The Downside of Denial

What's most amazing about the past year and a half is that there have been no consequences to Trump's serial mismanagement. Last year his trade war failed when the Supreme Court overruled his tariffs. Now his Iran war is looking like a massive fiasco. Still no consequences from his own party. I call this economy "TrumpTopia", because the burdens and costs fall on the middle class and working class, but the benefits only accrue to the wealthy. Trump's MAGA base have no problem with this policy, because they all believe they will be millionaires in the future as well.

So far, market momentum has only been higher and those beliefs have not been tested, therefore the collapse of those financial aspirations can only come as a cataclysmic shock.

Last year, Trump's trade war caused markets to tank in April 2025, but markets came roaring back when he signaled that the trade war was over. In the meantime, the FOMC cut rates three times as a precautionary measure. Much of the world was in easing mode in 2025 to offset the trade war, which lubricated markets all the way into early 2026. Then came the war with Iran which has further bolstered global inflation. This time around, global central banks are responding with rate hikes. Last week the ECB raised rates. Earlier this week the BOJ raised rates. And today the FOMC signaled a likely rate hike by the end of this year. The war is ending, but instead of bringing a peace dividend, it's bringing a tightening of monetary policy. Last year's rate cuts are starting to look like a BIG mistake by stoking the inflation emanating from the trade war and the oil war.

This set-up is similar to Y2K: Prior to the millennial date change, global central banks were easing which caused a manic melt-up in markets. But then AFTER the date change, global central banks all played catch-up on rate hikes which collapsed the bubble.

What we have now overall is extreme policy risk because central banks are more focused on inflation than they are on market risk. Just today, the new Fed chairman Kevin Warsh announced that he will be launching a committee to discuss how best to reduce the Fed balance sheet. As I said in my prior blog post - he is NOT market friendly. It would take a MAJOR asset crash to change his mindset on monetary bailouts.

This preoccupation with inflation caused by a late cycle spike in oil and commodities, is what collapsed markets in 2008 as well. This time, markets are contending with a Tech bubble AND an incipient credit implosion.

In summary, it's very easy to ignore all risks when the money is flowing and markets keep rising day after day. But when the reversal comes, all of those risks still matter, but investors are totally unprepared for the inconvenient reality.

Momentum hides all risk, until you reach the downside of denial.