Predicting the Future
In the spring of 2021, I was having a conversation with father. I was explaining to him a few investment ideas and decided to counterbalance them with a bearish take on the macro markets. I started laying down potential future negative catalysts. My basic understanding of monetary policy and the banking system led me to the conclusion that inflation was the prime contender for the worst scenario.
Well, it is sufficient to say, I was right. It wasn’t of any help, but I was right.
The idea here in this little essay is to do the same: lay down ideas and find the worst-case scenario that could unfold and stop this beautiful run we’re having. Let’s try and do this by depicting a fairly accurate representation of the current macro situation and the main blockers I see for economic prosperity.
The Current Situation
Inflation is not totally under control, yet the job market collapse seems to have already started. If you’re not sure about any of this, the mechanics behind it are the following: high rates equal less borrowing, which leads to less business, meaning less hiring, which in turn makes prices go down because people have less money to spend, so supply is higher than demand, bla-bla-bla. This whole cycle only works in a neutral environment. When you implement something as dumb as tariffs, all of a sudden you’ve got a clear blocker that acts only on the last part of this whole equation, prices, making them artificially higher than they should be. This directly leads to stagflation.
The FED is so afraid of this stagflation scenario that they just chose to accept the unacceptable: cut rates in an economy that we’re not 100% certain can afford it.
Their reasoning, I guess, is that ramping inflation and a disastrous job market don’t pair well together, and that it will take more time to get out of the hole if we have both of these problems on our hands rather than just one.
So, knowing that they can’t control inflation anymore, since it’s not the result of a monetary policy issue but a trade policy issue caused by tariffs, they’ve made the lesser evil choice to try to control the one thing they still can: the job market. Hence, cut rates.
In their view, this will help strengthen employment. Yet, as we speak, job creation is already collapsing: rates have stayed higher for longer due to tariffs, slowing hiring by a measurable margin. This has culminated in the firing of the BLS supervisor, a move that could signal an attempt to cover up bad data, pointing to a hidden economic downturn.
Tariffs
They virtually add fire to every bad scenario that will unfold.
There will be other factors at play but tarifs could make them much harder to overcome. Persisting inflation? Tariffs. Job market collapse? Tariffs. Stagflation? Tariffs. I didn’t have anything against Trump before tariffs since I don’t care about politics and view politicians as complete sociopaths, right or left. The big “liberation day” had me pay attention to this man, and man, is it bad. This is not a political essay, so I won’t go much further, but even though I find him to have a few qualities, notably his anti-war approach and his humour, I can’t accept that a U.S. president launches a shitcoin for inauguration day, lies all the time, doesn’t understand basic economics, manipulates markets, and is on the Epstein list.
Who do you think is the best at this economy stuff? A populist president, prone to conspiracy-theory thinking, who bankrupted several businesses and states that drug prices “will go down 1000%” under his presidency, paired with an incompetent economist that cites himself in his books by using an acronym of his own name? Or every competent economist in history? Because the latter all say the same: tariffs are a disaster for the economy.
The world should be treated as one and only one economy, where exchanges bring added value to every nation. The moment you disrupt this peaceful economic process, bad things happen. Maybe the U.S will play their hand perfectly and re-industrialise the country, but chances are, it will just add a new layer of taxes on consumers disguised as nationalism.
To be clear, I will never sell my core $RKLB position, because not even the #2 dumbest president in recent history (Bush Jr. being an easy #1) will make me believe that the U.S.A. is not the best country on the planet.
That said, my strong conviction is that there will be an economic downturn caused by tariffs, and other components, of course, coming our way within 12 months.
Rocket Lab will outshine this bad macro weather because they’re entering the hyper-growth phase of their business cycle, but get prepared for compressed valuations across the board and make sure to have your margin in check.