Trump's Economic War on the World

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So…that was the shortest trade war in history, right? Everybody cheer!

Not so fast.

Today we’re going to discuss the reality of what’s happening to the economy, what lies ahead, how close we are to the edge, and what it really all means.

Trump’s Economic War on the World

That wasn’t the end of the trade war. It was just the beginning.

(And it isn’t really “a trade war.” It’s a global rebalancing, which is going to have consequences for the world, but dire ones especially for Americans. But I’ll come to that.)

What really just happened? Let me give you a way to think about it.

Two sides go to war. They begin by each nuking a major city belonging to the other. Realizing the damage would be too grave, they each back down. And decide instead to fight, tooth and nail, a slightly more conventional war.

Trump backed down from thermonuclear economic war. That much is true. 

What are nuclear wars like? Short, sudden, incredibly violent, and existential.

Make no mistake, now we are entering a different kind of war.

It’s something more like World War I. Remember that? It was long, bitter, and dirty. It was fought in muddy trenches. From it, originated the term “shellshock,” the forerunner of modern “trauma.”

And it dragged on for so long precisely because each side could neither escalate nor de-escalate. So there nations where, stuck in bloody trenches, that side lobbing over a grenade, this side attempting yet another futile, foolish charge.

Do you like poetry? Read this poem by one of my favorites, Sassoon. And be haunted. Because I want you to understand this analogy so much that you feel it.

Now we are entering a phase of economic war much more like that. It will be long, bloody, and stupid, because nobody wins trade wars.

So. We’re not in a thermonuclear war now. But we are in a long, dirty war, which will be fought in the trenches, and the price will be incredibly high.

Irrational Exuberance and Mutually Assured Destruction

There’s a term economists use. “Irrational exuberance.” It was coined by one of the greats. What does it mean? It’s an overly complicated way of saying: the markets think things are going way too well.

So let us be the Adults in the Room for a moment. Let us see and think clearly.

Here’s the reality. Tariffs are still sky high. They’re not at thermonuclear levels of 200% or what have you—here, I incinerated everything. They’re nominally at 30%, and in fact, the average rate all in is closer to 40%.

How high is that, in reality? Is it really that bad?

Let’s think about it together.

You run a factory that makes widgets. What happens if the machines you use to make the widgets also come from China? What about the stuff the warehouse uses? How about the wholesaler and the retailer? Now we’re talking about something much, much more than a mere 30%. That’s how fast tariffs add up. In that sense, they’re not merely additive.

So a 30% tariff rate is sky high in this sense, and in all the other senses you can think about, too. Do you really want to pay 30% for exactly the same stuff? Of course not. How many people can afford that? Not many.

So what happens as a result? People begin to have to choose. They choose to buy less pencil or dolls, as Trump himself puts it. What does that do? Pretty soon, this pencil company or that doll company has a lot less customers.

And what does that do? Eventually, they lay people off. Who spend less money, in turn. And eventually, unable to survive, many go broke.

Other, who do survive, cut back severely. And that way lie both shortages and pretty severe price spikes.

All this takes years to play out. It doesn’t end swiftly. It’s triggered, and can’t be easily “untriggered,” like you can’t unshoot a gun. It’s in that sense that I mean: the trade war didn’t just end, it’s only just begun.

What Happens Next to the Economy

Let’s simplify that, so you can think about it clearly.

How many businesses have a profit margin higher than 30%? That’s really what we’re talking about here. As a boundary case if you will, the business that imports everything from China. So let’s say there’s a small business that imports just half of its stuff from China. How many of those have a profit margin higher than 15%?

Not many, is the answer. Most profit margins are in fact very, very thin. And so what tariffs at this rate tend to do is cause widespread economic destruction.

Self-destruction. Because people still (and I know this is incredible) don’t fully understand yet that they pay the tariffs. That tariffs are just taxes, essentially, and regressive ones at that.

So now let’s think about the stock market.

There it is rallying, over all this “good news.” By now, you might already have the feeling that something’s very, very wrong with that. Now you know exactly what, in sort of gruesome detail.

The stock market is cheering on—and rewarding—profits being hit by up to 30%+.

Sound sane to you? Even if you’re a die-hard believer in capitalism, that should scare you a little bit, because it’s every bit as delusional as it sounds.

Stock markets should never cheer the destruction of value, or even the widespread, sudden, double-digit loss of profit. But that is exactly what we’re seeing here.

“Irrational exuberance” means something interesting. Eventually, markets must come back to their senses. In this case, markets will eventually realize, to their horror, that all that really just happened is that the destruction of profitability was limited, thanks Trump, to just a mere 30%+

When they figure that out, then of course, share prices will slide again. They might have to figure that out the hard way, as in, waiting for companies to actually report some pretty shocking results.

You don’t have to figure it out the hard way, which is going to be very costly indeed. I’ve taught you the easy way, which is that if tariffs cost X%, then there go profit margins, and eventually, there go share prices, too, and there go America's life savings.

The Deep, Dark Woods of Financial Ruin

So we are not by any means out of the woods yet.

This isn’t a truce, and it isn’t even an armistice. It’s just an agreement to stop nuking each other for 90 days, and simply wage a bloody trench war instead. That’s it. That is not going to be good for anyone.

Trump will continue to bluster and fumble and rage and so on. He’ll back down, to what extent he can, but he’s serious about this. It’s not correct to say that “Trump blinked” or “everything’s fine” when all the effects I’ve taught you are about to start happening right now.

So let’s think about what’s going in the stock market right now. Prices are back to “normal,” as in, the market’s pretending that none of this ever happened, or is happening. It is pretending that the “trade war is over.” As I’ve just taught you, the real war is just beginning, and the market here is badly mistaken.

If this is the level that your finance guys are thinking at, then you should be questioning them. It’s your money and your life after all.

What I’ve taught you here is that choices have consequences. Choices like this don’t just have first-order consequences, but second, third, fourth, and so on ones.

That means: tariffs don’t just raise prices. Raising prices depresses investment, shrinks real incomes, raises unemployment, reduces business activity, and in the end, all that reduces share price valuations. Not just this share or that share, but across the board. Because of course now the economy is much smaller, as in, people have less money to spend. How much less?

Now let us arrive at the clearest picture of all this, and after you understand it this way, you will know way, way more than your average money guy.

People will be paying 30%+ more for the same stuff. Let’s assume their budgets are fixed, because in reality, everyone’s are. That means that 30%+ less will be going to bottom lines, and 30%+ more will be going to Donald Trump, whoops, sorry, I mean the US Treasury, but I’m not really sure anyone sane in the world thinks there’s much of a difference anymore.

Re-read that if you didn’t get it the first time, because I want you to really grasp this, since once you do, you’ll be the expert, not your money guys.

That is the mistake the market is making. It isn’t pricing in any of this in. Is it really sane to act like things are “back to normal”? That “nothing happened”? Of course not. Any sane and rational market participant would be wondering something like: if 30% less is going to profits, and 30% more is going to Donald Trump, does that mean share prices will also by around an equivalent amount?

The answer to that is: maybe less. That’s sort of a floor, if we’re lucky, and if we’re unlucky, it’ll be more. If it’s sudden, that’s a “crash” like 1987 or 1929, and if it’s slow, it’s a long, painful, relentless slide, punctuated by moments of irrationality.

But there’s no world, really, in which they can rise, unless I’m missing something, and profits are going to rise because people are paying Donald Trump 30% more.

Wealth in an Age of American Collapse

The point I want to make is very simple for today. I’ve tried to teach you how situations like this play out. They cause long term economic damage.

That damage is called “scarring” technically. Now think back to World War I. There, we discovered the concept, the notion, of “trauma.” That people could suffer long-term damage that lasted long, long after the war.

This situation is precisely analogous.

The war isn’t over. It’s just begun. And the damage it’s going to go will last long, long beyond the day it does end. The economy will be scarred.

I’ve taught you that tariffs and their like, capital controls, cause all the following: higher levels of unemployment, lower levels of income, lower levels of profit, far lower living standards, not to mention higher prices, interest rates, and more bank failures.

But all that will last. It won’t magically go away. America’s economy is now on course for all that over the long-term.

That means that:

—American asset prices will fall, as the economy’s scarred 
—Stock markets will bounce around, irrationally, but as the damage is done, the bill come due
—Bond markets will be tested over and over again
—The dollar will see continued flight, because Americans will get poorer

And so standard portfolios built on this kind of thinking remain at serious risk.

Here Trump has acted as a master showman, and seduced the media—war’s over, guys!—but the facts remain that America’s placed steep barriers against all major global economies it depends on, not just China, but Mexico, Europe, and Canada, to name just a few. America is now fighting a long, dirty trench war with the world.

Sassoon taught us the pain and price of such wars, in haunting, unsparing, poetry. What a pity it is I must use them to remind you of what lies ahead for people’s money and lives now.

As always, if you need help, just reach out.

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