By Peter Tchir of Academy Securities

It was a relatively quiet week on the tariff front. Last Friday night we had more tariff exemptions, followed by promises (or threats) of sectoral tariffs. But since then, the chatter has become all about the deals.

Ok, there is the talk about firing Fed Chair Powell, but away from that, on the economic front, we seemed to have switched from the tariff phase to the deal phase.

I do not think firing Powell would be a good thing over time. It would be a step towards reducing (or eliminating) the Fed’s independence. I don’t always agree with their policy. I do think it is weird that they feel the need to have less dissent than the politburo on their votes. But I think the appearance (and largely reality) of Fed independence helps the dollar and the Treasury market.

But markets are more likely to move on “deals” than anything else in the coming days and weeks (assuming some new, major topic doesn’t get introduced into the conversation).

The administration is touting deals. Progress. More deals. However, the administration seems to have backed off from stating that countries are begging for deals.

The U.S. messaging is clear (and less aggressive than before):

The messaging from the rest of the world is far from clear:

With little to no information, we have to guess which is an issue, but at least it can help us prepare a plan for how to react to the headlines.

The first problem in trying to evaluate our trade and tariff policy is trying to understand what tariffs are supposed to achieve.

Some of the objectives that have been presented by senior people in the administration cannot co-exist. Deciphering which reasons are most important has been incredibly difficult.

One question that comes to mind is how big of an impact will tariffs have on the ability to increase sales of Made in America products?

With that part of the equation as clear as mud, let’s move on.

I think we can all safely agree that the administration is focused on trade deficits. We can all argue about a lot of things, but this much is clear. It is consistent with Trump 1.0 as well. Heck, it is consistent with things President Trump said long before he became president.

There are two things that I think are insane to be left out of the trade conversation, yet they are.

A couple of other things “irk” me. Not insane, but curious at least, why they don’t come up more.

I’m not sure how we got to where we are on trade balances, but I suspect a more detailed discussion and analysis would reduce the perceived problem, rather than amplifying it. But that is not where we are.

The Tariff Rollout

Before thinking about what deals might occur, we do need to look at the tariff rollout.

How the tariffs have been rolled out and have evolved, I think is important.

As countries come to the negotiating table, I think this is a reasonable assessment of their state of mind.

My view is that countries are coming in concerned about the economic impact on their country, but with the sense that mistakes have been made, and there is some lack of trust (i.e. deals are going to be viewed as a stopgap solution, giving them time to figure out longer-term solutions).

Finally, we get to the main point. Are we going to get “rip your face off” rallies on the back of deals? Or will deals or the lack of deals drag markets (and the economy) lower?

Let’s assume this approach is now only used 30% of the time. I think this approach has a very low success rate. Countries, for a variety of reasons, are likely to resist this. As time goes on, if we don’t get deals, the market will sense that the U.S. has over-reached and will have to price in more economic problems and lower corporate profits. If the U.S. gets deals of this nature, it would be a big and actual win.

My base case is that the U.S. likely started down the “Real Trade Balance Deals” path and that is why we are hearing so little from other countries. They are potentially left confused or even flabbergasted by U.S. demands and are not in a rush to sign that type of deal.

Maybe some countries cave and sign that type of deal, bringing more countries to that type of deal.

But if we go weeks without deals, or worse, leaks that countries are far apart, look for the negotiating strategy to shift to “Face Saving Deals” (if it hasn’t already).

I could be wrong on how I read the “cards” at the table, but that is my best estimate of who is holding what. I think the biggest risk for markets and the economy, is that one side thinks their cards are far better than they are (and from what I’ve seen so far, that risk seems to be more likely on the American side). That would mean the problems in the global economy would mount and the risk of a deep recession would grow.

If the entire world lets bygones be bygones, we can get back to roughly where we were before. 

I just don’t see that.

I think there will be an extended period where American stocks, bonds, and products suffer from the geopolitical and economic actions taken.

I would love to be wrong here, but I don’t think I am. Especially since even if deals are signed, the news flow, economically, geopolitically, and domestically will certainly highlight divisiveness that doesn’t help heal any wounds that have been created.

I think the volatility and “beta” to any given headline has been reduced.

I think this is a path back to where we all thought we were headed – growth fueled by business-friendly strategies. Taking actions to spur the development of domestic industries, with an emphasis on issues linked to National Security. The extraction and PROCESSING of commodities, especially those that are energy-related, or crucial to future tech. Chips. A more domestic-focused policy can achieve the goals over time, and have a narrower range of outcomes (that are more predictable than trying to rebalance global trade relationships, that took years to form, in a matter of months).

A pivot is required, and we might get it.

I would be pleasantly surprised to see some very strong trade deals announced, but my base case is that we realize that this approach isn’t working, and we wind up getting some face-saving deals.

The economy is slowing, and I think that will become more evident in the coming weeks (unless I’m surprised on the “big trade deal” front).

The U.S., as an investment choice, a tourist destination, or a brand more broadly, is going to act to slow the economy and markets.

That should be good for rates, but all the hope about deficit reduction seems to be diminishing. Much of what I think would be required to make a pivot successful will involve spending.

I think that keeps bonds in a range (maybe a wide range of 4.1% to 4.5% on 10s) but a range, nonetheless. At the moment, the risk of breaking out of this range is to the higher yield side. I see more headline risk to bonds than optimism, especially on the deficit side of the equation.

Equities will suffer, in dribs and drabs, if the U.S. doesn’t back down on what we hope to achieve in trade negotiations.

To me, it comes down to undoing a lot on the trade front and pivoting sharply to doing what is in primarily U.S. control.
Good luck and hopefully the shelf life of this thought process is more than a few hours.

The rate at which announcements shaping the geopolitical environment, the economic environment, and the investing landscape is staggering.

Hope you have been able to use the long weekend to regroup and get ready for more! And hopefully it is Dealpalooza time – we could all use that!