By Peter Tchir of Academy Securities

While not as catchy or creepy as “They’re Heeere” (remember when TVs were tubes and had “snow”?), Poltergeist II tried to expand on the franchise. Unfortunately for markets, tariffs with China are back.

It is always dangerous to argue that “this time is different” but I think it is very different.

Leading up to Liberation Day, there were tariffs implemented against certain products, certain countries, etc. Then we had the Liberation Day tariffs and markets ensued a deep sell-off until the tariffs imposed via executive order were dramatically reduced.

Since Liberation Day we’ve had some trade deals (in principle) and have been in a “steady” state of tariffs somewhere between 10% and 20% on most things. We have argued (and continue to argue) that the tariff impacts are only starting to be felt in the economy and will weave their way into markets in the coming quarters as their costs are finally felt.

Tariffs have “only” been about $200 billion more than usual so far, a big number for you and me, but still a small number relative to the U.S. economy.

But that all potentially changed this week.

The “steady” state is no longer so “steady.”

We specifically say “this week” as opposed to Friday, as the potential issue emerged earlier in the week – reports that China would restrict shipments of not just processed rare earths/critical minerals, but also some products that incorporate them.

The President responded on Friday by imposing 100% tariffs (starting November 1st) and restricting sales of critical software (I have to admit there is some confusion around that). Chips are likely to face restrictions as well.
Notice the timeline and how different it is than prior escalations in the trade war.

This was NOT a relatively unilateral act by the admin. China provoked this.

We will explore why China may have done this (it is a natural extension, to a large degree, of our previous work, and quite possibly a dangerous extension), but markets “bucketing” this tariff with others may be missing the critical point – how we came to adding this 100% tariff is very different than how we got to other tariff escalations.

It is easy to understand why the “buy the dippers” all chattered about TACO (Trump Always Chickens Out). We think that is the wrong analysis.

More on our “response function” in a bit, but “spoiler” alert – it will be heavy on ProSec™.

Since China initiated this round of escalation, let’s think about what China may or may not be thinking. Yes, we get to play the “red team” as an exercise here.

The reality is that this is far more likely to be a calculated step by China. That there is intent in this escalation.

So, China’s bargaining chip is declining in value and they think they can actually benefit from restricted access to chips.
That would support an argument that China has analyzed the situation and is prepared for a full-on trade war.

This also fits well (from China’s perspective) with the steps they have been taking to transition from Made In China to Made By China (where they don’t want to make goods for us to sell, they want to make their own brands to sell).

There were signs of this already. China has handled Trump 2.0 very differently on trade. During 1.0, every time we said tariff, they said, negotiate. Now they just accepted some, or quietly matched the President’s tariffs. China had 4 years to prepare for this and 4 years to better understand how the President negotiates.

My working assumption is this is a very calculated escalation by China and they are prepared to dig in.

Seriously, we are being asked to believe that we wouldn’t retaliate aggressively? I find it hard to believe that anyone who has watched the admin really thinks we won’t respond aggressively to something that has to be perceived as an assault on our economy.

General (ret.) Spider Marks discussed this concept recently. He also went through the thought process in more detail during some meetings in Milwaukee this week.

Basically, the argument is that the post-war world we lived in since the end of World War II (with a big bump from the fall of the Soviet Union) is changing. That the mentality of a post-war world (basking in the glow of peace) may have to shift to the mentality of a pre-war world.

In the pre-war world, all of our decisions (and investments) have to be looked at through the lens of how it helps us prepare for war (or create the deterrence necessary to avoid war).

The element that could be most interesting is that in a pre-war world, people are more willing to make sacrifices for the greater good.

Some could argue that we have lived a “pampered” life where the battles, except for the horrific events of 9/11, happened elsewhere. That Putin’s invasion of Ukraine was an aberration, rather than a shifting norm.

That mindset could be changing.

Germany, for example, ahead of the first winter after the Ukraine war, put serious restrictions on anything from heating to lawn mowing to preserve precious energy supplies. The Germans abided by those rules and made it through that winter better than they would have had they gone about “business as usual.”

We’ve argued before (and we will argue again) that we had the luxury to create a lot of regulations and we need to revisit those regulations to see if they still make sense.

How many people would agree to fight a battle with one hand tied behind their back (even an economic battle)? Yet that is to some extent what we have been doing.

This week may turn out to be more pivotal to markets and the economy than people currently think. This may be the week that really turns the tide in how we think about our economy and our need to manufacture, process, and refine things.

If I’m wrong, then back to business as usual.

If I’m right:

Maybe I’m overreacting, but I think China’s response is calculated and it is “game on” for us versus them in global trade and production.

I want to own anything and everything that benefits from ProSec™ while being cautious on some of the companies most exposed to China.

Maybe it will be TACO Tuesday, but I think it is far more likely to be Lithium Thursday (I’m pretty sure eating Lithium is not good for your health – but making and refining it is).

For the first time, I think we might be ready for a period where Main Street is more important than Wall Street (or whatever street it is where we extract and make things).

We didn’t touch on the Fed today or growing concerns about the private credit market, as we did not want to dilute today’s message, but we will address those topics early in the week too.