Trade Wars

The Trump administration's tariff announcement this week—applying tariffs calculated as half the trade deficit with each country—has triggered severe market turmoil, marking one of the ten worst two-day performances in stock market history, with indices like the Nasdaq and Russell 2000 down over 20% from their peaks. Stocks have broadly collapsed, driven initially by high-beta tech names, and later spreading across sectors, sending the VIX into the mid-40s, a clear signal of extreme panic. The following day, China retaliated by implementing reciprocal tariffs on US goods. Vietnam was said to be trying to do a deal with the administration to get the tariffs back to zero.

• The most perplexing element of these tariffs is that the calculation used was completely non-sensical
• Instead of looking at actual tariffs on US goods, the administration effectively took the trade deficit with every country and divided it by a factor of 2
• The administration then sent cabinet members to reiterate that this was non-negotiable and the US would be implementing these rates
• If you review the economic priorities outlined by Trump and his Treasury Secretary, Scott Bessent, it is obvious that this administration is determined to right the fiscal situation the country is in
• DOGE is one of the efforts to cut costs, while another is lowering our unsustainable interest costs (the interest on US debt)
• The only rational explanation for this action can be that this was a way to get interest rates down (and hence help in being able to refinance our extensive debt burden)
• Scott Bessent would have certainly been aware of what the market reaction to this announcement would be
• In light of extreme uncertainty, investors sell risk assets (stocks) and buy safe assets (government bonds)
• This is exactly what has occurred. As the S&P 500 fell by over 10% in two days, the yield on the 10-year treasury has come down from ~4.2% to under 4%
• Since Trump’s inauguration, the yield on the 10-year has come down from ~4.8% to under 4%, a significant move in a short amount of time
• The only other rational explanation is that this announcement was the beginning of a negotiation for better trade terms
• This theory was bolstered by Trump’s comments later in the day that if a country came to him with a good deal, he would consider it
• On Friday, he also commented on good conversations with Vietnam about getting their tariff rate down to zero
• Way before the election, Scott Bessent discussed “...a grand economic re-ordering. Something equivalent to a new Bretton Woods…” You can view the full video here.
• Across this administration, there seems to be a steadfast belief that we need to change the trajectory of the United States if it is to thrive again
• These actions are in line with these goals, but as currently announced, the economy would just not be able to function properly
• So again, the most likely scenario is that this was designed to bring countries to the negotiating table to improve the US position in global trade
• Most notably, this needs to be done with China
• Coincidentally, OPEC announced that it would be increasing production, putting further pressure on already weak oil prices
• Oil prices have now declined over 10%, which will be good for bringing down inflation, as well as put pressure on Russia
• As it pertains to stocks, the initial selling had pockets of strength, where defensive sectors (healthcare, consumer staples) did not sell off as much
• However, as the selling stretched into its second day, the pressure was more broad-based, resulting in poor performance across all sectors
• Given this was one of the 10 worst 2-day periods of performance for the stock market, we are likely to see a relief rally at some point

• However, until we get better clarity on what the tariff policy will be, it will be hard to have conviction to hold risk assets

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