Trump Doesn’t Have the Cards on Tariffs

By Larry Ramer

“You don’t have the cards...”

Thus started a heated Oval Office argument in late February, U.S. President Donald Trump and his vice president piling on Ukraine’s president, Volodymyr Zelenskyy.

And what Trump said was largely true. Dependent on U.S. aid and facing huge difficulties on the battlefield, Zelenskyy has little choice but to give in to the Trump administration’s demands.

But when it comes to tariffs, it’s Trump that doesn’t have the cards. Yet most people on Wall Street fail to realize that.

Recent events show that the U.S. president will have to back down to a large extent on tariffs and when he does, look for U.S. stocks to rally. 

Trump does not have the cards vis-a-vis tariffs because plummeting U.S. Treasury bond prices and/or a shortage of rare earth minerals would prove to be devastating for America. 

Earlier this month, as the trade war between the U.S. and the rest of the world peaked, prices of Treasuries plunged.  

“This is a fire sale of Treasuries,” Calvin Yeoh, a portfolio manager at the hedge fund Blue Edge Advisors, was quoted as saying by Bloomberg. 

Falling Treasury bond prices, of course, cause interest rates on the notes to climb.

As a consequence,  Washington would have to pay much more to borrow money at a time when its interest payments are already nearing unsustainable levels. And because the balance sheets of large U.S. banks include large holdings of expensive Treasury notes, a massive decline of bond prices would likely trigger the failures of  a number of major banks and cause many financial institutions to greatly reduce their lending. 

What’s more, because Treasury rates greatly affect the amount of interest paid for both home mortgages and commercial mortgages, the entire real estate market would probably enter a crisis, putting further strain on the banks. And in the wake of all of these events, America would in all likelihood enter a severe recession, accompanied by a stock market plunge and a nasty financial crisis. 

Some have said that the Federal Reserve could effectively combat falling Treasury bond prices. I’m not an expert on the Fed, but I do know that the central bank is far from all-powerful, as shown by its inability to contain the damage in 2008. Therefore, I have my doubts about whether the Fed could completely contain a massive selloff of Treasury notes. 

Adding to my doubts is the reaction of the Trump administration to the bond selloff this month. Specifically, the administration rather quickly scaled down its tariff plans.  I doubt if Trump would have reacted to the bond selloff so quickly and with such dramatic steps if he was very confident in the Fed’s ability to combat the trend.   

So whether one believes that the Treasury bonds fell because of a concerted effort by foreign nations, worries about the U.S. economy, or a combination of both, I think it’s clear that the Trump administration has zero interest in dealing with the trend and its likely catastrophic repercussions. 

In response to Trump’s tariffs, China has placed “export controls” on many of its rare earth minerals. Although these minerals are abundant, they are difficult to find in “pure form, and they are very hazardous to extract,” the BBC reported. And “China has a near monopoly on extracting rare earths as well as on refining them,” the channel noted.   

These minerals are critical to multiple industries that are of great importance to the U.S. economy and/or its national security, including defense technologies, medical technologies, and auto manufacturing. And Beijing has apparently also restricted the delivery of some rare earths to U.S. allies, including the EU and Japan. 

It’s true that high American tariffs would meaningfully hurt many other countries’ economies. Still, the combined damage to America from plummeting Treasury bonds and shortages of rare earth minerals would likely be much greater and be felt with much more immediacy. 

Also importantly, however, the U.S. does need money to reduce its deficit and pay for Trump’s tax cuts, and the President seems determined to obtain significant revenue from tariffs. Further, U.S. allies need America’s help in other areas, while China needs America’s consumers,  and consequently, they will likely want to give Trump an opportunity to “save face.”

In light of all of these points, I expect the U.S. to ultimately leave some new tariffs on its allies and China standing. But these duties are likely to be relatively low  — around 8% to 12%, for the most part  — and they will probably be imposed on relatively few products.

As a consequence of my forecast, I expect the U.S. stock market to rally a great deal by the end of the year, with the S&P 500 index at least coming close to new all-time highs by that time.  

Disclaimer: The author did not hold a position in any of the securities mentioned above. The information provided in this article is for educational and informational purposes only and should not be construed as investment advice. Always conduct your own research or consult with a licensed financial professional before making any investment decisions. Past performance is not indicative of future results.

Larry Ramer is currently ranked 1,150 out of 31,021 financial bloggers analyzed by TipRanks, with a 7.0% average return on his buy and sell ratings. He has been a long-time contributor to Insider Monkey, Seeking Alpha and InvestorPlace. He is one of the founding contributors to this newsletter.

He focuses on contrary investing and specializes in the renewable energy and consumer discretionary sectors. Among his highly successful, contrarian picks have been Plug Power, Exxon Mobil, solar stocks, and airline stocks. On the downside, he was an early predictor of the collapse of cryptocurrencies, marijuana stocks, Ocugen, and Meta Platforms.