Tchir: The Risk For Stocks Is That The Administration Decides It Was Correct All Along On Tariffs

By Peter Tchir of Academy Securities

Big, Beautiful Production For Security

The “Big Beautiful Bill” is now law (which always brings back childhood memories of Schoolhouse Rock – yes, we had that in Canada too). If you don’t know the “I’m Just a Bill” song it is well worth a quick search.

We are taking the view that the new tax law is a big positive for the economy and markets.

• Yes, we can all argue who benefited the most and who got hurt by the bill. We can worry about the deficit. The law is probably far from anyone’s ideal vision of a “perfect” law, but we don’t think that is the main point.
  • It is too early to worry about some “calculated” deficit that would occur over several years, under certain sets of conditions, that may or may not occur.
  • Also, we will continue to highlight the Tariff Revenue Chart, which is adding real revenue for the Treasury and is NOT included in the CBO projections.
• A bill, passed by the House and Senate, and signed into law by the President, is a big deal. We can now plan. So far, much of what has been driving the economy and markets has relied on Executive Orders. While Executive Orders are useful, we have seen how easily they can be changed or even challenged in court. This law gives us certainty for many important aspects of the economy for at least the next 4 years. Maybe we should focus more on the details, as the “devil is in the details,” but this time, that might be “missing the forest for the trees.” What it says is less important than the fact that it now exists. Some degree of uncertainty for the economy has been removed.
  • From what we can tell, it seems that some of the growth-oriented benefits are front-loaded. To the extent that plays out, it will help propel the economy in the near-term.

Peace through Strength seems to be holding with the ceasefire in the Middle East and NATO increasing their spending.

Both of these developments (the new tax law and renewed respect on the military front) should help unleash some Animal Spirits in the Economy. The markets have had no shortage of Animal Spirits, but that does not seem to be entirely the case with the economy.

The Jobs Data was better than we expected (and what virtually every other economist was expecting), and as we described in that report, it was more consistent than prior reports. Having said that, there are some things to quibble about, but all that can change if we really start to reignite the Animal Spirts, which the administration seems to be doing.

One Eye on Tariffs

The July 9th date is rapidly approaching and there are indications that the “extension” of the “pause” may not be a given. It makes me very nervous that my social media stream is FULL of people mocking anyone who was afraid of tariffs. “Record highs despite the tariffs,” scream report after report. Hmmm.

Let’s not forget that the stock market rally started when we “paused” tariffs from levels that seemed insanely high and based on “dubious” (to be extremely polite) logic. 10% on most of the world, with China at 35%, wasn’t much worse than where many thought we were headed – reciprocal tariffs. We continue to highlight the wide variety of tariff mitigation strategies being employed which are also softening any blow. But it is disingenuous to claim the “tariff policy” worked and the bears “missed it.”

The President backing down on tariffs is what allowed for the rally.

Since then, we’ve had the tax law and Peace through Strength, which are additional positives.

The spending on AI continues unabated as companies crave efficiency, whether or not the economy is doing well.

We only mention this as there does seem to be some risk that the administration will decide to take “another bite at the apple” on tariffs. That seems like the biggest risk to the market in the coming days. That we go back to some policy that employs tariffs at levels that will not be manageable. That risk is increasing as the number of victory laps on tariff policy is growing. Finally, that Tariff Chart we mentioned, which is bringing in revenue, also shows that very little money, relative to the size of the economy, has been spent on tariffs so far, so it is too early to judge (even at the “pause” rates) what the impact will be on the economy.

Finally, while “sectoral” tariffs have dropped from the headlines, some tail risk remains with those (depending on how the administration decides to use them). It seems that the more formal process in place for these reduces any tail risk, but it is another thing on the tariff front that seems to have more downside than upside, given how comfortable markets are.

National Production for National Security

If I thought it was intimidating being in London with Admiral Sir George Zambellas (former First Sea Lord and Lord Warden of the Cinque Ports), it was about to get even more intimidating.

We finished our London trip as part of the keynote address of an event held by Q15. Katy Martin of the FT moderated a panel with me and Baroness Dambisa Moyo, who had to zoom in as there was an urgent matter being debated in the House of Lords. She also serves on the boards of Chevron and Starbucks.

Despite our dramatically different backgrounds (and degrees of success) we seemed to reach similar conclusions on the concept of National Production for National Security. We get to similar conclusions (described somewhat differently, but close enough for these purposes) via different processes. To me, that makes it resonate even more.

The U.S. is not the only country that needs to be taking steps toward figuring out what is required for a “no fail” state and then doing something to ensure that this occurs.

Not every country needs to be (or can be) isolated for all of its needs. Even some crucial necessities will require trade. But the more that can be done with allies, or friends, or even just countries in close proximity, the better. It is, as we’ve seen, easy for “adversaries” to use your critical needs to your disadvantage. Even allies, who might not do it on purpose, could face unforeseen events for themselves that limit their ability to continue to trade as before.

My fervent hope is that the administration dedicates as much time and energy to this pursuit as possible. Ideally shifting away from tariffs as the main tool to get domestic growth higher and focusing on DEREGULATION and Targeted Spending to really jumpstart these efforts.

We have seen some things done on the semiconductor side, and apparently on the steel side (not sure if the things being done regarding steel will turn out to be useful, but it is out there).

Yet there doesn’t seem to be the urgency I would expect.

The latest trade negotiations with China scream:

• We are at risk of being held hostage by processed and refined rare earths and critical minerals.
• Academy has been writing about this for years: Rare Earths – a National Security Threat was published back in February 2021 – and yet, it still feels like the nation is in its infancy with regards to overcoming this risk.
• DEREGULAITON can go a long way. As a property developer this seems like it is in the President’s Wheelhouse. The Commerce Secretary also seems well suited for this battle. We have imposed regulation after regulation over the years. The question is whether all these regulations make sense in an era where we are in direct competition with China. The U.S. had the luxury of being the sole superpower for decades, so it is valid (even necessary) to revisit a lot of things now that we must look at global competition from a different perspective.
• We may need to spend money. Offer contracts. Take a variety of financial initiatives (beyond some things like accelerated depreciation in the newly passed tax law) to get these industries that are important for national security (chips, medicines, certain commodities, etc.) to grow as rapidly as we may need them to grow. While deregulation is definitively in the Trump playbook, it is less clear that this is. However, we look back to Bessent’s “three legged stool” analogy, where he seems to realize it and may be able to help on that front while others tackle deregulation.
• We cannot hammer home the point enough that refined and processed commodities are at the forefront of our fear. We usually get some “snickers” when we point out that oil is useless. And yes, the statement is designed to illicit that response, but the reality is that Gasoline and Diesel are extremely useful, but oil in its raw (or crude) form is just not that useful in everyday life. Again, yes, the statement is a bit over the top, but it is meant to get people really thinking about what we need – and that is the refined (or processed) versions of commodities. We’ve lamented that many reports indicate that 90% of the oil released from the Strategic Petroleum Reserve was sent outside the country to be refined.
  • Yes, getting access to rare earths and critical minerals is important, but if you cannot process them or refine them yourselves, you are leaving the most important step to someone else – in this case China. It depends on the specific commodity, but using AI, it seems fair to say that somewhere between 80% and 90% of mission critical materials for “things” we need (on many fronts) is still controlled by China.
  • We don’t need to be able to procure and refine every last ounce of what we use, but we are so far from that, and we need to take urgent steps as the lack of processing and refining is becoming a very visible weakness (and not just in the U.S. but also in many other major countries, who have possibly been “too comfortable” to do some of the “heavy lifting” that they really need to do).

It is a good time to paraphrase one of my favorite lines from COVID. I believe it was the CEO of Whirlpool who said something to the effect of “a product that is 99% done, is still not done.” Just think about that statement in the context of where we are with respect to many rare earths, critical minerals, semiconductors, medicines, etc.

Bottom Line

A focus on national production for national security (something every country needs to be thinking about) would go a long way to supporting the economic momentum delivered by the tax law and rejuvenated defense posture of the United States.

The risk is that the administration decides it was correct all along on tariffs and that we see more “Big Beautiful Tariff” policies in the coming days and weeks as we near some deadlines.

Markets seem “ahead” of the economy, which is fine if we continue to put forth policies that encourage the economy to catch up. We seem to be on the right path for “Animal Spirits” to rise within the economy, but not if there is a renewed focus on tariffs.

It should be another interesting week and hope you are all having a great 4th of July weekend!