Trump's Head-Scratching Tariff Calculations Signal Modifications Are Highly Likely
The president's tariffs are far more aggressive than expected and the market is panicking. But is this just the start of negotiations? Here's my game plan for Thursday.
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Investors were hopeful that the tariff announcement would be a case of better-the-feared and that the market would rally once there was some certainty about the level of tariffs. Instead, the tariffs were far more aggressive than anticipated and have sparked a global selloff.
Meanwhile, economists and investors are scratching their heads over the way in which tariff rates were calculated. The chart President Trump showed claims that tariffs were calculated as the tariff rates plus non-tariff barriers. Instead, the ratio of the trade deficit was calculated. For example, Indonesia has a trade deficit of $17.9 billion. Its exports to us are $28 billion. $17.9/$28 = 64%. That is not the tariff rate. It is a ratio that has nothing to do with tariff rates, but the plan is to charge Indonesia a tariff rate equal to one-half of that, or 32%. Some of these tariff rates are massive, especially in China.
This approach to tariffs is completely illogical, but it likely was done this way because the intent now is to enter into negotiations with every country with a high ratio of exports to the trade deficit.
While the tariff program is far more aggressive than anticipated, the big unknown now is how fast it will be modified. The usual economists are projecting that the tariffs won’t change, which is a ridiculous assumption, but it does create the impression of a huge economic disaster.
This style of negotiation is Trump’s hallmark. He likes to create chaos and then use his leverage to extract concessions. That is a dangerous game when you are dealing with the global economy, although as soon as the first modifications are made for individual countries, the market is likely to be much more optimistic about the long-term impact.
The immediate question for market participants is how fast and how big the modifications to the tariff plans will be. Will we start hearing about negotiations today?
My game plan Thursday is to make some very small buys of names that look like they have little exposure to tariffs but are being punished simply because they are caught up in the overall selling pressure. I expect to see a sharp rebound once negotiations and concessions start to take place.
Out of chaos comes opportunity, but stay disciplined and be ready to move fast.
At the time of publication, Rev Shark had no positions in any securities mentioned.
