The Masque of the Red Death

The title of this post is a reference to a story by Edgar Allen Poe, which I would strongly recommend and, not wishing to give much away in the way of spoilers, is about a very exclusive party given by a Prince Prospero that ended extremely badly for all participants. It seems an appropriate title today,

As I suspected Trump did go ahead with the April 2nd ‘Liberation Day’ tariffs and seems determined to persist with these for several months at least. In practice this is the largest peacetime tax hike on US citizens in history and it seems unlikely that this experiment will go well. Before I look at the markets today I’d like to put these tariffs into some factual and historical context.

Firstly these tariffs are not reciprocal, as they are not based on any actual tariffs or non-trade barriers that these would be reciprocating against. The number for each country or trading bloc (EU) on the charts that Trump showed was calculated by taking the trade deficit with that country (or EU) and dividing it by the exports of that country (or EU) to the US. This has since been confirmed by the White House.

The example I have seen is Indonesia, with $28bn exports to the US and a US trade deficit of $17.9%. The calculation delivers a ‘tariff’ rate of 64%, and the same calculation delivers Trump’s numbers for South Korea, EU etc etc. Not real tariffs or non-trade barriers, but using this method did save doing a lot of research and analysis involving some potentially tricky math.

There was an operating minimum of 10% assigned to countries with whom the US has a trade surplus, hence the 10% rate and tariff against the UK for instance, and this hilariously also delivered 10% rate assessments and tariffs against the Heard and McDonald Islands, inhabited only by penguins, and the British Ocean Territory, inhabited only by those assigned to the US base there at Diego Garcia.

In terms of the history of big tariff hikes by the US I yield to Rand Paul, who delivered an excellent speech in the Senate on this yesterday that is well worth watching:

Rand Paul Delivers Epic Speech Against Trump's Tariffs On 'Liberation Day'

In terms of the history Senator Paul mentioned three previous Presidents that raised tariffs a lot. The first was John Quincy Adams in 1828 & he was the second of the ten presidents that failed to be re-elected. The tariffs were very unpopular. He was representing the Democratic Republicans who split into the Democrats and the National Republicans during his term in office, with the Democrats taking the 1832 election. The National Republicans were then absorbed into the Whigs, who then fell apart and were absorbed into the relatively new Republicans in the 1850s.

The second was Trump’s hero William McKinley who as a congressman introduced the short lived McKinley Tariff Act in 1890, which probably wasn’t the only reason for the landslide victory by the Democrats later in that year in which Republicans lost over 100 of their 170 seats in the House of Representatives. As President from 1896 he oversaw the Dingley Tariff Act in 1897 which raised average tariff rates to 47%. That didn’t lead to an economic crisis, he was re-elected in 1900, and he was assassinated for unrelated reasons in 1901.

The third was Herbert Hoover who was the seventh of the ten presidents that failed to be re-elected. Hoover was president when the Smoot-Hawley Act was passed in 1930. That raised overall weighted-average tariffs to 20%, sparking a general trade war in the world, reducing US trade with the rest of the world by 67% over the 1930s and deepening the Great Depression. That was a political disaster for Republicans in both Houses of Congress, with both houses turning back briefly to Republicans in 1947-9 and 1953-5, but otherwise with the Republicans losing control of both houses until 1983 for the Senate and 1995 for the House of Representatives.

The tariffs announced yesterday raise average weighted tariffs to 29%, the highest in well over a century. That is unlikely to spark a general trade war here, as most other countries remember the lessons of the 1930s, but is likely to lead to retaliatory tariffs against the US and a sharp reduction in US trade with the rest of the world. I have suggested to a couple of friends in recent weeks that this round of tariffs might seriously damage Republicans for a generation, and looking at what happened after 1930 that may be right. It is also unlikely to be good for prices, the US economy, or the markets. On the plus side a contracting economy tends to depress inflation.

On to the markets, where of the four topping patterns on US indices that I looked at in my post on 19th February, QQQ had already made target, SPX made target this morning, and DIA and IWM are getting closer.

As for the bear flags on these four indices that I called likely highs for in my post on on 26th March, those have now all made their targets at the retest of the March lows with the DIA finally retesting that low this morning. Let’s have a look at the obvious remaining downside targets on all four of these in detail.

This morning SPX went lower and reached the higher double top target in the 5440 area. The lower target is in the 5390 area and likely will also be reached soon but at the time of writing SPX has reached and is trying to hold the higher probability possible support trendline that I posted last week. I’m watching that with interest.

If SPX goes lower then the very obvious target area below is the 5100 level I was looking at in my post on Tuesday. If reached, I have pencilled in a possible rally from there back into the 5600-5700 area before a possible move much lower.

SPX 60min chart:

QQQ reached the initial double top target in late March after the bear flag also made target. I have a possible high quality support trendline currently in the 442 area and, if QQQ goes lower then the obvious next big target areas that I was looking at in my post yesterday are the possible H&S necklines in the 430 and 420 areas. If support is found there I’d be looking for a possible right shoulder rally there before a possible move much lower.

QQQ 60min chart:

IWM reached the bear flag target at the retest of the prior March low at the end of March, and is getting close to the H&S target in the 183 area. I drew in a possible high quality support trendline that might hold in a post last week but that broke hard this morning. There is no obvious next support level anywhere close below. The two really big levels on IWM are the big 193-5 area that is breaking so far today, and the even larger level below in the 156-8 area.

IWM 60min chart:

DIA finally reached the bear flag target today and the double top target is still significantly lower in the 383 area. That target is very close to the higher of the two possible H&S necklines in the 380 then 370 areas, and that is the big support area that I am looking for next.

Depending on the relative speeds of their declines, it is currently very credible that SPX, QQQ and DIA might reach at the same time their big support areas respectively in the 5100 area, the 520-30 area and the 370-80 area. Those areas are all big support areas and possible H&S necklines that may set up large topping patterns that could then later deliver a move much lower on these indices.

DIA 60min chart:

I don’t like to assume anything, mainly taking my view on prices just from market action, but I really like these downside scenarios and the economic backdrop looks very favorable for a deep bear market developing over the coming months. I’ll be watching this develop very carefully and would note that if I am right, there will still be strong rallies on the way as these moves very rarely happen over a very short timeframe or in anything resembling a straight line. My working assumption is that such a deep bear market would play out over the next six months to a year, and might take as long as eighteen months.

As I have been since the start of 2025 I’m still leaning on the bigger picture towards a weak first half of 2025 and new all time highs later in the year, very possibly as a topping process for a much more significant high. One way or another I think we’ll be seeing lower soon and I’m not expecting this to be a good year for US equities, not least because both of the last two years have been banner years for US equities. A third straight year of these kinds of gains looks like a big stretch. I could of course however be mistaken. UPDATE 11th March 2025 - I am wondering if this may be a bear market that dominates the whole of 2025.

If you like my analysis and would like to see more, please take a free subscription at my chartingthemarkets substack, where I publish these posts first. I also do a premarket video every day on equity indices, bonds, currencies, energies, precious commodities and other commodities at 8.45am EST. If you’d like to see those I post the links every morning on my twitter, and the videos are posted shortly afterwards on my Youtube channel.

April Fools

‘Fools rush in where angels fear to tread’ - Alexander Pope

Here we are on the morning of ‘Liberation Day’ and it really does look as though the Trump Administration is planning to launch a trade war against the rest of the world today. I understand that is scheduled for 4pm EST this afternoon as the RTH market closes.

If Trump is right then, unlike any other instance where tariffs have been imposed in history, US trading partners will absorb the cost of tariffs and in effect the tariffs will be a tax on those trading partners for the privilege of trading with the US, while the decreased competitiveness of imports, even though those import prices will not have risen, will rebuild the US manufacturing base.

Personally I don’t believe any of that is at all likely, and that instead there is a high probability that these policies, sustained for anything more than a brief period, may lead to a very deep recession in the US, and turmoil in equity, bonds and currency markets over the next few months. We'll see how that goes.

This is the third in my series of posts this week looking at the likely impact of the proposed large expansion of tariffs scheduled to happen today.

In my first post Monday night, Brave New World, I was looking at the economic reasons why I think that the planned tariff war on the world due to start tomorrow may have a very serious economic impact, particularly on the US economy.

In my second post yesterday, Four Bear Markets and a Setup, I looked at the last four big bear markets / crashes on SPX, and put the case for that happening again here, and projected an ideal path for that bear market to take.

Those first two posts were on my The Bigger Picture substack as that’s generally more appropriate for bigger picture posts.

In this third and last post of the series on my main substack, I’m looking at the secular bull market patterns and fibonacci retracement levels on NDX, DIA and IWM from the low in 2009, and looking at the more likely targets and the ideal paths to get to those targets.

I decided to use NDX rather than QQQ for this analysis as the trendlines were clearer.

On the weekly chart NDX has already broken the rising wedge from the Oct 2023 low and reached the initial double top target. Looking lower there are two obvious possible H&S necklines in the 17450 and 17000 areas and either would be a decent match with the possible H&S neckline on SPX in the 5100 area.

The higher neckline would look for an ideal right shoulder high in the 20600 area and the lower in the 18500 area and on subsequent sustained breaks below the respective necklines the target would either be in the 12700 or 11550 area.

NDX weekly chart - 2019-date with bear market projections from here:

Looking at the monthly log scale chart from 2000 to date I had a couple of options for the resistance trendline on the NDX secular bull market pattern, but my working assumption is now that the one shown on the chart below is likely the correct one. It is worth noting though that the rising support trendline is closer on NDX than it is on any of the other three and will therefore likely break first, and possibly will be the only one to break in the moves I am projecting.

If these secular pattern support trendlines start to break that raises a serious possibility that the secular bull market from the low in 2009 has topped out after sixteen years and, for reference, the last secular bull market from the low in 1982 lasted for eighteen years into the 2000 high, with the SPX secular bull market rising channel then breaking down in early 2001. This current secular bull market has lasted sixteen years from the low in 2009.

The first big support level is at rising wedge support, currently in the 16000 area but if we see an H&S form and break down through that then the ideal target would be the 50% retracement of the bull market in the 11600 area, and that is a very close match to the H&S option with the neckline in the 17000 area.

NDX monthly (LOG) chart - 2000-25 secular bull market pattern:

On DIA there is a clear and high quality rising wedge from the 2020 low, and the initial double top target is in the 382 area. If reached then that is close to a possible H&S neckline in the 380 area, and if we see that hit and a right shoulder form in a rally from there then the ideal right shoulder high would be in the 410 area. A subsequent break back below the neckline and the rising wedge support trendline, then likely to be in the neckline area, the target would be in the 310 area, very close to the 50% retracement of the rising wedge from the 2020 low.

There is a possible alternate lower H&S neckline option in the 370 area. If reached the ideal right shoulder high would then be in the 395 area and the ultimate target in the 290 area. This is the alternate because the higher option would likely be a better fit with the H&S scenarios on SPX and NDX and the target is a better retracement target.

DIA weekly chart - 2019-date with bear market projections from here:

On the weekly log scale chart there is a good quality rising wedge from the 2009 low with rising support now in the 304 area and, very possibly by the time that is hit, also a good match with that 310 target. If a low was made there then, as with SPX, the secular bull market pattern need not break down to make the ideal target area.

DIA weekly (LOG) chart - 2005-25 secular bull market pattern:

IWM is a harder chart to call, in part because the move up on IWM has formed very differently from the others. There was an initial rising megaphone from the 2020 low into the highs in 2021, but that retraced hard afterwards and the move up from the 2022 lows barely did more than retest the 2021 high.

The H&S pattern from the highs is in the 184 area and I’m expecting that to be hit, there’s no obvious compelling larger pattern option that may form here but then there’s no need for one, as there is already a large and good quality double top pattern with double top support in the 156.63 area. If that pattern was to break down and reach target the first target would be a retest of the 2020 low at 89.52, with an extension target in the 78/9 area.

IWM weekly chart - 2019-date with bear market projections from here:

Looking at the monthly log scale chart there is a decent quality rising channel from the 2009 low with rising support currently in the 153 area and rising towards double top support at 156.63.

I’m wondering if IWM might hold that level though. There is the rising channel support in the area of course but there is also a very strong looking support range 156-160 with the 2018 high at 159.10, the 2020 high at 159.37 and then four significant lows in the 156 to 165 area in 2022-3. That area might hold.

If that support breaks then I’d still be skeptical about seeing those double top targets reached and would be watching for possible support at the 50% retracement level at 135 or the 61.8% retracement level at 110. Both of those are at decent established support levels.

IWM monthly (LOG) chart - 2000-25 secular bull market pattern:

My working assumption here is that the tariffs scheduled to be announced today will be announced and applied. There currently seems to be strong conviction from the administration that they would hold through any short term pain in the expectation that the pain would soon pass. I’m very doubtful about that pain doing anything but increase before the tariffs are lifted but I could be mistaken.

What is obvious here though is that even if the overall secular bull market patterns are going to hold or possibly evolve into larger patterns then we would have been looking for a significant high here, as I was when I was looking at all the short term topping patterns on SPX, QQQ, DIA and IWM in my post on 19th February. Whatever path we take towards those secular bull market pattern support trendlines from here, they will still look like the obvious next targets regardless of what happens with tariffs today.

As I have been since the start of 2025 I’m still leaning on the bigger picture towards a weak first half of 2025 and new all time highs later in the year, very possibly as a topping process for a much more significant high. One way or another I think we’ll be seeing lower soon and I’m not expecting this to be a good year for US equities, not least because both of the last two years have been banner years for US equities. A third straight year of these kinds of gains looks like a big stretch. I could of course however be mistaken. UPDATE 11th March 2025 - I am wondering if this may be a bear market that dominates the whole of 2025.

If you like my analysis and would like to see more, please take a free subscription at my chartingthemarkets substack, where I publish these posts first. I also do a premarket video every day on equity indices, bonds, currencies, energies, precious commodities and other commodities at 8.45am EST. If you’d like to see those I post the links every morning on my twitter, and the videos are posted shortly afterwards on my Youtube channel.

Four Bear Markets and a Setup

As I’ve been working on my post today to look at downside patterns on US equity indices I have realised that this too needs to be split into two posts, so this first TA post will just look at the historical and very compelling current setups on SPX, while the second post will also look at the current setups and targets on QQQ, DIA and IWM.

In my last post overnight, Brave New World, I was looking at the economic reasons why I think that the planned tariff war on the world due to start tomorrow may have a very serious economic impact, particularly on the US economy.

In this post I am looking at last four big bear markets / crash setups on SPX and how they played out, and looking at the setup and targets currently on SPX if we are about to see something similar play out here, as I think we well might.

My next post, entitled April Fools, which will be posted at my chartingthemarkets substack, hopefully tonight, will be looking at the setups and downside targets on QQQ, DIA and IWM in the event that we are looking at a bear market /crash scenario here.

Firstly I’d like to look at the last four big bear markets on SPX that are often referred to as crashes and dispel any idea that these occurred in a pattern vacuum or were wholly unexpected or chaotic. Personally I think that the word crash is very overused and rarely appropriate from a TA perspective in relation to equity indices on a longer term view. This is important as I am putting forward a scenario here and now on SPX that would be similar, and might also be called a crash in the future, but in truth I would just see all of these as deep bear markets, or on the bigger picture even bullish retracements, with the possibly arguable exception of the COVID crash in 2020.

Looking at the 1987 crash, generally portrayed as unexpected and chaotic, it is clearly anything but. It was sudden and fast for sure, but there was a great pattern setup going into it and the only thing it was missing was a good topping pattern.

What it had was a lovely rising megaphone that was clearly topping out, clear negative divergence on the weekly RSI 14, and the decline was an almost perfect 50% retracement of the move up from the 1982 low to the 1987 high.

On the bigger picture this was very much just a sudden bullish 50% retracement.

SPX weekly chart - patterns 1980-7:

Looking at the post 2000 bear market, also generally referred to as a crash, there was a nice rising megaphone leading into it, a high quality H&S that formed and reached target, clear negative divergence on the weekly RSI 14, and the decline was an almost perfect 61.8% retracement of the move up from the 1990 low to 1987 high while forming a high quality falling channel. Really nothing chaotic on this chart at all.

I don’t have room today to show the weekly log chart showing the lovely secular bull market channel 1982-2000 but it was also a very nice high on that chart too.

SPX weekly chart - patterns 1990-2003:

The whole period 1997-2011 was in retrospect a range trade with the bottom of the range in the 750 area and the top of the range in the 1550 area, and the pattern from the 2002 low to 2007 high was a rising wedge that was then entirely retraced into the last test of the range low.

Again there was a very clear rising wedge that topped out in 2007 with an initial double top with a target in the 1170 area, then a larger H&S with a target in the 835 area, a falling channel from the 2007 high that failed lower hard, clear negative divergence on the weekly RSI 14, and the decline was an almost perfect full retracement of the move up from the 2002 low to 2007 high. Really nothing chaotic on this chart at all either.

SPX weekly chart - patterns 2002-9:

Even in the case of the COVID crash in 2020 the pattern setup was clearly strongly suggesting at least a significant high in the rising megaphone from the 2011 bear market low, clear negative divergence on the weekly RSI 14, and even though the decline was really fast, there was a rally to set up the right shoulder on a decent quality H&S that then played out to target in the 2280 area. The decline was close to the 50% retracement of the rising megaphone. It was very sudden and fast but, as all these four were, also very technical in the way it delivered and where it ended.

SPX weekly chart: - patterns 2008-20:

So what about now? I mentioned 5100 as an area I’m watching in a post last week that is an important waystation on the path I have in mind for a serious bear market here. As ever these projections don’t have to play out, but this one is a peach.

Obviously, as with the previous four, we have clear negative divergence on the RSI 14. A small double top has broken down from the highs and on this scenario SPX is on the way down to the possible H&S neckline in the 5100 area near the 50% retracement of the rising wedge from the Oct 2023 low. Ideally there would then be a right shoulder rally into the 5650 area, followed by a break down with a target in the 4100 area, at the full retracement of the rising wedge from the October 2023 low, and the 50% retracement of the move up from the 2020 low.

Is this projection just too mathematically elegant to play out? I guess we’ll see, but I really like it. The current US administration in my view is working very hard to make this scenario happen so I think it has a decent shot.

SPX weekly chart - 2015-date with bear market projections from here:

The elegance of this scenario doesn’t end with that chart though. Secular bull markets on SPX also tend to develop high quality patterns on the log scale charts, and I have a lovely rising wedge here from the 2009 low.

On this secular bull market chart the next obvious target would also be in the 4100 area towards the end of 2025 at rising wedge support, and that would further be a 38.2% retracement of the move up from the 2009 low.

If there was a further decline from 4100 then I have marked in a possible lower target in the 3400 area, at the 50% retracement of the move the 2009 low and the very strong support/resistance area at the 2020 high at 3393, and the 2022 (technical bear market) bullish breakout backtest at 3401.

Either of these two targets would be a model of technical perfection and you most definitely read it here first :-). Would a move to either of these targets constitute a crash either in my view? No.

SPX weekly (LOG) chart - 2000-25 secular bull market pattern:

If you like my analysis and would like to see more, please take a free subscription at my thebiggerpicture substack, where I publish these posts first and do bi-weekly videos looking at equity indices, bonds, currencies and commodities. If you’d like to see those I post the links on Wednesday and Sunday evenings on my twitter, and the videos are posted on my Youtube channel. The follow up post to this post looking at possible downside targets this year on QQQ, DIA and IWM if we see serious market disruption will be posted at my chartingthemarkets substack.

Brave New World

I’ve been mulling over how to do this post for a while because I don’t want to offend readers who might be very sensitive to any criticism, direct or implied, of the Trump administration, and I tend to stay away from any political discussions. However, any objective review of the likely effect of some of that administration’s policies requires an honest discussion of those policies and their likely impact.

Given that I now believe that the odds of seeing a serious bear market this year are high and that a full market crash is increasingly on the cards. I need to do that objective review, and my apologies if anyone is offended. I am just describing the geopolitical and economic realities here as I see them, and am not planning to make political commentary a regular feature in my analysis going forward.

I would like to assure all readers though that I am non-partisan, generally regarding all politicians with suspicion, that I have a very low opinion of most of them, and that my feelings about government policy historically are well summarised in the image below that I have used regularly in posts before over the years:

Lastly, the purpose of this post is to explain my rationale for thinking that a serious bear market this year is likely and that a full market crash is on the cards, to be read before my follow-on post today looking at the likely targets in either of those scenarios. If you are happy to take my word for this and/or don’t enjoy economic analysis then read no further. The TA part of this analysis will be published later today on my main charting substack Charting The Markets and will be entitled April Fools, so move on to look for that there.

THE YEAR SO FAR

After Trump won the election in November I mentioned repeatedly in my posts that this was likely to be a particularly interesting year on the markets because it was the intention of the incoming administration to be revolutionary and disruptive rather than evolutionary and, in that respect at least, this administration has not disappointed. Since the inauguration the geopolitical world political and economic orders have been shaken to their very foundations, and the foundations of a new world order may well be starting to form here.

Is that a bad thing? Not necessarily, the post Cold War settlement has been failing to deliver economically for much of the free world for decades, and the rise of China meant that the days of the US being the sole world superpower were already numbered so, as I mentioned in my posts after the election, the existing world order likely needed a good shake. Out of this (hopefully creative) destruction I’m looking for a rebalancing of the world economy and political order and a better foundation for prosperity in the future. That rebalancing is likely just getting started in my view and may take a decade or two to fully settle down in a new form.

It would be hard to overstate the impact of this revolution so far on the world around us. On the morning after the inauguration Trump woke up as the leader of the free world, the leader of the most powerful military alliance in history (NATO), and as the leader of the greatest trading alliance in history (WTO). Since then Trump has effectively walked the US away from the leadership of the free world and NATO, in effect torn up the free trade agreement with Canada and Mexico, and walked away from the WTO, among other less important world institutions.

This is having a huge impact. In NATO, where the US has effectively now left an empty chair at the head of the NATO table, and Trump has both said repeatedly that the US no longer feels bound by the mutual defence NATO Article 5, and even refused to rule out military action against two NATO allies, Canada and Denmark over territorial demands against Canada and Greenland, former NATO allies have realised that for now at least, the US is no longer a reliable ally and may in fact be evolving into an adversary.

With Trump’s actions regarding Ukraine, the consensus view in Europe is now that Europe has moved from a post-war (WW2) footing to a pre-war footing (perhaps WW3 defending Europe against Russia), and that Europe’s past trust in the US to be their main supplier of weapons may have been a very serious mistake. Europe is starting to now rearm against the current fascist dictator with dreams of empire in Europe, in the expectation that the US may no longer be an ally in that conflict and may even be hostile.

That brings us to the trade disruptions. So far these have been relatively minor, mainly directed against Canada, Mexico, Aluminium and Steel, and that has prompted a correction in US equity indices of 10% so far and some economic disruption. However the tariffs are scheduled to be widened to most of the major trade partners of the US on Wednesday 2nd April, and a 25% tax on imported cars and car parts has already been announced this week to be implemented as part of that.

TARIFFS AS A POLICY TOOL

In terms of assessing tariffs as a policy tool I will defer to Ronald Reagan, in a speech in 1987 as the US was renegotiating trade terms with Japan. 

President Reagan's Radio Address on Free and Fair Trade on April 25, 1987

There is also a pretty decent summary given by the Tax Policy Center here, but to sum these up the cost of tariffs is generally paid by buyers of the tariffed goods or services, unless or until they buy from alternative non-tariffed suppliers, if available or competitive with those tariffed prices. Tariffs imposed by the US will restrict and alter trade but is, in essence, a tax on US consumers and businesses.

THE TRADE WAR CLIFF

As Trump has mentioned regularly, tariffs were a very important tool in the nineteenth century in the US and across the world. They were still significant in the twentieth century, with a big move towards protectionism in the decade before WW2 from the US Smoot-Hawley Tariff Act in 1930. That was a total disaster that was a key factor in turning a recession in 1930 into The Great Depression, so there was a free trade consensus in reaction to that after WW2. Since then tariffs had dwindled mostly into insignificance across most of the world until now.

Trump’s intention is for the US to become more isolationist and for some protectionist policies to return in the longer term, particularly in order to return more manufacturing to the US. That’s not inherently a bad thing in my view. The world was in any case heading towards a more multi-polar world, with the US status as the sole world superpower likely to end whatever else happened in the next decade or two, and in that multi-polar world without a single guarantor of peace, countries will need to have much more strategic manufacturing of key goods at home or done by trusted allies to guard against the higher risk of supply chain disruption.

However there is more than one way to move towards that. I was talking to a Trump supporter friend of mine a couple of days ago about tariffs and I said that it wasn’t the aims I have an issue with so much as the proposed method. I compared it to a man standing at the top of a tall cliff who needs to get to the bottom. The easiest and fastest way to get to the bottom is simply to step off the cliff, but that way comes with some clear disadvantages that mean that it is well worth investigating any other potential routes first.

Is some of the trade conducted by the US with trading partners unfair? For sure, but the other path would be to negotiate those imbalances one trading partner at a time with trade war being the alternative option in the event that those negotiations failed. Instead Trump seems to be planning to launch a trade war with the rest of the world first, and then negotiate afterwards.

At the least this is a brave move, as while no individual trade partner is a huge part of the US economy, trade as a whole is 24% of the US economy. There is therefore a large potential for major economic disruption to the US economy as part of a general trade war waged by the US on the rest of the trading world.

When Trump started acting against Canada there were talking heads saying that Canada was in a weak position because while trade with the US was a large part of the economy for Canada, trade with Canada was only a small part of the economy for the US.

Going into a trade war with all trading partners reverses this math. Trade with the US is for instance about 4-5% of the EU’s economy, and that is the largest trading partner of the US. Trade with everyone however is 24% of the US economy.

Trump’s plan seems to be that the US would unilaterally impose tariffs against each trading partner, and in the event that there was any retaliation against those initial tariffs by any trading partners, then the US would retaliate against that retaliation with punitive further tariffs. There seems to be an underlying assumption that most trade partners would not retaliate against those initial US tariffs and that any disruption would therefore be minor.

This seems very optimistic, and the tariffs levied so far against:

1. The European Union (18% of all US trade 2024)

2. Canada (14.3% of all US trade 2024 )

3. China (10.9% of all US trade 2024)

…. have all been retaliated against with tariffs against the US and promises of tit for tat tariffs levied against any further tariffs . That may also be the case with many of the other major US trading partners who are:

1. Mexico (15.7% of all US trade 2024)

2. Japan (4.2% of all US trade 2024)

3. South Korea (3.7% of all US trade 2024)

4. Taiwan (3% of all US trade 2024)

5. UK (2.8% of all US trade 2024)

6. Vietnam (2.8% of all US trade 2024)

7. India (2.4% of all US trade 2024)

8. Brazil (1.7% of all US trade 2024)

9. Singapore (1.7% of all US trade 2024)

10. Switzerland (1.7% of all US trade 2024)

11. Thailand (1.5% of all US trade 2024)

12. Malaysia (1.5% of all US trade 2024)

Between them these fifteen top US trading partners account for 82.2% of all US trade. It may be though that possible exceptions of Mexico (too scared to retaliate much so far), Japan, South Korea & Taiwan (still thinking, possibly correctly, that the US may be still be their vital military ally that they cannot afford to offend), Vietnam, India, Thailand and Malaysia (possibly also economically small enough to bully) and the UK, Brazil and Singapore (all currently buying more from the US than they sell so possibly exempt from further tariffs). Excluding those eleven, the trading partners already or almost certain to retaliate against US tariffs come to at least 44% of US trade volume. Given that there is also a growing global boycott of US goods in response to this trade war I’ll very generously round for working purposes that to 50% or so of US trade that may be significantly or very badly affected by this trade war.

With US trade accounting for 24% of the economy, that gives us a conservative working number at 12% or more of the US economy that may be seriously disrupted, and that brings us to the next section.

THE LIKELY RECESSION COMING IN THE US

In retrospect, there were strong signs that a recession in the US may have been on the way in any case this year before Trump was inaugurated, but the uncertainty since then has now made that much more likely, with consumer confidence falling hard on expectations of a weaker economy and business investment expectations falling due to the uncertainty about US policy, the tax regime, and business conditions going forward. In this situation consumers spend less and businesses invest less, weakening economic activity and making that recession much more likely. At this point the recession may well have already started.

In terms of the consumer confidence numbers I show the latest ones below with a cut-off date for results on 19th March. I would particularly draw your attention to the Expectations index, which has tumbled down about 20 in the last two months to a level strongly indicating recession. If A full trade war really is starting next week then may well drop a lot further into the next numbers.

There’s more though, I calculated above that in the event of a trade war 12% or more of the US economy would be seriously disrupted, but there is more to add to that.

The US government’s Bureau of Economic Analysis is getting harder to get data from due to ‘budget constraints’ but as of Q3 2023 federal spending to GDP there was about 23%, divided between mandatory/entitlement spending, discretionary spending, and interest on government debt. Obviously this is also vulnerable to serious disruption as a lot of federal employees are being downsized and budgets are cut. Total GDP in 2024 would have been in the $28.3tn area, with total federal spending therefore in the $6.5tn area. Elon Musk is hoping to cut $2tn from that and while that seems ambitious it is certain that none of that will be coming from paying interest on the national debt. One way or another a lot of federal jobs and spending are likely to be cut

Between trade and federal spending 35% to 47% of the US economy is likely to be seriously disrupted and a lot of jobs lost at a point when the economy is already likely to be entering a recession. This feeds back into markets and the markets feed back into this. You can see this on the FRED (St Louis Fed) chart tracking the Nasdaq 100 and unemployment against the three recessions in the US since 1995. The economy and markets are a delicate system that don’t react well to big shocks.

As this is all being done at the same time this may therefore develop into a major economic shock and a consequently much deeper and more protracted recession.

INFLATION OUTLOOK

What effect does all this have on inflation? There are three main parts to that.

The first part and the ‘good’ news is that recessions and falling demand reduce inflation, with the recent official inflation numbers likely overstated.

The second part is that tariffs increase prices to consumers and businesses, and that is most definitely inflationary, and will reduce consumer spending further. For illustration the estimates of the costs of the tariffs on the ticket prices on new cars that I have seen are high, starting at about $3,000 per car sold and rising a lot from there as foreign made content increases. This will affect almost all cars sold in the US with the smallest effect likely to be on Tesla, though all cars manufactured in the US will also be affected by the tariffs on steel and aluminium. Price rises will be steep, fewer cars will be sold, economic activity will decrease.

The third part is the effect on the US dollar. Now that is an interesting one. Trump wants a lower US dollar to make US exports cheaper and imports more expensive. Obviously that would also be inflationary. There’s more though and that takes us to the last section here:

THE US DOLLAR AND INTEREST RATES

The US dollar has been artificially high for many decades now because the US Dollar is the reserve currency for much of the world. This is a large part of the reason that the US has been running a trade deficit for decades. If the US is withdrawing from world trade to a large degree as seems to be the plan, then there isn’t much point using the US dollar as a reserve currency any more, and alternatives will likely be found. This will depress the US dollar, and that will in turn reduce the trade deficit BUT ….

Other countries hold their dollars in US treasury bills and that keeps bond yields lower than they otherwise would be, and they hold a lot of them, somewhere in the region of $7-8tn of then, so over 25% of the $28tn of US treasury bills outstanding.

What happens when they sell them? Well US treasury prices go down and interest rates in the US go up, as the practical interest rate in the US on which loans & mortgages are based is either the US treasury ten year yield or (long term mortgages) the thirty year yield. Trading partners may also reach a decision to sell faster because either they are retaliating against US tariffs or they want to sell first to avoid selling when the US dollar is lower.

What is the practical effect of this? US dollar goes down, interest rates go up regardless of what the Fed does, as it is really the bond markets that set interest rates. Back in November I was writing about an interesting possible chart setup on TNX suggesting that US interest rates might break up towards 8% & maybe this is the way that happens.

The US dollar going down makes imports even more expensive, on top of tariffs which also drives up inflation.

SUMMARY

There is a very serious possibility that the effects of Trump’s proposed tariffs, if maintained more than a couple of months will be:

• Much slowed growth and likely recession

• Higher prices to the consumer resulting in inflation

• Higher interest rates

What will be the effect on the rest of the trading world? Not huge, US trade is 5% of the Chinese & German economies but falls elsewhere. The only two nations very vulnerable are Canada and Mexico and, over time, both of those can likely move their business elsewhere, particularly Canada, which exports a lot of energy and food. It’s unlikely that these trading partners will start trade wars against each other. Everyone remembers that is how the Great Depression started in the US and was exported worldwide. Likely the rest of the world will just trade more with each other and the US becomes a trading backwater if protectionism becomes long term policy in the US.

What are the likely effects on the US? Hard to say but likely in a range somewhere between bad and disastrous. This is, after all, how the Great Depression really got going in the 1930s. All things pass but it could get very rough and I am wondering if we could see a 5% decline in US GDP over the next year if tariffs and cuts in government spending are implemented strongly and at the same time. What could happen to markets if the US economy catches a severe cold?

If you like my analysis and would like to see more, please take a free subscription at my thebiggerpicture substack, where I publish these posts first and do bi-weekly videos looking at equity indices, bonds, currencies and commodities. If you’d like to see those I post the links on Wednesday and Sunday evenings on my twitter, and the videos are posted on my Youtube channel. The follow up post to this post looking at possible downside targets this year on US equities if we see serious market disruption will be posted at my chartingthemarkets substack.