It Was All Going So Well
- MAC10
- Apr 30
- 4 min read
This week Trump celebrated his first 100 days in office and his major accomplishments. His goal from the outset was to implode the status quo. For that, I give him A+.
In the first 100 days, Trump gave the stock market sticker shock due to his trade war, but his idolatrous base was largely unaffected. I predict that in the next 100 days he is going to give his unwavering base sticker shock as well.
Preliminary Q1 GDP came out today and it was negative as expected. Everyone knew that Trump's trade war would lead to manic hoarding both by merchants and consumers ahead of the tariffs. Nevertheless, one mistake almost every economist is making right now is to believe that the Q1 massive increase in import costs is a one time shock. The primary theme of 2025 will be Supply Shock. Currently, the overall expected tariff rate for 2025 stands at 28%, which means that surging imports will be a drag on GDP for this entire year. Of course, the Q1 import increase was due to a surge in the quantity of goods imported, however these remaining quarterly increases will be due to a surge in prices paid. Nevertheless, the effect on GDP will be the exact same - surging import costs will "crowd out" consumption for domestic goods and services, which will have the opposite effect Trump expects. Unfortunately, when you put tariffs on goods that your home country doesn't make, then consumers have no choice but to pay more for imports because there is no "substitution" of consumption available. That is called 100% demand inelasticity, something the Trump Administration has never heard of before.
"President Donald Trump’s tariff onslaught has roiled Washington and Wall Street for nearly a month. If the trade war persists, the next upheaval will hit much closer to home."
By the middle of May, thousands of companies — big and small — will be needing to replenish inventories. Giant retailers such as Walmart Inc. (WMT) and Target Corp. (TGT) told Trump in a meeting last week that shoppers are likely to see empty shelves and higher prices. Torsten Slok, Apollo Management’s chief economist, recently warned of looming “Covid-like” shortages and significant layoffs in industries spanning trucking, logistics and retail."
Of course the trade war is making all manner of prediction more difficult, not the least of which is predicting corporate profits, but instead of questioning Trump's trade war, CEOs are merely saying in earnings calls that they can't predict the rest of the year. They have zero visibility. It's a total cop out and it's an outright lie. They all know that the rest of the year will be FAR worse than Q1 for corporate earnings and revenue. How could it not be when their supply costs are sharply rising and their demand from China is collapsing. Among those companies that will be hit hardest by China's de facto embargo of U.S. exports are Apple (iPhone), Tesla (EV), Nvidia (Semiconductors) and Microsoft (software). In other words, the Magnificent 7 have the most to lose in terms of revenue from this trade war. In addition, the higher import costs discussed above will serve to REDUCE demand for domestic goods and services which is the opposite effect the Trump team is seeking. In other words, this trade war is following a path that someone with zero knowledge of economics would take - slap tariffs on exporters and tell everyone that the importing country ALWAYS benefits. Even Treasury Secretary Scott Bessent doesn't understand that thousands of U.S. businesses rely upon Chinese imports to provide value added goods and services. He thinks that only the Chinese can lose jobs from this trade war.
The other big news event is the all-important tax cut which is supposed to come by the end of May or June at the latest. The bull case at the moment is that the trade war will soon de-escalate and then the tax cut will carry the market higher. Unfortunately, the tax cut is entirely dependent upon the revenue from the trade war. So if there was no trade war, how could there be a tax cut? Minor detail for the bull case. It doesn't matter because Trump has no intention of fully de-escalating with China. His first goal is to shift production to other Asian countries and out of China, a process that began back in 2018 during his first trade war. And his second goal is to shift production from other Asian countries back to the U.S. Unfortunately, China knows that Trump wants to put China Inc. out of business, therefore they have ZERO incentive to de-escalate.
The net result of this trade war / tax cut policy will take from the poor and give to the rich as detailed by the Yale Budget Lab:
The irony of this trade war is that from a financial markets perspective the rest of the world is gaining while the U.S. is losing. Even China's stock market is outperforming the U.S. Here we see the Magnificent 7 are STILL in bear market even after the recent bounce. Meanwhile the rest of the world is back near all time highs, having been the primary beneficiary of the first 100 days.
In summary, I started blogging in late 2006 at the height of the subprime bubble. Back then, I wrote on the dedicated theme of the imminent collapse of Globalization. That was ahead of the Trump era by many years. At the 2010 recessionary nadir I believed that our leaders would finally acknowledge that massive trade imbalances and the attendant unemployment had caused U.S. households to load up on excess debt, putting "Free Trade" to rest. But as we now know through non-stop monetary bailouts over the ensuing 15 years, central banks succeeded in borrowing our way out of a debt crisis. Now at the peak of the longest cycle in U.S. history Trump thinks this is the time to "fix" 40 years of free trade, when the Fed is sidelined by surging inflation with U.S. household stock ownership at record highs.
What is coming over the NEXT 100 days is sticker shock AND wealth shock at the same time. And if things get REALLY BAD, we will finally get some acknowledgement that people who never studied economics should not be running the economy.
