Market Lab Report - Tariffs + global liquidity = ?

by Dr. Chris Kacher

Tariffs nuke markets

Some argue that tariffs may incentivize reshoring of manufacturing, creating jobs in sectors like steel, automotive, and electronics. Reduced reliance on foreign suppliers could strengthen national security and buffer against global disruptions such as pandemics and geopolitical conflicts. Trump going in hard can pressure trading partners to negotiate favorable terms.

• Pro: Punishing China with extreme tariffs could weaken its economic dominance, slowing its tech and military rise while elevating US influence.  
• Mechanism: Reduced US demand for Chinese goods (20% of U.S. imports) squeezes Beijing’s revenue, forcing concessions or decline.  
• Higher-Order Win: Allies might realign with the US, reshaping trade blocs in America’s favor.

But higher inflation from supply chain chaos and retaliatory tariffs would reduce GDP. Recession could hit sooner than later given overvaluations from the AI bubble which are unwinding plus higher order effects from tariffs. The Japan carry trade is also unwinding again plus corporate default swap (CDS) risk a possible smoking gun which may trigger later as a ticking timebomb.

In terms of specifics, exports which are 12% of GDP fell 67% after Smoot-Hawley when exports were only a few percent. A similar drop now could cost 1-2 million jobs. Tit-for-tat retaliatory measures shrink foreign markets, hitting agriculture and manufacturing hardest. Early 2025 signals from Ottawa and Beijing suggest this is likely.

Some believe this is potentially 2008 2.0 but for different reasons. This time, inflation is an issue (despite today's CPI) so QE may not be the easy option. Fed chair Powell has said he is waiting and seeing on when to lower rates which will depend on the data.

The destruction of trade chains built over the years has big repercussions. Retaliatory tariffs, supply chain chaos, deglobalization, a more centralized US government, and destruction of trade alliances between the US and other countries carry consequences.

While tariffs may offer short-term protection for specific industries, their higher-order effects—economic contraction, inflationary pressure, and global alienation—risk undermining long-term US competitiveness.

That said, a counterargument was put forward by the notable Chamath Palihapitiya who wrote on the tariffs:

"A strategy in two images: 1. To establish an enduring democracy in America requires limiting the influence of the bureaucracy and globalist deep state. It needs the government and the economy to be firmly in the hands of the people.  2. To manage the relationships with foreign governments, the fastest way to effect change abroad is to directly and immediately influence the revenues they generate from us.  We embarked on both of these strategies this week. No doubt there will be more volatility ahead. But the potential for a realignment of the world order is now possible. The result can be a strengthened bottoms-up democracy and an American economy that benefits the many, over the few."

My comment is that while it can strengthen democracy in the US, it may come at a much higher price in the long run. Ray Dalio has pointed out that the impact on the intricate web of global interrelationships disrupts economies, markets, geopolitical orders, climate change, and tech innovation. Bolstering centralized forms of governance as Trump has done for the US will become outdated in the coming years as the decentralized form of governance spurred by the exponential growth of the network state takes hold as detailed in prior reports and in Balaji Srinivasan's book. But that is for another discussion.

Should the correction worsen in the coming weeks, central banks may have no choice but to print big. Renewed direct QE would have potentially dire implications for runaway inflation but would create a likely sustainable uptrend.

But even without direct QE intervention, stealth QE remains poised and lower rates are likely. Investors such as Raoul Pal’s dismissal of tariff-driven recession risks stems from his conviction that liquidity trumps trade policy. By focusing on central bank actions, dollar trends, and cyclical indicators, he argues the global economy is poised for growth despite short-term turbulence. Plus, markets hate uncertainty and the likelihood of tariff transparency from Trump's initially hard stance are likely to soften as negotiations ensue, along with sentiment levels falling from their bearish extremes as well as accelerating global liquidity, so markets are more likely to trade higher overall from here though volatility remains elevated.

But if we do get a recession, keep in mind the stock market frequently finds its major low during the middle of a recession because it anticipates economic recovery ahead of time. Historical patterns show that while recessions bring heightened volatility and significant drawdowns (average ~30%), markets typically rebound before economic conditions improve.

Global liquidity 

Higher markets have generally been guided by global liquidity which will continue to accelerate since expenditures from debt interest and other unfunded liabilities will continue to rise. This is ultimately bullish in the long run for stocks, bitcoin, and real estate. Debt rollover means interest rates must come down so debt can be refinanced at lower rates.

As global interest rates fall, global M2 rises.  

Further, China has a dollar debt problem so they need to service those debts. They will be launching substantial levels of QE thus add to global liquidity.


Global liquidity as forecast by the GMI Index 9 months out will rise which suggests ISM will move higher.


And as global M2 rises, bitcoin will rise along with it.


Bitcoin metrics suggest its run is far from over.


Bottom line is both stocks and bitcoin correlate heavily with global liquidity. Bitcoin's R^2 is 89.4% and 95.3% for stocks. With global liquidity continuing to accelerate, especially given the slowdown created by tariffs, expect more QE ahead and inflation be damned. The Fed has already said they will discount tariff-induced inflation in how they guide monetary policy. CME FedWatch is pricing in four rate cuts this year  though there is a standoff between Trump and Powell.




The crash may deepen as a result of standoffs such as between the US and China whose potential tariffs stand at 145% as of this writing. Ray Dalio called the tariffs the latest ingredient in an ongoing breakdown of major monetary and geopolitical norms as we sit in the 11th hour of the long term debt cycle. While he sees levies as disruptive to markets and international politics, he also believes he can help guide the US to a stronger position that benefits the world without having to experience global collapse. And such major crashes would spur global liquidity thus markets would likely find major lows as they did in 2008 and 2020.