The Cost of Doing Business
While the tariff news has shocked many, there's no time to whine. Here's how to view this rather ... taxing ... situation.
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At the risk of sounding a little bit insensitive, I'm going to remind readers that feeling sorry for oneself is going to be counterproductive. What is, is what is. Globalism may have been great for the stock market. It was not so great for those who neither consider themselves to be rich nor poor. I grew up in a lower middle-class neighborhood in Queens, N.Y. I had never even met a person who went away to college until I got a job on Wall Street. I get it.
Pres. Trump announced his "Liberation Day" schedule of reciprocal tariffs on U.S. trading partners on Wednesday evening. The cold truth is that these tariffs are larger than what had been thought to be a worst-case scenario going into the event. These tariffs are larger than anything U.S. financial markets had priced in last week, or really since the selling began in earnest back in mid-February.
A base rate tariff of 10% was placed upon all trading partners globally, regardless of its relationship to the U.S. or its trade history. The reciprocal part of these tariffs was then added, using that nation's tariffs on goods imported from the U.S. as well as all other tactics used to impact trade such as currency manipulation and things like VAT (value added tax) taxes. When all is said and done, from my perspective as an economist, the formula used to create a different rate for almost every single nation that the U.S. trades with, appears to correlate loosely with the size of the U.S. trade deficit with that nation, while also factoring in something for expected demand elasticity.
Researchers at Morgan Stanley overnight figured that the average effective U.S. tariff rate will now be a rough 22%, up from about 2.4% last year and that this would in theory, lead to a 5% increase in import pricing. Of course, 22% is an average and there is a lot of variability, especially across large U.S. trading partners. Remember, these reciprocal tariffs are being added to existing tariffs. That means that the 34% reciprocal tariff on Chinese imports is being added to the existing 20% tariff, making for a 54% total.
The 10% baseline tariff goes into effect this Saturday at 12:01 a.m. ET, while the reciprocal part of these tariffs will be implemented on April 9th at 12:01 a.m. ET. Tariffs on both Canada and Mexico were left where they had been ahead of the announcement, at 25% as announced a month ago. USMCA-compliant exports remain exempt. The White House estimates that about 50% of Mexican imports and 38% of Canadian imports are indeed USMCA compliant.
The Ugly Stick
It did not take long for equity index futures to erase on Wednesday evening what had been a positive regular trading session for U.S. equity markets. In fact, as I work on this piece through the zero-dark hours on Thursday morning, it appears that all gains made this week are at stake. Asian stocks are trading lower. European stocks are trading lower. Beijing has already threatened to respond as has Brussels.
Keep in mind that financial markets, the U.S. economy and the global economy will now struggle perhaps more than they already had, to price in the new reality of what will be a trade war. Trade wars are ugly. There is no way around this. Can a trade war turn into a currency war? Very easily. Can a trade war go kinetic? Heaven forbid it, but anything and everything is possible.
Certainty Becomes Our Reality
Not as reaffirming as we thought it would be? My guess is that... no, it is not. That said, after a few pounds of flesh are taken out of your 401(k) and your IRA, that might be as bad as it gets. Unless the national or global economies go into recession. There are "silver" linings. These actions have weakened the U.S. Dollar Index overnight.
These actions have chased the flow of capital into U.S. Treasury debt securities forcing yields and therefore interest rates significantly lower. I see the U.S. Ten Year Note yielding 4.05% this morning, down from 4.21% on Wednesday. This should be a positive for precious metals. I did write that gold and silver piece for you on Monday. We did warn about the S&P 500's bear flag pattern in Monday's Market Recon as well.
These developments are nasty. That said, as we are creatures who do make a living hunting and gathering all while adjusting to changed environments, so we can do this. We can find opportunities. We can protect ourselves. We must remember our rules for trading and for life as we proceed....
- Understand... Every action taken is taken for a reason. This reason must be something that one could explain to a novice. If one does not understand something, or something does not add up, then do not become exposed to it.
- Identify... As always, there are three items that need to be identified as we move to act. One needs to be able to recognize perceived threats as they materialize, avenues of attack or approach that pose threats and finally targets of opportunity as they appear. Take care of those three items and you'll take care of yourself and those reliant upon you.
- Adapt... Environments always change. This time is different. So be it. We must be different. We know that at times like this, there are no standard operating procedures. Methods change. Become what is required when whatever that is, is required. No excuses. Failure is not an option. Not for us anyway.
- Overcome... Find a way. Even in the face of failure or persistently changing obstacles. Our enemies will adapt as well. We're all smart. We must be willing to outwork all who might get in our way. We will. We expect victory and will make it happen through ethics, discipline and strategy. Fear? We respect, we don't fear. Fear is but for the wicked.
- Carry On... Victory? Defeat? You've been there before. You'll be there again. No emotion. Move on. Next at-bat. The game is not over. The fight is not over. Nothing is ever over. Not ever.
There are some trades and investments that will work in this environment. Don't bag-hold. Do not fall in love with your positions. If you already have, divorce yourself from those notions. Be flexible and be open to the idea that you may or may not know better. Remember, there are no kids from Brooklyn, Queens and Staten Island in the crowd to protect you these days.
There are just high-speed, keyword reading algorithms. They are far more ruthless than humans ever were, and they will force momentum overshoot in order to create market inefficiencies. That gives them an advantage in speed but also makes them quite vulnerable to ambush.
In the coming days, weeks and perhaps even months, different nations and different multinational corporations will try to make deals with each other and with this current U.S. administration. These headlines will swing markets wildly when they occur as those just mentioned algorithms do what they have been designed to do. We may have to trade more than invest. So be it. Results matter. Method does not. With our shields or on them, gang. Always Faithful.
Economics (All Times Eastern)
08:30 - Initial Jobless Claims (Weekly): Expecting 226K, Last 224K.
08:30 - Continuing Claims (Weekly): Last 1.856M.
09:45 - S&P Global Services PMI (Mar-F): Flashed 54.3
10:00 - ISM Non-Manufacturing Index (Mar): Expecting 53.0, Last 53.5.
10:30 - Natural Gas Inventories (Weekly): Last +37B cf.
The Fed (All Times Eastern)
12:30 p.m. - Speaker: Federal Reserve Vice Chair Philip Jefferson
2:30 - Speaker: Reserve Board Gov. Lisa Cook.
Today's Earnings Highlights (Consensus EPS Expectations)
Before the Open: AYI (3.70), CAG (.53), LW (87)
At the time of publication, Guilfoyle had no position in any security mentioned.
