It’s been an interesting five weeks huh.
Originally when Trump was elected I had hope that it would more or less be fine economically. I’m not a particularly partisan person when it comes to the economy. It needs to work to give us things like food and shelter, and I don’t want my fellow Americans to become poorer.
Trump was talking a big game, as he’s done in the past, but his trade policy from his last term wasn’t terrible. He appointed the same guy who did NAFTA 2, Covid showed onshoring critical industries to America is a good goal, tariffs are part of the story somewhere. Sure, why not!
Unfortunately that’s not what has happened. Instead we have, now officially, reenacted failed economic policy from the late 1890-1930s. Good reading is the McKinley Tariff , Smoot Hawly Tariff Act, and the wiki page on Tariff politics in the US . These policies have been universally unpopular and prolonged economic issues in the US, particularly during the Great Depression.
This is not the first time these political winds have blown in America. Even America First is not new.
In order to understand why tariffs specifically are so bad, we should zoom in on a single sector of the modern economy, Oil.
Oil
Oil is the defining commodity of the modern world. We use it for synthetic materials that make everything from clothes to fast food containers, energy to drive around, power our lights, and get goods from port or train stop to where they need to be.
The supply chain for oil is roughly:
- Crude oil is extracted from the ground
- Transported to a refinery by pipeline or barrel
- Refined into products, gasoline/plastic etc
- Shipped out where it’s needed.
But, crude is not fully fungible. Depending on where it’s produced it has different grades. Light vs Heavy and Sweet vs Sour. Yes someone did taste it, no you shouldn’t.
The more Light and Sweet crude is the easier to refine, but the less usable products you can get out of it. Heavy and Sour has greater yields but is harder to work with.
The USA won the Civ start and most of our oil is Light and Sweet. That helped the domestic oil industry when it was first conceived.
We didn’t have to build advanced refineries to process our domestic crude, but these days a large portion of our refineries are built to process imported Heavy and Sour crude while the Light and Sweet is exported to countries with less advanced refineries.
The exported oil goes to countries that don’t have developed oil infrastructure, who pay a premium and we use that money to import crappy oil. This mean we have more products than we could produce domestically, it’s a win-win for us and our partners.
Where is the oil we import coming from? The same place we just made 10% more expensive for literally no reason.
So 25% of the oil the US currently uses, now got 10% more expensive.
Oil prices in America, translate to gas prices, things that politicians are extremely sensitive about because Americans fill up their cars every few days, and also drive by giant signs with the prices on them. When gas prices increase people get pissed before the inflation hits things like produce on the shelf.
Not all Tariffs are bad
Not all tariffs are bad, and they can be useful tools when other countries try to corner markets through subsidies and dumping. Stopping Temu from exploiting USPS loopholes, or combatting the dumping of BYD cars to protect our local auto industry? Sure, maybe, we can talk about it, but that’s not what these trade policies do.
The shale revolution, fracking, solved the “Peak oil” scare of the 2000s and broke our reliance on the Middle East for oil. The oil industry in the US is stronger than ever, and it’s a huge economic and geopolitical win.
The industry needs approximately zero help from protectionism. There are no massive job losses, Canada is not dumping crude to destroy American production. This system let’s us buy the right inputs from Canada to give us even more than we could produce locally, while our exporters get access to markets willing to pay more.
North Americans are not only energy independent, but prosperous as a result of this system.
The publicly supported reasons to need to tariff our allies right now are completely nonsensical and unrelated to trade.
Just as an example Canada:
- not at all responsible to for the Fentanyl issue in the US. Almost none is trafficked from there into the US. Production is set up in the states itself. We can tackle Fentanyl another time.
- becoming the 51st state is a nonsensical demand. It just exists to “trigger the libs”. There’s no way on planet earth it’ll be accepted and if it is, it would end in disaster.
Let’s say there are few better neighbors across the world than Canada and leave it at that.
Other industries
This is a giant, “Make everything more expensive button” that was just pressed, for no reason. There are even more expensive buttons exist, retaliatory tariffs go back and forth across the US and our Allies. Every tariff announced is another one of these buttons.
If you thought inflation was bad before, just wait. The stated policy is that we’re working on replicating the Covid supply shocks ourselves. The fed can only cut rates when inflation is under control, and will have to hike if it goes up even if that crashes the economy further.
Here are some more fun examples:
- Agriculture in the US is export driven. US farmers mostly grow intensive expensive things, like alfalfa or soybeans, and sell them abroad. Farmers are going to be hit by these policies as other countries add import controls. This happened during the first Trump term, but it was mostly China focused, and they were helped by subsidies.
- Supply chains for cars involve crossing borders repeatedly. Every time an assembly, door/wheel whatever, crosses the border? That’s right another 25% import tax. Each individual part is often shipped across the US/Canada/Mexico several times.
And more.
Other countries are not obligated to sit and take this. This is a multi agent game and they will retaliate. Trump fundamentally views all trade as exploitative of one party, and he’ll throw even more on to them as they retaliate.
Even if these are rolled back tomorrow, other countries will work on ensuring that US trade is limited, because they don’t want every month to turn into this unstable game.
It’s a losing position for the US with no winners globally. Except other powers cough China cough who will pitch themselves as stable strategic trade partners.
The economy is already rickety
The economy under Joe Biden was broadly successful if you look at general indicators. There was inflation, but it was mostly defeated after Covid. We avoided GDP contraction and passed large bills that injected money into the economy when it looked weak. People were very fearful of a recession in 2023, but it was averted, with some minor bank instability.
Bidenomics mostly worked from these broad indicators, but the recovery was certainly unevenly distributed.
In my opinion, the only reason the market has been as jubilant as it has over the last month or so is because the median trader on Wall St is assuming that Trump is just bluffing. Using these threats as a negotiating tactic and will function more or less as he did in 2016.
This is somewhat reasonable given that he often just doesn’t do the things he says does or will do, and delayed the tariffs once already.
But now that the tariffs are here this is a dangerous game. The market will have to contend with reality and equity markets move fairly quickly, especially when people see that they’re wrong.
That’s very concerning to me because the only people actually spending in the economy above inflation are the top 10% of households, who have gotten a huge bump in spending power through asset inflation these last few years. If equities and other risk assets go down, that will go away and with it the spending driving the economy.
Combine that with the gut punching the lower half of earners by cutting Medicare, raising their taxes, mass firings at the countries largest employer, no-one will spend on the lower half the tax bracket either.
If unemployment starts to go up and there’s nowhere for newly unemployed people to go, what happens next? This includes the fired federal workers. All that money is currently sucked away from the economy.
This is before the admin starts going after Social Security and the like, regardless of your opinion on if this a good or bad idea long term, this is a recipe for short term economic pain.
I’m failing to see how consumer spending in the US doesn’t crash within the next six months or less and along with it the rest of the economy.
Previously in 2023, there was a soft landing scenario that the government was pursuing that was risky but logical. Unless the admin today changes course or throws away every goal they’ve communicated, where is the growth story in the next six months?
The only scenarios I’ve heard from talking to friends are that the Trump admin doesn’t do anything it’s loudly promising to do and already partially implemented, or the Fed will bail us out.
Apparently neither do any of the Trump team:
And if we end up in a situation where the economy is doing poorly, it’s more than likely we’re going to end up in austerity.
Conclusions
The tariffs are now in place, and it’s a core part of this admin’s agenda.
They view tariffs a combination of sanctions-esque negotiating leverage and a tax on foreign countries that will replace progressive taxes.
Tariffs aren’t, as history has shown, but it doesn’t matter.
I haven’t been shaken by volatility out of my core positions since I first started investing in like ~2016, including Covid, and the 2023 crisis. I rarely actively invest, only gambling with high conviction bets. I’m a firm believer in time in the market.
But at this point it feels like it’s obvious that the goal of the admin is to crash the economy for a while, so I’m going to sit out the public markets as there’s clarity over the next few weeks to months. I haven’t heard a single convincing bullish narrative so far, but if one emerges I could be tempted back into risk on.
I don’t take short positions, I’m only interested in downside protection. Not financial advice obviously, so figure it out yourself, reality cannot be trifled with.
These are the questions I want to answer over the next month or so:
- Where is economic growth going to come from when we hurt export markets and raise inputs erratically?
- Even if this is a negotiation, the terms don’t seem to exist publicly.
- Where are all the fired federal workers going to go if companies aren’t planning on hiring as long as instability lasts? (particularly when instability is part of the Trumpian “flood the zone” playbook)
- If the Fed cuts rates while inflation is high, will institutional players actually keep their money in US equities?
- If the Fed has no discipline why wouldn’t people start switching over to Euros/Yen/RMB.
- AI is where exactly?
- A lot of capex is spent on it, there seems to be broadly useful things related to it, but where’s the GDP growth that’s promised by hype men?
- Model growth seems to be stalling, Claude 3.7 + GPT 4.5.
- There’s meat on the bone, but AGI that justified the capex. Questionable right now.
- There’s a lot of tail risk associated with DOGE, social security checks not going out. NOAA missing data for large weather events, etc.
- Doesn’t feel like that’s priced into the market anywhere while we’re all fixated on tariffs?
- Everything the admin has done that is crypto related is a bad idea.
The main things that would show my concern is unwarranted are:
- DOGE is disempowered and their actions are largely reversed.
- Trump sees the light on Tariffs, and focuses on cutting deals similar to NAFTA 2. A UK specific deal would be fantastic to see.
- “Stable instability” like 2018-2019. Trump limits his goals to photo ops and jokes, but not core government services.
- Discontinuing obvious corruption, abandoning crypto grifts that directly enrich admin officials including the president.
- Talking points from admin proxies step away from a “Biden recession” line.
A note on recessions and young people
It occurred to me recently on talking to my college student sister that every young person, does not remember a “real” recession.
2001-08 is sadly, the birthdates for a lot of you who are about 18-24 years old. It’s highly likely that this is one of the contributing factors to a vibecession over the last few years. Indulge me for a second in my old man yells at clouds moment.
You do not* want a recession. Yes I know what dumb rich guy number 3, Chamath, has said that it’s good for you. It’s not. You won’t have the cash to take advantage of it. It will be gone. You’re going to be even more “asset light” than you can imagine.
A recession is not when delivery starts becoming a treat, or McDonalds is a once a week/month thing.
A recession means that four people with PhDs are competing for the same job at that McDonalds. Your quality of life will get worse, and if you don’t care about that, your parents quality of life will get worse. Your post school job offer will be rescinded, you will not be able to move out of your parents house, which the bank may even take.
The economy feels abstract to you because you’ve never seen people get kicked out of their homes for not paying bills, or watched formerly successful people kill themselves because they can’t bare the shame of losing their livelihoods. Crime will go up, house prices will go down, people who wanted to retire won’t be able to maybe for their entire lives.
This is not a “when we burn everything down my ideology will rise from the ashes” thing. Your ideology will not rise from the ashes, you will be miserable every day for months at a time as the people in charge try and make things better and it won’t happen.
For a depression multiply that all by 100x. All this stuff happened less than 100 years ago you should literally go on YouTube and lookup media from the time.
The entire 60 Minutes 2008 mini series should be required watching for every high school classroom in America. Followed by the fireside chats from FDR.
Long term everything will work out, Millennials bounced back even after their late start. Ask any of them, some are your parents at this point, what 2008 was like.
I don’t particularly care who you voted for, but don’t cheer on the destruction of the American economy to “own the libs”.
If there are bread lines we’ll all be there regardless of party.