Just Another TACO? Trump Lobs Fresh Tariff Threats Against The EU, Canada, And Mexico | Hakimian

Key Concepts

• Liberation Day 2.0: Refers to the re-emergence of widespread tariff announcements by the Trump administration.
• Trade Tariffs: Taxes imposed on imported goods, specifically focusing on those targeting Europe, Canada, and Mexico.
• Market Signals: Reactions in financial markets (stock market, bond yields, currency values) indicating the perceived impact of economic policies.
• Trump Taco: A term implying President Trump's tendency to back down from implementing announced tariffs due to market pressures.
• Boy Who Cried Wolf Syndrome: A situation where repeated false alarms erode credibility, making it difficult to convey genuine urgency or concern.

I. Overview of Tariffs

• Announcement: President Trump announced a 30% tariff on all goods from Europe, Canada, and Mexico.
• Trade Volumes:
  • Roughly $1 trillion in trade with the European Union (excluding the UK).
  • Around $750 billion with Mexico.
  • About $700 billion with Canada.
• Significance: These three trade blocs account for roughly $2.45 trillion of the $7 trillion total U.S. trade (approximately 35%).
• Potential Impact: A 30% tariff could halt trade or make it prohibitively expensive, leading to shortages and inflation.
• Concerns: The primary concern is that markets are not reacting strongly to the tariff announcements, potentially leading Trump to believe that there will be no major repercussions if he were to go through with implementing the tariff.

II. Lessons from April (The "Taco" Scenario)

• Market Reaction: In April, threats of tariffs caused:
  • A 20% stock market decline in 4-5 trading days.
  • A 50 basis point surge in bond yields in 3-4 trading days.
  • A falling dollar, atypical during such events.
• Result: This "mini financial crisis" prompted advisors like Scott Bessant to convince Trump to pause the tariffs for 90 days for negotiations.
• Current Situation: The 90-day pause has been extended to August 1st, leading to market complacency.

III. The Problem of Non-Reaction

• Market Indicators:
  • The stock market is near an all-time high.
  • Bond yields are not signaling crisis.
  • The dollar is not in freefall.
  • Home prices are at all-time highs.
  • Unemployment is stable.
• Trump's Perspective: Trump may not perceive the potential devastation of tariffs due to the lack of negative market signals.
• Risk: If Trump believes tariffs are viable (a belief he has held for 50 years), he might implement them if there's no market correction.
• Consequences: Imposing tariffs could "wipe away the second half of 2025," making commerce and trade unfeasible.

IV. Analysis of Tariff Strategy

• Critique: The current tariff strategy involves announcing "nonsensical, randomly generated numbers" without a clear plan.
• Negotiation: There is a lack of serious negotiation efforts.
• Impact on Business: Companies are forced to focus on rapidly changing tariff rates announced via social media, creating instability.
• Dollar's Perception: Foreigners may view the U.S. approach as erratic, discouraging investment.
• Desired Approach: Tariffs need to be part of a clear, well-defined plan, not arbitrary announcements.

V. The "Boy Who Cried Wolf" Effect

• Erosion of Trust: Repeated tariff threats without implementation have diminished the credibility of presidential statements.
• Market Apathy: Markets no longer react significantly to tariff announcements.
• Future Implications: This lack of credibility could be problematic during future crises (e.g., another COVID) when the president needs to convey urgent messages or implement fiscal stimulus.

VI. Alternative Perspectives on Tariffs

• Trade Deficits: While the U.S. has a $100 billion deficit with the EU on $1 trillion of trade, the U.S. sells high-margin financial services and software, while importing lower-margin goods like cars and wine.
• Targeted Tariffs: Tariffs can be effective when targeted and coalition-based, such as using them to discourage countries from cooperating with China on advanced chips.
• Lack of Coherent Strategy: The current approach feels like a return to "Liberation Day," with random tariff numbers announced for various countries.

VII. Conclusion

The speaker believes that Trump will ultimately back down from implementing the tariffs, because the people around him in the Oval Office will prevent him from doing so. The market needs to either sell off to signal the potential damage of tariffs or risk Trump implementing them due to a lack of perceived consequences. The current tariff strategy lacks a clear plan, erodes trust, and may ultimately be counterproductive. More targeted and strategic use of tariffs may be more effective. The presenter is interested in hearing viewers opinions on the topic.