American Brexit

First off, take all predictions with a grain of salt mine, including this one. In fairness however I have been warning all along that Wall Street is profoundly underestimating Trump's resolve to collapse the global trading order and now Wall Street has finally figured out that was the right point of view. Following the theme of 2025, Wall Street fatally underestimated yesterday's gargantuan escalation in this burgeoning trade war. Yesterday's Black Swan tariff escalation means that Wall Street predictions for 2025 are now officially null and void. Which also means that not one money manager is positioned for what comes next.

President Trump’s biggest tariff blitz yet sends a clear message to U.S. and foreign companies alike: The era of globalization is over.

“The U.S. has been at the center of globalization,” said Andre Sapir, a former EU official who is now economics professor at the Free University of Brussels. “Now the U.S., the center, wants to pull away.”

"Free trade", which has been the dominant U.S.-controlled paradigm since it was invented by the Reagan Administration, is now over. It was a period of unparalleled prosperity for American corporations and the American super elite even as it decimated the U.S. working class. Ironically, Reagan ran on a platform of rescuing America from 15 years of financial stagflation which lasted from the mid 1960s Vietnam war era to the late 1970s. Now Trump wants to return to the stagflation paradigm which will shift the focus of the economy from capital back to labor. I'm not saying it's a bad idea - it's long overdue - however Trump is attempting to unwind 45 years of trade negotiations literally overnight, which will not be accretive to corporate profit nor will it bolster near term demand as he expects.

Coming into this seminal week, we were informed via the Wall Street Journal and various other outlets that the WORST case scenario was an across the board 20% universal tariff. Initially during his Rose Garden diatribe, Trump revealed an across the world 10% tariff, at which point the S&P futures ripped higher. However, that was merely the MINIMUM tariff that will be applied to every nation on the planet. Then to the shock of everyone, he went on to individually single out the various export mercantilist nations listed below with much larger tariffs which were almost universally beyond the range of 20%. In other words, coming into this event, Wall Street's worst case scenario which I dubbed "The nuclear option", was actually the BEST case scenario, but unfortunately the 20% option is no longer on the table, except for Europe.

Which makes this the Thermonuclear Option with the epicenter being Asia:

Trump's fatal miscalculation in this high risk gambit is believing that U.S. companies can provide all of the goods that are currently imported from these critical trading partners. His assumption is that U.S. producers can easily substitute U.S. products for foreign made products, which is not at all true. Therefore, for a considerable period of time - until U.S. companies can start manufacturing goods they currently have no idea how to produce - the massive tariffs shown above will have to be paid and they will therefore be a major drag on U.S. GDP.

Here is the initial take from Wall Street:

"Crucially, JPMorgan emphasised that this forecast does not yet incorporate the potential drag from falling exports and reduced investment spending, both of which are likely to come under further pressure. Reports of retaliatory actions from U.S. trading partners have already begun to surface, adding to the downside risks."

As I wrote recently, ALL factors of GDP will be imploded by this gambit at the same time: Government (fiscal), Consumption, Investment, and net Exports. And of course this ever-escalating trade war continues to be a moving target and Wall Street will fall continually further behind the curve as to where the economy will land in 2025. Wall Street's S&P price targets for 2025 have now been officially obliterated. As have their economic predictions which are off by a minus sign. So take everything they say with a grain of salt mine, because they will be in ass-saving mode from this point forward.

From a markets perspective, I believe the closest analog to this event is the pandemic crash of March 2020. Recall that the pandemic was a massive supply chain shock and this is a massive supply chain shock as well. However, this will likely be a much larger demand shock because during the pandemic globally there was a massive fiscal stimulus response which will be entirely lacking this time around. In March 2020 it took over two weeks for global markets to fully absorb the resulting selling. The selling started off fairly orderly in late February but in early March it steamrolled into full blown meltdown. It's too early to tell how long it will take to "price in" this Black Swan event; however what was already notable in the overnight markets is the LARGER extent to which U.S. (futures) markets got hit relative to the above countries that are about to receive massive tariffs. Which makes sense in the context of U.S. companies that are the most leveraged to the globalized "Free trade" paradigm.

The trillion dollar question of course is at what point does the Fed step in to save markets. I believe we need to keep a close eye on the high yield spread for signs of duress in the bond market. Which I will post periodically on Twitter. In addition, we'll keep an eye on commodities which are imploding and sending a deflationary signal. The complication for the Fed is that at least short term this will be a price shock that sends inflation readings HIGHER - by some estimates by a full percentage point on PCE.

The other trillion dollar question is now what breaks in the global financial system? First off, leveraged speculators will be wiped out en masse since they were wrongly told to BTFD ahead of this fiasco. In addition, hedge funds will be forced to delever, at which point many will implode since they were in no way prepared for this level of shock. I predict the VIX may start off relatively low but steadily move higher as REAL selling hits this market for the first time since the pandemic.

Notice hedge fund positioning (bottom pane) now versus in 2022 at this same level below the 50 week moving average. And also note where positioning was at the bottom (red rectangle):

And then there are Emerging Markets which I stated recently are teetering on collapse. Overnight, EMs were relatively stable, but that is mostly because EM central banks stepped in to control the magnitude of collapse. This event will surely test their resources and resolve in the days to come as they attempt to ease monetary policy AND support their currencies at the same time. The impossible dilemma.

When "something" finally breaks, that's when the Fed will panic cut rates, possibly as soon as next week. And they will be forced to restart QE to Japanify the bond market. At that point, U.S. bond yields will collapse. I think that rates will meaningfully collapse by the end of June if not much sooner. TBD.

Of course, following the worst quarter for bank stocks since 2023, the risk of another bank breaking now is extremely high:

In summary, buckle up.

The age of Artificial Intelligence is exploding and no one saw it coming.