Ticking Taco Bomb

Trump has a taco problem, and any bouts of indigestion will not be pleasant. Wall Street is all abuzz with his latest label, intimating that he's about to "chicken out" on tariffs. We all know his love of fast food, but his thin skin may get the better of him this time. He's bristling about the catchy perjorative, so watch out, revenge is second nature to him. Will it be a severe case of the TACO touristas for stock buyers?

It's been easy money to bet against the many Cassandras who have predicted 3 out of the last zero recessions recently. These various 'Chicken Littles' are bearishly positioned, predicting a falling economic sky. But they have been made to look silly as the economy chugged along, and the market has rallied 20% since the dreaded "Independence Day" lows. So when the next dip comes - and it will - will they hold their nose and buy?

Sometimes investing is easier than it looks. You wait for a spike in the VIX over 40 and back up the truck. As my friend Joe Luca has often argued, such a strategy has paid off. He's a great contrarian trader and has made many good calls, even if he didn't always bid me in the quote when he was the top Bank trader at BMO! His VIX model has just worked again!

But something about playing a game for too long bugs me about this market. I'll say this once:

"Once people catch on to a game, it ceases to become one."

At some point this year, and it may be sooner than we think, the straw that breaks the camel's back will drop. The current myopic view of U.S. exceptionalism is dangerous complacency. The recent economic strength stemming from the frantic AI infrastructure buildout and a pre-tariff consumer buying stampede is a transient support to a weakening consumer economy. The recent Atlanta GDP Now—a volatile indicator that extrapolates the short-term data—has spiked to a three-year high. I can't see any scenario that makes this sustainable.

Atlanta Fed GDPNow

The problem with implementing any tariff regime change is that the pain is experienced before the pleasure. Once the highly touted '90-day pause' runs out, inflationary impacts will abruptly roll through the economy over the next few months. That narrative has paralyzed the Fed into inaction and caused the equity short-covering rally. Looking at the above chart, Chair Powell sees no employment impacts yet, so he sits on his hands. Consumers are still spending while whistling past the graveyard, one filled with previous tariff fans like Mssrs Smoot and Hawley. But hey, gas is cheap, and China will pay the tariffs. Yeah, and Mexico paid for the wall, too.

The market's betting on a flurry of tariff deal-making from the White House, aka Trump's House of Chicken (out). Bullish pundits claim markets will then look through the negatives and focus on the 'certainty' of a predictable trade policy. And any slowdown will allow the Fed to cut rates. Maybe so, but I don't think there's enough time to implement these deals before Trump's TACO revenge is inflicted on an unsuspecting Wall Street. He's likely to make traders squirm a bit first.

All while Congress is trying to devise a palatable plan for the federal budget. The deterioration in fiscal probity experienced since the COVID-19 outbreak shocked fixed-income investors. Not only did Trump's tax cuts (with Biden's tacit approval) choke off much-needed revenue, but they also embedded a sense of entitlement that will be hard to expunge. Hence, the return of bond vigilantes. Good luck, fiscal hawks on 'the Hill'. You have many fans in the fixed-income crowd, but I don't like your chances.

None of this is priced into a market trading where this one is at a VIX below 20. As I stated last week, a market driven by too much money chasing too few stocks has been so baked into investors' minds since the 2020 bottom that it will take a recession or a more hostile Fed to get rid of it. AI is the new dot-com bubble. Once the data center land rush runs its course, there will be a sobering drop in tech profitability as adoption rates lag and ROIs disappoint. But that's a story for down the road. Right now, tech is still the only game in town.

And when there's $7 trillion of unrisked cash in the money market, the path of least resistance will always be up.

But sometimes it isn't always going up. Buy some protection here.

See you in late August. I wanna hear how that dip you bought turned out.

Risk Model: 2/5 - Risk Off

After its 'Johnny-come-lately' bullish call last week, the model has faltered due to a decline in AAII sentiment. The XIU (TSX ETF) has an RSI of 70 and is 9% above its 200-day moving average. It is a good time to book any remaining profits.

For the third time in two years, the equal-weighted S&P has lagged the market rally as it attempts a cyclical turn. Since an easier Fed and a post-slowdown re-acceleration in growth are needed to cement such a bottom, I will watch this scenario develop later this summer or early fall. A market correction focused on the tech heavyweights could produce a positive relative strength signal for this group. Stay tuned.

Equal Weight ETF vs S&P

Fans of mine know how much I use volume confirmation to guide my analysis. The BIGT - an ETF dedicated to the Magnificent Seven stocks - is now giving me a sell signal. Not much fresh money is going into the tired leadership group. Sell.

Mag 7 ETF