Trump Tariffs, take 3: Why the economic fallout will not be that bad

I saw this post from Brian Chau:

He writes:

The evening of April 1st, an editor and I were working on the finishing touches on an article about Trump’s tariff strategy. “Keep updated with what happens with the tariffs,” one late-night message read.

The next morning, Trump blew the piece to bits. He announced sweeping tariffs based on existing trade deficits — which fell predominantly on Asian and African countries.

“Blown to bits” That is an apt way of describing the events of the past month. A lot of people have gotten a lot of things wrong since Trump was inaugurated. Although Trump promised tariffs and made it a centerpiece of his campaign, so it ought to not come as much of a surprise he followed through, people underestimated the scope and severity.

This is why I have been writing less about topical matters. All it takes is for Trump to change his mind on something–and hours or days worth of careful, detailed policy analysis is instantly invalidated. This was the case regarding Bitcoin, where I was wrong about the reserve. However, shorting Bitcoin has worked great as a hedge this year. Thanks to shorting Bitcoin, I am still positive for the year compared to the market being down a lot. So this an example of being wrong about the prediction yet still coming out ahead.

Things are moving too fast. Trump has internalized the moto of Silicon Valley–move fast and break things. Except we’re all affected. Trump has surpassed even the most optimistic (or pessimistic, depending on how you frame it) of expectations. During his first term, a common and justified complaint was that he was not doing enough and too cautious. Now it’s the opposite. Trump has finally stopped dithering, with major sweeping executive orders and other initiatives. Instead of trying to predict what Trump will do, which is close to impossible unless you have insider information, I am predicting the economic outcome, which is much easier.

About the economic fallout of the tariffs, I am still predicting they will prove to be not nearly as bad as indicated by the sharp decline in stock prices. It’s similar to Covid, in which the economy recovered quickly and the deaths were mostly limited to the elderly or infirm, rather than everyone as originally feared. It’s like the bark is worse than the bite. The threat of inflation is worse than the actual inflation. When the Covid case fatality rate was revised from as high as 1% to only .05-.1%, stocks surged.

Estimates about how much inflation will actually increase, appear modest. From CNBC: “As a result, the consumer price index could jump to 4.5% later in 2025, Capital Economics estimated Thursday. That’s up from 2.8% in February, and roughly double the Federal Reserve’s long-term inflation target”. From Vox, “According to an estimate from the Budget Lab at Yale, Trump’s tariffs are poised to raise America’s price level by 2.3 percent in 2025.”

Of course, imports will be more expensive, but this will be smoothed out by other items, like food, which is domestic, so the overall inflation will be much less. 2-3% does not seem that bad. The stores are packed with people. Streets packed with cars. There is so much consumption and economic activity going on right now. I find it hard to believe that some modest price increases will affect this much. As I mentioned earlier, Americans love to spend, as much as they may complain about prices. I don’t see a TV costing $550 instead of $500 being a deal-breaker. Or an iPhone being somewhat more expensive.

I have begun buying leveraged tech stocks on the dip this morning to take advantage of this great overreaction. My favorite: FNGA.

Yet at the same time, from a political or strategic perceptive, the tariff were a mistake in that they may hurt the GOP during midterms, and possibly hurt Trump’s successor. Even real estate will not be immune from a global asset selloff. Having tens of millions of Americans suddenly poorer will hurt, as the economy has always been a top issue for voters. A common argument is that Trump’s base is composed of disaffected people who do not own stocks, yet on the margins, it will matter. There are still plenty of Trump voters who are wealthy or upper-middle class. Or people who are undecided.

But there is still plenty of time for Trump to backpedal. Trump cares about being popular. If he can sense the party turning against him, he will pivot.

Global stocks have all fallen a lot. Similar to 2008, 2020, or 2022, it’s a situation where the US will still come out ahead, especially if the fed begins a rate-cutting regime and Trump passes a huge round of stimulus. Like Covid, tariffs may be used as a pretext or accelerant for AI and other automation, similar to the Door Dash/Uber Eats delivery boom post-Covid. With tariffs eating into profits, companies will use any and all means to cut expenses. Labor is always a big expense, so the tariffs may backfire in the sense of speeding up automation instead of hiring Americans.