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“Chaos is a ladder.”

— Littlefinger, Game of Thrones

Friday chaotic charts

This week’s market crash was “to be expected,” the president said yesterday, because “this is a patient that was very sick. We inherited a terrible economy.”

But this morning’s job data confirmed that the patient was hale and hearty as recently as last week.

Not everything’s perfect, of course: The federal debt is too big, for example, and unemployment is 4.2%, not 0%. 

But treating these minor economic symptoms by deliberately crashing the economy is like amputating a leg to treat a splinter.

Also, the doctor appears to be a quack.

“On economics Mr. Trump’s assertions are flat-out nonsense,” The Economist opined this morning. 

The biggest nonsense this week was perhaps the president’s assertion that the Smoot-Hawley tariffs were not a cause of the Great Depression, as every economist agrees, but a preventive cure that was applied too late.

The crushing 1930s depression “would have never happened if they had stayed with the tariff policy,” he claimed in a bit of revisionist-history worthy of George Orwell’s 1984.

There were a lot of these kinds of up-is-down claims this week — to Orwell’s “war is peace” and “freedom is slavery” we can now add “economic suffering is liberation.”  

I remain hopeful that we won't soon be living in a real-world version of Orwell’s Oceania, but the president does seem intent on turning the globalist US into a new Hermit Kingdom.

The original Hermit Kingdom was one of three countries excluded from this week’s tariffs, simply because there’s no trade with North Korea to tariff.

That might soon become less of an exception and more of a rule.

Tim Geithner told the Odd Lots podcast yesterday that President Trump’s new 70%-ish tariff on China could completely eliminate trade between the two countries.

It’s hard to imagine that eliminating trade between the world’s two largest economies will work out well for either China or the US.

But of the two, the Wall Street Journal thinks China is more likely to come out ahead: “Mr. Trump’s tariffs may have the U.S. investing to create jobs in shoe-making when it should invest in AI. This misallocation of capital will not make the U.S. more competitive against China.”

Currency markets appear to agree.

Tariffs were expected to make the US dollar go a little higher, partly because countries exporting to the US were expected to devalue their currencies to offset the tariffs like they did to some degree in Trump’s first term.

This time, however, the dollar has gone a lot lower — possibly because the tariffs are so extreme that countries like China will simply give up on trading with the US.

“This is what happens when people think they don't need dollars, which makes sense if trade is pushed outside our borders,” Neil Dutta explains.

This should give the president pause.

In his first term, the inflationary effect of tariffs was diminished because the US dollar appreciated against the currencies of its major trading partners.

Now, the inflationary effects will be amplified because the dollar is depreciating. 

It’s unlikely he’ll pause long enough to think about it, of course — this is, after all, a person who appears to believe that drug traffickers pay tariffs on the fentanyl they smuggle across the border. 

I’m guessing he mispoke on that one, but Justin Wolfers believes the president’s actions this week were not a lot more rooted in reality than that: “Monstrously destructive, incoherent, ill-informed tariffs based on fabrications, imagined wrongs, discredited theories and ignorance of decades of evidence.” 

But “the real tragedy, Wolfers says, “is that they will hurt working Americans more than anyone else.”

Currency markets appear to be saying something similar: A falling dollar suggests that Trump’s tariffs are likely to make the US poorer relative to the rest of the world.

China thinks so, too.

“The Chinese believe they can survive Trump’s onslaught,” Martin Wolf wrote after a visit to China two weeks ago. “Indeed, many believe it may help them, by destroying US credibility and perceptions of its competence.”

I imagine they’re feeling even better about that now.

If President Trump’s tariff chaos is building a ladder, it’s China that seems most likely to climb it.

Let’s check the charts.

The patient should get a second opinion:

Since 1975, when the US last ran a trade surplus, Americans’ real income (ie, adjusted for inflation) is up 133%. Pretty healthy, I’d say.

Trade is not zero-sum, Mr. President:

As measured by GDP per capita, people in both America and China have been getting richer — but Americans have been extending their lead. America’s GDP per capita is now $52,000 greater than China’s, up from $43,000 greater in 1990.

You keep using that word…

President Trump’s tariffs are so much higher than any other developed country’s that they’re literally off the charts. We were promised “reciprocol” but got disproportionate instead.

Stagflation in a picture:

Apollo’s Torsten Sløk estimates that a 22% effective tariff rate (which sounds low?) would take 1.5% off of US GDP and add 1.5% to US inflation.

Recession odds:

Polymarket bettors put the odds of the US falling into recession in 2025 at 56%. That feels approximately 44% too low to me — but I guess it’s still possible the president changes his mind.

It’s just China:

Per this chart from Brad Setser it’s really just China that’s been growing its trade surplus. Every other country in the world can feel unjustly accused by the president’s tariffs this week.

Worse than Smoot-Hawely:

There’s approximately one person in America that thinks Smoot and Hawley had the right idea and he happens to be the president. Ugh.

Ok, fine. Not one person. But not many, either:

14% of Americans agree with the president that foreign trade is a “threat to the economy” but 81% disagree, seeing trade as an “opportunity for economic growth.” 81%! I didn’t think there was anything that 81% of Americans agreed on.

A glimmer of hope?

The FT’s John Burn-Murdoch cites survey data from YouGov showing that President Trump’s non-Maga voters are losing faith in his stewardship of the economy. Unfortunately, the president no longer seems to care what anyone thinks, according to reporting by the Washington Post. But maybe Republican Senators and Congressmen do?

It’s a bull market in uncertainty:

Economic policy uncertainty is unofficially in chaos territory.   

Markets love to climb a wall of worry, so maybe this is just yet another buying opportunity for investors with steelier nerves than me.

But, I don’t know, it feels like we’re beyond worry this time and into chaos.

If so, President Trump’s tariffs might prove to be a ladder that only China can climb.

Have a great weekend, free-trading readers.

— Byron Gilliam

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4. Why Web3 gaming won’t see an uptick in VC activity 

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This Is What Capitulation Feels Like

This week, Tony Greer and Jared Dillian from Macro Dirt join the roundup to discuss the fallout of Trump’s tariffs, what markets we’re eyeing during this meltdown, and how to manage risk as a trader. We also delve into commodities, tax cuts, bitcoin’s resilience, and more.

Listen to Forward Guidance on Spotify, Apple Podcasts or YouTube.

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Speaker applications? Open.

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