I had a memorable bucket list experience last month. Carrie and I schlepped to Las Vegas for a long weekend to see The Eagles at the Sphere concert venue. The Eagles were excellent, due in large part to the brilliance of their newest band member, Vince Gill.
I was correctly advised that you can’t properly explain the Sphere entertainment experience, you must personally immerse yourself in the venue.
Both the Sphere venue and the ticket prices are breathtaking, but here’s a handy travel tip to defray the cost: sign up for a “vacation club” (a.k.a. timeshare) promotion to secure a multi-night hotel room on the Vegas Strip and stay for pennies on the dollar. Just don’t fall prey to the mandatory sales pitch and purchase an over-priced travel package; we were able to escape unscathed.
Our clients will be relieved to know that I don’t enjoy gambling – and it shows whenever I try my luck at a casino once a decade. I do enjoy, however, watching other people gamble, especially those who are expert at blackjack and poker.
Now that Liberation Day week is here, the inundation of tariff headlines has me hyper- focused on the high stakes game of trade poker that Donald Trump is playing in the early days of his second administration.
The tariff obsession is rooted in his populist “America First” philosophy. The view is that high import duties will protect U.S. manufacturers and workers from unfair foreign competition, bring back jobs lost to globalization, undo bad past trade deals (including his own major trade deal with Mexico and Canada in 2018) and boost government revenues without a tax increase.
In addition, Trump views high tariffs as leverage against all of his pet grievances, a way to counter geopolitical rivals (China) and to punish adversaries, real and perceived.
As an investment professional, I’m perplexed and conflicted about Trump’s current tariff gambit.
On the one hand, the country’s fiscal house is on fire. For some time, I’ve fretted about the consequences of the massive, irresponsible and chronic US federal government budget deficits that would make a Latin American country blush. The serious pile up of government debt and intractable budget deficits did mandate a bold new approach – and Trump’s tariff strategy is the linchpin of a multi-pronged new scheme.
Compounding the fiscal deficit situation is the fact that over nine trillion dollars in US Treasury debt - nearly one-quarter of all government debt! – must be refinanced in 2025 at higher interest rates. That’s a scary financial number, and the new Treasury Secretary has been dealt a crappy hand on the draw.
Here’s my understanding of Trump’s master plan: Gut government spending, enact broad deregulation and pass a significant tax cut law, all to jolt economic growth (and produce higher tax revenue), devalue the dollar to encourage exports and, of course, levy heavy universal tariffs to offset the lost revenue from the income tax cuts.
The objective is to bridge the massive budget deficit gap over the next few years. Lower budget deficits should help lower interest rates, thereby reducing the future interest expense burden on the government budget. The complicated plan, parts of which feel like a lab experiment, is akin to expecting pocket aces before the cards are dealt.
To be fair, Trump inherited a fiscal mess and his spitball approach may be the only way to break the status quo.
On the other hand, Trump’s tariff gyrations have been maddening. He negotiates with himself too often, which has caused deep uncertainty within the business community.
I’m no economist, but why not instead try strategic tariffs to fix legitimate unfair trade practices? Stiff targeted duties against India and China would be justified - and much less risky than starting a world trade war through retaliatory tariffs. The last time the US tried universal global tariffs as a protectionist cudgel occurred in 1930 and the result was a trade war leading to the great Depression.
Another concern is that an unchecked tariff war could adversely impact global supply chains. These systems can take decades to develop and could be seriously disrupted or even destroyed by blanket tariffs. We just endured an inflation headache started by an epic disruption in the global supply chain caused by the COVID pandemic; another supply shock could be in the offing.
The term “stagflation”, the unpleasant combination of slow economic growth and high inflation, would be kryptonite consumers and investors. Yet stagflation risk is a growing concern among many economists in a maximalist tariff scenario.
Trump and his acolytes would push back that all this tariff hand wringing is misplaced, that it’s a all part of a unique negotiation strategy and that exporters will ultimately eat most / all the tariff costs to retain access to US markets. That’s a dubious position and not consistent with how commodity prices behaved when Trump introduced steep targeted tariffs in 2018.
The reality is that US importers will likely have to eat some of the import tariff cost to protect their market share. This would ease inflation pressures but pinch corporate profit margins, perhaps meaningfully, which could cause more stock market duress.
The political reality is that’s Trump’s fixation on tariffs could quickly lead to a recession, a bear market in stocks, geopolitical instability and even a return of inflation.
A recession and/or stagflation outcome would surely cost the Republicans the House in 2026 and then Trump would lose control of his policy agenda before it was complete. This existential political risk from a trade war makes the risky poker game that he’s playing even more confusing.
Business owners, corporate executives and investors can manage risk but loathe uncertainty. For retail investors, uncertainty can regress to fear quickly. The prevailing climate of uncertainty is already buffeting the economy and has bludgeoned the stock market; we’re watching events with bated breath.
Right now, our cash chips are off the table; we’re focused on preservation until this historic tariff game plays itself out.
Until next time, be well…Tim