Is Trump 2.0 Serious?
Are we underpricing the risk Trump 2.0 is serious?
As someone who loves the car industry and has several investments in it, this question is one that weighs heavily on me today. I don’t know the answer, and you probably don’t either. But it deserves reflection on the consequences of Trump 2.0 being serious.
Some videos that sent me down this path:
What Do I Mean By "Serious"?
When I ask if Trump 2.0 is "serious," I'm questioning whether this administration intends to fully enact its agenda even when it causes economic pain and proves unpopular. The first Trump administration typically pivoted when the stock market expressed clear dislike for its policies. Today, if you invested based on Trump's recent election, you're already down 4.4% - suggesting that markets believe these policies may be a net negative for America's future cash flows. And this is real money revealing its opinion, with genuine skin in the game.
Why Trump Might Be Serious
There are a few reasons to think the second Trump Presidency might be different. The most obvious one is that he isn’t running for re-election. He no longer has to care about popularity, he has to care about his legacy. What would build a legacy? Bringing manufacturing back. Acquiring new territories. Re-arming Europe. Balancing the budget. Getting out of wars. These are things he talks about. Maybe this time Donald is willing to tolerate the pain each of these accomplishments might cost. Maybe Trump 2.0 is willing to tolerate a recession and the end of economic expansion to attempt to bring manufacturing back to the United States. Maybe he is so sure he is right that he hasn’t considered the chance that this all backfires and destroys his legacy. He might be creating his own Continental System or Smoot-Hawley.
The Auto Tariff Situation
Turning to the news of the week that’s sent me down this path. Auto tariffs of 25% on all car parts and all cars are far beyond anything I’d anticipated. With America importing 50% of its cars and probably 50% of the car parts used for domestic production, this is a 25% consumption tax on cars. The very cheapest rate might be a 15% tariff rate on a Tesla (made of tariffed metals and tariffed batteries and tariffed car parts). At 15% on all cars, I expect the economic pain to be significant.
Cars are a big expense for most families. Between insurance, gas, maintenance, taxes, and the loan, it tallies up to a large portion of the family budget, estimated at $12,100 in 2023. The current tariff rate means all of those items but gas will go up at least 15% for families.
The Ripple Effects of Uncertainty
But can these extra taxes be readily absorbed by families? Are they ready for their insurance to go up 15% on the next renewal? Can new buyers be found when all cars cost 15% more next week? What are car manufacturers going to do? Keep building? Or are they going to wait and see if Trump is serious?
Uncertainty about the seriousness of Trump is a business killer. We saw during COVID what happens when car production lines go down for a while. But these car companies have 2-8% margins, they can’t possibly absorb tariffs when it’ll be at least 15% on every car. Do companies shut down production today? Wait until next week to see if Trump is serious? Wait until May? June?
A Potential Cascade of Consequences
Let’s assume Trump is serious and these tariffs are permanent. I find it unlikely the EU doesn’t retaliate. In response, maybe the EU has passes the Meta ban. Meta is forced to divest it’s products to an EU tech firm. Trump gets mad and levies more tariffs. Meanwhile, car production chains have snarled and layoffs are hitting car manufacturers. Cars are sitting on lots with no buyers. Unemployment has crept from 4 to 4.5%, then suddenly jumps to 5.5%. A recession is now unstoppable. Even if a grand bargain is reached, economic damage has been done.
Headed Towards a Tipping Point?
My take is that we are barrelling towards tipping into a recession because there is no faster way to kill an economy than uncertainty. Should your local wine store order $500k more French wine? They don’t know if it’ll have a 200% ($1 million) tariff on it when it gets here because they don’t know if Trump is serious. Should they open a new location? Um, not when they don’t know how much their product will cost, so we know their real estate agent, architect, and slew of contractors are all idle right now, while everyone waits to find out if Trump is serious.
Skin in the Game
I’ve told you my thoughts; now let me tell you my actions and reveal my skin in the game. I’ve sold half my German car manufacture investments to raise cash, and I am pondering the question of this blog post. If there is a non-zero chance, these 25% auto tariffs are permanent, it is worth considering what actions may work out well and minimizing regret from assuming Trump 2.0 is Trump 1.0.