Martin North – Digital Finance Analytics (DFA) Blog

Trumps Tariff Tidal Wave Swamps Markets With Stagflation Incoming…

This is our weekly market update, where we start in the US, cross to Europe and Asia and end in Australia, covering commodities and crypto along the way.

The 2nd of April “T” day will go down in infamy, as global markets have since lost around $6 trillion of value as the global world trade order was trashed. The U.S. now accounts for 70% of the global equity market, up from 40% during the Global Financial Crisis. CNN’s Fear and Greed Index fell to 4 out of 100, falling deeper into ‘extreme fear’ territory.

US Treasury Secretary Scott Bessent, the former hedge fund manager who the market hoped would be the voice of reason in President Donald Trump’s second administration, did an interview with Tucker Carlson on Friday night amid more carnage on Wall Street. And remarkably, he claimed it had nothing to do with the tariff war launched by his boss.

Things got so wild that Warren Buffett’s team had to make a public statement after Trump shared a video on social media that suggested Buffett endorsed Trump’s apparent plan to send the share market down 20 per cent on purpose to ultimately revitalise the US economy.

While the 10% level of tariffs are now in place, and the higher levels, calculated on the back of an envelope it seems, following, it is not clear whether they are here to stay, a negotiating point of departure, or an attempt to drive yields lower, thus easing the US deficit.

Jerome Powell on Friday said the FED expects US grow to fall, and inflation to rise which sounds like stagflation to me while acknowledge the tariffs were larger than expected.

China responded with a matching 34% on many US good, Canada imposed 25% tariffs on cars to the US, while other countries are circling the wagons trying to maintain the existing world order, even as the new world order is emerging. This is not going to abate anytime time soon, and there are consequences for households, especially US households actually, businesses and countries. “We’re in the Wild West of a trade war right now,” said Mariam Adams, managing director at UBS Wealth Management.

Trump likened the process to a surgical operation on a patient, stating, “It was an operation like when a patient gets operated on, and it’s a big thing. I said this would exactly be the way it is.” He further predicted that the markets, stocks, and the country will experience a boom.

What is clear so far is that US big firms who have invested in global supply chains, to source cheaply and mark-up massively to sell branded good like Nike and Apple, are right in the front line. Future cash-flows are at risk, so stock valuations are down, with Apple down 25% year to date and Nvidia down 29%.

This market insecurity is set to continue, as the tariff game is played, this is a world class science experiment, driven by Trump and his team, with significant and long lasting collateral damage well beyond the US. As I discussed in my recent post, the basis of the calculations are largely political, and the potential implications enormous. Many will need to reevaluate the potential future earnings from stock, and so value, stocks which generally were priced to perfection, and which are still some way from fundamental value. So, volatility and more falls need to be expected. Duck and cover as stagflation enters centre stage!

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Plenty Of Fudge Around Tariffs, Markets And The Election Campaign!

Markets have continued to react negatively with the ASX 200 down another 2.38% on Friday, taking year to date falls to 6.02%. The local volatility index was also elevated.

It was a similar story across Asia, apart from in China and Hong Kong which were closed for a holiday, with the Japanese Nikkei down 2.8% and down 9% across the week, and down 15% year to date; while the KOSPI was down 0.86% (perhaps impacted also by the news on the presidential impeachment, and overnight).

In the US, the S&P 500 was down 4.84%, the Dow down 3.98% and the NASDAQ down 5.97%. It will interesting to see if that trend continues on Friday and I will make my normal weekly review show tomorrow. The VIX remains elevated and the Dollar index fell again.

Meantime, Trump seemed to suggest the tariffs were open to negotiation in his latest grab, though other officials seem less open to changing them.

And we also go more clarity, (if that is the right word) on just how much fudge there is in the calculations they used to come up with figures, which as I said yesterday, were suspect. Originally commenters assumed more science behind them, including things like exchange rates and GST or VAT rates, but now according to the BBC, if you unpick the formula it boils down to simple maths: take the trade deficit for the US in goods with a particular country, divide that by the total goods imports from that country and then divide that number by two.

So plenty of fudge in these numbers to justify a political stance. And as Albo said yesterday, not the action of a friend. And the fudge continues, if you have been following the Australian election campaigns, as both sides try to react, without reacting.

Which takes us nicely to a show recorded yesterday with Adam Stokes, on his channel, where we discussed the tariffs, the end of globalisation, and also the local political scene. So I am going to play that now, and I will be back with my normal weekend show tomorrow, where I will look at the damage across the markets in more detail.

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The End Of Globalisation?

Yesterday, President Donald Trump announced broad “reciprocal” tariffs on imports from US trading partners across the world. The US will impose a minimum 10% tariff on all trading partners and slap even higher rates on about 60 countries that hold large trade surpluses with the US. For example, the reciprocal rate on imports from China will be 34%; from the European Union, 20%; and from Vietnam, 46%.

According to a White House fact sheet, the global 10% tariff will go into effect on April 5 and then will be replaced by the individualized higher tariffs on April 9.

Australia is at the lower end of the Tariffs at 10% and with America accounting for just 4 per cent of Australia’s goods exports, economists said the direct effect of Trump’s 10 per cent tariff on Australia would be modest.
But they warned the broader risk to the Australian economy was significant, with Australia’s major trading partners including China, Japan and South Korea hit with new tariffs ranging from 24 per cent to 34 per cent.

The widespread selloff in global markets makes clear that investors don’t expect any winners from the latest — and by the far the largest — salvo in a growing trade war. But they also suggest the US itself might be one of the biggest victims of Trump’s protectionist policies.

But to an extent, there is an important grain of truth here. The trend of recent years, of open trade, products being manufactured in countries with a strategic advantage of low wages, cheap energy and low environmental standards did mean the hollowing out of jobs in local markets, as can be seen by the reduction in local manufacturing in Australia.

But the conclusion is clear: globalisation as we have come to know it is over. Trumps latest actions reconfirms this. But the question is what next then. Regionalisation? Fragmentation? Worse?

UPDATE: The algorithm they used to calculate the “tariff rate” was even less sophisticated, it boils down to simple maths: take the trade deficit for the US in goods with a particular country, divide that by the total goods imports from that country and then divide that number by two.

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The Next Incoming Tax Grab: Taxing Unrealised Gains?

I have highlighted the indisputable fact that the share of Government funding taken from households, via higher taxes, and freezing the bands so fiscal drag means we pay more, and despite the promise of tax cuts, has lead to the highest proportion ever. In fact, it is a bigger impost on households that the higher interest payments thanks to rate hikes.

This is also a function of Corporations paying less, thanks to their ability to structure their affairs, get massive Government handouts, and their capacity to pressure our elected officials.

Given the fact that the federal budget is facing a structural deficit, perhaps it should be no surprise that a new front in taxing more is opening. And that relates to taxing assets, and especially unrealised gains. It starts with superannuation, but it is unlikely to stop there. Tuesday’s budget indeed revealed Labor is full steam ahead on taxing unrealised capital gains.

In the budget forward estimates it reveals Labor expects to tax an extra $9.7 billion from superannuation funds over the five years from 2024-25 to 2028-29, compared to what was forecast in MYEFO. And it is worth reading the small print.

If Labor is re-elected with this policy intact, this could be the thin end of the wedge. As well as freezing the protected level to $3million, which means over time more will get dragged, in, so yet another form of fiscal drag. The $3 million cap, unindexed, is a sneaky ‘tax on young people, tomorrow’ that is dressed up as a ‘tax on rich people, today’ so its a deceptive tax grab that borrows from young people’s future by ignoring that in 40 years when today’s 25-year-olds are retiring, $3 million will not be considered a very high balance!

And the precedent would be set to tax unrealised gains is taxing a profit you may never receive. As day follows night, this would be widened, potentially hitting a lot of farmers, small businesses, and entrepreneurs and even eventually perhaps the family home.

http://www.martinnorth.com/

Details of our one to one service are here: https://digitalfinanceanalytics.com/blog/dfa-one-to-one/

Go to the Walk The World Universe at https://walktheworld.com.au/

Market Disorder Incoming As “Pax Americana” Unwinds…

It seems that markets are beginning to read the room, as the unwinding of the so-called rules based order – which really was based on a Pax Americana Hegemony, is falling apart. After the 25% auto imports tariffs were announced this week, the so called “Liberation Day”, on April 2, when Trump said he plans to announce reciprocal tariffs to end the days of other nations ripping off the US, or “T “ day is looking to be the next milestone.

No surprise then that safe-haven gold hit a fresh record high on Friday with the futures at $3126 and up more than 18% this year, even as the MSCI index of global shares fell, down 1.58%, and down year to date too, while the STOXX 600 European index fell 0.77% on Friday but is still up 6.79% this year. The SP500 was down 1.97% on Friday erasing -$1 TRILLION of market cap and posted its largest daily decline since March 10th and it’s down 5.11% year to date while the ASX 200 was up 0.16% as the election was announced, but down 2.17% so far this year, all weighed down by worries over a looming trade war sparked by tariff decisions from U.S. President Donald Trump.

With the price of BTC down over 4% this week from weekly highs of $89,000 to $83,654, it really has not value anchor so this may not be the end of the pain for holders of Bitcoin and, of course, other crypto assets, as when the leader falls, others follow.

But sometimes, it only takes one number to shift sentiment on the market, and this time, that number came from the latest inflation report. The price of Bitcoin has now lost a crucial technical support level – the 200-day moving average – after the latest Personal Consumption Expenditures (PCE) data was released, adding more weight to an already uncertain macroeconomic backdrop. For Bitcoin, which tends to struggle in tight liquidity conditions, the break below the 200-day moving average could signal further downside if macro pressures persist. What comes next? That depends on whether inflation slows or if markets have, once again, been too eager to price in victory too soon.