From @apralky, “Has the economy been more resilient to Trump’s trade policy than anticipated?”
I’ve mentioned before that my prior is that the US and global economies have turned out to be broadly more resilient to MAGA trade policy than economists (and markets) had anticipated.
I’ve also mentioned that I believe such a prior is shared by most other market participants, though less so by economists.
Similar to Covid, the Expert Consensus® was wrong. Instead of ‘trust the science’, it was ‘trust the economists’ (although @apralky speaks highly of the profession). At the time there were two dominant positions: on that Right, that Trump would not back down, or on the Left, that the tariffs would be economically catastrophic. I was among a tiny minority who predicted correctly that he would back down, and minimal economic harm. Nine months later, GDP is unaffected. CPI is lukewarm, even if things subjectively feel too expensive or more expensive.
Similarly, during Covid, I also correctly predicted the US economy and stock market would recover from the pandemic far faster than commonly assumed, and profited by aggressively buying leveraged tech ETFs on the dip, when the consensus was for a long, deep recession.
On April third, 2025, a day after Trump’s ‘liberation day’ tariffs dropped, I was among the first to predict Trump would backtrack (now called the TACO meme) on the tariffs, and to buy the dip in stocks. Here is what I wrote:
For these reasons, the market selloff presents a good buying opportunity. In the unlikely event the situation worsens, there are a few options. Trump can simply backtrack, and then use the selloff as an excuse to do a 180 by passing stimulus.
And a follow-up post a day later:
Overall, I still think the stock market will quickly recover and that the economic fallout of the tariffs will not be as bad as expected, but still, it’s hard to paint this in a positive light. The stock market sure is not buying it.
By May/June 2025, all the tariff-related losses were recovered. A big nothingburger in hindsight. The Nasdaq would go on to rise 19% for 2025, when just a 6-8 months earlier people were predicting crisis.
So why was this? Such resiliency is explained by the US economy being dominated by Big Tech and services, not tariff-sensitive manufactured goods production. I gave the example of Starbucks and Chipotle and how imported raw goods are only a tiny percentage of the final sticker price of a consumer good. This was a detail many had overlooked:
Trump’s tariffs represent only a tiny fraction of the inputs of the US economy. The US economy is so big and dynamic that tariffs will not have much of an impact. This is why, two weeks later, inflation has not gone up much, if it ever does at all. Consider a $5 cup of coffee from Starbucks or an overpriced Chipotle burrito bowl. The majority of the sticker price is for labor and advertising. The actual raw goods such as the beans, which are imported, is a tiny percentage of this. An increasingly large share of the US economy is services; imported electronics is a small fraction.
Free-trade purists–what I refer to as the “Milton Friedman people”–tended to invoke an oversimplified conception of the economy and consequently overestimated the damage the tariffs would cause. My view, which proved correct, is that the US economy is a large, adaptive, and highly dynamic system that defies “Econ 101” reductionism.
And second, the tendency of Trump always backing down or meeting in the middle at the slightest resistance. Third, the ‘AI boom,’ which keeps defying predictions of its collapse. Every month brings higher tech stock prices, more AI usage, increasingly advanced models, and higher valuations for leading private AI companies.
Psychology also matters. So many people who think they ‘know Trump’ and are his biggest supporters or detractors, don’t actually understand him that well. Trump seeks validation as a “Great Man” of history. He wants to be regarded as a major geopolitical strategist, which explains his recurring fixation on the Nobel Prize for its symbolic prestige, even though most Americans place little importance on it.
When the tariffs caused the stock market to plunge, he backtracked because he saw it was coming at the possible cost of his approval ratings. But he didn’t abandon it entirely, as he was invested in tariffs as part of his economic legacy. He seeks to strike a balance between being a great strategist, and also the approval of the public. So this means lots of backtracking when things turn sour, based on reading sentiment.
And on top of that, I came up with the idea of shorting Bitcoin to hedge the inevitable knee-jerk selling from tariff news and Middle East news and the general unpredictably of the Trump administration, characterized by considerable headline risk even if such news is economically inconsequential. Tech stocks recover much faster and and fall much less than Bitcoin, allowing me to profit from the differential by shorting Bitcoin and going ‘long tech’.