On Tuesday, we saw a massive stock market dump. The Dow Jones Industrial Average plunged almost 900 points.
The stock market has been in a bit of a freefall over the course of the last couple of weeks, and I have been predicting this for a while.
It turns out that when you mess with the market mechanisms, people don’t like it. Investors tend to take the money out of the market and wait for things to be a little calmer, a little steadier. If you think of the free markets essentially as an ocean, sometimes it’s pretty choppy out there. Right now, it’s choppy.
If this administration is blamed for the choppy waters, that will be quite bad — not just for this administration, but also for everything it represents in the public mind.
Today, Emerson released a new poll showing President Trump’s handling of the economy underwater by 11 points. His job approval rating remains at 47-45, which is largely due to the widespread and correct perception that he totally changed the game on immigration. We are experiencing the lowest levels of illegal immigration ever recorded in the United States, as far as I’m aware.
But when it comes to the economy, which is what most people base their vote upon, if President Trump is blamed for an economic downturn, the effects could be disastrous, not just obviously for the Trump administration, but for the many things that are important for the United States, including free markets more generally.
“But worries about a trade war, signs of flagging growth and splinters in the artificial-intelligence trade have taken some of the shine off that optimism,” The Wall Street Journal reported yesterday. “President Trump over the weekend refused to rule out a recession this year, setting off a fresh wave of declines in U.S. stocks. The S&P 500 fell 2.7%, while tech-heavy Nasdaq Composite lost 4%. Bank stocks slid, along with shares of smaller companies perceived to be sensitive to the economy. Bonds rallied.”
When people are uncertain what to do, they start buying bonds because they feel like they’re at least going to get paid off at a certain point.
“While the U.S.’s strength is in question, other countries are ramping up efforts to revive their economies,” the Journal continued. “China has unleashed more stimulus to meet its economic growth target. Germany announced a spending splurge on its military and infrastructure.”
If you just borrow to spend, which is what the United States has been doing for a very long time, you end up with an artificially inflated economy. This has happened previously in the United States, but it’s far more true for Germany and China than for the U.S.
However, there is something else happening, something deeper. And that is a widespread perception that the Trump team is trying to reshape the global order in a way that will not be good for the American or the global economy. It is a widespread perception that is beginning to percolate into the markets.
I’ve been talking to many of the market makers. I’m having conversations with business people who have hundreds of millions of dollars invested in the markets. And they are all very, very wary of the signals that are being put out.
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When it comes to today’s economy, signals matter an awful lot. As I have explained before, if you’re a small business person, what do you want to make sure that you’re going to invest in your business?
You want a growing economy. You want to make sure the government doesn’t come and take your money or overregulate you; you want to know the conditions of tomorrow are going to be very similar to the conditions of today.
That’s how you engage in predictive decision-making. It’s how you decide whether to hire that extra employee. It’s how you decide whether to invest in more capital equipment. It’s how you decide whether to expand your holdings or contractor holdings in particular areas.
Predictability matters. Now, President Trump is not a predictable president. He has never been a predictable president. But the one area where he was always quite predictable was economics. President Trump liked tariffs. But what did he like more? He liked results.
What that meant was that during the first administration, when he talked about tariffs a lot, the total amount of tariffs put on the American economy effectually ended up totaling around $30 billion total. It was not a huge amount, and much of it was designed to leverage places like Mexico into signing a new version of the USMCA.
I think one of the reasons people in the markets are particularly perturbed by Trump’s attacks on Canada is the difference in cause. It’s one thing to say we’re going after Mexico to get them to close the border; that’s a piece of leverage. All right. Fine.
Similarly, it’s a second thing to say we’re going to put tariffs on China because China is stealing our intellectual property and building up their military at incredibly rapid rates. Completely agree. Fine.
But Canada. What did Canada do? The very notion that Canada is not a major trading partner with the United States is untrue. Canada is our number one trading partner. Canada has extraordinarily low-average tariff rates with the United States under a deal negotiated during President Trump’s first term, the USMCA.
Thus, the aim at Canada appears to the global markets to be a move away from America’s involvement in the world in total.
As I’ve addressed before, that doesn’t mean we need to be involved everywhere, either militarily or economically. However, the reality that America is the global hegemon is one of the reasons that the American economy continues to be the behemoth that it is. When you withdraw from what is a de facto financial empire, when you withdraw from providing global security and freedom of the seas, and when you appear to be attempting to draw inward, the rest of the world is less interested in investing in you, in buying your debt, and in funding your giant government expenditures.
The rest of the world is less interested in doing business with you if it’s harder to do business with you. And this has a detrimental effect on the economy, not just outside the United States, but also inside the United States. It turns out that autarchy — the notion that we should produce and consume everything in the United States — is a romantic idea, but it has ended with impoverishment of the population and generally been followed by expansionism everywhere it has been tried over the course of the last few centuries. That was true in Germany. It was true in China. It was true in Russia. It’s true virtually everywhere it’s been tried.
So, if the markets think that’s what you’re doing, even if you’re not, that’s not going to be good for the markets.
President Trump is saying he is implementing short-term pain for long-term gain. He has said, “What we’re doing is we’re building a tremendous foundation for the future.”
That’s fine, but he also needs to explain if that is the case, what is the tremendous foundation that is going to lead to future growth? How do we get from point A to point B in a way that doesn’t blow up?
More than half of Americans are heavily invested in the stock market, so this is not a “rich people problem.” This is an “everybody” problem.
I understand the notion that trade deficits, where we buy more from people than they buy from us, somehow reflects American weakness. But the reality is that there are many poor countries with trade surpluses, and there are many rich countries with trade deficits.
Trade deficits are not necessarily what they appear to be. The reality is that if we spend more money abroad than people spend here, those dollars come back, often in the form of governments either holding our dollars as the global reserve currency or other governments buying American bonds, which funds our growing national debt, which is out of control.
The reality is — as I have said and will continue to say — we are not solving our national debt problem unless we take a look at the very things no one on either side wants to take a look at: Medicare, Medicaid, and Social Security — means-tested welfare programs. Those are the massive drivers of the American national debt.
But the way the markets are increasingly reading President Trump’s actions on a global scale is that he wants to reshore everything and to withdraw from the world.
And that is not going to have beneficial effects for the American consumer, the American producer, and the American economy at large.
