More than a month ago in “WHY MAKING AMERICA GREAT AGAIN IS SUCH A BAD NEWS FOR MANY (GREEDY) US INVESTORS” I warned about how those companies that would suffer the biggest impact from US tariffs on foreign countries were, paradoxically, US companies. Why? Companies like Apple spent years building a supply chain outside the US that could operate at the lowest possible cost and in the most tax-efficient way to preserve incredibly inflated (and unreasonable) margins and profits while selling their products to voracious US consumers.
It took more than a month for investors to figure out what I warned about at that time, and now they are crying wolf. There should be no doubt anymore that what is good for real economies and the vast majority of people is bad for investors and vice versa. Another thing investors still fail to understand is that Wall Street and rich corporate America didn’t vote for Donald Trump; the president was elected thanks to the votes of the vast majority of the population that has been greatly impoverished by the reckless Biden administration. Last year in “HOW THE BIDEN ADMINISTRATION SET UP MINE FIELDS ALL OVER THE US ECONOMY TO UNDERMINE THE FUTURE GOVERNMENT IN CASE THEY LOSE ELECTIONS” I explained how Donald Trump was going to find himself in a complete mess if he won the elections, and now here we are with MSM trying to blame all that’s happening on the current president. The truth is that Trump is currently fulfilling the (strong) mandate he received from the US people, and that will require draconian actions to put a broken economy back on its feet. Furthermore, from a political perspective, the timing is perfect: if all the most “painful” actions are taken now at the beginning of the presidential term, the positive outcomes will already start to manifest themselves within the term, creating a tailwind for the Republican Party heading into the next US presidential elections.
Will this plan be successful? If the US were an isolated economic system, the chances would have been high, but unfortunately for Trump, the US has to take into consideration the global financial and economic system that benefited from the US economy splurging of cash all around the world but also returned it back by reinvesting most of the profits back in US financial markets, from US Treasuries to bonds and stocks. As a consequence, the Trump administration needs to act carefully, as they are doing even if MSM is trying to brainwash the masses to believe the opposite, on one side not to step onto one of the “mines” left behind by the Biden administration and on another side not to collapse the fragile house of cards that is today’s global financial system.
As I write, the VIX is still below 30 as a sign that there is increased tension in the financial system with many overleveraged investors being liquidated on their (again) unsustainable JPY carry trades (my latest article on the matter is “THE CENTRAL BANK ‘KING’ IS MORE AND MORE ‘NAKED’“), however many already forgot that between the 2nd and the 5th of August 2024, the VIX literally skyrocketed from below 20 to 60+ in a sign of chaos in the markets resulting from investors’ panic selling with little to no liquidity available to show a bid at that time. A comparison of these two events should help to understand how the current correction in markets is rather orderly and fits perfectly into the overall Trump plan that has the goal to “reattach” markets to the real economy by pulling the plug on all the government spending and policies that only achieved inflating stock valuations and making financial assets “addicted” to it to remain inflated with lower and lower marginal benefits for markets while US deficit and debt were ballooning and impairing the health of the real economy.
As long as volatility is under control, nothing will break, and as long as liquidity remains abundant, banks will manage to hide their mounting problems. This is the real Achilles’ heel of the Trump plan: if volatility goes out of control, triggering a credit crisis that will ultimately evolve into a banking crisis before the next elections, then surely there will be little to no tailwinds helping the Republican Party to remain in charge, in a similar situation to what we experienced in 2008 when Barack Obama became president.
Personally, I believe that Trump and Bessent are fully aware of all of this, and so far their actions have been exactly in line with what I expected. As long as no Black Swan appears (and the bankruptcy of a huge bank like Norinchukin wouldn’t fall into this category), markets will stabilize at more sustainable levels to then resume growing along with the underlying economy. Considering how insanely overvalued markets have become, this process will be painful but necessary to avoid a total collapse of the modern financial and economic system based on fiat currency, out-of-control government spending, and infinite money printing.
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