A Question Every Wife Should Ask…

Investors need to dance near the emergency exits...

Action to Take:  Trump's day-one tariff threats of 25% on Mexico/Canada and an additional 10% on China read like classic negotiating tactics– watch institutional flows and momentum for clues about cross-border risks ahead.

With Mexico's peso and Canada's dollar already tumbling, we must be cautious about taking these as just empty threats. If you haven't caught Chapter Two of our Capital Wars series, it's essential reading for understanding how $175 trillion in global liquidity can shift on policy shocks.

The timing couldn't be better as trade tensions return to center stage. 

Meanwhile, Republic Insider subscribers should close out LUV and BBWI positions. There is no sense in waiting around for just a few cents.

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Dear Fellow Expat:

This morning, I’ve changed the format of this letter to address the entire list. I wanted to provide everyone with a preview of a new risk that has entered the financial chain.

Last year… my wife asked me a question. 

“Do you think you could land an aircraft in an emergency?”

You know the scenario: Both pilots are out cold… and they need someone to land the plane.

At first - hubris takes over. So, I thought I could land a plane, right?

About 50% of men believe they can land a 737 or 777 in an emergency. I thought about it. A day later, I laughed and admitted that there was no physical way I could ever pull that off. 

Perception and reality are tricky things.

You can’t rely on Hollywood stories, YouTube videos, and Microsoft amateur airplane simulators. Eventually - reality will catch up with you - or, in my case, the realization that the ground would be coming UP at me VERY FAST when trying to land something I knew nothing about. 

I barely like driving a car above 50 miles per hour.

Please don’t give me a missile heading several hundred miles per hour.

Instead, know your limitations. 

My financial focus remains on managing and tracking risk. After the first Thanksgiving conversation last night, I’m looking into the financial markets and thinking about what will happen to this economy under Trump. 

There is a clear case of optimism - and to me, it feels like Trump is expected to land this economic engine on the runway and then turn right back around and launch it back into the clouds - where all of our dreams will come true.

Here’s the issue… There hasn’t been a clear understanding of what comes yet because economists—especially at the university level—have become political and easily dismissed by the independent and right-leaning media. 

And I’m just trying to better understand three major things that have historically not worked out very well.

The Trump Risks

First… tariffs. 

I don’t know how or why there’s suddenly this large defense of tariffs.

But as I’ve pointed out - in a financialized economy, there aren’t going to be huge incentives to invest in new capacity and production at scale. There will not be an effort to get mines set up in America. It takes decades to open a mine in the United States, and we’re behind nations like Zambia on those rankings.

All this stagnation in production, etc., is just a gift to lawyers, who don't do much for our economy when it comes to boosting real growth and solidifying the middle class.

Yes, we will build some semiconductors and pipelines in the economy - but we’re not seeing a groundswell that offsets the incredible amount of cash that American companies are holding.

But they aren’t just holding it because of legal issues and challenges in building stuff here.

They’re also holding it because they can get a better return on investment in the financialization of the economy, and they want to have cash. I’ll explain this at length today as we explore Chapters 3 and 4 of Capital Wars. 

Tariffs and protectionism have created more problems than benefits… and if we start attacking free trade at a higher level, we will have a serious problem. We’ll end up stratifying the global economy like we did during the Cold War and potentially shutting off billions of people who benefit from it.

Second… how will cutting $2 trillion help the economy? 

You might have a theory. But… the theory doesn’t matter compared to how things really work in this economy.

This economy runs on Keynesian interpretations of spending.

All spending is good in the eyes of the Harvard economics Ph.D.

Spend the money…and that’s good for the GDP - because GDP is a measurement of Consumer + Government + Investment spending… plus (Exports minus Imports). 

Could we reduce imports due to tariffs - and still see our exports swell? 

I doubt that.

We will face retaliation from other nations in the form of tariffs, too. 

Then, cut government spending by $2 trillion… what happens? 

That’s what we’re going to find out. 

Europe eventually rejected austerity after its financial crises in the last decade. 

The theory—and it’s largely theory, I assure you—is that if we cut all this government bloat and then save all this money in taxes, companies will suddenly invest it and hire Americans. 

I’m not taking that bet… I’ll take the opposite side. 

We might cut a lot of spending, but will there be enough action to press people to invest here… and not just push all that saved capital into the shadow banking system? 

This could get messy… I’m not sure anyone understands what’s happening here.

As I’ll highlight today, companies stopped investing in new products after China joined the World Trade Organization because their ROI on new investments plunged post-2000. That’s the problem… competition. Tariffs will not be the things that structurally change this opinion because tariffs are short-term bargaining chips for the Trump administration, not long-term policies that strengthen an economy. 

If the tariffs could be lifted on a whim, why invest $100 billion into U.S. manufacturing on a product that another country could undercut in pricing during the next administration? There’s just too much political risk here.

Trade is very good.

I'm afraid I have to disagree with this administration on trade, especially when we spend so much time complaining about our falling U.S. dollar.

Instead of slapping tariffs on China for solar panels, we should give them what they don’t want… a heaping amount of U.S. dollars that continue to depreciate in value over the long term… in exchange for things of real value. 

This brings me to No. 3: Treasury Secretary nominee Scott Bessent. 

He’s got a massive challenge on his hands because, in the wake of COVID, the U.S. started borrowing at an incredible clip—in the short term.

The markets haven’t been focused on long-term premia because investors could get a 5% annualized return on three—to six-month bonds (adjusted for time) and not have to lock up money for a decade.

Scott Bessent will replace Janet Yellen as Treasury Secretary. Investors should wonder if he can keep this short-term borrowing plan going or if it will cause problems as it did for a British leader, Liz Truss.

Truss tried something similar in the UK, and it scared investors. They stopped trusting her plan, which made borrowing money more expensive for the UK government.

It led to the 2022 GILT Crisis. I’m not saying that Bessent is Truss, but their entrances are similar.

Optimism turns to fear faster than the other way around.

Tariffs… austerity… and financing…

Oh my… 

How will this play out? 

It could work. It might crash. I think you want answers…

But all I can do is react. If there’s a liquidity crisis caused by all this, Republic Risk readers will be the first to know because we’ll have seen money flow out of the market quickly. We’ll turn to the investments that people NEED to have when there’s a short-term or brewing crisis. 

Things like the Invesco DB US Dollar Index Bullish Fund (UUP). 

I’ll tell you when.

Now… let’s get to today’s signals… which will tell you when the problems start or stop…