Well, he’s done it.
And by him, I mean President Trump.
And by it, I don’t mean tariffs.
I mean forcing me to write about politics, which deserve to be kept separate from investment conversations, but Wednesday’s liberation day announcement (worth watching if you haven’t) took a 2 by 4 to separating politics from your portfolio. Whether that lasts is the question investors are now asking.
Here are my liberation day thoughts…
U.S. stock market investors hate it so far, judging by the 20% sell-off. The market wasn’t expecting what was rolled out despite President Trump’s forty year love affair with tariffs. That’s not surprising given that the “reciprocal” tariffs portion wasn’t reciprocal, but based on an odd trade deficit formula.
I’ve spent time digging into this for readers and have some thoughts, not predictions, since as Sam Ro pointed out, If you know where things are heading, then you probably don’t know what you’re talking about.
If It’s About Revenue Too, Don’t Expect a Full Reversal
Listening to the extended roll out, it’s clear the administration wants tariff revenue. It’s not just about trade. They think the U.S. consumer keeps the global economy going, so they want to capture import revenue to help with deficits, future spending, and tax cuts.
Therefore, it’s reasonable to assume higher tariffs are staying, and we won’t get an announcement completely reversing course after some trade wins.
Former Trump Treasury Secretary Steve Mnuchin said on CNBC that settling at a 10% tariff and dropping the reciprocal formula would mean a policy the world can adjust to and provide us beneficial revenue.
Howard Marks sharing how this is probably the biggest change in environment he’s seen supports this read.
Continuing False Reciprocity Will be Bad
Continuing with Steve Mnuchin, he hopes the “reciprocity” will get negotiated away, which can be translated into it’ll be bad if it doesn’t. Others have made this point.
Recession fears have increased. You can see this in the dollar’s weakening against other currencies, which shouldn’t happen with higher U.S. tariffs. And we’re now seeing big banks and prognosticators up their recession odds. I’ve never understood how you can ballpark recession odds, but directionally we’re seeing discomfort registered in these forecasts.
There Are Trade Imbalances to Address
It’s complicated, but China and Germany provide two strong examples of why we’d want to reorient trade with certain countries.
China and Germany are export-based economies. They limit internal demand for their goods and use various methods to make their exports cheaper. They also protect their own markets from foreign imports. This outsources demand for their goods and relies on American consumers living in a relatively open market to keep their economies going, without providing the same access to American goods. You can dig into this more here in this Trumponomics podcast episode. Side note: this Bloomberg podcast is a great resource.
This is One Way to Get Yields Down
The administration has been focused on lowering the 10-year yield. It’s now around 4%. Mortgage rates have dropped, and there are more Fed expected rate cuts this year than before.
Some have argued that it’s surprising (and concerning) that yields haven’t dropped more, perhaps because tariff driven inflation and a recession are on the table. In fact, as I finalize this piece today, bond yields are back up a bit.
Stay Tuned
We’re living this in real time, and there’s lots more to digest, like breaking out how different investments have performed, stagflation fears, investment guidance, and what reorienting trade could bring long-term.
I’ll keep chipping away and share more liberation day thoughts.
Feel free to reach out with any questions…
