A Trump Embargo Pivot Threatens to Make Affordability Worse
The president is not happy with a Supreme Court ruling on tariffs and prices could soon go up even more.
You're reading 0 of 1 free page.
Register to read more or Unlock Pro — 50% Off Ends Soon
We wrote about the tariff ruling on Friday.
That was before the 10% “new” tariff, which was then changed to a 15% one.
Markets don’t like this. Trading counterparts are confused by it. But, that is the least of my concerns.
Is the President Able to 'Embargo' Trade?
The ruling seems to open the door to trade embargoes. Do I think we should do some sort of embargo? No. Would an embargo be good for the country? Certainly not in the short term, as it would drive prices higher, making affordability worse.
Does That Mean it Won’t be Used as 'Leverage'?
No, it does not. We have a president who is very frustrated with the "supreme court" (he said he was not going to capitalize the words in a Truth Social post). We have the state of the union.
If there was a “prediction market” (and there might be, I haven’t checked) for whether or not the president will threaten a country with an embargo in February, I’d “buy” it, if it was any cheaper than 60%.
Maybe I will be pleasantly surprised and the embargo threat won’t get used. Even if it is used, we will not experience a repeat of Liberation Day (everyone “knows” these are just talking points), but it could hurt.
If this was a “standalone” issue, I’d be more dismissive, but the markets seems susceptible to a pullback in any case.
Mexico: Scary, Dangerous... But an Opportunity?
I have argued that, some time in Q1 or early Q2, the president would focus on the cartels in Mexico, with or without president Claudia Sheinbaum Pardo’s support. Is it possible the Mexican government’s actions this weekend were part of a bigger effort to work with the U.S.? I don’t know, but again, I think much of what was done by the U.S. regarding a drug crackdown in Venezuela (sinking ships and hitting operations on land), was to set the stage for similar activities in Mexico.
With the cartels showing just how evil they are, it is plausible to see a path to U.S. technology and capability being used to defeat the cartels. This could (and probably should, be at the request of Mexico), but given the danger posed to U.S. citizens, there might be a path for the U.S. to act unilaterally (who thought the U.S. would snatch Venezuelan president Nicolas Maduro?).
I think the peso will do well, and I will be looking to buy a Mexico-focused ETF (probably (EWW) ). I already own (ILF) (which is Latin America focused) and (EMLC) (which is an emerging market local currency bond fund, with less exposure to China than in some other local currency emerging market bond funds).
My Market Views
Despite the inflation data, I would still position for three rate cuts by the end of the September meeting, with a better than 50/50 chance of a cut while chair Jerome Powell is still in charge.
Look for 10-year yields to go below 4% though, as we wrote last weekend, with 10s at 4.05% (and 4.08% now), it isn’t a pound-the-table type of trade.
Overweight foreign stock markets: They continue to outperform and as they get more urgency in their own "production for security" efforts (it is happening globally) and their own trade deals, there is the potential for that trend to continue.
In the U.S.: remain underweight, asset light, high margin businesses, with serious exposure to AI. This will not “end in tears" for these companies and the sell-off may already be overdone, but some degree of margin compression as they try and “make their moats deeper.” That is the natural response to the fears and there will be a buying opportunity. I’ve started working on BDCs and CLOs, where there is loan exposure to these types of companies, but at some price, that is opportunity rather than danger (I haven’t done the work yet to figure out where in that spectrum we currently are).
The flip side is overweight, “physically intensive” businesses that stand to benefit from AI and can achieve multiple expansion, if for no other reason, because “rotation” flows force the multiples higher.
I would not “buy the dip” on crypto. The headlines continue to be “positive” (progress in D.C., etc.) yet it keeps selling off. Not a market I would touch here — I’d rather focus on finding a bottom in BDCs or software than this, until something changes so the price seems linked to the narrative.
At the time of publication, Tchir was long ILF.
