Disclaimer that this is not investment advice, and while the market may be showing the start of a wait-and-see approach, this is not, in and of itself, a cause for optimism. Today has further developed some issues, which if they continue as policy, are simply *not good.*
Of the 3 competing and totally disparate policies presented by the administration over the weekend, it appears the worst of the 3 is becoming the orthodoxy, i.e., that it's not about tariffs but about equal trade flows, the latter of which is largely irrelevant to how value is created and cannot be achieved with tariffs alone.
At one point, Republicans would rail against equity, but now are willing to apply the same concept to every single economic transaction. Tariffs are only the start, because they are not sufficient to achieve this form of equity, and what Republicans used to say – i.e., that the only way equity works is to make everyone less well off – remains true, but now applies to economic policy.
This means at least few things.
- Things like services are not desired forms of investment (and they already do not receive preferential taxation and can more easily traverse borders), so other policies will need to be put in place to control investment. Look forward to capital controls and punitive taxation against returns in undesired investments.
- It will be the biggest negative shift in economic freedom, perhaps ever. If whatever you do is now contributive to the deficit, either in whole or *in part*, you may not be able to do it at all. Take the Milton Friedman 'pencil' video making the rounds today. Of the 20 or 30 pieces that go into that pencil, if acquiring just one is contributive to the deficit, your pencil now becomes more expensive or perhaps it isn't made at all; there will be no US substitute for every part in every supply chain, and even if there were, there wouldn't be a business that could afford it. So, the business will not exist and you've destroyed the economic value of both the US workers who knew how to put it all together and the value that would have been created from that good in the market.
- It will also be the biggest negative shift in personal freedom and living standards, perhaps ever. The store shelves are not a bland harmonized tariff schedule of goods. Rice is not just "rice"; there are 50 different varieties, some American, some Japanese, some Vietnamese, etc. There are plenty of reasons to select one over the other, which is why the choice exists and is economically viable. No more. The US product will be preferred, some foreign products may no longer be economically viable to import, and you will be left with less choice and in some cases no choice. What you do with your life will be controlled by the fact that a trading partner, almost certainly one with lower per-capita GDP, cannot afford to buy from the US as much as the US buys from it.
And the worst part is that this doesn't even stabilize the market.
Every quarter, every year, for the next 4 years or so, we get to go through a "true-up" exercise with reviews and penalties to ensure that some Honduran banana farmer is buying god-only-knows-what in equal share from the US. We're not talking about waiting with bated breath for corporate earnings anymore, we're waiting for customs numbers to see who's going to get penalized (certainly, no one ever rewarded).
So, time to take a deep breath, pray that economic shamans get cast from Trump's ear, and folks who are just close enough with the right ideas don't throw in the towel. Sadly, I'm not optimistic, because guys like Navarro *only* have their ideology, and someone like Bessent (who knows better) can more easily check out and not have to deal with it.
**Note that I didn’t say a thing about China, because I still think that China falls into the camp with Bessent and other free-traders simply as a tool for them to defend Trump’s policies without having to defend the whole thing. They mention China as predatory, but stop the discussion before having to explain why Australia or Japan are also considered problematic.