't think so.
