Veni, Vidi, Tariff

I hope you bought your life jacket...

I was halfway through drafting an article titled “AI CapEx is Dead, Long Live AI” while driving across France toward the Alps. My plan was simple: soak in the panoramic views of Mont Blanc, reflect on those days when some well-timed puts saved my portfolio, and finalize fresh insights on AI-driven capital expenditures. But—call it a real Veni, Vidi, Tariff moment—President Trump suddenly unveiled 25% tariffs on imports from Canada and Mexico (with a partial carve-out for Canadian energy) and 10% on Chinese goods, and my AI conversation had to shift to second priority. It’s the kind of environment where, yes, I hope you bought your life jacket.

In a last-minute twist, Trump also agreed to a 30-day delay for tariffs on Canada, mirroring a one-month reprieve granted to Mexico. Canadian Prime Minister Justin Trudeau says this buys time for further negotiations, though the White House insists that both neighbors remain under threat of duties if they fail to address U.S. demands. For now, the peso and loonie both rebounded against the dollar, while U.S. stocks erased some of their initial losses—but my sense is that the tension hasn’t evaporated; it’s merely postponed.

When tariffs this broad come into play, even if some are temporarily delayed, they can reorder global supply chains, rattle markets, and reshape the narrative around government deficits and foreign capital flows. Indeed, the price of everyday goods—including cars—now looks set to rise, with inflationary pressure hitting American consumers who were already feeling the pinch in areas like food and housing. While many still assume these moves are a negotiating ploy that might be reversed any day, the complacency in equity markets seems dangerously high if those assumptions prove false. This is starting to smell like the beginning of the end for the World Trade Organization (WTO) and the entire post-war consensus on global free trade—a moment that could send us sailing into uncharted waters. That, in turn, has ramifications for nearly every asset class and we will do our best to keep an eye out for good risk-reward trades along the way.

I’ve repeatedly noted—especially in my earlier piece, The Tech Equities Odyssey: Riding the Sirens’ Liquidity Song—that abundant liquidity can mask all kinds of structural vulnerabilities. Even if these tariffs prove temporary, they might accelerate the very liquidity drain I warned about, particularly if foreign investors reprice the risks of parking capital in American assets. So I’m paying close attention to this development, because whether we see an immediate or delayed pullback in equities could hinge on the outcome of trade negotiations and potential ripple effects on liquidity flows.

The Tech Equities Odyssey: Riding the Sirens’ Liquidity Song

The Two Big Gaps: Government Shortfalls and External Flows

When Budget Overruns Become a Tailwind

Since COVID, the U.S. has repeatedly deployed outsized government spending to shore up economic growth. Whether one calls it stimulus or pro-labor policy, the effect has been to inflate corporate earnings, consumer demand, and overall liquidity—effectively turning the budget deficit into a powerful engine for risk assets. Add to this the muscle memory companies gained during pandemic supply shocks—where they got comfortable raising prices without losing customers—and the result is a persistent inflation tailwind.

However, if higher deficits are fueling inflation, the government might tighten the spigot. That would yank away a crucial support for equities, particularly those whose valuations ride on easy capital. This tension also reflects a broader pivot toward reindustrialization, where domestic wages and manufacturing capacity hold greater political priority, even if it means structural changes (and cost pressures) for corporations.

Trump says he wants to see this chart invert

We have extensively touched on the themes of the shift to pro-labor from pro-capital and the Fiscal Spending put in prior works. I recommend giving those a quick glance as the themes will remain relevant moving forward:

Fed’s Holiday Playbook

Post-Election Implications and Trade Sketches

Quick rates update: one month anniversary

The External Trade Gap as a Source of Liquidity

Now Trump is not a fan of the word “deficit” and has created a department of government efficiency to reduce the one we talked about above, but his trade war against the world is meant to tackle the current account deficit. For decades, the U.S. thrived under a system in which it imports real goods but exports financial assets. Foreign suppliers—China, Mexico, Canada—collect dollars from selling goods to American consumers, then reinvest those dollars in Treasuries, corporate bonds, or equities (this helps them avoid selling those dollars to buy back local currency and keep their currency competitive). This arrangement effectively lowers U.S. borrowing costs and inflates U.S. valuations across the risk curve.

This is probably my favorite chart on the subject which I read on the MacroTourist’s article on twin deficits and illustrates this idea beautifully:

It almost feels like a made up chart, but that is just how powerful it is.

But if the White House truly shrinks the trade gap (via tariffs or onshoring) while also cutting deficits to contain inflation, it risks choking off that synergy. I’ve seen some studies suggesting that even a 25% tariff on all imports from Canada and Mexico might only generate some $200 billion in “savings,” nowhere near enough to eliminate the U.S. external deficit (can’t find the source anymore given my very mobile set-up). Meanwhile, such a move can hammer Mexico, which sends $500 billion of goods a year to the U.S.—a huge share of its <$2 trillion GDP—and also ding Canada, whose economy is more diverse yet still reliant on cross-border auto parts and energy exports. For Americans, that likely translates into higher consumer prices—which can quickly morph into both lower real purchasing power and a potential shift in how foreigners see the U.S. as a destination for their capital.

And if trade becomes a political tool for all manner of policy—perhaps culminating in threats to exit the WTO—global investors might not view U.S. assets with the same uncritical fervor. That’s precisely the synergy I underscored in The Tech Equities Odyssey: Riding the Sirens’ Liquidity Song: big deficits plus a free flow of foreign capital have buoyed valuations. Undermine either, and the foundation of lofty equity prices starts to wobble.

it would not look good for asset prices if the peach colored section shrinks.

Enter the Tariff Storm: Risks of Shifting Capital Flows

Over the past few days, I watched what many wrote off as bluster morph into real policy: 25% tariffs on Canada and Mexico (with adjustments for Canadian energy) and 10% on Chinese goods. Now we hear about 30-day extensions for both neighbors. Yes, these might vanish in a swirl of last-minute negotiations, but I wouldn’t bet my bitcoin on it. If the administration is serious about re-shoring production or using tariffs to fund deficits, these delays are merely short-term concessions.

Shocks and Retaliation

Tariffs tend to hurt both sides, but the degree of pain varies. I recall the 2018 washing machine tariffs, studied by Flaaen, Hortacsu, and Tintelnot, which revealed how manufacturers used the new levies to justify not only higher washer prices but also dryers—even though dryers weren’t directly tariffed. This is a classic example of how tariffs spark broader inflation: domestic companies raise prices “just because they can,” and that cost is shouldered by the consumer.

Those researchers also found that while some U.S. manufacturing came back, the cost to consumers per job created was roughly $800,000 a year—a hefty price tag (for the profit margin of your most beloved equities). Whether or not one deems that “worth it” misses the broader economic point: it’s inflationary, contractionary, and stokes major uncertainty. Multiply that by an entire supply chain (like autos, consumer staples, electronics), and you get a scenario reminiscent of stagflation: rising prices and stagnating growth. The market isn’t priced for that, in my opinion.

Moreover, I see no reason why Canada, Mexico, and China would just swallow the pain. Retaliation can cut into U.S. companies’ margins, especially if they depend on exports or cross-border supply chains. And let’s not forget the financialized nature of the U.S. system—where a significant drop in equity or bond markets can reverberate into the real economy far more than linear economic math would suggest.

The Larger Story: Balancing Liquidity and Real-World Headwinds

The fundamental question remains: how long can liquidity alone sustain markets if structural pressures keep piling up? In latest note on liquidty, I pointed out that high-flying valuations rely heavily on abundant capital. If tariffs erode global confidence in U.S. trade policy—especially if they widen into new fronts—liquidity could retreat far quicker than many expect. Should government deficits also contract to fight inflation, two key liquidity pillars could crumble simultaneously (although I think government deficits would likely still go up in an inflationary scenario and the Fed would end up being a policy taker under our fiscal dominance framework).

The Mechanics of Fiscal Dominance

Fiscal dominance arises when fiscal priorities—namely deficit financing—dictate systemic liquidity flows, reducing the effectiveness of monetary policy as the primary driver of economic conditions.

There’s a valid argument that reindustrializing America justifies these tradeoffs, possibly revitalizing places like Appalachia or the Rust Belt. From an investor standpoint, though, that path raises production costs, fosters higher consumer prices, and erodes corporate margins (if it was more capital efficient to do it, it would have been done) —especially if wages get priority over capital returns. Pair that with potential retaliation from major trading partners, and we’re staring at a stagflationary mix: persistent inflation, lower growth, and a market increasingly concerned about risk premiums.

If the U.S. was great back then when duties were astronomical, and MAGA, therefore…..

I’ve heard the refrain that “Trump will fold if the S&P falls 20%,” but I’m not so sure. That complacency alone concerns me. This is why I’m examining ex-U.S. opportunities—if the White House genuinely pursues a lower trade deficit, the U.S.’s old synergy of massive deficits plus abundant foreign capital might end, forcing a reevaluation of valuations across the board. I remain strongly invested in China and Brazil now for 7% of book along with some other like Colombia which have substantial tailwinds; I went over some of the ideas in the article below and will elaborate more (soon-ish).

Post-Election Implications and Trade Sketches

Gold is also highly attractive in this environment as reasoned through in this piece:

The Structural Hedge to Life’s Randomness - The Demand Side

Time to Sail Away Before the Lake Runs Dry?

That one-month extension for both Mexico and Canada shows how fast tariff decisions can flip, allowing the peso and loonie to rebound while U.S. stocks (futures and post market trading) pare losses. But these fleeting reprieves don’t erase the core tensions: 25% duties still loom if neighbors don’t meet U.S. demands, a 10% levy on Chinese goods remains in play, and the administration has signaled it’s willing to expand this policy arsenal further.

Meanwhile, my earlier warnings in The Tech Equities Odyssey: Riding the Sirens’ Liquidity Song feel especially timely: once the liquidity pond starts receding, it can evaporate faster than most imagine. If tariffs truly shift cross-border flows—or if the government reduces deficits to combat inflation—two critical liquidity streams could dry up simultaneously. Markets keep banking on a quick return to normal trade. I’m not so sure.

So for now, I remain cautious. A broader re-rating of valuations might await if these tariffs don’t just fade away or if major trade partners decide to respond in kind. Think of the 2018 washing machine tariffs, where higher prices bled into unrelated products and created a big consumer tab per job saved. Scale that up to automotive or electronics, and it’s easy to see how inflation meets decelerating growth. That’s a combination the market has barely accounted for.

If you’re counting on the White House folding the minute the S&P sinks, remember that the stated goal is lowering the trade deficit, not necessarily propping up equities. Even if the market wobbles, it may not force an immediate reversal of this agenda. The complacency embedded in current valuations only heightens the risk. Because, as I wrote before, when valuations hinge on liquid capital, the pond can vanish just when you’re most transfixed by your own reflection.

The Investor’s Playbook: Managing the Trade & Deficit Crosscurrents

Below is how I’d think about positioning, keeping in mind that day-to-day negotiations can briefly soothe or inflame volatility, but the broader risk of a structural shift in trade policy remains.