Whenever there’s a shock, folks often refer to living in “unprecedented times.”
People have used the phrase for stock market crashes, the dot-com bust, the 2008 financial crisis, and more recently COVID.
Of course, there’s nothing unprecedented about tariffs setting off a trade war. But the current situation is revealing something quite unusual…
The U.S. has had a massive trade deficit for years. Now the White House is urgently trying to rebalance the equation.
That means decoupling from our neighbors to the north and south as well as others farther afield like Europe and Asia. The White House has imposed tariffs on friends and foes alike.
And markets have hated it.
So today, let’s look at the problem the current administration is trying to solve… and why we may have more pain ahead in the days to come…
A Growing Debt Pile
The U.S. is in a trade deficit. That means the U.S. imports way more goods than it exports.
Across all the countries the U.S. trades with, the goods deficit topped out at just over $1.2 trillion last year.
Whichever way you slice it, we have to finance that deficit – typically through foreign debt…
But the U.S. government is already sitting on a massive pile of debt. Worse still, it can’t stop spending.
Treasury Secretary Scott Bessent argued over the weekend that if the government had kept on its existing trajectory, it would have ended with another financial crisis. That could have led to far bigger losses in the markets than we’re witnessing right now.
Yet the cuts in spending (including federal jobs) to bring the budget back into line will cause their own problems.
The government is walking a thin line.
It is trying to reduce the economy’s dependence on government spending and transfer that back to the private sector. But it wants to do so without causing a recession…
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On the Cusp of Recession
Despite the market recovery at the end of last week and beginning of this week, I’m becoming increasingly concerned about the health of the economy.
We could already be right on the cusp of a recession.
Stocks have been priced for strong growth over the past couple of years (led by Big Tech). But those valuations are going to come under pressure as growth slows.
As government spending is slashed, that will cut demand out of the economy. And that is going to lead to reduced company earnings.
On top of all that, tariffs will add a dead weight to the global economy – which will pull the U.S. economy and markets lower.
Where it all lands is anyone’s guess. But right now, we’re only in the early stages.
We need to appreciate that circumstances have changed. We’re just one piece of bad news away from the market making another leg down.
Another 10% move lower will technically put us in bear market territory. (The market made its first 10% lower in roughly a month.)
Some will buy the dip and try to white knuckle it out. But the “smart money” will likely sell into counter-rallies.
The good news for my subscribers is that we have the strategy to profit from up and down moves. We’ve used options effectively this year to draw out gains from the market’s quick moves back and forth.
That’s even been true with volatile assets like Bitcoin and tech stocks. In One Ticker Trader, we’ve had 11 winning trades in a row this year, with an average gain of 34.3%.
So if you’re feeling uneasy or aren’t sure what to do in this environment, I’d encourage you to take a look. You can learn all about how to get started by clicking here.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict