Friday, January 3, 2025

Tariff Shockwaves: Are You Prepared for the Fallout?

Katusa's Investment Insights

January 3, 2025

Tariff Shockwaves: Are You Prepared for the Fallout?

“It... is a beautiful word. One of the most beautiful words I've ever heard. It's music to my ears.”
– Donald Trump

Donald Trump’s favorite word could spell chaos for the global financial order.

He used it frequently on the campaign trail, calling it “the greatest thing ever invented.”

That word? Tariff.

Trump’s fondness for it has only grown deeper since the election. In a series of tweets over the past month, he’s threatened a half dozen historic tariffs, including:

Pundits reacted with their usual alarm. They feared hyperinflation, isolationism, and a collapse of global trade. But that’s a fundamental misunderstanding of how Trump operates.

And if you want to execute the Trump Trade well, you must understand exactly how he works.

Trump Rule #1: Trump makes huge threats for easy wins

It’s always been his MO. During his first term, Trump threatened to pull out of NAFTA—then settled for a renegotiation of the agreement.

In 2018, he threatened Europe with tariffs. The European Commission promised to import more American soybeans and LNG. In return, Trump said he would "hold off on further tariffs."

A year later, Trump announced a 5% tariff on Mexican imports, increasing by 5% every month until the border problem was fixed.

Results took exactly one week.

Trump announced that Mexico had agreed to take strong measures, including a National Guard deployment, to curb illegal immigration to the U.S.

This method of issuing an ultimate threat to force total surrender is so common that the current nominee for Treasury Secretary calls it “de-escalation through escalation." It's the art of making extreme threats to get small concessions.

And it only works if the threat is real.

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**Trump Rule #2: Trump’s tariffs are not empty threats**

Trump has often used tariffs as a weapon. So, many now see them as just bargaining chips and initial offers to negotiate new trade deals.

But it would be dangerous to believe that Trump will not follow through if necessary. Time and again, he has proven that he is willing to make conflicts extremely costly for his opponents.

Which is why world leaders believe him:

“Donald Trump, when he makes statements [about tariffs], he plans on carrying them out. There’s no question about it.”
– Canadian Prime Minister Justin Trudeau

Because they’re afraid of losing access to an extremely valuable asset.

Trump Rule #3: Trump never gives something for nothing

The United States possesses what other economies desperately need: a massive consumer market with persistent excess demand.

And its largest trade partners, Mexico, Canada, and China, are selling into that excess demand, keeping their economies from entering a deflationary spiral.

That’s why each of those countries are hitting historically high trade deficits with the U.S.

Meanwhile, the United States gets almost nothing in return.

In one of his books, Trump refers to his love of “crushing the other side and taking the benefits.” But right now, he sees the other side crushing the U.S.—and taking the benefits.

So, his tariff threats simply work to get something for the U.S. in return for providing the world with the service of consumption.

Fortunately for them, Trump makes clear demands.

Trump Rule #4: Trump states exactly what he wants

What Trump wants often has very little to do with trade. For the recently announced tariffs, his demands included slowing illegal immigration and halting drug trafficking.

But his speeches and platform indicate that what he really wants is:

Highly favorable trade agreements
Reviving domestic manufacturing
Raising government revenue
Forcing other countries to pay for their own defense

There are already indications that world leaders are giving in to Trump’s demand.

Trump Rule #5: Trump threats get immediate results

Canadian Prime Minister Justin Trudeau has already flown to Florida to have dinner with Trump, promising to deploy more helicopters and drones to secure the northern border.

Mexican President Claudia Sheinbaum called Trump to discuss the tariff threats but took a more brazen tack. “There will not be a potential tariff war,” she said.

European Commission president Ursula von der Leyen says that’s the wrong response. Following her directive, and without even being threatened, the EU has already entered negotiations by (again) suggesting they will buy more American LNG.

Trump Rule #6: Trump tariffs mean The Rise of America

Trump's threatened tariffs quickly secured commitments from neighboring countries. They are also reshaping global trade in real-time, giving the U.S. a notable advantage. Even before new trade deals are made.

Faced by the uncertainty of tariffs, global companies have begun shifting supply chains away from China and toward U.S. and U.S.-allied countries.

Of course, there’s always a chance that Trump will need to make good on his word and enact real tariffs.

If that occurs, it stands to make the U.S. even stronger.

Follow Marin Katusa’s premium research in his monthly research letter - Katusa’s Resource Opportunities. It’s a journal of in-depth research, analysis, and charts. Not to mention actionable opportunities in the energy and metals sectors.

Marin’s most recent high-risk pick from December is up 25% and breaking new all-time highs.

Regards,

Katusa Research

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Friday, January 3, 2025