The Trump Tariff Wars Are about to Get Hot!
Real hot! Because this time is different! Entirely and extremely different!
The stock market, again, appears unhinged as traders seem to be doing their best to bid the market back up just before Trump’s April 2nd tariffs destroy the market (timed for April 2 so as not to risk being confused with an April Fool’s joke where he takes them away as soon as he announces them). You would think investors all want to get into more stocks so they can lose as much money as possible on Wednesday.
I suppose what is more likely happening, given that we just ended a quarter in which stocks did terrible, is mandatory portfolio rebalancing by major retirement funds. Many funds promise a 60/40 split between the value they hold in stocks and the value they hold in bonds. At times like this, those promised splits seem suicidal because they force a company to sell bonds and buy a lot more failing stocks at the end of the quarter just to get back to that 60/40 split in value. Those added stocks, of course, are likely to all plunge in value tomorrow and in the days ahead when Trump imposes his nearly across-the board tariffs. It’s like a suicide run over an embankment.
While Trump, who loves surprise announcements, won’t reveal exactly what his plan looks like until the very day it goes into effect (and he’s said it will go into effect as soon as announced), White House aids have hinted at something like 20% being the typical tariff amount, but that will vary nation-by-nation on the “reciprocity” principle Trump has been trumpeting about.
So far, most of the action in stocks has been due to anticipation of the tariffs and fatigue over all the uncertainty/chaos. Today, stocks have been way up, way down and back up again. Stocks particularly taking the hits, other than Tesla which is in some kind of revenge trade, have been airline stocks as Europeans and Canadians are cancelling US vacations out of understandable spite.
Airline stocks slid further on Tuesday as Wall Street's concerns about weaker-than-expected travel demand amid looming tariffs and a sharp drop in consumer confidence continue to weigh on the sector.
Shares of Delta Air Lines were down more than 3% in afternoon trading after Jefferies downgraded the carrier, the most profitable in the U.S., to a hold rating from buy, and nearly halved its price target to $46, several weeks after the airline cut its first-quarter guidance.
Those risk concerns are endemic in the airline industry right now. So, expect to see many airlines sustain the same damage due to flagging travel. However, it is not just trade-war cancellations. Domestic travel is also down because weary consumers are starting to tighten their belts:
Airline executives at a JPMorgan industry conference in mid-March warned about softer-than-expected demand, particularly for domestic travel, which makes up the bulk of the U.S. travel industry's revenue.
Not surprising with credit-card defaults already soaring to an all-time high, as I wrote about yesterday.
Another way in which tariffs are already hurting the US is that China, in its retaliation, as the one nation against which broad tariffs are fully imposed by the US, is shifting its buying away from the US and toward India. Sometimes when these trading relationships break down, they don’t readily return to the old normal. They prefer to stay with the new normal, and so the damage becomes permanent. We won’t be able to undo all the damage from these tariff wars.
Stocks are quavering in the face of all of this, in spite of a strong PMI report today, but the likely reason for the strength in the report would explain why it came as no help to stocks. The “soft data”—the surveys in the report—sank, but the hard data rose (improved), making times appear far better than reality, and the reason is tariffs. So, we have to dig deeper into what that is about, though this isn’t supposed to be a Deeper Dive, but I guess I cannot help myself when it comes to explaining things that look, at first blush, like they are not cooperating with my predictions.
Inflation factors coming in hotter
Prices paid soared to their highest level since June, 2022, and inventories surged, even as new orders fell. The most likely reason given was that manufacturers are front-running tariffs as much as they can afford to in hopes of baking in costs at a level that, in spite of rising prices, will be much lower than they will be once the tariffs add to the current inflation.
“The strong start to the year for US manufacturers has faltered in March. A combination of improved optimism surrounding the new administration and the need to front-run tariffs had buoyed the goods-producing sector in the first two months of the year, but cracks are now starting to appear. Production fell for the first time in three months in March, and order books are becoming increasingly depleted.”
Business optimism about the year ahead has deteriorated further from January’s near three-year high, and has dropped sharply over the past two months, causing firms to stop raising payroll counts for the first time since October.
So, they are stocked up with inventory, even as sales are beginning to decline and are backing away from making new hires. We call this “hunkering down” by both consumers and manufacturers.
A key concern among manufacturers is the degree to which heightened uncertainty resulting from government policy changes, notably in relation to tariffs, causes customers to cancel or delay spending, and the extent to which costs are rising and supply chains deteriorating in this environment….
Tariffs were the most cited cause of factory input costs rising in March, and at a rate not seen since mid-2022 during the pandemic-related supply shock. Supply chains are also suffering to a degree not seen since October 2022 as delivery delays become more widespread.
That was the period I pointed back to when I said we can be certain tariffs will cause price-inflating supply shocks because we experienced a lot of supply shocks during Trump Tariff War 1.0. Peter Navarro and those in the Trump Administrations who are saying otherwise are baldfaced liars. We have already seen that tariffs do create supply crises.
While Navarro claims that won’t create inflation, the truth is that supply shortages didn’t drive prices before Covid because we were in a decade-long anti-inflationary environment due to the continuing undertow of the Great Recession. In today's overpressured inflationary environment, shortages will drive prices up just like they did in the pandemic. They already are!
Jobs starting to turn
The turn is still small because courts have thwarted many of the labor cuts. However, we see today that the Health agency layoffs under RFK are beginning. We’re entering the next turn of events where I said court objections based on DOGE not having authority to fire would easily be overcome by those who do have the authority carrying out Trump’s bidding.
What we see right now is not a move on the unemployment side as of yet, but a move on the hiring side. As touched on above, manufacturers and others are slowing hiring due to the uncertainty in this time of chaos. With new orders slumping, inventory already stacking up, new hires are backing down. It may not be enough to be a meaningful number at present, but it could be the start of the turn I’ve said you can expect. Open jobs are at the lowest level since last September.
"The February JOLTS report showed some cooling of labor market conditions but is unlikely to sway the Federal Reserve from its view that the job market is stable enough to withstand an extended period of unchanged interest rates as the central bank monitors progress on inflation," Oxford Economics lead US economist Nancy Vanden Houten wrote in a note to clients on Tuesday.
So, not a lot of movement, but some in the anticipated direction. Not much, but a nudge:
"If we think we're going to see layoffs increase, which I very much anticipate going forward, and we continue to have pretty tepid job growth, that's a problem," Hooper told Yahoo Finance. "And underscores that message that the risk of stagflation, or at least a deceleration in the economy and potential recession, is increasing."
Businesses will feel pressure to shut down
The damage of tariff wars doesn’t just hit as higher prices or product shortages. Those shortages happen to the producers, too, as do the higher prices; and, if they cannot pass the higher prices on to consumers who are tightening their belts, they sometimes go out of existence. Likewise, if they can no longer get the material they need to make their products or fill their retail shelves.
We remember the restaurants that shuttered permanently under the strains of the Covid lockdowns. Preliminary signs of similar stresses are already appearing.
For the last decade, Johnson’s company, Better Display Cases, has been importing about 8,000 sports memorabilia display cases a year from a factory in Shenzhen, in southern China – where they are far cheaper to make – and then selling them in the US.
But now that America has a president who considers cheap imports an enemy of the state, and has already slammed Chinese goods with two rounds of 10pc tariffs, Johnson has taken steps to adapt fast. So far, he has raised his prices by 15pc and moved to a factory in Vietnam.
Vietnam, of course, may very well get hit by tomorrow’s surprise tariffs (surprise only in that no one is saying what nations will get hit by how much). That will undermined Johnson’s effort to circumnavigate the supply crisis he experienced from China due to tariffs, and that run-around already resulted in Johnson having to raise prices 15%. How much more will he have to raise them remains to be seen when tariffs are applied to Vietnam tomorrow. He may have to shift his source again, but at some point he simply runs out of his consumers’ willingness to pay more.
Hence …
The president on Monday pledged to slap tariffs on “all countries”, and is preparing for what he calls “liberation day” on Wednesday, when he will announce sweeping reciprocal tariffs on US trading partners.
But the reality on the ground for American businesses is the quite the opposite. Instead of utopia, companies are grappling with rising prices, plunging confidence and dwindling spending.
We don’t know for certain at this point if Trump will raise tariffs to match all the value-added taxes other nations apply to their own products and to imported products when they arrive. Trump views these as a form of tariff, in spite of the fact that those nations apply the same VAT rate to their own products as they do to US products. Perhaps we’ll see tomorrow if he’s decided to treat them as tariffs by hitting those nations with “reciprocal” tariffs in the amount of their VATs.
Thus …
Since Trump came into office, the charges Johnson has to pay on his imports have surged from 13pc to 33pc. But his main concern was how much higher the tariffs on China would go….
Two weeks ago, he received his last shipment from his Shenzhen factory. But instead of moving jobs to America, as Trump claims will happen, Johnson has shifted his operations to Vietnam.
Johnson said he tried changing to American manufacturers but he couldn’t find any that were capable of supplying his needs. Some gave him bids but couldn’t come close to matching the size of his orders:
“I would love to have my product made in the USA. That would be really great to have on my website,” says Johnson.
“So I’ve tried a lot of places. All the way from an individual guy where he made things in his shed at the back to several larger companies. I once flew to Wisconsin to meet with a company there. But mostly they just can’t deliver.
“I cannot get my product in America in the quantities that I want to sell it. I’ve tried numerous places, they’re extremely slow. I would just be out of stock constantly….”
“Maybe if I tripled my price we could finally bring the resources together to make my product fast enough here. But the question is, who’s going to buy it at triple?”
Other bosses have sounded the alarm, too. Brian Connell, the chief executive of giant US retailer Target, said in March that Trump’s 25pc tariffs on goods from Mexico meant prices would shoot up within days for millions of Americans.
William Oplinger, the boss of aluminium producer Alcoa, also said Trump’s steel and aluminium tariffs would be “bad for American workers”.
Liberation Day is T-Day When Things Go Boom!
So, tomorrow is “Liberation Day,” Tariff-Day, which is the day your money will start to be liberated from your wallet as that is supposed to be the day when companies finally lose all the uncertainty, when the veil is pulled on the pricing of US tariffs all over the world so US companies know what cost increases they have to absorb or pass on to consumers if they cannot negotiate their suppliers down. Some will in the months ahead get too pinched in the squeeze, just as we saw happen during the Covidcrisis, and they will go out of business for good.
Regardless, the unknowns don’t truly end on Liberation Day:
Whatever Trump announces on Wednesday, his reputation for about-turns, delays and last-minute escalations adds an extra frisson of jeopardy. The retaliatory response from the countries he plans to hit with new tariffs are also a big unknown.
Unsurprisingly, Europe has already announced that it has plenty in store for the US in additional retaliatory actions; but, since Trump is holding his cards close to his chest in order to give his announcement maximum impact tomorrow, so the EU is holding their cards close, saying they will reveal what they have in store for retaliation once they see whether Trump follows through, as they hope against hope they need to do nothing.
No one trusts Lucy not to snatch the football away one more time, but I’m pretty sure Lucy’s counterpart, the Great Pumpkin, will follow through this time and hold the ball in place this time, at least until someone tosses him a bone he can pretend is a victory, or he will lose face due to too many faltered starts. Even his MAGA constituents might grow a little restless or disillusioned if he implements his tariffs a third time and then immediately withdraws them once again with little to show for it. The game gets older than the player in a hurry.
So, expect the world to start tilting and reeling on April 2nd as the carnage begins to get real, and businesses and consumers start trying to pick their way through the wreckage of economic collapse as it unfolds around them.
Among small business owners, the mood is fear, says John Arensmeyer, the chief executive of the Small Business Majority.
“Some small businesses will shut down [because of tariffs]. I wouldn’t be surprised if it’s 5pc or 10pc. It may be more than that,” he says.
There are more than 33m small businesses in America and combined they employ 62m people – nearly half of the private sector workforce. If even 5pc are forced to close, millions of people will be out of work.
The differences between Trump Tariff War 1.0 and 2.0 are that last time was just about fair trade. This time is about finishing what last time never finished with China, the war that was supposed to be so easy but wasn’t. This time Trump has also made it about imperial expansion, which is causing nation’s to plant their feet. This time, the tariffs look like they’ll be broader and already promise retaliation everywhere. This time we’re picking fights with nations that thought they already resolved all of this in Trump Tariff War 1.0, so they have no reason to negotiate with us again since those agreements didn’t hold up well. This time we’ll be fighting Europe full force at the same time as we fight Canada and China and perhaps Mexico and all of the rest of the world, making us the world’s solitary enemy and all of them ours! And this time we’re takin on the world in a trade war as we withdraw most of our decades of free gifts, making them less likely to hold back in tariff retaliation. This time Trump has also said many times over this is about creating a new permanent tax system as America’s source of revenue, which means he cannot remove the tariffs if he is actually going to make that happen. And, most of all, this time the tariffs are happening after inflation has already become a major problem. Last time, inflation had not been a problem for decades. This time, inflation is already glowing so hot it will burst into flames the second it gets some new oxygen.
(If anyone’s inclined to leave me for telling the hard, unwanted truth before it happens, just remember where to come back to when it does all happen as predicted and you decide you’re ready to handle the truth. On the other hand, if it doesn’t happen as predicted, I’ll go away and take this publication with me after fulfilling my subscription obligations. To rest of you brave and steady souls, hang in there; things start proving out in even bigger ways from late Wednesday afternoon forward (when Trump makes his big announcement), and these predictions been on track all of this year and last, which is what taking the political blinders off and seeing what you don’t want to see gets you. It’s never about what I want to believe; it’s about what is coming based on what we already know.)