Cooler Heads Might Rework Tariff Plan, But Can They Fix the Damage Already Done?

Reports circulated Sunday night that the administration could tone down the "Liberation Day" tariffs. The trade taxes would be more targeted by product and country, according to reports. It sounds like the administration may have given up trying to treat VAT (value added taxes) as tariffs.

To me, this would signify that Sec. of Treasury Scott Bessent and Trade Representative Jamieson Greer are gaining more control of the process, as they seemed to be more thoughtful on how to approach tariffs than some others. That would be a positive, assuming the reporting is accurate.

We can now assume that some initial tariffs were “bungled,” for lack of a better word, and that is having an impact. For example, we heard the “it's about fentanyl” and then it's not much about fentanyl, all the back and forth from Canada and Mexico, about tariffs on everything but autos to everything that isn’t compliant with the USMCA trade deal. Finally last week, the USDA had to provide $10 billion of assistance to farmers due to increased costs (at least some of which comes from the tariffs – with potash being but one example, where about 80% of the U.S. needs come from Canada).

Pressure from corporations is growing, too. The S&P 500 gets somewhere around a third or more of its earnings from global sales. They have global supply chains. All these changes were likely to impact earnings.

Are We Out of the Woods?

It's far too early to tell. Sure, a rally makes sense and today’s is global in nature as being more “organized” on tariffs should reduce economic risks not just domestically, but globally.

Having said that, we face several hurdles:

• This could have been a trial balloon leaked by someone trying to dial back the administration and we will learn that isn’t the case.

• The damage done to the “American Brand” internationally over the past few months stems not just from tariffs, but handling of NATO and increasingly on words like “annexing.” How much damage has been done and how easily it can be repaired remains to be seen. I’m in the camp, sadly, that countries around the globe are trying to figure out trading partners who follow more traditional diplomacy, even if they can’t organize along those lines yet. Capital flows have benefited the U.S. greatly and remain at risk here.

• We still haven’t seen the economic impact of DOGE cuts and negative net immigration (especially if you include illegal immigrants who were working in the country, but are no longer going to work, for fear of what might happen next). Economic data has been boosted by front-running the tariffs, so we could see some nasty data starting with the March and April data (a few weeks to a month or so away from being released).

• Crypto is doing well today, in part for all the same reasons all risk assets are doing well. But crypto is also benefiting from the issuance of STRF notes, allowing Strategy to buy more bitcoin – which may have started already – so take that pop in bitcoin with a grain of salt. I’m seriously considering shorting IBIT or one of the other bitcoin ETFs early this week, if we see the gains start to fade.

With the potential for a slower, more well thought out policy being implemented, the chances for longer term success increase. I think there is still risk in the near term, as some policies hurt workers and income and spending, and some policy that should help workers, will hit earnings directly.

Even with some small adjustments to "Liberation Day," the ultimate success of the policies for the middle class, the economy and markets remain in doubt.

I once again see China as the winner (so look to exchange-traded funds like FXI and KWEB) and will be looking for signs to fade the rally in the Powershares QQQ Trust QQQ (more stories about success in AI out of China got drowned out by the positive signal on tariffs).

On the Ten Year Note, around 4.1% to 4.4% seems about right. I’m nervous about the economy and think the Fed might cut three times this year, so am looking at buying exposure to two years. I like the Simplify Short Term Treasury Futures Strategy ETF (TUA), which is a leveraged play on the Two-Year Treasuries (hard to make money being right on Twos without leverage). Haven’t bought it yet, but it is on my watch list.

So far, I’m not doing anything with my closed-end municipal fund holdings, but I am trying to see if any of the people in the administration calling for the end of the tax benefits of munis can get any traction. So far, the answer I’m hearing is a resounding "no," but something else to keep an eye on (as if we didn’t have enough).

At the time of publication, Tchir has positions in FXI and KWEB and has been trading long and short QQQ.