Tariffs, Trade and Trauma

Liberation has morphed into desperation after the U.S. imposed tariffs on the world on Wednesday. $6Tn of wealth have been erased in 2 days from the equity markets in the U.S., or about 10% of the total ($62Tn). And we could argue that some of the erased wealth was an excess, and should have never been created, but as Buffett says, in the short run, the market is a voting machine, while in the long run, is a weighing machine. Why are we here? If you look at the chart below, you will see that, for decades, the U.S. has had a trade deficit with, basically, the world. That pushed manufacturing out of the US and into Asia, looking for cheap labour, low levels of domestic consumption and weaker currencies. The US became, basically, a consumer machine in terms of goods, creating a huge imbalance. As revealed during Covid, efficiency has a cost, and that cost is resilience and dependency. And even though the writing was on the wall for decades, we suddenly realized that our biggest competitor, China, has become our factory, and also our biggest creditor. What the Trump administration seems to look for, is to reverse that imbalance by onshoring manufacturing back to the U.S., making it cheaper to build things in the U.S., and more resilient, by imposing tariffs on imported goods. Furthermore, the U.S. has a twin deficit problem, not only a trade deficit, but also a budget deficit. By imposing tariffs on imported goods, producing countries will pay for the majority of the tariff tax, while consumers in the U.S. will pay, supposedly, a small portion of it. Tariff revenue, paired with government spending cuts, will hopefully bring the deficit down. Since trade deficit rests from GDP calculation, we might even get a growth boost. But there are timing and mismatching issues, that the Trump administration hopes to fix through negotiation. Vietnam has already folded, confirming they will drop their tariffs on American goods to zero. But the big problem is China. And they’re famous for their patience and their ability to withstand pain. And Xi doesn’t have to worry about midterms or 4 year presidential cycles. That’s why Trump has initiate this before his first 100 days in office. We may see a negative gdp growth number in the U.S. soon, and further wealth erased in the markets. That will create more pressure on the Fed, which may be forced to act. The coming weeks will be a test for those investors who have bet on passive strategies as a holy grail. And also for active managers that need to show their stripes, after years of uninterrupted and straight lined markets full of liquidity and suppressed volatility.

Want to know more? You can find all our posts at https://www.myfundamental.net/insights

#iamfundamental #soyfundamental #wealthmanagement #familyoffice #financialadvisor #financialplanning

#policymistake #ratecut #stagflation