Hard Pass

With the path forward for the global economy a coin toss, I can't blame investors for taking a hard pass on this rally. Trump's attempted economic makeover of Fortress America has massively damaged investor sentiment. Only short-term traders are happy. Given the sharp recovery in stock prices, I'm ready to reverse the all-clear signal from just two weeks ago. Traders will trade, but investors need not apply. Choppy markets ahead!

The next shoe to drop, which will hurt when it does, is the 'hard' economic data on output and employment instead of the 'soft' survey data that has suddenly collapsed. The most recent reports of financial resilience, such as retail sales, are an illusion reflective of pre-tariff overstocking by companies pulling forward demand. This morning's trade data showed a massive trade deficit as the last few containers were offloaded in U.S. ports.

Companies are in a state of suspended animation as they attempt to wait out the tariff storm, huddled in a corner. As we speak, the initial impacts of tariffs on prices have been hitting us. The output effects have not yet hit the data. They are coming. But the ships aren't! They are laid up in China.

Ship Locations

The collapse of shipping deliveries at the West Coast ports makes it obvious. Once this supply shock transfers from Long Beach/LA ports to Mainstreet America, Walmart will go from fully stocked shelves to empty in weeks. It'll be more like Bare Wall Mart.

Walmart Shelves

The 'V' shape bounce markets traced this month are simultaneously encouraging and unnerving. The credentials of this rally are decent enough. A breadth thrust measure—the Ziewg Indicator—indicates the rally's strength has been substantial. However, from the likes of Tesla and sketchy crypto plays, the rally's leadership smacks of short-covering and hot money flows. The rally looks like a giant case of bottom-fishing, unsupported by positive estimate revisions or surprises. The headlines markets will soon hear are likely lower earnings reports and downward guidance.

After the recent shake-out, recession fears have stabilized the bond market, which, in turn, has supported the stock rally. The Federal Reserve's Governor Waller has hinted that inflation risk from tariffs is unlikely to become embedded in consumer psychology. The bigger risk to the economy from the bludgeoning of supply chains is now an apparent threat to job data. UPS just announced 20K layoffs. Economic weakness will defray any inflationary impact from tariffs. That gets investors thinking about rate cuts at some point this year. The S&P 500 at 20x forward earnings based on a shaky downwardly-biased estimate needs all the help it can get.

As we will hear in Michigan today, Trump's spin doctors will be out in force this year, crowing about the re-shoring investment. But Corporate America will offer its tribute to the King grudgingly. The likelihood of closing low-cost plants in Mexico or Canada to recreate a replica in the uncompetitive wilds of MAGA-land is an ill-conceived fever dream. However, as I said last week, Trump seems to be able to dream big, despite logical analysis to the contrary. Behind closed doors, CEOs are already making plans based on the post-Trump era of a more rational economic order. I expect them to defy Trump more openly at some point.

Jeff Bezos—the guy with the rocket modelled on his head—is doing so today, proposing explicitly showing Amazon customers the effect of tariffs. Trump's trained attack parrot, KKKaroline Leavitt, described it as an act of "hostility". More like a reality check, I'd say. The loyalty Bezos so cravenly demonstrated at Trump's inauguration was repaid in a direct attack on the core of Amazon's business, Chinese imports. And watch for Trump's Sycophant-in-Chief, Elon Musk, to get the boot soon. Maybe he can take an 11-minute ride in Bezo's rocket to forget his troubles.

So, if Trump turns on his tech-bro buddies and continues to be stymied by more rational corporate leaders, will he continue to back off the tariff tourniquet that has been so mindlessly applied to the once invincible U.S. economy? Or will he, like a modern-day Nero, continue to fiddle (more likely waggle his golf clubs) while Ameri-Rome burns? Stay tuned.

The next U.S. Employment Report, which was reported this Friday, looks like an excuse to duck here. Torsten Slok of Apollo Management says it could be a negative number since it is the first hard data to include the 'Liberation Day' bombshell. If that is the case, my call is bond yields with a three-handle and stocks revisiting their lows.

Meanwhile, at some point, a return to rational thought will resolve this mess. But this administration has an unwavering and dogmatic approach to policy-making. Without an internal revolt within the GOP, I don't see an easy path forward for risk-takers. Trump is even more erratic than in the first term. This 'play' is more tragedy than comedy—and we are only in the first act!

So thank you, rally, I'm taking a hard pass now.

Risk Model: 2/5 -Risk Off

A Tuesday at 11 top would be just what the doctor ordered here. All the hope and crossed fingers for a return to sanity have been reflected in the 10% bounce from the bottom, and the next shoe to drop looks pretty heavy. Watch your toes.

The AAII sentiment indicator has "fallen and can't get up." Calling Life Alert does the stock market no good here.

AAII Bull/Bear Ratio