(MEMO) Memo - This Won't Last
By: Wilson
I firmly believe that the tariff war won't last. Market participants have rightly observed that Trump doesn't have the stomach to fight his ideology (tariffs are good). The reality won't let him, and in the 2025 edition, the credit market won't let him.
In my memo last week titled, "Trying To Find Clarity Amidst The Insanity," I said:
This tit for tat will continue until someone folds, and judging by the sensitivity of Trump to both 1) the stock market and 2) interest rates, the market will inevitably have to force it. So in another way, the worse things get (i.e. lower stock market or higher interest rates), the faster this all gets resolved before real damage is inflicted.
In other words, the faster the market declines, the better it is in the long-run as no real tariffs will be implemented and cooler heads will prevail.
There are other aspects of this tariff announcement that lead me to believe that it won't be sustained. The tit-for-tat nature of what's to come is so damaging to all sides that it reminds me of the Saudi oil price war in 2020.
Rewinding back to the events that unfolded this week and the sell-off to start this week finally caught Trump's attention. The more interesting dynamic that unfolded this week happened in US treasuries where the 10-year yield showed the fastest weekly increase since 2001.
But there appears to be a disconnect in people's perception of what's to come. If the US engages in the current tariff war (no changes), then wouldn't this hurt economic growth and result in a recession, which would push yields down?
In theory, yes, but this is not your normal market situation. The tariffs being imposed on China today (145% altogether) are akin to an embargo and will create havoc in the supply chain. Similar to the COVID supply chain crisis that resulted in inflation to shoot higher, the tariff will create a similar dynamic.
Even if Trump is successful in negotiating deals with other countries (soon), I think the embargo on Chinese goods will make it 1) expensive to replace and 2) difficult to source.
Either businesses in the US will have to eat the cost increase and pass it onto consumers, or there will be a lot of problems for small-to-medium sized businesses.
The credit market will continue to reflect the growing disconnect between perception (we are winning the trade war) to the reality (everyone is going to lose).
In the coming weeks, treasury yields will continue to climb, creating panic inside the Trump administration. I know for certain that Bessent has been watching the bond market closely, and even in Lutnick's case, the rise in yields will scream in his face that his policy recommendations are disastrous at best.
What's obvious to me here is that the credit market will be the key signal to watch for when this trade war ends.
Based on everything I've seen from China, they have 1) no incentive to cave in and 2) no issues with replacing imports from the US. It will be Trump that caves in, and it will be thanks to the rising yields.