Through The Mind Of A Pragmatist - Tariff Edition

My only market commentary is if they don’t back off this misguided plan to restructure global trade through tariffs, all rallies will fail at Fib levels, and a prolonged bear market is likely. Here’s the question to ask yourself: what is the potential time frame of the headwind causing the selling? Compare the acute fast nature of the Yen carry trade unwind vs a lasting policy change like universal tariffs trying to restructure global trade. Captain chaos is hurting consumer confidence, spending, and capex. The bottom half is already broke, and tariffs are a regressive tax upon their nonexistent discretionary income. There’s massive debt refinancing just ahead and it’s only been 2 months since the high of the most expensive market in history with potential for earnings to go down not up. The Fed can certainly change the game, but they’re on hold due to the unknown short-term effects of tariffs on CPI, except if they’re forced to bail out treasuries, but that won’t help the consumer. This is not what a bottom typically looks like and the whole debacle is the perfect example of how dangerous ideologues in power can be. Milton Friedman once called tariffs the one thing that nearly every economist agrees upon. 

Here is my argument against tariffs as a policy. 3400 words. 

Intro

Hey ChatGPT, did the US acquire gold through WW2? 

Yes.  Over the course of World War II the United States became by far the world’s largest gold‐holding nation.  Key drivers were:

-Allied gold shipments for safekeeping 

  As war engulfed Europe, the U.K., France, Belgium, the Netherlands and other nations transferred much of their central‐bank gold to New York for protection.  

-Lend‑Lease settlements  

  After the war, the U.S. was repaid (in part) with gold for the massive transfers of military equipment under Lend‑Lease.  

-Seizure of Axis gold

  Allied forces recovered large quantities of Nazi‐controlled gold and looted central‐bank reserves, some of which were shipped to the U.S. for processing and redistribution.  

As a result, U.S. official gold reserves rose from roughly 13,700 metric tons in 1939 to about 20,000 metric tons by 1945, giving America roughly three‑quarters of the world’s monetary gold on the eve of Bretton Woods.

Summary

-Our trade deficits are not caused by the tariffs of foreign countries; they are caused by the differential of our cost of production vs overseas, stemming from our acquisition of gold, our free markets, innovation, and socioeconomic political systems. The deficits are caused by US exceptionalism post WW2. 

-Globalization is the free market's self-correcting mechanism balancing gold back to the world, which Nixon interrupted in 1971. Since then, the forex currency system of relative values without a unifying neutral asset, and the Triffin dilemma, prevented the dollar from depreciating to keep global trade in balance, so globalization is the growth of US global businesses penetrating world markets, and the recycling flow of US dollars overseas back into US assets. Trying in vain to reverse this will not be a detox; it will be a death. 

-If you imagine our monetary system as 100% hard money, globalization is gold flowing overseas, which would impoverish this country, except it’s our businesses overseas receiving much of the gold, so anyone who owns those businesses got rich as the rest of the country was impoverished. 

-Tariffs are not the answer - they prevent the consumer from benefiting from low prices, and they prevent domestic businesses from competing in global markets. Creating trade frictions will end in disaster and result in the removal of tariffs. The sooner, the better. It seems most market participants and people in business understand this. It’s only people putting politics ahead of truth that are twisting themselves in knots to rationalize this policy. 

-There are two outcomes: if tariffs end up as nothing but a negotiating tool and return to what they were, or less, or zero, for as many countries as possible, including the US, that would be a positive outcome as globalization resumes in full force with even less trade barriers getting in the way of US tech from global penetration. However, if tariffs become a prolonged policy, the destabilization of markets will inevitably force the removal of the tariffs after a period of chaos that accomplishes nothing in comparison as globalization resumes in full force with even less trade barriers getting in the way. The only difference is how long it takes Trump to realize tariffs are a misguided policy that will hurt, not help, us. 

-How come it was so obvious to the MAGA crowd when Biden was trying to force adoption of EV’s that his policy was imposing itself on free market forces and could result in a massive misallocation of resources, but Trump’s attempt to force manufacturing to reshore against their economic best interests isn’t the same thing? Imagine the teeth gnashing if Weekend At Bernie’s was trying to evade the constitution with tariffs beyond any semblance of reciprocal. If it’s not okay for one side, then it’s not okay for the other.

Through The Mind of a Pragmatist - Tariff Edition

The MAGA Trump team either doesn’t understand the consequences of tariffs, or they’re lying about them. I’m not sure which is worse, so I’ll leave that up to you. Since there’s a lot of people drinking the Kool Aid they’re selling, I thought I’d explore the concept of tariffs to show that they are not the problem, so when they don't work, the natural order of globalization will resume because it’s irreversible. 

Imagine the world before globalization, but an alternate, idealized history where the US maintained independence from the world, so our military was self-contained within our borders, our government paid for itself with current taxes and had no debt, our banking and monetary system was built upon sound money, and we had a strong manufacturing base sprinkled with a balance of services. In other words, a sustainable, healthy system. 

Time goes by and the world becomes more aware of itself through the inventions of media. Less developed cultures from across the globe see our markets and realize they can make knock-off versions of our products at a fraction of the cost, so they build hyper-efficient manufacturing plants and produce a line of products and sneakers called Schmikees, which they start exporting into our country. Our citizens, particularly the lower 50%, realize they can replace all their brand name domestically produced clothes, furniture, electronics, and sneakers with the Schmikee knock-offs and save a lot of money, so next year they can go on 3 vacations instead of 1. 

As our domestic businesses lose market share to these foreign competitors, they beg their workers: “if you don’t stop buying Schmikees, you're gonna put us out of business and lose your job.” But the workers give them the face palm and play Phil Collins’ “I Don’t Care Anymore” on their drive home, thinking about where to vacation next month with all their freed up discretionary income. So our domestic businesses get the government involved to erect tariffs to protect them, making the imported Schmikees cost the same as their domestically produced Nikes. 

The foreign businesses with quite the profit margin react by absorbing half the tariff and continue to market their Schmikees into our country as a discounted alternative to the brand names. Now the domestic workers can only take 2 vacations because they have to pay a higher price for their beloved imports. So our domestic businesses push the government to raise the tariff again to equalize the price of their Nikes, and it works - the foreign producers withdraw their products since no one wants a generic knock-off at the same price of the local brand name, so all is well, crisis averted, tariffs worked! 

Unfortunately, that is not the end of the story. 

The foreign businesses pivot to the rest of the world and sell their Scmikees everywhere there’s feet, and their global market share grows and grows, so Fortune magazine puts them on their cover. Our local Nike owners read the article and realize, “hey, there’s a big bad world out there - why don’t we sell our much higher quality sneakers to the fine folks of India?” So they develop a marketing plan and make a special sneaker called Shiva and prepare to dominate. The only problem is they sell zero Shivas in India because they’re way too expensive, so the executives convene and ponder how the Schmikees are being produced at a fraction of their cost. They send in their best investigative reporter, a guy named Rico Berrera, who wears purple snake skin suits and black alligator boots, and he discovers these Schmikee guys cram all their workers into factories and pay them in Cheetos because they have no regulations over there. So the Nike execs are like, “hmmm, we have Cheetos. What if we move overseas and make our sneakers there?” 

Insert dramatic music here. When one goes, they all go since they have to compete on price, which is the free market doing its job of creating the most efficiency for the sake of the consumer. 

Except, wait a minute, there’s a problem: that pesky tariff. So the Nike execs lobby the government to get rid of the very trade barrier they begged them to create in the first place, convincing them that free trade will produce the cheapest products, and their workers, cough cough, ex-workers, will be able to take 3 vacations with the savings - after they find a comparable income, which they won’t, so it’s no vacations for you, only cheap imported high quality goods. 

So the tariffs go the way of the dodo bird and globalization begins with a giant sucking sound of manufacturing across all products relocating overseas for the enormous profit margins and soaring market caps for their shareholders. Our overseas US manufacturing base starts exporting to every country in the world, except many of them erect tariffs to protect their local businesses. In some cases, it doesn’t matter because the cheap expenses of overseas production creates such a huge profit margin they can still capture some of the market share by absorbing some of the tariff, but they certainly hurt their ability to penetrate everywhere. And, of course, they export back into the US and create enormous savings for the lower and middle class for the products they purchase, which allows a much higher quality of TVs and laptops and phones that they’d never be able to afford otherwise, but it also creates a massive wealth divide as Wall Street booms and Main Street dooms as the middle class erodes.  

Back to reality with King Trump and his Trumpeteers who are claiming our trade deficit is due to the tariffs foreign countries impose upon us with all their cheating and currency manipulation, which is resoundingly false and misleading. Our trade deficits are due to the cost of domestic production being too expensive to export our products to poorer nations, which is a byproduct of our success that you can ascribe to things like winning WW2, the baby boom that followed, the innovations and domestic manufacturing that produced those products in a mostly free market society, and our debt-based, maxed-out-credit, pull-forward monetary system etc etc. 

The point is our trade deficits are caused by the enormous differential between the cost of production domestically versus overseas due to our wealth as a developed nation, so erecting tariffs is not going to fix that without severe consequences like losing sight of the bigger picture of technology and a withdrawal of foreign money from US assets, including the dollars of our trade deficit being recycled into Treasuries that puts downward pressure on yields, which will destabilize markets until this misguided policy reverses.

Onshoring our production means our companies would have no chance of competing in world markets against knock-off foreign products produced overseas. A tariff would crush their profit margins, hurt their global TAM, and make their products consume a much higher percentage of the disposable income of the American consumer because tariffs are a regressive tax that hurts the lower 50% the most through higher prices, and, no, the currency does not offset their loss of discretionary income. If that sounds like a bad idea, it’s because it is. Trump is attempting to raise taxes on the lower half through tariffs to fund a tax cut for the rich, which is the opposite of populism. Their rhetoric misunderstands the cause of our trade deficit or dramatically underestimates the macro forces of our USD reserve system repressing yields and boosting stocks and the dollar. The pain of reversing this process is not a detox - it’s a death.

If the world was nothing more than shoes, clothes, and cars, maybe it would be tolerable to lose our competitiveness in global markets and shrink back down into a domestically constrained manufacturing base via tariffs, and let the rest of the world conquer each other with their products and cultural values as we remain independent of it all. But we live in a world with nuclear bombs and technology that controls our perceptions and influences our thought, so each culture is dependent on the information they have access to in order to understand what’s going on in the world to prevent governments and corporations from abusing their power against their best interests. In other words, the 21st century is an arms race of who will own the technology taking over the world to control the perceptions of the people with their values. Will it be: Freedom? Individual rights? Truth? Democracy? Checks and balances on power? Or the quest for control and an Orwellian enslavement of humanity? 

This is the larger story of globalization. This is why trying to revert back to a self-contained pre-globalized world threatens our collective future, particularly if China dominates the rest of the world with their technology, and their values, in our absence overseas from an ignorant, misguided reshoring. China would be able to control the information and perceptions of everyone who adopts their phones, laptops, search engines, social media, LLMs etc., as it spreads throughout Asia, Russia, Africa...instead of ours, so it’s in our best interest to eliminate all trade barriers preventing our companies from penetrating global markets, including our own since, in large part, it’s our companies exporting back to us, which means giving up the ideal of reshoring manufacturing as a way of restoring balance. There is a larger balance playing out that is uplifting the developing world as they adopt our technology, which is in everyone’s best interest because it’s our US companies who own it.  

I recently read someone trying to defend Trump’s doomed tariffs by suggesting a dystopian technocracy has been debunked and is a flawed concern, but we don’t have to speculate on this - it’s already happening. Even here in our US culture with a Bill of Rights that values freedom of expression, there is a war of misinformation fighting for control of what people think and express - from self-censorship in a highly charged political environment to who moderates the content on social media to appeasing advertisers in mainstream media, and subtle political biases - all of which has the power to shape elections, and policies, and form tribes based on lies, so what chance would there be for the future of the planet if the misinformation was created on purpose from a communist government with the goal of controlling the population? It is not a coincidence that the country who values freedom and individual rights is the one in control, nor is it a coincidence there hasn’t been a world war on the scale of the previous two since our military has been on guard globally, so this allegiance to an isolationist and idealistic view of our Founding Fathers’ vision is ignorant of the purpose and broad forces of globalization, which will ultimately liberate humanity from work, if we don’t get in the way. 

Even if Apple maintained a manufacturing plant overseas and made a stripped-down cheap version of an iphone for foreign markets while also reshoring back here to keep producing their top of the line model for us, most of our citizens would not be able to afford the new higher priced phone, so Apple would have to make a stripped-down cheaper version with less features for us too, which is essentially devolving backwards and forcing them to compete with lesser generic brands for tiny margins, so they would take a dramatic hit to their cash flow domestically and globally, which would stunt their ability to fund the rollout of their technology into global markets. Trying to shrink megacap tech is going backwards. The sooner the Trump administration realizes globalization is irreversible, the better off we’ll be. 

The solution is a global digital currency that dynamically adjusts the values of sovereign currencies against itself as a neutral asset to balance trade so each sovereign currency can reprice lower independently against it instead of being relatively valued against each other through Forex like two dumb robots perpetually smashing into each other in a Battle Royale of Incompetence. Essentially, this would be a global devaluation of all sovereign currencies that eliminates the upward pressure of the USD as reserve currency, which would benefit everyone if it was phased in over time so the dramatic loss of USD purchasing power was spread out over years while AI evolves and increases our productivity. Essentially, offshoring is an effect of our currency system. 

There would still be relative values between sovereign currencies, so you might argue that China would not agree to let the USD devalue that much more than them, but they need to devalue as well, so this would be a lifeboat for them; it’s just the USD would be devalued the most, partly due to the USD debt in foreign countries, but phased in slowly over a decade. That’s how you balance global trade without the frictions created by tariffs, which is the foolish version of a currency devaluation in disguise since tariffs accomplish a similar result of increasing the cost of imports while lowering the cost of exports but without reducing the burden of debt. Austerity and debt restructuring are also misguided because the depression that would follow in our imbalanced global system would immediately require fire hoses of liquidity and defeat the purpose. The answer is global devaluation, or a productivity miracle. This is the way. 

The only potential positive that could come from The Tariff Man Cometh, which, btw, is also how he can spin this as a win and stop the madness, is if he truly gets the rest of the world to drop their tariffs completely it would allow easier access to their markets for our technology, but that includes our tariffs being zero too, which means our manufacturing stays overseas to maintain the profit margins and cash flow to fund their continual expansion into global markets with their products. Unfortunately, that does nothing to balance the wealth divide domestically, but it does continue to balance the larger global wealth gap as developing nations increase their standard of living through our technology, which is the sacrifice our middle and lower classes are making in order to control the technology taking over the world with our values. 

As much as I would love to see a balancing of the wealth divide in this country, tariffs are not the way to accomplish that, largely because they would have to become permanent law for any business to have confidence in policy continuity in order to go against their best interest to invest massive amounts of money for worse margins and a broke consumer base unable to afford their products. Luckily, our country is designed to restrain power in case an idealogue dictator gets elected, so hopefully Congress will be more economically literate than this.

When critics of Trump’s tariff plan pointed out our lack of domestic labor willing and able to do these “reshoring” jobs, and how much more the price of the products would be since we earn more than $2/hour, the administration changed their story like a teenager caught in a lie to “robots will do the work so the price stays the same,” but…I thought the whole point was to restore the middle class? So Lutnik counters: “we’ll need robot technicians and HVAC guys too,” which is disingenuous at best because now we’re talking about threatening the future of humanity for like five extra jobs, and if the technology was ready for full automation as a viable business model, why wouldn’t Apple move back on their own without the need for tariffs?  

Manufacturing will reshore when it is a viable business decision, which would happen from a devaluation into a new global currency system designed to maintain balance. Either you understand free market forces or you don’t. If you think tariffs are a good idea, then you don’t. I read Miran’s paper. The false assumption underlying their plan to rebalance global trade is that tariffs are paid for by the tariffed country, or the currency revalues to neutralize it, so there’s no burden on the tariffing country, but they are relying significantly on the effects from Trump’s 2018/19 tariffs when those were niche in scope, not across the board, universal tariffs aimed at reversing global trade and dollar flows, which is an entirely different beast. Not to mention, the yield curve in 2019 was suggesting an impending recession before Covid hit. The bottom line is tariffs hurt the tariffing country, particularly the lower half they claim to be helping. It’s not a coincidence we have one of the lowest tariff rates and the most global penetration of our businesses.

Businesses pursuing their best interest with the least government intervention possible will always produce the best result. To think otherwise is to believe in all government interventions like price controls and currency pegs. The pressure of free market forces will always break government controls. Even the OG tariff man himself (McKinley) abandoned them to open ourselves to global trade, which is something Trump will either succumb to voluntarily or be forced into by financial markets blowing up. We’ll see how much damage they cause in the process, but it’s only a matter of time before the natural order of globalization reasserts itself as tariffs get exposed as a doomed dam trying to contain the unstoppable, irreversible flows and natural incentives of free market competition producing the lowest cost products for the consumer as a Trojan Horse installing our technology across the world.

Globalization Is Irreversible

Tariffs are like being mad at someone and getting revenge by punching yourself in the face. Did you know that Trump is one chromosome closer to a baboon than the rest of us? I bet you didn’t know that. Everyone would be much better off as a political independent so you can see objectively and not through the lens of whatever idiot team fits your biases. They’re all the blind leading the blind. I can only tell you the truth as I see it. You get to decide how many tomatoes you’d like to throw. Then I make sauce. 

Globalization is irreversible. Take as much time to process that as you need. Time flows in one direction. Gravity only pulls downward. Water seeks the lowest level. Aging is not stoppable. Toothpaste can’t be put back in the tube. Businesses seek lower expenses and higher revenue. Some people seem to think the pre-globalized world, particularly in the US, was the natural order, and globalization is this anomalous condition that must be corrected when in fact globalization is the natural order - the world just needed to mature into its inevitability because life can’t be contained by artificial borders, so technology spreads to uplift everyone without prejudice, across all cultural divides. I’ve been as outspoken about the devastating effects of globalization on the developed world as anyone, but it is what it is - there is a larger design at work. Globalization IS the free market. It’s businesses seeking to lower their expenses and increase their revenue. We might not like the result of the free market, but government intervention is always and everywhere worse (except, of course, sensible regulations protecting us from humans cutting corners for profit). The true problem is not trade anyway - it’s the currency system. 

While a gold-backed system is ineffective in restraining politicians and therefore doesn’t work in practice, it’s still useful to envision it operating under the surface to illuminate the distortions we’ve created because it hasn't gone away - it's just repressed. For example, in a gold-backed monetary system, when there’s a persistent trade imbalance causing dollars to flow to China in exchange for sneakers and tech gadgets, China would see our industrial base hollowing out and redeem those dollars for our gold, which would weaken our currency relative to theirs, and incentivize production to reshore back here, thereby maintaining a balance of trade without the need for doomed government interventions like tariffs. If you’re a fan of tariffs, you must love government currency pegs, the Fed meddling around with overnight rates, QE, and price controls. Why not have Trump wake up every morning and decide what the price is for everything, then he can rearrange the world around himself exactly as he wants and pick the winners and losers by government decree - at least, until it collapses and leads to the election of an equally extreme politician on the other side. This world is madness. 

When globalization started happening, the self-correcting free market response would have been to lower our wages and working conditions to compete with overseas slave camps, or our currency would devalue dramatically to accomplish the same result. Since neither of those things were possible due to our cost of living and outstanding debts making lower wages impossible, and our insistence of individual rights preventing slave camps with suicide nets as a fundamental value of this country, the inflexibility of our “human designed” fiat currency system prevented a dynamic adjustment downward in USD and therefore resulted in a trade imbalance that has persisted and increased for decades, inevitably forcing the Fed and Treasury to fill in the economic hole it created with sovereign debt. 

I’m not sure everyone is appreciating the severity of this problem. The entire US economy is a bubble - a dollar based bubble, precisely because the value of the USD should be half the price (maybe less) in order to balance trade. Just because we delinked from gold doesn’t mean the self-correcting free market mechanism is broken - it’s just delayed. Now we have a massive debt to refinance but if we reduce government spending to slow the growth of the debt, the job losses will expose the economic hole and cause a recession that lowers government tax receipts and therefore causes the deficit to increase not decrease, which will be met by a Fed and Treasury put to prevent asset price deflation from becoming consumer price deflation and a financial crisis. In other words, the US economy has a deflationary black hole at its core trying to self-correct this trade imbalance through a lower dollar but it can’t because the USD has upward pressure from being the reserve currency, so the Fed and Treasury must continually throw debt on the fire to prevent collapse, which, of course, is not sustainable because debt can’t grow faster than productivity forever. 

It is a dangerous (and I would say wrong) assumption to think the private sector will pick up the slack from a reduction in government spending precisely because we don’t have the industrial base, and the gig economy does not provide sufficient income/benefits/security like manufacturing does. If the private sector is capable of employing everyone, why isn’t it happening already?  The Great Handoff to the private sector will happen naturally, in fact, that is the recipe for growing our way out of debt. You don’t cut government first and expect a private sector miracle without an industrial base - you create the conditions for the private sector to boom first and let government shrink naturally (obviously, DOGE eliminating waste and fraud is great, but it will just shift into other government spending to fill the deflationary hole that will occur). Also, why do people say we’ve never grown our way out of debt when It happened post WW2? 

The real solution is always the same: innovation. And innovation has a pace of its own. You can’t force it by decree. Technology will either create the private sector jobs to attract people away from government naturally, or it will take all of our jobs and we will enter an entirely new paradigm of living (which is my understanding of where this is all going, btw, and fully expressed in the whitepaper I am withholding as I figure out how to proceed). 

The other complementary solution is a new currency system that reduces the role of the USD as the global reserve and dynamically adjusts its relative values to maintain a balance of trade, mimicking the benefits of a gold backed system. Tariffs are like trying to force a square into a round hole. The math doesn’t work. You can think of globalization as a falsely inflated profit margin. Forcing businesses to make unviable decisions against their best interest through government mandate would be crushing those profit margins and essentially creating an enormous misallocation of resources back into a nonviable system where customers can’t afford the cost of the products produced, so they will buy cheaper foreign alternatives, thereby crushing our American based companies, and preventing the spread of their ecosystems across the world, which is our technology, backed by our values of freedom and individual rights. Tariffs threaten that. 

Deglobalization and isolationism is a suicide mission that will open the door for China’s technology to compete with ours in taking over the world, but with their values of repression and top down control. In fact, any doomed attempt to revert back to a pre-globalized world threatens world peace. Forcing Europe to build up their own military instead of making them fund their fair share of ours is a disastrous policy. You might recall where the previous world wars originated. And we want to empower them? There’s too many culture clashes over there with a bunch of hotheads at the helm. Withdrawing our military from overseas is a policy that competes only with tariffs for the poster of foolishness. Some people are so deluded by their own ideological narrative that they can’t see clearly. They’ve fallen in love with an ideal of how they imagine the past to be. What’s next, a return to slavery and taking away women's right to vote? Should we go back to horse and buggy too? And why do all the megacap tech CEO’s change their stripes with every administration? 

Haters of regulations are idealists and academics. The free market needs a higher authority that can inspect what you’re doing and shut you down if you’re not upholding the universal standards created into law. This applies on a global scale as well. (Obviously, government power can be abused with wrongheaded policies, which I experienced personally, but the alternative of mob rule is worse, so it's just another trade-off of least bad. The mob doesn't have courts.) Sovereign powers need to be balanced with checks on each other through alliances and coalitions in the same way private unions keep corporations from acquiring too much power and enslaving them. If the US tells China what to do it causes frictions and seeds the potential for war. If a global governing body backed by a proportionate balance of countries tells them what to do, they can either oblige and choose to be integrated with the rest of the world in prosperity, or ignore the directive and isolate like a withering grape on the vine. Empires always cause a rebellion. What we need is balance, harmony, and fairness through mutual respect for communally created standards and laws - both domestically and internationally. Power is supposed to protect the powerless. The restraint of power is the core principle upon which this country is founded. We prevent government overreach by building an independent currency system with decentralized technology and community awareness to restrain and return power to the people, all of which lead the way toward the First Turning that awaits #BeyondTheBaboon. 

The global system of the First Turning will be driven by technology with rules and laws enforced by artificial intelligence and non-sovereign, universal computer code. It will be our choice whether we let it enslave us, or liberate us, and that will depend on whether or not we come together globally and unify around common standards and community fairness to ensure the technology and currency system are in the multidimensional best interest of the global community and not governments and corporations, which may in fact require a revolution both internationally and domestically. What is emerging is a universal order and it won't be derailed by a clown show.

The only way we arrive at the utopian outcome is through compromise and a synthesis of open-source community-based solutions, not peak Fourth Turning divisiveness, and the selfishness of a “me first” grade school mentality withdrawing from global institutions that may be flawed but are certainly necessary and therefore should be embraced, fixed, and enhanced, not rejected for a Neanderthal caveman backwards isolationist view of a guy who would be the first person kicked off Survivor island because he does not nurture relationships - instead, he exploits everyone for his own gain at their expense. If you ran into that guy in your life you would warn people not to do business with him. This is not to say some of what is being done isn’t necessary, but it’s counterproductive if you alienate everyone in the process and motivate them into secret coalitions against us. This is literally base level game theory from Survivor Island. If an anti-US coalition forms it will now include the entire world, and half the US. If we can’t arrive at non-sovereign, non-corporate, community-driven initiatives and solutions in the best interest of a global people beyond artificial borders, then the innate incentives of corporations and governments to control and enslave us will result in the dystopian nightmare we fear. As always, the choice will be ours. 

Let’s see how this worldview is reflected in current market pricing and possible paths forward. 

The only way starting a trade war makes sense is if they are purposely trying to pull money out of stocks and into treasuries to lower the yield so Bessent can attempt to normalize issuance. They probably figure this entire year can be sacrificed attempting to achieve that goal, so it’s likely correct to be suspicious of all rallies for the foreseeable future. I expect to see SPX 4450 by the end of the year with sizable bear market rallies in between, but that doesn’t mean I’m going to be right. There’s a couple spots with a higher chance of rallies like the August lows, for example. I do expect eventually the market resolves in new highs, but it could take a lot longer than people realize due to recency bias. Stocks have outperformed their historical average over the last 5 years, so how else do we make the long-term average without correction through time and price?  The problem is people anchor to the high print of their account. I think brokerages should display two account balances. One is the current print as it is, and the other is your portfolio at the historical average P/E (or whatever metric), so we can anchor to that number because when stocks get overvalued, unless earnings skyrocket, it's the more accurate representation. I’m sure that’s more complicated than it sounds, but you can subtract the difference mentally to ballpark the same result. And then even decide if it's worth it at that price. Most people should manage risk through size and diversification and not timing though, or you'll make a mess of it.

ES - If there's more selling through the big day, it's reasonable to expect the bots to follow it with a face ripper, but overall I expect this triangle to fill in down to around 5000/5100, then we'll see. I'm still focused on 4450 SPX, which would likely require a sizable rally off this trendline first that may in fact be the bottom and we never get there. Too early to tell, in fact, we will only know in hindsight anyway.

The 10-year treasury yield is forming a head and shoulders, which is ideal because at least it provides a guide for risk control. I’d say the top of the right shoulder needs to be contained somewhere around 4.44/50 on a closing basis.  If it stays below there, it will likely drift downward toward the neckline at 3.60-ish because that’s what they’re trying to achieve, and growth concerns are becoming more prominent than inflation, especially if prices rise due to tariffs. The treasury market should look through forced price increases from tariffs and focus on the growth slowdown they will cause, but we’ll have to see how much they affect CPI and the reaction. It’s hard to say, which is why a technical pattern helps, but I'd expect a bad jobs number to seal the deal (if it happens).

The key will be what happens when Bessent attempts to normalize issuance, probably August-ish, if it ever happens. I would assume a mid 3% starting point yield with a bear market in stocks will be helpful, so he'll want to get that process started early in this sacrificial year. Once that starts, we’ll see how treasuries react. If they steamroll upward in yield again, we’re in big trouble. You would think a higher equity risk premium through lower prices would make people want to go back into stocks but the natural instinct is backwards. Humans always chase and always think what's currently happening will continue, which is what the bots are designed to take advantage of. If for some reason treasuries shift their focus to tariff-induced price increases and term premium over the unfolding growth scare concerns, we’re in big trouble. The worst case scenario is rising yields and falling stocks. It’s probably best to use this technical pattern as a guide and assume a sideways to downward drift unless 4.44/50 is broken definitively. 

5-year weekly (prices not yield). I'm hoping to see the upper horizontal line get tested before a significant pullback. I'm in the actual treasury, not futures because I'm busy with other things.

Gold is anticipating the near certainty that any attempt at normalizing issuance or forcing deglobalization will end in massive money printing. The price to pay for gold leverage creates the contract rollover gaps, which often fill like price gaps.  Gold is really stretched at the moment. It’s extended about the same from the 200-day as it was before the correction from the election, so a backtest of $3,000 to fill that rollover gap is probably likely or maybe down to $2800 if “Liberation Day” aks “Idiocy Day” is used as a sell the news event and it changes sentiment short-term, but I think all pullbacks in gold whether it’s 3% or 10% will be quickly followed by new highs for the rest of this year with the idea of reaching around $3700-ish.  Obviously, I could be wrong about that, and there will certainly be times of shaking the leverage tree, but the only thing I see that could cause long-term selling for gold is if AGI gets solved and the economic revolution that follows makes it obvious that this is how we will fix our debt problem - with sustainable growth. That seems years away to me. In the meantime, it will be a continual currency devaluation with Fed/Treasury financial engineering that will push gold higher. The way I'm doing this is I currently have 14% in physical gold from long ago, so it's easier to trade out of a paper position without feeling FOMO. Paper position can range from 5-25% (or higher with futures but I'm not interested in babysitting positions at the moment). Currently, I just sold down to 5%, but looking to add it back on pullbacks even as shallow as a backtest of $3,000.

Silver is at really interesting levels.  It looks like it wants to break out badly, but if Idiocy Day (or the day after) is a sell the news event, it’s in a dangerous short-term spot that you learn over time not to mess with, yet, when the breakout comes it never lets you in, so it’s very tricky, which is why you have to anticipate this and already be in. There’s nothing worse than waiting for a breakout backtest of something you really want to be in that just goes and goes and never backtests. Silver should lead bull markets, so if and when this does breakout, especially if the Euro breaks out too, it should really go.  In a larger view, I think silver will make new all-time highs, but you have to be careful with this one because it’s wily. 

Silver weekly

Silver Daily - if it does pullback, there's the support level that should hold or it would be concerning.

EUR/USD.  I’ve long had the view that the Euro was doomed to all-time lows, but maybe the doomed Trump policies will come first and cause a sustained move lower in the dollar and higher in the Euro. Here’s the levels on both charts I think are worth watching.  I’m currently just using this as an indicator like oil because I don’t know which currency is worse. As long as Trump is forcing international money to withdraw from the US, I would think the dollar would continue going down.  It gets complicated when the world economy starts to crumble because a dollar shortage happens and causes a spike in USD.  I can't think of a single reason to own either currency.

EUR/USD weekly. It has to punch through those recent highs and hold them to mean anything. 

USD monthly.  This will eventually break one way or the other, but there needs to be a sustained policy differential or it just goes nowhere, as it should. It's ideal for currencies to not be a factor. 

Oil and the other commodities are just indicators to me.  If oil sustainably breaks its long-term downtrend line, maybe I’d be interested, but I just think it’s the worst piece of garbage to trade, and it will likely go lower as growth slows. No reason to even post a chart, which maybe is a meaningful sentiment.

I’m just doing what the Trump team is telling me to do. Long treasuries (but in 5s because I’m afraid of being wrong at the long end and don’t care about the return, I’m just sidestepping stocks, hopefully). Long gold, small silver (I attempt to trade around a core position peeling off into strength and buying back on pullbacks - sometimes it helps, sometimes it's stupid. Technically, I have an insignificant short in QQQs, but I will cover often (like Tuesday weakness) with standing orders and look to fade rallies. I’m talking if I make 2% on the entire move down, that’s fine.  I have better things to do than fight these bots. My only client is the idiot looking back at me in the mirror. If SPX truly makes it to 4450 I plan to get fully invested again, hopefully permanently, in ETFs this time because if I’m not willing to listen to earnings calls and pay attention I shouldn’t be in individual stocks anymore. 

Anyway, I had a couple hours to kill. Oh, btw, I thought of another way to express why the Bitcoin thesis is wrong, so that’ll be a good time. And maybe I’ll write up an ETF article too. 

Just food for thought.

Breakouts or Fakeouts

In the process of rewriting the next article in my series, it expanded into a 43-page whitepaper that I’m keeping private until I figure out how to proceed because I’m moving forward with it as the new direction in my life. 

In the meantime, despite my intention to not write about markets anymore, I’ve been forced into my Rethink Room by this move higher in yields to determine whether my view that a hard landing is inevitable is early or whether my entire worldview is wrong. In the process, I’ve come to the conclusion that I’m early and a soft landing is impossible, but I will point out the one variable that would make me change my mind. For the people who are like “hard landing?- we just had blowout jobs numbers - what is he talking about?” I’m referring to structural flaws akin to termites gnawing away beneath the surface. 

At the core of the hard landing question is whether or not we entered a “post Covid, post QE” new world or whether we’re still in the old world and nothing fundamentally has changed. As you will see, I believe the answer lies in whether or not there will be a gap in time before the real, game changing AI innovations cause a lasting economic boom similar to the internet. Getting that right is likely to be the key variable. 

First, if you believe we are in a new “post Covid/QE” world, then what you are saying is QE worked and it was an effective tool to bridge the broken economy of the GFC with a new economic frontier that is strong, sustainable, fully healed, and will no longer need assistance. For example, the last time we had this level of debt/GDP was post WW2, which involved a prolonged period of Fed/Treasury financial engineering followed by a sustained period of innovations that created everyday goods, produced jobs, and improved efficiency, particularly household appliances, radios, TVs etc... The financial engineering of that era was the government reaction function to keep the ship from sinking to bridge the economic hardship with the new frontier that surely awaited - they hoped (and they were right). The everyday innovation era that followed was how we organically grew our way back to a manageable level of debt relative to GDP, but the most important variable of that era was that we manufactured all those integrated-in-our lives goods ourselves. 

In our current environment, the shining ray of hope is AI and the renewal of our energy infrastructure it necessitates to process all the data. However, thus far, the only innovations out of AI have been more like an assistant for already existing products and services. Whether that and the energy transformation for the data processing is enough economic growth IS the core of the question of whether we’re in a “post Covid/QE” world or not because if it’s enough, then rising yields will be sustainable by a lasting economic boom created by the proliferation of these new innovations, therefore the deficit can be reduced without any adverse effects of hurting demand since private sector activity will rise as gov’t intervention falls and our debt/GDP can be reduced over time similar to post WW2. However, if these AI innovations are not enough, then rising yields will expose a still broken economy by squeezing the profit margins of businesses and the discretionary income of consumers as both are forced to maintain, roll, or initiate new debt at higher rates, which will cause an economic contraction that leads to declining earnings and layoffs in a downward spiral of recession. 

If the AI innovations of today are enough of an economic engine for The Great Handoff from gov’t dependency of the last 15 years to private sector flourishing, the equity market might sell off to price in a higher risk premium to compete with treasury yields, but it will stay contained to a correction. If the AI innovations are not enough to sustain The Great Handoff, then an equity market selloff will likely lead to a bear market and the deflationary effect of falling asset prices will cause more Fed and Treasury intervention and reveal that we’re still in the same pre-Covid world of QE supported markets - for now. Any notion of an in-between won’t last long - it will ultimately be one or the other. We’re either in a QE-is-still-necessary-world or we are in the early stages of The Great Handoff. 

Another consideration is that yields are not rising because we’re in the midst of the real economic expansion of The Great Handoff, rather, it’s an unwind of Yellen’s yield curve control in anticipation of Bessent’s coming attempt to normalize issuance back toward the long-end, so the question is: did Yellen shorten duration for political reasons (or whatever excuse she makes), or was there a bond auction or two that made her nervous? Meaning, it’s quite an assumption to think the long end can absorb all the issuance that’s built into mandatory spending over the next decade. What if it’s not possible to normalize duration? This too begs the question of whether we are in a new “post Covid/QE” world because if the private market can’t absorb the issuance, or they demand a yield the economy can’t handle, then we’re not in a “post QE” world because the Fed will eventually be forced to monetize that debt, which will happen as a response to a deflationary recession with falling equity prices leading to layoffs and reduced consumer spending etc.. 

This idea of the Fed being unable to save the equity markets due to inflation is only valid at the top of a bull market because this economy is so financialized, when the stock market is getting crushed, inflation expectations will be too. This is a key variable the inflationists got wrong for a decade: QE does not inflate consumer prices - it inflates asset prices. However, as Jim Bianco points out, after every recession the world changes in some way. I believe what changed this time is they figured out how to cause inflation by sending insane amounts of money directly to consumers, so if that is the form QE takes, then most likely we’ll see a repeat of the last few years, but at some point the long end is not going to fall for it, so the Fed will have to pin the long end and raise rates on the short end to dampen demand. This is too far ahead. There’s plenty that can go right to avoid this. 

The main way to avoid that recessionary scenario is if the AI innovations create enough real economic growth that it leads to rising tax receipts, real economic expansion, and an ability of the private market to absorb a normalized duration issuance (of a path of spending that goes straight up - without a recession), which will then allow deficits to be reduced as The Great Handoff lifts us to the fabled soft landing glide path higher. (btw, this is how I define a soft landing - it's a complete exodus of gov't intervention like the post WW2 era).

Here’s the key variable, though: the reason I worry about a gap in time that prevents this is because I'm assuming in order for AI innovations to have a similar post WW2 effect they’ll need to be actual everyday products in our lives like robots and robotaxis, and virtual reality devices as contact lenses etc., which requires solving AGI first. This is the crux of the issue. There’s no Great Handoff to a new “post Covid, post QE world” unless it’s driven by genuine economic innovations that allow deficits to be reduced and higher yields to be sustained broadly without adversely affecting earnings that leads to layoffs. The question is whether or not the economic activity from the evolving AI developments along the way to the everyday integrated-in-our-lives innovations of the future is sufficient, or whether there’s a gap.

 

The same applies to energy. The planned nuclear sites are solely for data processing and will still take 5 years, so is the economic activity from the investments in energy infrastructure sufficient to broadly absorb higher interest rates, even though there will likely be a greater demand on energy than available supply during the process, which should cause energy prices to rise and squeeze discretionary income etc...  I’m referring to electricity more than oil or natural gas, although, rising oil prices due to geopolitical tensions if Trump can’t end the war on day 1 certainly needs monitoring. 

I am not surprised we didn’t have a recession for the last two years because the stimulus put the consumer in good shape, but I am surprised we still have rising yields and strong jobs and increasing inflation expectations. The call of the inflationists and bond bears for a resurgence off the lows was the correct one, especially heading into the first few months of the year and possible tariffs. But now we’re back to the key question regarding inflation: is it self-fueling? And I adamantly, table poundily say it is not. The reason is because unlike a deflationary mindset that doesn’t require anything else, an inflationary mindset is meaningless without money. It requires money. If the consumer has no stimmies and they hit their credit card limits, there’s nothing left to spend. 

I wrote thousands of words on this, so I will sum it up succinctly as follows: Wall Street has co-opted the term inflation to mean rising consumer prices, which is inaccurately misleading because it combines both supply side and demand side causes into one concept, but they have opposite economic effects. I understand the horse is out of the barn on the semantics, so it’s your job when someone says inflation and they’re referring to rising prices to translate it in your head to distinguish whether they mean actual inflation which is more money than available goods that leads to an economic boom for as long as the money is flowing, or supply side causes like rising oil or interest rates or tariffs which leads to an economic contraction from squeezing margins since it lacks the monetary expansion to pay for the rising prices. 

Obviously, Trump is wrong that tariffs are a tax on the other country, but a lot of people have been calling it a tax on consumers, which assumes the business can pass it along. If you’re thinking on the level of general economic concepts, you are not operating on the transactional level where every business has different pricing power, market share, and balance sheets, so each business will have to independently decide how much they can pass along without hurting their own sales, and how much they have to absorb, which will force them to trim other expenses to make up for it. 

Since a feature of our system is the constant changing of the guard, overseas businesses can also choose to pivot to other markets or wait out the Trump presidency and NOT move back here, which is yet another assumption people are making. They're assuming a business doesn’t have other options and Trump can pull a bunch of levers and make them do what he wants when the reality is that an irreversible global system is emerging, driven by technology, and a carnival barker with an idea that would have been great in 1994 is not going to stop it. By the way, if tariffs were erected in 1994 it would have had the same effect as gold, meaning, it was only a matter of time before the pressure from companies with global ambitions pursuing their own self-interest would have broken the restraint of tariffs and we’d be in the same situation today. It’s remarkable how many people willfully choose to ignore that it's not in the best interest of these overseas companies to come back here when cheaper locations with policies lasting more than four years exist. Maybe everyone calling for deglobalization can gather the millions of people who lost their jobs and lead a rally on the Atlantic coast so you can keep promising the ships with all the manufacturing equipment coming home to restore their jobs are right over the horizon.

A global interconnected system of technology is the force in charge. 

Let’s look at some charts.  Are these breakouts or fakeouts?  

SPX is not only forming the dreaded head and shoulders pattern, it’s on the edge of breaking out to the downside. To be fair, when a technical pattern like this fails, it tends to be a great signal in the other direction, so it’s not over yet, but there’s so much uncertainty ahead and so many things that can go wrong, and this is exactly what a top would look like, so it should at least have everyone’s highest attention, especially since the first few months of the year have tended to run hot on CPI as yearly prices reset. A completion of this pattern would be the first lower low since the Nov 23’ backtest reversal off 4200 (a lower low meaning a pullback that didn’t make a new high - this one retraced 78%).

IF stocks break down, particularly if it happens on a hot CPI that causes yields to rise (that’s 2 IFs), the equity market will shift to a mindset of selling the rips and it won’t stop until the downtrend it creates is definitively broken and becomes an uptrend again. All the thoughts I just wrote about and all the thoughts in your head will evaporate into the arbiter of truth: price. If you think about the nastiest thing that could happen, it would be two days of rally back into range and then a terrible last 3 days closing the week with a clear breakdown bar. If the market isn’t ready to fall, this week needs to be a banger to the upside to shift the whole psychology of it morphing to the dark side. The question is: if Yellen’s yield curve control and Powell’s pivot allowed stocks to rally this much, what does the unwind of YCC and Powell’s pause do?  Or will optimism over the coming policies mute these concerns? Just asking questions. 

GOLD - it is exceptionally interesting that gold and silver rallied WITH yields and solid data. What this means, to me, is that either gold is not a believer The Great Handoff is underway and we’re still in the old world, so rising yields means an eventual breaking of the economy that will cause a collapse in yields and more QE, or it was a market-maker-conventiently-disappeared-for-the-morning fake out.

Gold is currently trying to break out of this triangle, but if the CPIs are hot, it could rather quickly retest the lows. If gold and silver continue ignoring hot data and rising yields, look out when they break the economy.  I'm thinking if gold gets killed on CPI, I’ll be looking for a breakout of this triangle from the bottom, or seeking a therapist if it breaks down from there.  

10-YEAR YIELD - while I expected a bounce in yields at the first rate cut in September because that’s what happens every time, I thought yields would be contained by the down trendline, which is clearly wrong, so wrong in fact that it prompted the rethink that led to this article (remember, I’m not writing these anymore). I don’t have a level that would interest me in duration, but if the combination of an economy that won’t quit + deficit spending + tariff fears + normalizing issuance somehow causes a 6 handle I don’t see why I’d ever take risk again, except for the fact that equities would be so cheap I don’t see why I’d ever own treasuries again. I’m trying to be as open minded as possible to the outcomes, given Trump’s policies. 

OIL - This is also testing an important trendline. If the economy defies all headwinds and remains strong, and oil breaks out, it will become yet another test of the economy’s resilience. Meaning, I can justify no recession when consumers and businesses had stimmies to offset rising prices, but if rising energy and rates still have no effect, then I would be forced to consider whether QE worked and the new frontier of AI innovations and The Great Handoff is here. That would be a complete letting go of the inevitability of a debt/currency crisis. I honestly cannot imagine this as possible at the moment, but that’s what it would look like. 

Anyway, those are my thoughts in the most dispassionate expression possible. The timing would be nice, but it’s not as important as understanding the forces at work and having the patience to wait for it to play out, and, of course, recognizing what will prove you wrong. I’ll put a number on it: if the SPX touches 4450, then it’s not a new world, although still debatable, but if the SPX touches a deep 3 handle anytime in the next few years, it’s the same old QE world and nothing has changed. I'm trying to be done with these, so best of luck to you.