The New Captain Titanic

So far, Trump's second term is beginning the same way his first term began with respect to economic policy.

In his first term, Trump excoriated Mexico and Canada for their large trade deficits which are largely due to the NAFTA supply chain which extracts resources from Canada and labour from Mexico, in order to create finished goods in the U.S. The net result was to force Canada and Mexico to proactively tighten their border security to ease tensions. Next, the Trump team renamed the NAFTA trade agreement "USMCA", made some minor adjustments, and that was it. Trump declared major victory over a non-event. On China however, at the beginning of his term Trump was more cautious. He first launched a review of China's trade practices, and then he launched the trade war. So far, events have been very similar. More rhetoric has been aimed at U.S. trade allies than at U.S. trade competitors. Perhaps Trump wants another "quick win" with Canada and Mexico before moving onto the main event. We don't actually know, because there is no actual plan behind the sound and fury signifying chaos.

If Trump REALLY wanted to "fix" the U.S. trade deficit, then he would need to scrap NAFTA/USMCA entirely AND he would need to put large permanent tariffs on China which would force U.S. manufacturers to move their factories back to the U.S. That re-shoring process would take years and require billions in corporate investment. The initial effects would be highly inflationary. In the end, U.S. workers would have higher productivity jobs, but corporate profits would be much lower. Which means the stock market would implode sooner than later. Similarly, scrapping NAFTA/USMCA would raise U.S. supply chain costs and make the U.S. less competitive globally.

In the meantime, any tariffs Trump levies on Canada, Mexico or China will be catalyst for a global currency crisis. So far it appears markets are betting that tariffs WON'T happen - but if it DOES happen, then what we just witnessed with week was global short covering ahead of a massive crisis.

Which gets us to markets:

So far, the inauguration has led to a collective sigh of relief in global markets which is deja vu of Trump's election week back in November. It's been a massive RISK ON short covering rally in every major risk market.

A good way to understand these markets is through the S&P equal weight. Here we see the election rally on the left shoulder and the inauguration rally on the right shoulder of a head and shoulders top. The shoulder line is sloping down to the right, because market breadth has been collapsing. As indicated by new highs in the bottom pane:

The Nasdaq failed to confirm the S&P 500's new high yesterday which is deja vu of the 2021 top:

Here I show the levered NDX, which is stalled at the same level as last time, however down volume hit a new record.

Momentum Tech peaked with Netflix earnings this week, which is deja vu of the July top. And NYSE breadth has rolled over again.

The BOJ raised rates for the third time last night to the highest level since 2008, and said more rate hikes are on the table if inflation continues to rise and the Yen continues to weaken.

EM investors took Trump's cautious China rhetoric as a sign for optimism. But if you remember 2018 at all then you recall that his entire negotiating tactic was to sow false optimism and then follow through with punitive action. I'm not sure where he learned that technique but some Cracker Jack box wants its riddle back.

Of course this time Chinese markets are far weaker than they were back in 2018:

In summary, we're on schedule for lower interest rates.

And we know who to thank.