1930 Deja Vu

Exiting the first quarter, stocks are having their second worst start to a presidential term on record, the Barron's article this morning aptly sums up Wall Street's hopium based "strategy" for the remainder of 2025:

"This quarter has been turbulent but markets should brace for even worse as a global trade war kicks off.

It’s been a bad quarter and the risks are mounting but don’t write off the year just yet."

Mike Wilson from Morgan Stanley said the same thing on Bloomberg Surveillance on Thursday morning - the first nine months will be brutal but then comes "the good stuff" in Q4. Analysts are calling it the "detox" period, echoing Treasury Secretary Scott Bessent.

What it comes down to and the reason why Trump sequenced the bad stuff first is because he needs to make room in the budget for his planned tax cut. That's why he is prepared to tank the economy in the first half of the year to reduce the deficit. As I explained recently, if he pushes the economy into recession, his plan will backfire, because tax receipts will collapse and the deficit will blow-out record wide which is where it ended in his first term during the pandemic - the largest deficit in U.S. history.

“This will continue to spur growth,” Trump told reporters. “We’ll effectively be charging a 25% tariff.”

“We’re looking at much higher vehicle prices,” said economist Mary Lovely, senior fellow at the Peterson Institute for International Economics. “We’re going to see reduced choice. ... These kinds of taxes fall more heavily on the middle and working class.’’

Trump wrongly believes that foreign manufacturers pay 100% of tariffs. Technically he is correct - the tariff itself is paid at the point of entry; however, usually auto manufacturers can raise car prices to offset the tariff at least partially, in which case the U.S. consumer ends up paying much of the tariff. Trump has repeatedly been saying that his tariffs will be "lenient", but this week's auto tariff caught Wall Street offguard, as it was far worse than what they were expecting. The auto trade deal with Canada and Mexico which Trump effectively destroyed this week was negotiated by Trump himself back in 2018, which he called "USMCA" renamed from NAFTA. At the time, he called it the greatest trade deal in U.S. history. This week he called his own trade deal a bad deal for the U.S. One can only imagine what is coming next week when across the board tariffs are announced on everything. Trump's definition of "lenient" is measured against his own standard of worst case scenario, it's not measured against Wall Street's consistently overly-optimistic predictions. The potential for "surprise" is massive.

However, the real unspoken assumption in this high risk trade war is the total faith in monetary policy and the ability to pull the economy out of any type of recession with minimum dislocation. It appears that investors have forgotten that back in 2008 when the GFC got started, it took rate cuts from 5.25% all the way down to 0% AND record QE to reverse a -55% stock loss.

Unfortunately, this time, the Fed has been effectively sidelined in 2025. Here is what Fed members are thinking at the end of the first quarter:

Notice below the difference in inflation expectations now versus back in Trump's first term. It's possible this trade war will force the Fed to resume raising interest rates again in a repeat of the Volcker fiasco circa 1981 which caused 10% unemployment.

All of this risk just for ANOTHER tax cut, and all under the fake auspice of helping the working class, when it's really only about enriching oligarchs.

Now for an update on the collapsing Artificial Intelligence bubble:

This week we got news that China is banning the highest performance Nvidia chips due to environmental concerns around energy consumption. This is an indirect way of escalating the AI trade war by pressuing the semiconductor sector. China is pursuing much more of a software based AI solution versus the hardware arms race that U.S. Tech giants are pursuing. On that note, we learned that Microsoft has cancelled some data center contracts recently, which is leading to concerns of a slowdown in the "hyperscaler" growth rate:

“People are talking, literally talking, about $500 billion, several hundred billion dollars...I think, in a way, people are investing ahead of the demand that they’re seeing today"

TD Cowen analysts said in a note in February that Microsoft had canceled data center leases worth “a couple of hundred megawatts” — potentially signaling an oversupply of AI infrastructure."

The problem for building out data centers AHEAD of demand is that a lot of the AI semiconductor hardware being bought today will be obsolete a year from now. It will be obsoleted by China's new DeepSeek software models AND by Nvidia itself which is planning much faster chips next year. So it's entirely possible that a large portion of this hardware spend will be a TOTAL write off. The largest in corporate history.

Another shock to the AI sector this week came amid cooling demand for what was considered the hottest IPO of 2025:

"It was supposed to be one of the splashiest IPOs of the year. Now CoreWeave’s stock-market debut is turning into a high-profile stumble for both the AI industry and new public listings."

Here we see the AI and Robotics ETF which made its all time high back in late 2021 and a second lower high this year.

In summary, here comes Liberation Day.