The $64 Trillion Question

As we wrote earlier this month (“The $64 Trillion Question“), the most important question with respect to stocks is whether President Trump intends his new tariffs to balance trade or not. Most market participants, including hedge fund manager Bill Ackman, still believe the tariffs are simply a negotiating tactic. That means that stocks have further to fall, because the pivot to a new economic model hasn’t been priced in.

That’s still true, but a few related questions have arisen since then that we should address.

Why Does Trump Keep Talking About Making Deals On Tariffs?

If Trump’s goal is to balance trade, there really isn’t much to negotiate. The other country either buys more from us or we buy less from them, or both; those are the only ways to balance trade. If China, for example, tweaks its tariff regime, but still runs massive trade surpluses with us, why would Trump be satisfied by that?

The other problem with Trump’s talk of dealmaking is that it makes many people think he’s not serious about balancing trade. And if CEOs don’t think he’s serious about it, they will be less likely to incur the costs required to shift production to the U.S. And if companies don’t shift production here, we’ll have the worst of both worlds: higher costs for imports without a revival in domestic manufacturing.

Can We Maintain The World’s Reserve Currency Without Trade Deficits?

A few pundits, including Cullen Roche, have suggested we can’t, but we actually did have the world’s reserve currency and trade surpluses–for 26 years. The U.S. dollar officially became the world’s reserve currency with the Breton Woods agreement in the summer of 1944. At that point, we had been running trade surpluses nearly every year since 1870, and that trend continued until 1970.

Would It Be So Bad If We Can’t?

How has having the world’s reserve currency helped us recently? Let’s compare the U.S. to two countries that don’t have the world’s reserve currency, but do have persistent trade surpluses, Russia and China.

You may object that unlike Russia and China, the U.S. is “already rich”, so we had less potential for improvement. Certainly, that’s true, if you compare our stock markets…

But how does that or our reserve currency status help the state of our infrastructure or public spaces? Compare New York to Moscow…

@holvek
#moscow #newyork #subway #💀
♬ оригинальный звук – ADZXRY – ADZXRY

Or to Shanghai…

@hhtty482
USA vs. China #economy #interesting
♬ original sound – hhtty

Are the Chinese really missing out on not having the world’s reserve currency? Are we using ours to borrow so we can clean up New York and fix its infrastructure? Not quite.

I've talked about this before. It's astounding when you look at the numbers. Medicaid paying people to stay at home to take care of relatives accounts for 12% of all jobs in NYC! pic.twitter.com/wdudCFnSDB
— Brian Wesbury (@wesbury) April 19, 2025

Would we miss having the world’s reserve currency, if, in exchange, we reindustrialized?

Is the Status Quo Even Sustainable?

Critics of Trump’s tariff policy seem to think that we could have maintained the status quo (perennial, widening, trade deficits) indefinitely, but is that true? Warren Buffett didn’t think so when he wrote this warning about our trade deficits in Fortune. He used a parable of two islands, Squanderville and Thriftville, which you can read at that link. Let’s think about this in more concrete terms though.

All U.S. dollars ultimately have to be spent in America. Countries that have trade surpluses with us, like China, can’t find enough goods or services of ours they want to buy. So what else can they do with their dollars? They can buy U.S. securities, of which the largest, putatively safest, and most liquid are U.S. Treasury bonds. Or they can buy U.S. real estate. But how long would our Treasuries remain attractive to them, if we keep running massive fiscal deficits (suggesting we’ll need to inflate away our debt)? And how long would our real estate remain attractive to them, if the current trajectories of our cities and theirs continue?

Narrowing Our Focus To The Near Term

Whatever the answers to the questions above, the picture in the near term seems clearer. It seems likely that we are already in a recession. The DOGE cuts alone probably kicked that off (even wasteful government spending stimulates the economy), and the DeepSeek Sputnik moment in January probably added to it, by cooling big tech capex. As for the tariffs, while large companies should be able to adapt to them, by moving production. But as Ryan Petersen notes below, most small businesses that import from China won’t be able to adapt.

These small businesses are largely unable to move their manufacturing out of China. They are last in line when they try to go to a new country as those other countries can't even keep up with the demand from mega corporations.
— Ryan Petersen (@typesfast) April 17, 2025

That doesn’t mean balancing trade isn’t necessary or worth doing, but that there’s likely to be a big economic hit in the near term.

What This All Means For Investors

Stocks probably have further to fall this year. On top of the DOGE cuts, the ongoing ripples from DeepSeek, and the tariffs, the Trump administration’s crackdown on Ivy League universities may cause some of the largest endowments to dump stocks.

BREAKING: Wall Street execs who follow the college endowment business say it's only a matter of time before @Harvard starts selling what's liquid in its portfolio ie stocks, maybe issue more debt, if its tax-exempt status remains revoked. There are UNCONFIRMED market reports that…
— Charles Gasparino (@CGasparino) April 19, 2025

What To Do About It

If you are a conservative investor

Consider hedging. As a reminder, you can download the Portfolio Armor optimal hedging app by aiming your iPhone camera at the QR code below (or by tapping here, if you’re reading this on your phone). Our app can help you find the least expensive hedges given your risk tolerance and time frame.

If you are an aggressive investor

Keep an eye out for opportunities on the way down. Think about all of those small business Ryan Petersen warned are about to go bust, for example. Most of them aren’t publicly traded, but there are a few publicly traded vendors many of them use. We have bearish trades teed up on those vendors. If you would like a heads up when we place them, feel free to subscribe to our trading Substack/occasional email list below.

Market Meltdown Update

Took advantage of today’s market meltdown to exit a couple of bearish bets…

Options

Puts on Apple, Inc. (NASDAQ:AAPL). Bought for $1.81 on 4//14/2025; sold for $2.71 on 4/21/2025. Profit: 50%.
Puts on Nvidia Corporation (NASDAQ:NVDA). Bought for $1.56 on 4/9/2025; sold for $4.02 on 4/21/2025. Profit: 158%.

And add a couple of bullish bets. We’ll look to add the bearish bets mentioned above on the next bounce.

$AAPL $NVDA https://t.co/vJNbgejQ79
— Portfolio Armor (@PortfolioArmor) April 21, 2025

If you’d like to stay in touch

You can scan for optimal hedges for individual securities, find our current top ten names, and create hedged portfolios on our website. You can also follow Portfolio Armor on X here, or become a free subscriber to our trading Substack using the link below (we’re using that for our occasional emails now).

Axi