The Gamestop Moment

Global markets are melting up into the escalation of Trump's trade war. We have now reached the point at which the biggest risk to the market, is the market itself...

First off, I didn't comment on the Israel-Iran war in my prior blog post and I will only briefly mention it now. Why? Because global markets have essentially ignored the whole thing to the point that oil is now collapsing. Which is the exact opposite reaction that Wall Street pundits expected. And Trump already took a victory lap on an imaginary ceasefire which has stoked this blow-off top. However the war gives us a good opportunity to highlight the amount of complacency in these markets.

Below we see Israeli stocks making a new all time high when the economy is effectively shut down. The Wall Street Journal actually believes this makes sense. An entire article rationalizing financial insanity. Israeli stocks making new highs while the economy is shut down makes as much sense as Gamestop circa 2021.

Speaking of Gamestop 2021, below we see that the last time Israeli stocks hit this level was in 2021, then they collapsed like a cheap tent along with global markets.

They were Gamestopped:

Which gets us to last week's FOMC meeting. At that meeting, Powell was adamant that the Fed needed to be vigilant about tariff-induced inflation. He was hawkish. However, the stock market didn't believe him. And it turns out that his fellow Fed members don't believe him either because Fed members have subsequently been teeing up a rate cut for July, which has further stoked the market:

"In remarks for a speech in Prague, Bowman became the second central banker in recent days to suggest that President Donald Trump’s tariffs are likely to have a temporary and muted impact on prices, thus paving the way for lower rates."

In this chart below I showed on Twitter what happened back in 2018 during the first Trump tax cut and trade war. The CPI rose 1% from 2% to 3%. Bear in mind that back in 2018 the tariffs were much lower than the ones now. And we don't know what's coming down the pike in this next round (see next section below). In addition, the budget deficit is far larger today than it was back then AND in 2018 the Fed was RAISING rates the whole year AND Quantitative Tightening. Therefore the Fed is far more accommodative now than it was back then.

Now imagine if we get a spike in inflation this summer with markets expecting a rate cut.

Smoking crater.

Speaking of smoking crater, that gets us to the second round of the trade war which is due this week - July 9th at the latest. I say this week, because two weeks ago Trump said he was going to unveil new "unilateral tariffs" within two weeks:

"The pressure is now on. From Canada to Japan, key trade deals are struggling to get over the finish line with just two weeks to go before President Trump's tariff deadline.

The furious push follows Trump's recent warning that he would soon send letters setting unilateral tariff rates, raising questions about the status of negotiations and a return to his "Liberation Day" tariffs that roiled markets"

In summary, the entire market has been turned into Gamestop - an irrational stampede into momentum with no way out. Now no good news and no bad news will stop this melt-up from exploding.