Two months ago in the article “WHY MAKING AMERICA GREAT AGAIN IS SUCH A BAD NEWS FOR MANY (GREEDY) US INVESTORS“, I warned that, contrary to popular belief, US companies (especially Apple) would be the ones to lose the most in the tariff war between the US and the rest of the world. Then, one month later in March, in “DONALD TRUMP IS PLAYING CHESS, NOT CHEQUERS“, I emphasized these two key points that traders still greatly ignore:
- “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.”
Traders had plenty of time to prepare, but they fell into the “regency bias” of believing the bull market would continue grinding higher at a steady pace, regardless of all the headwinds building up against it. Until the last minutes of trading on April 2nd, ahead of President Trump’s scheduled speech to announce his tariff plans, traders confidently bet against him by accumulating VIX put options and short volatility trades. They believed that, like in his first term, he wouldn’t have the resolve to stand firm on his threats, and the tariffs would be milder than pre-announced. Traders couldn’t have been more wrong, and now they’ll pay the price because Trump cannot back off this time if he wants to fulfill his electoral mandate.
The biggest losing trade will be Apple, which has enjoyed an incredible amount of supporting flows until now. The company will pay the highest price in the tariff war since most of its supply chain is in China – a country where Apple is experiencing a collapse in market share, so the losses it will suffer in the US won’t be compensated at all from that front. The company has almost no room to maneuver this time, and the impact on its margins will be severe, considering its phones are already priced at the top of the market range at a level increasingly unaffordable for a growing portion of its customer base.
The second biggest losing trade is, needless to say, Nvidia, which is not only seeing its business model and narrative completely shattered as I warned about in “THE NVIDIA FAKE AI NARRATIVE IS OFFICIALLY OVER“, but also has its entire supply chain is outside the US while the largest buyers of its GPUs remain within the country. These buyers are already making significant cuts to their CAPEX plans as a consequence of the tectonic shift triggered by DeepSeek in January, which showed the world there was no need for hundreds of thousands of GPUs to develop and run leading AI models.
The third biggest losing trade will be in Europe, where traders have accumulated an incredible amount of investments in the last month, enticed by the huge and misguided spending plans to be financed by EU debt, mostly to rebuild its weapons inventory depleted by transfers to Ukraine in recent years. What’s particularly baffling is that investors considered it bullish for the continent to raise up to 1 trillion EUR and spend it on the most economically unproductive use possible, while the core elements of its industrial infrastructure were already imploding after years of poor investments that made many companies increasingly uncompetitive globally, especially in the automotive sector. Moreover, Europe, which has already seen demand from Chinese buyers evaporating and impacting trade balances of countries like Germany the most, is extremely dependent on US consumers, with a net trade surplus of ~120bn EUR a year as of the end of 2024.
China is best positioned to withstand the impact of these tariffs for two reasons:
- Chinese consumers are increasingly buying goods made by Chinese companies rather than products made in China by Western companies that are sold with a Western price tag (Apple or Volkswagen were the best examples) and then moved these profits abroad, creating a problematic outflow of capital.
- The cost to produce goods in China remains so low, and its supply chain is so efficient, that the absolute impact of tariffs, which will be paid by US importers (predominantly US companies), won’t be significant. Consider a widget being produced for $1 apiece – what’s the impact of 34% tariffs? 34 cents. Will this price increase prompt US importers to shift their supply chain, at a far greater cost, to other locations? They already made this mistake during Trump’s first term when companies tried to shift to countries like Vietnam (which won’t escape tariffs this time either), ultimately realizing that the costs of a significantly less efficient supply chain and less skilled labor force far exceeded the potential savings.
It should come as no surprise that Chinese onshore stocks are currently almost flat despite the “shocking” tariffs announcement delivered by President Trump.
Traders will now be forced to revise their Excel models and reconsider all their assumptions, especially regarding the ability of US and European companies to maintain the high margins they enjoyed during the Biden administration. Why? Because the price of their goods in the US is already at the highest level consumers could bear, many have accumulated historic levels of consumer credit just to afford them. More and more consumers are maxing out their credit, to the point where some have started relying on “buy now pay later” financing solutions even for food deliveries (“‘Eat now, pay later’? DoorDash-Klarna deal fuels concerns around loans for takeout“). Significantly lower margins while revenues remain flat will result in much lower expected future earnings, and earnings are what matter most for valuation. As if this wasn’t enough, valuation multiples were already declining after recently breaking all-time records, reaching levels above those seen in 1929.
Clearly, everything is pointing to a sharp correction in stocks in the months ahead unless US trading partners start to cave. Will they? They can hardly afford to do so because losing trade surpluses against the US would be disastrous for their own industrial and economic systems, even more than the pain inflicted by US tariffs. In this context, I expect central banks to become creative in how to keep injecting liquidity into the system, as banks sitting on huge amounts of hidden losses would start to implode without it, while trying their best to contain the side effects on inflation that continues to rage across the Western world. The clear winning trade in all of this will obviously be gold (“IT WON’T TAKE LONG FOR THIS GOLD RUSH TO TURN INTO PANIC BUYING“) and, as I write this article, spot gold prices have just broken a new all-time high record.
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