I was going to share with you part two of my spring letter to IMA clients. What was supposed to be a few paragraphs turned into four pages. Consider yourself warned: This is going to read like a rant – because it is. I wrote it early this morning, as a stream of consciousness. I didn’t have time to polish and rewrite it a few times.
Before we begin, I highly encourage you to download and print the full spring letter, which we don’t usually share. Yes, I’m writing on a politically charged subject today – but my focus is still economics. If you think this is my political bias leaking through, in the letter I explain why that’s not the case. (You can download it here.)
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Let’s get into it.
The world is changing before our eyes. The global order is being rewritten. The consequences of this shift? Incredibly hard to predict.
The trade war Trump ignited could end tomorrow with a tweet – or it could drag on indefinitely. My take on this is not popular.
Right now, Trump is behaving like a king. His tariff decisions are unilateral – even though the Constitution clearly places that power in Congress’s hands. He’s exploiting an emergency loophole. Why does he behave like a king? Because he’s popular, and Republicans are too scared to speak up. He prosecutes dissent with viciousness.
But Americans don’t like kings (sorry, King Charles). This isn’t Russia – despite Trump’s affection for Putin and Kim Jong Un, Americans don’t want to be ruled by a king or (a dictator).
There are few things I feel certain about, but this is one: If these tariffs continue, they will push us into a recession. Tariffs on even smaller scales have failed in the past (Smoot Hawley caused the Great Depression), and this time won’t be different. However, even if they’re rolled back tomorrow, the damage might already be done. (In the Spring letter, I discuss what we'll do if that happens.)
Yes, I’m venturing into crystal-ball territory here – so take the following as the confidence of a gypsy reading tea leaves:
Scenario One:
Trump rolls back the tariffs. He does a victory lap, claiming Japan dropped restrictions on US car imports and France is now fine with our super-antibiotic-injected beef. He leaves in place a 10% tariff across the board. And it’s framed as a win – because hey, 10% is better than 40%, right?
The last week feels like the beginning of the pandemic (the early days, when we were told to drink bleach), except we are deliberately walking into the Wuhan lab (or wet market) and injecting ourselves with the virus. But that is the good news – Trump can end this madness as easily as he started it.
Scenario Two:
He keeps the tariffs. The economy starts contracting – not just because of the tariffs but because of the uncertainty they create. The rules are being rewritten by a mercurial king. Corporations stop hiring. Some of them begin prepping for leaner years. That means layoffs. Higher unemployment.
Trump is already starting to lose support from some anti-Harris voters. And the MAGA crowd, thrilled they won’t have to pay taxes on tips and overtime, may soon realize that in order to pay taxes, you actually need a job.
They’ll also start remembering that, for all his branding, our billionaire president did go bankrupt a few times. Not all his business ideas – Trump Steaks, Trump University – were pure genius.
As Trump’s popularity fades, so does his ability to rule like a king. Republicans will begin to feel pressure from their constituents. Faced with a lose-lose choice, they’ll start voting against the king’s policies. And if Trump refuses to roll back tariffs as the economy deteriorates, Congress may strip that power from him and reverse the tariffs themselves.
So far, Trump has ignored the stock market. As I write this, it’s down in the teens year to date. Can he ignore a 20–25% decline? I doubt it.
Scenario Three:
There’s another line of thinking: Trump is a Machiavellian genius.
The US has $37 trillion in debt, with $10 trillion rolling over this year. What if pushing the economy into a recession is part of the plan? A recession forces the Fed to cut rates. Bond investors – who ultimately control the 10-year yield – start seeing deflation on the horizon and bring yields down. Mortgage rates, which track the 10-year, follow suit.
This is exactly what’s happening – Trump’s a genius!
But hold on – there’s a big risk baked into this strategy. We’re already running a 6–7% budget deficit at full employment. What happens in a recession? Tax revenues fall – bad for deficits. Government spending increases: bailouts, unemployment benefits, stimulus checks. That’s also bad for deficits. Eventually, the bond market might wake up to a hard truth: More debt means more money printing. That’s when things get messy.
Historically, this type of economic strategy has failed. I see no reason why this time will be any different. The real question is how long it takes before the president – or Congress – reverses course.
Now let’s unpack the “bring manufacturing back to America” narrative.
Tariffs can be a useful tool – they are a good solution for some problems, but not all problems. They won’t magically restore US manufacturing. There’s a fundamental misunderstanding about what kinds of jobs would come back, and why they left.
We’re not going to start making Nike shoes and T-shirts in Iowa. Those jobs pay $2 an hour, and Americans don’t want them. And if those factories did return, they’d be run by robots – employed by one guy flipping the switch.
Many jobs moved overseas because of differences in environmental regulations. Take rare earth minerals – crucial for robotics and semiconductors. They’re not rare. We could mine and refine them here. We just don’t want to – too toxic.
We’re not going to grow coffee in the US, either. And we shouldn’t have to try.
There’s a legitimate argument for global trade and comparative advantage. We make software. Colombia grows coffee. Mexico makes tequila. But the issue is more nuanced. Trade hasn’t always been fair. Trump’s not wrong there. Our trading partners restricted our exports. We hollowed out parts of our manufacturing base while ignoring that imbalance. That deserves attention. But pretending we can rewind to 1955 isn’t the answer.
Trump romanticizes the 1950s and ’60s, when America was a manufacturing giant. But that was a unique moment in time – when the rest of the world was in ruins, still recovering from WWII. We can’t go back there. And we shouldn’t.
Americans don’t want those jobs.
We often justify illegal immigration by saying, “Mexicans do jobs Americans won’t.” That’s true – to a point. Americans don’t want to climb roofs for $15/hour. At $30 or $40? Maybe they would.
I visited Huntington Ingalls last week. They build submarines and aircraft carriers for the Navy. Their biggest problem? They can’t hire enough people. Starting pay: $24/hour. And yet, if you’re 20 and choosing between welding in all weather for $24 or working at 7-Eleven for $18, a not surprising number choose selling Slurpees.
The government will inject billions to raise wages and attract workers. But Huntington Ingalls’ long-term solution isn’t labor – it’s automation.
Walking through their shipyard felt like stepping into a Soviet-era facility in Murmansk. No red flags, but very little automation. Why? Because you can’t justify the capital investment if you're building one submarine every two years, or one aircraft carrier a decade. This is about to change. (For context: Korea builds cruise ships in 2–3 years.)
The future? Marry AI with automation and you get factories run by robots, not people.
This whole discussion is full of nuances. Here's one more: Our trade imbalance is both a bug and a feature of the US dollar being the world's reserve currency. The dollar is arguably our biggest export. That privilege has historically subsidized American life – foreigners parked their hard-earned money in our Treasuries, which led to a lower cost of capital, lowering mortgage rates and car payments through artificially low interest rates.
But as trade deficits shrink, so might the dollar’s dominance. I’ll discuss that more in tomorrow’s letter (or you can read it here).
Let me end this rant on a hopeful note.
The faster the market declines, the faster we may see the transition from king back to president. And the faster these tariffs get rolled back.
What happened to Biden after the first 2024 debate could happen to Trump just as fast. Biden went from “He’s the sharpest he’s ever been” to “He’s a senile old man” in a matter of hours. Today, MAGA thinks Trump is playing 4D chess. Soon, they may realize he’s just playing golf. And the faster they realize that, the faster this country moves forward.
One Final Reminder: Bull markets stretch investors’ time horizons to infinity. Bear markets shrink them to days. If your time horizon isn’t 7–10 years, you shouldn’t be in stocks.
The price quote on your portfolio today? It’s just an opinion – not a final verdict.
Most of your return is made during bear markets. You just don’t realize it at the time.
Vitaliy Katsenelson is the CEO at IMA, a value investing firm in Denver. He has written two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. Soul in the Game: The Art of a Meaningful Life (Harriman House, 2022) is his first non-investing book. You can get unpublished bonus chapters by forwarding your purchase receipt to [email protected].
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