Thoughts From The Divide: Grief

“The market could have certainty that this is the number, barring retaliation”

There’s no getting around this week’s elephant in the room: Liberation Day, has turned out to be quite the volatility extravaganza. As equities puked (with the biggest one-day losses since 2020) and bonds went bid, analysts and commentators were furiously working to discover what exactly was behind the “reciprocal tariffs”. The official response, per the Office of the U.S. Trade Representative, was that they were “calculated as the tariff necessary to balance bilateral trade deficits between the U.S. and each of our trading partners”, taking into account “a combination of tariff and non-tariff factors that prevent trade from balancing”, some numbers sleuths had a more direct explanation, “they took the trade deficit the US has with each country and divided it by our imports from that country”.

This does seem like a classic case of potayto-potahto: why can’t both be true!? However the administration came to these specific tariffs, markets seemed none too pleased, despite the tariff rates being framed as “lenient” as the president “wants to be kind to the world”. The Art of the Deal.

The Administration’s response seems to indicate that they are relatively unconcerned about the market movements. Scott Bessent said “That’s a Mag 7 problem, not a MAGA problem” and while he seems to have tried to spin the current levels as a ceiling, internal White House talking points (from “an anonymous source”?) indicate that the Administration does NOT want the announced rates to “be characterized as a starting point for negotiations”. The speed and size of the market moves give the strong impression of an Administration playing the part of Lucy pulling the football away at the last minute from the market’s Charlie Brown. But just like the real message of the cartoon strip isn’t Lucy’s cruelty as much as Charlie Brown’s capacity for self-deception, perhaps the fault lay with the market’s desire to be deceived. Given the enormous hullabaloo around Liberation Day, perhaps some (MI2 among them) might argue that the market was willfully ignoring the Administration’s plain warnings and stuck in the first stage of grief? If there’s retaliation, which the Administration explicitly warned against (yes, he’s talking to you, EU) we suspect that markets may move into the next stage of grief (anger), and embrace even more volatility. Good Grief!

(More of the football gag)

P.S. While the market appears to have not believed Trump when he explained his intention to use tariffs to shape US industrial policy, at MI2 we’ve been discussing the realities of Trump 2.0 since the night of the election. We sent a piece titled “Breaking Eggs” to clients just ahead of the elections, and while we may have missed with our prediction of a tight presidential race, we hit the ball squarely with our warning,

“Many believe the threat of tariffs is a negotiating stance that will gradually ratchet up over time until China complies. We understand that the target is as much, if not more so, US firms that manufacture overseas. Thus, tariffs will be introduced with full force early in the Presidency to build a tariff wall, which makes it cheaper to produce in the US when combined with tax incentives. That may require short-term pain via corporate profits and inflation, but if workers are better off in the long term, then it is a price worth paying! P.S. One thing to watch is if the Administration closes the current loophole where tariffs will only be applied to goods that cost more than $800. If that goes, then the likes of Walmart and Costco get crushed.”

With the current tariffs closing the de minimis loophole, we believe we are well on our way to investors coming to terms with the reality of Trump 2.0 policy priorities. While many of you are subscribers to either our institutional product or MacroCapture, we’re making this notable piece—Election: Breaking Eggs—publicly available for a limited time. You can download it for free and see how our thinking has held up. Be on the lookout.

---

Big picture. Big shift. 🌎 The global order is shifting beneath our feet. A dollar exodus, trade realignments, and policy shifts—this is macro in motion. This is when you need MI2.