Rope-a-Dope

The current market set-up is at least as lethal as the 2022 bear market. Which is now the best case scenario. The worst case scenario is that this short trade war has unleashed FOMO at the end of the cycle. Right before the wheels come off the bus.

Trump just called his latest trade deal a "full reset" of relations with China. For once, I agree with him - he just reset trade policy back to where it was six weeks ago before this buffoonery was unleashed on the unsuspecting populace.

Let's recap the past six weeks:

In early April, Trump hailed Liberation Day (April 2nd) as the day in which Americans would be freed from global economic oppression. Factory slaves in China were forcing Walmart zombies to shop themselves into financial oblivion, so Trump wanted them to experience the joys of working on an assembly line for $4 an hour firsthand. It was a likely story, hard to question. However, six weeks later and the end result is a 10% tariff on the world ex-China, and a 10% increase on the pre-Liberation Day China tariff from 20% to 30%. That's it. In other words, Liberation Day was a total bust aside from imploding global markets. Walmart zombies are now unhindered to self-implode again.

Now here we are having round tripped to where markets were back in March and bullish pundits are now saying the coast is clear. It's our job to consider what could go wrong?

The good news is that the trade war portion of the program is very likely over. Why? Because Trump's economic team is now focused on the impending tax cut and they won't want to sully that event with another round of trade war escalation. Which means that the make-believe move towards autarky (economic independence) has already been canceled. I'm not sure where that sits with Trump true believers, but it's clear they were the first ones who got rope-a-doped into believing that a country club billionaire cared about the working class. Check that fantasy off the list. Tax cuts take priority.

The second ones to get rope-a-doped are the bulls who are right now aggressively buying stocks on the belief that the worst is over. Unfortunately, there are lingering casualties to this abbreviated trade war.

The first casualty of war is the fact that the current tariff level is just high enough to keep the Fed on the sidelines. Inflation expectations are still near multi-decade highs and long-term bond yields rose on the news.

Rate cut bets are falling not rising, as bulls would expect from a full blown truce:

"Traders are paring their overall outlook for 2025 rate cuts from three to two"

The other casualty of trade war is the Tech sector. These stocks melted up into the election but soon after imploded when Trump's trade war plans were revealed. The net effect is that the Artificial Intelligence sector and in particular semiconductors REMAIN the locus of the trade war. Of course this latest Wall Street scam was going to implode anyways, but the trade war was the last nail in the coffin.

And then of course there is the economic effect on China which was already imploding before this trade war started. We have been witnessing a collapse in commodities these past few weeks while all of this trade war turmoil was occurring in the background. The trillion dollar question is - did this chaotic trade war trigger global deleveraging? We will soon find out.

The other casualy of war are the stock market safe havens. Throughout this trade war, safe havens such as gold, gold stocks, Bitcoins and dividend plays have been leading the market. Now they are imploding. Meaning on the next leg down there will be nowhere to hide.

In summary, the 2022 analog is now the best case scenario. The market continues to eerily follow the same path as it did in that bear market.

That's the good news.

The bad news is that there is a very high probability that this short trade war has merely served to unleash FOMO right before the wheels come off the bus.