Something has to give with this economy. There is simply too much craziness for this to continue.
The stock market is still booming as if the economy is just wonderful. Gold has surpassed the $4,000 mark after just surpassing $3,000 earlier in the year. Silver is at new all-time highs, surpassing the $50 mark.
Not only did gold and silver touch new milestones, but they blew past them. Two days of gains in these metals can make for a good annual gain in a typical investment. It isn’t normal for an asset to go up 5 to 10 percent in just a few days.
Perhaps gold and silver are just catching up with the rest of the Everything Bubble. Stocks and Bitcoin have been in bull markets for many years with small periods of pullbacks.
Even with the insane national debt and the insane monetary policy of the last two decades, it is still surprising to see the price of gold go up this far and this fast. Even if you are an investor in gold, it is still a bit jarring.
Now there is talk of $10,000 gold. I’m not sure I want to see $10,000 gold any time soon. It means something else is really off. We really don’t want to see the dollar depreciate this much.
The Tariff Economy
Trump has become unhinged in his second term as president. He has always been bombastic and all over the place with his rhetoric. But he has taken it to a new level. It isn’t just Trump mouthing off. It is having real-world consequences. In addition to his insane foreign policy, he thinks he is playing some kind of game (maybe a different version of Monopoly) where he can just bully other people to “negotiate” with him.
Trump has threatened to impose a 100% new tariff on all Chinese products. This would be an additional tariff on top of the already-existing tariffs.
There are about 1.4 billion people in China. The Chinese produce a wide variety of products that are exported throughout the world.
Trump is essentially sanctioning the entire country of China and the 1.4 billion people who live there. If this 100% tariff goes through, Trump is effectively blocking trade with China. It isn’t much different than the blockade with Russia.
There are already tariffs on Chinese imports. If you add a 100% tariff, it means the price will be more than double what it should be. It would not be worth it to Chinese producers and American consumers to have much, if any, trade at all. At some point, it becomes more of a sanction than a tax.
If the government were to put a 100% additional tax on cookies at the grocery store, most people would stop eating cookies or they would make their own. A few people might still buy cookies because they really like them and don’t care much about paying double the price. But you can imagine that a great percentage of people would find something else for dessert.
Unpredictability
Some people talk about Trump as TACO (Trump Always Chickens Out). Why don’t people use this against Trump in his funding of wars? Trump always chickens out and continues to fund foreign conflicts.
But Trump doesn’t always chicken out when it comes to tariffs. While he has backed off on the percentage many times, there are still additional tariffs in effect that weren’t there before.
Even if Trump does “chicken out” on these 100% tariffs on China, it is hard to estimate just how much of an impact this has on business. This goes for small and big businesses.
Even if your primary product is made in America, manufacturers rely on certain materials and parts that are imported from other countries.
Just imagine you have a business that sells a product that costs $100 to produce. One-fifth of the cost of that product is from materials imported from China. That $20 portion may now rise to $40 with Trump’s new tariff. So, the cost of that product is now $120 instead of $100.
Will consumers pay a significantly higher price so that your business can still make a profit? Will you order the materials and then see the tariff go back down? Should you order a huge supply of materials in anticipation of the tariff coming soon? What if you order too much and they don’t sell? What if you don’t order enough and will have to quickly raise your prices? What if Trump wakes up grumpy tomorrow morning and decides it will be a 200% tariff?
The uncertainty here is enormous. This is happening for thousands of businesses across the country. It impacts homebuilders. It impacts sellers of electronics, toys, furniture, and a lot of other things that are a big part of our lives.
Even if everything else in the economy were solid, this alone creates massive havoc and uncertainty. It is very bad for business.
The Yield Curve
Let’s not forget that the yield curve was inverted for 2023 and most of 2024. It is slowly normalizing. The 10-year yield is hovering around 4%, along with the 3-month yield. The short-term yields should continue to decline with the Fed in interest rate cutting mode.
The inverted yield curve is a warning indicator for a recession. The recession typically comes after the yield curve has somewhat normalized (gone back to not being inverted). We are reaching that point now.
This alone should be a major warning sign that a recession is on the horizon. Add to this the tariffs. Add to this the massive market bubble where assets keep going higher to insane prices.
This whole economy could blow at any moment. So far, things have held together in spite of Trump’s tariffs and his tariff threats. That doesn’t mean things will continue to hold together.