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“One should not put a loaded rifle onto the stage if no one is thinking of firing it.”

— Anton Chekhov

Friday theatrical charts

In an investment letter written last year, Scott Bessent, now the treasury secretary of the United States, confidently assured his investors that the “tariff gun will always be loaded and ready, but it will rarely be fired."

Until recently, investors seemed to believe that President Trump might not use it all (or not in earnest, at least).

But every devoted theater goer knows the rule of Chekhov’s Gun: A gun, once introduced, will be used.

Investors are now learning the rule of Trump’s Tariffs, too: Tariffs, once introduced, will be used.

And not rarely, as Bessent promised, but constantly.

Investors have understandably been caught off guard by this.

President Trump, they were sure, is a businessman that measures his performance by the stock market and everyone knows that tariffs are terrible for both business and markets.

They were often encouraged to keep thinking that.

In September, for example, now-Commerce Secretary Howard Lutnick said tariffs are a "bargaining chip.”

Markets nodded in agreement: The president would put his tariff gun on display just to extract trade concessions from China and then put it away, unfired, after cutting a deal.

The president himself never really encouraged that belief, but as late as this past weekend, NEC head Kevin Hassett could plausibly contend that President Trump had launched "a drug war, not a trade war” on Canada.

By the end of the week, however, investors had realized that the president was no longer listening to his market-friendly advisors.

This is a change.

In his first term, the president celebrated and took credit for every new high the stock market made on his watch.

In his second term, the president has struck a completely different tone — he now sounds like a Manchurian candidate who’s been compromised by Occupy Wall Street.

In response to plunging stock prices, Trump told us that “you can’t really watch the stock market” and that the stock market is “a fake economy.”

He posted on Truth Social that there should be “no crying in the casino” (as if the falling price of Ford shares is of no greater consequence than the falling price of the TRUMP memecoin).

He said the US economy would have to endure a “period of transition” that his treasury secretary described as a “detox.”

In case the message wasn’t getting through to investors, Secretary Bessent further spelled it out for us in language we’d understand: There is no “Trump put” for markets, Bessent told CNBC this week.

He did say there’s a “Trump call” to take solace in instead — but that is unlikely to catch on because call options are not nearly as valuable as put options.

Puts are for investors seeking to hedge downside risks and calls are for traders trying to amplify upside risks.

But if the president really thinks the stock market is a casino, I guess he must also think we’re all just traders. 

Perhaps even more worryingly, investors no longer have a "Fed put" to count on, either. 

With the president's tariffs raising prices and disrupting supply chains, the Fed won’t be in any position to stabilize markets with rate cuts.

How bad could things get?

There’s presumably some level of the S&P 500 that would convince the president to back off on tariffs.

But the lesson learned this week is that this level appears to be much, much lower than what we thought it was.

It might not come to that.

While lowering their year-end target for the S&P 500 only modestly, strategists at Goldman Sachs estimated this week that a five percentage point increase in US tariffs would reduce S&P 500 earnings by 1-2%.

That doesn’t sound too bad!

“Outside of a recession,” the note hopefully concluded, “history shows that S&P 500 drawdowns are usually good buying opportunities.”

But that happy outlook assumes that the president will put away his tariff gun — and this week, at least, it didn’t sound like he’d be doing that anytime soon.

The tariff story might only be in Act 1.

Let’s check the charts.

Is there any method to this madness?

Brad Setser notes that the US runs a surplus in manufacturing trade with Canada: “If the goal of the tariffs is to reindustrialize the United States, the trade war with Canada is doubly counter-productive.”

We’re already getting detox tremors:

US employers announced 172,000 job cuts in February, the most since the height of the pandemic, according to data from Challenger, Gray & Christmas. "With the impact of the Department of Government Efficiency [DOGE] actions, as well as canceled Government contracts, fear of trade wars and bankruptcies, job cuts soared in February,“ Challenger noted.

Narrative violation?

As a percentage of GDP, government spending is basically unchanged since 1982.

Making everyone else great again:

I know, the president told us we can’t look at the stock market, but Mohamed El-Erian thinks that the relative performance of US stocks is telling us something: “The recent bout of US unpredictability risks robbing the US of one of its important and differentiating ‘edges’ — long-term investor confidence in policy framework and decision making.”

Trump I vs. Trump II:

The market has realized that he’s different this time.

Japan is worryingly different, too:

Japanese bond yields hit a 17-year high this week. Higher yields in Japan likely means Japan-based investors will be selling US assets to invest more at home instead.

Are Japan bond yields more important than tariffs?

This chart from BCA Research (via Jon Authers) suggests that low bond yields in Japan have been a driver of the high stock market valuations in the US. Authers goes so far as to suggest that “even if the tariff drama hogs our attention, it’s quite possible that the epochal shift in Japan matters more.”

A reminder that recession is not inevitable:

Polymarket odds suggest that despite all the tariff drama, the US is still likely to avoid recession this year.

The real Trump put?

The president says he no longer cares about the stock market, but he might still care about his approval ratings.

Or maybe we won’t need a Trump put — markets finished sharply higher today.

Let’s hope that means we’re moving on to Act II.

Have a great weekend, theatrical readers.

— Byron Gilliam

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