Market Lab Report - Tariffs and tailwinds

by Dr. Chris Kacher

But shortly after the announcement, Trump postponed the tariffs except for the 10% levy on China that took effect early Tuesday. For Canada and Mexico, he might be signing tariff orders not with the goal of implementing them, but to strong-arm other nations to do a deal. This can be quite beneficial to the US.  Markets, in consequence, stemmed their bleeding and bounced.

But even if the tariffs do get implemented, if we close in on what matters, tariffs will impact the pace of global liquidity. China and Japan have already both reduced their levels of quantitative easing. Since markets strongly correlate with global liquidity, the question once again comes back to inflation which correlates highly with global liquidity thus market direction.

On the one hand, tariffs may initially push inflation higher in the US, possibly pushing inflation to 4% annually. But inflation may then decline as re-shoring leads to greater domestic supply and productivity. Consumers may pay a higher price for tariffed goods in the first 3-6 months while the market works out the changing demand patterns to shift towards domestically produced goods.

Also, increased US production and less reliance on overseas supply chains will reduce supply-driven inflation risks. Tariffs will make imported goods more expensive, so consumers and businesses may turn to made-in-America alternatives which would favor US production and jobs as investment moves into US manufacturing. Indeed, this was the case when Trump introduced tariffs on solar panels and washing machines (January 2018) then steel and aluminum (March 2018). Prices first rose in the first few months then fell below prices prior to the tariffs. Also, CPI fell from 2.1% in January 2018 to 1.6% in January 2019, so the tariffs didn’t lead to higher inflation either.

Further, countries will shift investments and operations to the US to mitigate potential tariffs. Indeed, almost half of Canadian companies surveyed plan to do this. Thus, America’s tariffs can spur investment dollars and business operations into the US.

On the other hand, inflation may continue to rise because businesses have no choice but to pass higher import costs onto consumers and everyday essentials get more expensive. The Fed would then be forced to keep rates higher for longer, impacting economic growth. Further, Canada, Mexico, and China plan to tax US goods in key industries like technology, agriculture, energy, and manufacturing which would lead to weaker business and earnings for US companies. US businesses with overseas supply chains would also face higher costs.

The tariffs could also push Canada, Mexico, and China into recession which tends to be contagious since everything is connected. If you look at the last two centuries, when any major country experienced recession, it typically pushed the rest of the world into recession. Any sell-off in major markets could then spread to other markets.

While those such as Jamie Dimon, CEO of JPMorgan, thinks the tariffs may cause some inflation, he believes it's good in the long run for the US. Maybe so, but the price to pay may be a global recession. This suggests major averages may have topped or are near a top. Of course, the pace of global liquidity which largely depends on inflation since inflation guides the hands of central banks will determine market direction. Should tariffs create recessionary conditions on a global level due to a trade war, central banks would be forced to print by lowering interest rates. This could suggest a short-lived recession depending on how much QE is utilized and how fast rates are reduced. Since 2008, central banks have not been gun shy about blasting the markets with QE during crises. The question is whether a recession would fall under that category. Nevertheless, in such a scenario, major averages could certainly undergo sharp corrections until QE was launched.

Tailwinds

In the meantime, earnings are at record levels, profit margins are at cycle highs and the consumer and labor markets remain resilient. ISM manufacturing which is a reasonably good predictor of the direction of global liquidity continues to beat estimates though is concerned about the tariffs if they materialize as indicated.

Debt re-financing crises are caused by the inability to roll-over record levels of debt. As central banks struggle to print to honor their debts, the massive indebtedness has become a key source of income for the private sector. The huge amount of stealth QE to honor debt finds its way into stocks, bonds, bitcoin, precious metals and real estate. 

Thus global liquidity is even more important an influence on market direction than interest rates since debts get refinanced in the US every 5-6 years, and the next refinancing cycle is upon us.

• $7.6 trillion in US public debt (31% of total) matures within 12 months starting October 2024, with refinancing needs concentrated in 2025.
• Corporate debt maturing in 2025 totals $1.3 trillion (64% within the first three years).
• This aligns with the 5-6 year refinancing cycle observed since 2008, where debt accumulation peaks require systematic rollovers.

With global capital markets now prioritizing refinancing over new debt issuance (7:1 ratio), systemic liquidity—measured by financial sector balance sheet capacity—has overtaken interest rates as the primary cycle driver. The 2025 cycle will test the Treasury’s ability to manage $36.2 trillion in federal debt amid rising rollover risks and investor appetite for short-term instruments.

The US refinancing cycle will intensify in mid-2025, marked by debt ceiling negotiations, corporate maturity walls, and Fed policy easing. We will monitor June 2025 liquidity pressures and Treasury auction patterns (e.g., T-bill vs. long-bond issuance) for signals of market stress.

Of course, price/volume action of leading stocks and major averages works well for traders while those who wish to take a longer term approach to catch the "meat" of moves in major averages as I've illustrated in prior reports will follow global liquidity which has correlated well with major market direction since QE was launched in 2008.