The Complacency Bubble
The last major global trade war was in 1930 at the start of the Great Depression. Looking back, pundits will be widely discredited for not having seen this trade war as a harbinger of a hard landing. It's clear that most people are oblivious to their place in history, amid the ruins piling up around them.
First off, it's clear that many investors have forgotten that Trump is a second term president and they also forget that he has reversed his order of operations from his first term. Back in 2017, Trump cut taxes first, THEN he started the trade war. Back then the plan was that the tax cut euphoria would buffer the negative consequences of the trade war. Regardless, by the end of 2018, U.S. stocks were down -20% after the onset of the trade war. This time around, the trade war Trump is planning is much larger than last time AND there is no buffer ahead of time because a tax cut is not on the table until early next year so the losses will likely be far larger by the time it arrives.
Complacency can be measured many ways, but one of the more tangible ways of measuring complacency is in stock inflows. Last week, global stocks (including the U.S.) saw the largest inflows of the year AHEAD of the impending escalation of the trade war on April 2nd.
"Global stock funds recorded about $43.4 billion in inflows in the week through Wednesday, the largest amount this year"
We also learned at the end of last week that retail investors have been buying the dip ahead of trade war escalation as well:
"The recent behavior of individual investors is characteristic of a “down” year in the stock market, Wu said. It was also seen in 2022, she noted"
In this chart we see the remarkable similarity between 2022 and now:
What investors also forget is that this is already the second short covering rally in 2025. Here we see the first short covering rally took place ahead of the February tariffs on Canada, Mexico and China. Trump immediately postponed the Canada/Mexico tariffs by a month, but as we see, stocks kept falling and then accelerated when the tariffs came into effect in March.
This is March 2025, a quarter century from the infamous DotCom collapse of March 2000 - So I would be remiss if I did not point out - as I did on Twitter - that the Artificial Intelligence bubble is now imploding. An event that could be every bit as jarring as the Dotcom implosion. Many pundits claim that the AI bubble is much smaller than the Dotcom bubble, but they forget that we have had TWO back to back Tech bubbles which means that the Tech overweight is now much LARGER than Y2K.
In this chart below we see that the pandemic Tech / Work from Home / Cloud bubble got Tech over-weight back to the Dotcom era level. And this Artificial Intelligence scam has taken the Tech overweight ABOVE the Dotcom level. One of the arguments that the article linked above claims is that the internet did NOT have a business case, whereas AI is highly profitable:
“There was a lot of hype around the internet, which materialized well before anybody had a business model for making money from the internet,” Nobel Prize-winning MIT economist Daron Acemoglu said. “That’s why you had the internet boom and the internet bust.”
Actually, most companies were widely adopting the world wide web throughout the second half of the 1990s and had a REAL working presence on the internet long before the Dotcoms collapsed. And then the actual use of the internet and total bandwidth exploded after Y2K with the advent of broadband streaming internet. Every day now, millions of people rely upon the internet for doing their jobs - ask yourself how many people do you know are relying upon Artificial Intelligence on a daily basis to do their jobs? NO ONE. It's clear that all Silicon Valley / Wall Street did was invent a mania to replace the pandemic / Cloud mania that collapsed like a cheap tent in 2022. Which was also a massive scam.
So either you forget the lesson of 1930, or you forget the lesson of Y2K, or you forget the lesson of 2022, or you forget the lesson of six weeks ago.
Either way, it's not a good look.
