Authored by Peter Tchir via Academy Securities,
Apparently today at 4:00 pm we will learn the details of this wave of tariffs.
Treasury Secretary said yesterday that this will represent a “cap” on tariffs and basically the starting point of negotiations from here (we will see if that messaging sticks).
What I think we know:
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Relatively little “negotiating” has occurred, which I believe is not what the administration expected. Other countries are “playing” the President differently than they did during Trump 1.0. It also probably doesn’t help that this time around, there is no “divide and conquer”.
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Other countries are already having conversations about trade, bypassing the U.S. Apparently, Japan, China and South Korea are talking. That makes sense as the U.S. policy toward Taiwan is unclear and that could dramatically impact South Korea and Japan. Canada and Mexico are apparently having discussions. I’m sure Europe (or some countries within Europe) are having a variety of trade dialogues (it is really, really, really important to notice that they do not want to spend their increased military spending on U.S. equipment – to the extent they can avoid it).
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Other countries are likely going through their tariffs, line by line, estimating which ones they can give in on, with minimal impact and which ones are important. Given that the U.S. is fighting with everyone and allegedly still hasn’t finalized its plan, we are likely to not fare well at the granular level.
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The Geopolitical actions so far – from NATO, to Russia/Ukraine, to 51st State, to “take” Greenland, etc., have only added to the questions about dealing with the U.S. that other countries have.
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The U.S. does not have a lot of excess capacity (it will take time to build) and so far no legislation on the deregulation front
Deliberate/Thoughtful Tariffs :
- Risk Assets can and should rally. If these sort of tariffs had been the starting point, we could probably move on. But they weren’t and coupled with the issues listed above, I think the rally will stall. It will need indications that global tensions with trading partners have eased to reduce. It will be curious to see how his base responds? Will there be any erosion of the aura of “the art of the deal”?
Medium Level of Tariffs:
- Anything less than 15% to 20% across the board tariffs. I expect slight risk asset rally (market seem desperate to rally on certainty) but think that fades quickly and we drift lower, trading on headlines going forward.
Aggressive Tariffs
- Immediate sell-off in risk assets. Stocks drop 3% or more quickly with ongoing selling pressure. 10-year treasury likely breaks 4%.
I hear a lot of chatter that the policies will force the Fed to act.
Maybe but, I think the Fed will act late and it will be too small relative to the total revamp of global trade to stop the slide.
There were a lot of easier ways to get the Fed to cut – like stick to “drill baby drill”, reduce regulations (ideally via legislation as opposed to executive orders), etc.
The whole “this is all to get the Fed to cut” is incredibly risky (who knows what was set in motion) and only seems to have gotten traction because Wall Street doesn’t want to believe how much this administration believes in the benefits of tariffs.
Hopefully I will be disappointed and wrong and markets can rally and threats to the global economy can be greatly reduced, but I think once we get beyond debating the tariffs, we will be forced to digest the mess that global trade is in, and that cannot be good for corporate earnings or the economy.
For better or for worse, here is Academy on Bloomberg TV this morning, where, the jetlag worked in my favor as I was up at 3 am anyways
Should be an interesting few days, to say the least!
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