A Clue
US stocks closed mostly lower on Monday, as markets reacted to President Donald Trump's escalating trade war with China, including a threat to impose an additional 50% tariff if Beijing did not back down from its retaliatory measures.
The S&P 500 fell 0.7%, the Dow Jones dropped 342 points in a wild session marked by record intraday swings, the Nasdaq 100 closed up 0.2% after earlier plunging over 3%.
Volatility spiked across asset classes, with equities, Treasuries, and commodities all whipsawed by conflicting headlines, including speculation of a 90-day tariff pause, a rumor the White House quickly denied.
Domestic automakers were under pressure as concerns grew over upcoming tariffs on auto parts, with General Motors (-1.4%), Stellantis (-7.8%), Ford (-3.6%), and Tesla (-2.5%) all posting losses.
Apple’s (-3.7%) market cap has dropped $640 billion in three days, with shares down 20% due to its significant reliance on China, where tariffs have reached 54%.
Let's talk about some comments made over the weekend by the Treasury Secretary, Scott Bessent, and how it relates to some of yesterday’s activities. Bessent had an hour long interview with Tucker Carlson that was posted on Friday (see it here).
In this interview, he made a brief comparison of the Trump tariff strategy to Reagan's tactic of "escalating to de-escalate" in dealing with the Soviets.
To describe it simply, core to this tactic was Reagan's massive military ramp-up, which provoked the Soviets into a costly arms race.
Reagan then (arguably) coordinated with the Saudis to flood the oil market with supply, crashing oil prices. That slashed Soviet oil income, which it needed to finance the military buildup. From an economically fragile position, Gorbachev made a deal.
Reagan, unlike his predecessors, viewed the Soviet Union as an existential threat, and was focused on defeating it, not managing it. As for Trump's tariff strategy, it's really all about China.
In Trump 1.0, he thought just getting any movement on trade with China would be considered a success. In Trump 2.0, it's about ending China's multi-decade economic war.
As we discussed in my note last week, if anyone is wondering if the bark might be worse than the bite, they can look no further than Trump’s Secretary of State selection.
In Rubio's book, he called the Chinese Communist Party “a totalitarian regime bent on world domination.” And in his confirmation hearing to become Secretary of State, he said "if we stay on the road we are on right now, in less than 10 years, virtually everything that matters to us in life will depend on whether China allows us to have it or not."
All this to say, the first level of Trump's "escalate to de-escalate" strategy seems to be about drawing the rest of the world back into alignment with the U.S., using the U.S. consumer as leverage. And he's getting movement, from over 50 countries so far - even Europe.
After re-aligning/rebuilding allies, the second level of the "escalate to de-escalate" strategy seems likely to be about isolating China. Like Reagan, Trump escalated and has now provoked a tit-for-tat increase in tariffs, and China's economy will be the biggest loser.
So, if we consider this, when it was falsely reported that Trump's economic advisor said he was considering a 90-day pause on tariffs, the recovery in markets was explosive.
The S&P 500 spiked 8.7% in about half an hour.
The U.S. 10-year yield spiked 20 basis points. The yield curve steepened.
Even after the report was debunked, markets held up.
Did this market reaction, on the idea that Trump may pause tariffs, prove that Trump does indeed "hold the cards" (as he likes to say) ... that the economy is strong ... and that he can turn the dials, at will, to unleash it?
Perhaps a clue: The stock of the most important company in the world, traded in a 17% range, and put in a bullish technical reversal signal (an outside day - yellow box).
And the S&P, traded just shy of this trendline from the covid lows, before bouncing 7% ...