Tag Archives: tariffs

Tariffs the only big missing piece of a bad puzzle

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As I write on July 3, the U.S. House of Representatives has just passed Trump’s massive budget and policy bill; probably to be signed tomorrow. The remaining major piece of Trump economic policy to be settled will be the new large tariffs to be charged to products of all trading partners. Tariff outcomes may come into focus in the coming few months. A smaller, but quite important additional item is what Trump will decide about replacing Jerome Powell, head of the Federal Reserve. With these acts Donald Trump will have completed his redefinition of U.S. economic and foreign policy. Soon, we won’t be talking about the chaotic whip-saws of Trump policy making, but instead major macroeconomic movements will be underway — and not easily reversed.

My newer market models (above) are optimistic for the coming 6 months even though they generally see the markets as flat for the next month or so (partly since markets have risen so well this past month). My older models (with nearly 18 years of actual experience) are a bit less positive for the next 6 months, but several variants are distinctly of split minds for the next 3 months.

My puny stock market forecasting models only look 6 months into the future, and, frankly, they now are fixated on readings from a single long-standing data source. The models generally are largely unaware of the market distortions that will be created by the new tariffs, and they have only a hint of the significant increase in federal deficit spending or the retribution that world bond markets will enforce when they damn well feel like it. None the less, one leading indicator with a solid track record is flashing bright red.

The big concern of both sets of models is very specific: the current set of forecasts from the Survey of Professional Forecasters a set of detailed forecasts from roughly 40 top-ranked economists that has been recorded since 1968. Most of the other leading indicators I track point to a very low probability of recession or economic trauma in the next few months. The Survey of Professional Forecasters, however, sees a 35% chance of recession in the coming quarter — a VERY high number for this normally quite staid group. Clearly, they are extremely concerned about resolution of tariff turmoil, and doubt that it will end well.

The rest of the world is also worried. The Dollar Index (DXY) measures the performance of the U.S. Dollar against a basket of major national currencies. Since the start of the year DXY is down 10.4% — a major failing and the sword is still falling. The rest of the world obviously has grave doubts about the stability of the Dollar and the U.S. economy. It takes a lot of time to move trillions of investment out of an economy without causing a major alarm and a panic. But, that is what appears to be happening; and more should be expected. The stock market may continue to move up, but your actual wealth invested in Dollar-denominated assets is sliding down the drain. Keep watching DXY. A continued fall spells trouble.

Other than that, everything is great!

Weeks of bad stock market news coming.

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The US stock market will likely be in free-fall for a few weeks until Congress passes the final version of the FY 2026 federal budget. No bottom in sight. But, short sellers should pay attention: instantly after the budget bill gets signed the stock market could launch an amazing boom and bubble. For geezers who might still retain a few memories, this probably will be similar to the 1998 stock market crash: sharp, deep, V-shaped, with a fast rebound. Don’t blame me; I’m just the highly fallable messenger.

Last Thursday and Friday stock market sent a clear message on Trump’s kind and gentle tariff announcement by immediately staging the worst 2-day market collapse ever. Ever. Prior to the announcement, stock prices were still elevated as they have been for many months, so there was plenty of room to fall. Even now, there still is plenty of room below.

Unless the President relents and eases the tariffs, the market faces only more bad news or worse, faces continuing unknowns about how the tariffs will actually affect the economy or how other nations will counter the tariffs, or further escalate the trade war. We have yet to learn, for instance, how the European Union plans to react to the tariffs. (I personally expect a major hit to US services in Europe where we are actually running a massive trade surplus. There go The Magnificent Seven.) A zero response from Europe is unlikely. Neither have we seen how much consumer prices will actually rise, how much business production will drop, or how much unemployment rises due to decreased economic activity. Multiple globs of bad news will probably keep falling down in coming days and weeks. We won’t see the actual drops in US corporate profits for months and months.

Any potential good news of US industrial redevelopment is months or years away. What’s at stake is that the US economy could quickly be in a significant recession. Fear alone is enough to cut demand enough to create a recession. It doesn’t take much, just a 2% to 3% cut in what people buy. The World economy is also in jeopardy. With a sudden recession stock prices can quickly fall a further 30% to 70%. An extended recession or depression could be worse still. All unknown now.

Many have wondered why, other than sheer incompetence, Trump chose to pull together and implement an instant slap-dash set of simplistic and drastic tariffs. Tariffs aren’t a new thing. Queen Elizabeth I used them to protect wool knitters. Throughout the past several hundred years tariffs have almost always come out of extensive lengthy negotiations and have been implemented with lag times to permit adjustment by the economy. Often a threat of tariffs has been enough to change things. What’s different this time? The answer is simple: He needed to have the massive taxes in-place now! They had to be gigantic and they had to be actual, not just in discussion. The bigger the better. Might make sense to go higher still. (see below)

Reconciliation budget Trump and his maga crew desperately want to extend the expiring tax cuts they enacted in 2017, and they want to add in roughly $1.5 trillion is new tax cuts. This can only be achieved via the appropriation budget for FY 2026, which along with an expansion of a massive deficit approval must be passed in the fairly near future. But, to get their way without input from Democrats, they need to use a congressional approval process called “reconciliation”. The final bill must pass both houses of Congress, and because of a Senate rule, it must not increase the long-term US budget deficit. “Arcane”, is a word typically used to describe the reconciliation process meaning mysterious, secret, confusing, or convoluted. Flim-flam scam, Kabuki theater, and “Lets’ just pretend” might also be used.

Here is how it needs to go.

Both houses of Congress have now passed resolutions that outline their versions of a new FY 2026 budget. The outlines are similar, but they contain few details. Crucially, these budgets will only balance via major cuts to federal spending programs and if truly massive tariffs are in place to make up for the revenue lost by the many tax cuts. The higher the expected revenue from tariffs, and the more spending can claimed to be cut, the more tax cuts can slide on through. For the legislation to gain approval from the Congressional Budget Office, the tariffs must be either in-place or fully defined in the legislation. Importantly, if the tariffs are contained in legislation two bad things would occur. First, the representatives would get blamed for imposing huge new taxes. Second, the tariffs would be much harder to remove later. Trump’s Executive Order saved then from catching any blame.

Filling in the details of the budget legislation is what is going to take a few weeks. Getting agreement on all the budget cuts that need to be made is going to be a problem. In particular, approximately $800 billion is health care is scoped for elimination. Also, many of the federal programs that have been scrapped actually are very important for various people. These will be a difficult pills for many Republican representatives to swallow. So, there may be additional show-downs and delays. Uncertainty will exist. “Brinksmanship” is a word that is often used to describe these negotiations.

The key, however, is that without the draconian tariffs and spending cuts in place, the reconciliation budget and its glorious tax cuts cannot pass. The tariffs must remain in-place for the next few weeks. Trump must pretend, at least, that the tariffs are real continuing policy.

Once the budget has been signed into law, the “Let’s pretend” theater can end. Instantly. Trump will be free to drop tariffs to the extent reality demands or that his whim and “instinct” feels is right. That is the moment that can also bring massive “emergency” spending, and could bring about a major “short squeeze” in the stock market.

But, until the budget gets passed, I don’t see anything but really bad news for the US stock market.

I hope I am wrong.

This is not usual

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The statistical stock market performance models I report on here have done pretty well since 2007 forecasting normal market activity, but they cannot predict the unpredictable. The models forecast what the stock market usually does in situations when usual market factors operate. In no world is the instant imposition of massive market tariffs “usual”. In fact, a good test of when things return to something like normal will be when these market forecasts become accurate again. That is months away.

In the meantime, there are some guesses that seem to make sense.

Trump cannot back down, at least not until the next round of tax cuts has been approved. The tariff program is central to the Trump push to keep income taxes low and to further reduce taxes for the very wealthy. Thanks to his 2017 round of tax cuts, but also because of the continuing cost escalation of Social Security, Medicare, and Medicaid, the federal budget deficit has grown to a dangerous and unsustainable level — over 6% of GDP. Without the revenue of tariffs the low-tax regime will fall apart. The Trump/Musk budget cutting chain saw can only yield minor savings — they don’t go after the real problems. So, the Trump regime must pretend to practice fiscal responsibility until Congress has approved his new round of tax cuts. The new authorization could come within weeks, so there is a chance that Trump could declare victory and relent at that time. But…

Other nations are just starting to react. Trump’s tariff announcement yesterday was merely the opening salvo in what is likely to become an extended trade war. Individual nations and groups of countries like the European Union have yet to announce their counter-measures. In the case of the EU, in particular, this presents a very special opportunity to strike against American hegemony in high technology services. I think the ‘Magnificent 7’ high tech stocks should be fearful. Europe has wanted to strike back for decades.

Actual economic impacts have not yet hit. Trump simply made an announcement. It will take days, weeks, and months before prices rise, and supply chains become significantly disrupted. It will be June before corporate quarterly reports show ANY impacts. At best, significantly increased US industrial production will not occur for well over a year. It takes years to plan and build a new factory. There is a time lag before economic pain will be felt and a much longer period before any potential benefits are realized. Much pain before any gain. Much continuing uncertainty.

There will be many twists and turns along the way. Over the coming months the focus of attention of this saga will shift. Like any war there will be numerous battles, victories and losses. Translated to the stock market, there is near-certain high volatility and a net trail of losses. Most wars these days are won by attrition — maximization of losses. “Buy the dip” has been replaced by “sell the rally”.

This is not over. In other instances of massive exogenous stock market disruption (1987, 2007, 1998, 2020-2022) a stock market crash continues until it has obviously ‘gone too far’. In most cases that will be a total market capitulation of 30% to 60% loss. This avoidable disaster of crudely implemented tariffs has only just begun. After a real crash will be a great time to invest in stocks!

On the eve of: (a) Liberation? (b) Destruction?

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In 2 days the Trump government says it will announce a comprehensive package of trade tariffs. These taxes will be imposed on top of the recently adopted 25% tax on imported automobiles and components, steel and aluminum tariff increases, and additional tariffs on products from China. This will be a surprise announcement — the Trump White House typically leaks information like a sieve, but this time the leaks are so confusing and contradictory that they effectively have been equivalent to a full news black out. The most quoted insider statement is that they are hoping to gain $6 trillion in tariff revenue over the next decade — $600 billion per year. A hundred billion dollars here, a hundred billion there, and sooner or later you are starting to talk about real money.

My opinions on this exploding Trade War don’t count. No one cares about my opinions, nor should they as I am not an economist, let alone one with extensive knowledge of international trade. Economics 101, however, told me that when “Trade War” is capitalized it is not a good thing.

What this blog does is to document how well my macroeconomic statistical forecasting approach succeeds in forecasting US stock market prices in time spans from 1 week to 6 months.

My forecasts are largely blind to what is coming. The monthly forecasting approach that I have been reporting on for 17 years sees a subdued next half-year. We have been inching toward a recession for quite some time. The probability of at least breaking even over the next 6 months is roughly 45% to 60%, definitely below the normal 70% to 85% likelihood. The predicted 6-month gains average at a below-normal 2% gain, but the swarming models range from -2% to +7%. The 1-month models are all positive, but slightly below average. I will report on my more advanced daily forecasting methods in a couple of days, after the tariff announcements, but their current numbers are comparable to the long-standing monthly models.

Last month’s sharp stock market decline puts the S&P 500 price almost exactly at my long-term price trend line, and the equal-weight Value Line Arithmetic Average is about 8% BELOW trend. So, unlike a few months ago, stocks now “have room” to move either up or down. That’s a good thing, but does nothing to suggest what happens next.

The current market direction is down, not up.