By Peter Tchir of Academy Securities
Worry More About “Certainty” than “Uncertainty”
Uncertainty seemed to be the word of the week on Wall Street. Uncertainty this. Uncertainty that. Everywhere you turned, it was about uncertainty.
We should be more worried about certainty than uncertainty.
Uncertainty seemed to give courage to the bulls, who seem to claim that everyone is bearish, yet I see little evidence of that (we will tackle that at the end of today’s report).
April 2nd is now being designated as Liberation Day.
Presumably, we will get “certainty” on Liberation Day of what the U.S. tariff strategy is, and then markets can “rally” as we will now have “certainty” and a plan.
As much as that would be nice if true, there are a LOT of reasons to doubt that “certainty” will be a good thing. It reminds me very much of trading through the GFC and the European Debt Crisis. The market would focus on an issue. The government (or central bank) would finally get around to addressing that issue or concern. Yet, the relief rally, if any, would be muted since the market had already moved on to the next issue.
If Liberation Day gets watered down, I can be more aggressive on taking risk, but for now, the “certainty” of what we get may force us to really think through it, and I suspect many will start leaning towards more downside risk to markets even if the plans work out over time (which I think, is a big IF).
We Already Have Some Evidence that the Plan Isn’t Well Thought Out
There are many things we could point to, but let’s just take a look at tariffs with Canada and Mexico.
The tariffs were going to be 25% across the board, but tariffs on energy were only 10% (makes some sense, though if you subtract Canada’s energy exports to the U.S. from the total, Canada is a net importer from the U.S., but we can ignore that).
- Almost immediately, there was a carve out for the auto industry. Anyone with any scant bit of knowledge about the North American auto industry could have foreseen that. Yet the government didn’t.
- Shortly after, the exemption was for anything USMCA compliant. Since this was a reasonably newly signed deal and one signed by the current president, it seems logical that this exemption would make sense. Why wasn’t it caught?
- The USDA Expediting $10 Billion in Direct Economic Assistance to Agricultural Producers. I missed this announcement on March 18th. The stated rationale, by Secretary Rollins, is that “Producers are facing higher costs and market uncertainty.” What is the cost? As one example, out of many possibilities, let’s look at potash. Using Grok (since it seems most likely to be aligned/used by the administration) it turns out that the U.S. imports about 90% of its potash, with 85% to 90% of that coming from Canada.
- Is this aid just circular? The farmers pay the government tariffs (yes, the importer does pay the tariff) and then the money works its way through the system and gets paid back to the farmers via this aid? But wasn’t the point of tariffs to raise money? Wasn’t the point of DOGE to cut government spending? Not saying any of this is wrong, but it does seem like there could have been better planning around this.
- How much potash is available in the U.S.? No idea, and no idea what cost it comes at. With 25% tariffs, will it be better to find it domestically? Maybe, maybe not. Domestic sources certainly won’t be ready for this year, and will it even be ready (if feasible) by next year? This will be another theme/concern that plays out regularly today. Could some come cheaper from Ukraine? Presumably, but I have no idea who their potash is contracted to (though maybe existing contracts may get overridden by the minerals deal once signed?). Also, I have to wonder how it gets transported here efficiently, at the best of times, let alone when the entire world might be scrambling to change supply chains?
We know in theory what the tariffs are supposed to do, but in the early, simplest round, it is far from clear that they worked. To me, at least, there is evidence that they haven’t been planned out as well as they could have been. See last weekend’s section on Steel.
Short Staffed, 100 vs 1, on 3 Fronts
The president has been able to get his secretaries confirmed at a good clip. Yet many undersecretaries are yet to be confirmed, and it is unclear whether all of the staff positions have been filled. As good of a job as this administration has done at getting up to speed, they are still a bit understaffed and have many who are just getting familiar with their roles, and the tools at their disposal. Normally this is not an issue, as administrations ease into their first 100 days, but that is not the case here.
With Reciprocal Tariffs, there is some element of “negotiation” at work. But every country we are targeting presumably has a team to analyze the tariffs they impose and any that the U.S. imposes. In a one versus one negotiation I’d have complete confidence that we understood the tariffs, what mattered, and what didn’t, as well as the other side. Heck, if the U.S. was negotiating with 3 or 4 countries, I’d expect the U.S. to have as much insight into the existing scenarios as the other countries. But every country on earth? The risk that countries “give” concessions on things that don’t really help the U.S. (things the U.S. doesn’t make, or doesn’t make for that market, or even with tariffs, isn’t really competitive) is high. And vice versa. There is a lot of talk out of D.C. about holding cards, but you need to at least look at the cards and it might be very difficult when playing 100 hands simultaneously.
The 3 fronts as I see them are:
- Peace/War. Syria. Iran/Israel and the proxies. Russia and Ukraine. I won’t address these today as we’ve covered them quite a bit at Academy Securities, but they do take time away from senior government officials and are impacting how the world sees the U.S.
- DOGE. We all know what DOGE is intended to do, but how it is playing out is somewhat curious. We will examine this later today as it is a key part of our overall concern.
- Tariffs. We’ve already hit on this, but will come back for more.
Price Levels, not Inflation, Matter
While we all talk about inflation, and the Fed (and even the administration) seems to think very academically about the subject (rate of change), I don’t think that is how it plays out in the real world. We can talk about “inflation” from tariffs as being “transitory,” and that is correct, but the changes to price levels will be anything but transitory. A bunch of economists quietly celebrating the transitory nature of tariffs may well be missing the point, and that could be making them overly optimistic about the economy.
Keeping the Current Tax Rates is NOT a Tax Cut
If the administration fails to keep the existing tax code from sunsetting. that will be a tax HIKE. Extending is not the same as a tax cut for the economy. No one is out there spending less today because they are worried that their take home pay next year might decline. That might happen if it looks like the extension won’t occur.
A big part of the need to get the deficit down and to extend the tax rules in place is only to keep the status quo.
I think this is incredibly important when thinking about the deficit and the economy.
The Middle Class is not the Stock Market
The administration has been very consistent on their messaging. If you wrote it as a computer program it would look something like this.
- Make the Middle Class Great Again.
- Tariffs to encourage manufacturing to return to the U.S. and to raise revenue.
- If 1 has been achieved go to step 5.
- If 1 has not been achieved go to step 2.
- Celebrate.
Nowhere is there a “check the S&P 500 level” before going back to step 2. The messaging seems clear to me:
- We believe our policies will work.
- If they don’t work initially, they will eventually work.
- If they don’t eventually work, then we didn’t do enough.
I have absolutely no problem with their goal and support it wholeheartedly!
My problem is that while I still see some possibility of the policies working as advertised, I’m increasingly seeing paths to a much worse outcome.
DOGE, Immigration, and Jobs
We labelled this “front” as DOGE, but it might be easier to think of DOGE, Immigration, and Jobs on one level.
- The Federal government is firing people. The number remains a bit of a mystery, but this is occurring.
- Immigration is down and presumably some illegal immigrants have left or are not working in the same capacity as they were before.
I find it difficult to believe that many of the government workers will fill jobs that had been filled by illegal migrants. The skill sets don’t match very well.
So, one thing that will weigh on the economy is that in this job market, many of those let go may have difficulty in finding new jobs easily with similar pay in the same geographic location.
Having jobs freed up because people not eligible to work in the U.S. have left seems in line with the goals of this administration.
But who will fill those jobs?
- Probably not people getting laid off from “white collar” jobs.
- Can we get the labor participation rate higher? It hovered above 66% from 2000 until the GFC. Only after the GFC did is start declining, but it was above 63% coming into COVID. It is currently just 62.4% so there is room to get people back into the labor force.
- Do you entice them with higher wages? Presumably, these jobs would have been available to citizens or those here legally, but people chose not to fill those jobs. So, the “carrot” would be higher wages, increasing inflation.
- Do you “force” people into the job market by cutting benefits? The “stick” side of the equation would be to slash benefits because it seems likely that there are some people who choose benefits over work. By reducing benefits, it would force people back to work. That would be very much in line with the efforts by DOGE.
These jobs, with a combination of tactics, might get filled with little inflation pressure. There is likely to be some, but part of the bargain of creating a strong middle class is to not provide as much support to those who could work but aren’t.
Having said all that, it doesn’t really create new jobs, it just changes who is getting the jobs, so there won’t be a lot of new spending, just different people spending. Which tells me that if the economy is going to benefit, it is from the reduced government spending side that lets the administration fund other projects (like tax cuts).
Any way I cut it, I see weakness for the economy in the coming months and I don’t think that we see any benefits unless we can really change taxes with the savings, and we can get actual tax cuts rather than just extensions.
Housing Gluts!
Housing gluts! I don’t think that is a term that has been in a macro report in a long time. But there seems to be some evidence that the number of listings are increasing dramatically in some areas, even to pre-Covid levels. The FRED database (courtesy of the St. Louis Fed) has a lot of data on home listings. The link I included is to Florida, which is now higher than pre-Covid, rising from 35,000 available 3 years ago, to almost 170,000. If you spend any time on social media you can see any number of locations that seem to be “for sale.” We discussed this in Where the Economy is Headed.
There are likely a lot of factors at work here, but it does seem likely that the changes in immigration rules and enforcement could be one of those factors.
I’m torn on what this means:
- On the one hand, more affordable housing would ease the burden for many families.
- On the other hand, for many families, their biggest asset is their home’s appreciation, and that might be problematic for the economy.
- I suspect that there were a number of “buy to rent” type of properties out there (based on where inventory is increasing the most) which might then hurt the pocket of investors who were involved, but overall, it will benefit the communities as affordable housing helps.
Again, I haven’t got a strong opinion on this, but it is a new dynamic, and one we need to digest.
Tariffs
Here is why I’m increasingly nervous (terrified) about the tariffs:
- It is far from clear that we have a coordinated plan to maximize the benefits without hurting the economy (see the early examples).
- It will disrupt global supply chains, hurting everyone. With over 1/3 of the S&P 500 earnings coming from overseas, there is a risk purely on the economic side.
- I don’t see evidence of excess capacity in the U.S. Whether it was steel last weekend, or any other product we wind up discussing, there is very little evidence that there is a lot of excess capacity that can get turned on. For big things, the timeframe is years not months, to build out manufacturing at scale in the U.S. Anything that has a hope of being competitive will need to be done at scale and will require a lot of resources (including advanced robotics). These are not done quickly. It will take a leap of faith by even the most aggressive companies to spend massively in the U.S. based on tariffs – especially if the global economy is shaky. Jobs will be created during the build out, if that occurs, which would be good.
- This might be the lynchpin of my concern with the government plan. If we see rapid efforts to build plants, those jobs alone could get us through the hump (along with the tariff income), but I think neither the global economy, nor the domestic economy will warrant that. It would help on the regulatory front (in particular, but also on many fronts) to get Congress to pass legislation rather than relying so heavily on executive orders.
- This is all predicated on the American Brand not being materially damaged. I highly recommend reading last weekend’s When Jeans Were a Symbol of Freedom. This is likely another area where I differ from the bulls. I think the brand has been damaged and that has consequences in terms the of buying of American brands and Capital flows into America. I doubt the EU implements the Anti-Coercion Instrument but it might give a taste of what is to come.
According to Grok, global GDP was $110 trillion in 2024 – which lines up with World Bank estimates. US GDP is almost $30 trillion and far bigger than any other country. But the administration doesn’t seem to be picking a fight with any one country, it seems to be going against them all. That is a risk.
Domestic Politics
I’m loath to bring this up, but domestic politics are likely to play a role in the success of these programs. If there was bipartisan support to get the U.S. through the difficult times (that even those who fully believe the strategies will work admit to), then seeing a positive outcome would be easier. There will be much dissent as the politicians continue to divide and much of the country is divided. While the electoral college win was large, many key states came down to the wire, so we will also have to watch how public support plays out, from those “middle” voters who went Republican in the last election. While there may not be a Trump Put for the stock market, there might be one on the political popularity side.
Again, much of this comes down to the “how” and not the “what,” but this time around the “how” may really affect the “what” (which it didn’t really do during Trump 1.0).
Remembering Japan
I remember growing up being worried about Japan “dominating the world” – at least economically. Their brands were soaring in popularity. Car brands that you had never heard of suddenly were all over the road. Allegedly better quality at a lower price.
Their TVs were everywhere (I believe that TV glass is still priced in YEN, despite the fact that the manufacturing of TVs is heavily dominated by China and South Korea now).
What the heck happened to Japan?
I’m not as bearish as this graph implies, but it deserves at least a moment of your time.
Did anyone wake up on January 1st, 1990, thinking – it is over for Japan?
Was it obvious at the time that the market would fall 60% in 2.5 years? Sure, there were some big bounces, but the declines were quite ugly and relentless. Would anyone have bet on January 1, 1990, that it would take over 30 years to recoup the losses?
Maybe it was “obvious” in hindsight, but I suspect not.
So here we are, trying to change the world order in supply chains, and domestic government spending, in a short time and we have no fear that we are overstating our power and ability?
I’m not lying awake at night thinking about this, there are plenty of other things keeping me awake at night, but it does crop up in my mind periodically.
U.S. Stocks So Oversold!
I’m not sure how to make the title of this section ooze with sarcasm, so I will just run with it.
We were at an all-time, like highest level ever, as recently as February 19th. The S&P 500 is down 5.7% in a month and 3.5% year to date.
Check out the shares outstanding of these funds
We chose to start at August 31st, as there was enough time for the Democratic Convention in Chicago’s “halo” effect to wear off.
- VOO – is a $620 billion S&P 500 ETF. Steady like a rock in terms of inflows (the recent spike likely due to annual contributions to 401k accounts as it is less of a trading vehicle than others).
- SPY – a $585 billion S&P 500 ETF has barely budged in terms of share count.
- QQQ – a $301 billion Nasdaq 100 ETF has seen some small outflows, but pretty negligible and still more shares outstanding than before the election.
- TQQQ – a $21 billion 3x Nasdaq 100 ETF has seen inflows surge. I do have to give the “degens” who trade TQQQ (I use the term affectionately) credit for selling out during the rally, but they are showing the exact opposite of capitulation. People seem to want to mock this fund, despite it controlling $63 billion of Nasdaq 100 risk in a risky form, while celebrating the potential for pension fund rebalancing, which is a similar size. Just because something is weird and quirky, doesn’t mean it isn’t useful.
I understand all the hopes for a big rally and some of the rationale, but it seems like a lot of people are long risk “because everyone else is short risk” when the evidence that everyone else is short or underweight isn’t as compelling as I’d like to see.
Bottom Line
Too Much, Too Fast, Too Poorly Planned.
I guess I could have saved you a lot of time and just written that for today’s T-Report (though I hope walking through what is behind that synopsis is helpful).
I’m now bearish on global risk. I won’t be as bearish on the U.S. because I’m being convinced by so many people that we are due for a big bounce, but I think for now, risky assets across the globe are likely to suffer (though I still lean long China as they seem poised to benefit from the disruption in global supply chains). Probably a different story if China was targeted by itself, but that’s not what we’ve got so far.
Difficult to hate rates here, when I’m this bearish on the economy, but given my concern about global capital flows and the ability to drive the deficits down by finding purely wasteful spending or increased income from tariffs, I cannot love the 10-year at 4.25% either. I still think the range is 4.1% to 4.5%.
Maybe everyone will love the “certainty” when we get the Liberation Day announcement (though I expect we will see hints dropped all week on Truth Social), but I think we should be careful what we wish for.
When we transition from speculating what could happen, to figuring out the likely consequences of what happened, I expect another round of selling pressure on equities – likely across the globe.
If Liberation Day gets watered down, I can be more aggressive on taking risk, but for now, the “certainty” of what we get may force us to really think through it, and I suspect many will start leaning towards more downside risk to markets even if the plans work out over time (which I think, is a big IF).
On that positive note, hopefully you are crushing it in your NCAA brackets! I’m looking forward to this week as we hit Dublin, London, and Paris and should get a good take on their perspectives on what is happening.
