30 Days in the Hole

Sorry, but I'll use any excuse to feature a classic rock icon in my blog. This week's submission is Steve Marriot of Small Faces and Humble Pie fame. 'Itchycoo Park' was a favourite of mine back in the early psychedelic era. Marriot's Thirty Days in the Hole was a staple at many high school house parties. This autobiographical song chronicled his incarceration in a South African prison ( the 'hole') following a drug bust, a well-worn theme in blues-based rock of the early 70s.

Canada and Mexico are in a similar hole but for entirely different reasons. Despite yesterday's reprieve, both countries are still left squirming, awaiting final sentencing from their bullying jailor, DJT, 30 days hence. This psychological torture is designed to keep pressure on the two economies most vulnerable to his economic hegemony. It feeds his insatiable need to win at all costs, but spending $1.2 billion of my tax dollars to stop less than 50 pounds of fentanyl and a few thousand migrants is a high price to pay for such a fleeting victory.

The core tenet of 'Making America Great Again' argues for the simpler time when the U.S. economy reigned supreme. That nostalgic "Happy Days' version of middle America is in Trump's DNA. Consequently, he wants a highly closed, self-sufficient country without imports, no matter how cheap. Hence, he uses tariffs as his 'wall' to keep foreign goods out - and you know how much he likes walls. If you follow his logic to its ultimate conclusion, you get a capitalist autarky that mirrors the socialist one in North Korea. Didn't he say Kim Jong Un was a "very smart guy'?

So, I don't believe the market can price in the ultimate end-game as it lurches back and forth with every announcement from the Trump administration. As confounding as it is, his 'ready, fire, aim' approach is being normalized by a docile electorate that sees it as a disruptive but necessary deep-state purge. With his unfettered government agency access, henchman Elon Musk is ripping down the bureaucracy at the speed of his space rockets. All the while, the MAGA mob cheers on, and a cowering Congress watches on silently, powerless to stop the carnage.

The markets must choose between a creative destruction scenario leading to higher growth and productivity or the spectre of a Smoot-Hawley global depression. Today's muted reprieve indicates indecisiveness, as all bets are off for now. But make no mistake; either scenario is still on the table, given the stridency and arbitrary personalities of the actors in this drama. NEC's Kevin Hassett, Trump sycophant-in-chief, may have given the 'drug war' version yesterday, but more hawkish voices like Howard Lutnick and the ex-con Peter Navarro still are to be heard from. When it comes to re-shoring the lost smoke-stack economy of the 50's and 60's, they want it all. An Orange Menace still threatens Ontario car plants and Quebec Aluminum mills.

So, is Trump's tariff time-out a clever feint? Or now that he has his pound of fentanyl-laced flesh, was this all just sound and fury that signified nothing? I still believe it's part of a long game that ups the ante for doing business in Trump's America. Europe and China are next. Just wait for the preferential 15% corporate tax rate to kick in later this year. Lutnick still believes tariffs can pay for that perk. Yeah, and Mexico paid for the wall, too.

The 'art of the deal' can take many forms. One of them is to play rope-a-dope for a few days.

30 days to be exact.

Risk Model: 3/5 - Risk On

Only AAII Sentiment and Cu/Au are in sell mode. That tells me there is low confidence in the economic outcomes from the initial Trump policy barrage. The muted market reaction stems from a willingness to 'wait and see' bias to risk-taking—however, higher levels of implied volatility have started to creep into the Trump 2.0 era markets. The inflection point pre-dated the election but has persisted into the new year. Expect more volatility to come.

It makes sense to me. Elect a clown, get a circus.