Buckle up buttercup! Trumps trade war has started

VTS Community, I woke up and chose violence...

The trade war has started

For all those people who said that Trump doesn't actually mean what he says, that he's just posturing, well he's done it.  The trade war he's talked about for years has started.  25% tariffs against Canada and Mexico, and 10% against China.  He's also said the tariffs against European countries are coming so expect that to follow soon.  If it ends with that, it would already be a terrible situation.  If retaliation and escalation takes place though, this could get ugly.

What does this mean for stocks?

There's no way of knowing but to be honest anything is on the table.  Could the market just brush this off as it has for so many potential firework situations in the last few years and just keep marching higher?  Sure.  Could this be the start of an epic decline that seemingly has no bottom?  Absolutely.  Today I'm just going to rant about the economic impact, but there's no doubt this will raise market uncertainty to an uncomfortable level.

Inflation will get worse

One of several reasons why Trump was re-elected this cycle was due to the high inflation thrust upon the Economy after the pandemic.  Voters just didn't forgive the incumbent party for the high prices, and honestly they shouldn't.  One of the primary jobs of government is to facilitate an affordable living environment for the average person.

Trump said on Truth social, due to tariffs there will be pain.  My question is, who's pain sir?  With respect Mr President, but you haven't been to a grocery store in 50 years.

While tariffs aren't literally a direct price increase, the effect of them is the same.  If you impose a 10% tariff on Chinese goods, that is effectively just passed off to consumers in the same amount.

Now you might say, well that's good because people will just start buying the cheaper American made goods.  Sure, in some cases, IF they are available and on par quality wise.  I'm not a person who opposes tariffs as a matter of course.  There is a time and place for effective targeted tariffs to protect a few key local industries.  However, I don't know if anybody has noticed but the US doesn't produce what it used to, and some of the things they do make just aren't as good as the foreign counterparts. 

The bigger problem is, the ramp up time to revitalize those industries and get them up to a place where they can be competitive in many cases could take many years or even a decade or longer.  Tariffs by themselves, without an equal focus on developing those replacement industries is nothing but a self inflicted wound.

There's a reason those goods are better and cheaper produced elsewhere, and it didn't happen overnight.  You can't just wake up and artificially force people to buy American and not have that be a huge increase in inflation that will take many years to overcome, if ever.

Higher inflation is good, for "them"

Who owns most of the assets?  Rich people.  Out of control inflation actually benefits the people in power.  It primarily benefits them because most of their wealth is invested in assets that rise in value with inflation.  Secondly, they benefit on a relative basis because basic living expenses make up a tiny fraction of their monthly budget compared to the average person who dedicates most if not all of their discretionary spending on living expenses.  The higher inflation, the larger the wealth gap.

So does Donald Trump, Elon Musk, Vivek Ramaswamy, David Sacks, Sam Altman, Peter Thiel, Miriam Adelson, and all the CEOs and tech billionaires care about the cost of living for the average person?

Not to take too much of a dig at Mr. President but it is a sign of the times.  Donald Trump made more money in 1 day doing a meme crypto pump and dump than he made in his entire 78 year life.  And who was it who lined his pockets in this scheme?  That's right, his supporters.  The people who need his help end up holding the bag.  Do any of the rest of the many billionaires and former Wall Street bankers really care what happens to the average American?  Call me skeptical.  Every one of those people I mentioned and dozens more in the administration, who have more money than 10,000 distant relatives could spend in their lifetime, are going to become even more unimaginably wealthy in the coming years. 

We the people won't, but they will.

It's not just the economy, stupid

As financially burdensome as things may get domestically if there is an escalation of a trade war, I would argue that the geopolitical consequences may turn out to be even worse long-term.  The balance of power has been slowly shifting over the years and legacy Western countries are not entirely running the show as they used to.  Many countries, some of them in strong growth phases, have been finding ways to bypass much of the US and Europe hegemony that has existed for decades.  In trade, finance, technology, military, there are other alliances building around the world.  Life in the US doesn't exist in a vacuum and there could be unforeseen consequences that go far beyond the increased cost for American consumers.

Just ask yourself. what message does it send to potential future trading partners that the US is directly punishing, of all countries, Canada?  Even a long term ally is not safe and respected.  It's certainly possible that leaders around the world will think twice about entering any agreements with a partner that so brazenly punishes what has for the most part been a very prosperous alliance between two friends.  We already know most of the non Western countries have done that already.  Will Europe take advantage of this situation and start looking elsewhere too? 

Most people try to escape the deserted island, not actively try to vacation there.

Does Trump understand the economics of tariffs?

For years we've heard him say that other countries that the US runs a trade deficit with are "ripping us off."  He seems to genuinely not understand that trade is based on competitive advantage, and if you can get goods and services from other places for cheaper than you make domestically, it's a good thing for your country and the people in it.

Now you wouldn't want to do that 100% across the board of course, it's beneficial to be selfish and try to get the best of both worlds.  Again, I'm not against strategic protectionism.  However, running a trade deficit with other countries may mean you can focus time, resources, and man power on your strengths domestically.

There is a better way

Instead of Tariffs, the United States could develop open free trade alliances with key strategic partners to bring in quality goods at cheap prices to help reduce cost of living domestically, while at the same time dedicating resources and high skilled American man power into dominating high value goods and services to maintain global supremacy.

There is not enough money to go around.  You can't dominate high value goods and services globally, while also dedicating trillions of dollars to revitalize American manufacturing of cheap goods to bring down inflation.  

Trade deficits are good for the US.  It means they can allocate resources to the places that make the biggest impact, and just import the rest.  Tariffs are the equivalent of the old saying, cutting off one's nose to spite one's face.

Score another point for China

Do you know who does understand trade and tariffs?  CHINA!  I guarantee you China is going to take advantage of this unforced error by the Trump administration, and actively start perusing even more friendly trade agreements around the world.  They have a long-term plan, and despite the propaganda you've seen by legacy mainstream media in the US, China is very quickly modernizing and quite frankly, eating the US's lunch.

I lived in the United States for many years, and as a Canadian I've always thought the US was the greatest country in the world.  In many ways I still do.  It has its problems but for the most part, the US is a fantastic country with potential that is off the charts.  With a few well made strategic decisions, it could once again be all of that and more.

Unfortunately, it does not have the same competitive advantage it did 30 years ago.  Trump still thinks America swings the biggest stick and he can just bully the rest of the world.  I'm sorry to say, I think a hard lesson is about to be learned...

/end rant