Trade War Blow-Off Top

I never thought I would have to write a blog post with a title called "Trade War Blow-Off Top", however it's now obvious that Trump's trade war has catalyzed a blow-off top in global financial markets. Why? Because post-pandemic, investors no longer fear economic slowdown, they welcome it, because it means more monetary easing. This is the exact scenario that hedge fund manager Hugh Hendry several years ago predicted would final implode global markets - the moral hazard resulting from serial bailouts.

Here we see the Global Dow pulled back in April (blue circle) and then sky-rocketed to a new all time high over these past three months. The very definition of a blow-off top. This top completes the rally that began at the lows of the 2022 bear market. In addition, we see the Aussie Dollar which is a proxy for global growth has collapsed down to the lows of 2008 and 2020. And despite stocks making new highs, since April, the Aussie has gone nowhere. Interestingly, the biggest pandemic stock market surge took place April through June as well, which makes for easy comparison. Notice the difference in the Aussie Dollar at the 2020 low, versus now. What it shows is that currently there is a massive divergence between investor expectations and the AMOUNT of monetary easing currently taking place. Today, the amount of monetary easing is a fraction of what took place during the pandemic.

On the topic of the trade war - since I posted earlier this week, Trump dramatically escalated tariffs on Korea and Japan along with several other countries. And then today he announced ANOTHER escalation on Canada, because he wants to implode that country and make it the 51st state. Meanwhile he announced that the MINIMUM global tariff rate globally is going from 10% to either 15% or 20%. And ironically he credits stock market ebullience for giving him the confidence to go through with it:

"President Donald Trump said Thursday he plans to impose blanket tariffs of 15% or 20% on most trade partners, dismissing concerns that further tariffs could negatively affect the stock market or drive inflation."

“I think the tariffs have been very well received. The stock market hit a new high today,” Trump added.

In other words, the stock market melt-up into this July trade deadline has now sealed the fate of the global economy.

Here we see Dow Transports collapsed when the trade war started. Then rebounded in a three wave correction from April. And are now rolling over at a lower high at this July escalation:

As far as the FOMO in the market, we got confirmation from none other than the chief market strategist at Interactive Brokers:

"He also noted that market reactions to tariff announcements have diminished over time. “The market has been basically conditioned to look through them, or ignore them, or look past them,” he said, describing how investors have learned that selling on tariff news has typically proven unnecessary."

This is the "TACO" trade I discussed in my last blog post - eager TACO traders have stopped waiting for the pullback before buying the "dip". Which means there is no dip anymore and hence recent tariff news has catalyzed a TACO blow-off top.

Adding to this momentum melt-up is the fact that Wall Street keeps upgrading their price targets to keep up with the blow-off top:

Next week begins 2nd quarter earnings season.

Big banks kick off on Wednesday (July 16th), including JP Morgan and Goldman Sachs.

In summary, Goldman Sachs just upgraded a trade war blow-off top to Strong Buy.