By Peter Tchir of Academy Securities

One of our favorite sayings is:

Fool me once, shame on you.
Fool me twice, shame on me.

It is good on many levels. It indicates that it is okay to get fooled. We don’t expect people to try to fool us, but we are susceptible to it. It does indicate that you have to take some responsibility (if you’ve been fooled) and not get fooled again. If “Won’t Get Fooled Again” by the Who hasn’t popped into your head at this point, there is little I can do on the musical front.

In any case, focusing on “Foolin’” (Def Leppard, and yes, it’s been a long week) seemed to be a better way to start this report, rather than the other analogy that came to mind - “boiling frogs.” The boiling frog “idiom” (had to look that up), was that if you put a frog in water and gradually increased the temperature, it wouldn’t notice, and would be boiled. Apparently there was research done on this (can’t really think of why anyone would do this), and the frogs do try to escape, but that hasn’t stopped people from using this phrase.

So where is this all headed?

Last weekend we published Big Beautiful Production for Security. We continue to believe that the more the administration focuses on the production, processing, and refining of a broad range of commodities and products critical to national security, the better for the economy and markets. Some aspects of the tax law, such as accelerated depreciation, dovetail nicely with this effort. The Department of Defense Investment in MP fits our narrative almost perfectly. We’ve argued that jumpstarting some industries may require government support. This action fits well into the Sovereign Wealth Fund idea that we haven’t heard much about lately. The U.S. will benefit from its investment if it turns out to be a good investment. It isn’t a handout. We’ve seen a lot of headlines about private investment, particularly in chips, but this seems like a new approach (one that makes sense on almost every level).

Using the DoD in this way seems like it can open the door to more investments and allow the American taxpayer to participate in these decisions, rather than just rewarding outsiders. We feel vindicated in our assessment that National Production for National Security is an incredibly important investment theme (and one of the few “concepts” that isn’t entirely dependent on AI spending).

Which brings us to tariffs.

In last weekend’s report, the positive outlook was driven by National Production for National Security. We even had some confirmation of that.

The risks were a renewed focus on tariffs. On Monday the President sent some letters, which the market more or less took in stride, prompting us to publish Fake News Tariffs? As the week went on, much of the news flow from D.C. seemed to indicate a renewed emphasis on tariffs as a key policy tool. We even saw something “new” in the tariff arena – potential 50% tariffs on Brazil over their treatment of Bolsonaro. The U.S. has a trade surplus with Brazil and it is difficult to see how this tariff fits an “economic emergency” which has been the underlying policy supporting the President’s ability to determine tariffs unilaterally.

Yet markets barely budged. Every time markets sold off on tariff concerns, the dip was bought and we went through the week virtually unchanged on the S&P 500 and Nasdaq.

The market is either:

Let’s look at these two options for a moment.

There are some people who will argue this. They argued for it before and after the Liberation Day tariffs. They will claim that despite tariffs, the market and economy have been fine.
But is this a widely held view? I don’t think so and it certainly isn’t my view:

Tariffs, so far, have been small in actual dollars (it is easy to get caught up in a world of percentages, but the total dollar amount, so far, has been small relative to the size of the economy).

I find it difficult to believe that markets think that higher tariffs won’t impact the economy and markets negatively over time.

That explanation just doesn’t cut it from my perspective.

This is the real reason markets are taking all the tariff headlines in stride. We were “fooled” once:

We went through that.

And let’s not forget that the Liberation Day tariffs actually were, in theory, implemented. We went through the midnight deadline with no “stay of execution.” Rallies based on “pauses” or “extensions” headlines faded rapidly, until we got the Big Beautiful Pause. 

Since then, stocks have rallied. The first leg was driven by the “pause,” but stocks have been helped by the ongoing commitment to AI spending, progress on Peace Through Strength, and the Big Beautiful Bill.

Will this administration risk the progress to refocus on tariffs? Why do this, when other avenues for economic development exist (National Production for National Security, the Sovereign Wealth Fund, etc.). Heck there is the possibility of “dealz.” Though it is a bit concerning that there is no clarity over what was agreed to with China, there seems to be confusion about what Vietnam agreed to or didn’t agree to, and many nations are signaling that their negotiating teams are struggling to understand the U.S. objective.

So maybe the market doesn’t want to overreact because we could see deals? That is possible, but it seems unlikely as progress on deals has been slow and if 10% with good friends like the U.K. is the best a country can expect, then we might be ripe for disappointment on deals (or the U.K. may regret what they agreed to).

Or is it the belief that the administration will back down again?

Trump Always Chickens Out (TACO) has become a theme. It is not a theme we subscribe to.

The President will PIVOT. He will shift away from “losers” to “winners.” Do a Google Trends search on “Peter Navarro” – it has dropped to almost nothing since peaking in early April. That has been the President’s style. 

Having said that, there are reasons to be concerned that this shift back to tariffs could be real and could be implemented:

The idea that the market is simply unwilling to accept that higher tariffs will be implement and kept in place seems to be the best explanation for why tariffs have failed to move the market this past week. The market has been fooled once and won’t be fooled again.

The market has been fooled once and won’t be fooled again. Or will it? Has the market simply become so complacent that it is not only missing (or ignoring) signs that the administration is serious about trying again on tariffs, but also that the complacency is giving the administration the conviction it needs to try again?

There are a lot of good things going on with the economy and hopefully the MP deal referenced earlier is a template and a sign that the administration is going to aggressively address crucial areas where we are nowhere close enough to being self-sufficient to be secure.

For markets, be overweight anything that should benefit from this theme of National Production for National Security. Be underweight industries most affected by tariffs. While it might be “safe” to assume the administration will back down, extend, and try to move towards deals, there seems to be some real risk to that.

On rates, if it wasn’t for tariffs, I’d be bullish again here, but with tariff risk, probably neutral to slightly bearish the long end.

Credit should continue to do well under most scenarios, but owning the companies that will benefit from domestic production should outperform.

Crypto should continue to benefit from uncertainty, and the increased attention that the administration will pay to it in the coming weeks and months now that they’ve knocked off some other big projects and have time to focus.

A President, who has had several big recent wins, truly believes in tariffs, and cannot like the TACO meme (which we don’t like either) may be far more serious about this then is currently getting priced in. With those other big wins under the belt, the market should not respond as poorly as it did the first go around, but a pullback of 5% would seem highly likely as we near August 1st without any major reprieve.

Academy Securities gets the week started from 6-6:30 Monday morning on Bloomberg Surveillance. I wonder if the President will be watching as he certainly was on jobs day when he posted this on Truth Social. If so, we will be trying to send one message loudly and clearly – continue to focus on extricating ourselves from supply chain bottlenecks in areas where we need to be truly secure – chips, pharma, and certain refined/processed commodities. That is where the economic opportunity lies and it will be good for jobs, the economy, the national psyche, and markets.

Good luck, I hope I’m wrong on my tariff concerns and hope that we are just at the very beginning of a big push towards national production for national security! We have been “fooled once” but are we set up to be “fooled” in the other direction? That seems to be the biggest risk to this market.