At the time of this writing, the S&P 500 index had dropped 12% over the previous 30 days, primarily on the uncertainty surrounding the Trump administration’s multiple announcements regarding tariff actions against the majority of our trade partners. Like most people, I have tax deferred retirement accounts (401k, IRA, etc) and have witnessed the impact on my personal net worth. As I try not to react emotionally to these types of events, I did what I often do – research to see what is driving these policies and if they make sense.
Having listened to Donald Trump’s rants and ravings over the past decade, I am convinced that, whatever you think of him as a person, he sincerely believes that future U.S. prosperity is linked to reshoring much of the manufacturing base we lost as a result of the free-trade deals we made beginning in the early 1990’s. Whatever you think of Elon Musk, after listening to two lengthy interviews with Joe Rogan (recorded 2/28/25 and 11/4/24), I am convinced that he sincerely believes that the pattern of government deficits and mounting national debt is the single biggest threat to U.S. long-term security and stability. Together, they are aggressively pursuing these twin goals.
The national debt began to climb during the Reagan administration as he simply outspent the Soviet Union, leading to its collapse. Unfortunately, politicians noticed that the mounting debt had very little impact on the economy. Dire predictions of rampant inflation resulting from the debt never seemed to materialize. So a new attitude about deficits emerged on both sides of the aisle. They gave lip service to fiscal responsibility while believing that deficits didn’t really matter. It took us 40 years, until COVID-19 stimulus finally pushed us over the edge, to see that long awaited inflation occur.
I found this opinion piece by Tanvi Ratna, a geopolitical and policy analyst, to be informative. She makes the point that $6.5 trillion of the U.S. national debt must be refinanced in June 2025. When investors are selling riskier stocks due to uncertainty, they tend to park that money in safer places, like the 10-year Treasury note. As a result of this increased demand in the 10-year Treasury, the yield has dropped nearly 30 basis points in those same 30 days. This drop in yield is estimated to have a $30 billion positive impact on the cost to refinance the maturing debt. This would explain why Trump is defiant about his tariffs in the midst of the stock sell-off. And why Musk is defiant in the face of all the anti-Musk sentiment that is costing him billions of his personal wealth.
Trump’s desire to bring manufacturing back to the U.S. is a bit more complicated. Supply chains take years to develop. Ratna says she thinks Trump wants the country to experience the stock market pain now so that a bounce back is evident in time for the 2026 mid-terms. But if the tariffs must remain artificially high for an extended period for manufacturers to begin making the capital decisions to reshore certain value-added manufacturing, the risk that inflation remains stubborn and stock market investors continue to be bearish also remains high. June 30 is more than 75 days away. Even if there is a stock market rebound in the late-summer/fall, if investors continue to move from equities to treasuries for the next 75 days, the stock market will have dropped a long way. And the panic will grow proportionately.
In general, I’m sold on the work of DOGE. But I am concerned about the aggressive efforts to reshore manufacturing. Ross Perot proved prophetic in 1992 when he said that “giant sucking sound” was the sound of U.S. jobs headed to Mexico and other places when NAFTA was ratified. He was labeled an alarmist at the time, but he wasn’t wrong. Workers in the furniture, textile and automotive industries experienced real pain when those industries off-shored. But workers in other industries and Americans in general benefitted from lower priced goods. How happy are we going to be when our low value-add products like socks and tee shirts are much more expensive because they were made by workers making union wages in the U.S. instead of low wage workers in Cambodia or El Salvador?
The risk of maintaining an aggressive posture too long is pointed out by Thomas Sowell, conservative economist. A protracted global trade war is one that nobody wins. And the worst case scenario is that people hoard their cash rather than investing.
I’m hoping that soon, before my retirement account takes too big a hit, Trump will transition from a shotgun approach to tariffs to a more targeted approach. Keeping tariffs on the high value-add industries (like microchips and automotive parts) we have the skilled workers to reshore, while removing tariffs on the low value-add products (like textiles) that don’t make sense to reshore may be workable. Either way, the markets need to be comfortable that the policy is set or we’re going to continue to see volatility on multiple fronts.