The Great Race of Nations

 PARADIGM SHIFT
The Great Race of Nations

I think it’s fair to say that we’ve seen a global disruption unlike many of us have seen in our lifetimes.

The rules of the game have changed. And it’s created an international race to re-order trade with the United States.

Whichever nations are first movers stand a strong likelihood of increasing trade with the US, which theoretically means greater long-term income potential for them.

Whichever nations are last to move, or even retaliate with their own new restrictions, risk watching their trade with the US rapidly decline, potentially costing them dearly in the long-run.

It’s not simple, easy or convenient to change up supply chains. It’s not something a company does unless they have no other choice, or there’s a significant and undeniable advantage.

So once the trading players re-order themselves in this great race to move up the ranks, very likely that will be largely the way things remain for years to come.

This is a massive opportunity to smaller nations. And it’s a tremendous threat to nations that have, until present, enjoyed significant trade with the US.

I talked last week about why this was done: mainly cited in the Executive Order as a matter of strengthening national security that results from the independent ability to fully supply our own military with equipment and our citizens with basic necessities like food.

Secondarily, it’s about a lofty goal to restructure the US economy so that more money flows income-tax-free internally, and less of it makes the circular round of flowing out (for imports) and flowing back to the government as a loan (when foreign nations buy Treasuries with their export profits).

With the goal of DOGE being a dramatic cut to government spending, to the point of slowing or possibly reversing the growth of national debt, there may be some logical consistency with restructuring the economy this way. Although some benefit of income tax cuts will be cancelled by higher production costs, the simple math (all else being equal) says the elimination of the federal income tax would be a net benefit to the American people IF it can be done in such a way that doesn’t hurt the government’s existing deficit. But it will take massive spending cuts and economic restructuring, the “how” of which is almost unfathomable at the moment.

Back to national security.

Are the tariffs actually going to make the US more or less defensible?

De-globalization was already a growing trend. President Trump just decided to move it lightyears forward all at once.

Having mutually beneficial trading relations with countries around the world helps to maintain the peace, because we have to consider how the disruption of war would break down our mutual ability to carry on business.

Dividing those trading relations into different BLOCs, let’s say East and West, may help preserve certain cultures, economic values, social values and independence, but does it also remove soft barriers to war?

I think that’s the question no one really knows the answer to at this point. There are well-founded opinions both sides of the fence.

The market has to assess not only what this means mathematically for future GDP, but also what unforeseen risks it could cause in terms of international conflict. While the market is focused mainly on 3-30 months ahead, it also needs to consider the long-term geopolitical risks that could arise.

With economic growth already slowing down this year (even without the impact of tariffs), the perception of risk and uncertainty can cause companies to slow investing and hiring until they gain more clarity. If that happens for long enough, it can induce a recession.

I expect we continue to see big moves in the market for many weeks to come as investors grapple with the rapidly changing playing field and assess how best to price future earnings.